Sunday, May 08, 2005

Now They "Ask For Less" In San Diego

Listen to the bubble popping in San Diego. "Bill Holz of Eastlake is a Navy command master chief. 'We upgraded the house to the hilt. We probably have $100,000 in upgrades.'"

"He and his wife Nancy decided to put their home on the market after less than two years of ownership. Using prices of comparable homes as their guide, they listed it in early February for $919,000, nearly double the $509,000 they paid originally."

It's hard to feel sorry for people who expect such windfalls. "If his home doesn't sell by the end of May, he said he will probably rent it and sell it later. 'People don't make enough money to buy them. Your buyer pool is like a pyramid, the higher the prices, the smaller the pool of qualified buyers. We've got to get somebody moving up from another house or condo or town house that might be able to buy these houses.'"

This is a classic top of the cycle statement. "Alleda Harrison (a realtor) said the current market requires sellers to price their homes less aggressively. Instead of tacking on 10 percent or $25,000 to the price last paid in the neighborhood, sellers should hope they can get a price equal to the last comparable home sold nearby."

And they gaze fondly on the past. "They were hounded by desperate buyers, who wondered if they were paying too much, and nervous sellers, who thought they were getting too little."

Expectations are changing. "There's always the 30, 60, 90, 120-day price."


At 10:09 AM, Anonymous Anonymous said...

Greedy ego maniac, serves him right. Oh yeah, rent it out and wait until you can get your price. He's in for a rude awakening.

At 10:20 AM, Blogger Melody said...

Happy Mother's Day!!!

Good read:

The Perfect Storm That Could Drown the Economy

WE seem to be living in apocalyptic times. On NBC's "Revelations," Bill Pullman and Natascha McElhone seek signs of the End of Days. In the Senate, gray-haired eminences speak of the "nuclear option."

The doomsday theme is seeping into the normally circumspect world of economics. In April, Arjun Murti, a veteran analyst at the investment bank Goldman Sachs, warned that oil could "super-spike" to $105 a barrel. And increasingly, economists are prophesying that the American economy as a whole may be sailing into choppy waters.

Just look at the many obvious and worrisome portents. The government each year spends much more than it brings in, and so the nation has a large budget deficit ($412 billion in fiscal 2004, and growing). Americans also import far more goods than they export, and so the nation has record trade and current account deficits.

As consumers, Americans personally spend significantly more than they earn. Worse, some imbalances are eerily reminiscent of conditions that helped touch off recent economic crises: Mexico in 1994, Asia in 1997, Russia in 1998 and Argentina in 2002. Throw in rising interest rates, warnings of a housing bubble and the potential for higher inflation and slower growth (a k a stagflation) - and you can understand why some economic analysts may be plumbing the New Testament for inspiration.

The forces propelling and buffeting the economy are like a series of interrelated and interconnected weather systems. Could they be setting the conditions for a perfect storm - a swift series of disturbances that causes lasting damage? If so, what would it look like?

"There's a pattern that is familiar from so many other countries that have gotten into debt problems," said Jeffrey A. Frankel, an economist at Harvard's Kennedy School of Government. "A simultaneous rise in interest rates, fall in securities prices and depreciation of the currency."

Of course, economists, always armed with bandoliers of caveats, are quick to warn that the economy is relatively healthy. Job growth numbers released on Friday were strong, with 274,00 new jobs created in April.

And they warn against drawing parallels too sharply between the mighty United States and emerging markets. The dollar remains the world's reserve currency, and the United States is a global military and political hegemon. And the nation has been able to borrow huge amounts for years without suffering a crisis.

That said, how might a perfect storm be created? It would likely gather overseas, and wouldn't necessarily take the form of a terrorist strike or oil shock. The United States finances its spendthrift ways by selling dollars and dollar-denominated securities (like Treasury bills) to foreign creditors, mostly to central banks in Asia. To sustain growth, the United States needs foreign creditors to continue to add to their piles every day.

Any signs to the contrary are worrisome. In February, when the Korean government suggested that the Bank of Korea might diversify its foreign exchange holdings, "this seemingly innocuous statement set off a small panic in our stocks and bond markets," said James Grant, editor of Grant's Interest Rate Observer.

If the Bank of China, which has been accumulating dollars at the rate of $200 billion a year, decides to cut back on new purchases, either to diversify or to let its currency appreciate, the United States would quickly have to offer sharply higher interest rates to retain existing investors and entice new ones. Nouriel Roubini, an economics professor at New York University's Stern School of Business, estimates that if China cut its rate of accumulation by half, long-term interest rates in the United States could rise by 200 basis points over a few months and the value of the dollar would fall.

Such a rising tide - the yield on the 10-year bond shooting from 4.25 to 6.25, the average 30-year mortgage rising from 6 percent to 8 percent - would mean instantly higher borrowing costs for the government, businesses and consumers. It would drench Wall Street, soaking the stocks of giant interest-rate-sensitive blue chips like Citigroup and making life difficult for speculative, debt-ridden companies. Some highly leveraged hedge funds or investment banks caught on the wrong side of trades would incur significant losses.

The United States weathered a sharp decline in the stock market just a few years ago, in large part because of the housing market's strength. But a sharp rise in interest rates would literally hit home. For new home buyers, or for people with adjustable rate mortgages, 200 extra basis points of interest on a $400,000 mortgage would represent $8,000 a year in extra payments. If mortgage rates were to rise sharply, housing prices would level off and perhaps do the unthinkable: fall.

Suddenly, the mechanisms that have allowed consumers to keep the economy afloat - the ability to realize profits from selling homes, to refinance mortgages at lower rates and to borrow cheaply against home equity - would be broken. In the absence of sharply rising wages, that $8,000 in extra interest would be $8,000 less to spend at Home Depot, or at the Cheesecake Factory, or at Disney World.

"Personal expenditures in the past 15 months have been largely financed by borrowing," said Wynne Godley, a Cambridge University economist who is affiliated with the Levy Institute at Bard College. "And even a reduction in the pace of debt creation will force people to start spending less, on a big scale."

If the dollar weakens and consumption falls, the trade and current account deficits would start to narrow. But the United States economy would slow and, perhaps, even shrink.

"The result would not be a full-blown financial crisis most likely, but it would still be a major recession," said Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley.

What would create the full-blown crisis? When the slowdown starts to radiate across the globe, said Catherine L. Mann, senior fellow at the Washington-based Institute for International Economics.

For years, the American consumer has been the engine of global growth, by gobbling up the output of oil wells in Saudi Arabia and factories from Mexico to China. "The slowdown in consumer spending is going to have a negative influence on the global economy through reduced international trade," Ms. Mann said.

What's more, a recovery would be comparatively slow in coming. When the global economy came to a screeching, synchronous halt in 2001, the United States led much of the world back to growth because the federal government went on a stimulus binge for several years: Congress significantly increased government spending while cutting taxes, and the Federal Reserve slashed interest rates to historic lows, and held them there.

But in the perfect economic storm, none of these three powerful levers would be readily available. Today's deep budget deficits make both significant tax cuts and spending increases unlikely. And rising interest rates would make it difficult, if not impossible, for the Federal Reserve to reduce the cost of borrowing.

It sure sounds alarming. But as the clouds gather and the wind stiffens, we sail onward, with no apparent adjustment in course, full steam ahead.

Why aren't we rushing to take evasive action? Why is Congress adding new spending while it passes new tax cuts? Why aren't financial institutions encouraging Americans to pay down their debt rather take on more?

A lot of it has to do with timing. While many economists are willing to imagine in detail what a perfect storm would look like, virtually none will forecast precisely when - or if - it will start. And so it remains a vague and distant possibility.

Besides, adds Jeffrey Frankel, "some of us have been warning of this hard-landing scenario for more than 20 years."

At 10:24 AM, Anonymous boulderbo said...

bought a home in cape cod in 1993 for $135,000 from a seller who paid $215,000 for it 1987. he brought $17,000 to the table to get out of a 15 year mortgage, paid down for five years. what struck me was the mentality at that time, how bad did he really think the market was and how bad did he think it was going to get. for those of you who have never experienced a down market, remember that a "market" is only what people believe it to be, a perception of many participants. the frothy speculation on the way up can quickly turn to panick, gloom and fear on the way down. it's very interesting how quickly the market in sd went from frothy to normal (2 months on market). my guess is that it won't too much longer to turn from normal to soggy when flippers run for the doors.

At 10:32 AM, Blogger Melody said...

Another good read..

Price column: Bakersfield at 300,000: Can you believe it?

Posted: Tuesday May 3rd, 2005, 11:40 PM
Last Updated: Tuesday May 3rd, 2005, 11:43 PM

You knew this day was coming. You've driven past housing developments that, as best you can remember, were almond orchards or rows of alfalfa just the previous week.
And now, practically overnight, as if Rod Serling had somehow orchestrated the transformation, those fields are cul-de-sacs filled with twig-trunked trees, spiky green lawns and curbside skateboard ramps.

Nevertheless, it's mildly stunning to realize that the population of Bakersfield proper now unofficially exceeds 300,000. In one dizzying 12-month burst of growth, Bakersfield has leapfrogged past Riverside and Stockton to become the 11th largest city in California.

Maybe you heard earlier this week that the State Department of Finance now puts Bakersfield's population, as of Jan. 1, at 295,893. The agency also puts Bakersfield's 2004 rate of growth at 4.7 percent, largest in California among cities with at least 200,000 people.

Assuming that rate of growth has continued into 2005 -- and that's almost certainly the case, given the ongoing demand for building permits, according to Jim Eggert, a principal planner with the city -- Bakersfield hit 300,000 on or about April 15.

The metro area's total population, including unincorporated islands and appendages such as Oildale and Alta Vista, is roughly 452,000.

Three hundred thousand has a certain ring to it, a resonance that suggests a city of consequence. It will look good on city-limits signs along the freeway, on Chamber of Commerce brochures and in PowerPoint presentations on economic development.

The new population number also underscores the continuing challenges that city and regional planners will continue to face, however -- core issues like traffic, air quality, water and public safety, but also tougher-to-quantify matters. Things like a city's personality and character. Parks, recreation, arts and diversity of business are some of the relevant factors there. But it's more than that.

Call it vibrancy. Some cities have it and some cities don't, and it doesn't merely boil down to money and a city's willingness to spend it.

It's about vision and the will to act on it. Bakersfield's breakneck pace of growth -- brought more clearly into focus by the 300,000 population threshold -- only makes those things more important now. Because tomorrow somebody's pouring more asphalt. Somewhere.

The new population milestone might sound good to some ears, but it has offsetting negatives: As the city grows, sales and hotel tax revenues will grow, allowing the city more flexibility in some areas.

But service costs will grow too, more so if Bakersfield continues to be among the state's leaders in residential lot size.

And if growth brings more affluence, Bakersfield's chances of jump-starting urban redevelopment will take a hit, because fewer areas will qualify for federal redevelopment grants.

But maybe that's making lemons out of lemonade: Other cities have undertaken positive makeovers long after they became "cities of consequence" and achieved new levels of affluence.

Bakersfield need only look at Anaheim, the city immediately above it on the list of California's most populous.

No. 10 Anaheim (pop. 345,317) pulled off a striking remake of its downtown a few years ago, and the tourism business in the Orange County city has never been better.

Growth doesn't blunt a city's ability to remake itself, but it does up the ante.

A few other statistical morsels from the Department of Finance report:

Bakersfield added 13,222 residents in 2004, nearly as many as San Diego (14,035) and San Jose (13,625), the state's second- and third-largest cities.

Bakersfield officials can't say how many new residents moved in from other places in 2004, or to what extent the population increase reflected the number of local births in excess of deaths.

But they do know how many people became residents because their homes were annexed into the city: just 19. Most of the city's annexations in 2004 were in unpopulated areas.

Kern County added 20,669 residents in 2004, seventh-most among the state's 58 counties. Kern was the sixth-fastest growing California county at 2.8 percent -- the second-fastest rate among counties with at least 350,000 people.

Bakersfield's growth rate might have been No. 1 among larger cities, but it wasn't No. 1 in Kern County. That distinction belongs to McFarland, which jumped to 12,179 -- an increase of 8.2 percent. Delano grew to 45,056, an increase of 3.4 percent.

Maricopa lost four people. We're not certain where they went, but the town is down to 1,147 people.

At 1:09 PM, Anonymous Anonymous said...

I'm sure they'll enjoy the mortgage and property tax bills when they are in Japan. And where did that $100k come from? Probably HELOC. All today probably around $40k/year to wait.

At 2:05 PM, Anonymous ChrisH said...

I remember an article much like this in the OC register last year around November. It was about a couple who sold a Huntington Beach house to buy one in San Juan Capistrano. They were concerned because it seemed like the market had turned over night and they weren't getting offers for it.

At the time I thought for sure the bubble was about to burst. Orange County all of a sudden had growing inventory. Then after Christmas, it started to go nuts once again and has been out of control again for the past few months.

I wonder if it is for real this time.

At 3:25 PM, Anonymous Jim in Venice said...

"I wonder if it is for real this time."

God, I hope so. I'm starting to lose faith in Los Angeles - and humanity in general - from this ridiculous bubble.

I went to a party last night for a friend's BOATwarming - that is, she is living on a boat instead of in a house because it is bigger and nicer than anything she can afford on land. Ridiculous.

At 4:44 PM, Anonymous Anonymous said...

Good point, Jim - we've neglected to monetize the oceans. And while we're at it, why not start selling real estate in space and on other planets? Your descendants can live there once we have the technology, and meanwhile we can use one-thousand-year mortgages to keep those monthly payments low, low, low!

I'll call Ben Bernanke and tell him to warm up the printing presses.

At 8:18 PM, Blogger Ben Jones said...

4:44 anon,
They aren't making any more sky!


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