HBB Rates The Media: Southern California
A review of the media and the housing bubble continues with southern California.
The good:
Voice of San Diego, April 2005: “The developers have learned a new trick after the last local real estate price bubble popped in 1989. It’s called controlling the ‘absorption rate.’ It goes like this: A builder gets the land and zoning approvals to build new housing subdivisions, but only builds in small numbers of new homes. That is done for two reasons. One is to make sure that housing prices remain high by limiting the supply of new homes, and the other is to ensure that they can sell all the homes in each partial release of homes before they invest in the next.”
“The San Diego Building Industry Association has done a very slick public relations job of linking the problem of a lack of affordable housing and regulatory restraints on unlimited homebuilding in the public’s mind. The argument is that we could build a lot more homes if the regulations didn’t get in the way.”
“The truth is that builder actions to limit the number of homes they release into the market at any one time is a key factor driving up home prices, along with all the young speculators who are getting in with nothing down. Many of the speculators are going to go bust when the price bubble bursts, but the builders will continue to profit as much as they can.”
The Press Telegram, May 2005: “Properties across the board are sitting on the market longer thanks to a rise in the number of homes for sale. The state’s housing inventory is double the level of last year, according to the California Association of Realtors.” Sales of homes for $1 million and up rose from 19,100 in 2003 to 33,100 in 2004.”
“‘I think it’s a psychological threshold as well as a threshold for financial obligation,’ said Robert Kleinhenz, an economist with the CAR. In talking with realtors, more people are backing out of the luxury market, or looking at more affordable options inland, he said.”
“Even at the high end of the market people are shopping for the best deal, said Richard Daskam, with Keller Williams Realty in Long Beach.”
Again the Press Telegram in May 2005: “A blazer and slacks just don’t cut it for one local real estate agent. Heath chose to wear a bikini on a billboard she posted earlier this month. The advertisement is turning heads quicker than a Naples Island open house. ‘It’s kind of flipped people out,’ said Heath, who reported receiving almost as many calls from Realtors upset with the ad as those voicing support. ‘A couple of agents are having a fit about it, but that’s because they just didn’t think of it first.’”
“In a competitive business like real estate, people are increasingly being forced to find creative ways to get people to remember their names, marketing experts say. ‘The problem is everybody has a (real estate) license nowadays, and unless you differentiate yourself, it’s tough to make a living.’”
The Desert Sun, April 2005: “Retiree Fred Crutcher, 68, and wife, Patricia, have had frustrating experiences as both buyers and sellers. While they’re very happy with their new home in northern Palm Springs, they’re still trying to sell their former home, a large two-level condo in southern Palm Springs.”
“The couple listed the at $589,000, but have since reduced the price twice, it is now listed at $580,000. ‘It’s really hard to tell why it hasn’t sold so far,’ said Crutcher. In the meantime, the couple is now having to pay two mortgages, not to mention homeowners’ association fees in two places.”
The Orange County Register: “‘We’re dead in the water as far as home-price appreciation’ if interest rates rise another half-point, said one in Laguna Niguel. ‘Wages are just not in line with home prices.’”
“Paul Scheper of L.L. Financial in Aliso Viejo noted..’inflation fears, prompting an increase in rates. It’s a knee-jerk reaction’…there’s ‘no need for concern or panic - unless the … (jobs figure) does the same thing again.’”
The bad:
Union Tribune, May 2005: “Bill Holz of Eastlake is a Navy command master chief…He and his wife Nancy decided to put their home on the market after less than two years of ownership. Using prices of comparable homes as their guide, they listed it in early February for $919,000, nearly double the $509,000 they paid originally.”
“‘We upgraded the house to the hilt. We probably have $100,000 in upgrades…People don’t make enough money to buy them. Your buyer pool is like a pyramid, the higher the prices, the smaller the pool of qualified buyers. We’ve got to get somebody moving up from another house or condo or town house that might be able to buy these houses.’”
“Alleda Harrison (a realtor) said the current market requires sellers to price their homes less aggressively. Instead of tacking on 10 percent or $25,000 to the price last paid in the neighborhood, sellers should hope they can get a price equal to the last comparable home sold nearby.”
UT, April 2005: “More than 40 percent of the 120 units in Park Boulevard West condo complex are non-owner occupied. At the 86-unit Crown Bay project, roughly half of the property tax bills are mailed to addresses outside the complex. At the 211-unit Horizons tower, it’s about about 35 percent. ‘You’re not going to lose money on property,’ (said one speculator.)”
The North County Times, May 2005: “‘Home values and purchase prices have gone up so tremendously, it’s led to a number of products to assist consumers to be able to buy and to provide flexible options so they can afford what they buy,’ said according to Doug Perry, of Countrywide Home Loans.”
“When Paul Espinoza decided to refinance the home he owns he decided to go with an interest-only package in order to reduce his monthly payment. What he didn’t know at the time he signed his refinancing documents was that his principal amount would continue to climb. ‘The cost to you is really the amount that the principal goes up over the period of the loan,’ said Espinoza who felt that he wasn’t made fully aware of that possibility by his lender when he arranged for the new deal. ‘I’m curious why this isn’t mentioned by loan officers?’”
“Rob McNelis, president of the California Association of Mortgage Brokers’ San Diego chapter said, ‘We’ve all known this rapid price appreciation is unsustainable. Historically, the real rate of home price appreciation is around 3 to 3.5 percent; not a bad day at the races when you realize it’s free money.’”
North County Times, May 2005: “The Realtors report issued last week found the median price of detached homes in Carmel Valley closing in on $1 million, up an even $30,000 from March to $985,000 in April. ‘The theory is, hey, you’ve got two homes, either a vacation home or a primary residence,’ Jim Vanderspek, an Escondido certified public accountant, said. ‘If you don’t want to rent a second or vacation home, it makes a lot of sense to move every two years and then be exempt from capital gains every time.’”
“People who are that property-rich, Vanderspek says he knows of one person with six houses, may not think renting out their home is a good idea, he said. Leaving the house vacant reduces maintenance costs and potential problems with renters. And if you buy with cash, as some are doing, there’s no mortgage to pay off. ‘People are deciding to buy real estate as a straight cash investment. They can just own it and watch it go up in value,’ he said.”
The Santa Maria Times, May 2005: “Financial experts have lately become fixated on the “bubble economic theory,” which basically insists that economic forces create bubbles in various markets, then counter-forces burst the bubble.
The collapse of tech stocks in the late 1990s is a classic demonstration of bubble activity. That market went crazy for several years, turning teen-agers into Ferrari-driving multi-millionaires. The kids who used to be known as computer geeks quickly became sirs. Then that bubble burst, and the sirs went back to geekism and Ford Fiestas.”
The thing about bubbles is no one really knows how long they/ll last. America/s homes are not dot-com stocks in the late 1990s or the Japanese stock market of the late 1980s. Homes have utility that stocks don/t have 7 you can live in a home. If the housing market softens and you lose a little short-term equity, it/s a safe bet you/ll get that value back just by waiting out market swings 7 and have a comfortable place to live while you/re waiting.”
“In other words, don/t sweat the bubbles, which seem to be connected and have a life of their own.”
The LA Times, May 2005: “Kim Kaul, a 36-year-old San Diego homemaker, was an unlikely player..with four young children and a rented apartment. Kaul saw a posting on the Internet..He sold the contract to Kaul for $8,500, money she took out of the family’s meager savings.. the Vegas market caught a chill.”
“She found a tenant, who pays $1,250 a month. But her mortgage was $3,000. When her husband lost his job, the situation became dire. The couple paid the January mortgage with borrowed money, then gave up. ‘I’m sure the market’s going to pick up, but I can’t hold out that long. This is kind of a bummer.’”
The LA Times, April 2005: “The LA Times is reporting on a ‘real estate expo less like a hard-nosed business event than a Gen-X and boomer-friendly rave. ‘It’s a mega-event,’ added Bill Zanker, president of the Learning Annex. ‘L.A. is responding like wild. Everybody in L.A. is talking about real estate. It’s the new aphrodisiac..the new type of rock concert.’”
“The New York-based company (is) famous for its workshops and classes such as cardio striptease and tarot card reading.”
“What they are calling the ‘classes’…’The Lazy Way to Create Real Estate Wealth, How to ‘Quick Turn’ Real Estate in Los Angeles With No Money, Credit or Risk, and How to Get Free Money From the Government for Real Estate.”
Market observers, you decide.
May 2005: “We expected things to level off a little bit this year, but it appears that’s not the case,’ said Jim Link, association vice president. ‘People are concerned that if they didn’t buy now, they won’t be able to afford to buy later.’ Mike Davis, president of the association’s Santa Clarita Valley division, said ‘It’s (a) good to buy and (a) better time to sell,’ Davis said. ‘If someone is going to relocate they should do it sooner (rather) than later.’”
March 2006: “February marked the 13th consecutive month that the region’s median price rose at least 20% year-over-year..’There’s still plenty of gas left in the tank,’ said DataQuicks John Karevoll.”
“Economist Christopher Cagan says the price increases are moving inland and ’suddenly starting to pop, and when it comes, it comes like a really hard whip crack.’”
“In Los Angeles County, sales dipped 8.6%, in Orange County sales fell 11%, in Ventura, sales slid 3.9%, and in Riverside County, sales edged down 2.7%. Michael Davin of CataList Homes in Hermosa Beach believes the region’s high prices are ’sucking the oxygen out of the market.’”
“‘San Diego should have hit the wall about a year ago,’ Karevoll said, ‘but since then prices have..gone up another 16%. There is some uncharted territory we’re in right now,’ he said. ‘And we would love to have had a chart.’”
April 2005: “County residents moved out of Southern California entirely, too, largely in search of cheaper real estate. It’s affordability that’s causing middle-class flights. People can’t afford housing in Los Angeles, but want to stay in the Southwest and will commute long distances. ‘We’re getting a little bit too expensive,’ economist Jack Kyser said of the county, noting a similar trend in Orange County, where 27,590 residents left for other counties last year.”
May 2005: “DataQuick analyst John Karevoll said he gets more calls about San Diego from East Coast financiers than for any other market he monitors. ‘We’re being watched,’ Karevoll said. ‘We’re under the magnifying glass.’”
“Anne Throckmorton said that most real estate professionals remain optimistic. ‘We went around our group, asking about each state’s market areas, and there wasn’t one area where the market was down,’ she said. ‘It was a very ebullient attitude.’”
May 2005: “With no savings, and a college loan to repay, Kelly Pearson took out a mortgage for 100 percent of the price of the house. Closing costs were paid for by a $10,000 gift from her parents. Her plan: to borrow more soon and invest in a condo. The number of homes sold in San Diego in March fell compared with the number sold in March 2004, the eighth monthly year-over-year decline in nine months. The number of San Diego listings swelled 27 percent in March, to 7,062 houses for sale, up from 5,555 for sale in March 2004.”
“Jerry and Laura Satran’s Sunday open house is empty. (They) are asking $1.3 million. But here they are, the second week the house has been on the market, drumming their fingers. The previous Sunday, Jerry says, 40 visitors stopped by. No offers. Two weeks later the Satrans receive an offer: $1.2 million. Not the full asking price. No one seems more disappointed than the neighbors. One woman suggests the Satrans would be hurting the entire block if they settled for less than $1.25 million. ‘She says she was only going to be here for two years, so don’t screw up the comps,’ says Laura. ‘She’s not being cruel, everybody who lives here is in it for the investment.’”
May 2005: “Steve Johnson, of the self-described ‘real estate think tank’ ‘The resale market is the most significant driver of the new housing economy, due to the trillions of dollars of equity relative to debt. Conservative lending practices and a universal merchant marketing/retail approach to new home production drastically limits speculative building in this region,’ Johnson said.”
May 2005: “It’s old news that fewer than one of every five California families can afford a median-priced home in the state. A far different question might be to ask what percentage of families can afford any home at all. ‘It would appear that close to half of California families are on the outside of the market. ‘That is unhealthy,’ said Steve Johnson, director of a real-estate think tank.”
“Another factor helping some people is the fact that some lenders now are offering 40-year mortgages. ‘It seems like all we’re doing is renting from the bank anyway,’ Johnson said. ‘I remember when mortgages went from 20 years to 30 years, so I suppose this is not that big a deal.’”
“Economist Jack Kyser says people with lower incomes could benefit if we were able to ‘unlock’ parts of the housing supply. ‘There are some areas, such as South Los Angeles, which are very affordable and very centrally located,’ Kyser said. ‘The thing that’s keeping this part of the supply “locked’ is problems with crime and with poor schools. It won’t happen overnight, but if we could improve safety and the schools in some of these areas, we could add a lot more housing supply.’”
April 2005: “In some neighborhoods of Los Angeles where, in addition to offering as much as $75,000 over the asking price, buyers are sending flowery bios, pictures, and letters to sellers. ‘I just oohed and ahhed my way from room to room,’ read one letter to Jane Centofante, who was selling her 2,000 square-foot home in Westwood, a tony L.A. suburb, for a cool $1.49 million. ‘I gather from your [house] that you are warm and smart and bring incredibly beautiful detail to your world.’”
“‘They’ve had to kiss a lot of frogs before they find their prince,’ says Ms. Jacobson, a native New Yorker. ‘But those other frogs will find their palaces, too. There are still plenty of opportunities.’”
March 2005: “In his report, UCLA Anderson Forecast Director Edward Leamer …points out that historically; economic expansions have not lasted very long, with five of the last nine lasting only 14 quarters or less. The current expansion is 12 quarters old right now and Leamer sees no growth spurt on the horizon that will extend it much further.”
“In a detailed discussion, Leamer reveals that the three longest expansions in history all experienced growth spurts during which the rate of growth of GDP was abnormally high and the rate of unemployment was driven down. Each expansion is different, with different stimuli bringing about the growth spurt. But Leamer sees no clear stimuli on the horizon in 2005, ruling out both tax cuts (which have already occurred) and monetary stimulus (which has also occurred through low interest rates). An increase in government spending is doubtful (unless it is wartime spending), leaving only exports as a possible ray of hope. Exports were a major factor in the length of the Reagan expansion, and the declining dollar vs. the Euro should stimulate this sector.”
“Leamer concludes with the assertion that a recession is in the future; he just doesn’t know when yet. He doesn’t see it in 2005, but believes it could happen in 2006.”
“In California, UCLA Anderson senior economist Christopher Thornberg says that at best the state economy can be expected to maintain slow growth over the next few years as the weak housing sector saps off strength created in other parts of the state’s recovering economy. ”
May 2005: “‘Affordability is a serious issue,’ said Esmael Adibi at Chapman University in Orange. ‘The fact is that more people are trying to buy more housing than their incomes can justify.’”
“By letting short-term interest rates hit rock bottom, the central bank helped drive down mortgage rates. That in turn created an exaggerated demand for housing, Adibi said. ‘The Fed caused some of the problem, no question,’ said Adibi, who believes local housing prices may start to fall by the end of the year.”
“Adibi and others suggested that Greenspan might be trying to reduce the impending shock of a slowing housing market. But Greenspan’s remarks may be ‘too little, too late,’ said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast who has been among the few economists to emphatically describe California’s housing market as a bubble.”
“People have been freely spending ‘because they feel wealthy’ thanks to soaring home prices, he said. ‘When the market cools, it will have implications beyond real estate,’ Thornberg added.”
