EID Rate Hike

In case you haven't heard (thanks to all who forwarded e-mails), El Dorado Irrigation District is proposing a huge rate hike (80% over the next 5 years). Up till now I was hesitant to post anything about the protest, since I was worried they might default on their bond obligations. The literature I read made it sound like they needed the money to pay for infrastructure projects etc.

Well, now I am pissed off. I just saw today that the proposed rate hike is not all about covering the cost of water projects. Apparently there were some massive pension increases (35%) approved back in 2004. This seems really irresponsible to me. Times have changed. I understand that forecasts were calling for continued revenues, but revenues have changed drastically. Everyone should be asked to sacrifice, not just the rate payers.

Copied below is the e-mail I received from several folks explaining the situation:

EID is proposing a series of rate hikes starting with 35 percent in 2010, 15 percent in 2011 and concluding with 5 percent raises for the following three years, 2012-2014. The notices began arriving last week in your bill. Altogether it compounds out to an 80 percent increase in five years. The first rate hike is planned to go into effect a week before February, 2010.

The notices start a 45-day deadline for ratepayers to mail written protests to EID. Protests must include the assessor's parcel number of the property in which the person signing the protest letter has an interest, either as the owner or a tenant paying the utility bills. Only one written protest per parcel is counted.

Under the terms of Proposition 218 if 51 percent mail in objections to the rate increase within 45 days the rate increase is defeated.

Chafing at Charity

This time of year I find myself thinking a lot about needs versus wants. Two things set me on this train of thought. The first, was the FHA loan limit for the Sac Metro area, and the second, a wish list item for a needy family. Let me make a couple observations before I get back to this.

In theory there are very few basic needs for someone living in a developed country: nutritious food, clothing, clean water, shelter, electricity (for heating and cooling), transportation to and from a job.

There are also many additional things that are considered basic needs by most Americans, but which I classify as wants: cell phones, TVs, name brand clothing and shoes, ipods, sushi etc.

So back to the housing related discussion.....in theory, the FHA is supposed to help folks of moderate means secure a loan to buy a home. So I was pretty stunned to learn that the FHA limit for the Sac Metro area is $580,000 (according to my google query). A loan of that size gives you access to over 90% of single family homes in the Sacramento area. A family of modest means should not be purchasing a home for almost 600k. The whole FHA thing has gotten way out of control.

As to the second item, call me a Grinch, but I recently received the wish list of an "Adopt-a-family" through my moms group, and I was really surprised. It had items like "gift card for ipod", and matching bedding set. These are items my kids don't even have.....since when does a kid from a truly needy family have an ipod?

Are my ideas of basic needs to stringent, am I being too judgemental? When I first moved to Sacramento after college, I ate ramen noodles, had a bike, a bean bag, a small radio, a microwave, and slept on a futon. I made due on my $10 hr job at a non-profit, and even managed to save some money for graduate school.

As many of you all know, I'm a bleeding heart, but using taxpayer money to subsidize a loan for a $580,000 home in the Sacramento area, and buying ipod gift cards is a stretch, even for my sense of charity.

Investment vs. Shelter

Adjusted for inflation, a home is not a very good investment, especially if you consider transaction costs and maintenance. So if you are looking for long term gains on investment, there are many other relatively safe alternatives that offer higher returns.

This is why I have never been very concerned with when the bottom of the cycle occurs. If I were looking at a home as an investment, the buy low, sell high, would be the rule to follow.

So if it's not an investment (as many were led to believe during the boom), then what exactly is it?

• As long as you don't have a neg-am loan, a home is a forced savings account. With each payment, your equity grows (in a normal market).
• If you do have equity, a home can also be a source of emergency cash in times of crisis (medical bills etc.).
• It could also be a hedge against inflation should it spiral out of control as it did several decades ago.
• And of course most importantly, buying is an alternative to renting.

Hence, I always get a chuckle out of the "now is a great time to buy," which I have heard countless times since we bought our home in Feb. This is part of an investment mindset. When I meet people who are thinking of buying a home because "now is a great time to buy," I always bring up the analogy that they aren't stocking up on gas, since it is now half off what it cost last summer. Why is a home any different?

Obession Pays

I was recently asked about why I obsessed about the housing market. In a nutshell, it makes financial sense to do the research.

People spend time on Sunday's clipping coupons to save $5 - $10 dollars at the grocery store the following week (not to mention the time it takes to find the items on sale). People drive to out of the way gas stations to save 5 cents a gallon (even at 20 gallons, that's only $1). People will go from store to store, and spend countless hours online to save $20 or so on a purchase.

In those cases, the return for the extra time invested is very very small. Not so with housing.

Given my obsession which has lasted approximately 2.5 years, assuming I spent 1.5 hours a day on housing related research during the work week, and also assuming we saved $150,000 on our purchase price (what homes our size sold for 2.5 years ago), I saved approximately $256 for ever hour of my time invested. Totally worth the time if you ask me.

Conventional wisdom encourages people to do independent research on their financial investments (like stocks and bonds). Relying on a commission based broker for all investment advise creates a conflict of interest. This same wisdom should apply to home purchases as well.

Top 25 to Bottom 35 in just 3 years

Well, the data gods must have been listening to my earlier laments......just yesterday I got wind, via the WSJ, that the Global Insight / National City (now PNC Financial Services Group) housing valuation study is still being published.

While I greatly respect the methodology, the current valuation results don't quite seem credible. In Q4 of 2005 Sacramento was in the top 25 in the nation (ranked from overvalued to undervalued, out of 330 markets), at an overvaluation of 53.3 and a home price of 391.2. That I believe.

Fast forward three years, we are now in the bottom 35 in the nation, with an undervaluation of 22.4, and home price of 216.5 (the price seems right, but the undervaluation does not).

In fact they are showing that much of California is undervalued or fairly valued.

If I had to guess why their valuation seems off , it's because they take into account interest rates in their affordability calculation. Yes, interest rates are historically low, but not everyone can get a loan with today's more rational underwriting requirements especially at the higher end.

Diminishing Data

So I was just lamenting the fact that DQ data by zip code is no longer publicly available via the SacBee. It then occurred to me that I hadn't seen a story on another one of my favorite data sets, the Global Insight/National City housing valuation study. I checked some of the old links to their studies, and it seems National City merged, and the links and studies are no longer available.

While I didn't really agree with some of their recent model results (showing Sac as fairly valued back in Q1 of 2007), I really liked their more comprehensive methodology. Their methodology, while perhaps not tuned properly, took into consideration multiple variables. From what I remember inputs included: income, population density, and interest rates.

Of course I am partial to this type of modeling based valuation methodology as I do this kinda stuff for a living (just related to air transportation). Too bad I can't make a living playing with RE data =(

In any case, this is a very disturbing trend.

Some Details on our New Domicile

We signed a stack of papers on Saturday, and close this coming Friday...so I feel a bit more comfortable sharing some of the details now. (The process is very different from closing in VA, where you get the keys the same day.)

For quite some time, I have been tempted by the floor plan, overall modest development size and location of our future home. We have visited on numerous occasions. Back in August we saw the lot our home would sit on. It fell out of escrow sometime in December. So the week between Christmas an New Years, we threw out an offer, 5% below asking and 15k toward closing (the 15k toward closing, if we used their mortgage company, was their standard offer for everyone who walked in the door). 5% below asking put us just beneath our 20% DP cap, and $179 a square foot.

I've never really been very good at bargaining, and house shopping is no exception. The builder accepted that day, with no counter. Of course we were thrilled, as we didn't think they would accept. After thinking about it, I felt a little lame as we must have offered too much. On the other hand, they may have been eager to report one more home pending by COB 2008, as we signed and turned in the purchase agreement on New Year's Eve. To make myself feel better, I went online to the SacBee home sales database, and as of October 2008, there had been no sales below the price we had agreed upon (since that time, I have come to find out that two homes on smaller lots have closed at prices slightly below ours, within 1%).

However when I look at comps in the area, there really aren't any homes in such good shape, with a similar lot size, and proximity to Hwy 50, at or below our price (especially when you consider we won't pay a dime toward closing). I'm sure there will be soon though. Prices seem to be dropping fast lately. In fact, there are now many upscale tract homes to be had in the surrounding area for under 400k.

All this to say, I don't feel we got any type of "deal." We put in an offer on a home that really suits us, at a price we could afford (comparable to rent when the tax incentives are included).

There also was some luck involved. When it comes to interest rates timing is everything these days. I had done my original calculations at 5.25% and we ended up with 4.625% (which now gives us a larger chunk of change to spend on the backyard). Side note: I was rather anxious about using the builders lender, thinking they would make up the 15k in marked up fees etc., but they have been very competitive, and offered good service to boot.

As much as I tried, the builder would not budge on the realtor commission, because he never came with us on our visits (especially the first one). We plan to pay him out of pocket once we close. He showed us homes on 6 different occasions, and answered many e-mails inquiring about listings.

My one current misgiving is that we may miss out on the $15,000 tax credit, as the last report I read suggested it won't take effect until enactment, which is likely a week or two away. Sigh.

Speculating from my Soapbox

To date supply side solutions offered by the government and lenders, mainly in the form of loan modifications, have not been very effective, as evidenced by the high recidivism rates. So the current proposal at least makes sense in that it tries to stimulate demand.

The two ideas being floated right now involve artificially lowering interest rates, and giving buyers a tax credit. While this may slow the decline in prices, increasing demand, it will only serve to prolong the market adjustment.

Interest rates are low right now, and I hope the government encourages anyone who is still able, to refinance out of their ARM and into a fixed rate, assuming they can afford the payment. I am relieved that at least one family member living in the LA basin has been able to do just that.

Personally, I would much rather see the government put the billion dollar subsidies towards creating jobs and infrastructure, so that families don’t lose their income and subsequently their home. There are a lot of construction workers out of work (I just met one on Tuesday standing in line to register my daughter for kindergarten). I would love to see them put to work rehabilitating our aging air traffic facilities and schools which are in an embarrassing state of disrepair.

By focusing on creating jobs and resuscitating the economy, home prices will find a bottom sooner, as there will be income to support the demand for housing once it reaches reasonable levels of affordability (which we are approaching in some areas). As a side note, I am thrilled to see that the bad press and new administration has caused banks and financial firms to cut back on bonuses and out-sized perks. The idea that they report enormous losses, take taxpayer money, yet pay themselves richly is just absurd.

Seems all these housing related proposals, do nothing but buy time. (Of course if the government plans to throw $15,000 at me for buying a home, I certainly won’t turn it down.)

Out with the Bubble, in with the Recession

My last post wasn’t properly framed. What I was really trying to get at was two things: 1) The desirable areas, which many feel still have a long way to fall, have more or less fallen to pre-bubble levels (at least for the two zips I track), and thus 2) housing market declines from here on out, will be primarily driven by a sagging economy.

To respond to some of the comments……

“Under demand or over supply equal the same thing right?”

Same result (price drops), but they have different solutions. For example, in aviation, delay from weather, versus delay from wanting to land at an airport everyone else wants to land at, has very different implications and solutions.

“The excess housing out there has NOT been dealt with, and there are LARGE amounts still out there.”

I don’t agree. Based on my calculations Sacramento Metro area is under 5 months inventory, and has been for quite some time. Yes there are vacant homes, and foreclosures waiting to be put on the market, but I it’s not enough to get us back up to last year’s 12 month's inventory levels.

“So is this a case of using data to form an opinion, or now that you own you have an opinion and will see proof in everything and find stats to back you up?”

Probably a little of both. We wouldn’t have pulled the trigger if I felt we were still at bubble pricing levels. We had been eyeing this development for a long time and had plenty of opportunities in the past year and a half, but didn’t feel comfortable buying till now. Back when I started this blog, in April of 2007, my inflation adjusted calculations called for a decline from peak of 39% and 41% (in Folsom and EDH) to be back at “reasonable levels”. Two years later, we are very close to those levels (inflation adjusting for those additional two years).

Update: Regarding the last point, there is only a small amount of manipulation possible in my actual calculations. I primarily gather existing data and report on it. Manipulation can come from monkeying around with inflation adjustments. But for yesterday's post, I actually went to inflationdata.com to calculate inflation over the period of my data.

It's the interpretation of the data that can be biased...hence I try to publish it all, so everyone can come to their own conclusions. I have always welcomed comments from both sides of the debate. It's how I learn to be a better analyst. Groupthink, and biased interpretation on either side is undesirable.....and is largely responsible for this mess in the first place.

Enumerating the Uncertainties

I would be lying if I told you I was perfectly at peace with our decision to purchase a home next month (we close mid-Feb). When I visit the house, everything feels right. But then I get back to the daily grind, and my confidence is shaken by the steady drumbeat of layoffs and record setting economic bad news.

I am a planner, and therefore very unsettled by uncertainty. Unfortunately, right now, uncertainty abounds. We are making this purchase decision based on assumptions and expectations about our future. Given our assumptions, the decision seems a reasonable one. But who is to say if those expectations actually play out? For instance, our intention is to stay in this home till our little ones graduate high school. But a lot can happen in 20 years (medical, family, job issues).

By the time we close escrow, we will have waited out the bubble for almost 2.25 years. Mr. BT and I are both ready to move on, and focus our efforts on other things. We look forward to designing our backyard and planting fruit trees, starting a real garden, and getting to know the neighbors.

Some days the anxiety is worse than others. Today is one of those days.....sigh.

Home at Last?

I am pleased to announce that as of today, we are under contract for a new home. We read and signed over an inch and a half of papers, and turned them in on Wednesday, December 31st, 2008.

Turns out Santa came through after all. This home is almost everything we wanted, and much more. I never would have though we could afford a home like this, especially if you had asked me two years ago. My husband and I both come from modest working class families and paid our way through school.

I feel very blessed that the housing market has been so good to us, as I know countless others have not been as fortunate. We sold our home in 2006, after living in it for almost 5 years. With the proceeds we were able to pay off our ginormous student loans, and still have a substantial amount left over for a down payment. For the last two years, we have waited, not so patiently, for the housing market to become affordable again.

As I have maintained throughout my time as a blogger, we were not waiting for bottom. My daughter will start kindergarten in the fall which is a big motivating factor for us to purchase sooner than later. To be quite honest, I am also worried inflation will start to erode my purchasing power by the end of 2009. With low interest rates, it seems like the ideal time to for us purchase the ideal home.

Below is a picture of our majestic oak tree and the view from our backyard (which we will need to finish). Unfortunately, I don't have much time today, so I will post more details later.



Ironically, OCRenter at BMIT just posted today that he became a homeowner.

Short Run Solutions

As Keynes was quoted as saying, "In the long run, we are all dead." With that in mind, lets look at the short run. Right now interest rates are at the lowest level I've seen since I started tracking them. Compared to rates earlier in the year, current rates could lead to almost $300 savings a month given our specifics.

In the short run, low interest rates are great for everyone. Buyers pay less each month, or can afford more house for their money. Home owners with ARMs, who are not already under water, can refinance into a low fixed rate mortgage. Thus low interest rates both increase demand, and help lower the distressed supply.

Lest we forget, low interest rates were one of the culprits fueling the housing bubble. Longer term, we will still have to ween ourselves from our low rate addiction, leading to the economic shakes. (I know some of the hardcore econ folks tackled this issue, but I had a sick kid all week, so no time for reading up).

With all the $$ being thrown around by the fed, inflation is bound to kick in, thus interest rates will inevitably be raised. Once again, we will be faced with housing market problems as demand dries up, but hopefully by then, all the toxic loans will be out of the system (either through refi, modification or foreclosure) leaving us with a slightly less onerous housing downturn.

Why Punish the Prudent?

Dear Lawmakers –

I have a couple questions I was hoping you could answer. Why is it that people, who put little to no money down on a home, are now eligible for 2.5% interest backed by the government, and principle reductions of 90% to market?

We would love to purchase a home using a 20% down payment, however all we can find are interest rates at 6% or higher, and market home prices? It seems to me that those of us who have excellent credit scores, and down-payments are actually being punished and asked to pay more when compared to others.

I honestly don’t mind the government helping out actual homeowners. However, I don’t consider someone a homeowner unless they put more than 10% down when purchasing their home.

So all this talk about keeping people in “their” homes, seems like rhetoric aimed at people’s heartstrings. How am I, a renter, any different than someone who moved into a home with little to no money down? For a renter, it’s called a deposit, but for these “homeowners” it’s called closing costs. Yet paying closing costs, now entitles them to lots of special government subsidies that I am not eligible for.

As I am sure you are aware, rewriting loans to keep people in “their” homes, will prolong the pain and keep home prices higher than they would otherwise be. If a loan is rewritten, the government /lender should be required to record the new principle balance with the county, so that us home buyers can at least benefit from the lower more affordable comp.

As evidenced in many parts of Sacramento, the housing market is not broke. People will buy homes once they become affordable (using responsible lending products). Right now homes under $250,000 in our area are receiving multiple bids.

Letting the market adjust back to affordable levels has many benefits. If people are spending less on housing, they will have more disposable income to fuel the economy. It also means people can buy homes closer to work, as opposed to distant suburbs. This had a dual benefit because it will cut emissions and energy demand, while allowing people to spend more time with their loved ones and less time commuting.

Best of luck saving the economy,

Your Average Buyer

Cha Ching!

Wholesale conforming interest rates just dipped below 6%!

I use the Mtg. Professor for the daily rate as well as some good info and advise.

The Home Stretch

Of all the new home developments in the area, the one we are most tempted by is the Pulte Laurel Oaks development off Bass Lake Road in El Dorado Hills. They have single story homes, on nice sized lots, in a lovely little valley, and even managed to keep some of the existing oak trees.

Initially the prices were way too high and we had written them off our list. But they are close to finishing the development (which is a huge plus) and dropped their prices back in May to move the last couple homes, and added in some upgrades.

When we visited last time, we were incredibly tempted, but the lots weren't quite what we were looking for (odd slopes, angles etc). So it was a bit easier to pass up. At that time, there was a particular lot that I coveted, but it was already reserved. As with recent trends, the buyer pulled out....and now it's available.

When we sat down with the sales guy after looking at the home, the monthly quote he gave us was a bit surprising. It was considerably higher than we had calculated (his higher interest rate, my tax benefit inclusion). We could afford the payment, but it would really stretch us, and force us to change some of our spending/saving habits. It's also significantly higher than our current rent.

There are some not-so-minor financial issues. 20% on the home is a bit more than our current down payment, so we would have to get a loan from family to avoid PMI. Pulte won't pay our agents commission, which is really annoying, since I have been working with him for over a year to find a home. And, with all new homes, we would have to put in a backyard.

So basically, it all comes down to money, and how much we are willing to stretch. The home is everything we want, but money would be very tight in the short term. I'm just not sure the perfect home is worth the financial strain. Sigh.

Update: Driving Home the Debt

A couple months ago I did a post on the WSJ's monthly "hottest models." As some may recall, I was flabbergasted by the price tag on these cars that were so popular.

In another sign of the times, the July 2008 list is a very different list. This time, only three cars had price tags over 30K, as opposed to the vast majority in Feb/Mar. The average price tag for all the models listed has fallen around 28% compared to the earlier time frame!

Not surprisingly, the Toyota Prius tops the list (it was also the only car under 30K on the list in March).

Bemoaning the Budget

Since budgets are all the talk right now in Sacramento, I thought it would be a good topic for the day.

When average folks have a goal, like home ownership or early retirement, the standard advise seems to be "make a budget". To me this is a lot like the "food diary" advise for weight loss. Nice in theory, but just way to intrusive and hard to keep up for a busy family.

I do reconcile our credit cards, bank statements, etc. in Quicken every couple months. I also categorize the purchases, but there are many items that fall outside a normal budget (like loans to family, or work expenses), or ATM cash that just disappeared. I have tried on several occasions to use the budgeting functionality in Quicken, but for some reason or another, it doesn't get me what I am looking for.

This leads me to wonder, does anyone actually have a household budget and if so, do you follow it?

There are many categories, in which I am unsure about how much to budget. For instance, how much to give to charity, how much should we allocate in gifts to family and friends, how much for travel and vacations?

Both Mr. BT and I grew up in families that struggled to pay for basics like food and clothes during some periods of our lives. This environment shaped our financial habits. We don't buy on credit unless we can pay off the bills immediately. Now that our massive student loans are paid off, we have relaxed the reigns a bit and spend a bit more freely.

I have an idea how much we spend on things, but I don't know if its above average, or if we are really pinching pennies. Talking to my uncle, who's family makes considerably less than us, I feel like we really pinch pennies on things like food, auto and cable bills compared to them. But I don't know if they are over spending, or if we are underspending.

With finances a somewhat taboo subject among friends and colleagues....how do people figure this stuff out?

The Family Treehouse

Here is a quick rundown on how my immediate family has been affected by the housing bubble. Increased affordability has helped my mom and dad (separately) become homeowners again, but unfortunately it will be a struggle for my younger brother to hold on to his home.

• Mom, Santa Maria CA, just bought a home with her long time boyfriend, paid cash, retired.
• Brother, Aliso Viejo CA, has lost all equity on the home he and is wife purchased in 2005. Their ARM will adjust in 2 years, to approximately 50% their income. It will be difficult to work something out with the bank since they took out a 2nd when purchasing the home.
  
• Father, Puerto Vallarta/Stocton CA, moved to Mexico from Stockton around 5 years ago, now purchasing a bank owned home in Stockton. Currently under contract. Retired.
  

Price Fixing

My new favorite quote (courtesy of BMIT):

"There's nothing the price can't fix."

Losing Interest

Yikes! Interest rates rose almost 1/2 percentage point last week.

There were a couple homes we were considering, and they suddenly got more expensive!

Not sure if this is giving me more incentive to jump before they go higher, or less, as I wait for the home price to come down further to compensate.

At any rate, although expected, this is not a welcome development.

(I have to admit, this is happening a bit sooner than anticipated, I figured they would start rising substantially around Aug/Sept....so I thought we had a bit more time to shop while rates were low).