April 6, 2008

A Foolish Investment In California

The Fresno Bee reports from California. “Some 40,000 to 45,000 Fresno County property owners may be in line for a break on their taxes next year, a silver lining in this deeply depressed housing market. Like their colleagues across California, officials in the county assessor’s office are flooded by requests to reduce the home value assessments that property taxes are based on. They’re getting so many requests, in fact, that they’re taking the unusual step of slashing many assessments without being asked.”

“The adjustments are too late to help with current taxes, the final payment for which is due Thursday. But they may lessen the housing slump’s sting for recent buyers like Peter Fahey, who bought a southeast Clovis home in 2005 for $315,000, only to see its value plummet.”

“Late last year, after a potential lender’s appraisal placed his home’s value at $280,000, Fahey asked for an assessment reduction. Based on recent sales of similar houses in the area, his assessment was cut even more, to $245,000, a reduction of more than 20% that should cut his tax bill by a like proportion.”

“‘Everybody makes a foolish investment at least once,’ he said.”

The San Francisco Chronicle. “As the nation’s housing market swoons, lenders are tightening their grip on their money. Last month, that credit crunch reached Brent Meyers.” “He owns a substantial investment portfolio and a million-dollar house in Moraga. He pays his bills on time and has no credit card debt. His credit score, he says, is around 800.”

“But in mid-March, Bank of America cut off his home equity credit line of a little more than $180,000, citing a decline in the value of his property. Meyers is now scrambling to come up with $75,000 to pay for a major landscaping project and is canceling other big spending plans.”

“‘My wife would like a new car, but that’s going to have to wait,’ he said. ‘We’re taking a $75,000 cash-flow hit, and I want to boost savings.’”

“As home prices started to sink…lenders including Bank of America, Washington Mutual and Countrywide Financial cut back on home equity loans to reduce their exposure to the housing market. ‘These are unprecedented market conditions,’ said Bank of America spokesman Terry Francisco.”

“Warren Leiber, Brent Meyers’ landscaping contractor, sees the spending slowdown every day. His Walnut Creek business, serves an affluent corridor from Benicia to San Ramon. A typical job comes in at $30,000 to $40,000.”

“He estimates that 80 percent of his clients used home equity loans or mortgage refinancings to pay for his services. Now, with that tap choked off, his strapped clients are backing off, knocking $10,000 or $20,000 off their work orders, if they go ahead at all.”

“‘Things started to really go south back in October,’ Leiber said. ‘We would get to the point of reviewing proposals, and people would say, ‘That’s great. Looks terrific. But it’s more than we can spend right now.’”

“‘Some of our clients have not been paying on time,’ he said. ‘I have quite a few clients who owe me various amounts of money. People have their pride. They won’t say they’re having a hard time. That’s started to concern me.’”

“When Meyers took out the credit line in November 2006, his home was valued at $1.475 million. With less than $1 million in principal outstanding on his first mortgage, he had a comfortable equity cushion to cover the line.”

“A few weeks ago, Meyers got a letter from Bank of America informing him that the line had been suspended in its entirety. When he called to ask why, he was told that his house had dropped to an estimated $1.09 million in value, which left insufficient equity to cover the line.”

“Losing the credit line is prompting him and his wife to retrench. ‘I’m going to change my spending behavior because I lost access to $180,000,’ he said. ‘We’re going to be deferring other expenditures to build a pot of money to replace what Bank of America took away.’”

“Bay Area home sales have plummeted to their lowest level in two decades, making the wait between commission checks unbearable for many agents. Bonnie Stevens, an agent in Pleasanton, began her real estate career in 1995, at the end of the market’s last down cycle.”

“‘This is actually worse than 1995. There are agents in my office who have been in the business for 30 years telling me that this is the worst they’ve seen,’ she said.”

“During her 13 years as an agent, a good year for Stevens has meant selling 15 to 18 homes. So far this year, she’s sold only one.”

“But she isn’t giving up yet, although she’s testing out a second career doing direct sales for a Los Angeles clothing company. She said she got into the clothing business because all of the fun had been zapped out of her real estate job and she was looking for something new.”

“‘I wanted to do something different that was more fun than real estate,’ she said. ‘I love real estate, but it’s really not a lot of fun right now.’”

The Monterey County Herald. “The Commons at Rogge Road was to be the model for providing low-cost homes and apartments for people priced out of a superheated Monterey County housing market. The project was praised at every juncture as it made its way through the approval process to its March 2006 unanimous blessing by Monterey County supervisors.”

“Today, the first 46 homes in the phased development are empty. They have been on the market since August. Not one has been sold. And the developers are seeking changes to the original deal designed to ensure affordability of the homes and apartments. They want the changes just to sell the homes, complete the project and avoid big losses.”

“‘We’ve already resigned ourselves that we are going to lose $2 million to $3 million, if we can get the restrictions modified,’ said William Silva, chief financial officer for Woodman Development, who bought the home sites. ‘If not, the losses will be far greater.’”

“It’s the empty homes that are the rub. And they’re why the developers are seeking project changes from the county. ‘Right now we don’t have a fighting chance in the market,’ Silva said.”

“The plan originally was to sell the homes to income-qualified buyers — families making up to 180 percent of median county income — for $273,553 to $483,517. Silva said they’ve cut prices by up to $84,000 to lure buyers, but to no avail.”

“Those one-time affordable prices — up to $300,000 below what some homes in North Salinas were selling for a couple years ago — are now bobbing on the wave of a deflated housing market, where new or foreclosed homes in the same area may be going for the same price or less, he said.”

“Buyers can now find homes in the same price ranges without those kinds of strings attached. The resale restriction is radioactive. ‘No discerning buyer in their right mind is going to buy our house, as nice as they are, with a 20-year deed restriction,’ Silva said.”

“Silva quickly denies any assertion the developers are seeking to get out from under…the provision of affordable housing. ‘That’s not what we are trying to do,’ he said. ‘Everything is work force housing now. We have prices today that match what they were a decade ago.’”

The LA Daily News. “In all the chatter these days about mortgage reform, the new rules for appraisers aren’t getting a lot of attention. But that issue gained traction after New York Attorney General Andrew Cuomo began investigating allegations of conflicts of interest, fraud and other misconduct.”

“One result is that mortgage giants Freddie Mac and Fannie Mae agreed to cooperate with Cuomo and the Office of Federal Housing Enterprise Oversight in helping regulators tighten home appraisal practices to ensure there is some independence in the process.”

“Cuomo subsequently terminated his investigation into some of the business practices at Fannie and Freddie.”

“The result is the Home Valuation Protection Code, scheduled to take effect Jan.1. It essentially tries to prevent anyone in the residential real estate food chain from pressuring an appraiser to inflate a home’s value - a not uncommon practice during the industry’s boom. The mortgage industry has until April 30 to comment on the code.”

“Ted Faravelli, executive director of the San Jose-based California Association of Real Estate Appraisers, conceded that some appraisers were pressured to value homes above the fair-market price during the housing boom.”

“‘We cannot have have future erosion in the public trust as what we do as appraisers,’ Faravelli said. ‘I think we have been tarnished. Much of it is our own fault.’”

“Faravelli also has one big problem with all this. The code doesn’t have any real punishment for breaking the rules. He said that exerting the kind of pressure mentioned in the code should be a crime.”

“‘In short, I think it’s just so much rhetoric,’ he said of the code. (But) ‘I applaud the efforts of everyone trying to find a solution.’”

The North County Times. “Real estate agents are buzzing: Homes are half-priced. There is a swarm of buyers. The housing market is starting to recover. The recovery is being driven by aggressive pricing on cheaper homes, with discounts up to 60 percent off previous sales prices.”

“The best deals, according to listing data, appear to come from areas on the outskirts of San Diego in areas such as Valley Center and Ramona and in foreclosure clusters such as Oceanside.”

“But not everyone is sold on the idea that this is a recovering housing market. Some data suggest that home prices will continue to decline: It would take more than 12 months to sell all the homes listed for sale. Foreclosures skyrocketed in 2007, and some foreclosure trackers expect even more this year than last.”

“Prices have dropped for 19 straight months, with the last four months showing some of the steepest declines.”

“All those numbers fail to faze real estate agents’ optimism because, they say, current activity will not show up in such data for another two or three months.”

“Oceanside has seen some of the county’s deepest price reductions. During the boom of the market, some neighborhoods with relatively higher crime rates saw home prices soar past $450,000. Now, some of those homes have entered, or are in danger of, foreclosure and are listed for less than $200,000.”

“Despite a price tag more befitting the Midwest than San Diego, many of the Oceanside homes struggle to sell because of the condition and location, real estate agents said.”

“Maria Lopez, a Vista agent, listed a Libby Lake-area home for $199,000 to $212,000, at least 57 percent below the last time it sold in 2007 for $490,000. Foot-high weeds blanket the home’s front and back yards. Bits of trash litter the deeply stained carpets inside. But there are no holes in the wall. This one is in good shape, Lopez said.”

“Still, the five offers she has received are all from investors, not would-be homeowners. ‘Even though there’s people who want to buy a home at this price, they don’t think it looks like this. They don’t see the value,’ Lopez said.”

“Mostly, investors will look to fix up a home and sell it for a profit. But some homes are so deeply discounted, said Brian Crisp, a San Diego broker who structures loans for investors, that investors can rent them for a profit.”

“‘My business had doubled just in this month. And I’m seeing some cash-flow potential with a lot of deals lately,’ he said. ‘But those guys (investors) are running a lot of risk because there’s so much volatility in the market. … Your exit strategy has to be really bulletproof, or you’re going to lose your shirt.’”

“Some analysts said that sellers are hesitant to reduce their asking price, meaning widespread affordability could take a long time.”

“‘Those who are paying attention and realizing that they’re not getting any offers, they’re going to figure it out and lower their price,’ said Jim Klinge, a real estate agent in Carlsbad. ‘How many sellers are willing to keep lowering their price until it sells? Maybe one out of 50.’”




Prices In Other Countries Were Even More Overvalued

I suggested the possible global housing bubble collapse as a weekend topic. “As a weakening housing market appears to be dragging the American economy into recession, the International Monetary Fund warned this week that home prices in other industrial countries were even more overvalued. The fund also concluded that central banks should pay close attention to home prices and consider raising interest rates when prices are rising rapidly.”

“That conclusion is directly contrary to the established policy of most central banks, including the Federal Reserve, which ignores home prices when they are expanding.”

One asked, “How will this affect the U.S.? Will it end the ‘decoupling’ scenario, where global growth prevents the U.S from spiraling downward? Will it cause the dollar to crash, as net savings countries have losses to cover back home?”

“Or will this cause the dollar to stabilize or even rise, as people conclude that all the other countries are skewed too? Finally, what does a global bubble, in places with different cultures and economic systems, say about human nature or our modern globalized society?”

A reply, “IMO Asian economies are decoupled from USA, but the financial systems are not. I don’t see how this scenario is dollar-positive.”

More questions, “Lots of paper wealth is going away in the first world countries because of RE deflation. Will this be the end of emerging economies blistering growth?”

Another said, “What becomes of the Pound & Euro? England is in a much bigger mess than us. Houses went up many multiples more there, and the cost of living is absurd.”

“German & Swiss citizens didn’t participate in the housing bubble, but their banks went all in. Ireland & Spain might just be the cause of the breakup of the Euro, as the other senior members are highly cognizant of the possibility of these 2 rotting apples, spoiling the rest of the barrel’s contents.”

“Other tiny (NZ) or moderate bubbles (Australia & Canada) just add fuel to the financial fire. China doesn’t get talked about much on here, but friends that travel regularly there, tell tales of posh condos built on spec, that sit unoccupied for years, this on top of the Shanghai stock exchange falling almost 50%, recently.”

“What does it all mean to each of us on an individual basis?”

From Bloomberg. “Thanks to Spain’s slumping property market, house buyers are as popular as movie stars. Reporters outnumbered bidders as lot No. 1 hit the slate in Europe’s first ‘Dutch auction’ for real estate last weekend in Madrid.”

“Of 216 lots, 194 were withdrawn when they weren’t purchased at the reserve price. One man, investor Manuel Sainz, bought almost half of everything sold.”

“‘Next stop Hollywood!’ laughed Sainz, head of property company Las Terrazas de San Blas SA, as he fought off the press after buying 10 properties at discounts of as much as 30 percent. The event shows the depth of Spain’s housing bust after prices tripled in the past decade.”

Scotland on Sunday. “House prices in Scotland are now at a virtual standstill with the global credit crunch and the mortgage squeeze starting to affect owners throughout the country.”

“Professor Gwilym Pryce, of the Urban Studies Department at Glasgow University, said: ‘In real terms we are at zero growth now and what happens next depends on the wider economy…My worry is the lower end. Many more people own homes in Scotland than they did in the early 1990s and the level of mortgage indebtedness has been increasing. The bottom end of the market could be flooded with people wanting to sell.’”

“Mark Hordern, marketing manager at the GSPC, said: ‘In the last two or three weeks the market has slowed noticeably. People still want mortgages to buy new homes, but it is increasingly difficult to get a mortgage to allow you to pursue the purchase. Effectively there are no 100% mortgages any more.’”

Trend Capital. “By the end of the year, the prices in the real estate market will increase by 12-20%, the Head of State Real Estate Register Service, Arif Garashov, said on 1 April.’”

“With regards to the activity of the market, Garashov said that although the market was stable over the recent period, it is impossible to consider the situation as stagnant.”

“Many housing buildings are being constructed in almost every part of Baku. Considering that there are not such a large number of people in Azerbaijan, all apartments cannot be sold immediately.”

“‘In addition, it needs to take into consideration that those who urgently need apartment already acquired it and it is one of the reasons for stability in the market,’ Garashov said.”

“The public organization Participants of Real Estate Market stated that the average prices of apartments in Baku had exceeded $130,000 in February.”

“Land scarcity, real-estate speculation and rapid urbanization are fueling soaring prices for graveyard plots. Chinese consumers, facing the fastest inflation in 11 years, are finding that the rising cost of living has reached into the afterlife as buying a graveyard plot becomes more expensive than a home.”

“Five of the capital’s major cemeteries charge as much as 30,000 yuan ($4,273) per square meter for a standard plot, compared with an average of 20,000 yuan per square meter for an apartment in the city center, the English-language China Daily reported today.”

National Business Review. “A senior Cabinet minister has criticised banks for fuelling the housing debt boom and has suggested they have only themselves to blame. Agriculture Minister Jim Anderton said today that if house prices fell as much as the BNZ was warning, banks should look in the mirror.”

“‘Although wages and incomes in New Zealand have been growing quickly, they have not been growing at a pace that could keep up with inflating house prices,’ the minister said. ‘The banks have provided the fuel that has pushed up house prices over a fairly long period now.’”

“‘It’s all very well to warn now that house prices could fall. But where was the BNZ a year ago when it was maintaining another 14 percent increase in indebtedness? It’s a bit rich for the pot to now be calling the kettle black,’ he said.”

The Toronto Star. “Realtor Jim Common has been riding high on one of the most bullish markets in Canadian history. Just don’t ask him about this year. ‘It’s been miserable,’ the ReMax agent said. ‘Buyers just seem stopped dead in their tracks.’”

“The Royal Bank of Canada released a forecast for Ontario, saying the province was ‘teetering’ on recession as certain sectors of the economy, particular manufacturing, are hit hard by the soaring Canadian dollar.”

“A report by the bank last month also noted a ’significant shift,’ with the proportion of Canadians planning to buy a home in the next two years falling to 23 per cent, down 5 percentage points compared with 2007.”

The Star Phoenix. “Saskatoon house prices appear to have eclipsed Edmonton’s prices in the first three months of the year, but a local real estate sales manager says average family income here can’t pay for Edmonton-level house prices.”

“Royal LePage’s national quarterly report notes ‘thriving Saskatoon’ saw year-over-year house prices on the west side of the city jump 66 per cent in the past year.”

“That’s the biggest increase anywhere in Canada, but local Royal LePage sales manager Norm Fisher sees the ever-rising prices city-wide as a double-edged sword. ‘When an average family income can’t service a mortgage on an average home, you can’t continue that indefinitely,’ he said.”

“While standard bungalows in Saskatoon sold for an average $340,000 in the first quarter — a 50 per cent rise in one year — the price in Edmonton was $330,000, a drop of 4.9 per cent. Standard two-storeys in Saskatoon sold for $395,000 on average in the first quarter of 2008 while the price for that type of house in Edmonton was pegged at $363,707.”

The Leader Post. “Regina housing prices are continuing to go through the roof, with year-over-year increases ranging between 40 and 60 per cent, according to the latest quarterly report by Royal LePage.”

“For example, the average price of a bungalow in Regina jumped 50 per cent to $237,000 in the first quarter of 2008 compared with the same period last year, said the report. Detached two-storey houses saw a 42-per-cent increase to $227,000, while condos saw the biggest price increase — 57 per cent — to $161,000, compared with the first quarter of 2007.”

“Mike Duggleby, manager of Royal LePage Regina Realty, said Regina home prices are finally catching up with prices in Saskatoon and other major urban centres in Canada. ‘We’re just playing catch-up,’ he said.’”

“‘Even though some people are getting a little frightened by what’s happening in the market, we’re still behind other centres as far as housing prices are concerned,’ Duggleby said.”

“And with average prices $100,000 below the national average, there’s plenty of room for price increases, he added. ‘If you’re waiting for prices to come down, don’t hold your breath.’”




Local Market Observations!

What do you see in your local housing market this weekend? Speculation? “As Southwest Ohio and Northern Kentucky enter a third straight year of declining home sales and falling prices, a new term has been folded into the local housing market vocabulary: Correction. ‘We’re getting back to reality in terms of pricing. Over the last five years, everybody became an expert in real estate,’ said Michael Dinn, a partner with downtown-based Property Advisors. ‘It became water-cooler talk, and it was a very speculative time in terms of value. What we’ve been experiencing is a correction – a housing hangover if you will.’”

“There are plenty of empty homes in North Texas. Homeowners are concerned about their property values with an uncertain future — especially with so many empty lots in the neighborhood. ‘We wanted neighbors, and we’ve got lots that are vacant that may not get built on for a while — and we don’t know when,’ said Joyce Hardeman.”

Slower building? “The demand for new homes in the Columbia region slowed significantly so far this year. Builders in Richland, Lexington and Kershaw counties saw a 33 percent drop to 1,082 single-family homes in the first three months of the year, according to the Home Builders Association of Greater Columbia.”

“‘We were expecting a downturn. I don’t know if I was expecting that much,’ association executive director Earl McLeod said.”

“‘This is the worst I’ve ever seen it,’ said builder David Beck, who has worked in the Columbia area for 17 years. ‘We’re just riding this to see what’s going to happen. I don’t think that it’s ever going to get back to the way it was.’”

“Beck said he started sensing a problem a year and a half ago, especially in the overbuilt areas of Northeast Richland. ‘The market was pretty much destroying itself,’ with people qualifying for loans to buy houses they couldn’t afford, Beck said.”

Bubble fallout? “Lawmakers are considering about 20 bills introduced in reaction to California’s wave of foreclosures. More than 37,000 notices of default were sent out statewide in February — up from about 27,000 in November. More than one-fifth of those homes were in hard-hit Riverside and San Bernardino counties.”

“The state legislation includes no direct financial help for builders, homeowners or others hurt by the housing slowdown. ‘Realistically, we don’t have the money,’ said Assemblyman Ted Lieu, chairman of the Assembly Banking and Finance Committee.”

“San Diego’s office vacancy rate spiked to its highest level since 1996 in the first quarter thanks to a combination of weak demand and new buildings coming to market. Brokers point to a slowing economy and the fallout from the housing bust as contributing to the vacancy boost. Many mortgage companies, title firms and home builders have closed or downsized over the past year.”

“‘The residential real estate industry ripple effect is a blood bath,’ said David Marino of Irving Hughes, which specializes in representing tenants. ‘When we got hit hard in 2001 through 2003 in the tech side, the residential real estate guys took a lot of that space. Today, there’s no recovering industry sector to offset’ the decline from housing-related companies.”

Lower prices? “The median price of a single-family Thurston County home fell last month compared with the same period a year ago, but South Sound real estate agents said they were not worried about it.”

“South Sound real estate broker Doug Burger said he didn’t know the last time single-family home prices fell in the county, but he said he was encouraged that the price drop was small. ‘For us in Thurston County to experience only a slight decline speaks highly of the strength of our area,’ Burger said.”




Bits Bucket And Craigslist Finds For April 6, 2008

Please post off-topic ideas, links and Craigslist finds here.