A couple of items worthy of mention. Firstly, inventory actually increased this week, going over 18,000 for the first time since mid-August:
I expect inventory to drop by next Saturday due to the end-of-the-month expiration effect, but it could stay well above 17,000 through the end of October. That would be an unprecedented event.
Secondly, the seller-in-trouble (SIT) situation continues to rapidly deteriorate. In terms of total dollar losses, percent of original sales price, total inventory, and percent of total inventory, there is no bottom in sight. The graphs speak for themselves:
Shocking (at least to me) is how close the average percent SIT loss is to the 20% level. That puts a large fraction of the first lien holders in the Sacramento RE market into a loss position.
The overall market indicators are feeling the SIT effect as well, with asking prices falling at an increasing rate:
Median asking prices in Sacramento County have fallen by $20,000 (6%) in the two months since the beginning of August. There was a 4% drop in the price-per-square-foot during that same period.
Stress continues to build, and every week a greater percentage of the market is selling at a loss. Clearly, the Sacramento market is in transition, and all indicators point to further price reductions. There is no bottom in sight. Usually I don't give advice on this blog, since any decision to buy or sell a house is highly individualized. However, if you can wait, I think you should.
Sunday, September 30, 2007
A couple of items worthy of mention. Firstly, inventory actually increased this week, going over 18,000 for the first time since mid-August:
Saturday, September 29, 2007
September was not kind to the real estate market. At press time, I'm only seeing 1,031 sold listings during the month of September. Compare that to 1,935 during September of 2006 and you see a 47% drop in sales. I'm sure some stragglers will be entered in the next few days, so I'll be sure to update this over the next week.
Friday, September 28, 2007
I figured I'd start examining listings by month to see how many new listings are entered and what percentage are REO/Short Sales Listings. Here's what we have for September:
3,791 total listings entered
1,419 REO/Short Sales entered (37% of listings entered)
5,361 total listings entered
342 REO/Short Sales entered (6% of listings entered)
I'm surprised that there were fewer total listings entered in 2007 compared to 2006. I'm not that surprised at the REO/Short Sale listings though. Something tells me that by December, we'll see about a 50/50 ratio of REO/Short Sale listings to overall listings.
Monday, September 24, 2007
As a follow-up to several news stories on the apparent collapse of Dunmore Homes, I swung by the Monterey Village development in Elk Grove and took some pictures.
The development is located in the Franklin Reserve area in southern Elk Grove, and was one of the last parcels to be developed. It was considered an "affordable" development, consisting of small, tightly packed townhomes with shared common space. Construction began in late 2006, with model homes opening in January 2007 to great fanfare:
Builders say higher-density projects generally are more affordable than single-family homes on large lots and that affordability gives them a broader range of buyers.
"From our standpoint, it's the price," said Jill Shannon, vice present of sales and marketing for Dunmore Homes, which is building 150 Pull-A-Part townhomes in an Elk Grove development that includes standard housing as well. "Affordability being such a huge issue these days, we can bring home ownership within reach of more people."
The townhomes in the company's Monterey Village development range from $254,000 for a 1,000-square-foot model to $350,000 for a four-bedroom home with about 2,000 square feet. The area's average home price is above $400,000.
While touring the models recently, West, the partner in charge of BSB Design's El Dorado Hills office, recalled the challenges in creating the design.
"We started to wonder how far we could take the concept, using every building code we could to our advantage," she said.
At first glance, her creations look like traditional townhomes. A closer look reveals five varying floorplans that are separated -- by just six feet in some cases, with three feet of lot space and a fence running between them. The density is about 15 units per acre, and BSB designed them to be built in what they call "10 paks."
Dunmore's models have been open since mid-November; 15 of the planned 150 units have been sold in advance of construction. "That's a really good figure in today's market," Shannon said.
From the looks of things, those 15 pre-sales were the only sales that took place. Most of the development is an empty, graded field with some lots marked off and a few streets layed:
A few buildings in various stages of completion are located near the sales office:
The only occupied homes are on the east side of the development. It looks like they built several on spec, and sold units in an alternating pattern to make it appear as though they were all occupied:
The sales office was still furnished, but the posted message left little comfort. Even the office hours were removed:
My heart goes out to the residents of this development. From what I saw, there were no unoccupied houses that didn't have a Dunmore "Available" sign in the window. The few people who bought there are victims of poor decision making and a builder who didn't deliver on his promises. Odds are this will take years to resolve, and the community will look nothing like the original plan.
Some interesting trends seem to be holding up so far this month. For one thing, inventory remained steady at almost 18,000, while SIT inventory continued to climb:
Also, $200K-$300K inventory shot back up after a few weeks of decline, returning to its previous trend:
Asking prices continued to decline:
The flipper market share bounce-back may be peaking:
At this point, I would like to introduce two new graphs to the collection. I've been trying to dig a little deeper into the "Seller In Trouble" phenomena in terms of the overall market, and these graphs are the byproduct. The first depicts the total dollar amount lost in each county due to SITs, based on asking prices. The second looks at the average percent loss per SIT. I added the FIT values as well, for comparison:
Interestingly, except for El Dorado County, the performance of the SIT houses vs. the FIT houses is almost identical. This helps prove my overall thesis that a lot of buyers were behaving like investors during the peak bubble years, even though many were buying houses to live in.
Unsurprisingly, the exponential rise in SIT losses mirrors the rise in SIT inventory. Somewhat surprising, however, is the increase in the average loss per SIT over time. I would expect there is a natural barrier at 20% or so due to down payment amounts (either through a second lien or cash). Any break through that level would indicate that lenders have completely taken over the SIT market.
Wednesday, September 19, 2007
As a follow-up to the earlier discussion, here is a graph of the weekly average percent loss on asking prices for the FIT and SIT. It was derived by dividing the difference between the last sale price and the asking price (asking price loss) by the last sale price. Ask you can see, there is no meaningful difference between the two, except for lately in El Dorado County:
(The Spring 2006 Yolo data is most likely in error. I will clean it up for future posts.)
One thing's for sure: no matter how you look at it, the market in this town keeps getting worse.
Sunday, September 16, 2007
Inspired by Bubble Sitter who has diligently been adding up the "Total Losses" value over on the Flippers In Trouble site, I ran a plot of the sum of all the asking price losses for each county over the last year and a half:
The peak in asking price losses corresponds well with both the overall inventory peak as well as the FIT inventory county peaks, but not with SIT inventory (there aren't any peaks yet):
What gave me pause was the exponential increase in SIT dollar-value losses toward the end of summer compared to the fairly linear increases in both SIT inventory and FIT dollar losses. What the heck is going on in SIT world? Another thing to ponder is that the drop in flipper inventory accounts for nearly all of the drop in total inventory we have seen since the peak.
Of all the trends, the one that remains in place is the drop in asking prices. Sellers are waking up, if rather slowly:
I would love to hear your guesses as to what is happening in SIT world. Why is this happening with SITs but not FITs? Is there a huge undercurrent of short-sale activity going unreported in the MLS...? Inquiring minds want to know.
Friday, September 14, 2007
Some of you may remember the Hudson & Marshall auction on July 22 at Sacramento's Radisson Hotel. They were auctioning off 175 homes, and 61 were in Sacramento County. Almost 2 months later, I looked up the status of those 61 homes and found out the following:
Sold - 11
Pending - 11
Withdrawn (Not relisted) - 2
Temp off Market - 2
Active - 34
Expired - 1
Of the 11 that have sold, here are some stats on them:
MSL#_____List $___Sale $___Amt Financed
70044644 - 397900 - 350000 - 90%
70047013 - 430000 - 329900 - 90%
70049502 - 329900 - 305000 - 100%
70049631 - 334900 - 265125 - 100%
70057307 - 355000 - 244000 - 100%
70050597 - 249900 - 220000 - 100%
70050421 - 209900 - 219000 - 100%
70036155 - 288000 - 207000 - 95%
60132148 - 254900 - 179000 - 100%
70058190 - 159900 - 150000 - 60%
70019144 - 189900 - 105000 - 0%
What amazes me is that 6 of these homes were 100% financed. I wonder how long until some of the 6 make it back on the list....?
Tuesday, September 11, 2007
More and more, we hear the term short sale. Most of us are somewhat familiar with the meaning, but for those who have no idea what it means, here's a quick definition: If sellers owe more than their property is worth, they can attempt to negotiate with the lender(s) and hope the lender(s) will agree to a sales price below what is owed on the property. For example, assume the sellers owe $500,000 on their home, yet it realistically can only be sold for $400,000. In this situation, the sellers have four options: 1) Add their own funds at close of escrow; 2) Negotiate with the lender and hope they will take the deed in lieu of foreclosure; 3) default on the loan and let the lender foreclose; or 4) attempt to negotiate a short sale. The first two choices are about as rare as an honest politician. The third choice is as common as a crooked politician.
Now that we understand the terminology, I want to take you through the process I was recently involved in to give you a better understanding of what all is involved in a short sale transaction.
Just over 2 1/2 years ago, I sold a house for some clients and they walked away with about $100. Prices were going up quickly, and their neighborhood was going down quickly. I told them I would seriously consider renting for a while and investing the money they made on the sale of their house. I also told them prices would not always continue to rise. They ignored my suggestions and settled on a 3/2 in Elk Grove priced at $460K for just over 1800 square feet. And instead of putting money down, they went with 100% interest only financing. To make matters worse, it was a 2/28 loan that would be subject to a rate adjustment after two years. The lender was supposedly a friend of theirs, and when I questioned the loan they were receiving, the lender and I got into some serious verbal exchanges.
Fast forward 23 months...I got the call I had been expecting. My former clients had received "the letter" telling them that their payments would soon be going up nearly $900 a month, still interest only. This pushed their loan payments to close to $4,000 a month. I ran some comps for them, and let them know that their $460K home they purchased two years ago would probably go for around $340K. I asked if they could put any of the money they made from their recent sale (around $100K) towards this house at close of escrow. Their response: It's all gone. I then explained to them the short sale process, but told them the tax consequences could be sever and to contact their CPA. (Side note: They didn't contact their CPA at this time. You'll see why this is important later.)
I listed their house at $350K, which was about $30K under similar comps in the area. About 2 months later, we got an offer for $340K. Keep in mind that the sellers have not made a payment for 3 months and have only been contacted by their lenders once. So, we open escrow and I get authorization to talk to the lenders on the sellers' behalf. It turns out there are two different lenders involved, one that is owed about $350K and one that's owed $80K. The first lender has a laundry list of required documentation from me and the sellers. After a week of getting this information, we submit it to the lender for review. Three weeks later, the lender agrees to a short pay off of $340K, minus expense of about $20K.
I then contact the lender with the second and once again I'm given a laundry list of required documentation. However, this time the list is far more extensive for some reason. I tried to explain to him that his company was out of luck in terms of getting any money out of the deal. We were lucky to get the offer at $340K and there simply wouldn't be any money left to pay towards the second. I tried to explain the situation, but he wouldn't listen to my reasoning. Since legally the second mortgage holder has to sign off on the short sale to remove the lien that's on the property, there was no way around this. I faxed him over the required documentation on my end and called the sellers to tell them what they would need to fax over to him. During the call, I could tell they were hesitant to move forward. I pressed further and found out they finally called their CPA and were told to expect a tax bill of about $50,000. This obviously didn't sit well with them, so they contacted a bankruptcy attorney who assured them they could buy another house in a couple years with little impact to their credit. My objections aside, they told me that they were done with the short sale and decided to file bankruptcy. Just like that, three months of my time was wasted. After a month of negotiating with the lenders, when I called the buyer's agent to tell him what happened, he told me his client was ready to pull the plug too because it was taking so long.
At this point, the sellers have been living rent free for about 4 months. They still haven't received a notice of default, which means they've got almost another 4 months before they have to move!
The short sale process is very complicated. I have represented buyers that were successful in the purchase of a short sale, but it's a VERY long and drawn out process, often ending is disappointment for everyone involved. The main reason is that the lenders think the property can sell for more than what the agent has listed it for. What we're seeing now is just the tip of the iceberg...
There's been a lot of discussion lately about the number of REOs and Short Sales entering the market. I've read that up to 8,000 REOs are for sale, yet I've been unable to confirm such a large number through MLS searches. My numbers show a little over 3,000 short sales and around 2,400 REOs currently listed in MLS. As I've alluded to before, those numbers are low because of entry errors and agent oversight. However, I just can't see 5,000 additional listings in MLS as not being correctly identified as REOs. So why the discrepancies? That's a good question and unfortunately I can't do much with it as I only have access to what's in MLS. So, I decided to look at some MLS entry statistics and see how many listings have been entered and what proportion are REO/Short Sales.
What is really surprising is that short sales are escalating, but REO listings are not. Are banks holding on to the properties and hoping that spring will bring them greater opportunities?
Here's a quick snapshot of sales activity for REOs and Short Sales over the last 3 months. Take note at the small number of short sales that are selling, even though there are more short sales in MLS than REOs. Why you ask? Look for a new post with an in depth look at the short sale process I was just involved in with some sellers and you'll soon find out...
Monday, September 10, 2007
The negative real estate market news has been coming in fast and hard for the past couple of weeks, and my data is no exception. Just as Sacramento exits the prime summer selling season, stress indicators are continuing to worsen. The new "Sellers In Trouble" metric hit an all time high, both in number and percent of market, even as the "Flippers In Trouble" metric improved slightly:
Inventory remained historically high at 17,923 for the four-county area:
Inventory is something to watch carefully as there are rumors that banks are beginning to unload their inventory in large numbers in order to raise cash. The inventory and stress indicators should tell us if/when that process accelerates.
Asking prices continued their decline as well this week:
All in all, the real estate market in Sacramento is under stress, and conditions are changing rapidly. Watch this space for updates as they come in.