HBB Rates The Media: Northern California
The look at the media and the housing bubble in northern California.
The good:
Santa Cruz Sentinel, May 2005: “The median price for single-family homes in April was $715,000; March’s median was $723,129. The average price of a single-family home last month was $803,238, the second time it’s been over $800,000; the average in March was $821,695. The continuing high housing prices, said (realtor) Szychowski, are the result of those low interest rates, combined with low inventory and the loans available.”
“The interest-only loans have pulled in another huge buying pool,’ he said. ‘We’re seeing a lot of dual incomes and a lot of big down payments on the move-up buyers, which is new equity created by this run-up.’”
The Contra Costa Times, May 2005: “The president of the Federal Reserve Bank in San Francisco, Janet Yellen: ‘There are some fundamentals that explain why housing is doing so well at the moment. A key one is low interest rates. Mortgage rates remained quite low, and they really haven’t risen a lot since the Fed started to tighten monetary policy. Incomes are rising. People feel more optimistic about the future.’”
“‘The Bay Area economy has roughly stabilized, but we haven’t regained what we lost. We’re just growing modestly. I don’t think the IT sector has revived and is growing robustly enough at this point to really generate strong growth in jobs here.’”
“‘Is it a bubble? Nobody ever knows for sure until one pops. I wouldn’t rule out the possibility that there’s a bubble and we could have house price declines ahead.’”
The San Francisco Chronicle, May 2005: “Why buy a home when you can rent for half the cost? That might seem like heresy in the Bay Area, where real estate is not only a craze, but sometimes feels like a cult. ‘Every two or three years, I get the urge to buy a place to live in, and then the urge goes away very quickly,’ said Guy Smith, an Alameda marketing consultant who lives and works out of his rented $1,300 beach cottage in the island city.”
‘Smith said that if he bought a $550,000 home in Alameda, he’d put down $50,000 and borrow the rest, making his monthly payments somewhere around $2, 500. But because he is worried about a Bay Area housing bubble, and enjoys the hardwood floors and water views in his rented cottage, Smith says he will stick with renting. ‘I would like to be putting equity into my own pocket, but there’s no way to do it,’ Smith said. ‘The amount of risk and up-front capital is not matching the amount of reward I want.’”
“Real estate agents, for their part, will tell you that the tax advantage that comes from deducting mortgage interest is enough reason to buy a home if you can afford it. It’s money down the drain to rent, they’ll say. But there is an alternative viewpoint held by people who do not value building equity above all other considerations, or have no desire to house-hunt in this atmosphere. ‘Personally, I don’t like the idea of overbidding 13 times and not getting the house,’ said Jim Buckmaster, chief executive of Craigslist in San Francisco. ‘I am a minimalist and I don’t have the patience for that type of thing.’”
“Even mortgage professionals see the point in renting. ‘It’s easier to be a renter with the current level of competition for buying homes, especially if you have a static income,’ said Kevin Clay, a former head of the California Association of Mortgage Brokers. ‘When you rent, you have more flexibility. You can get another job and move. You don’t have the responsibility of a home. You don’t have to pay the plumber to fix the toilet.’”
The Mercury News, March 2005: “Mortgage rates are creeping up slowly but relentlessly, pricing more residents out of the Bay Area’s housing market. That means some residents can’t buy houses because they won’t be able to afford the higher monthly payments.”
“Last spring, a buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76. (Mortgage broker)…Doug Jones says he thinks a big pool of homes could hit the market this year, especially as many homeowners with lots of equity in their homes think to themselves, ‘If I don’t get this house sold, rates may go up and I may not have the qualified buyers.’”
MN, April 2005: “Bay Area residents have invested heavily in property outside the area, especially in places like Las Vegas, Sacramento suburbs and Phoenix. In the first eight months of 2004, Bay Area buyers purchased more than 13,700 homes outside the region and somewhere in western states.”
The Sacramento Bee, April 2005: “It’s hard to find a bigger proponent of homeownership than Scott Syphax, head of Sacramento-based Nehemiah Corp. Syphax’s advice: Wait it out a year. In that time, he suspects, the market will cool, meaning more homes to choose from and maybe even some bargains.”
“In today’s market ‘it’s certainly hard to even think of breaking even in terms of the rents,’ said Joan Krizman, a longtime Sacramento investor-landlord whose family owns nearly 70 homes in the east Sacramento and Land Park areas. Krizman said the woman, who’s been buying homes as rental investments nationwide, was hoping to get $1,200 a month because her mortgage payment was $1,600. ‘I hate to disappoint her but I have to. She’ll be lucky if it rents for $995 a month.’”
“Rental industry sources say investors from other regions continue to purchase single-family homes here without doing their homework. These investors, including many from the Bay Area and Southern California, are often disappointed to learn that the rents they had hoped to fetch here are hundreds of dollars above market.”
The bad:
Modesto Bee, April 2005: “The California Housing Finance Agency has thrown a ‘life raft’ to residents…’A fixed-rate, 35-year loan — an alternative to the mortgage industry’s conventional 30-year loan — offering buyers interest-only payments the first five years. ‘It’s aggressive and exactly what’s needed at this point in California,’ said Michael Faust, legislative chairman for the California Association of Mortgage Brokers.”
April 2005: “The Contra Costa Times tells us buyers are sleeping in their SUV’s to get to bid on homes. ‘In one respect, it’s sort of sad that it’s come to this,’ said Jim Croy, who took a day off work to take the head of the line.”
“San Francisco resident Melissa Shanoian persuaded her sister to drive by periodically to see if a line was forming. She and her husband, rushed to the site at 9:30 p.m. Thursday to become fourth in line (for) townhomes that go on sale Sunday. ‘I just made it,’ she said. The couple placed a television in their SUV and inflated an air-bed for the night. Shanoian’s sister brought her a muffin and coffee in the morning while her husband went to work.”
“The camp-out pleasantly surprised company officials, said DeNova sales and marketing director Debbie Bahr. Her husband slept in the van overnight and she stayed there during the day, alternately knitting an orange scarf or reading. ‘Right now, the price looks OK, and that’s the reason that we’re jumping into this. But I didn’t know that people do camping for housing.’”
The San Francisco Chronicle, April 2005: “Last week, a little duplex in Bernal Heights was listed for $799,000. As is customary for most real estate sales in the City, offers were to be reviewed on an appointed date about two weeks later. But after the property had been on the market for only a few days, as agents and prospective buyers were still swarming the property at the broker’s tour, the building was already in contract. The price? More than $1 million. The buyer? Someone who knew better than to wait around for the offer date.”
“I thought about how to coin this kind of activity: ‘cut ahead of the line and pay through your nose’ bid or ’snooker the suckers, then laugh all the way to the lender’ offer. In real estate parlance, though, it’s already got a name replete with hawkish overtones. The pre-emptive offer.”
“‘It’s become a standard question,’ said veteran agent Jan Neufeld, who added that at a recent showing of one of her listings, three real estate agents in a row asked her about backdoor bids. ‘First, you ask when are offers being presented,” she explained. “Then, you ask if the seller is accepting pre-emptive offers.’”
“‘People are trying to do more of them,’ said Alice Micklewright, of Pacific Union Realty. ‘I’m getting approached [about pre-emptive offers] every time we have a new listing.’”
“In a market that is so inherently insane, perhaps it’s only agents, with their acute sensitivity to the ethics of their industry, who will dare to use the innocent word unfair in the context of real estate in the Bay Area. Who really cares if some people aren’t waiting for the offer date, but, instead, throw cash at the problem out of turn? The offer date is good for sellers, because it foments a bidding war, and it’s fair to buyers, because they all get to bid on houses. But, of course, what’s unfair is that the majority of people can’t afford them, no matter how you slice the business ethics.”
“In the end, the pre-emptive offer is emblematic of the way the real estate market has come to represent the businessification of the average citizen. Once, buyers were just home seekers; now, if they want to join the game, they are aggressive players in a dog-eat-dog industry.”
Market observers, you decide:
March 2005: “Another month, another real estate record. Median prices for existing homes in the Bay Area hit an all-time-high of $569,000 in February, rocketing 19.5 percent from $476,000 in February 2004 and up 2.3 percent from $556,000 in January. Prices are increasing at their fastest pace in four years, according to DataQuick Information Systems. ‘It’s stronger than we’d anticipated,’ said John Karevoll, a DataQuick analyst. ‘These numbers show there’s still gas in the tank, and the market has a way to go before it levels off. We did not anticipate a downturn but thought we’d be coming in for a soft landing.’”
“The bottom line is lots of buyers and very few homes,’ said Joan Underwood, a broker who specializes in El Cerrito and Richmond Annex. In the Annex, she’s seen ‘a huge surge in prices in the past month or so, almost like a racehorse galloping out of the gate.’ She sold one house for $621,000, 25.7 percent over its list price of $494,000. Another that listed at $429,000 went for $511,000.”
“Another factor in the increase is that interest rates are inching higher. ‘In the last few weeks, interest rates have gone up, so there might be a little bit of panic in some buyers,’ said Bill McDowell, a Realtor with Berkeley Hills Realty. They’re thinking, ‘If we’re going to do this, we have to do it now,’ he said.”
“Everyone who looks at the market says the price acceleration can’t last, but real estate agents and other experts said they expect a gradual leveling rather than a bubble bursting. ‘I think it will taper off because it can’t continue this way,’ McDowell said. When a slowdown does occur, he thinks it will hit the more-outlying areas hardest.”
“‘In 1990, the door slammed shut with no warning, and we went through several years of declining prices,’ Underwood said. ‘This will probably be more gradual than a door slamming shut.’”
April 2005: “Apartment rents and occupancy rates have stagnated in the Bay Area and most other parts of the West, which is good news for renters but not for landlords and investors who are thinking of hopping into the real estate market. Rental property is usually valued using the cap rate, which is the property’s annual operating income divided by its price. If an investor pays $1 million for an apartment building that generates $90,000 in annual operating income, the cap rate is 9 percent. When apartment prices go up, cap rates fall. Falling cap rates mean investors are willing to pay more for a dollar of rental income.”
“‘It’s like the inverse of a price-earnings ratio for stocks,’ says UCLA economist Ed Leamer.”
“Is this the sign of a market top, like the proverbial taxi driver giving stock tips? It could be, says Leamer. But it also reflects the fact that ‘people have no place else to park their money.’ ‘The stock market is not giving you very much,’ he said, and neither is the bond market. ‘You have a choice between cash and real estate.’”
“Lance Sherwood, a flight attendant who lives in Capistrano Beach, is involved in a real estate club in Orange County. The organizers ‘investigate different properties and then throw it out there for people to choose to invest in or not. They look at different cities, their local economies and make a prediction’ about which markets will make good investments, he says.”
“Almost all of the opportunities are outside California because property prices here are too high. The homes usually cost around $100,000 to $150,000, low enough for the landlords to break even. Sherwood bought his first house in a foreclosure sale in 2000 and is about to close on his sixth. He bought most through the club, but he bought a couple on his own. Most are in the Southeast. Sherwood always looks at the property before he buys it but says some club members ‘just look at a picture on the Internet and invest.’”
“Apart from the club, Sherwood is buying property in El Salvador, which he hopes to subdivide and sell to local people.”
May 2005: “Two out of three Bay Area home buyers are choosing interest-only loans, and some experts warn that the popularity of the controversial form of mortgage debt is a sign that the overheated housing market is boiling over. ‘This is frightening, frankly,’ said UC Berkeley economist and real estate expert Ken Rosen. ‘I’m worried that more and more people are using (homes) as an investment vehicle and not as a consumption market, and that’s true of the peak of housing markets.’”
“With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income. His new technology consultancy is flying, and Kelly is confident that with a fixed monthly payment of $4,200 for the first three years, he chose the right mortgage.”
“He acknowledges some of the possible perils of his mortgage. But even in the worst-case scenario, he figures he could refinance or sell the house and move to a less expensive part of the Bay Area. ‘For most people,’ he adds, ‘I think (interest-only loans) are a terrible idea. If they don’t have bright prospects (for income growth), they could be in real trouble.’”
“California Association of Realtors economist Leslie Appleton-Young admits there are some troubling potential scenarios for interest-only borrowers. But she argues that the loans are just the latest advance in the mortgage market. Little outright speculation is occurring, she said. The popularity of the loans reflects the fact that they allow people to get into homes they otherwise wouldn’t be able to afford.”
“‘Given the performance of the housing market over the long-term, instruments that help people get into the housing market are a good thing,’ she said.”
