Am I Still Bullish On the Sacramento Real Estate Market, and Was I Ever?
Back in the early stages of the nationwide and Sacramento real estate market correction (or, depending on your point of view: “downturn”, “collapse”, or “debacle”), a few of the folks who read the bubble blogs chided me for being too bullish on the market. At the time I argued with some success that I wasn’t being bullish, I just wasn’t joining them in the bubble-bear’s picnic (much as I enjoyed the song of a similar name).
What I did at the time, and what I still do, is publish the numbers. When the numbers drop, I said they dropped (whereas a real dedicated bull would say they “adjusted”).
Nevertheless, I suppose in some sense I always tried to overcome my innate pessimism by retaining a certain optimism about the state of the industry that does, after all, feed me.
I must admit however that in the last couple of days I was pretty shaken by two things, one in the press and the other in my practice, with the one in the press shaking me a bit more.
The article in the press was the Sacramento Bee’s article reporting on Countrywide was tapping a relatively high-interest credit line for cash. The article also reported that the Moody’s credit rating agency has downgraded Countrywide to their lowest investment grade, one step above their highest rated junk bonds. Although on the plus side a Moody’s analyst was quoted as saying that Countrywide was probably liquid throughout 2008, the very possibility of a major player like Countrywide being in trouble was enough to shake my confidence in the wider economic outlook, and certainly give me concerns over the money supply and the outlook for rising interest rates.
The second thing that shook my confidence somewhat and made me question “how low is down” were what seemed to me to be some fairly rapid increases in the decline in prices on condos. One offer I’ll be working on today for an investor is for a condo in a subdivision and size that a month or two ago I was showing to another investor for 18% more! Of course, that’s a single data point, so by itself it’s not a cause to go jump off a bridge if you own a condo in Sacramento, but it was nevertheless surprising. At the same time I found some other condos that were selling around the peak for $180,000, now being offered in a couple of instances (as is, distressed sales) for about $120,000 to $125,000. Granted, we’re comparing “best of breed” to “distressed sales”, so to some extent this comparison is unfair, but you might say the drop is on the order of $165,000 to $120,000, which is still about a 37.5% drop over two years.
As is conventional wisdom, condos are “the last to rise, and the first to fall.”
Until now, when publishing the real estate numbers, I’ve always maintained that we’ve been dropping, but falling at a rate that’s been mild compared to the rate of increase. Though this is pretty anecdotal evidence, it seems clear to me from the last couple of days of showing that the rate is accelerating, at least for condos.
My recommendations based on the above?
- If you’ve despaired in the past of getting positive cash flow in Sacramento with a reasonable down payment, we’re at the point where that may well be turning around for many properties.
- If you believe Countrywide is on the verge of collapse, don’t buy unless you plan to hold for ten years or more.
- If you don’t believe Countrywide is on the verge of collapse, don’t buy unless you plan to hold for five years or more.
- Try to time the bottom if you have cash.
- If you’re in a position like my investor where the exchange rate makes now a favorable time, or if you’re depending on financing, buy now, especially if you’re in the market for a condo.
The first item is probably most important, because it’s a lot easier to hang in there waiting for the upturn when you’re creating cash every month than when you’re investing it.
Of course, these are (in the language of stock market disclaimers) forward looking statements. You should base your buying decisions on your own research and considerations of the economy, cash flow, and other factors.
August 19th, 2007 at 2:47 pm
Hey John, what’s up?
>Try to time the bottom if you have cash.
Please contact me the minute it hits bottom, will ya? Thanks!
August 19th, 2007 at 3:23 pm
Be happy to. What sort of property are you looking to buy out here, and how much cash are you looking to invest?
Oh.
Actually it’d make a good service for some multi-millionaires — a private “Are we there yet?” mailing list. I’ll be happy to put together a private mailing list for a look at your cash and a five year buyer-broker agreement. Any takers?
Seriously, it shouldn’t be too hard — when it goes up slightly three months in a row, you just missed it. Still enough time to get some good bargains. By October, 2005, I knew that the top was in August, 2005, for example.
The rest of us need financing, so trying to time the bottom is a fools errand at best because one would expect it to come along at the same time as the period of tightest (most expensive) money.
Now’s always the right time to buy, but only for the people for whom now is really the right time to buy. Purva and I haven’t yet learned the proper voodoo math to argue any differently, but we’d welcome a guest article.
August 21st, 2007 at 9:19 am
I think you’ve stumbled onto a great idea John. The five year buyer/broker agreement!
Your ‘fools errand’ comment is spot on. I’ve believed for years buying when you ‘think’ we’re at the bottom is probably ok. If you’re right you’re a genius, not to mention in the chips. If you’re wrong, who cares? It just means you’ll wait a little longer to be in the chips. And since we’ve not ever had a national bubble, a monster drop would be only a miniscule risk.
I’d develop that five year agreement idea if I was you John.
August 22nd, 2007 at 9:34 am
Good post. Finding the bottom is really not possible.
Since I work primarily with people buying owner occupied single family homes the question really is…should I rent or buy? That depends on how long they are going to stay in the home and what they believe the the future holds.
It also depends on how much value they place in deciding whether they can paint their home, plant a garden in the back yard, own a pet, etc. In other words, are they tired of asking permission from a landlord for everthing and how much is that worth to them.
August 28th, 2007 at 8:11 pm
[…] Published by Rory at 4:00 pm under Dana Point News and Info, Local News and Information, Orange County Market Conditions What do you think of when you hear these terms? Crystal Cove, Headlands, Custom Homes, Ocean View…. The OC Register has a name for it, “Sand Rush”. This description is indicative of the limited availability of coastal home building space, and limited number of coastal homes. Here in Orange County, there is not only the inland luxury market that still attracts people to places like Coto de Caza and Nellie Gail Ranch, but the one crown jewel of the Orange County market are the coastal homes. The coastal luxury market is like a giant bridge that brings us from one market to the next. While Wall Street, local and national lenders get sorted through the Sub prime Tsunami, the coastal luxury market will still be going, full steam. Why? Because typically people buying homes in the 10-25 Million dollar range aren’t going to rely on Countrywide for their capital, so the whole discussion of mortgage fallout is a non-sequitur. For everyone else, the market is cyclical. What goes up must come down, but it also goes up again. That is why a cycle is different than a bubble. The word bubble implies that once there is a pop, there is nothing left. In the meantime John Lockwood in Sacramento gives great advice of how to strategically weather the lender storm. […]