Tuesday, September 19, 2006

CALIFORNIA BUBBLE ABOUT TO BURST

California housing bubble about to burst


Several U.S. real estate markets including Fresno and Stockton in the Central Valley are facing a bust as real estate prices driven to unsustainable levels by years of activity by real estate speculators and increased reliance by homeowners on low down-payment, short-term adjustable rate mortgages have created a glut of motivated home sellers, says House Buyer Network, a Marietta, Ga.-based company which buys and sells distressed properties.

“You’ve got the makings here of the perfect storm,” Mr. LeGate says. “I can see prices going down by a good 20 percent in the markets we’re calling ‘bust.’




http://tinyurl.com/zrqks

9 comments:

JTS said...

“I can see prices going down by a good 20 percent in the markets we’re calling ‘bust.’

Are you kidding me? Prices have already dropped 20% in Sacramento. My neighbor just settled for $389,000 closing escrow on 9/1/06. The same model sold for $484,000 in 3/1/2005. Hello, that is a 19+% price drop in 18 months.

JTS in Lincoln is offering 15% reductions and is having no success dumping unsold inventory. The word on the street is they will have to go to auction in February. They allowed investors to buy in their subdivision at the Estates and many of them walked, leaving their deposits. Three homeowners in the neighborhood, surrounded by 120 investors in deep trouble. No homeowner wants to buy there now, because of the threat of many foreclosures, together with the fact most of the homes will turn into rentals shortly, since the existing investors bought at $100-200,000 over JTS current liquidation prices. They are stuck.

smoggiebakersfield said...

The question in my mind is, what happens to the housing market when the mortgage rates plunge? The Fed is doing as much as they can to make this happen. The 10 yr bond is tumbling down, which in turn has been lowering the mortgage rate. As the stock market gains the traders stray away from bond markets. Today for instance the Fed is making a decision on keeping the overnight rate, at it's current percentage of 5.25 or holding steady. If the Fed holds, the stock market is going to shoot up through the roof and the 10 yr bond will plunge further. Anybody have a take on this?

Bakersfield Bubble said...

Most of the run up in prices was caused by the use of adjustable rate mortgages, something like 70% in 2004 and 2005 of all mortgages. In order for a run up to begin again, the short term rates would have to drop like a rock again. In looking at LIBOR and the COFI (key rates tied to adj rate loans) they have remained near their highs of this year. For example the 30 day LIBOR is at 5.33 (peaked at 5.45 or so), usually banks require a spread of 150 to 200 basis points (for profit, credit risk, etc..). During the runup LIBOR dropped to 1.02.

That said, I expect the bust continue, UNLESS, these short term rates come down.

smoggiebakersfield said...

Bakersfield,

I didn't quite understand the 30 LIBOR and COFI rates, until you explained it.

Thanks, for the FYI.

smoggiebakersfield said...

"The LIBOR is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. This page also lists some other less-common indexes." Source bankrate.

Bakersfield, your very right, I looked at some data and the LIBOR is not moving much at all. I'm still learning, but the knowledge is coming fast!

desi dude said...

Countrywide may cut jobs by 10%

Countrywide blames housing sales slowdown

By Jim McLain, jmclain@VenturaCountyStar.com
September 20, 2006

The end of the real estate market boom is forcing one of Ventura County's largest employers to cut 5 percent to 10 percent of its work force over the next few months, a top executive told workers Tuesday.

Countrywide Financial Corp., the country's largest mortgage lender with about 5,700 workers in Simi Valley, Thousand Oaks and Westlake Village, instituted a 60-day hiring freeze and plans to reduce staffing in several areas, Dave Sambol, president and chief operating officer, said in a memo obtained by The Star.

The memo does not mention layoffs, but several workers leaving the company's Westlake Village office as security guards roamed the parking lot declined to discuss layoffs or said they were told not to talk with the media.

A Thousand Oaks woman who did not give her name said she received two weeks severance pay after working for the company the past 2 years. She clutched a packet she said contained information to help her find another job. She added that layoff rumors that had been swirling on the Countrywide campus for weeks were confirmed Tuesday morning.

"You found out because your vacation time on your paycheck was gone," she said.

Countrywide officials did not return The Star's repeated calls for comment.

The Calabasas-based holding company, which offers a range of financial services, has more than 56,000 employees and some 900 offices nationwide. That means the cutbacks might directly affect as many as 5,600 workers.

From boom to normal market

Sambol's memo says the real estate industry is undergoing a challenging transition from a boom to a more normal market, with home sales down sharply, inventories of unsold homes increasing and property values flat or down in many areas.

"Given the early results of several organizational assessments, it is clear that our administrative functions have grown at a disproportionate rate and current staffing levels are not appropriate in the current business environment," Sambol wrote. "Therefore, we are beginning a process to reduce staffing ? in all areas, excluding our sales force and operations personnel necessary to support production activity. We expect some of the reduction to come through usual attrition, as well as counseling poor performers out of the Company."

Gary Wartik, economic development manager in Thousand Oaks, and Brian Gabler, economic development director and assistant city manager in Simi Valley, said they had heard Countrywide was planning job cuts but had not been told anything specific.

Fourth largest employer

The UC Santa Barbara Economic Outlook 2006 ranks Countrywide as Ventura County's fourth largest employer behind the county of Ventura, biotech giant Amgen Inc. and the military.

The real estate slowdown was evident in the company's operational report for August — mortgage loan fundings were down 24 percent from the previous year to $40 billion, and home equity loan fundings were flat at $4.1 billion.

Average daily mortgage loan application activity for the month fell 17 percent to $2.6 billion, while the mortgage loan pipeline totaled $64 billion on Aug. 31, down from $78 billion a year earlier.

Ventura County's median home sales price has edged up so far this year, but incrementally, not the double-digit increases of 2004-05.

Meanwhile, sales have plummeted. DataQuick, the real estate information service, reported the August median price Tuesday at $598,000, up 1 percent from the previous year, but sales were down 31.8 percent, from 1,578 to 1,076.

For Southern California, sales were down more than 25 percent, and the median was up 2.7 percent from a year ago. It was the industry's slowest August since 1997, DataQuick said.

Facing sharp sales declines, new-home builders nationwide are offering costly extras such as upgraded carpeting and kitchen appliances for free or at steep discounts to lure buyers, one expert said.

The number of new construction permits also is down. Individual buyers and sellers are at a stalemate, with sellers refusing to cut prices and buyers demanding reductions. All that is putting jobs in the title insurance, mortgage lending and other real estate-related businesses in jeopardy.

‘Bloodbath levels of decline'

"Sales of single-family homes for the year through July were down 27 percent, condos are down 60," said economist Mark Schniepp of the California Economic Forecast Project in Goleta. "These are bloodbath levels of declines. I don't see how you can call that kind of a market healthy. ? There are direct casualties from this downturn."

But Thousand Oaks' Wartik said interest rates have fallen since midsummer and remain low by historical standards. Demand for housing is still high, he said, and many in real estate continue to predict that 2006 home prices will be 5 percent to 6 percent higher than 2005.

"That has to tell you that the bottom has not fallen out of the market. Anything but," Wartik said. "It's returning to what it should be. The good news ? is that even though it's slowed down substantially, the appreciation rates of 2004 and '05 were not sustainable, not good for the economy."

Countrywide, founded in 1969, is a member of the S&P 500 and Fortune 500. Its 2005 revenues totaled $10 billion, according to its Web site, while earnings hit $2.5 billion.

The company's stock shot up last week when co-founder, Chairman and CEO Angelo R. Mozilo, 67, said he expected to sign an employment-extension contract with the company's board before the end of the month. His current contract expires at the end of this year.

Drop in volume to continue

Sambol's memo says the real estate sales slump has caused a drop in Countrywide's mortgage origination volume, which company officials expect to continue through the end of this year and into 2007.

The company has been working for months to reduce expenses, the memo says, but cannot achieve adequate savings without reducing staffing, its biggest budget item.

Sambol emphasized that Countrywide's long-term prospects are bright, but said much depends on its ability to change and adapt to changing markets.

"I am confident that together we will meet these industry-wide challenges head-on and unleash the next phase of growth and success for Countrywide, our shareholders, our customers and our employees," he wrote.

— Star staff writer Jean Ortiz contributed to this report.

On the Net:

http://www.countrywide.com

Bakersfield Bubble said...

Thanks Desi. I will post as soon as blogger posts are working. UGH!

Gary Anderson said...

Adjustable rates will probably not come down because investors may not want the risk. The fed may not be able to lower because there is inflation. They said that prices are going up on the wholesale level and everybody knows that Starbucks is raising prices. I believe the fed cannot just drop rates willy nilly in order to prop up a sector that could be dead for years.

David Ashley Gilbert said...

Your blog entry was very interesting. I am a realtor specializing in Tampa Bay Florida Real Estate .