October 10, 2013

The Mercurial Rise May Signal A Future Bust

A report from Southern California Public Radio. “It’s not breaking news that the California housing market is heating up, but now the California Association of Realtors is confirming it on the record, predicting that the trend will continue upward into 2014. For the past three or four years, investors have bought homes and rented them out. Now, Leslie Appleton-Young, the association’s chief economist, says they’re starting to ‘flip’ the houses more frequently.”

“So is all of this heated activity sending California into a housing bubble of the kind that preceded the 2008 financial crisis? Appleton-Young’s first answer is ‘never say never,’ but she believes the dynamics of today’s housing market are very different from the bubbly times. ‘The underwriting that goes into loan origination today does not look anything like the underwriting that we had in 2003-6, where you essentially had a pulse and got a loan,’ Appleton-Young said.”

The Mercury News. “Ramy Ugarte, a 24-year-old engineering forecaster for a San Ramon company, said he was ‘ready to call it quits’ after almost a year of looking at condos and homes and getting beaten out ‘on maybe 15 to 20 offers.’ ‘When I started looking I was going for condos, and I was looking at this one complex that started at $180,000. By October they were in the $300,000s,’ Ugarte said.”

“He turned to Neighborhood Housing Services Silicon Valley. Now, he’s moving into a house he bought in Hayward for $375,000, with loan assistance from a five-county program run by the nonprofit.”

“The percentage of first-time buyers who could afford to buy in the Bay Area fell from 66 percent in the first quarter of 2012 to 45 percent in the second quarter of this year, the California Association of Realtors reported. In Berkeley and Oakland, ‘people were struggling to compete as it was, and when interest rates rose they just dropped out altogether,’ said Mark Biggins of Redfin. ‘I’ve seen a lot of people drop out and continue renting like they did before.’”

The East Bay Express. “According to a market analysis from Red Oak Realty Investors, purchase prices in Oakland rose 64 percent from the second quarter of 2012 to the second quarter of 2013. When investors fix up a house and put it back on the market, said Patty Flores, a real estate agent who works in West and East Oakland, the price increase ‘can be pretty dramatic. Something you could have bought for 150 is now rehabbed and selling for 350.’ But the repairs don’t always justify the higher price tag. There’s widespread suspicion among people familiar with the housing market that ‘rehabilitation’ can mean little more than slapping on a coat of paint.”

“Steve King, a researcher for the nonprofit Urban Strategies Council, said many of the corporations currently renting out single-family houses are planning to sell them in five to seven years, after they increase in value. ‘Then we’ll have a whole other wave of destabilization,’ he added.”

“There are currently 432 homes in some form of foreclosure in Richmond, according to RealtyTrac. And of all the foreclosed properties in Contra Costa County, 13 percent are zombies. Over the past few years, banks have been dragging out the foreclosure process, allowing them to avoid becoming the owner of the property, and skirting their legal obligation to maintain foreclosed homes. In California, the average amount of time it takes banks to finalize foreclosures after mailing the initial public foreclosure notice has more than doubled since 2007 — from 154 days to 383 days — according to RealtyTrac. As a result, there were more than 29,000 zombie titles in California as of March.”

“A 2010 Federal Reserve paper noted that when banks stall foreclosures, they can ‘obtain whatever insurance or accounting benefit is available by documenting the loss,’ without having to maintain the vacant property. Also, keeping foreclosures off the books allows banks to borrow and lend more money, since foreclosures count as a liability against them.”

“Keeping homes out of foreclosure also boosts local property values because there are then fewer houses for sale on the market. The lack of inventory can cause a feeding frenzy among potential buyers who outbid each other for homes. ‘It’s part of the incredible manipulation of the market that we have right now,’ said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates. ‘You have entities that are trying to show inventory … in drips and drops … because they want to artificially prop up prices.’”

Wall Street Cheat Sheet. “A new survey finds that sellers might be losing their control on the market. In the third quarter, 72 percent of real estate agents said now is a good time to sell a home, down from 86 percent in the previous quarter, and the first drop of the year, according to Redfin. On the other side of the closing table, 55 percent of agents said now is a good time to buy, up from 46 percent at the beginning of the year. Thirty percent of agents also said that sellers are having difficulties getting their home to appraise for the contract purchase amount.”

“‘At the end of this summer, you could smell the rubber on the road from buyers hitting the breaks,’ said Redfin San Diego agent Sara Fischer. ‘The cutthroat competition and frenzied demand has relaxed considerably.’”

The Californian. “For most of the past five years, the pessimists Gov. Jerry Brown likes to call ‘declinists’ were out in force, shouting to everyone who would listen that California’s best days are behind it, that Texas is the place to go. But they’ve been oddly silent lately. For good times are starting to roll again in the Golden State.”

“There still has not been full recovery from the Great Recession of 2008-11. Home foreclosures are down from their peak levels of three years ago, but remain higher than previous norms. And while the state has more millionaires than any other, with the accompanying mega-mansions, only 44 percent of residents are now able to afford a median-priced California home, priced at $428,510 in June. That’s down from 56 percent a year earlier, when prices were much lower.”

“Good for sellers, awful for buyers, especially first-time buyers, and a possible indicator that the mercurial real estate price rises of the last few months, with their accompanying spate of all-cash offers, may signal a future bust.”

The San Bernardino Sun. “What happened to us? We used to be the beautiful people, the privileged few, the well-to-do elite of Southern California. Now, we’re the poor people. The Inland Empire is No. 1 on a list, just released by the U.S. Census Bureau, of the poorest large metropolitan areas in the nation. What happened?”

“Our century-long heyday seems to have ended with a run of bad luck starting in the 1980s when Kaiser Steel in Fontana closed, Campus Crusade for Christ relocated its world headquarters from San Bernardino to Florida, Norton Air Force Base in San Bernardino shut down, and Santa Fe Railway in San Bernardino moved away.”

“We lost a lot of jobs. And I guess we started feeling like unfortunates. We started to feel like losers. Misery loves company and we started welcoming more and more unfortunates into our midst. We demolished downtown landmarks so we could build more and more low-cost housing units. We lost homeowners and gained renters. We ripped out the last of our vineyards and groves and replaced them with strip malls and warehouses.”

“We need to stop feeling sorry for ourselves and start feeling lucky again. Money follows money, just as poverty breeds poverty. We need to build more high-cost housing and less low-cost housing. We need to build more high-end malls and fewer strip malls. We need to develop, not neglect, our recreational amenities. We need to do a better job of selling others on ourselves. We need to do a better job of selling ourselves on ourselves.”

“We need to turn our frowns upside down and start acting like a better class of people. Maybe we’ll find that a better class of people starts to join us here. And maybe we’ll find that the people who insist on feeling and acting like unfortunates, like losers, will start to feel less and less welcome here.”

Bits Bucket for October 10, 2013

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