Monday, July 07, 2008

Sacramento Regional Real Estate Trends for July 5, 2008

As expected, the monthly drop in inventory took out the last two weeks of increases. Also noteworthy is that inventory is at new low for the year. Was the runup in June just a fluke? Mid July will tell the tale.


... said...

Is that the lowest inventory levels since March 2007?

Max said...

Yep. Ever since April we've been making 12 month lows.

... said...

OK that would be a 15 month low...

Here's interesting news...

"..The first official signal that housing market fortunes are shifting in Manteca and the rest of the Northern San Joaquin Valley came last week when appraisers dropped the "declining market" stigma.

It essentially means the extra 5 percent down that has been added across the board to loan products could now disappear. "

Their 2008 sales already surpassed 2007 totals..

Max said...

Yeah, all that GSE money is really making things happen. I wonder when prices will stop declining? Maybe when the banks stop foreclosing on more houses than they can sell...

... said...

The appraisers are saying the prices have stopped declining in Manteca.

.... lets not confuse a declining median price with the price or value of an individual home.

The median will continue to drop until homes above $300K start selling faster.

BTW, looking at your mini charts ... I see that above $300K in Sacramento, inventory is at a 26 month low... almost all price ranges above $300K.

Wondering where all that "shadow inventory" is...

Deflationary Jane said...

The GSEs dropped the 5% extra for ALL markets.

It has nothing to do with whether the area is declining or not. They need people to buy fast. With interest rates going up, despite the Phed holding the overnight low, and fewer and fewer people with downpayment money, they had to do something.

Eventually they'll blow through that demand segment and need come up with some new way to lure the few fencesitter to closing table.

But nice job on the spin >: )

Anonymous said...

Things are progressing exactly as they must. With scores of lenders gone belly-up and the securitization model in tatters, the GSE's represent what's left of the that ill-fated scam. Basically, they are being set up as the mechanism for the final RE bust bagholder handoff.

And the bagholder is not the average RE specuvestor as one might expect. Instead the ultimate bagholder is the GSE bond holder. This list includes mostly foreign central banks but also a lot of pensions. Even some money market accounts are sometimes stuffed with this GSE garbage paper.

Probably the GSE leadership knows very well what the true role of the GSE's now is, and only recently have they resisted this. Even though the conforming limit has been raised north of $700K, very, very few of these loans have actually been written. Regardless, its too little too late and the equity market is now pricing FNM as being seriously under-capitalized and is close to no longer being a going concern. Its gone from $70 to $15 in the last several months so something is definitely not right there, and they won't be able to raise capital easily or cheaply. In fact, the last few weeks look exactly like a CFC liquidity death-spiral.

You guys can look upon this FNM cash infusion as a short-lived mirage. Undoubtedly Bernanke was hoping to float the banking system for a while longer while RE recovered (LOL) or at least long enough to suck in a few more hapless foreign central banks. Good try, but that train has now left the station. You can't undo the damage of a monster RE bubble without trillions in appropriate write-offs, which hasn't remotely happened yet.

Here's a good article that demonstrates how much trouble FNM is in and why the stock is in free-fall. It shows that they have little more than one cent of capital for each dollar of exposure! Yep, you heard that right.

Bottom line: The GSE's will fail and will fail very soon. The market says that I am right on this. Once this happens, you can kiss goodbye what's left of the RE market for years, possibly decades.

Max said...

The appraisers are saying the prices have stopped declining in Manteca.

I guess you can't get lower than zero. How much for one rib?

Wadin' In said...

Very funny thread today everybody:

Sippn: "....appraisers dropped the "declining market" stigma..."

Jane: "...The GSEs dropped the 5% extra for ALL markets...But nice job on the spin >:)...."

It occured to me that Sippn chose his name because it is made up of the letters S, P, I, & N. However, I have been reading this blog long enough to know he chose Sippn based on popping a Heiniken, while making fun of the cheap beer crowd losing their homes. Plus, he likes to sip his morning coffee. He just mispelled his name when he chose his blog handle (too many Heinies that day?). I think that was early 2006.

So for 3 years, Sippn has been touting the virtues of real estate, while Jane (aka Gwynster) has been correctly calling the declining market.

You know, at some point Sippn will be right. It just hasn't happened yet.....and may take a few more years, perhaps even a decade.

In the meantime, I really, really enjoy the banter around here. I keeps everybody honest and provides a good perspective. And as the market continues to crater, I keep Wadin In. I just hope I don't get over my head....

So far rental demand seems strong for the foreclosures I have purchased, but I must say the declining quality of the credit is veeerrrry scary.

Thank you Max for providing a most excellent forum.

... said...

Thanks for the history lesson. :)

Wadin'... since you are "g" challenged also, I'll accept that.

Currently prefer hefe's of any brand, Sierra Nevada Pale Ale as a base. Heinie will do in a pinch, but I'm a sucker for anything on sale. Brought home some IPA's and now my wife has to have those. . . . but I think its more of a political rebellion in the Sippn house...she's such an experimenter..

Visited my best friend in Portland a few weeks ago, spent a day wine tasting (boy do Oregonians have a California chip on their shoulder!) and consumed a lot of fancy beer, etc. but in the end I spied the Bud in the rear of my friend's refer. . . . you can take the boy from away La Jolla, but white trash is still white trash... can I say that without offending anybody?

Regarding rentals, thats what people with poor credit scores do, rent, along with other nice people with good scores.

I wouldn't put too much weight on foreclosures and late house payments in this market if you can see the actual report and the rest looks good.

Big deposits, quick evictions, get their attention.

MJ - thanks for the PHeD ref...
I thinks it was really the GSE's relinquishing the markets to Wall Street (while paying out large bonuses to their CEOs) that's a huge part of the problem. Had they been asking for restraint and regulation, it may have happened.... but the bloodlines are interrelated.

Since you're in academia, are ethics classes required yet? The closest thing I had was a finance prof. telling us that stock buy backs were all smoke and mirrors, "bricks and mortar!" meaning investing money in the company long term instead of stock price prop ups.

Darth - seeking alpha is interesting...

Sold in '05- Bought in '09 said...

For anyone who knows their beer, Heiniken (as sold in the U.S.) is skunk pizzle.

Much like our local faux affluent stucco crap boxes...


Anonymous said...

wadin' in, how can you make the numbers work for rental properties when you are competing against long-time owners who can rent out for much less than you can? Unless you had a lot of cash sitting on the sidelines which you poured into downpayments, you're running a negative cash-flow and things will just get worse as the depression takes hold and rents decline. Not a good time to be leveraging up, imho. Much better to wait a couple more years to see how this plays out. You'll be kicking yourself if you went bottom fishing only to discover that you were actually knife-catching.

Continuing on with the GSE discussion, here is an excellent piece by Russ Winter outlining the capital problems at FNM:

Speaking of which, did you guys see this item showing the need for another $75B in capital at FNM/FRE?

Meanwhile, spreads for credit default swaps for the GSE's are blowing out big time. Its hard to describe how not good this is. Hopefully some of the ostriches around here will wake up and realize that the next leg down is dead ahead. :-)

... said...

Don't you think that its the GSE's that should get priority PHeD help over the private investment banks?

patient renter said...

For anyone who knows their beer, Heiniken (as sold in the U.S.) is skunk pizzle.

I'd have to agree. I don't know if this is true, but the story I heard is that when Heini was first brought to the US, the transit took so long that the beer went bad in route. But upon being consumed, the beerdrinkers in the US didn't know any better and actually became accustomed to the taste. Thus, the American Heini bitter/stale/old beer taste became normal and the beermaker brewed Heini with that taste intentionally.

Speaking of which, did you guys see this item showing the need for another $75B in capital at FNM/FRE?

Yea. It seems the collapse that many people have been predicting is immenent, save for that bailout that many of the same people have also been expecting. We'll see what happens.

Don't you think that its the GSE's that should get priority PHeD help over the private investment banks?

Personally, I can't even answer that question. None of these idiot institutions deserve a piece of my hard earned money. I don't believe in bailouts. They reward risk, encourage further risky behavior, and create many more victims (us/taxpayers) than they relieve.

Regarding the GSEs specifically, they are a freaking joke. They have veered so far off course from their mission of promoting affordability that they're better off left for dead.

patient renter said...

Just checked out that seeking alpha article. Good stuff. One little comment stuck out:

Before the Bush Stimulus Package, the administration was adamant about not allowing an increase in conforming loan limits until Congress tackled full fledged GSE reform. They caved in to this OFHEO recommended safeguard to speed up the process of getting checks in the hands of eager consumers. A decision we may all some day regret.

"WE" regretted that decision right when it was made. Only an idiot would have thought that increasing the conforming limit in the midst of a crashing market that was driven by loose money was a good idea. Unfortunately for us, idiots were at the healm.

... said...

Apparently, a lot of the issue with the GSE's is accounting rule 140 caused them to devalue their holdings based on market information. New rule. Like the investment banks - but the IBs were hiding a lot of leveraged stuff....makes for big changes.

Would have gone unnoticed if not there....just weathering the storm.

Remember when Mommy and Daddy didn't tell you everything?

... said...

SO I believe the hiene story, but how do yo explain the success of Bud (vs taste).

Oh yea, I sent to my Bud friend an obit pic with the dead guy and 2 Bud girls. They do have that.

Anonymous said...

sippn, I can see your point on that for sure!

There's a couple of things that come to mind when pondering why the Fed seems to favor IB's over the GSE's, and depending upon how much of the red pill you have swallowed one or more of these things may make sense to you.

To begin with, the Fed held (until recently) nearly $900B in treasuries, of which well over half is now on "loan" to the IB's via the TSLF, TAF, etc. in exchange for level three assets of questionable value (CDO's). It seems to me that the Fed would only trade garbage for garbage. In other words, the Fed is NOT giving the IB's FRNs (cash) in exchange for CDO's, they are only giving out treasuries which they apparently think are no better than garbage or they believe that the level-three accounting is close to par (doubtful they are that naive.)

This is why I've been saying for a while now that the Fed is playing a very dangerous game with the bondholders. They are putrefying their balance sheet willingly, almost eagerly and the USD has suffered as a result and this putrefaction is also fueling the commodities crack-up-boom. But what is the actual game here? The Treasury (and GSEs) have been printing bonds like mad and so far the foreigners have been gobbling up this paper at a record pace, fast enough to meet the incredible supply. Meanwhile the Fed is all too happy to trade treasuries for garbage to float the IB's and is conspicuously NOT PRINTING FRN's (Federal Reserve Notes) although the FCB's are printing their currencies like mad and sterilizing in the bond and GSE markets.

If the Fed wanted to create a situation where the pigmen (IB's and Fed) owned ALL of the real estate and ALL of the money, the best way to do this would be through and engineered bond/GSE crises. The FCB's assume that bonds are as good as FRN's, but are they? Bonds are backed by the full faith and credit of the US government and FRN's are backed by a very old private banking cartel run by an uber-rich global oligarchy. Who is the actual government and which of the above has better backing? These are hard questions to answer, but I think I know what the answer is.

The IB's (especially JPM and GS) are essentially favored pigmen and have close ties with the oligarchy and old-money families. If the Fed (which is really just a political front group for the oligarchy) decides to implode the GSE's, what better way then to create a crises of confidence where all FCB's would be willing to take 10 cents on the dollar for the bond (foreclosure and asset) mountain? In this manner, JPM/GS wind up with the RE mountain for a song and can sell back the mountain to the Gente over a period of years while the RE market recovers for huge profits, enough profits to easily offset fictitious capital losses and re-capitalize the banking system.

Is this a gloom and doom fantasy? Mr Market says no. BTW, I'm not particularly happy about any of the above in case some of you think that is what I'm all about. I don't have that much vulture capital to play with and thus wouldn't stand to gain much by a complete GSE and treasury collapse. I'm just trying to figure out what these rats are up to and what the big picture looks like. This is more of a mental exercise than anything.

patient renter said...

they [the fed] are only giving out treasuries which they apparently think are no better than garbage

what better way then to create a crises of confidence where all FCB's would be willing to take 10 cents on the dollar for the bond (foreclosure and asset) mountain? In this manner, JPM/GS wind up with the RE mountain for a song

I think you're thinking about this too deeply and giving the Fed more credit (and brains) than they really have. The Fed and the oligarchy have proven themselves to be so ignorant and shortsighted that it's hard to imagine that the Fed has any plans beyond their initiative to "bail out their banking buddies" (as Mish would say) ASAP. The Fed and the big banks don't really need to think up any grand devious plans. The big banks are the Fed and always will be as long as it's around.

Josh said...

I think you're thinking about this too deeply and giving the Fed more credit (and brains) than they really have.

Never ascribe to malevolence what can be blamed on stupidity. That gives them too much credit. :)

Wadin' In said...


The numbers do work. I usually put 25% down. I make a 5.4% return on my investment capital on the last house I purchased (thank you Bear Stearns). $280,000 PP, 6.125% mortgage & $24,000/year rent. If you add loan amortization, my return is really in the 8.5% range.

Your observations are correct though: 1) housing prices are still dropping, 2) rents could soften, 3) interest rates are going higher, 4) and the economy could get much worse. There are risks in everything, but I have a conservative plan.

I like to buy in Oct/Nov/Dec, so I haven't purchased anything this summer. There were too many buyers chasing foreclosures and putting in multiple offers this spring and summer, but that is abating. Lots of REO is just sitting now. I quit buying houses in 1999, and did not start again until late 2007. There are selected deals that work now. But I look at 100 for every one I find that actually works.

I also manage all my own properties and my vacancy rate is less than 1% over the last 3 years. I provide excellent care for the residents of my houses and maintain solid communication with everyone. The reality is that I work for them.

I handle all my own maintenance, so I suppose if you figure that cost, I would be breaking even, but I also get about $1,800/month in prinicple reductions on my total mortgage portfolio.

All these mortgage fraudsters and flippers who paid anything for a property and were pulling $200,000 out from cash back purchase acquisitions are getting tossed on their heads. The time has come where people will start considering an extra $10,000 in price a deal breaker. Imagine that!

In the early 1990's I reduced my living costs by 68% between June 1990 & June 1995. I bought a house at the top of the bubble in Jan 1990 and learned from my mistake. I still own the house, but had to do a "cash in" refi in 1994, to reduce my interest rate! You will all be surprised at how much consumtion you can cut when you put your mind to it.

Sippn, I purposefully left the "g" out of wading, as a hat tip to your nom de plume.

... said...

4 am too. Whew!

Thanks for the rental investment/management lesson.

patient renter said...

"$280,000 PP, 6.125% mortgage & $24,000/year rent."

You certainly sound like you have things under control, but 2k a month in rent on a 280k home? How does that fly?

Deflationary Jane said...

See I don't get that either. If I was going to fork out $2k a month for a house, I'd just buy one.

It also really depends on where that house is located.

Anonymous said...

wadin, great post and I agree with a lot of what you said!

Just remember this: smart money buys when interest rates are very HIGH not when they are near historic lows. Speaking of which, did you see this little gem about the GSE bailout? Say hello to VERY high interest rates dead ahead. Maybe by October things will REALLY be in your favor.

Wadin' In said...

"....You certainly sound like you have things under control, but 2k a month in rent on a 280k home? How does that fly?..."

It is a 2650 SF house, 4 Bd, 3 Ba, 3 car split garage. $.75/SF is the going rent for a nice executive level home in S. Placer.

The existing lender had a $725,000 mortgage on the place, plus arreages for taxes, HOA, utilities, etc. I submitted an offer in Jan. 08. It sat for weeks and weeks while other, higher offers came, but failed to close. The lender agreed to take my short sale offer the day before they went to trustee sale. We got a short extension and closed in 10-days.

This is my whole point to all of you. There are some good deals, if you are patient, if you know where to look, and if you can close the deal. That being said, I am just as concerned as everyone else here about where the bottom will be pegged in ths market.

I moved 50% of my liquid capital out of stocks into T-bills in Dec, 2006 (11,800 Dow?) and the other 50% out in Dec 2007 (12,800 Dow). A lot of people made fun of me as I missed the run up to 14,000. I am now buying back in at 11,200 and made 5% on my money these last two years in T's, while many others have lost 20%.

If the Dow goes up, I win a little. If it goes lower, I buy some more (30% invested now).

The houses I buy must provide a decent return, as there is no point in buying a (very) illiquid asset these days, unless is pays a good dividend.