The Wealth Effect “In Reversal”: California
The Desert Sun reports from California. “Ernie Vincent sees plenty of lookers, but not so many home buyers. ‘The notion that consumers are in a ‘wait-and-see mode’ is true,’ said Vincent, VP of Palm Springs Modern Homes. Home builders across the Coachella Valley have their pulse on the slowing new-home market, and they’re reacting by constructing fewer homes, bolstering incentives and scrutinizing construction costs.”
“As jittery home buyers abandon sales contracts or balk at buying amid uncertainties in the housing market, builders in the valley and across Southern California have cut back on construction. There were 2,782 homes being built at the end of September across the valley, down from 3,748 at the same time last year, according Metrostudy.”
“In the Riverside County/San Bernardino/Ontario area, 1,691 building permits were issued in September, down from 5,101 in September 2005, according to the California Building Industry Association.”
“The slowdown in new-home building permits is in direct response to growing new-home inventory. Some 1,511 new homes sat vacant at the end of the third quarter in the Coachella Valley, compared with 537 at the same time during 2005, said Steve Johnson, of Metrostudy.”
“‘The builders are taking the initiative to slow down their construction starts to deal with this inventory,’ he said. Home builders are reacting in other ways, too. They’re beefing up home-buyer incentives, reigning in escalating construction costs wherever possible and analyzing land deals.”
“Ashbrook Communities, with developments in Cathedral City, Palm Springs and Indio, is watching its spending on everything from construction materials and marketing to payroll, while at the same time aggressively introducing new incentives to attract pensive buyers.”
The San Francisco Chronicle. “Toll Bros. Inc., the luxury home builder with projects in San Ramon, Dublin and Sunnyvale, said Tuesday that it will report a 10 percent drop in quarterly home-building revenue in another sign of a weakening housing market.”
“Citing a higher-than-usual rate of home sale cancellations in Northern California, the company said the number of contracts it signed throughout the country fell 55 percent in its fiscal fourth quarter, which ended Oct. 31. Northern California accounted for 11 percent of the canceled sales nationwide.”
“‘You had a high level of speculative activity, more flexible down-payment rules, and you’re coming off a period of very rapid home price increases,’ Toll Bros. spokesman Fred Cooper said.”
“The company closed sales on just 167 units in California during the quarter, less than half of the 362 home sales completed in the same period a year earlier. Revenue from home building in California for the full year dropped 34 percent.”
“The company said it expects the softness to continue in Northern California and other former hot spots in the country.”
The Orange County Register. “These are not happy days in the odd home-loan game that Orange County all but perfected. Subprime lending was a true gravy train when real estate was hot and folks rushed to buy homes. Today, though, nobody’s getting rich making mortgages, traditional or subprime deals. Too many lenders are chasing an ever-shrinking pool of willing borrowers.”
“The slowdown across the county creates a flood of bad news that shows little hope of ebbing soon: On Monday, Option One from Irvine was put up for sale by owner. H&R Block is closing one-third of Option One’s loan offices.”
“At Impac Mortgage in Newport Beach, second-quarter profits were 25 percent smaller than last year as its loan business shrunk by 60 percent in what was called a ‘challenging environment.’”
“ECC Capital in Irvine, started two years ago by former execs from cross-town competitor New Century, is basically liquidating itself. It’s selling its lending operations after investors who had bought ECC mortgages returned many of the loans. ECC lost $16 million when it resold the returned loans at much lower prices.”
“In May, industry pioneer Ameriquest from Orange cut 3,800 positions and closed most of its branch operations after agreeing to a huge settlement with regulators over its lending practices. In November 2005, Ameriquest cut 1,500 spots.”
“For Orange County, the risk isn’t the loss of a key lender. Rather, the county risks losing a job-creation machine. Orange County lenders of all stripes grew payrolls between 1996 and last year by 25,000, a 13 percent annual pace.”
“In the year just ended in September, local lender payrolls were flat. This recent housing boom nudged subprime lending into the mainstream mortgage spectrum. Now with the real estate game in reversal, both cyclical and systemic pressures will test the managerial mettle of subprime lenders.”
The Sacramento Bee. “Faced with a sluggish home construction market, Sacramento-based Beutler Heating and Air Conditioning announced Monday it will merge business operations with its Air Design Inc. affiliate to reduce overhead costs. Beutler will lay off about 45 employees at facilities in Sacramento and five other Central Valley and Bay Area locations.”
“‘We’ve been in a red-hot market. It was unsustainable,’ Beutler President Rick Wylie said. ‘New construction can go only so far,’ said Mark Skaer, a senior editor at ACHR News. In California, the number of permits issued for new home construction in September fell 47 percent from a year ago.”
The North County Times. “With the huge run-up in local real estate prices in recent years, a house has become much more than a home, some economists tell us, an incentive to spend, the ‘wealth effect.’”
“The signs are clearly visible, or I should say, not visible. A year ago, you couldn’t drive through a neighborhood without having to run a gauntlet of home-improvement equipment: cement mixers, roofing trucks and painters’ ladders. Now it’s a straight shot.”
“Robert Brown, a Cal State San Marcos economics professor says it’s no surprise that homeowner spending is falling. With rising interest rates, those holding adjustable-rate mortgages or home-equity loans must spend more just to stay in place.”
‘Diversified manufacturer Pentair Inc. said on Wednesday it expects the current slowdown in demand for pools, which took a toll on its third-quarter results, to be short-lived. ‘This business was growing 10 to 15 percent a year, and right now the largest markets, California and Florida, are down in new pool starts. And I think people are being cautious,’ said CEO Randall Hogan.’
I think as main street goes, so goes wall street. Funny how they always say wall street is always moving 6 months ahead of events. HA HA HA
Wait till next year when builders eliminate incentives (pools being a big one in the west) and just cut the real home prices instead. We’ll check back with CEO Hogan then and see if biz improved.
Pool is just about the most discretionary purchase a home owner can make. CEO is wishing out loud if he truly thinks the distribution channel is going to clear and return to growth in the WINTER months!
Short history on Pentair
09/2006 Pentair cuts earning estimates for 3Q06 & 4Q06
10/2006 Pentair misses lowered 3Q06 earnings estimate
11/2006 Pentair lowers earnings estimates for 4Q06
Clearly CEO Randall Hogan doesn’t have a clue when this will end
Cautious?? I was just told about a NEW and IMPROVED loan program whereby you get to skip the first 3 payments! Imagine that, live free for 3 months after your purchase/refi. You should run a thread on predictions about what the new wacky loan programs will be.
Wow — home prices peaked months ago, but lending standards continue to loosen. Don’t these idiots know that (1) standards cannot stay loose forever, and (2) if you think prices are falling quickly now, just wait and see how fast they fall once the lenders get the heebie-jeebies.
But maybe Fannie Mae, with its black hole balance sheet, is sucking in all the risk in the galaxy, so these lenders have nothing to worry about, especially with the Dems back in charge of the House.
Why do they care??? It’s someone else’s money they are lending. They just see that big fat commission check!
Regardless of your politics, Dems will have the recession on their watch. Almost EVERY client that comes in the door (~25 per week now) are connected to real estate. I.E. real estate agent, broker, flipper, broke client who should not have been able to qualify for a loan, etc. Amazing that the denial is still prevalent. I’m giving a seminar to 100 new realtors next week on why BK first is better for clients than short sales. I have to admit that THESE realtors are at least trying to help their clients make the right decision.
BK lawyer,
Thank you for explaining it to the Realtors as well!
It sounds as though business is picking up for you. How has the general trend in your office been since this blog started up (spring 2005). IOW, is there a trend (more clients — a lot more?)? Is it accelerating, etc.?
Thanks in advance!!!
Bklawyer-
The new BK laws mandate for filers to engage in educational sessions with a BK “counselor”.
As an honest and legit appraiser for 24 years, I figure I have a pretty good grasp on how people have ended up as FB’ers.
I’ve been trying to find info on entrance into the field, but not much as come up.
Any suggestions?
That’s nothing. On my way to work this morning, I heard an ad for a new loan with no payments for 12 months. How is that even possible? Oh, and it was a teaser rate after that, with the interest rate on the loan (didn’t catch what the rate was) fixed for 10 years. Of course, I assume there are some hidden provisions regarding re-casting or re-setting after the LTV hits a certain threshold. But still, what are lenders thinking by offering this type of product in a declining market? And who are bozos buying these loans (assuming that the lender is selling them)?
I’m thinking these loans can only prolong the inevitable. And make that inevitable 10x worse.
The only way they could possibly work is if we have major wage inflation.
Right — tacking a few pennies on to the minimum wage won’t quite do the job…
As usual, Arwen, you’ve got it right.
It would take major wage inflation to keep it going. It’s going to take major wage inflation to keep us out of a deep and prolonged recession. Its going to take major inflation to reduce our foreign debt.
Deflation is the last thing the Fed wants. With rates currently low, they have little room to move and a recession would put them in danger of creating a liquidity trap. They don’t want to lose control that way.
They will continue to engineer inflation and do their best to hide it.
No, No, No. Inflation will lead to losing reserve currency status. We lose reserve currency status (think oil no longer denominated in USD), and we are screwed. The Fed will defend the dollar…period. They do not care about FBs.
You can engineer price inflation, but not wage inflation. US workers lack bargaining power. Price inflation without wage inflation reduces housing affordability even more and exerts more downward pressure on house prices.
Recession or stagflation. Take your pick. And stagflation ends with a recession anyway.
> You can engineer price inflation, but not wage inflation.
Increase in minimum wage is on tap for first 100 hours.
We lose reserve currency status (think oil no longer denominated in USD),
What the f*ck does everybody think the Iraq war is really all about?
Hussein’s real threat was his intent to replace the dollar with the Euro as the reserve currency for his oil.
Iran is threatening the same.
The WMD BS was a cover, to divert attention away from how out of control the US debt system has become and what a worthless POS currency the dollar has become.
Increasing the minimum wage will have virtually *zero* effect on wage inflation — because the percentage of people who make minimum wage is infinitesimal, less than 3%. And needless to say, you’d pretty much have to triple the minimum wage to come anywhere close to having any effect at all on housing demand. And in the bubble markets, fuggetaboutit — not even highly-paid professionals can afford a median-priced house without resorting to funny-money loans. No, the only thing that can save this market is lenders continuing to make loans borrowers have no chance of repaying. It astonishes me that they still are doing so.
Thomas, don’t know how true it is, but I’ve heard that many unions’ salaries are pegged to some multiple of minimum wage. So upping minimum wage would up these unions’ member’s salaries, no? There’s your artificial wage inflation.
If you get “free” payments, you are paying a higher rate and/or margin on your ARM, or the lender is making the loan larger to cover the payments.
Another new one is a Fixed Option payment loan. You can make lower than an interest-only payment on a loan that has a fixed rate. Rates are in the low to mid 7% range.
All of these ridiculous loans are merely and attempt to dodge the ultimate principal payment of the initial loan until either their wage catches up or they can pass it on to another FB. Debt is debt and someone has to be bagholder at some point. All their doing is sliding the prinicipal down the amortization schedule. Basically, Gambling like Getstucco said on the other thread.
here in santa rosa we have 100% financing,no payments for a year,and free upgrades at a couple of developments….oh and easy qualifying,too.
tom stone posts “here in santa rosa we have 100% financing,no payments for a year,and free upgrades at a couple of developments….oh and easy qualifying,too. ”
I am glad to see the “new Fed guidelines” are being followed.
It is very difficult to grow at a faster rate than the overall economy for a long period of time.
Being in the swimming pool business myself I wonder what this fellow sees that I don’t. Why will the slow down in sales be short lived? My best guess is that at least 80% percent of the folks buying pools are financing them through home loans. We always see a slow down in the winter but what does the spring bring?
I don’t understand how this is possible. The MSM assured us all last year that homebuilders and mortgage lenders had “learned their lesson this time” and not overbuilt or overlent.
Here are some recent comments from the Kansas City Fed Prez about “overlending”. I think he sees the writing on the wall.
It is a small PDF from a speech to Banking Directors.
http://www.kc.frb.org/spch&bio/HoenigPDF/Tucson10-31-06.pdf
“This time its different” — interesting title… Do you think Hoenig reads here?
Probably not.
But it does show that some of the Fed governors are keenly aware about the state of affairs, but remain cautiously quiet about it. As they say “loose lips sink ships”.
Or as Disraeli once wrote, “Never complain, never explain.”
But I find it interesting that many of the Fed govenors are speaking directly about this or are dancing around it, each wiht their own voice and spin.
Either Bernanke has lost control, or he’s sending his minions out to prime the pump for the eventual truth to flow.
Something tells me that a lot of these FBs who don’t understand how their IO / option ARM mortgage works will think that banks can just raise payments at will. They’ll demand that the government do something about “greedy bankers” who keep raising their payments. Will they even blame Bush for it?
When voters are economically unhappy they blame who ever is in office. Hence the Clinton winning philosophy:
“It’s the Economy Stupid!”
I heard someone saying today, “Now the MSM will lay off of housing that the democrats are in charge.” I think the market is bit to f***ed for that…..
I’m sure high on the Dems agenda will be making sure the administration gets pinned for the housing/credit mess. They’ll introduce some band-aids in legislation as an excuse to harp on the bullet wounds that occurred on the Bush crews watch.
I’m sure high on the Dems agenda will be making sure the administration gets pinned for the housing/credit mess.
All of this house as an “ATM” refinance borrowing shit started on Clinton’s watch.
It’s why his economic numbers always looked so good.
In my opinion, the MSM has not even gotten started on housing.
Comment by BanteringBear
In my opinion, the MSM has not even gotten started on housing.
I think you are right. A bit here and there but nothing like it will be.
I agree.
It can’t be pinned on the dems as they just got control of congress. They certainly haven’t been in charge of anything for the last six years.
I thought that comment was naive/funny though.
Just like 9/11 didn’t get blamed on Bush because he wasn’t in charge for the prior 8 years? That’s why I never vote based on current economic conditions. But I feel that I’m a minority in that regard.
It would be nice if politicians who talk about “The American Dream” actually read some of Horatio Alger Jr.’s books and realized that debt and profligate spending are, um, well, bad.
I hope this last 6 years has taught every American a lesson. The only good government is a government that is hopelessly deadlocked between the administration and the congress. That way nothing gets done unless its a huge majority across party lines.
Give one party too much power and we wind up with messes like this.
Next time throw away your party card and vote whoever isn’t in power.
The problem with gridlock is that it locks us in at full throttle on whatever course the last non-gridlocked majority launched us on. I think the last time there was truly ungridlocked government — that is, when one party had a filibuster-proof majority in the Senate as well as the Presidency — was during the Carter administration. Suffice it to say that the assumptions of the late 1970s may not have been entirely borne out by experience — but we’re still hurtling full steam ahead under policies that were based on those assumptions, and, thanks to various degrees of gridlock, have never been capable of being revised.
The systemic flaws in Social Security and some of the more irrational restrictions on nuclear power (we could solve an awful lot of energy problems by permitting spent nuclear fuel to be reprocessed, burning up the transuranic elements and making the resulting waste capable of being diluted back to the levels of raw uranium ore, making disposal much more safe) are based in part on the inability, due to gridlock, to correct some of the mistakes of the seventies.
They’ll scream. Maybe they’ll get some relief. Maybe they’ll just ban those stupid loans.
We all wish they do!!!
If they ban the loans, the market tanks 50% to 60%. Those who have the loans won’t be able to sell, because they won’t get enough money from the sale to cover the loan, and/or get a new place. Those who want to buy won’t be able to afford anything more than a 30 year fixed. The market stalls.
Look for lots of regulation with names like “Homeowner and Taxpayer Shelter Secutity and Protection Act.” It will require borrowers to sign lots of paper that, in the end, protect the lenders from lawsuits.
If they get rid of the mortgage interest deduction, the market tanks 20%.
Won’t have to ban them; they’ll kill themselves off much more efficiently once the defaults hit record levels.
I vote for calling it the:
Real Estate and Mortgage Equity Management, Home and Residential Dissolution Act
or REAM EM HARD!!
The “reverse wealth effect” also known as “losses” are both a result of and a trigger for further unwinding of leveraging. Think of it as the largest clock-spring ever built. It had enormous energy while it was being wound up and while it was getting tight, but now all of that energy is pent up. If the back comes off the clock, the spring will explode out, scattering clock parts in every direction.
The “reverse wealth effect”
Yea, there’s a new house rapidly being built that everyone can afford. It’s called “The Poor House”
LOL- This is like telling an amputee he got a “severe dislocation”!
Or telling an FB that he just got an anal dilation.
Sans lubrication.
uh oh you are skating treacherouly close to the verboten “ass-pounding”
chillidogg posts ” uh oh you are skating treacherouly close to the verboten “ass-pounding”
Nah chillidoggg, I fear the AP is skating very close to us now for real… the future is now. Like they say “a time and place for everything”
GWBush just ate the meat, now we are going to get “it”. This was the final piece, the stage has been set the slaughter is on…. we are engaged.
“For Orange County, the risk isn’t the loss of a key lender. Rather, the county risks losing a job-creation machine. Orange County lenders of all stripes grew payrolls between 1996 and last year by 25,000, a 13 percent annual pace.”
The job losses, in industries that hardly encompass what would be considered risk-averse types, will represent the next great wave. As their incomes go to ZERO and their expenses mount along with their adjustable mortgages the default numbers will clearly go nowhere but UP.
Since we hit a lull in the for-sale inventory run-up the next telling signal to watch is foreclosure numbers. I would not expect much more downward price movement until these numbers jump. Once these properties accumulate on lender books, along with their carrying costs, that’s when we’ll see prices really move….
AZ right you are! First, inventory stocked up for God knows how long. Now, we have massive layoffs occurring. Next will be the foreclosure and liens. This is going to get really bloody, esp. in the “OC”. Get the popcorn and enjoy the movie!
I see your movie taste runs towards the “Sadistic Slasher” Flick!
imploder posts I see your movie taste runs towards the “Sadistic Slasher” Flick!
Try I Spit on Your Grave”
I have no intention of eating popcorn and watching this time. During the RTC event I did pick up 1 very nice property. Not this time. I am loading up on ammunition (CASH AND NAMES) and when I feel the bottom is close I will be picky as I gobble up the best deals I can find.
It will be interesting to see the impact on commercial real estate - I think Southern Orange County is going to get slaughtered once all these lenders, title companies, etc begin to shrink, merge, or go completely belly up. Anyone in need of massive amounts of office space will have no problem finding it in Irvine in the next few years.
Office space in California won’t be hard to find for years.
In Torrance, I see all the circa 2000 stock brokerages are now real estate offices. Those offices will be available soon.
In Irvine, lots of large office parks will open up as well as dozens of smaller ex-realtor ™ office spaces.
Ventura aready has quite a bit of office space empty. Countrywide laying off will add more.
Palmcaster has a large complex with Countrywide…
Not to mention downtown LA hosts brokerage services too…
Southern California will not lack office space in 2008. So much for the commercial building…
Neil
I thought there was a glut from the last Commercial RE boom in the late 80s….
No problem. They’ll just turn all of it into “Modern Urban Setting Lofts” to compete with all the other empty, unsold Lofts.
Cubicles for a 100K!! Bwaahaha
Commerical real estate, hell, there is going to be a lot of homes available in 2008 and very cheap. This area is not only overbuilt, but it is way TOOOOOOOOOOOOOOOOO EXPENSIVE! I repeat, no one is left to buy at 750-900K for a starter home with 2000 sq. ft. and a lot the size of a parking space at Walmart. No one, I repeat, no one is left. Suicide loans be damned!
A work associate and his fiance last week purchased a new home - ~ 3000 sq ft - in Silicon Valley (don’t know which city) for $1.275M. Just the two of them in their late twenties / early 30s. I feel sorry for them taking on this huge of a mortgage. Also another work associate bought a $1M home in the San Francisco area a few months back. He is single and was just laid off last week!! Denial and GFers still resident here in the SF Bay Area unfortunately. I am wondering when things will finally hit the fan here in SF Bay Area?
bay area seems to be about 6-8 months behind the rest of cali
A coll mil and laid off. How does he sleep at night? I hope is has a stockpile of cash in the bank or another job in the wings. I know I could not EVER take on a million dollar mortgage.
posted “Cubicles for a 100K!! Bwaahaha ”
Watch out, your boss might start charging you rent while you work for him!
On Richards Blvd in Sacramento, about five blocks from downtown is a huge office building with ample parking. This building was brand new three years ago has never been filled. Sits empty. Lots of empty office space in Sacramento. I think the commercial vacancy rates are skewed just a little. Everything is such smoke and mirrors these days, anything to get someone to part with a dollar.
I’m reminded of the security guard in Mike Leigh’s movie “Naked” who is paid to guard “empty space” in an empty office building in London!
Re: CountryWide. I have some first hand knowledge of something they are doing. My wife does some part time accounting work for a company which was based in Westlake, Ca. The company had a lease which was about to expire and the new lease was going to increase 50%. So they moved to the City of Ventura. It seems the new lease in Westlake was picked up by Countrywide Finance. This week, my wife went to the new offices in the City of Ventura and saw another company moving in. She was told it was Countrywide Finance. So? Well, CountryWide has offices in the Agoura Hills, Westlake, Thousand Oaks area. Most very upscale offices. These offices they have taken (in Westlake and the City of Ventura) are NOT upscale. They are “working” offices which do not depend on being cosmetically acceptable to clients with fancy foyers and snazzy desks, etc.
What does this mean? Not sure but it could be that Countrywide Finance is reducing expenses for the long haul. I know they’ve been laying off employees and moving some of their operations to (cheaper) Plano, Texas. Maybe they are getting out of fashionable offices and downscaling. I’ll know that’s happening when I see that CountryWide signs have been taken down on those flashy offices.
“They are “working” offices which do not depend on being cosmetically acceptable to clients”
What does this mean?
Uh, REO departments?
You may be onto something. They know what’s coming better than anyone - especially economists and the NAR.
Exactly Fred
IIRC, Countrywide also stopped providing doughnuts to their employees once a month.
That alone should keep them afloat.
Yea, but I heard they are providing free donut seat pillows with every ARM loan Resetting. Part of the new “Brutally Soft” PR campaign they are rolling out next spring.
posted “IIRC, Countrywide also stopped providing doughnuts to their employees once a month.”
KZ rations
It’s still extremely easy to find commercial real estate in Silicon Valley, five years after the dot bombs exploded.
San Diego has a huge oversupply of office space as well, and they
continue to build. Drive down West Bernardo in Rancho Bernardo
and every building has a for lease sign on it, and there are new
buildings being built on the west side. This country is going to
have a massive number of empty buildings with no work to
fill them.
Why would someone set up a company requiring a lot of space in OC, or anywhere in CA? Haven’t we been hearing of companies wanting to bail because the cost of living is too high in CA?
Implosion,
No one would want that much office space. Hence the argument that there will be no commercial building boom for California.
Heck, I’m shocked the mortgage companies are in so-cal, but they are.
Neil
As I mentioned earlier, I was down at the office complex on Enterprise in Aliso Viejo the other day, and noticed the (shuttered) doors of 123 Loans had a notice of default posted on them. Another casualty.
“In the Riverside County/San Bernardino/Ontario area, 1,691 building permits were issued in September, down from 5,101 in September 2005, according to the California Building Industry Association.”
I cannot even begin to guess how many job losses this translates into. Think about how much income the jobs created by the construction of one of these homes creates from the time they cut dirt to the finishing touches on the landscaping, multiply that by a decrease in 3500 homes……for one month! Now add in Orange County, LA County, San Diego County, because I’m sure the slowdown numbers are similar. Can you see the snowball effect taking shape? We’re relly not even going to feel or see the effects of these numbers until well into ‘07. And they say the worst is behind us? The avalanch has just begun. Now throw in all the job losses and lack of commissions in the mortgage industry, realtors dropping like fumagated flies,…..ya think this gonna get any better?
2007 is going to be pretty freaky, my friends.
“I cannot even begin to guess how many job losses this translates into. Think about how much income the jobs created by the construction of one of these homes creates from the time they cut dirt to the finishing touches on the landscaping, multiply that by a decrease in 3500 homes……for one month”
Paying all those materials, labor hours, transaction overhead… All financed by HUGE DEBT. Not only will there be substantial employment loss to contend with but massive leverage unwinding that will completely flatten the housing market.
This, however, is why I think that the housing bubble will take an excruciatingly long time to work out. Debt has been sliced, diced, tranched, repackaged, hedged, and default-swapped so much that I doubt anyone even KNOWS who the final bagholder is. Even after we start getting a large number of defaults (and this ball has just barely gotten started rolling), that just lights the fuse of the endless series of demand letters and (inevitably) litigation. The wheels of lawyers grind slowly (probably because we’re paid by the hour:)). It takes a year or more for even a simple business-litigation case to work its way through the courts in California. Imagine how long a convoluted default transaction will take, from beginning to end. Then you have to factor in how long it will take for the uncertainties of litigation (which may fail) to work its way through companies’ balance sheets (since so much of lenders’ balance-sheet income consists of non-cash earnings) and, in turn, have any effect on the willingness of other investors to lend *them* money.
No, the irrationality will continue as long as the rottenness is kept off the books, which will continue until substantially after the last gavel comes down.
Once these properties accumulate on lender books, along with their carrying costs, that’s when we’ll see prices really move….
That seems like logic from the last bust. I think you will see prices keep declining at steady yet lower clip. Not everyone bought in the last five years and so some of these people can still get out.
We’ll see. I think very few sellers have the flexibility to drop even $1 from current ask - HELOC/arm/0-Down- CASH-OUT REFI. Those that need to sell don’t have to move down much to attract buyers and the inventory of expensive homes with no negotiating room sit and hold prices up… until they throw in the towel in great numbers. That’s when prices start to shift and then the holdouts simply capitulate at once.
Well a homeowner can’t write off capitol losses on a house from their taxes. But a bank can write off the difference between the loan amount and the REO sale. That’s when prices will fall.
San Diego foreclosure numbers are climbing steadily. I have only tracked them since July, but I know from another source that they have been climbing since August last year. The graph is just starting to look like an exponential function. Here are the numbers from early each month:
Jul. 415
Aug. 556
Sept. 619
Oct. 743
Nov. 1059 (this was Monday, today it’s 1070)
Holy toledo, it is looking bad.
The SD foreclosure rate is growing exponentially with a 3.2 month doubling time.
Alternatively, it has recently been growing by a factor of 13.4 / year (luckily trees don’t grow to the sky!).
A doubling time on foreclosures of (nominally) every quarter?!? In rough terms thats an increase of 12X to 16X per year. Its a good thing trees don’t grow to the sky. Why? This implies that within 18 months every home for sale in San Diego would be in foreclosure. Gulp. Unfortunately for San Diego its too late. The market is going to be at a crawl by mid-2007. (By lock up, buyers will be too scared to buy in any quantity that matters.)
Has anyone tracked other areas?
Neil
“12X to 16X per year”
13.2X, to be precise (and the R^2 on my regression using five data points was over 0.99)…
GeekStucco,
I just taught my kids the ol’ coefficient of determination THIS WEEK!
Neil,
The Commonwealth of Virginia, from foreclosure.com:
8/31/06
Foreclosures: 580
Preforeclosures: 53
9/26/06
Foreclosures: 656
Preforeclosures: 47
11/08/06
Foreclosures: 753
Preforeclosures: 81
Nationwide foreclosures courtesy of foreclosure.com:
9/18: 106.7K
9/23: 110.4K
10/3: 113.5K
10/12: 119.1K
10/24: 121.7K
11/8: 125.2K
Thats foreclosures. BK’s are climbing pretty well too, from
378.7K on 9/18 to 407.6K today. Move along people, nothing
to see here!
Thanks Arwin and Amoney,
It looks like national trends are still linear. Virginia might (or might not) be breaking out.
GetStucco: I’ll accept 13.2.
Ok, I’m good with math, but I don’t expect trends to hold constant with the political change. Note: I don’t expect them to get better either.
BTW, according to ziprealty.com, SD has 21,000 or so used homes for sale. So can we conclude from the above that 5% of these are in foreclosure? Sounds like more price reductions are on the way…
But how many of those are actually hitting the deck ie: going back to the bank. I’ll be glad when people start getting it and post those numbers that’s the real deal. When you see those types of numbers going back to the bank then you know the party has started.
I agree with you, mrincomestream. We need to see a critical mass of homes which NEED to be off-loaded, fast. With REOs, it’s just business. We need to eliminate the owner/sellers who have an emotional attachment to their “home” and a particular price. We still have a long way to go, IMHO.
Too many lenders are chasing an ever-shrinking pool of willing borrowers.”
And the gov regulator’s think they’ve SEEN loan fraud…LMFAO.
Ha! Job listing on Craigslist.
http://dallas.craigslist.org/ofc/232042835.html
Here it is. The new “Bubble”. Pounding on deadbeats!
$13 an hour, I am all over it.
Out of work appraiser’s will flock to apply for this job in hordes.
The great irony will be that the company will probably hire the same 5 appraisals a-day, number-hitting, newbie hack,
who punched the ticket on the loans which are now all under
analysis for foreclosure…bwahahahaha!
This is about $26,000 per year. Is that a good wage in TX for college graduates? Sounds really low, can anyone live on that in TX?
“This is about $26,000 per year. Is that a good wage in TX for college graduates? Sounds really low, can anyone live on that in TX?”
My stipend as a Ph.D. student is less than $26k, but I walk to campus each day, my rent is cheap, I don’t have a family to support, and weekend entertain is research in the lab. I wouldn’t want to try to support a family on that wage - much less save for retirement.
Of course, if the economy melts down (as it appears posed to do), a lot of people may have to live off less than $26k/yr. in many states in addition to TX.
I came out of college making $43K/yr back in 2000. The median household income in TX for 2005 was $41K/yr. There are plenty of decent houses for under $100K in TX though. If I came out of college making $26K/yr I would not have been a happy camper
I’ll say this much for it — seeing the effects of getting squeezed by debt on a daily basis would probably be an excellent educational supplement for a young college grad.
About 2 months ago, I got bids for redoing my rear yard landscaping. I figured about $2,000. Three landscaping contractors came by to price it out. They all drove new trucks, one was a GMC 3500 club cab w/ duelies. The type of vehicles that were driven of the dealership within the last 4-5 months. The price quotes: $5900 to $13,000……..get this: $3.50/sf to $7/sf. WTF? I decided to do it myself for $1,500 in materials. Now, they are calling me back, saying work is getting thin, and cutting their prices in half. Too late. But I went and looked as some of the jobs these guys did as references. They spent 1-2 days with 2 or 3 workers (illegal?) and made some serious money. I could not believe the homeowners were paying these prices. Now that home values are declining, that game is over. A great deal of “funny money” has been floating around for the last 3-4 years, and it is now vanishing into thin air.
Believe it or not, what you just described is called….DEFLATION.
Irving Fisher might have a few words of warning, from the distant past.
Over-indebtedness? Check.
Falling prices? … stay tuned.
“Fisher identifies nine factors, which together describe the development of a depression. These factors are (1) over-indebtedness of the private sector leading at some point to debt liquidation, (2) a reduction of the money supply (deposits are reduced by loan liquidation), [3] a reduction of the general price level (triggered by the reduction in the money supply and distress selling of assets), (4) a reduction of the net-worth of firms and consumers, (5) a reduction of profits, (6) a contraction of output, (7) a general loss of confidence, (8) a reduction in the velocity of currency circulation, and (9) an increase in real interest rates.”
The Fed is all over this. The question is how they will play their hand to try to prevent Fisher’s nine factors from simultaneously returning. It seems like many of those factors could best be mitigated by creating inflation.
Seriously, pray they don’t go that route. We will be in a world of shit if they do.
Don’t worry, the chairman has written a book on it.
I kinda noticed myself that there are an awful lot of guys in the trades driving $50,000 worth of truck. Since most tradesmen around Chicago make $65,000 to maybe $80,000 with overtime and sidework it makes me think that I will be able to pick up a slightly used/leather-wrapped/4×4 for a song in two years.
I would prefer to hire the guy with the 15 year old beater of a truck. That way I would not worry about how much of the price he was charging me was to pay for his nice new $50,000 truck.
Anything on ebay yet?
lots of lots on ebay
“I kinda noticed myself that there are an awful lot of guys in the trades driving $50,000 worth of truck.”
Funny how the “big three” still can’t pencil it out despite huge profits from these trucks.
A guy up the street from me has an air conditioning business. He’s about 35 years old. 2 kids. He has been making money hand over fist for the last 5 years. Brand new contractors trucks (2). He drives an almost new big Merc. His wife drives a new Lexus. All the other toys are in evidence. 30′ RV, 2 of those cross country Honda death traps mounted on a trailer and, bought in the last 2 months, a speedboat. Of course, the house he lives in has also gone up at least 100% since 2000 (from around $275,000 to $600,000) so he might be sucking money out of that little piggy bank as well. Obviously, I don’t wish the guy ill but if he’s an example of what’s been happening, lets hope the brilliant guys at the Fed in cahoots with government (Dem or Rep) have some plan in the works to keep the party going. Don’t hold your breath.
Give every moron 60K to 100K of “free” money and see how they spend it. No wonder we as a nation are in deep doo doo. Think about it. How can you blow 100K in less than 12 months? It’s pretty easy. It is simply irresponsible to put that kind of money in the hands of the avgerage Joe.
Hey JR,
Contractors were just throwing numbers out there these past few years. If they got 1 out of 10 bids they were happy. But it looked then - and from what I’m hearing now not many of them socked any of it away.
I just went back and forth with a painting sub today who was bent out of shape because I took 3 whole days to get a punch list of details he had to finish before his final check. We’re talking less than 2k the customer is holding and he’s crying about needing the money right away.
I’ve been so busy it takes me a week or two just to get a 10k bill to my customers and this guy is squirming over 2k after a couple days.
This is the 4th or 5th time I’ve seen something like this firsthand in the last few months.
Yeah, simular story here in Bend. Looks like the contractors are all calling back now though. Hmmmm, maybe I’ll call them back in a month for another quote slash. Or maybe I’ll never call them back. A little retribution for 3 years of nobody returning your call for work.
Contractor story so true here in Bend Oregon too! They’re all calling back now wanting to re-bid the job. Hmmmm, maybe I’ll wait another month and not call them back. It will make up for 3 years of NO RETURNED calls from them.
When your flush (even if it is HELOC money) it is far too easy to throw money at every “problem”. The trough has been full of paper gains for too many years now and all the little piggies are headed to the barn to become spiral sliced hams. Pumpkin or apple pie with that sir?
mmmm…spiral sliced hams….
(cue Homer Simpson drooling noise)
Centex CEO says housing downturn to play out more
PrintDisable live quotesRSSDigg itDel.icio.usRelated Blog Posts & ArticlesBy John Spence
Last Update: 2:22 PM ET Nov 8, 2006
“BOSTON (MarketWatch) — Centex Corp. (CTX : Centex Corporation
Last: 49.65-0.04-0.08%
5:29pm 11/08/2006
Chief Executive Tim Eller speaking at a UBS-sponsored investor conference Wednesday said judging by previous housing downturns, it normally takes about two and a half years from the peak to the trough. “So we still have further to go” since most experts place the top of the housing boom in July 2005, the CEO said. He called the decline “supply-driven” because speculative investors, who were most active in coastal markets, tried to take profits when home affordability became squeezed. Also, potential buyers are having trouble selling their existing homes and are canceling, which is creating more inventory and drove price declines, Eller said. “In hindsight, we didn’t take our foot off the gas pedal soon enough,” he added. ”
http://tinyurl.com/txsnx
It looks like the downturn will take LONGER than next spring!
Eller said. “In hindsight, we didn’t take our foot off the gas pedal soon enough,” he added. ”
There it is. Right from the horses mouth. This time “it is NOT different”
Warning……….
Look like the housing Zeppelin is drifting towards the high-tension wires
Look=Looks
And the FB’s are going to be “Dazed and Confused”.
Actually, the more appropriate LTA comparison is the Shenendoah. Unable to avoid a storm, it was caught in an updraft and despite attempts to keep from flying too high (engines on full, the nose pointed down, it actually stalled upwards) it flew high enough that the internal pressure damaged the rigid framework and broke up in the air. Housing too has gone so high that the market is broken will inevitably fall to the ground in pieces no matter what is done now to try and save it.
LESSONS FROM THE LAST BUST - Officially not learned!
Can anybody from the San Francisco area tell me how much the average victorian house out there is going for these days? Are these homes going to fall in value as the bust escalates?
Depends where in SF and how big of Victorian. It would be difficult to get anything in reasonable condition that is fairly large for under $1M in the city itself.
I do know that a house LOOKING like one of the Painted Ladies there recently sold for $2.1M. No bubble here.
You are aware, of course, that we have these same Victorians in the City of Angels, and they’re close to USC, you can live in a college neighbor-hood!
Emphasis on the “hood”.
In Pacific Heights, they are around $2 million. You may be able to get a fixer upper with a postcard sized back yard for around $1.4 million.
“Normal” victorians in other neighborhoods range from 500,000 (comes with iron bars over windows and bullet proof vests for family members) to $1.5 million. These are your average 1600 sq foot house.
Sounds about right. Entry-level housing here is a one-bedroom condo in a highrise, around 700 sq. ft. Those are going for around $650 - $750K, depending on accoutrements.
Meanwhile the average San Franciscan makes $70 - $75K/year. So entry level home is 10x median income, or 5x for a couple. Definitely no bubble here.
The median *household* income in San Francisco was a mere $57,496 in 2005. That’s everybody in the house working, not $57K per person. Check the info here:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/08/30/MNGMPKRNOT1.DTL
How is the Fed going to inflation SF incomes fast enough to keep the whole town from collapsing under a weight of home prices at over 10X incomes?
GS: Inflating incomes would be a good trick on the Fed’s part. If they could somehow do it, I get this crazy feeling they would. The problem is that so many white-collar tech jobs are sent overseas these days (an event I’ve seen too many times to count). More than many places, the effects of global arbitrage will keep salaries pretty stagnant in the SF Bay Area. Of course, 80% of our mortgages in ‘05 were IO/Option Arms, which is the only explanation I can manage for how “average” homes here still get sold.
And Fannie and Freddie surge higher and higher. And they’ll continue to rise with the democratic congress.
The Wealth Effect “In Reversal”: California
Boom Bust
Boom Bust
Boom Bust
Just another cycle in Cali…nothing new!!! move along people !!!
It still makes me laught when I hear people come to Silicon Valley talking about the wealth effect !!!! Something about IPO and Tech companies and “get rich like Steve Jobs”…. LOL !!
the article mentioned there is a new development in sunnyvale. Where exactly is there free land for a devlopment in sunnyvale? and what are the houses like? thanks
Townhomes, dude!
Toll Bros in Satan Clara county
Did you catch that article about a commercial high rise $100M tower in downtown san jose.. just completed and no tenants. Major employers pulled out of the deal… Was on Last Monday on San Jose Mercury front page.. what a waste.. could have been a HR condo … see my other comments below.
It is called City Park at Sunnyvale. Pardon the long URL. They are crappy little squeezed together townhouses. Really awful. Not only are they not all that close to what there is in Sunnyvale that could be considered “town”, they are close to the roaring freeway and train, they are in the area where the bay occasionally creates a massive septic stink, and they are not far from one of the most depressing concentrations of mobile parks in the entire bay area. When I drove by this construction site I could hardly believe how squalid it is, and there were Mexican construction workers fighting hard with each other in angry Spanish. That is always a bad sign.
http://www.tollbrothers.com/homesearch/servlet/HomeSearch?app=community_description&comm_num=5928
From Mole Man link…
De Anza - $671,975
Bedrooms : 2
Bathrooms : 2
1/2 Baths : 1 Sq. Ft : 1579
Master Bedroom : 2nd Floor
Back in 1996 this would have sold for under $175K …on a fundemental basis only worth $200K if you factor in inflation and normal appreciation of 5-6% YoY… No real justification for $670K and cannot compete with rentals income for cash flow.
Big candidate for +50% cut in price…
A complete bargain at $450 a sq. ft. and angry Mexican guys in the neighborhood.
“Robert Brown, a Cal State San Marcos economics professor says it’s no surprise that homeowner spending is falling. With rising interest rates, those holding adjustable-rate mortgages or home-equity loans must spend more just to stay in place.”
Everytime I read anything this guy says, he’s usually on the mark. I guess that means he spends alot of money on claymores and barbed wire to protect his family and home from the frothing-at-the-mouth realtors and their mortgage broker minions. Do colleges reimburse you for these types of expenses?
“Everytime I read anything this guy says, he’s usually on the mark.”
Unfortunately I don’t think he was saying anything 6 months (maybe even 3 months) ago.
He was busy putting the barbed wire and claymores up FIRST
“Toll Bros. Inc., the luxury home builder with projects in San Ramon, Dublin and Sunnyvale, said Tuesday that it will report a 10 percent drop in quarterly home-building revenue in another sign of a weakening housing market.”
I have been told by many recent migrant workers (from the east coast) in Silicon Valley that Sunnyvale is very desirable and plenty of high paid jobs will sustain those… 60’s ranch homes…( which were selling for $160-200K in 1995-6 and $1M plus in 2005)… Now we have been started to see employers move high cost jobs elsewhere! No surprise for us Silicon Valley old times… this happened before when the Valley lost all its manufacturing 1985-1994… This latest move will deflate the values of homes even more… why! Because all those jobs wont be here.
The only wealth effect is those selling for Million, leaving the valley, and retiring to cheaper areas of the country…The ones holding million $$ mortgages are still living in la-la land… $1M for a POS rancher built in 1960’s Oh its and Echard!!! … Just Laughable… There wont be that many here to pay $1M for a home.
“The slowdown across the county creates a flood of bad news that shows little hope of ebbing soon: On Monday, Option One from Irvine was put up for sale by owner.”
Do they have one of those hand lettered “For Sale By Owner” signs posted out in front of their headquarters building?
“the article mentioned there is a new development in sunnyvale. Where exactly is there free land for a devlopment in sunnyvale? and what are the houses like? thanks ”
Off 85 and central (new developments) New Pulte homes next to Old WebEx HQ… , also Tasman and Wolf….. Sunnyvale has added new housing most everywhere… I been in Sunnyvale since 1971… and can say there is plenty more land out there….New Lowes was added on a former Semiconductor plant..(Wolf and Stewart) Could has easily been Condos or Townhomes.
Old Moffet field + Muni Golf coarse is being scrapped.. .lots of land there! Look at the Google Maps for birds eye view…
The old business parts near Sunnyvale and Santa Clara San Thomas and 101, Central and Lawrence are vacant ( now going on to 5 years) and not getting any new tenants … could be redeveloped housing.
The Westinghouse plant off Central is Dead.. no business .. but the land is vast.. and close to downtown…
Not to mention all those little pockets of emply land here and there.
I am right by there at Central and Scott.
And don’t forget over 1,000 new condos are coming to Cupertino. They would have built even more, but Measure D & E did not pass. I also read about new housing coming to San Jose - 33,000 units to be phased in over the next decade(?).
…And the stretch of new townhomes along Arques from Fair Oaks to Wolfe.
“‘You had a high level of speculative activity, more flexible down-payment rules, and you’re coming off a period of very rapid home price increases,’ Toll Bros. spokesman Fred Cooper said.”
In other words, lots of folks who could not actually afford to buy a Toll Brothers McMansion at McMillionaire price levels were nonetheless given the opportunity to do so.
“Robert Brown, a Cal State San Marcos economics professor says it’s no surprise that homeowner spending is falling. With rising interest rates, those holding adjustable-rate mortgages or home-equity loans must spend more just to stay in place.”
He mentioned the negligible part of the story, and missed the big picture, which is the vanishing ability to spend 10%+ annual gains on homes valued over $500K+ through the magic of housing-ATM-cashout financing. This is the origin of the giant sucking sound of homeowner expeditures leaving aggregate consumption, not higher gas prices or the direct effect of rising interest rates on adjustable-rate mortgage payments.
As a Sunnyvale resident, I noticed that just within the last year or so, all the developers very quickly finished their subdivisions, and now have put all of them on sale. It all happened maybe within the last 6 months. I bet they saw the writing on the wall.
Love hearing about the CA falling stories. Keep em’ coming. Hope to have many more before I return to CA in early Dec.
Love hearing about the CA falling stories. Keep em’ coming. Hope to have many more before I return to CA in early Dec.
Max…I was noticing the same thing in my neck of the woods .I don’t know if builders were hurrying because they knew the word would get out about the market or if they were hurrying before interest rates went up/tight lending or both .
Focus on California’s Bust
http://wallstreetexaminer.com/blogs/winter/?p=92#more-92
“‘You had a high level of speculative activity, more flexible down-payment rules, and you’re coming off a period of very rapid home price increases,’ Toll Bros. spokesman Fred Cooper said.”
And all of this happened in a period of massive job losses (something like 20% for Santa Clara county), and a massive amount of new construction. Seriously, the amount of land in Dublin and San Ramon that was covered with SFR and MFR in the last 5 years is non-trivial in relation to the overall housing base in the Bay Area. I love that they now admit there was a significant speculative component, despite the high prices. Bigger bets with bigger payoffs. Lax lending is just the cherry on top.
I am waiting for Google Maps to update their satellite photos, so that I get a good before-and-after construction comparison. I might just draw in the new construction boundaries by hand for the photo gallery.
Listening to the radio. Some guest is blasting Greenspan and Lereah. He said Greenspan is the perfect contrarian indicator and mentioned him calling the housing bust bottoming out. Then he blasts Lereah and NAR and called them cheerleaders and says he doesn’t know why anyone takes them seriously