Housing Bubble Is ‘Ancient History’ In Merced
The LA Times reports on one town where the housing bubble has burst. “Merced, CA. Where did everyone go? Real estate agent Mark R. Gregory is holding an open house to sell a nearly new three-bedroom on a corner lot, and it’s as if the Earth had been emptied. Last year, this Central Valley city enjoyed the state’s hottest real estate market. Three hours quietly pass. At 4 p.m., the agent pulls up the sign and locks the door. Total visitors: zero.”
“‘It’s like everyone got together and said, ‘Let’s not buy for a while,’ Gregory says.”
“The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all. Just a little while ago, Merced was an investor’s dream. Prices in the city and surrounding area increased 31% in 2005. First in price appreciation in California and ninth in the nation. That already feels like ancient history.”
“(Economist) Andrew Leventis contemplated this ascending arc in a region that is not a tourist destination or retirement haven, where incomes are not growing and unemployment is perpetually high. He then used an un-economist word: ‘Shocking. It’s difficult to know what was driving these high rates of appreciation,’ Leventis said.”
“To people in Merced, however, there’s little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the ‘greater fool’ theory. In 2003 and 2004, carloads of investors would come down from the Bay Area and up from Los Angeles. They would see a $200,000 house and say, ‘Wow, if this were on the Westside or in Berkeley, it would be worth $750,000, easy. Let’s offer $225,000 to make sure we get it.’”
“Then the seller across the street would say, ‘If that place was worth $225,000, I’m going to ask $250,000.’”
“‘The demographics never changed here, but people bought as if they did,’ said Ray Rodriguez, president of the Merced County Assn. of Realtors. ‘It got real wild.’ Then last September came, when the first portion of the university opened. ‘The market shifted in two weeks,’ said Gregory, the agent. ‘All of a sudden, nothing.’”
“Officially, this city of 77,000 has 640 homes for sale, about 10 times as many as last summer. But agents say that if you add homes for sale by their owners, new homes being sold by builders and the dwellings that would-be sellers have pulled off the market in despair, the real number is at least twice that. The Merced Sun-Star’s Sunday real estate supplement has 40 pages of ads.”
“Many of those ads are for new developments. The city lists 47 active subdivisions where 7,173 homes are going up. For builders with excess inventory, it’s let’s-make-a-deal time. At the sales office of Shadow Creek, signs on the front door and walls proclaimed: ‘Ask us how to save $40,000 off a new home!!!’ ‘If you want to ask for more, just do it,’ the saleswoman advised. She said a $60,000 break would probably be fine.”
“Ryan Burchard, a San Luis Obispo radio host, examined one of Summer Creek’s model homes. ‘Some of these salespeople seem a little jumpy, a little desperate,’ he said. ‘It’s like walking onto a used-car lot.’ ‘Every other house here is for rent,’ he said.”
“Brenda Rodriguez (and) her husband were able to buy a place in November through a county program for low-income families. The house has its problems, but she’s glad to leave renting behind. ‘A house is something you invest in, it belongs to you,’ she said. ‘You hand it down to your family. Renting is just throwing your money away.’ Merced is going to grow, Rodriguez said, which means house prices will keep going up. And if they don’t? ‘Then I’m screwed.’”
“Many homeowners have been treating the equity as if it were income and spending it. In Merced, they would go down to the car dealers even before their refinancing cash-out check came through. Before the escalation began, 8 out of 10 home buyers in Merced County got a fixed-rate loan,. By last summer, 80% of buyers in Merced got adjustable-rate loans.”
“The only thing worse than the real estate market here is the market for real estate agents. They’ve been coming down to the Auto Toyz and Auto Store used-car lots looking for work. ‘Everyone who applied recently, about eight people, they all were Realtors,’ said Nico Pineda. ‘But things were slow for us, so we had to turn them down.’”
“This is a very good time to be a renter in Merced. A new $450,000 house, owned by an investor waiting to flip it, can be had for less than $1,000 a month.”
Don’t get too smug, LA Times — your town’s day of reckoning is right around the corner…
If may already be here-
Declining home sales a threat to economy
Nationwide, new house market shows signs of staggering after five-year boom
http://dailynews.com/business/ci_3637663
This excerpt from your post gives still more evidence to bolster the SOFT landing scenario everyone keeps discussing (SOFT = Suckers Only F**k Themselves):
‘ “The new-home market looks like it is starting to stagger,” said Joel Naroff, chief economist at Naroff Economic Advisers, a Pennsylvania forecasting firm. “Bubbles do burst, they really do.”
A crash in home prices is seen as one of the biggest threats to economic growth. Some analysts are worried that five straight years of record home sales, fueled by the lowest mortgage rates in a generation, spurred a speculative fever in housing similar to the forces that created a bubble in stock prices in the late 1990s.’
Did you read the article? This gem is priceless:
“In places such as Los Angeles, which have diverse economies, the consequences could be mild. In other communities, where prices became untethered from reality long ago…
As if LA prices are “tethered to reality.” It’s different there.
Mr. Cote,
Great call…
“tethered to reality - soft landings for everyone, please pass the Grey Poupon…:”
FAST FORWARD 6 months:
“Chained to a Cluster F in LA, trying to find anyone to buy this
$h!thouse!”
… and pass the smelling salts, please!
Robert,
I believe it truly is different in LaLa Land…
Maestro, start up the music:
“When you wish upon a star,
makes no difference who you are
Anything your heart desires
will come to you…”
GS
I have to agree about L.A., and the L.A. Times in particular. I get the paper version delivered. Only weeks ago they were running articles in the Real Estate section about sculptors stretching to buy $500,000 houses, and people draining the equity from their homes to support their stand-up comedy profession, without a slight hint of irony. Today, seeing this headline and the very incisive story that followed — notwithstanding the intro implying that L.A. is different — made me feel that we were finally getting some reality with our daily dose of claptrap.
Then I turned to the Business section, which had a banner headline “New-Home Sales Rise in Region.” Apparently, yesterday’s new housing figures showed a 10% increase in SoCal, despite a fall generally in the West. OK, fair enough, report that fact . . . but it’s the reasons they give for the increase, or more importantly, that they give them without attribution to any source. Best example:
“The Southland housing market also is holding up better because its economy is more diverse and job creation remains strong, thanks in part to growth in such sectors as tourism, trade and aerospace. The region is also proving to be less volatile because the presence of real estate speculators has been less than in other hot markets.”
That’s the reporter talking. No source offered. As though it were a generally accepted fact, like gravity or the sun setting in the east.
Is the LA Times editor on crack or something?
They’ll be learning all about gravity real soon. What goes up must come down.
Like Flippers with lustful eyes at scoring a great profit… suddenly finding themselves LIMP Floppers????
the reason new home sales are up is because of builder incentives. the builders know the down market is coming. they are offering incentives big time. comparitively, the new homes are way cheaper than resales right now. I don’t have a LA example. But there are SD new homes that saw a 20% drop in price, a $150,000 difference, in 7 months. resale market has not seen that type of drop at all.
I wouldn’t be surprised to see an increase YOY in SoCal. If everyone remembers, last year was when we had the 40 days and 40 nights of heavy rain (get out the Ark, Noah!) I can’t remember exactly which months it happened in, but I know the rain wouldn’t have been condusive to selling a lot of real estate.
hmmm… I am guessing that “investors” are the driving force.
and those same “investors” will be losing their shirts… How do you spell FBers?
He answered his own question in that bankrate piece on how everyone ought to get cautious, now that the bubble is in plain view:
On the bubble? Heed these do’s and don’ts
http://www.bankrate.com/brm/news/real-estate/reminiguide/moves2.asp?caret=12
‘Are people investing in the local home market to make money, rather than to live in a home? “One of the frequent definitions people give for bubbles is if people are buying just in expectation that the prices will rise, than out of some underlying need,” says Andrew Leventis, an economist with the Office of Federal Housing Enterprise Oversight.’
It’s difficult to know what was driving these high rates of appreciation,’ Leventis said.”
It’s not difficult to know. It’s easy to know. Real Estate Wealth Expo
And let’s not forget the role of these great advice books in helping to generate so much stock market and real estate wealth:
http://tinyurl.com/f88jz
Hey stucco — real estate isn’t the only thing crashing. Lereah’s book is also marked down 35%!
By the way, Robert Campbell wrote an excellent 1-star review of this pulp fiction:
His arguement goes something like this: Even though housing prices are high, the combination of low interest rates, 80 million wealthy baby boomers and their offspring (”echo boomers”) will continue to fuel demand. This is not objective, unbiased advice. As head cheerleader for the Realtor hallelujah choir, Lereah is using the same tactics that have been well-honed on Wall Street: “When the ducks are quackin’, feed ‘em.”
I don’t remember what Lereah was saying about U.S. housing prices in 1998 or 1999 when prices were 30% lower than they are today (and 75% lower in many of the highly populated coastal regions), but I think its safe to say he wasn’t forecasting a coming real estate boom that would last for the next 15 years.
The key to making money in real estate - and keeping it - is to get aboard a rising real estate trend early, not late. While it is true that real estate is a good long-term investment, what Lereah ignores is the cycle nature of real estate. In other words, if you buy an overvalued house late in the market cycle - and you are over leveraged and illiquid like most Americans are today - you may not be around for the long-term.
Maybe Lereah will still be able to make money on that book as its price crashes, much as many of our posters keep insisting the builders will continue to profit under price deflation…
Even more important — no one is buying into Lereah’s bull s—. Amazon.com Sales Rank: #217,733 in Books. I sold 7 copies of a book on Amazon once and the Sales Rank was about #500,000. Maybe he has cracked 20.
Real estate EXPO ..first sentence “highest returns, Greatest Value, least risk”……what is wrong with this sentence? Yes the world is designed for All to become Uber Rich, in fact it is what the Uber Rich want, for everyone to become as wealth as they! Of course, its obvious to me now! Lets all jump in!
Mr. Gregory said, “where did everybody go?”
Answer: The Lemmings jumped and now they are drowning into a sea of DEBT, called over leverage.!!!
Wow, you ARE Inspired! Good commentary!!
Well Brenda - you are screwed!
“The city lists 47 active subdivisions where 7,173 homes are going up.”
In a city of 77,000!!! Honestly, who thought this was a good business plan?
I live in a little mid-western town of 32,000. According to the planning department there are over 2,000 lots currently in various phases of approval. There is single and multi-family housing under construction right now to house over 1,000. I don’t see any moving trucks lined up at the city limits waiting to get in, and no new businesses opening up. Business plan? There’s no business plan.
Understand they are planning on a boom from the new University. Idiots, trusting the Great State of California. I say let ‘em crash.
The University may very well have the least expensive student housing available in the country. Anyone see a rush to expand the University?
If Merced tanks even worse than LA and SF, this may not be such a bad idea.
HI DEB!
Sounds like they’re talking about Ben’s Blog!
“‘It’s like everyone got together and said, ‘Let’s not buy for a while,’ Gregory says.”
Yeah, that’s probably it. They’re just taking a coffee break. They’ll be back in droves soon. Yep, I’m sure of it. Oh wait - I almost forgot to say the following: It looks like we’re in for a Soft Landing(TM).
“Soft Landing(TM)” Nice!!
““‘It’s like everyone got together and said, ‘Let’s not buy for a while” But I thought Ca. was growing and there could never be a crash because there was simply too much “demand” and a limited supply of houses. I mean didn’t all the RE “experts” tell us this historic boom was all about supply and demand?!? LMAO!
I guess none of them considered that this could simply be another speculative asset bubble brought about by too much credit/liquidity sloshing around the financial system? Nah!
Great, John in VA!
Here’s another one we should consider:
FlipFlopper (TM)
copywrited by SB BubbleBeliever
“‘It’s like everyone got together and said, ‘Let’s not buy for a while,’ Gregory says.”
It’s like everyone got together and said, ‘Let’s see if their is any thruth to the rumor that there is a real estate bubble that will result in falling prices in the near-term future.’
Scratch ‘their’; substitute ‘there’ (need to figure out that preview feature…)
‘truth’ (ugh!)
‘Brenda Rodriguez (and) her husband were able to buy a place in November through a county program for low-income families.’
A point many of us have made on this blog; the state assistance loans are putting people in overpriced homes they can’t afford. When all is said and done these programs will be remembered with scorn.
Once the emperor’s missing new clothes are in plain view, everyone will recognize how these demand-side low-income housing policies helped drive up prices (reducing affordability) while tempting many low-income buyers to purchase more house than their incomes could handle. At that point, there will be an epic battle of finger-pointing between the politicians and their economic advisors who advocated these flawed policies.
Still waiting for the bubble to burst in Portland Oregon. Neighbours and surrounding people are always flipping me shit about renting. I had the chance to but last year but instead bought a plasma cnc machine. I now run my own business and I am happy, will wait for the bubble to burst…
Smart move! Just out of curiosity, what are you manufacturing or fabbing?
After 8 illustrious years in the Army, I came to my senses that the vast amounts of energy consumed by us Americans wont last forever, so I got a second degree in Engineering . Renewable Energy Systems, I fab all my parts for Solar,turbine, geothermal. This will eventually peak as will there stocks.
I’m sure you’ll do very well. It’s unfortunate that most Americans took advantage of incredibly low interest rates not to start new businesses that will provide employment and economic vitality for years to come, but to blow it all on the greatest get-rich-quick scheme ever hatched. Congratulations and good luck to you, accroyer.
Congrats to you Accroyer,
You possess a truly American sense of Entrepenurialship… one that is harder and harder to find in this new world of GET RICH QUICK schemes.
You WILL DO WELL with this idea, I can feel it. Keep up the good work. It’s where America should be going vs. the offshore jobs we continually bleed.
This is something we have no choice in, gas prices are going up, people cannot afford to keep paying out of the pocket anymore. If you can get off the grid then you will no longer have an energy bill for heating or electricity. This will aloow you to sale back excess energy created by your solar, turbine or geothermal systems
Front page of Oregonian business section today: “New home sales start to skid.” The article has several exerpts from other articles, we’ve discussed here, including the quote from Joel Naroff: “Bubbles burst, they really do.” The mainstream media is turning, and the market psychology could turn very rapidly from here on.
Much of the Portland bubble seems to be driven by transplants from the Bay Area and San Diego. Once those bubbles burst, Portland will follow. Although, since the bubble started late in Portland, and since our city planning has restricted the amount of new housing, my guess is that the Portland bubble will be milder than SF or SD.
That’s how it was in the last bubble. Californians invaded Portland and Seattle and drove prices up. Resentment was so strong that there were stories of pedestrians spitting on cars with CA plates at crosswalks. Later, after the bubble burst in So Cal, people were flying from Seattle down to San Diego to buy boats cheap and sail them back up to Washington.
‘The city lists 47 active subdivisions where 7,173 homes are going up.’
And some believe that builders/lenders are savvy professionals who would only respond to true demand. If they can’t sell the 600 houses on the MLS, these houses will be empty for the next decade.
Ben,
Wouldn’t it be less expensive for whomever ends up holding the bag to sell these at market value (whatever the Dutch auction says that is), rather than letting them decay unoccupied for ten years? I never grasped this philosophy of financial negligence (We would rather let our homes sit empty and rapidly depreciate from desuetude and vandalism, then to accept less than our asking price…). Does it reflect the irrational belief that the prices will come back up to where they recently were within the next decade?
I am interested in hearing your thoughts on this.
GS
It sounds like there isn’t enough employment to fill the houses at any price. Months ago, when I tried to point out that places like Flagstaff don’t have the employment base to fill the thousand houses they are building, the media just scratched their heads. The reason empty homes have been bulldozed after past bubbles is they are a magnet for crime. It’s really sad.
I remember in Texas in the ’80s when they bulldozed the new house developments that were unsold or “mailbox returns”. The S &L s could not/would not make the liability insurance payments and it was less expensive to tear down.
Thanks, Ben. The problem of not enough jobs (other than RE and construction) to provide occupants at any price for these thousands of new homes out in Eastern Middle Fork Nomansland (not to mention LV Nevada) suggests the landing will be much harder in the outback than in Coastal CA.
You guys are forgeting the CA is building the first new research university in quite some time in Mercerd. UC schools eventually bring in tons of money, stable jobs, students with money to spend and renters.
You are forgetting that CA has a $10b hole in the budget left over from the .com bust ( at last time I checked — may soon get worse if Ahnold gets that $50b in bonds approved) and that this housing thingy will blow another hole in the budget once it plays out…
Good grief. They havent’s built that university YET? I remember in 1994 when Fresno was competing with it for a site.
Getstucco, $10 billion? This year alone “we” spent $16 billion more than we took in. Bread’n'Circuses.
Thanks, for the update, Robert. I stopped keeping score back when Ahnold lashed himself to the mast (”No new borrowing ever again if you let me do it just this one last time…”).
It will take many years for UC Merced to grow to a full UC campus.
Depending on state funding.
UC is famous for paying below market value on at least 90% of it’s positions. UC in general already has a huge issue with “brain drain” to places like Vanderbilt, Duke, etc because they offer higher starting wages and have housing costs at 1/4 of places like Davis, Westwood, SD, Irvine… you get the idea.
If you need data- so to any UC university and look up “salary scales”. Also bear in mind most staff hadn’t seen a cost of living raise in 5 years and no merit/step increases in 6 years.
I would never expect UC employees to bail out Merced’s bubble. In fact, town like Davis are shrinking. We have brand new elementary school closing due to falling enrollment numbers and rental prices are declining.
ditto for kingman, no good paying jobs.
kingman population 28,000. 1736 propertys on realtor.com. another 6-7 hundred new build not lised, probley 1 hundred fisbos. thousands in the pipeline. rhodes has 33,000 planned. if they build the californians will come to this paradise, 45 miles from beautiful downtown needles.
If you’d like to see what an attractive place Merced is to live, check out this picture. And hey, look — they posted the phone number to the local real estate flipper help line, too!
Let me start off by apologizing to all the fine residents of Merced. I went there for a cousin’s wedding 2 years ago and that place is a sh*tbox. Imagine if you can Bakersfield, devoid of any economic growth, dropped in the middle of Bum F*uck Egypt and you have Merced. Not a great place to live
There is a new UC there…
Some people have talked up Merced as being the newest and most affordable Bay Area exurb. . . nevermind that it’s 130 miles from San Francisco!
edit… that would be Bum F*ck Egypt…..sorry lol
As much as I hate the blanket “Renting is just throwing your money away” message, I have to give credit to the RE marketing machine. That mentality is so pervasive and ingrained in our culture, that it doesn’t even seem like marketing/advertising anymore — it’s just a “simple fact” of home ownership.
Home ownership is ingrained in the United States. The Constitution was written by home owners to protect their interest. For example, only home owners could vote.
Yes, it’s gotten to the point where some people would chop off their right arm rather than rent. If the rent were $10/month, they’d say, “sure, I only have one arm, but hey, at least I’m not throwing away ten dollars a month!”
I’m getting sick of hearing that line as well. Aren’t interest payments and taxes “toilet money” as well? In these bubble markets renting entails less money “down the toilet” than with buying.
“The good times have already ended here, in the same way slamming into a wall reduces your speed.”
There you are — more evidence that a soft landing is on the way.
This is the kind of story that I hope all the morons at the Federal Reserve read some day. It’ll show them just how much they’ve ruined our economy by recklessly flooding it with too much cheap money — and ENCOURAGING borrowers to take out ARMs just before they started raising rates 14 times. They fueled yet another boom and bust cycle just a few years after helping create the dot-com fiasco. As all these idiot investors … and innocent bystanders … have their financial lives ruined, Alan Greenspan is off making $100,000 a speech or something like that to talk about the economy he helped ruin. Despicable.
The Creature from Jekyl Island….(Aka..the FED) /
This is not the first time since 1913..When you have a government “untethered” right to issue dollars and every house and senator in you pockets trying to take a bribe….you have ( fuedalism)…Presto we lemmings work all day long to make those people rich and then they pay us in their “notes” ( IE promises to pay)! They won’t even pay sweat for sweat!
And You think people such as this, are going to let ALL these poor speculators get rich from Real Estate / or stocks, so they no longer have to “sweat” ?
If so? I have 100 Condo’s in the swamp of Fla.?I need to Flip!
MikeFL
You sum up the situation perfectly. My sentiments exactly.
Don’t forget all the other far flung east bay exurbs like Antioch, Tracy, Los Banos, etc. There is going to be so much hurt spread around….
“‘It’s like everyone got together and said, ‘Let’s not buy for a while,’ Gregory says.”
WHICH BEGS THE QUESTION….
WHY are Rich Dad/Poor Dad and The Donald in bed together, scheduled to be in San Francisco pitching their WEALTH series and how to get rich quick in R.E. schemes?
Was this huge convention booked last year, and the “event must go on” despite the beginning signs of a national MELTDOWN in R.E.?
In my opinion, this is the worst possible scenario for these two gents… standing there with their pants around their ankles, hawking “has been” Real Estate acquisition tools to the general public.
These scheduled conferences could single-handledly ruin both of their reputations over night. If I were them, I would scramble to at least change the content and format of the program to at least show that they are fully aware of the Cluster F brewing in the housing market. Push Bearish themes vs. Bull$h!t… er, I mean bullish themes.
Otherwise, they are going to just be reduced to SNAKE OIL salesman.
I still see the snake oil salesman pushing real estate on T.V..They claim that you can get big checks out of escrow from buying a house . Correct me if I’m wrong but doesn’t the buyer always put money into escrow . If this is some kind of a double escrow , I will say when I was in lending we would not allow these type of deals if they wanted to up the appraisal in the process .
You can also save big bucks on your home mortgage interest tax deduction instead of throwing away your money on rent, and make big bucks on the capital gains from selling your home in five years at three times the purchase price, no matter what the underlying market conditions are at the moment…
The snake oil salesmen are still pushing real estate on TV and at seminars in Australia, where the bubble peaked (excpt for Perth) 2 years ago.
If The Donald’s reputation is still intact after his past round of wealth destruction, then I would assume it is indestructible.
“There’s no underestimating the intelligence of the American public.”
H L Mencken
When I viewed the Rich Dad program on PBS a couple of weeks ago, he claimed he was excited by the opportunity to make money in real estate if the bubble pops and claimed he was still buying. I don’t know how long ago the thing was taped, but they are running it almost daily on the PBS stations in the L.A. area, promoting the expo here in April.
I have lost all respect for PBS for giving this jerk what amounts to free advertising for his snake oil as well as the Public Broadcasting “Seal of Approval.”
Totally agree. That “PUBLIC” broadcasting puts on his hour-long (or is it 2) infomercial is shameful.
Well said ladies
I noticed this week that Nightly Business Report, which we get at lunchtime on the next day our time (Eastern Australia), now has the NAR as a corporate sponsor.
I watch this show almost every Saturday our time, and that sponsorship started within the last couple of weeks.
“A new $450,000 house, owned by an investor waiting to flip it, can be had for less than $1,000 a month.”
My first reaction to this quote is that all these folks seem to be mispronouncing the word “speculator.”
My second reaction is that the above quote gives me a hint as to where prices are headed for these houses. (Hmmm… lemme see, 100 times “less than $1,000″ is…) Of course, I may be a bit too optimistic what with 7,173 new units about to collide with all the ARM resets. Man, this is gonna get ugly!
Hi Bloggers, long time I posted how interesting it will be to watch the RE burst
real time…not posting these days, butthe show is onand watching every episode…Dear Kosiuko,
Hello. Where are you watching the R.E. Bust- FROM??
Interesting to find out from ANYONE, if bloggers are mostly from the USA, or are actually picking up Ben’s Blog from ALL OVER THE WORLD.
Anyone from out of the USA care to share where they are watching from??
Canberra, capital of Australia.
South America here…invested in Florida, with very nice profits and cashed out one year ago.
No, there are always opportunities to make money in Real Estate, or any other commodity or asset. It is all relative to the price you pay.
They will simply be “re-directing” their shills to areas where “price appreciation” has been low, so there is some opportunity for a gain. Why do you think swarms of people started buying in Idaho, Oregon, Texas Inland, Arkansas, and God knows where…..because these geniuses have sent them out across the country to BUY, BUY, BUY with other people’s money at every town where there is a chance to rent at a gain, using I/O loans………thereby driving up the local prices, as swarms of Californicators and Florinvestors trek to new unexplored areas to reap the profits of unearned income.
Isn’t the new “investment paradigm” great?
Unfortunately, this will be the same scenario played out up and down the Central Valley of CA in the next 6-12 months. So they have a UC, so we have all the major oil compaines in Bakersfield making $$$. SO WHAT, prices are soo out of whack in incomes and rents and the level of inventory. They could build homes for 50 million people (no joke) up and down the valley and still have land left over. All the demand the last 3 years was LA and SF “investors” who are now the major bag holders here!
“‘The demographics never changed here, but people bought as if they did
I think this is my feeling for the whole country. Nothing has changed with the demographics or incomes in any city to justify a huge runup in prices in the last few years, not Las Vegas, not Los Angeles, South Florida,Northern Va. well you get my point-then it must be the bubble doing this to prices.
I agree with you wholeheartedly! Tho, I will add, any changes in income have been for the worse. As there are fewer high paying manufacturing jobs and increases in basic costs of living (which are not included in the “cost of living index” because they are to volatile) such as petroleum products (heating, gas etc.) and food - but are real expenses - The standard of living is dropping rapidly in the United States. Sometime in the future, historians will label the period from ~1920 to ~1970 the Golden age of America. Since 1974 the standard of living in the United states has dropped and the drop is accelerating.
Let’s just agree that incomes and housing prices have diverged in recent years, unless you consider the “wealth effect” of debt-fueled home equity extraction as part of income…
Places like Merced, Sacramento, Phoenix, and Las Vegas are the ignition points for the chain reaction cascade of this unfolding RE implosion. It is fairly reasonable to assume that the biggest holders in these disintegrating markets are from San Francisco, Orange County, and San Diego. The financial wreckage will find its collateral damage reverberating back to the primary markets. Orange County appears to be the most vulnerable due to its intimate attachment to this RE mania. It is infested with RE speculators, and RE dependent businesses. It is also the most complacent.
I agree! The OC is by far the most wacked area in the country. In the past, “keeping up with the Joneses” was a phenom shared by neighbors. In the OC the Joneses are the entire county! More people looking like they have money then anyplace in the United States…
Agree for South Orange County. In North Orange County, residents are less greedy and more grounded.
” Renting is just throwing your money away.’ Merced is going to grow, Rodriguez said, which means house prices will keep going up. And if they don’t? ‘Then I’m screwed.’”
Damn, that made my day….I needed a good laugh. Raining here on the Monterey coast again this weekend so all those Spring sale open houses will draw no lookers once again…..
The amazing thing to me is how long this ‘game’ has played… Part of the reason this has gone on so long, and I fear so painful, is the shear beauty of this bubble when viewed from afar. The amount of ingredients that contributed to this soup is just short of astonishing….
There is a spiritual experience from putting these disparate puzzle pieces into place so as to clearly view the emerging Picture of a bursting bubble…
Well stated. I am in the camp that you just can’t blame the Fed for something, that in hindsight, is so elegant.
Alot of frustration on this blog all understood. I remember the silence and blank faces that followed the tech bubble. We can expect the same and more with the upcoming unraveling of this tapestry…
So Merced has too many houses and not enough jobs. Simple solution; build more houses and create construction jobs. I know, I know this is a brilliant proposal and indeed I surprised myself when I thought of it. I suppose the beauty of any great economic theory is it’s simplicity. I call my theory the Pyramidal Theory and I intend to nominate myself for the Nobel Prize for economics for this seminal and groundbreaking work.
I would like to give my theory as a gift to the world and expect nothing in return (apart from a statue in the center of Merced.) I must go now as the nurse has come in with my medication.
May all your landings be soft.
That is really a great proposal. There will also be a ripple effect due to all the new opportunities for Realtors (TM) and the growth in home-mortgage lending that will result. Big Box Mart stores will move in to capture the spending generated by the Wealth Effect of all these new RE industry jobs.
Have you submitted your suggestions to Jerry Sanders, the new San Diego mayor, yet? Because I am sure he would be interested — he is trying to figure out what to do about our chronic housing shortage and lack of affordable housing.
Softlending,
you have a great sense of humor. btw, I support your nomination fro Nobel prize of economics. I think your theory is already proven ove the last 5 year years of great housing boom
KM
1) No fun lov’in college bound student will want to attend the Merced UC Campus except for the student who can’t get into one of the other UC campii. In this instance the student will attend for the required year before asking for a transfer to another UC campii.
2)“This is a very good time to be a renter in Merced. A new $450,000 house, owned by an investor waiting to flip it, can be had for less than $1,000 a month.” Anyone else agree with this statement. Seems to me renting could be quite a risk; property could be sold out from under you or foreclosed on and moving expenses are not cheap.
3) Gee, do you think those long commuters from the bay area have figured out that it’s cheaper to rent in the bay area then travel to and from Merced and the like. I mean like wow, no commute time, don’t have to worry able higher gas prices, don’t have to worry about falling RE prices, don’t have to worry about property taxes….what the hell could they be thinking!
You must be a Rush listener since you’re using the word “campii.”
Isn’t Merced in the area they made American Graffiti in? I remember Wolfman Jack screaming about it.
Modesto… (different town, similar surroundings)
Wolfman mentioned Merced in his weather summary, if I remember correctly.
The average Joe watches Diane Sawyer and she declared emphatically that the RE boom is as strong as ever. These seminars are no different than stock flipping seminars (I assume that they existed?) in March/April 2000. The only difference is that the time frame gets stretch a bit in RE world due to the sticky nature of the business.
“The only thing worse than the real estate market here is the market for real estate agents. They’ve been coming down to the Auto Toyz and Auto Store used-car lots looking for work. ‘Everyone who applied recently, about eight people, they all were Realtors,’ said Nico Pineda. ‘But things were slow for us, so we had to turn them down.’”
Is Big Box Mart there in Mercer?
http://www.jibjab.com
One thing I think we do not have a handle on yet about the bubble, how many of our neighbors “liberated equity” to buy investment houses in Merced, Bakersfield, Boise, and Mesa. That’s why I predict a reversion that overshoots the mean to the downside.
I bought my San Diego house in 1999 from a neighbor on my block, it was an estate sale. He had to watch it go from the 180K i paid to 550K “value” today. Last year he bought a place to retire to in St. George UT (on the LA Times highest 2005 appreciation list). This year he has his San Diego house FSBO for 650K, he’s stubborn and I can see him riding it down, nothing is selling here.. I think he’s getting whipsawed 3 times by the market. He’ll come out OK, just with no big gains.
He’ll sell it price reduced in 60 days, on the fifth time he puts it back on the market…
People who really wanted to “own their home” were very foolish if they liberated the equity in it. I used to work with a lot of people who wanted to “own their home” and the most important thing they thought about was how to pay it down quicker. Of course, most of them had been through at least one bankruptcy previously so they weren’t stupid enough to think about “liberating equity” or ARMs or any of those things.
I suppose, after this is all over, we’ll have a whole new group that has gone through bankruptcy who think the nicest thing in the world is owning something that is completely paid for!
I generally read this blog out of idle curiousity, and because I find the comments very entertaining. However, this article hit pretty close to home.
I live in San Francisco. A friend and his wife bought a house in Merced last year. Had to “wait in line” overnight for the opportunity to buy from the builder. Financed through an ARM I/O, basically nothing down (because of her “good credit!”). The documentation required that it be their “primary residence,” that they not rent the house to anyone for a year, and that they not sell for a year. Their plan was to secretly live in San Francisco, sell it as soon as possible, take the “guaranteed” profit and use it for a down payment for a place in San Francisco. I was told it was a “no-brainer” because the UC campus would guarantee that the area would become a hotspot. And the prices were “going up $10,000 per month.”
For a year they lived in their very nice apartment in a beautiful section of San Francisco, and periodically travelled to Merced to their new “home.” They put a few sticks of furniture in the house and bought some bushes. They fed the mortgage and paid rent. They had a child. They learned how much they really disliked Merced.
The year is now up. The house has dropped in value. The street is empty. They are both trying to find jobs in Merced, and will likely leave San Francisco, which they love, to move to Merced, which they hate. Their entire lives have been shaped, and disrupted, by the decision to buy into the housing bubble.
In hindsight this all looks pretty stupid, but these aren’t people that you’d usually consider stupid. I guess it was fear (of being “permanently locked out of home ownership”) and greed (expecting to get a huge profit just for signing a contract). And I know that their story isn’t really that unusual. It’s just that casualties seem a lot more real when it’s someone you know. I’d expect them to just turn the keys over to the bank, but then they’d “lose what they’ve already paid” (interest? what’s to lose?) and it would destroy their “good credit” (and thus prevent them from doing this again?).
After having lived at the epicenter of the dotcom bubble, and all of its excesses and distortions, and now living through the housing bubble, and all of its excesses and distortions, I’m getting nostalgic for any period without bubble behavior (heck, even the stagflation 70’s). Perhaps the bursting of the housing bubble will finally break the back of the mindset that there’s “easy money” out there.
Very interesting story. What I find fascinating is that many of the people who got caught up in the dot com bubble mania, or who viewed its impacts from close proximity, are now caught up in the housing bubble. Didn’t people learn anything from what happened six years ago?
Nah, memory is short-term only for some, and some believed that the housing bubble would allow them to regain everything they lost in the dot.com bubble. That, and the increasing popularity of ‘positive thinking’ psychobabble has created a nation of chronic gamblers.
What they seem to have “learned” is that now and then people get lucky and a bunch of money falls on their head without doing a lot of work. Sadly, their underlying assumption seems to be that just working hard and saving is never going to get them anywhere. I guess it’s the same mindset that fuels the lottery and the slot machines…and before that the numbers game in ghettos.
True, many intelligent people get caught up in speculative bubbles. Fear and greed can make a dumbass out of anyone …
I thought your comment about “easy money” was interesting. There always has been and always will be a motivation to make the “easy money” instead of producing something of value for it. However, the extent to which such motivation actually drives the economy could be a danger signal. How stable or progresssive could an economy possibly be if it becomes increasingly driven by people who are essentially gambling or taking money off the top of a transaction, without actually adding any value? Does the pervasiveness of this type of gambling signal the decline of economic viability? Do the speculators, investment professionals, corporate mergers and reorganizations really drive the economy forward, or are they just a drag force?
We’re going to hear more and more stories like this in the SF Bay Area.
“We” are not immune - it is the land of the “financially self-delusional” - no matter how smart “everyone” is here.
As GetStucco points out often, and may others have said, there has been no risk premium for nearly a decade for doing such stupid things.
As we are seeing, that is all changing quickly.
With all of these properties about to readjust, what impact will the County Assessors Office play in adjusting the property taxes lower ? How will this impact the State of Calif. and local governments? Do we eventually see layoffs in government and budget shortfalls? What about our Educational facilities? WOW!!! What a senario…….
They won’t reassess unless asked. However, plenty will ask… they did the last time around. This time, though, sales & income will take big hits, too, so government will see all forms of tax revenue tanking. Layoffs? Massive.
Would be a double whammy for San Diego, which is already suffering from a multi-billion pension scandal and an inability to sell municipal bonds.
Don Bauder of the San Diego Reader had a great overview this past week about San Diego, the nation’s finest “corrupt” city.
I say: “San Diego condos for everyone!”
Like rollerskates, best bought in a pair!
>The good times have already ended here, in the same way
>slamming into a wall reduces your speed.
I-ya tole youuuuuu! It’s the 2005 “fall wall”. It will become legendary in years to come. Remember, you heard it here first.
The leaflet for Hong’s home calls it “ideal for investors.” But he’s receiving only $925 a month in rent, less than his mortgage, and Merced is running low on fools.
“fools”? how did that slip out in the article?
To foobeca,
No I’m one of those unfortunates that in high school only had the choice of taking Latin or French, so I opted for Latin.
One of the only things I remember well was the poem, Latin is a dead language, as dead as it can be, it killed off all the Romans, and now its killing me……(like the housing market of today)
Thanks for the pix of Merced John in VA. While reading thru this thread a little voice in my head started saying “Gee, maybe you should go THERE and buy a house- sounds like they’ll be dirt cheap and pretty quickly too”
Then I saw those pictures of Merced and it shut that little voice right up.
This off topic but I finally got the “Sold” prices off the county site for my neighborhood in Seattle for the properties sold in Jan and Feb. Of 57 homes, FORTY sold below asking. 9 got AP and 8 went over AP.
This thing may be unravelling even faster than we know. There’s a 1-2 month time lag on us mere mortals getting that info. The reductions in the final sales prices were substantial ,> 50K, while the “over sales price” were paltry, 6- 20K.
The bidding wars are over. RIP. This market is on it’s way down, at long last.
I would never expect UC employees to bail out Merced’s bubble. In fact, town like Davis are shrinking. We have brand new elementary school closing due to falling enrollment numbers and rental prices are declining.
UC is famous for paying below market value on at least 90% of it’s positions. UC in general already has a huge issue with “brain drain” to places like Vanderbilt, Duke, etc because they offer higher starting wages and have housing costs at 1/4 of places like Davis, Westwood, SD, Irvine… you get the idea.If you need data- so to any UC university and look up “salary scales”. Also bear in mind most staff hadn’t seen a cost of living raise in 5 years and no merit/step increases in 6 years.