‘It’s Not Happening’ In California
A pair of reports on Californian housing markets. “Housing prices in Nevada County dropped for the third month in a row in February. The median price of house and condominium title transfers recorded at the county Recorder’s office dropped to $459,000 in February, compared to $470,000 in January.”
“‘People are starting to lower their prices, and we need that,’ said Patti Moore, broker in Nevada City. ‘Things just got too out of hand.’”
“Nevada County Board of Realtors director Skip Lusk said, ‘From my perspective, there isn’t any trend yet. My sense is, as the market tightens up a bit..people who really want to sell their house will bring the price down.”
“While some sellers seem to be lowering their prices to appeal more to wary buyers, others are digging in their heels, real estate agents said. In many cases, the prices that homes fetched six months ago don’t square with many buyers’ perceptions of where the market is headed.”
“‘(Sellers) still think that, because the house across the street sold for $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some,’ David Kerr, a Bay Area agent. ‘What’s happening is, it’s not happening.’”
And the Merced Sun Star follows up on the LA Times article. “Real estate is a driving force in Merced’s economy. Five of seven members of the City Council draw their livelihoods from it, four are licensed to sell homes, including the mayor.”
“It’s little wonder that an in-depth Los Angeles Times article spotlighting the city’s rapidly cooling housing market has made the rounds. ‘I think half the town has read it,’ said Mayor Ellie Wooten, a veteran real estate broker in Merced.”
“The article follows the city’s real estate market from the heady days of the past few years to the grinding slog of today. ‘It’s changed rapidly,’ said Wooten. ‘It boils down to supply and demand, and right now apparently we have an oversupply.’”
“But the city’s historic housing boom continues, in spite of slowing sales numbers. While many newly opened subdivisions sit empty, developers in Merced have 7,000 new houses in the works. Hundreds are expected to go on the market this spring. Councilwoman Michele Gabriault-Acosta said about 200 resale homes were on the market when she got her license to sell homes in July. The number has since grown to more than 600.”
“Gabriault-Acosta said she thinks too many homes on the market were overpriced.”
“Councilman Carl Pollard, who got his license to sell homes in August 2004, said the days of multiple offers above asking price are definitely gone. He said $30,000 and $40,000 breaks on homes are not uncommon. ‘Sellers are giving concessions, but if you look at the market, they’re still not moving property,’ he said.”
Thanks to the blogger who sent the Merced story in.
‘While many newly opened subdivisions sit empty, developers in Merced have 7,000 new houses in the works. Hundreds are expected to go on the market this spring. Councilwoman Michele Gabriault-Acosta said about 200 resale homes were on the market when she got her license to sell homes in July. The number has since grown to more than 600.’
How can this not end in a crash?
I love it! They admit to having an oversupply problem, so let’s go build 7,000 more homes. That’ll fix the problem.
It’s the “Field of Dreams” management philosophy — “If we build it, they will come.”
Clearly, the best minds in real estate are hard at work in Merced, California. Maybe Donald Trump should see if there are some prospects there for his next Apprentice show.
In sharp contrast to most real estate agents that I’ve met or apprear in the media, most of the posters on this board believe that supply and demand curve does apply to housing. If we truely believe that then building more homes is the answer to problem. Add enough supply and eventually the price will come down to a level that upper middle class people will be able to afford a starter home again.
If you go back through my blogs, I’ve consistently said we have too many houses already and the overbuilding is going to punish existing homeowners, lenders, taxpayers, the construction industry, etc. Overbuilding is a disaster.
Overbuilding was cited a key factor leading into the ‘89 crash in Phoenix. Overbuilding will clearly magnify the coming bust, leading to borrower defaults & Lender BKs. But, it’s hardly a disaster - Simply a bust that provides an opportunity to the patient housing bears.
Supply and demand NECESSARILY apply to housing. The wise ones on this board have, beginning with Ben’s own observations, conceded that point early. The problem has been that housing is not a discrete transaction. All of the other transactional factors surrounding the purchase of a house (creative lending, fraudulent appraisals, etc.) have prolonged the inevitable fall.
Of course. No sensible person will dispute this, in the long run. Manic behavior can delay the onset too, along with the other factors you suggested (lack of confidence in the securities markets - stock market crash of 01 another factor)… but in the end, high prices are the ultimate cure for high prices. What’s entirely uncertain is, the downside extent to which we suffer any ensuing crash…
The definition of disaster depends on your perspective and time frame. Long term housing prices have to undergo a large correction for any return to normalcy. The existing housing supply seems to be overbuilt enough to lead to price reductions in this distorted market. But in the three local housing busts I’ve lived through it’s been the last burst of massive over building as everyone tried to get in and out before before the party ended that destroyed the market. Long term though people could afford houses again.
Overbuilding is a symptom of the problem. The demand was artificial. People were buying multiple houses as investments. Many of these houses were never occupied.
Under normal cirumstances as prices go up the demand is reduced. This is the negative feedback that prevents overbuilding. In a mania, as the prices go up the demand increases, as more people are pulled into the buying frenzy. This type of positive feedback will result in a boom and bust cycle. When I hear people talking about things getting back to normal I can only shake my head. When has a buying frenzy ever ended with stable prices? Ben is correct; this has to end in a crash.
Regarding AZBubblePopper’s comment regarding overbuilding cited as the reason for the Phx crash last time. When S. Cal crashed during that time, the layoffs in the defense industry were cited as a contributor. Could it be that these localized crash reasons don’t matter? In otherwords, there are other more subtle underlying forces that act broadly and have nothing to do with local issues that cause these r/e crashes - but because people cannot “see” these underlying reasons, they look for tangible reasons in each locale. It will probably be the same this time around. Each market will have its list of reasons why a particular market crashed, but it was the broader more subtle issues that applied to all markets that were the true nails in the coffin.
The end of cashout ARM financing will put a big dent in the automakers’ ability to sell SUVs, as evidenced by the wave of layoff announcements in Detroit. As this unfolds, the labor market will be commonly (and incorrectly) sited as the cause of the housing market collapse, when in fact it is the end of the housing ATM’s support for aggregate demand which will lead to the layoffs we will see in the next couple of years.
Forget your local effects — this is the international economy I am talking about.
I think everyone would agree that OVERbuilding will reduce prices. Housing bulls probably just disagree about what constitutes overbuilding.
However, just because it will reduce prices does not necessarily mean that it is the optimal solution to high housing prices. Ideally, you would like to prevent unsustainable price growth in the first place and have a series of small, frequent “corrections” instead of one massive boom followed by one massive bust. The overbuilding “solution” is definitely a boom-bust scenario.
There are natural reasons for why small, frequent “corrections” are unlikely for the housing market. After all, building houses and especially condo towers takes time, and that building time is the natural time constant by which the market can “correct” itself. For markets with very long time constants, free markets naturally lend themselves to chaotic rather than stable behavior.
Said like a great economist, Annata…
My favorite line:
“‘Everybody was trying to jump on the bandwagon and make a big profit,’ she said.”
Including herself:
“…she got her license to sell homes in July…”
lemme see hmm Merced– 7,000 new units coming online……
Population > 18==41,000, Number of housing units –21,000 (both as of 2000). # SFR’s built in 2000–331. Number in last 10 years 4,000 (up to 2004) no, no problem here.
HOUSES FOR EVERYONE (well, maybe condos).
Ben, would you happen to have the link to that LA Times article? Did you already post it previously?
I think I found it. It’s Thursday’s article re: UCLA forecast, right?
No, it was the LA Times. I had a post on it. I believe it was last week.
I found it. I put ‘Merced’ into the search function on this blogs sidebar and it came right up.
March 25th, titled ‘The Land of the Open House’
“‘(Sellers) still think that, because the house across the street sold for $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some,’ David Kerr, a Bay Area agent. ‘What’s happening is, it’s not happening.’”
I wonder where they get these wild notions? Oh yeah –
‘”There is no justification for the prices we’re seeing now,” (UCLA’s Christopher) Thornberg said. He predicts that annual home-price appreciation will slow to 6% by the end of this year and will flatten in 2007.’
If a so-called expert is saying appreciation will “slow” to 6% by year’s end (implying that it is currently maybe around 10% or so), is it any wonder the seller’s cannot figure out how to price their dumps to move them?
Correction: s/b “sellers” not “seller’s”
I just learned that the residents of these units in SE-Florida were just notified last week that their apartments are going condo. The prices (see website) are beyond obscene!! This development is in an Ok area about one hundred and fifty yards from the noisy I-95 freeway.
It’s over $500/month for a one bedroom in taxes and condo fees alone. The current rent for a 1 bedroom here is $1070.00
At this stage in the game I have to believe there won’t be any takers….. right??
http://www.aventineresidences.com/
Hmm, those look like Silicon Valley prices with even higher HOA fees. What local industries support that kind of housing cost ??
Not to worry.
Next door is a Cracker Barrel restaurant with a “Help Wanted” sign in the window.
Next door is a Cracker Barrel restaurant
Well, that explains it then….Nothing like a good old Cracker Barrel as a generator for all those sales…
5 years ago you could buy a new 4 bedroom 3000 sq foot home in that town for 150K. Now they want 300K for a converted apartment building.
Why when I look at that. I get visions of tommorrows low income housing.
Looks like section 8 in a few years. Get your condo and you can get drugs without leaving your complex.
Wow, 336k for a 2 bedroom craphole with no garage. On top of that you have to pay 740/month for HOA and taxes.
If you put 0% down (42% of people last year did that) and get 6.5% interest rate, the mortage payment would be 2150/month. Add mortgage insurance of $150. That means you’re paying 3040/month for this piece of crap.
People paying 1000/month for rent aren’t going to jump at the opportunity to pay 3x more for the same place. I hope all the investors and speculators stay away and this thing falls through.
Can you say CHEAP and TACKY…..
Merced is my town. 70,000 population, maybe 100K close-in. Basically a Central Valley ag town with a history of high unemployment. The University of California is spending +/- 600 million on a new campus 3 miles from town-center, and this has caused the speculative land rush/building boom the article mentions. The expectations are that the campus will host 15K+ students in 10 years, as well as thousands of well-paid faculty, staff and administration. For all of this though, house prices are close to 2x their realistic value, and since about October inventory has exploded. That 600 figure is more like 850, and that’s listed re-sales only. Every street is littered with FS signs, and the national builders, having started some truly huge developments just cannot stop. They are on track to add 500 new homes this year, while a drive down the streets of their current stock shows row after row of empty, dark houses. Frankly, we are hitting a brick wall and everybody knows it.
Turnouthelights; Are their also a lot of apartments being built or just houses ??….I would suspect some fairly large apartment projects will be built sooner or later….Apartments are more condusive to student rentals vs. houses…Have you ever seen what college students do to houses ?? They can bring down a neighborhood all by themselves…
Read this quote somewhere the other day. Very apropos:
‘It’s been said that good judgment comes from experience, and experience comes from bad judgment.”
There’s gonna be loads of expericence floating around when this puppy pops!
A slightly different statement is one of my favorite quotes:
“Bad experiences can be avoided by exercising good judgement. Unfortunately, good judgement is usuall formed as a consequence of bad experiences.”
To Mike-in-florida
Speaking of Donald and the Apprentice, can you tell me if Donald sold off the house that the winning Apprentice was to help decorate, etc. BTW, wasn’t she a realtor or broker in Florida too?
Not sure about the house being sold or not — if it was, I imagine it would have been in the local paper, and I haven’t seen a story about it. But yes, she was a broker in one of the towns here between West Palm and Ft. Lauderdale (maybe Boynton Beach. Or Delray, if memory serves)
Another one of the Apprentice people who got booted is a Miami-area real estate agent, too. Christina, was it?
Just heard from the Realtor (TM) that’s helping us in the North Tustin area. Her comments (I asked for her opinion) via a v-mail were as follows:
* Houses that are selling (in North Tustin where we were looking) are remodeled Ranch Style homes or homes with good sized lots/square footage.
* The houses that were in the $800’s last year are now in the $900’s.
* Selling a lot of high-end homes - that segment of the market (hills of North Tustin + Newport Coast) is moving.
Just a point of reference for you all. Moving lots of the high end homes (on a relative basis) could certainly help w/ keeping the average prices high.
FYI, this Realtor (TM) has been great to work with, is not pushy, and truly has been good about only showing us homes that she knew would fit our taste. I wouldn’t lump her in w/ the other schiesters at all.
So go buy that 900,000 dollar house… hehehehe
There is a reason I’m on this blog every day (though not posting regularly)
That same $900 house was $350 in 2000.
>
It’ll be $350 again by 2009, I bet.
OC stomp… you are right.
In 2000 California had a terrific decline in housing prices or was that 1994? A 50% drop wasn’t it. So, just because some bought right when interest rates had sky rocketed?, And Cali lost the Mcdonald Douglas & some milatary bases, all is well that ends well!
So let’s me see if I understand your postion in 2006!…Had you been on this Blog site back in the rare moment when Cali home prices dropped nearly 50% you could have advised us to first sell the top then later reinvest by buying right (on the lows)! Is this not correct?
While on the other hand had you purchased that same property a year or 2 earlier, you might have paid (350*2= $700k). While you would have sold at the top then, the average Cali moron paid $700k sat on 50% decline road it up again to $800k twelve years later for a tidy $100k “fiat” profit. Now you and they think the $350k condo (12 yrs older) is worth $900k NOW! ;>) If they miss cashing in this time, not to worry,housing has always come back. Isn’t this what your saying NOW?
Never mind the leaves on the tree have clearly turned, winter may be comng again. While you and the smart Cali buyer got out @ $700k then, bought back @ $350k a few years later?…
Now to summarize your position today OC -stomp what your saying is “Don’t sell Now”! because its different this time. Right Pal!
One other thing do you think we are still in a Bull stock market ? Or do you wait for proof in MAY to see if the Major averages don’t exceed their 1999-2000 tops, creating the LONGEST span of time that a new high was not made (fiat currency wise) in 100 hundred years?
What a Realtor thats not a scheister say it isn’t so. The posters here may suffer from overload.
OC Stomp, I’m sure you’ve had a chance to see oc renter’s housing inventory site..did you notice inventory is up 61.6% YTD?? Will be interesting what happens in THE OC.
http://bubbletracking.blogspot.com/2006/03/tracking-orange-county.html
Read about Interesting Orange County Stats.
Melody–thanks for the laughs…Here is one analysis of the PHX mkt:
From Dottie Stein, REEELATUR
Friday, 03/31/06 We still have the lowest inventory in a very long time. In fact, a few contracts are stating that Buyer(s) will pay above the appraised value - usually with a maximum - (if the appraisal comes in below the Sale Price):
Lemme see FORTY THOUSAND FOR SALE SIGNS and it’s the lowest inventory in a long time……
Knock knock
who’s there..
Knock knock..
DOH..
Damned badge is on upside down… couldn’t read my name.
Perhaps the “We” refers to Dottie Stein and her associates, and the “inventory” to the number of properties THEY represent.
LOL!!!!
North Tustin has best elementary school in OC, a very good middle high, a decent HS. The prices will drop 15% from here to end of year. The $900k will back to $650K by end of next year.
To Mike-in-Fl,
Here’s the info. She was the winner of Apprentice 3. Can you tell us what she’s doing after all the hype?
Kendra Todd, 26-year-old real estate broker from Boynton Beach, Florida. Kendra is an ambitious and highly successful real estate entrepreneur. She obtained her undergraduate degree in linguistics from the University of Florida, and upon graduation became the founding Editor-in-Chief of an award-winning lifestyle magazine in South Florida.
Kendra went on to obtain her real estate license, and incorporated her media expertise into the development of My House Real Estate, Inc. an innovative real estate marketing company specializing in condo conversions and land acquisitions. My House Real Estate, Inc.’s marketing strategies are virtually unparalleled, and have generated involvement in some of Florida’s most sought after real estate. Kendra is currently one of the highest producing real estate agents in the marketplace. Additionally, she is “Special Agent 53″ on My House, Florida’s #1 real estate investment talk radio show on Clear Channel radio.
I can’t find the name of the estate but it did say Palm Beach Island if that helps….
There’s been a HUGE jump in inventory over at http://www.ocrealestatefinder.com.
14,213 from around 13,500.
Looks like they seperated Orange County from the surrounding counties over there.
Anyway, if there’s that many new listings within a week…
…it’s a very good guess that the new inventory is actual homeowners listing their homes.
This is the new wave coming in…
…people who can’t afford their mortgage payments, and are attempting to bail out.
Also, if there’s that many listings- there’s been very few people buying homes in Orange County. The last people to board the Titanic, maybe, but that’s about it.
Looks like the ‘Spring Bounce’ will become a ‘Spring Trounce’ in Orange County.
Honestly, I thought there’d be more morons buying homes right now. It even surprises me. Let the listings pile up!
PREDICTION: Orange County will hit the 20,000 mark by September…putting us right where San Diego is RIGHT NOW.
ALL HELL BREAKS LOOSE IN SEPTEMBER.
P.S…
The second installment of Orange County property taxes is due April 10th.
Taxes are due April 15th.
I’ve been seeing used cars popping up all over the streets in Huntington Beach.
And- I haven’t heard ANYONE bragging about the value of their home in at least two months.
BOMB’S AWAY!
Correction: ‘used cars’ = ‘used cars for sale
can you track me down a ‘68 nova 2 door, 325 small block will be ok
factory hubcaps too please.
hell, OC, just seeing used cars is a sign of a crash!
That’s true.
I’ve also been noticing a decrease in BMW’s and Mercedes driving around. The few I see around now appear dirty most of the time. Hummers appear to be fading away, too.
And now that I think about it…it’s been a long, long time since I saw a limo rolling down the streets of HB…
Hmm…
For an opposing point of view, I sure wish I could find a link to this article I am looking at in the Real Estate / Business section of the Pomerado Newspaper Group March 30, 2006 paper. I have to say that is the first time I have seen the word “frenzied” in print to describe the SD real estate market since last summer. I will type the first couple of paragraphs for your viewing pleasure, but I am hoping someone can find the article online, as it is a good belly laugh (I could not):
“North County housing market still hot — Frenzied sales pace continues at Del Sur
Local housing industry experts have long decried the rumor of a housing “bubble” as fallacy, citing various economic factors that defy the projections of silicon-bust alarmists.
Presented to the industry in late January, the latest statistics on new and resale home sales and buyer tendencies appear to agree with the no-bubble camp. And recent sales performance at Del Sur, north county’s newest master planned community west of I-15 off Highway 56, indicate that in San Diego, the housing market is still going strong.”
So there you go, all you silicon-bust alarmists (and other wussies)– the San Diego market is still hot, and there has never been a better time to buy a home there!
Kind of interesting when the writer harkens back to statistics “presented to the industry in late January” in an article dated March 30, 2006. Was she unable to find any more recent stats, or did she conveniently choose to ignore them?
GetStucco–
Looks like a typo–
Local housing industry experts have long decried the rumor of a housing “bubble” as
Was supposed to be:
Local housing idiots have long decried the rumor of a housing “bubble” as
I recognize that accent! That’s the Marketing Department trying to do journalism…
“But the city’s historic housing boom continues, in spite of slowing sales numbers. While many newly opened subdivisions sit empty, developers in Merced have 7,000 new houses in the works. Hundreds are expected to go on the market this spring. Councilwoman Michele Gabriault-Acosta said about 200 resale homes were on the market when she got her license to sell homes in July. The number has since grown to more than 600.”
This is such a classic supply response that it boggles the mind. Do the builders realize they are setting up the Merced market for a hard crash, or do they build on in happy oblivion?
There has been a lot of “Big Builders Crash” predictions on Ben’s Blog….I think to some degree, its just a lack of understanding of how the big developers are structured…They are in the best position to compete for what ever remaining buyers their are…
They have “HUGE” economies of scale with low land price (per unit) the best financing and tremendous leverage with their sub-contractors…..
I think the counterview depends heavily on the following assumptions which will be severely tested in the near term:
1) Demand will hold up after it becomes common knowledge that there is a huge oversupply of housing (as anyone who has read this blog regularly already knows);
2) Demand will hold up after the speculative motive is gone (no more price appreciation);
3) Demand will hold up after the economic downturn already underway in Detroit infects the rest of the country;
4) There may already be a recession underway, which will be very bad for McMansion demand (see the graph on this link relating new home sales to recessions, and count how many times new home demand fell off the cliff like it just did without a recession soon to follow:
http://calculatedrisk.blogspot.com/2006/03/new-home-sales-and-recessions-part-ii.html)
4) Ben’s post showing a 47% drop in LV land values is likely to soon be repeated for many other markets, and this will gouge the HB balance sheets in the same way the inventory item inflated their valuations in the bubble runup;
5) HB insiders cashed out of their stock positions last year, and may actually do better by deliberately building themselves into BK rather than slowing down now.
6) HB stock valuations are currently based on a questionable assumtion of profit growth into the indefinite future; when it becomes obvious that future profits will decline (maybe all the way down to $0), the future profit stream will be widely perceived as a declining annuity instead of the current rosy view that it is increasing. This paradigm shift will require a huge hit in the valuation of these shares.
But maybe I am unduly pessimistic here? Why don’t you elaborate a bit more on the bull case so we can compare notes?
Hmmm, have you paid attention to what has happened to the prices for copper plumbing, concrete, lumber, appliances, labor, anything at all in SS, steel…
I would imagine that any cost of a residence built today compared against 5 years ago would show 40%-60%+ jump.
Basis for older homes, for those in a bind that have to drop their price and haven’t HELOC’d will permit a sale price that builders won’t be able to compete against. They are already scaling back big time with permits off 30% in PHX for example. Add competition against REOs (coming to a city near you SOON), and we’ll see builder BK or a fraction of their former size.
The land commitments may turn out to be albatrosses that they will be trying to offload at fire sale prices… to stay afloat.
(Sorry — I guess I had seven reasons. I keep forgetting to hit that preview button!)
Stucco…Don’t mis interpet what I am suggesting….I am firmly in the Bear camp on the housing market…Over supply…High cost…Higher interest rates…soft job market…etc…
The big builders (Lenar,Pulte,KB etc.) just have so many tools in in their tool box that they have the ability compete even in a difficult inviorment….I don’t like to ramble on but since this is between me & you I will continue….
I remember in the early 80’s and even in the early 90’s 1 tool they used was interest rates….In the early 80’s loans were between 12-14%….The big builders (In my area) were offering fixed rate financing for 9.5%….How do you compete with that if you are “Joe Seller” ???…They have enough margin in there deals to absorb the cost of such a “Buy Down”…And, you see I did not mention lowering the price…
I remember lots of the HBs went BK in the early 90s, and I predict it will be “back to the future” soon because I don’t see what incentive they have to stay afloat if they can make more money by pump and dump. I know their business models are much better now, but I don’t think it matters — what does matter is the very selfish motives of the top managers, whose dumping of shares just before last year’s 50% stock price haircut tipped their hands, and demand conditions which I believe will surprise many who are too ignorant or religious to give much thought to the many compelling arguments shared here with data to back them.