Dogma or Doghouse?

I'm one to continually reassess my views as new information comes in. If you had told me at this time last year that we would be purchasing a house in February, I would have looked at you with an incredulous stare.

Up till now, I figured the worst of the price declines were behind us.....but I am beginning to reconsider. Today's WSJ development's blog had a very disturbing statistic that really jarred me. The post was about the fact that the FHA, VA and other government backed, low down payment, loans account for an overwhelming proportion of the market. The post noted that "In Northern California, for example, builders said that the government accounted for 76% of all mortgages."

I had seen a couple posts on Dr. Housing Bubble and Calculated Risk which broke out purchases by loan type, with roughly 28% using FHA, and 26% using cash (investors), for Sacramento. This seemed reasonable given the tax incentives and distressed inventory, but 76% for the region is downright frightening. Assuming 25% investor purchases, this suggests there is absolutely no demand without government subsidization.

I shudder to think about the fate of our housing market if this is true. With interest rate likely to rise as the government pulls out of the mortgage backed securities market, and very little organic demand......we may be in for a bigger drop than I had originally foreseen. The only saving grace is the continued reduction in inventory.....but in the face of these statistics, I'm not sure it will be enough.

Time and Time Again

Hats off to Michael Choe. Time Magazine (2005 & 2009) and the Sac Bee both featured him for his prescient decision to sell his Natomas home (that he bought in 2001) in 2004 and buy a foreclosure in 2008.

While our story is similar but a slightly later timeline......what really struck me was his true reason for purchasing before things had bottomed out. According to the Sacramento Bee "The real story was that his son was ready to start school. Otherwise he would have waited two more years to buy."

Our purchase this year was highly motivated by this same reason. Closing in February gave my daughter enough time to get to know some of the neighborhood kids who are also attending/starting the local elementary (she started Kindergarten in August).

Of course I get serious pangs of anxiety about this decision, as I watch the NODs in our neighborhood pile up. But knowing there are other bubble bloggers out there who followed the same route has us, is giving me great comfort.

Sometimes life just gets in the way of making a buck. For instance I forbade my husband to even think about selling our Townhouse in D.C. when I was pregnant/on maternity leave. I just couldn't handle the stress of a toddler, a newborn and a move. So we missed the peak in the market by about 6 months(luckily the peak in our area was almost a year later than Sac), .......and moved to Sacramento when my son was 9 months old.

The Bee article states that he frequent the blogs....hope he pays Average Buyer a visit, as he sounds like a kindred spirit.

The Time has Come?

Apparently the time has come......the WSJ has more or less called a housing bottom in Sacramento (with the unemployment wild card).

The reason for my proclamation....back when the bubble began to burst, and with only a couple blog posts to my name, the WSJ was all over Sacramento as the poster child for what is wrong with the housing market. I wrote a post, making a joke about how the WSJ will likely let us know when there are signs of life in the market.......which occurred today on page D1.

They also include the D.C area (Virginia suburbs), where we came from.

Sac Bee Editorial on El Dorado County BOS

Below is an editorial from the Sacramento Bee related to rehabilitating housing in El Dorado County. Thought it might be interesting to the blog's readership.

I really don't understand why the BOS rejected the money. It's not like they would be saving the Federal government money. The money has been budgeted and will be spent regardless. I would rather seem my federal tax dollars spent here as opposed to somwhere else.

__________________________
Editorial: El Dorado should take federal money

Published: Tuesday, Jun. 23, 2009 - 12:00 am
Page 10A Last Modified: Tuesday, Jun. 23, 2009 - 8:05 am

It's rare that the left and the right find common ground in El Dorado County, but that's what happened the other day.
A conservative Republican real estate agent and an activist Democrat affordable-housing advocate both urged El Dorado County supervisors to accept $1.6 million in federal stimulus funds to rehabilitate foreclosed homes.
The supervisors refused, arguing that stimulus money would lead to more government intrusion into society.
Initially, the supervisors rejected the federal grant 4-1 without even bothering to schedule a staff presentation on the proposal. When local contractors and real estate industry representatives raised a fuss, they reconsidered.
But the board majority of Jack Sweeney, Ron Briggs and John Knight voted "no" a second time. Supervisor Norma Santiago favored taking the funds all along. Ray Nutting, who'd voted with the majority the first time, wisely switched sides after listening to his constituents.
The $1.6 million would have allowed El Dorado to rehabilitate and resell between eight and 18 homes to families with low and moderate incomes.
Workers would have been paid the prevailing wage, supervisors noted, which in California means the union rate, which makes projects more expensive. But anything built with government funds in El Dorado, including roads, dams, overpasses and schools, requires union wage rates. Why get squeamish about that now?
Judy Mathat, a real estate agent and activist Republican, told the supervisors she agrees that government intrusion into the economy is dangerous. Nonetheless, she urged them to accept the funds. Her industry has been devastated by the housing collapse. The funds would have helped contractors, plumbers, painters and others in her industry keep their own homes from sliding into foreclosure.
To spurn federal help now, with the county in an economic slump, was just foolish.

Is High End Relative?

There has been much emphasis in the bloggosphere about the fact that subprime was only the beginning of our troubles. With warnings of huge defaults of Alt-A, Option ARM , and even Prime loans soon to come (yes I am mixing products and types).

We are now seeing big increases in the defaults of these products and types of loans. There seems to be a general consensus that the lower price ranges have more or less bottomed....but the mid to high end are still to take a big hit.

However what I want to know, is what exactly is mid to high end? Is it relative to all the homes in a metro area?.....say 350k for Sac. Or is it relative to the entire stock of housing in California?...say an 650k home in one of the coastal cities.

I wonder about this, because what might be considered a high end price range in the Sac Metro area, is probably just a starter home in many of the Coastal cities (LA, SF, San Diego, Orange County, Santa Barbara, etc.).

Basically I want to know how much of the forecasted doom and gloom applies to Sacramento and other cities in the valley (i.e. Stocton, Merced, Fresno, Bakersfield), versus the cities along the Coast of our financially doomed state.

Friday Forecasting Fun

Back in March (Friday the 13th to be specific) shortly after the DOW hit new lows....our department started a "pool party" on when and at what point the DOW hits bottom.

I will be out of the money here shortly as I had guessed July 8th at 6394. Thinking CRE was still to hit the fan as well as inflation.

I'd like to get everyone's thoughts on our macroeconomic situation here.....in particular the answers to some of the questions below.....

In theory the stock market is a foreword looking indicator (not sure I agree). Curious to know what others think, was March 9th bottom, or is this another false rally...yet to plumb the depths of the market?

Opinion on the recession..... are we really past bottom...bumping along bottom? If so, long recovery (L) or short recovery (V)? If not, why not?

I've also heard a lot of conflicting thoughts on inflation. Some think we are in a liquidity trap, others think inflation is going to take off very shortly here. What do you think?

Will market volitility ever abate?...in particular I am refering to commodities like oil. Steep swings in prices are really tough for industries like aviation to digest and will be a huge drag on recovery. Is it speculators driving the wild swings or legitimate concerns about the dollar and inflation?

Changing Horizons

Times have changed. Homes are no longer thought of as a sure fire "flip to get rich quick" investment, they are back to being a place to actually live and perhaps a store of wealth for retirement.

A lot can happen in the 20+ years someone plans to live in a home. Nearby fields are developed, secondary roads are turned into main thoroughfares, infrastructure can deteriorate etc. These are things, humans have control over.

But there are also many things we can't control. One of my early posts examined how parts of Sacramento would fare against some of the the woes mother nature can cause. In those cases, people can try to avoid high risk areas in the first place, or build to resist these problems (i.e. the wood we are considering for our deck has a very high fire rating).

I somehow forgot to mention drought in that post, which is one of the most common of our woes here in California, and is becoming more and more serious this cycle. Living in Northern California, I don't worry about this as much as I would if I were in down south, but I have been increasingly concerned about its impact on our already weakened economy.

I digress...back to long term changes that affect where your chose to live. What I am wondering about.....is this drought, and all the odd weather patterns we are seeing across the U.S., just a part of our regular climate cycle, or are they the result of a larger shift due in part to climate change? Not sure anyone has the answer...but the thought of Sacramento getting hotter and drier is not a reality I want to face over the next 20+ years.

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.

San Francisco Here We Come, Right Back Where we Started From

There has been a lot of speculation that the desirable zip codes have not fallen near as much as their less desirable counterparts. I saw a very interesting graphic on Calculated Risk last week that broke the San Francisco Case-Shiller into tiered price points. According to the chart, after tracking in lock-step for two decades, the three price points diverged during the boom. The low end shot up like a rocket, with the other two tiers lagging behind somewhat. In this context, I suppose it makes sense that the higher end homes have not fallen as much, because they also didn't rise as much.

As pointed out on CR, the higher end does have farther to fall, to be back in line with the dramatic decline of the lower end, but it is not near as steep a drop as some have suggested. Of course the Bay Area is not Sacramento....but I still think some parallels can be drawn.

If I had to hazard a guess, the higher end hasn't fallen as much as the lower end, because there were fewer sub-prime loans (i.e. foreclosures) at the higher price points. The "affordability products" for these pricier homes, Alt-A and Option ARM, are just now beginning to hit the skids.

Market Stress Update - April Fools?

The timing seems rather appropriate. If you will notice, the blue line with the black circle around it for Folsom REOs...... right around September it shot up, then mid March, it dropped back down. I don't have enough info to say if this is real or not. I would guess it's not, as I haven't been seeing the REOs show up in the MLS. The only semi-plausible answer would be a massive (over 100 homes) sale to an investor.

Just last month, I was expecting Folsom to see some serious downward pricing pressure (mainly based on this data), but it looks like, the shadow inventory is really a shadow and nothing more. With this turn of events, Folsom no longer looks like it will tip into the abyss as many have expected.

In any case, NODs for all three zip codes have now surpassed their previous legislation levels. I even had to adjust the scale to accommodate the number of NODs for Folsom (but El Dorado Hills is not far behind).

Dearth of Data

When we moved back to Sacramento in the fall of 2006, I was all set to buy a home. But quickly realized, after seeing the differential between rents and home prices, that buying was not a financially viable option for us.

In my attempt to reign in my very strong nesting instinct, not able to trust the realtors I had met, I turned to the internet where I found publicly available data. In particular, the data provided by zip code was the most relevant, when trying to discern trends in areas of interest. Through the local RE blogs, I found links to two separate sources, DataQuick and Melissa Data. It was nice to have more than one source of this data, to confirm trends, and ferret out bias.

Unfortunately, the favorite of my two, DataQuick has now stopped providing data to the Sacramento Bee, by zip code on a monthly basis (I finally e-mailed the Bee to inquire when it didn't show up this month). The best I can find is their data by city, which doesn't appear to corroborate with their previous data by zip.

This is a very frustrating turn of events, as this source of data was one of the best on the local housing market.

Is Mix Affecting our Median?

There seems to be a dogma that has developed over the last year, that the mix of homes makes the median home price unreliable. The argument goes, high end homes aren't selling, which means the median is particularly low due to the mix of low end foreclosed homes.

I would imagine this is fairly accurate for coastal cities, like the S.F. Bay Area, L.A. and San Diego, where jumbo loans are regularly needed.

But I am not so sure how much this applies to Sactown and other central valley cities. For mix to matter, you have to have a lot of high end or very expensive homes. Currently, in ZipRealty, there are around 9013 SFH in the greater Sac Metro area listed for sale, less than 15% of those are listed for more than $550k.** Thus only 15% of homes would need a jumbo loan given my assumptions (below). While 15% is significant, it is not enough to drastically alter the median for Sacramento the way some suggest. Of course the mix argument can affect pricier local zip medians, where a larger percentage of jumbo loans are required.

As they say, all real estate is local.


**My assumption was that $521K is the selling price for a home listed at $550 or less, which allows someone to meet the conforming loan limit of $417k if they have 20% down payment. I don't know what the conforming loan limit is for Sac anymore, so I just used the standby.

A Bountiful Backyard

Rather busy this week preparing for a conference...but I wanted to comment on something I read in the WSJ related to psychological depression trends (emphasis mine):

"They are taking cash out of the bank in preparation for a long-haul bad time. A friend in Florida told me the local bank was out of hundred-dollar bills on Wednesday because a man had come in the day before and withdrawn $90,000. Five weeks ago, when I asked a Wall Street titan what one should do to be safe in the future, he took me aback with the concreteness of his advice, and its bottom-line nature. Everyone should try to own a house, he said, no matter how big or small, but it has to have some land, on which you should learn how to grow things. He also recommended gold coins, such as American Eagles. I went to the U.S. Mint Web site the next day, but there was a six-week wait due to high demand."

I was rather surprised to read this, as it is reflective of my thinking as well. We went for a bigger lot (smaller house), which will allow us to grow fruit trees and have a garden. I figure not only is it fresh produce, that is more or less organic, but its also not shipped from Chile, and is a good hedge against supply disruptions or massive price increases. Of course this all assumes we have a green enough thumb to keep things alive, and the weather cooperates. Little did I know, the foothills are a great place to have a backyard orchard. On the problematic side, I had forgotten about the whole, you need two trees for cross-pollination to occur.....so we'll see how far we actually get with this endeavor.

More Market Mayhem?

Okay, so perhaps I am a little naive, or maybe just bucking the tide of mainstream thought (again =). But I will ask the question, why can't we let the big financial institutions fail (albeit in an orderly fashion)?

The major argument for not doing this.... It would throw our financial system into a panic.

Well it seems to me, our markets are currently in a panic....credit market conditions are now just as bad as they were shortly after Lehman failed back in September. The stock markets are back to 1997 levels.... I'm not sure how much worse things can get.

The other argument...it would wipe out shareholder value.

Some of these banks are trading for pennies on the dollar. Their value is largely wiped out at this moment. Hopefully individual investors are well diversified, so they won't feel the effects as much. (I recently heard a story of a very wealthy woman living off the dividends of a financial stock....very bad retirement strategy.)

Why can't we add a little fuel the the already hotly burning fire in the hopes that it would burn itself out more quickly? The analogies abound....like taking off a band aid quickly versus slowly.

The Irony

Seems Sacramento is now being used as a beacon of hope....we made the NY Times.

"In inland areas of California, for instance, sales are surging now that prices have fallen sharply. But most of the sellers are not individuals but rather banks that foreclosed on homeowners who could not or would not pay their mortgages."

A New Obsession?

So I will confess, housing data just isn't as interesting as it once was. One of my new obsessions, checking on California rainfall data here.

Agriculture is a vital part of our state's economy (my mom was employed at a family owned fertilizer company for almost 30 years)....three years of drought will make a bad recession even more painful. Ironically, the NY Times picked up the story this weekend.

• "The country’s biggest agricultural engine, California’s sprawling Central Valley, is being battered by the recession like farmland most everywhere. But in an unlucky strike of nature, the downturn is being deepened by a severe drought that threatens to drive up joblessness, increase food prices and cripple farms and towns."

It's not Just Me

According to today's WSJ, rent/own ratios in Sacrmento are back in line with historical averages.

Lander also has a post, showing Sacramento area affordability is now up to 66%, from a low of 7%.

The economic fundamentals are lining up. Is there still downside risk, yes. However, if you buy a home as a place to live, fundamentals are a good indicator for the long term.

Hometown Hero

I make a very concerted effort to stay away from political topics (aside from housing, which has become very political in the last couple years). But I will tiptoe into that territory today, as I want to acknowledge my hometown representative Abel Maldonado. Santa Maria rarely takes the national stage (save the Michael Jackson trial). So I was very pleased to see that he helped get us out of our ridiculous budget stalemate, and also delighted to see his proposal for open primaries, which should foster less extreme candidates, and hopefully lead to fewer ideological standoffs.

I have been disgusted and appalled at the behavior on both sides. It is the one primary responsibility of legislators....to make sure the State has can pay its bills. If they pass some laws, that is gravy. By stalling the budget, and related measures, many costs increase for the state, wasting more money. Interest is owed on contracts, overtime is paid for employees who take a day off on furlough day, then work over the weekend, etc. For example, Mr. BT is now subject to the furloughs, so he has to cut back his work to 40 hours (from 55-60) in order to drop 8 every other Friday. This will slow down his contract progress considerably, and will end up costing the state more $$.

Personally I do not believe that government workers should be unionized (save perhaps teachers). For example federal air traffic controllers make mid six figure salaries, with only a high school education, and get full retirement at a very young age. I was glad to see our governor try to trim back on state worker benefits (fewer holidays). Few in the private sector enjoy such job security and nice benefits.

The stalemate between the Dems and Reps was absolutely embarrassing and unnecessary. In a normal household, when times are tough, people look for additional revenue (take on second jobs), and cut back on expenses. With the Reps not wanting to raise taxes, stalling the budget, people lose jobs and revenue (reducing revenue further). If I had to guess, most would rather have a job, and pay a little more taxes. With the Dems not wanting to cut services, stalling the budget, people lose jobs, thus adding to the rolls of those who need services.

So this is my long winded way, of saying, thank goodness this is over.....for now.

(In other news...our local BofA was robbed on Tuesday, the suspect looks a lot like my old Sac roommate who used to chip cable boxes).

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.)

Pessimism Bubble?

Very interesting post over at five thirty eight.....he asks the question "is there a pessimism bubble?"

Housing bubble bloggers are often accused of being overly pessimistic, so I thought this was apropos. While I am certainly bearish on the economy, and have been for over a year and a half, my hope is that we are now entering the containment phase (having more or less assessed majority of the damage.......prior to this December I don't think everyone fully realized just how bad things are).