March 2, 2015

The Bubble Can’t Help But Burst

Tulsa World reports from Oklahoma. “Tulsa-area home sales rose only slightly in January compared to the same time last year, but they were at the highest January levels since before the housing bust. Tulsa’s average sale price also shot up significantly, as the reported $170,690 was 10.8 percent ahead of January 2014. Mike Craddock, 2015 president of GTAR, said that’s the result of the tightening inventory — there’s now a 5.94 month supply of homes on the market, down 15.7 percent from last year.”

“Craddock said the low interest rates, strong economy and significant commercial development all point to a year for further growth in home sales. ‘I think 2015 will be another strong year, barring something crazy happening,’ he said.”

The Odessa American in Texas. “Signs mount that at least some rent relief is on its way. To be sure, Odessa and Midland have among the most expensive apartment rents in the state. But no apartment complex has a wait list anymore, according to the Permian Basin Apartment Association, which counts about 26,000 units among its Permian Basin-wide membership. Some apartments are starting to advertise move-in specials. It is also a reality of the apartment market that rent reductions require vacancies, insiders say, and often the vacancies come from people who are laid off and move away from the area.”

“That is not an idea lost on renters who want relief, especially the long-time residents like Deidre Orcutt, a married mother of four who pays about $1,400 in monthly rent. Orcutt isn’t in an apartment — like many Odessa renters, she is in a home belonging to a private landlord — but she said she has still seen her rent double in the seven years she has lived there. ‘Not everyone works in the oilfield,’ Orcutt said. “And I’ve actually talked to oilfield families who are struggling too but they can’t afford the prices here. But you don’t have any option, because you can’t find anything cheaper.’”

“Her plan is to buy a home. She said she got a good price from the developer Betenbough, on a four-bedroom house for a down payment of about $6,000 and a monthly payment of about $1,600, including insurance and bills. ‘We are trying to wait now,’ she said. ‘And we are hoping that by some miracle everything decides to go down.’”

The Denver Post in Colorado. “Colorado is on a shortlist of states facing a more elevated risk of home price declines, a sharp contrast to the recent trend of home price gains. ‘While no one knows if current oil price levels will be sustained long-term, we view the dramatic decline in the price of oil as having a real and meaningful impact on the potential for home price declines in these regions,’ Ralph DeFranco, Arch Mortgage Insurance Co.’s senior director of risk analytics and pricing, said in a report.”

“Colorado now ties with Wyoming for the seventh-highest risk score among states. North Dakota and Louisiana are the states most at risk, with the odds of a price drop at 37 percent and 35 percent, respectively. Texas, Oklahoma, Alaska and New Mexico are other states with the highest odds of home price declines in the months ahead. As recently as November, Arch MI had none of those states in the top 10 for home price declines.”

The Winnipeg Free Press in Canada. “Canada’s farm-equipment industry is suffering through sagging sales and job losses as low grain prices and dwindling exports take a chunk out of the farming trade. Manitoba’s largest players aren’t immune, either, with companies such as Macdon Industries and Buhler Industries laying people off and reducing work weeks. The big international brands such as John Deere and Case New Holland have been cutting back for some time.”

“Ron Koslowsky, the Manitoba head of Canadian Manufacturers and Exporters, said it has some similar dynamics to housing markets that heat up into a frenzy where the bubble can’t help but burst. ‘Over a period of a few years, the end users — the farmers — see low interest rates, good times with prices high and good crops and there is a steady demand and things really ramp up,’ he said. ‘But inevitably… you can’t always keep buying.’”

The Courier Mail in Australia. “Locals say the main street of Dalby resembles a ghost town these days. Things have taken a turn for the worse since the glory days of the mining construction boom, with companies responding to falling commodity prices by pulling the plug on new projects and laying off workers across the Surat Basin. The increasing exodus of workers, investment and money from the mining towns has left houses empty and businesses struggling, with many of those left behind wondering what to do next.”

“Retail assistant Tina Henderson, who followed the mining construction boom to Dalby with her family three years ago. She said successive rounds of redundancies had left her worried about her husband’s mining job and her older children were struggling to get full time work. ‘It is much quieter now,’ she said. ‘I actually walked out of the shop last Saturday, looked up and down the street and thought: ‘Where is everyone?’”

“Further west in Chinchilla, the effects of the mining construction boom have mainly been felt in the real estate sector, where rents and house prices doubled from cashed-up workers arriving in the town. Long-term residents said many pensioners had been forced to leave because of high housing prices and now that prices had fallen some weren’t coming back. One real estate agent said ‘a hell of a lot’ of property was on the market – about 400 houses were for rent or sale and buyers were scarce.”

The Business Times in Singapore. “Cooling measures by the government, if left unchecked, could lead to an unintended downward spiralling of property prices, warned Augustine Tan, president of the Real Estate Developers’ Association of Singapore. Already, private housing completions from the last few years of ramp-up in government land sales are presenting ‘a worrying oversupply scenario’ that could bring vacancy rate to a new high, he said.”

“‘Analysts estimate that over 75,000 new private residential units will be completed from 2015 to 2019,’ Mr Tan said. ‘This will cause a further slip in home rentals and downward spiralling of property prices. For homeowners, their investments will be severely impacted… Some may be forced to sell their properties.’”

“‘There are those whose properties’ capital values are waning,’ said Tan Tee Khoon, executive director of residential services at Knight Frank. ‘As far as we are concerned, the rice bowls of property salespersons are severely impacted. With a 51 per cent drop in new home sales last year, the prospect of higher vacancy rates and impending rise of interest rates, we can expect tougher days ahead.’”

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Comment by Ben Jones
2015-03-02 05:40:57

‘Median home prices made their sharpest drop in almost two years in January, and housing inventory is at a four-year high, according to new numbers from the Real Estate Center at Texas A&M.’

‘Midland ended January with median prices down 6.1 percent year-over-year and at least five months of housing inventory. The Tall City has not had that much inventory since August 2011 and has faced a chronic housing shortage since the beginning of the oil boom in 2009, with a strong seller’s market reigning for more than three years.’

“Right now, we’re getting to be to where it’s no longer a seller’s market,” said Warren Ivey, a Midland Realtor with the Texas Association of Realtors. “So if that continues to grow to where we get over that 6.5 month supply… the sellers are going to sit back and think that they need to change their tactics.”

‘While the market adjusts, there is a positive for those who have been looking for homes and might have felt priced out of the market.’

“I think the buyers will have a little relief … if it’s not in price, it’ll be in selection where there’ll have a larger choice,” Ivey said. “If you look at the inventory time, we’re right there where it’s pretty level where it’s no longer a seller’s market. It’s not a buyer’s market at all, but our buyers are having a little bit better choices.”

Comment by Jingle Male
2015-03-02 08:52:46

Yale’s Robert Shiller: ‘This Is the Most Dramatic Housing Slump We’ve Ever Had’, Sunday, 22 Feb 2015 06:35 PM, By Dan Weil

The Yale professor Shiller said, “Home prices are . . . at about the right level based on history. So maybe they won’t go anywhere in the near future.”

Comment by Professor Bear
2015-03-02 09:07:48

Not much of an article you posted there…more like a few disjoint sound bites which the writer makes no attempt to explain or reconcile.

Comment by Beer and Cigar Guy
2015-03-02 09:11:42

Link to another story which also references an interesting viewpoint which has similar probability of accuracy:

Comment by Mugsy
2015-03-03 04:27:56

Batboy rules!

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Comment by Housing Analyst
2015-03-02 11:36:10

Imagine if he stated publicly what he says privately?

Comment by Jingle Male
2015-03-03 05:10:52

… 2010? HA, Shirley…you best. A Graph from 5 years ago? Shiller has to stick with data from 5 years ago? Get back in your cave… only cost $5/sf.

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Comment by Housing Analyst
2015-03-03 06:41:50

It’s a long way down Jingle_Fraud.

Comment by Ben Jones
2015-03-02 05:45:04

‘A 90 million-year-old underground rock formation was supposed to be an economic development alpha wolf for Southwest Mississippi. The plunge in oil prices has put the brakes on a lot of the drilling activity that has turned McComb into a somewhat of a hub for the industry since technology allowed operators to access the oil buried deep in the rock.’

‘That reality has forced some operators to either suspend drilling in the Tuscaloosa all together or cut back significantly. Even petroleum companies with a presence in Southwest Mississippi that drill elsewhere have throttled back. “The pace has really slowed down,” said Britt Herrin, executive director of the Pike County Economic Development District.’

Comment by Professor Bear
2015-03-02 09:09:18

If there is an upside to this boom-bust cycle, it’s that a number of new proven reserves in unlikely corners of the U.S. have been discovered which can be exploited during the next boom.

Comment by Ben Jones
2015-03-02 06:02:34

‘When final production is added up, the Kansas oil industry in 2014 may have drilled the most oil since “the Internet” was an unfamiliar term. That may be the last good thing that can be said for the state’s oil and gas industries in 2015.’

‘Falling oil prices have robbed Kansas companies of their desire to keep drilling at the rate they were, and may push some to stop drilling and nurse their existing wells.’

‘Oil drillers will join the state’s gas drillers – often the same people because well production is usually a mixture – who are on track for their worst production year since the Truman administration. Now, however, the drop in drilling has been sharp, said Todd Allam of VAL Energy.’

“Manpower has been destroyed,” Allam said. “We laid off 70 people and have stopped drilling for ourselves.”

‘Last year, he had seven rigs going non-stop, six as contract drillers and one for his own wells. He’s now down to two contract rigs. Allam sees a further drop in Kansas drilling this spring and summer as oil continues to flood in from shale regions, such as the Bakken in North Dakota – but only through the second quarter.’

‘The Kansas natural gas industry also remains in survival mode, with prices drifting well below $3 per million cubic feet.’

Comment by Professor Bear
2015-03-02 09:11:03

I had always thought of Kansas as more of a farm state than an oil industry stronghold. Who knew?

Comment by Mugsy
2015-03-03 04:30:10

If they flood the corn fields with crude we could have an ethanol boom.

Comment by Jingle Male
2015-03-03 05:32:51

It’s not a big producer. 50 million barrels in 2014? Vs Texas w 1,000 million barrels….

5% of Texas…..almost insignificant….unless it’s your job that was cut and your house being foreclosed.

Comment by Housing Analyst
2015-03-15 17:39:08

And 11% of California.

What to do Jingle_Fraud…. what to do.

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Comment by Raymond K Hessel
2015-03-02 06:06:47

For Wall Street, cashing out of the “bet on America” (using “money” printed by the Fed) could get messy.

Comment by Ben Jones
2015-03-02 06:10:45

‘With customary dragon dance and street parades, the 150,000-odd members of the Chinese community celebrated their new year in Calgary’s Chinatown in mid-February.’

‘However, just a few blocks away, where Canada’s oil majors are headquartered, the mood continues to be somber for officials of Chinese state-owned oil companies working tirelessly to improve profit margins of their mega investments in Alberta.’

‘Since 2009 until late 2012, they spent a whopping $33 billion in acquiring majority and minority stakes in the province’s oil sands companies, primarily in the name of energy security. But a few years later, the euphoria is fast vanishing.’

‘There is a growing sense of disappointment on the performance of acquired Canadian assets and a feeling is fast gaining ground in China that oil sands projects are too costly to develop, said Wenrang Jiang, an advisor with the Alberta government and a backroom official who acted as a catalyst to bring about the blitzkrieg of Chinese energy investments.’

‘Calgary-based analysts said the $4.65 billion paid in 2010 by Sinopec to acquire a 9% stake in Syncrude Canada was ‘grossly’ overpaid. Analysts have said Sinopec paid as much as $1 billion more than necessary on the deal.’

‘While inevitably the curtains may have come down on the multi-billion dollar deals, Chinese oil companies are now crunching numbers on capital costs to rationalize their investments. They are also working out ways to see where Canada fits in its upstream drive to acquire energy assets that started a decade ago.’

‘They will refrain, but not retreat,’ Holden said, implying Chinese SOE’s will not sell their Canadian assets. ‘They have over $4 trillion of foreign exchange reserves and their investments have been in treasury bills. But, owning overseas energy resources is close to their hearts,’ Holden said. As returns on T-bills are exceptionally low, it’s no surprise China would seek to bolster returns in resource investments.’

‘It’s time now for its national oil companies to bring about a change in the way they operate international assets. Apart from needing to learn how to interpret domestic pipeline and other oil-related politics, ‘they need to learn ways to work in a free market economy, like Canada,’ Holden said.’

Stupidest investors on the planet.

Comment by Ben Jones
2015-03-02 06:15:29

Well, it’s a contest:

‘Last year Encana , the Calgary-based oil and gas giant, had the woefully bad timing of spending $10 billion to acquire oil fields in Texas at what looks to have been the height of the American shale oil bubble.’

‘First, in April, it paid $3.1 billion to Freeport-McMoran for 45,500 acres (with 53,000 barrels per day of production) in the Eagle Ford shale. Then in September it plunked down $5.9 billion cash and assumed $1.1 billion in debt to buy Athlon Energy for its 140,000 acres (and 30,000 boepd) in the Permian.’

‘The timing was woeful, of course. Encana, led by new CEO Doug Suttles, bought its Texas oil at the top of the market, just before oil prices began their 50% plunge. Since Encana bought Athlon, shares in Permian-focused producers like Concho and Cimarex and Pioneer are down more than 20%. My sources say that acreage in the heart of the Permian that was going for nearly $30,000 an acre a year ago now only fetches half that. Had it waited until now to make a deal, Encana probably could have gotten Athlon for $2 billion less.’

‘Now there’s no sense in blaming Suttles for not having polished his crystal ball. In an interview with Bloomberg last fall, he said, “We actually don’t think you can time these things.” That’s debatable, though I will grant him that nobody thought oil prices would fall so far, so fast.’

Comment by Albuquerquedan
2015-03-02 06:28:18

To be fair government manipulation of prices is difficult to foresee particularly when it is against the long term interest of a country. But what can you expect from Obama, threatening to shoot down Israeli planes bombing Iran? As much as the Saudis hate Israel they would not do that. Destroying Iran’s nuclear capacity is in the best interest of the region. It is just not worth American blood. But if Israel is willing to do it alone, we should not be stopping them. Let them put their own boots on the ground to stop it.

Comment by Blue Skye
2015-03-02 07:52:41

To be fair, nobody can see the stumbling of a housing bubble, and the resources that go with it when they are invested in its continuance. Profits of foolish speculators and rising prices of necessities, is not what is the “best interest of the country”. What is in our best interest is to see these parasites fumigated.

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Comment by Professor Bear
2015-03-02 09:13:13

“Stupidest investors on the planet.”

Lucky they are rolling in dough.

Comment by Cactus
2015-03-02 10:16:45

The Chinese are even affecting the economies of West Virginia.

Comment by boots on the ground
2015-03-02 07:08:34

No bubble here, right?

Will share some more Region VIII housing anecdotals later, Happy Monday

Comment by In Colorado
2015-03-02 09:49:59

What is do dangattractive about those nabes? Is it because, unlike suburbia, they have mj dispensaries?

Comment by redmondjp
2015-03-02 11:43:30

The much bigger question is: How many of today’s families can afford a $889K home?

Comment by oxide
2015-03-02 13:18:32

And if I’m going to drop 900 large, it better be on a detached well-built manse, not an ugly ugly FUGLY modernist rowhouse that shares a wall. I can’t think of any architectural style or community plan that this thing doesn’t insult.

Even DC has better stuff than this at the same price point.

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Comment by Ben Jones
2015-03-02 07:26:10

‘The recent rapid rise in home prices is cooling but local market forces will keep bubble-like behavior at bay for California and throughout the nation, according to a report Monday from real estate information company Clear Capital of Truckee. “Our most recent data through February 2015 shows the Marin, San Francisco, San Mateo, and Santa Clara counties approaching or exceeding their peak levels over the last 18 months,” the Clear Capital report says.’

‘San Francisco and San Mateo counties have exceeded peak levels on an all property tier level (low, mid, and top tiers). San Francisco is now 16 percent above former peak levels, while San Mateo County is 8 percent above. On the cusp are Marin and Santa Clara counties, just 2 percent and 3 percent respectively, below their prior peak levels at the all tier level, says the report.’

“Yet, in spite of its peak-level performance, the Bay Area housing market is showing signs of cooling price gains, as opportunity for affordable housing is scarce,” the report says. “Data through February 2015 shows early signs of cooling in San Francisco and San Mateo counties. San Francisco and San Mateo counties’ quarterly growth rates peaked in the second quarter of 2013 at 6.6 percent and 5.9 percent respectively, but have decelerated in each quarter since.”

‘San Francisco County’s price gains fell into negative territory by 0.3 percent at the all tier level in February. “We observed the largest decline, of 0.5 percent, in the top tier segment. This time around, it’s the top tier that’s cooling first — the inverse of what occurred in the last bubble,” says Clear Capital.’

‘”The fact that we are now seeing quarterly declines in arguably one of the hottest markets in the country should be a stark reminder that the state of the overall housing market continues to be tenuous,” says Alex Villacorta, vice president of research and analytics at Clear Capital. “Buyers may have finally reached their limits in response to red-hot price increases, and as such are pulling out of the demand pool. If waning buyer demand continues through the first part of the year, we could see inventory increase, and in response falling home prices well into the second quarter.”

Comment by Ben Jones
2015-03-02 07:30:54

‘A winter chill hit Calgary’s resale housing market in February, as sales and prices were both down from a year ago. Mike Fotiou, associate broker with First Place Realty, said February MLS sales were the slowest for the month since 2009. Sales were 25 per cent o’ff the five-year average and 33 per cent off the 10-year average.

‘February marked the first month since March 2011 in which average and median MLS sale prices were both down year-over-year. Meanwhile, the inventory of homes for sale is more than double 2014’s numbers, and the highest level since 2009.’

Comment by Ben Jones
2015-03-02 07:36:40

‘Housing rents in Dubai could post a significant decline from 2016 onwards, as thousands of new apartments and villas will be completed this year, according to a real estate company. John Stevens, managing director at Asteco, said a huge supply of new residential units will enter the real estate market in the coming months, with 12,000 apartments and 2,000 villas expected to be completed this year.’

“This is good news for tenants across the emirate, and a more tempered rental environment is especially welcome when you consider that since 2011 apartment rents have increased by 65 per cent, and villas by 55 per cent,” said Stevens. “Looking beyond this year, a more significant drop in rental rates could be on the cards from 2016 onwards as the large number of projects announced in 2013/14 (an estimated 12,000 to 14,000 villas units) are completed.”

Comment by Ben Jones
2015-03-02 07:42:35

‘As the Central Provident Fund (CPF), Singapore’s pension scheme, was in the news recently, I was having a debate with a colleague on whether restrictions should be placed on the use of CPF savings to buy property, especially private property. It was not financially smart to commit that money - meant for retirement savings - to buy a pricey apartment, I said.’

‘She responded: “Why deny people the chance to break into the upper classes? You’ll exacerbate inequality if you prevent people from buying private property.”

‘Despite a slowdown in the housing market, the urge to buy private property remains extremely strong today. Many people are waiting for prices to crash or, at least, correct by a larger amount, so they can jump in. Others have already bought their condos in the low interest rate environment. Some have stretched their finances to do so.’

‘There are two premises to their views: First, private property prices will always go up; and second, it is therefore the best investment one can make.’

Comment by Blue Skye
2015-03-02 08:15:18

Because the property will make you rich.

Comment by Mugsy
2015-03-03 04:50:09

Everybody knows prices always go up. What’s wrong with you people?

Comment by Ben Jones
2015-03-02 07:49:11

‘It is getting cheaper to rent an apartment in North Dakota’s oil patch. Prices, which only last year rivaled levels in New York City and Geneva, have slipped about 15 to 20 per cent in the past two months as dozens of new apartment buildings opened in Williston, Watford City and other oil hub cities. “You’re starting to see prices fall this year as more units come online,” said Terry Metzler of Granite Peak Development, which has built apartments and a shopping center in Williston, considered capital of the state’s oil boom, and has an additional 480 apartments and houses under construction.’

‘Property managers, who only a few months ago could heavily scrutinize potential tenants and reject anyone whose credit or behaviour was in doubt, are now so eager for move-ins they’re all-but volunteering to carry boxes.’

‘At Williston’s Dakota Ridge, a luxury complex of three-story buildings owned by private equity firm Granite Peak Partners Inc (not affiliated with Metzler’s group), a two-bedroom apartment rented for $US3,200 per month in early 2014. A year later, even with recent recently added perks like a 10-person hot tub and free alcohol and snacks in the common lounge, the same apartment goes for $US2,600.’

‘KKR, the private equity giant, is slashing rents at Prairie Pines, a Williston upscale apartment complex it owns with CP Realty, with two-bedroom units costing $US2,300 per month, 18 per cent cheaper than last summer. “I could see the quality of life improving for some people if they’re not worried each month about how they’re going to make rent,” said Justin Hammer of IRET, which owns apartment complexes in Williston and Minot, some of which it has begun pricing below market rates to appeal to families and retirees.’

Comment by Ben Jones
2015-03-02 08:02:47

I wonder if there will be free alcohol beside the indoor lazy river the city is building? I smell some junk bonds going poof.

Comment by prime+1
2015-03-02 10:44:24

The same KKR that bought out RJ Reynolds? Wow.

Comment by Ben Jones
2015-03-02 08:41:43

‘Ultra-easy central bank monetary policies are about to come back to bite the global economy, bond guru Bill Gross said in his latest letter to investors. Institutions including the U.S. Federal Reserve fired the first shot in global competitive currency devaluation at the height of the financial crisis as a means to increase liquidity and push investors toward taking more risk.’

‘Others followed suit but have only recently matched the Fed’s aggressiveness. The European Central Bank, Bank of Japan and multiple others across foreign markets have gone to near-zero or negative interest rates as global growth has slowed.’

“Investors and bondholders who have cheered every instance of lower and now sub-zero yields in developed countries because of near-term capital gains that accompany them, must now beware of the potential negative consequences going forward,” Gross said in his monthly letter. “Central banks have gone and continue to go too far in their misguided efforts to support future economic growth.”

‘Gross believes policymakers are deluding themselves into thinking that currency devaluation and negative interest rates are paving the way toward lasting economic riches.”Lower yields make sovereign and corporate debt burdens more tolerable and their exports more competitive,” he said. “But common sense would argue that the global economy cannot devalue against itself.”

“A more serious concern however, might be that low interest rates globally destroy financial business models that are critical to the functioning of modern day economies. Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates,” he added.’

‘The Fed actually is expected to begin gradually increasing rates in the years ahead, with the first tightening expected to happen later this year. The damage, though, appears already to have been done, Gross said. “The financial system has become increasingly vulnerable only six years after its last collapse in 2009,” he said.’

Comment by Blue Skye
2015-03-02 08:48:29

“…the global economy cannot devalue against itself.”

But they have managed to postpone the reckoning of wholesale defaults for six years.

Comment by In Colorado
2015-03-02 09:51:33

“…the global economy cannot devalue against itself.”

You don’t have to outrun the bear, you only have to outrun the other countries.

Comment by Carl Morris
2015-03-02 14:17:40

I’m starting to think you only have to outrun the statute of limitations.

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Comment by oxide
2015-03-02 14:38:53

Good to see you Carl. Got any China insight?

We got an HBB-er who is insisting on the same 7.5% growth. That growth must in in bitcoin or other types of *poof* money, because whatever it is, it sure isn’t using any oil.

Comment by Carl Morris
2015-03-02 16:54:01

I checked in the other day but it was toward the bottom of the comments. China still looks the same as it did 6 months ago…everything seems to be in a holding pattern. Anybody there refusing to sell their house until prices come back is still waiting. But nobody seems to be panicking yet.

Comment by Dman
2015-03-02 09:17:02

This is the bubble that will pop every other bubble on the planet.

Comment by Professor Bear
2015-03-02 09:17:28

“Colorado now ties with Wyoming for the seventh-highest risk score among states. North Dakota and Louisiana are the states most at risk, with the odds of a price drop at 37 percent and 35 percent, respectively. Texas, Oklahoma, Alaska and New Mexico are other states with the highest odds of home price declines in the months ahead. As recently as November, Arch MI had none of those states in the top 10 for home price declines.”

I was surprised that California didn’t make the list. Isn’t it a major oil producing state?

Comment by In Colorado
2015-03-02 10:00:48

I suspect that Denver’s overheated housing bubble has more to do with it than oil. As I pointed out the other day, Colorado is a small producer when compared to states like Alaska, Texas, North Dakota and others. I’m sure they’re hurting in Grand Junction and other parts of the Western Slope.

Comment by Cactus
2015-03-02 10:20:59

I have noticed a lack of big drilling rigs going up near my house. They used to light up the night now all dark. Maybe its the rain ?

or not

Comment by Professor Bear
2015-03-02 09:24:44

The California Report
Economic Tanks Running Low in California Towns Fueled by Oil Revenue
A pair of typical Kern County pumpjacks drawing oil from the region’s still rich deposits. (Alice Daniel/KQED)
By Steven Cuevas
Feb 8, 2015

Way before people were striking it rich in Silicon Valley, another breed of millionaire was getting minted in a much different and much dirtier California industry — oil.

For a time, the Los Angeles area was gushing with the stuff and so, too, the Central Valley.

During the peak of the oil boom in the 1920s and 30s, parts of the Central Valley and Southern California coast were blanketed in oil wells and derricks.

You can still find huge refineries in the Long Beach area and spot the occasional seesawing pumpjack pulling oil from the ground in strip-mall parking lots or housing tracts.

While output isn’t nearly as much as it once was, governments in those areas still rely on oil revenue to help balance the books. But the recent plunge in oil prices means some bills might not get paid.

The city of Long Beach still earns a pretty penny from its underground reserves through sales and property taxes. How much depends on the ups and downs of the oil market.

Even city leaders sometimes wonder, as City Councilman Rex Richardson did at a public meeting a few days ago.

“How much? I know we budget our general fund based on this volatile commodity. What percentage of our budget is based on oil revenue?” asked Richardson.

About 5 percent a year, or roughly $45 million. Most of that money is earmarked for seismic upgrades to public piers, strengthening protective seawalls and other projects along the city’s picturesque coastline.

To help finance those projects, the city counts on oil prices staying well above $70 a barrel. But it’s now going for about $50 a barrel. So some projects may end up getting shelved, scrapped or paid for with grants or private donations.

“And just as one would do in a regular household budget, we have to make some adjustments in light of the fluctuations,” says Councilwoman Suzie Price.

“And so we will really be focusing on things that need to be fixed.”

The city does not anticipate more widespread cuts, like layoffs or slashing of public services.

Kern County, on the other hand, may wish it had such problems.

The still oil-rich county declared a fiscal emergency last week as it braces to lose about $61 million in oil-related revenue. That represents around 30 percent of Kern County’s annual budget.

The declaration allows the county to tap a rainy day fund. But it’s unlikely to stop possible hiring and salary freezes and cuts to some emergency services.

“We’ve been through this cycle before,” says county board chairman David Couch.

“Kern County is pretty reliant on oil and gas and the property tax that comes from that, and from the agricultural industry as well,” says Couch.

“I mean the price of oil going from $100 to less than $50 a barrel in six months, we had to react pretty quickly to that.”

The oil industry is reacting even quicker, slashing some 20,000 jobs across the country since oil prices started slipping about seven months ago. It’s unclear just how many of those jobs are in Kern County.

But county animal control officer David Camacho asked supervisors to keep those oil workers in mind before they begin trimming vital services.

“All the things our oil workers need right now, from job training and placement to temporary assistance, are provided by this county,” said Camacho.

“Cuts and freezes aren’t going to help our economy, and the damage they do in the long term will be more than we save in the short term.”

Earlier this month a couple of the largest oil contractors in Kern County announced layoffs. Les Clark says he’s bracing for more. Clark is president of the Independent Oil Producers Agency, which lobbies on behalf of Kern County-area oil firms.

“And there’s a lot of small contractors out there that will be at risk to as far as any job opportunities. If you’re not making any money, you certainly can’t go out and spend it,” says Clark.

“So we hope this is of a short duration. But you never know when the price for what you’re getting for crude is going to drop again.”

Comment by In Colorado
2015-03-02 10:02:32

For a time, the Los Angeles area was gushing with the stuff and so, too, the Central Valley.

When I was a kid I remember seeing the well pumps all over the place in Orange County.

Comment by Puggs
2015-03-02 15:47:46

Boo hoo. I guess you should have kept yer life priced in the conservative range of oil prices.

Comment by Overbanked
2015-03-02 19:37:49

Ahem. Long Beach does not have a “picturesque coastline.”

Comment by doom
2015-03-02 11:35:08

The Lone Star State, is going to be just that a Lone Star, oil isn’t coming back anytime soon, it will devastate the housing market there.

Oh and you folks in Greely Colorado who thought the boom won’t stop, I would be more then worried.

Comment by Housing Analyst
2015-03-02 11:43:53

Characterizing falling housing prices to dramatically lower and more affordable levels as “devastating” is gross misrepresentation of the truth.

Hint:Housing prices were already falling before the affordable oil appeared. If you think falling housing prices are limited to TX, you’re in for the surprise of your life.

Comment by doom
2015-03-02 15:26:44

luxury homes in the affluent zip codes of Ca. AZ. and Nev. continue to do quite well. Of course when we are talking $1m homes and up this all but excludes 95% of all buyers, in the upper middle to lower middle yes problems will continue no question.

Will prices drop to 2007 levels (40 to 60% off) no way it would have happen by now, most homes have reduced 5% to 20% and they do eventually sell. Matter of fact homes are on the market much longer true, the sellers either decide to take the home off the market after 6 to 8 months or continue to reduce till the hot button is hit.

In 2007 the difference, folks walked away, paid to much and to far underwater, today most can afford their payments because they bought those homes at 50% 0ff and can either reduce to a smaller profit or even a break even. The other people just don’t list, thus reduce inventory in the country.

CA. is always a wild card, rich can do what they want, the other 95% are stuck in neutral and sellers are not in the position to panic as bad as 2007 to 2012, that segment is stalemated, a poker game.

Quick example I always like DENVER real estate because of the feast and famine there. The Denver market saw a boom because sellers reduced and the folks bought. Inventory got tight buyers worried of a price increase but sellers were even more worried they were on the market long enough they flinched first in that poker game the buyers won out.

Now Denver has a energy issue and other concerns the market is fragile again, yes a concern for sure, all in all not just picking on Texas or Colorado but places like CA. are more diverse and other S/W states are more equip, Texas has a king sized problem, but everything in Texas is big including headaches?

Comment by Housing Analyst
2015-03-02 15:33:47

25 million excess empty depreciating houses my friend.

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Comment by Blue Skye
2015-03-02 16:26:23

It’s not different. It is later and worser, but it’s not different.

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Comment by oxide
2015-03-02 17:06:46

today most can afford their payments because they bought those homes at 50% 0ff

And they also bought with fixed-rate fully amortized mortgages. No nonsense with interest only or teaser interest rates. If they couldn’t afford to pay full freight, the bank didn’t lend. And the rest of the buyers paid cash.

Ben and I may disagree with this, but this sounds more like a “new normal” than a “bubble.”

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Comment by Housing Analyst
2015-03-02 17:26:57

And they also overpaid 250% like the suckers before them.

You’re one of them.

Comment by In Colorado
2015-03-02 13:49:57

Oh and you folks in Greely Colorado who thought the boom won’t stop, I would be more then worried.

Even with the oil boom, Greeley is still an armpit and houses are still much cheaper than in Denver (and they will soon be even cheaper than they are now)

Comment by Housing Analyst
2015-03-02 16:11:46

There’s a whole lotta lying realtors hangin’ round here. And they’re all sorts of pissed off. :mrgreen:

Comment by Professor Bear
2015-03-03 00:11:47

With housing once again cratering, can you blame them?

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