Saturday, April 30, 2005

Sacramento Rents Leave Speculators Short

This SacBee article brings up the issue of rents and you may be surprised who's talking. "It's hard to find a bigger proponent of homeownership than Scott Syphax, head of Sacramento-based Nehemiah Corp. Syphax's advice: Wait it out a year. In that time, he suspects, the market will cool, meaning more homes to choose from and maybe even some bargains."

"In today's market 'it's certainly hard to even think of breaking even in terms of the rents,' said Joan Krizman, a longtime Sacramento investor-landlord whose family owns nearly 70 homes in the east Sacramento and Land Park areas."

"Krizman said the woman, who's been buying homes as rental investments nationwide, was hoping to get $1,200 a month because her mortgage payment was $1,600. 'I hate to disappoint her but I have to. She'll be lucky if it rents for $995 a month.'"

"Rental industry sources say investors from other regions continue to purchase single-family homes here without doing their homework. These investors, including many from the Bay Area and Southern California, are often disappointed to learn that the rents they had hoped to fetch here are hundreds of dollars above market."


At 7:22 PM, Blogger Greenlander said...

The receptionist where I work set me up on a blind date about ten moths ago with a young woman she knew. The young woman was working as an assistant for a mortgage broker. Work was so slow she had to move back in with her parents.

Today, I was just chatting with the receptionist again and she said that this young woman had gotten her real estate license and was making "lots of money". She also mentioned that the woman had recently bought two houses in Sacramento as investments and was happy that she had already rented them out!

I guess she's doing OK selling overpriced properties in the bay area where we live, because I *know* you can't make money (as in a positive cash flow) buying a house in Sacramento and renting it out.

Stories of people speculating are all over the place....

At 7:53 PM, Blogger John Law said...

I can't believe people don't mind losing money month after month. I hate losing money even when I'm making it.

At 8:44 PM, Anonymous Anonymous said...

Whenever I look at an investment property to buy I calculate the normal PITI, but I also factor in 5% vacancy factor and 20% for repairs and reserves. If it doesn't pencil out at the asking price, I make an offer based on what the value should be factoring the above calculations.

Unfortunately there are not many deals to be had because the GRM and cap rates are so out of wack.

At 8:46 PM, Anonymous Stay @ home Mom said...

My personal story

My family just recently moved back to Southern CA in Oct 2004. We left before the RE boom (Oct 2001). My husband makes $100K a year. We have $200K in the bank, but we are sure the market will tank as it did in the early 90's (maybe worse). I (mom) left the engineering field with an income of $125K a year in 2001 and feel if we stay here and buy I will need to go back to work to afford a track home in Antelope Valley. We our currently renting and I feel as though I need to apologies and explain why we are renting to the moms at my kid's school. My in-laws who live in the San Diego area tell us we are being left out! These are the same people that I have to help set their cell phone option to vibrate and program their VCR. God is really paying some tricks on the college educated who use logic and reason! Being a mom I feel the need to nest like most women. I went to look at a model home for the third time and was about to go for it when in walks a man who could hardly speak english and worked as a landscaper about to purchase the same $400K home. It was a reality check for me!! He probably has no clue what a melo-roos tax is and I'm sure the sales rep didn't offer an explanation (he'll probably clue into what it all means at the closing when his escrow payment is $200 a month higher then he expected). Wages in the Antelope Valley just can't support these prices. What makes usually educated, rationale folks think it can go any higher?

At 9:30 PM, Blogger Ben Jones said...

Stay at Home Mom,
Great insight, thanks. We all learn from folks that are at the front-lines of the boom. You know your right. Hang in there. Good luck. Wages are the key, and they ain't rising enough.

At 10:06 PM, Anonymous Anonymous said...

Stay @ Home Mom:

I feel your pain. This has gotten totally out of control. I can't believe what people are paying for these homes, and I'm a Realtor.

Where I live in Burbank California, starter homes of 856 sq ft on 2670 sq ft lot on high traffic street and with apartments overlooking the back yard are selling for $500,000; 1020 sq ft on 6000 sq ft lot across street from a school are sellinf for $600,000; and 1200 sq ft on 6000 sq ft lot with apartments overlooking back yard are going for $689,000. And Burbank is not even considered an expensive or first choice community. And thats just Burbank, it is worse in other communities.

This can't continue for much longer.

Don't give in to the pressure, wait it will peak and go the other way. Then the school moms will still be talking about real estate, but they will be talking about how much their value went down and how many foreclosures there are.

Good Luck.

At 10:21 PM, Blogger goleta said...

One of the MIT online lectures about economics talks about the rat mentality when we're with a crowd. If the crowd are jumping off a cliff, most people will just follow without trying to make sense out of it.

At 10:35 PM, Blogger BC said...

Ben, You're doing a terrific job of warning those who will listen.

Whenever I check in to a hotel I'm unfamiliar with, the first thing I do is study the fire escape placard. In case of an emergency, the escape route is a very handy thing to know.

I like to apply the same precaution to real estate transactions. The first thing I consider when buying real estate is this: if conditions (job, economy, health, family emergency, etc) change, do I have a viable escape route? Will I have enough equity or cash reserves to get out?

In this market, it's not enough to have a 20% down payment, and a fixed rate mortgage. It's imparative to consider what the market conditions will be like in a year or two. Will someone be able to pay what you paid when they're look at an 8.5%+ mortgage? My hunch is that the pool of buyers will be much smaller, if not evaporated, in that environment.

At 12:49 AM, Anonymous Anonymous said...

Nehemiah, and other "down payment assistance" companies like it are part of the bubble problem. Nehemiah markets to home sellers whose homes have sat on the market a while, probably due to overpricing, and enrolls them, for a fee of $1500 or 2000, in their down payment assistance program, which works like this. For less than the amount they'd have to lower the price to sell it at market price, they pay to have Nehemiah market their house under the "down payment gifting" program. Normally sellers are not allowed to give buyers any cash to use as down payment, but what Nehemiah does is launder that money. The seller "gifts" $5000 to Nehemiah, which turns around and "gifts" $5000 to the buyer who can now qualify for that FHA or other 3% loan even though he has no cash. The seller recoups his $5000 "gift" by selling the house at (at least) $5000 over market value.

This is what I think is happening when you see a low-end house sit on the market longer than usual and then you find out it sold for $5000 over asking. This helps push up the prices of low-end homes up and up with no transparency to prospective buyers that this transfer of $5000 is getting rolled into the price.

At first, I read, the FHA issued an advice that said this type of "gifting" program was probably illegal and shouldn't be done, but there was a big uproar from RE agents and lenders so the FHA backed off and allowed it.

Oh, one more thing, I think Nehemiah, Partners In Charity, and other "gifting" programs call themselves charitable organizations, which as you can imagine creates further opportunities for double-dipping. I think one website said that the $5000 "gift" was tax-deductible as a "charitable contribution".

Total scam on the public.

Oh, yeah, and there was one more thing, they would only do the "gift" if the buyer was using a government-backed loan like FHA, since obviously what normal bank would buy a mortgage that was done like this? This way, only the taxpayers take the risk. Nice.

Yeah, I'm angry.

At 1:11 AM, Anonymous Anonymous said...

I forgot to mention my opinion that the only reason Nehemiah is sounding reasonable at this point is their target market, basically low-income buyers, is all but completely priced out so Nehemiah has pretty much finished cashing out this cycle, so now doesn't have anything to lose by acknowledging the bubble. They probably want to distance themselves from the whole mess they helped create.

At 5:34 AM, Blogger Sunny said...

interesting comments on Nehemiah. I'd like to research that further, any links?

At 7:14 AM, Blogger desi dude said...

yesterday on the way to the library in artesia(suburb of la) istopped by at a near by house with for sale sign.

Picked up a flyer! cost 985K+. a bigger house than average, 5 BR 2700 sft.

The houses were built in 2003 on a previous rail road track which was not in use. About 10 houses in that development, it is surrounded by homes which are pretty old, 1960,50. artesia is a very old city.

The homes when built were selling for 400,000+ in 2003 when built new.

At 8:44 AM, Anonymous Anonymous said...

Anon 12:49

Here is another uplifting story for taxpayers. I sold a year ago and am renting for the first time in 30 yrs. I rent from a young single minority woman with a child. She bought a new house and is renting me her other $700k house. Her mail still comes here and she picks it up, I am assuming so that she can claim it as a primary residence for tax purposes. But the kicker is that she gets a check once a month from the housing commission. Oh, I forgot, she also has a third house.
She makes $6 per hour + tips at a Casino. I just got killed in taxes this last April, now I know where it going.

I am pissed too

At 9:01 AM, Anonymous Anonymous said...

Stay-at-home-mom: two things. Who cares if you rent? I wouldn't bother explaining myself to people. Also: the fact that someone can barely speak English doesn't mean they can't understand contracts. You'd be amazed at how hard-working, frugal and, frankly, well off people who work as landscapers and housekeepers are. Having a college education doesn't necessarily mean you're the only one entitled to a house. In my town, Santa Barbara, the Mexican immigrants are the ones who do all the house refurbishing and landscaping for their white employers. They do good work and they work hard. I have no problem with them taking a cut for themselves.

At 9:04 AM, Anonymous Anonymous said...

I don't think it's useful to this discussion to identify people who you decide, based on their inability to speak English or their profession that they don't understand the basic laws associated with buying a house. My experience with Mexican immigrants is that they work very hard, many are extremely frugal and they have money. In my town, Santa Barbara, it is the Mexican immigrants who are doing all the house refurbishing, whether it be landscaping or building. I see no problem with their getting themselves a piece of the action.

Having a college degree does not entitle you to a house. I have two degrees myself. But frankly, I wish I'd become a carpenter.

At 9:05 AM, Anonymous Anonymous said...

Whoops. I posted twice, above. See how bring having a college education has made me?

At 10:28 AM, Anonymous Anonymous said...

"What makes usually educated, rationale folks think it can go any higher?"

People don't study investing, economics or bubbles in school and they don't spend any time really checking things out before they invest. The "street" says that prices are going up and they believe that.

It is not only Joe investor that isn't doing his homework, but also some of our economists. How many times have we heard a prominent economist say "there is no bubble" or "the landing will be soft". That is what gives people the courage to invest.

Its stupid. People running around sinking their life savings into a house (or three) and taking on a lifetime of debt, to make a quick buck. It has put our whole nation into peril and for what ?

I think the economists miss the big picture because they don't look at everything and their projections are riddled with assumptions. "As long as consumer spending keeps up" "As long as interest rates stay low" "As long as there is no drop in housing prices"

What they fail to realize is that we are in a vicious circle that is destined to break their assumptions. A consumer buys a house. 6 months later he sells it at a huge profit and buys another. He takes the money he made and spends it on SUVs, imported cars. He borrows more money and buys another house. He quits his job.

See the problems in this ? First, he stopped investing in the stock market. There hasn't really been any IPOs since 2001 !. Next, he took on more debt. Guess who is financing that debt ? Foreigners, because we have no savings. Then he went on a consumption binge. The result of that is more imports and a sharp increase in commodity use, driving up the price of commodities. INFLATION. Then he buys a second house. Speculation.

So there we have it: overloaded with debt, consuming like crazy, driving up commodity prices, foreigner financing us, creating an inflationary environment and finally mass speculation.

Yet the economists don't see anything wrong and their very predictions are predicated on these things not happening.

Sorry to rant, but this situation is getting more bizzare by the week.

Up this week: Greenspan (more Fedspeak) as well as China deciding (or not) to devalue the yuan.

Look out when that happens ! Washington may finally get what it wants. You won't be happy shopping at WalMart or Costco anymore !

It will make the rise in the price of gasoline seem small by comparison ! At least there is no inflation. ; )

At 10:36 AM, Anonymous lafferswerve said...

We all know how this will end, but it still is stunning how amateurish the RE market is getting. The Sacramento story beggars belief.

The buyer needs $1,600 a month in rent just to pay the mortgage. Plus hundreds more in assorted taxes, insurance and maintenance costs. But the home only rents for $1,000. So she has a minimum of $600-$1,000 negative monthly income.

She KNOWS that her ARM will go up so her monthly expenses are guaranteed to rise. She KNOWS that her interest-only mortgage will not build equity. She KNOWS that, upon sale, she will have to pay 5-6% of the sale price to the broker.

And yet, despite all this (negative cash flow, guaranteed rising cost of carry, hefty commission upon sale), she buys the home anyway assuming that asset inflation will absolve her of all sin. And she even wants to buy more of them.

Insane. Professional real estate investing is a business. Yet today amateurs are flooding in as if there was nothing to it. Buy at any price and you're a guaranteed winner. Charles Ponzi must be somewhere right now laughing his head off.

At 11:02 AM, Anonymous Anonymous said...

9:01 & 9:04AM Anonymous:

I don't know if you're trying to be politically correct or not, but if you can't see the outlandishness of a foreign landscaper walking in and wanting to buy the same house his employer might buy, you're not really grasping this bubble.

At 11:06 AM, Blogger Bookish Betty said...

I'm not trying to be politically correct. I'm saying that you can't judge a bank account by it's owners name/profession/ability to speak English. Don't tell me I'm not grasping the Bubble concept. You don't know me. I'm saying we cannot sit here and say there is a bubble just because people who are brown are buying in. That person probably has far more cash in hand than you realize. He also might plan to live in the house with a large extended family, all of whom will pay for it. There are many good economic reasons to back up the Bubble theory. Why not stick with these instead of reaching for easy, and frankly racist, examples. As I said earlier, it is not useful and might even delude us into believing things that just aren't true.

At 11:32 AM, Anonymous Anonymous said...

Way to stand your ground Bookish Betty! You are right.
Anon 12:49

Thanks for the insight about "down payment gifting". I am a Realtor and have never heard of it, probably because, due to the high prices in my area we don't deal with FHA financing. But that info is good to know, thanks for the education.

At 5:26 PM, Anonymous Anonymous said...

Sorry, it was HUD, not FHA who issued the opinion on down payment gifting programs (and later backed down). I was commenting from memory and I apologize for being sloppy about it.

I spent a few hours researching the scam/fraud aspect like a year ago when we were actually house-shopping (ultimately we did not buy), but all those links I collected are apparently lost at the moment. I got pretty worked up about it at the time. If I can locate them on a backup, I will post them here in the next day or so.

I remember being particularly interested in the career of Tammy Butler, CEO or president or something of Partners In Charity. Something about her I just don't trust, and I truly wonder about her claims that PIC benefits the charities shown on her website.

PIC sales pitch to home sellers:

PIC is a $32.5M a year business according to Guidestar:

At 6:52 PM, Anonymous Anonymous said...


Maybe the govt (translation: you and me) are helping her make money on her rental properties. I live in Elk Grove (south of Sacto) and I can't believe the number of brand new houses that go on the rental market as either Section 8 rentals or the owners rent out individual rooms in the houses. There is no way that local incomes could support rents high enough to cover those mortgages. I knew that the market had gone nuts a couple of years ago when someone making one third of my salary could rent a house twice the size of mine and pay half the amount that I pay for rent as a Section 8 renter. I'm sure their new neighbors were just as pleased.

At 7:35 PM, Anonymous Anonymous said...

I rent in an East Sacramento location (nice area in El Dorado Hills) and here are my actual numbers:

rent: $1800/mo. (includes gardener)

exact house as the one I'm living in listed down the street pending for 539K.

The PITI on a house of this price would come to $3345/mo. This assume 20% down with a 6% 30yr fixed, 1.25% tax rate and a two hundred a month for insurance. This doesn't include any home repair or gardener (which is included in my rent.)

Even after you factor in the interest deduction for the house the house payment is still $3054/mo. This assumes a median income, writing off about 22K/yr. in interest. Therefore, this makes no sense as an investment unless you are counting on appreciation, in which case you're not an "investor" you're a speculator.


Happy to be saving 1,500 a month.

At 9:59 PM, Anonymous Stay @ home Mom said...

"I don't think it's useful to this discussion to identify people who you decide, based on their inability to speak English or their profession that they don't understand the basic laws associated with buying a house."

"Why not stick with these instead of reaching for easy, and frankly racist, examples. As I said earlier, it is not useful and might even delude us into believing things that just aren't true."

By the way, I'm the brown person, the English challenged man I spoke about was not. Other point, I never said he was Mexican, you did. I guess you learn something every day, appearently all landscapers are Mexicans. Thanks for straightening that out (now where did I put that shovel)?

At 7:34 AM, Blogger Sunny said...

What is a melo-roos tax?

At 11:30 AM, Blogger Bookish Betty said...

Stay-at-home, I don't want to get into a big fight with you about this, but I didn't suggest that the person you were talking about was Mexican. I used the Mexican immigrants in my area as examples of people who don't speak English perfectly but who have managed nonetheless to buy property (no small feat in Santa Barbara). Perhaps the person you were talking about was Russian or Chinese. Different colors, same principle: a college education and sellar ability to speak English does not mean you are good with cash. Being a landscaper does not mean you are bad with cash. That a landscaper who doesn't speak English is buying a house doesn't mean anything about a housing bubble.

At 7:28 PM, Anonymous Anonymous said...

You are all hilarious! Half heart half money. I myself am an aggressive real estate investor. I started investing 2 years ago and 2 years later at the age of 28 I can say I have no regrets and I am still buying it all up like Trump. I currently have 10 homes, mostly here in Sacramento, also Vegas, Arizona, and Texas. I am selling three this year for an after tax profit of 250000, and I plan to buy more. Hinesight is 20/20 and opportunities are never going to pass me up anymore. I have increased my net worth dramatically since I started investing and I plan to keep on riding this wave till the vary end. Now is the time to take action and prosper. Time is the only thing that is taken from you that you can't get back so make use of it. I would never give my family the quality of living they have if I feared this imaginary "real estate bubble." Supply and demand people economics 101 the market will be hot for the rest of this decade. Don't waste time, time is money.


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