Tuesday, December 26, 2006

Caption Contest Finale

8. We've gathered up this food for those who are mortgage slaves this Holiday Season.
7. "And after your ARM resets if you recycle this many cans, every single day, you'll have enough money to make your payment!"
6. "Everything grows to the sky."
5. The real estate market...its in the can. Now if we could open all these up, we might find it!
4. Realtors: We CAN do it in any market!
3. "Support your local realtor."
2. Toys for tots. Cans for Casey.
1. "Pyramids" they're not just for schemes anymore!

Thanks, everybody!

Sunday, December 24, 2006

Sacramento Regional Real Estate Trends 2006 Final

Inventory levels declined slightly to 12,900 listings after the big drop last week:

Many readers submitted comments questioning the validity of last week’s inventory plunge, so I tried to address them in this comment. If any readers have additional ideas, knowledge, or insight about the IDX/MLS relationship and their respective data management processes, I would love to hear from you.

Prices also stabilized somewhat over last week, with some divergence between median and average asking prices beginning to appear:

The overall year-end inventory decline is still occurring at most price levels:

and the remaining flippers continue their march into trouble:

To put the year into perspective, I would like to share some inventory data I've been collecting since June 2005. It is for Sacramento County only, but I think helps illustrate how exceptional 2006 was from an inventory point of view:

As you can see, the 2006 run-up completely dwarfed 2005 in both scale and breadth. Put another way, inventory levels in December 2006 are nearly the same as levels in August 2005.

For the true data junkies out there, here's the inventory change-per-day graph for 2006:

Both the weekly Saturday increases and monthly drop-off patterns are easy to pick out here.

From just these two graphs, it's easy to see why the latest drop in inventory is not a "hopeful sign" that buyers are returning, but just a seasonal pattern.

We broke 15-year-old inventory records, but prices remained high by any measure. We also saw flippers start to take their leave from the market, with those that remained getting further into trouble. Average and median asking prices began to drop as resellers and new house builders began to compete in earnest. I think it is safe to characterize the 2006 housing market as a market in transition, with many signs pointing to further price declines and more record inventory.


I think the big 2007 housing story will be the rising foreclosures and bankruptcies due to ARM adjustments. I also think at least one, or possibly two major mortgage lenders will collapse due to forced buy-backs and increases in default. Ameriquest is my top choice, but Countrywide, Washington Mutual, and H&R Block (Option One) are top contenders.

Finally, I would like to thank everyone who made this site a success: Agent Bubble, JR, Lander, Patrick, Gwenster, and all the other bubble heads. If it weren't for your encouragement and feedback, I would have quit a long time ago.

Let's keep it rolling through 2007!

Monday, December 18, 2006

Caption Contest

This photo was taken over at the K Street mall, and represents one of three CanTreestm displayed around town by the Sacramento Association of Realtors:

The CanTreetm is an annual PR & charity campaign, and "is SAR's most important and highest profile charitable event."

Seeing as how there are hundreds of CanTreetm celebrations all across the country, I thought we could do SAR a favor and create a distinguishing slogan that combines the spirit of holiday food giving with the challenges of today's buyers' market. Just post your slogan in the comments, and I'll post it on Christmas day as my gift to you.

Sunday, December 17, 2006

Sacramento Regional Real Estate Trends for December 17, 2006

'Tis the season for inventory reductions. Inventory dropped by a whopping 3,126 listings over last week, putting us at 13,303 as we approach year-end, and blowing away the year-end prediction I made only last week:

The drop was felt across all price ranges and all four counties:

As a disproportionate number of lower-prices houses were dropped from the MLS, the effect on asking price ranges was equally dramatic:

As previously discussed, this rapid reduction in inventory is due to the seasonal expiration and automatic delisting of houses from the MLS, not to any real change in sentiment as reported elsewhere. This is seen in the relative number of flipper listings, which is in line with previous trends:

Flipper listings have taken a dive as well, and those that remain are now deeper in trouble:

In my mind, nothing illustrates the dramatic turn the market has taken this year better than the turnaround in the flipper market. In April, less than 4% of flippers were taking an asking price loss. Now, that number is over 33%. The number of loss takers has grown by 448% since April (including today’s drop).

Next week I’ll do a year-end summary, including a final set of graphs and data tables. 2007 should make for an interesting year.

Sunday, December 10, 2006

Sacramento Regional Real Estate Trends for December 9, 2006

Inventory continued to drop approaching year-end. The accelerated drop seen last week has moderated, so the projection is still ~13,500 listings by January 1, 2007:

By price, you can see the inventory drop is happening at most levels, which is indicative of listings expiring:

Asking prices are beginning to stabilize as we approach the new year:

Since sales continue to drop, I would expect the asking prices to begin trending downward again in by next quarter. If new house prices are any indicator, the resellers will have no choice.

Speaking of those with no choice, flipper market share surged last week:

But overall flipper listings showed only a modest increase:

So, the relative desire to sell is greater with flippers than with the overall market. That conclusion is also supported by the increase in Flippers In Trouble. They simply cannot afford to lower their prices, and they cannot let their listings expire while they wait for the market to recover.

In other words, flippers are between a rock and a hard place.

Sunday, December 03, 2006

Sacramento Regional Real Estate Trends for December 2, 2006

Welcome to the slowest time of year for real estate. Inventory is dropping rapidly in the four-county Sacramento region:

I revised the end-of-the-year projection downward to ~13,500, due to the increased fall-off today. Note that this is the usual inventory pattern for this time of year, as all the 90 listings that began in October expire and are removed automatically from the MLS database. If 2007 is anything like 2006, we should see a 33% increase in inventory between January and March.

Despite the drop in overall inventory, the lower individual price levels continue to hold up:

Asking price trends continued pretty much unchanged, with the exception of a stabilization of El Dorado price per square foot, a the rebound in Sacramento’s:

Flipper market share trends continued their longer term trends, with the exception of Yolo County, which seems to be seeing an increase in flipper houses on the market:

The decrease in flipper inventory seems to mirror the decrease in the overall market, with flippers in trouble the only exception:

It looks like some flippers are taking Christmas off to reassess, leaving the market to those who cannot afford a holiday.

Friday, December 01, 2006

Update on Distressed Properties

Just over two weeks ago, I wrote an article on the situation with distressed properties in our 4 county area. In short, my stats revealed than 1 in every 15 homes fell under the distressed properties umbrella. I classified a distressed property as: short sale, bank-owned, foreclosure, or foreclosure pending.

Today's numbers reveal the following:

Distressed properties: 1,196
# of MLS listings: 14,358

We've now gone from 1 in every 15 to 1 in every 12. This trend could get very ugly very quickly....

Wednesday, November 29, 2006

Priced to Sit Part IV: Lennar Corporation

Lennar Corporation is a major U.S. housebuilder with heavy exposure in the bubble regions, including Florida, Arizona, Nevada, Colorado, and California. They are a diverse builder with products ranging from smaller townhouses to large McMansions. With 13 developments currently under construction in the Sacramento region, they will be heavily impacting the resale market here for years to come.

One of Lennar's upper middleclass developments is called Ironcrest at Fiddyment Farm, which is located on the western edge of Roseville in Placer County. Ironcrest consists of houses ranging from the modest $464,000, 2200 square foot "Dynasty" model, up to the ostentatious $640,000, 3800 square foot "Imperial".

This 8-square-mile area of western Roseville has seen a lot of new residential development during the last few years, and there are currently 140 resale houses, including 32 flippers, between 2200 and 3800 square feet on the market within its boundaries:

The only real negative aspect of this development is its disturbingly close proximity to the Pleasant Grove Wastewater Treatment Plant and the newly constructed Roseville Energy Park. (One must consider whether a person inclined to buy a house called "The Imperial" wants a view of sewage from their second floor balcony.)

Along with the usual resale market vs. builder comparison, I decided to test my assumption that the flippers were more rational than typical house sellers, due to their strict profit motive. The following graphs tell the story:

Like the other housebuilders in this series, Lennar has under-priced the resale market at all levels. 43 resale houses (30%) are priced higher than the highest-priced Lennar house, and only 7 resale houses are priced lower than the lowest-priced Lennar house. In addition, the resale market is behaving irrationally with respect to price vs. price-per-sqft. Typically, as you move up the housing price scale, you would expect a lower price-per-sqft. In this development, the exact opposite is true. This is not a trend that is likely to continue.

Sadly, my rational flipper assumption has failed the test. There is clearly no tendency for flippers to price to the market in order to lock in previous gains (or to get out before a loss). The only remaining assumption is they are pricing based on what they owe, and success will be difficult while Lennar is undercutting them. Indeed, 16 of the 32 flippers are currently in trouble.

That puts us dangerously close to massacre territory.

Monday, November 20, 2006

Priced to Sit Part III: Beazer Homes

For the third part of this series, I chose mid-level builder Beazer Homes. Beazer has seven large developments under construction in the Sacramento region, with houses generally priced from $250K to $400K. According to their web site, they have plenty of houses "available now", which means they have had cancellations or they have been building on spec. Either way, these houses should be priced to sell quickly.

To balance out the other analyses, I focused on two of Beazer's more "affordable" developments. They are located in more marginal areas and consist of smaller houses built closer together on smaller parcels. The first, located in Rancho Cordova, is called Capital Village:

Capital Village is bordered on the north by a large office park complex, on the east by a flood-control channel beyond which are several junk yards and more light industry, on the south by another new development and some open pit gravel mines, and on the west by more light industrial. Mather Field, a major commercial airport and a hub for UPS, is less than a mile away to the southwest.

Since the development area is mostly non-residential, there were only 35 resale houses for comparison. Once again, however, a major house builder is putting the squeeze on their competition:

The second "affordable" development is called "Riverdale", and is located in west Natomas:

Riverdale is bordered on the north by another housing development, on the east and south by Interstate 5 and Interstate 80 respectively, and on the west by agriculture land. There is also a large 24-hour truck stop and an industrial equipment yard less than a mile away to the southwest.

There were 51 comparable resale houses on the market nearby, and once again, Beazer beats them all:

Like all housing market participants, new house builders are seeing the need to lower prices to attract business. They will continue to do so until all their spec inventory is depleted. Unless the resale market participants can bring their prices in line, they should expect an indefinite wait before a sale.

How long can they hold out?

Auction Report

Just received an email report from reader Pete, who attended a house auction in Roseville hosted by Accelerated Home Sales and Auctions. Here's his take on what transpired:


The auction in Roseville today was totally goofy. 16 properties and nothing sold except property #2 & #12. Everything else had minimum bids that were too high and no one wanted to be a fool. Buyers today want 10% cash on cash returns for rental properties, or there is no reason to buy it. There is too much risk in this rapidly falling market.

Property #2 @ 1607 Basler Street at 16th, Sacramento, MLS # 60066365, 828 SF, sold to the only bidder, a woman who paid the minimum bid of $195,000. $235/SF

Property #12 @ 3416 Milburn Street, Rocklin, MLS 60063806, 2213 SF, sold to the third bidder. The minimum was $275,000 and it went to $330,000. $149/SF. Milburn Street is a fairly solid property. The seller paid $336,000 for it in October 2003. After selling costs, he took a loss.

None of the other properties sold. None of the other properties even had an opening bid. The buyers are getting smarter these days. They know if a property reserve is over $125/SF, it is not worth seeking.

Two months ago, I saw an auction at 6000 Little Rock in Rocklin. It was an 1800 SF house with a minimum bid of $380,000. It had been listed for many months at $485,000 or so with a Realtor. The house sold for the minimum bid of $380,000. Today, you must realize that buyer, who probably thought he won a good deal, really caught a falling knife! He paid $211/SF. The new comp in town is a nicer, bigger, better located house for less money at $149/sf. That makes the Little Rock home worth what...$268,000 today? That buyer is down over $100,000 in two months!

The auction had about 60 people seated in the room at the Hilton Garden Inn in Roseville. They all came to check out the action and win a good deal. The only action turned out to be on the one home in Rocklin. There were 4 properties for sale in Lincoln, some are brand new, obviously owned by inverstors. No bids. The minimum bids are above what the home builders are asking for new homes in today's Sacramento Bee. How stupid is that?

There are several lessons here: 1) overpriced homes will not sell, particularly at an auction, 2) if you are going to buy an auctioned home be careful. A good deal 2 months ago may prove way overpriced two months from now, so it better make sense from a cost, income, and market comp standpoint. (ie., the Little Rock investor got burned, in hindsight). 3) Much better deals are coming downstream. There are 14 unfilled sellers at this auction who cut their prices to what they thought were the bone. Yet 60 qualified investors with money in their pockets just told them to go pound sand. Now those sellers get to reduce their prices further, or take the properties off the market. 4) If you bought a house in 2003, that is about what it is worth today. And it will probably be worth less tomorrow.

The auctioneer was named Barry Mathis with Accelerated Home Sales and Auctions. He seemed to be an experienced Realtor and kept telling us what great deals these were. Clearly, even the Realtors are out of touch with the market. He was trying to say how "small" the negative cash flow would be on these as rentals. Well, no one wants any negative cash flow now, particularly in a declining market. If a property does not gush cash flow after all expenses, including vacancy and management, you can keep it, Mr. Auctioneer.

All the best, Pete

Sacramento Regional Real Estate Trends for November 18, 2006

Inventory continues to slouch toward the inevitable end-of-the-year drop:

I expect to see an ever increasing rate of decline as we head into January. Bottom line: who wants to buy a house in December anyway? At least you can tell if the roof leaks.

Like inventory, at least one asking price metric is slowly creeping downward in all four counties:

This is probably due to the decrease in more expensive inventory rather than asking price reductions; though I am sure both come into play:

And for those who have to sell, their position continues to deteriorate:

In both Sacramento and Placer Counties, almost 30% of all flippers are in the red:

Editors’ Note: With the holiday coming up, the trend posting might not happen next week. It will return the following week.

Sunday, November 19, 2006

How Can They Afford This?

Last weekend, we had dinner with some friends that wanted me to look over their escrow documents and answer some questions about their property tax bill. I'm not one to pass up a good mean, so I eagerly accepted the invitation. They showed me a supplemental assessment they received from the county for around $3,000. I explained to them why they received it and that they are responsible for paying it, not the lender through their impound account. That was a pretty easy question and I was ready to eat dinner. But, they then told me they refinanced and didn't really understand the loan they received and had some questions about it and the property tax bill they received for the 2006/07 year. The property tax bill was over $6,000, and it was stamped copy, which usually means the lender will pay the tax bills from their impounds. I quickly glanced through their original loan docs, and they elected to have impounds instead of paying the tax bills and homeowner's insurance themselves. I noticed their refinance included an increase from the original loan amount by over $100,000. It wasn't until they said their mortgage payment went down after refinancing that I decided to take a closer look at their papers. Their previous payment was about $4,100 a month, which was an interest only loan at around 7%. After refinancing just two months later, their new payment was now around $3,500 a month. The interest rate was about 1/8% higher too. It was also an interest only note. Anyone care to guess why the loan payment went down? No, it's not an option ARM either. Here's the deal, and trust me, this one is a very sneaky trick the lender was involved with...

The owners built their own house. When you build a house, the county is usually a little slower at assessing the value and the county tax records sometimes aren't updated for up to two years after the house is built. This means the value of the land when it was purchased is all that shows as the assessed value when you examine the tax records. Lenders are aware of this and know that they should estimate the tax liability for the owners when refinancing from a construction loan. We built our own house twice, and both times the lender knew to take out enough money to cover the taxes for us in our impound account.

Well, this particular lender decided that he was going to estimate their taxes based solely on the value of the land as it showed in the current tax record. Yes, that's right, he gave them an impound account, but only for $800 a year. At this point, I asked my friends if they personally knew the lender that had set this loan up. Right then, the wife looked at the husband and gave him a dirty look and said "I told you something wasn't right with your friend. I knew he was out to get us." I looked at the husband and explained to him his loan. I told him, which I assumed he knew, that his loan was interest only for the first 7 years. The problem is he didn't know it was interest only. The look on his face was of complete disbelief and shock. I explained that he would be paying approximately $3,500 a month for the next 84 months (almost $300,000) in interest only and his loan balance would still be over $600,000 as when he took it out. Next I told him that his lender decided to only take out $79 a month instead of closer to $525 for his property taxes, which meant that the bill stamped "copy" for over $6,000 would in fact have to be paid by him. The good news, if you can call it that, is that "only" $3,000 of it was due by December 10th. He would have until April of 2007 for the other $3,000. The wife wanted to kill her husband at that time and they started to get into it right there in front of me.

The real issue here is that I don't think they could qualify for the new loan amount since they raised it over $100,000 and the lender knew this but wanted/needed their business. They make about $80,000 a year combined. Their mortgage payment should be around $4,700 a month for a fixed principle/interest mortgage with property taxes and insurance. A $4,700 a month house payment is 70% of an $80,000 a year combined salary.

I wonder how often this same situation is being repeated throughout Sacramento...

Thursday, November 16, 2006

Priced to Sit Part II: DR Horton

Continuing with the "Priced to Sit" theme, I decided to check out another hotbed of flipper activity: Elk Grove.

Over 10% of all flipper activity in Sacramento County is taking place in Elk Grove, and house building continues unabated. One major builder is DR Horton, who has 46 major developments underway in Northern California, including five in Elk Grove alone.

The Laguna Estates development cluster is located in south Elk Grove. DR Horton has two projects underway there; a mid-priced one called "Savannah", and a higher priced one called "Kensington". The houses range in size from a modest 2,075 SQFT to a grandiose 3,621 SQFT. According to their web site, DR has houses available now at all price and size levels. These spec houses are currently competing directly with 152 similar resale listings:

Resale activity within the Laguna Estates development cluster. Large dots represent asking price changes.

Apparently, DR is having trouble moving their inventory, and they are now offering a 14.7% discount on their 2300 SQFT model:

For the purposes of this analysis, I ran two comparisons: one assuming full asking price from the DR web site, and another using a 14.7% across the board discount on all models:

Here again, we see a builder using their superior market position to keep 152 resellers struggling. Using the discounted price assumption, there are 53 resale houses priced higher than the highest DR Horton house, and not one resale house is priced to comp.

It's over for these guys.