Monday, March 24, 2008

Sacramento Regional Real Estate Trends for March 22, 2008

Inventory continued to climb this week, reaching over 15,100 for the first time in six weeks. Overall market prices remained steady for the fourth week in a row, as pricier inventory is once again appearing on the market:

The troubled indicators were mixed last week, with losses both in total dollar value and percent showing some moderation. SIT market share remained steady at 48% of listed inventory, while FIT market share held at around 23% of inventory. SIT total inventory held steady or declined slightly in all counties save Yolo, which showed a sharp increase. The average days-since-last-sale value for SIT listings took a sharp dive. Given the relative stability in SIT inventory levels, this would be indicative of a high turnover rate for such inventory.

I will go out on a limb at this point and predict that the "dead cat bounce" period is nearly over. While there have been signs of stabilization, the fact that inventory is once again increasing, while SIT market share is still nearly 50% of inventory tells me that the sales rate is still too low to make a difference in the overall market.


patient renter said...

Laugh of the day:

I heard an NPR report on the NARs statement about the slight uptick in sales last month. The NPR commentator said something like "...which could signal the bottom". Seasonal pickup signals a bottom? Seriously? Where can I get paid to parrot NAR releases.

Any news on the shadow inventory?

Josh said...

Any news on the shadow inventory?

Yeah, there was no shadow inventory. :) The error in my processing routine was masking the FIT growth. The graphs are now correct, and show that FIT inventory was growing during the entire period. Only in the last couple of weeks have the market stress indicators truly stabilized.

Wadin' In said...

"...there was no shadow inventory.."

Max, it this error what resulted in the perception that lenders were holding properties off the market? Are you now thinking the foreclosures are processing thru to the market in a normal manner....well, "normal" for an all time record housing bust?

Josh said...

Are you now thinking the foreclosures are processing thru to the market in a normal manner....well, "normal" for an all time record housing bust?

Well, there's nothing in my data that suggests to me that there's any deliberate overhang. There's no doubt that the banks have stuff on the books that they aren't actively trying to sell, but I would wager that has more to do with REO department throughput issues than any mark-to-market conspiracy. There is, however, the "unknown-unknown" issue.

The rumors that I hear suggest to me that the "walk away" phenomena is accelerating, with people not even bothering to contact their bank or mail in the keys. I've heard stories second-hand of people literally driving away in the dead of night, leaving a house full of furniture because they couldn't afford a moving van. When this goes on, the banks might not even aware their NOD is 90 days away from being an REO.

Personally, I think the whole "cash buyer" "investor" outbidding-people-trying-to-buy-REOs story being bandied about lately is a crock. But that's just me. Inventory is starting to grow again, so we'll see how much "cash" is left by summertime.

Sorry, that's the best I can do at 6am without coffee. :)

patient renter said...

There's no doubt that the banks have stuff on the books that they aren't actively trying to sell

That's what I was referring to with my shadow inventory comment... I would imagine there's still a lot of this stuff yet to hit the MLS.

Anonymous said...

"That's what I was referring to with my shadow inventory comment... I would imagine there's still a lot of this stuff yet to hit the MLS."

There's no doubt about this imho. If any of you guys get a free trial like I did a while back, you will discover that there are literally hundreds upon hundreds of foreclosures, pre-foreclosures, tax liens, BK's, etc. in any given zip code (except tiny ones like Davis) that can sometimes equal or even eclipse the number of MLS total listings for that zip.

Now it's true that not every one of these will become an REO, but what you have to wonder is how many of them won't?! Especially considering how underwater a lot of these folks are on the mortgage and how long it takes to sell even aggressively priced RE right now.

Then there's the real elephant in the room and that is the GSE's. An internet meme I've seen recently suggests that at some point during the year, the investment banks will, along with the Fed's help, engineer a panic at the GSE's similar to the BSC debacle, and then come in to "rescue" the debt. The GSE's go away in this scenario, and the investment banks (JPM, MER, GS, etc.) wind up with the GSE debt for pennies on the dollar. That means they wind up with literally trillions in foreclosed homes and other debt that they can dump on the market at ultra-cheap prices ans STILL make a nice profit. They may even call the loans in on preforming assets if things get really ugly and they are gunning for a complete system reset.

If any of this comes to pass, then you guys will get to see what a REAL RE fire sale looks like. We're talking an immediate 50% or more price haircut from current levels and tons and tons of newly listed houses.

Wadin' In said...

Max & Darth,

Here are a couple of first hand accounts in response to your observations:

1) Multiple offers: I moved to a S. Placer bubble area in Sept. '06, after observing a huge inbalance of flippers buying houses. The idea was to wait and buy in the meltdown. We rented a house. Unfortunately, our flipper landlord got foreclosed in Sept. 07. Thus, we bought a foreclosure in Nov. '07, paying 56% of the April '06 flipper price ($389,000 or $120/sf). When the house we rented came on the market in January at $330,000, I put in an offer to buy it (a friend wanted to rent it). There were 23 offers and it went for $375,000 (yes, over listed price). It closed escrow last week. I just took the new owners a housewarmeing gift! Multiple offers on solid opportunities are reality today. (I don't know about tomorrow, as this market is still in decline.)

2) Nine weeks ago (Feb. 1) I put a $290,000 offer in on a S. Placer house listed at $335,000. The lender was Bear Stearns. Another full price offer came in above me, but fell out. I was patient. Bear Stearns, being suitably motivited, accepted my offer last week and I will close escrow on Thursday. The sale price is 41% of their mortgage. The price is $110/sf. If you look closely at certain markets, you will see what a RE fire sale looks like today. You don't have to wait. It is staring all of us in the face. This house offers a 4.9% cash on cash return and an 8.7% after tax return when I remove expenses for vacancy, manangement and maintenance (self managed, rented for 2 years to a friend and it is a brand new home) and consider the tax benefits.

I am not calling a bottom here by any means. It may get dicier, perhaps much dicier out there. The only point I am making is if you are prepared and do your homework, there are some good opportunities.

I almost purchased a home in 2005. Luckily, I stumbled across Max's blog and then Lander's and Ben Jones' blogs. The bottom line for me is that I found a point that made sense for me to buy. And I saved over $451,000 over my 2005 budget and purchased a nicer home (but with less land).

Anonymous said...

Wadin' In,

I hear what you are saying and your reasoning seems very logical to me. I cannot say with confidence that I will be able to time the bottom - anyone that would say that is arrogant and/or foolish. Having said this, there are several reasons why I'm firmly on the sidelines for now and will be for the next year or two.

The recession is just getting started. What looks like a good deal today from an income or rent ratio perspective may not look so good in a year or two. The layoffs are just kicking in. Did you know that Sacramento City just had the first layoff in over 50 years? This is astounding news and should be a giant wake-up call that something very strange is going on, something seen only once in a generation. The state budget is shot and what started as a $8B deficit has now mushroomed to $16B and the guvinator will likely call for much deeper cuts soon. This will destroy Sacramento especially, as the state capital houses much of the government work force.

What you're describing in terms of multiple offers on houses is understandable. There is a lot of pent-up demand of folks sitting on the sidelines and they look at today's prices and think, "wow, this is a good deal" compared to insane bubble pricing and so they jump in. These folks falsely believe that they can time the bottom and they look at rent/price or income ratios that make sense today without realizing that its a moving target. Or maybe they just want a house and really don't care whether it goes up or down. I care, a lot.

Rents will go down and are going down. Incomes will go down as the layoffs kick into high gear. People will lose jobs and have to sell. Each wave of buyers causes up-ticks in the prices and lowers inventory and Max has referred to these as dead-cat-bounces. Max was correct in calling for one this spring and that is most likely what you are observing. To be honest it looks like its about over.

From a cycle perspective, let's not forget that 2001 represented the cycle TOP for RE in Sacramento, and that the gains after that were totally false. What this means is that prices need to return to 1997 levels, income adjusted, to reach the "normal" cycle bottom before a healthy bottom can be put in. We are nowhere near that point yet.

But in truth, the main reasons I am on the sidelines have to do with the macro-economic picture and what I described about the GSE's. This is really my primary area of interest and local RE only a small window on this subject. Let's call this thing what it really was: a giant credit bubble. It wasn't really a housing bubble, per se. There is every indication that peak credit has occurred and what we are headed for is a K-Winter credit collapse. We are just now beginning to see the effects of this, but this is only the 2nd inning.

The US is now at a crossroads. Will the government and/or Federal Reserve monetize the bad debt (buy toxic CDO's or exchange these for Treasuries?) If this really begins in earnest, we will experience a Wiemar type event of hyperinflation and collapse of the dollar. If this is coupled with dramatic monthly increases in incomes (rare), we may see a re-ignition of the RE bubble and in this scenario you stand to make an insane amount of money. I am closely monitoring this situation and if it looks imminent I will likely jump into RE as well. Right now this is very long odds, maybe 20-1. If the dollar collapses and we don't see dramatic income increases, we get the Mad Max scenario. The odds of this are better, maybe 10-1, and RE gets killed in this scenario.

Much more likely is that the Fed is giving the appearance of monetization to calm credit markets and navigate through what they describe a a liquidity crises but is really an insolvency crises. They appear to be going down the Japan road. Remember that Japan also had an RE bubble (mostly commercial) and that the bust was 18 straight years of deflation as they zombified the banking system by refusing to allow banks to fail and mark bad debt to market. In this scenario, which it appears they have chosen, you will get slowly crushed over a period of several years and the only way you'll survive is if you can make the payments indefinitely on a slowly depreciating asset. Don't ever expect to refinance as LTV's will constantly be running against you, and never expect to sell for more than you bought.

Overall, I strongly disagree that what we are seeing represents a true fire sale. If the credit collapse accelerates we may get to see what this looks like in a year or so, and then we'll get a true washout bottom where total despair kicks in. Otherwise if the Fed zombifies all of the bad debt, it may be a decade before the bottom has been reached. Its really up to them, and who can say what they will choose?

In life, we all make our bets and have to be prepared for the consequences, good or bad, and reasonable people can disagree on outcomes. I am betting that RE will plummet from here and I could be right or wrong, but only time will tell. If I'm right, you lose a lot of $$$, and if I'm wrong I do.

Anonymous said...

Wadin' In,

If you are interested in the macro picture and credit markets generally, you may find the following blogs very good and interesting. Not all of these are particularly bearish, although some are very bearish:

Wadin' In said...


Fascinating post. I appreciate your perspective and understand what you are saying. I tend to take a less complex perspective. If I can buy something at below reproduction cost, it makes sense to move. I do agree real estate is going nowhere in terms of appreciation for the next two or three years. (I invest for cash flow.) You have little or nothing to lose by waiting, particularly if you are looking to buy in areas like mid-town. Those markets should drift slowly downward over the next few years.

I am buying in bubble areas and am looking for the prime properties: South facing rear yards, interior upgrades, large lots, premium views, etc. This is all stuff the foreclosing lenders have no idea exist. So I can buy them at the same price as the POS with the cheapo light fixtures some FB abandoned.

Good luck. One thing is certain: We will all look back at this in 2011 and view the market with 20/20 hindsight! It will be interesting.