Monday, August 29, 2005

The Million Angry-Ex-Day-Trader-Turned-Condo-Flipper March

Aug. 19—It's a sign of the times: Jim Eggleston, owner of Sacramento's biggest residential “For Sale” sign installer, predicts this will be his busiest week in 21 years in business. He's had to hire an extra worker and buy a new delivery truck since his crew planted a one-day record of 225 signs on Monday.

Sacramento is not a household name on the East Coast.

Unlike San Francisco and San Jose, it has not had a song written for it—at least not that I’ve ever heard—and if it did, the song would probably have been a Johnny Cash/Folsom Prison Blues/“I shot a man’s leg off just because he was bothering me and now I hear the lonesome Sacramento whistle outside my prison window” type of thing.

And, in fact, Folsom Prison happens to be right outside Sacramento, about 20 miles east along Route 50.

Sacramento itself lies 90 miles east of San Francisco, in the agriculture-rich Central Valley of California, on the road to Lake Tahoe, Reno, Salt Lake City and beyond. It is, for some reason, the oldest incorporated city in the state of California, and the State Capital to boot.

“There are whole lot of houses going up for sale,” says Eggleston, who promises next-day installation when a real estate broker orders a new sign. “The number of 'For Sale' signs we're removing keeps going down relative to the number we're putting up.”

Sacramento is also the home of McClatchy Newspapers—publisher of the Sacramento Bee, the source of this article—and one of the fastest growing metropolitan regions in the nation.

And while Sacramento is not a Speculative Housing Bubble-type market of the Las Vegas/Phoenix stripe, it’s close—having appeared alongside the San Diego, Los Angeles, Riverside, San Francisco and San Jose “Metropolitan Statistical Areas” in a listing of least-affordable U.S. housing markets earlier this year.

If this Sacramento Bee article is accurate, however, that region may be getting a little more affordable in the near term:

His [Jim Eggleston, the ‘For Sale’ sign guy] experience is just one more signal that the Sacramento region's housing market continues to cool off, as inventories rise, price reductions become rampant and homes stay on the market longer, particularly those in the $400,000-and-up price range.

In July, the monthly inventory of resale homes for sale in Sacramento, Placer, El Dorado and Yolo counties combined shot up to 7,263—the highest for any month since September 1998.

In other words, the number of Sacramento area homes for resale in July was the highest since September 1998, just before the Asian crisis hit the California economy.

And it appears that inventory actually increased in August:

As of Thursday morning [August 18], the inventory had risen another 26 percent to 9,141 homes, reports TrendGraphix, a local data firm affiliated with Lyon Real Estate of Sacramento.

"The inventory is ramping up and we're now seeing a changing market—the bell has tolled," said Michael Lyon, head of TrendGraphix and Lyon Real Estate.

Does Sacramento matter? Is it a canary in a coal mine? Is the Speculative Housing Bubble doomed to burst in a hail of fireworks?

Will angry ex-day-traders-turned-condo-flippers march on Washington to bemoan their top-ticking yet another market—The Million Angry-Ex-Day-Trader-Turned-Condo-Flipper March?

Beats me.

But I know this: human beings take comfort in the safety of numbers—and they are taking comfort, right now, in the safety of numbers of friends and family and neighbors and distant relations who are making money in the market…the housing market.

On Saturday night a proud father was regaling our table at dinner about his daughter who, to his amazement, had created a business fixing up and flipping houses out in Phoenix. “The first couple of houses, the banks needed our signature,” he said. “But now they don’t!”

Everyone at the table nodded in approval, and one lady said, “That’s the wonderful thing about children…they have no fear.”

Fifteen years ago, however, when the Resolution Trust Corporation was selling off bad real estate owned by failed savings and loans, there was plenty of fear. The average American considered buying real estate too risky. Proud fathers didn’t brag about their young daughters flipping houses—chances are Dad was already holding the bag on a condo he bought during the late-1980’s boom.

Besides, Dad couldn’t have gotten the financing anyway, given the state of the Savings and Loan industry.

But today there is no fear. Lots of headlines, lots of worried journalists and a few economists crying ‘wolf’—but among the young men and women taking out the interest-only mortgages, there is no fear.

And in at least one hot region of the country—Sacramento—inventory is rising and the market is “changing.” According to one real estate professional there, the bell has already tolled.

Too bad Johnny Cash is no longer around to write about it.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


stealthelephant said...

San Diego is orders of magnitude more attractive than Sac...but I'm selling the place down there anyway. 5x my money in less than 4 years. Talk about luck. Thinking of trading down to a condo (there are so many to choose from in SD) and stashing the rest in gold. Enjoy the thought of sitting atop all those ingots like a fat dragon. A shoeshine boy told me that gold was a decent inflation hedge while rhapsodizing about reverse mortgage financing.

skot e carruth said...

The day when Sacramento is a hot market is the day that the 'bubble' is confirmed. stealthelephant - congrats on your luck. I hope you put that extra money into the stock market instead of gold... in fact, I hope that all real estate investors become disillusioned and start supporting this stock market.

gvtucker said...

In a market like real estate, where the gains have come from leverage as much as anything else, once the bubble is burst there is nowhere else to put the capital, because the leverage evaporated the capital.

Sam S. Park said...

It sure is hot here in San Diego, and I’m not just talking about the weather. I may be young, but I do not share the risk tolerance level that most of my fellow younger generation has shown in this real estate market. Sure, we have seen extremely low mortgage rates… perhaps thanks to the foreign entities purchasing the Treasuries; but I can’t help notice the similarities of flippers and day-traders.

Jeff, I agree with you that, when considering the ease and method of financing, conditions seem unnerving. Some of my fellow younger generation “dudes” and “sistas” who used IO and floating mortgages will feel the pinch when the interest rate atmosphere reverses. Think about what happens if gas prices continue its course… I’m happy to fill my car for under $40, and that’s not as bad as the truck and SUV drivers that put up 80 dollars to fill their tanks. Can you say, OUCH!!! I think I’ll keep my eyes on the foreclosure rates. However, I’m not sure if there will be a pop… I think you’ll need a bigger catalyst than just higher gas prices, unless that forces people to move elsewhere. I know some people are waiting on the sidelines to buy a house, so liquidity will probably be there… but if they move too… UH HO.

Maybe I'll write a song about this. It'll go something like, "There goes the neighborhood..."

whydibuy said...

Yeah, Jeff, you highlight the one woman who's flipping real estate but what you ignore is that the other 7 people at your table either has a home paid off or a small mortgage left. Sure, there are wild eyed speculators here & there as there always have been and always will be. But for the most part, most homeowners are by nature frugal and conservative about the roof over their heads. This talk about bubbles is getting quite tiresome. Housing will NOT crash and blow away like an internet stock. Housing bubble blah, blah, blah. I and nearly everybody I know also has a house paid for free and clear or has a modest mortgage. Exactly where are all these bubble people? And finally, its very reassuring perversely that when everybody is fretting over something, its not going to happen. Give it a rest already.

Chris Fischer said...


I think you're actually illustrating Jeff's point - that the home owner who has a conservative mortgage is becoming a think of the past. There is plenty of evidence of this all around, from new mortgages (I believe HALF of new mortgages are some kind of floating rate payment) to consumer debt (it's doubled in the last 10 years) to home equity loans/lines. A lot of the older generation has taken a lot of the equity OUT of their houses.

And the younger generation (my generation) really has a gambling personality, probably because most of them have never remember tough times - or high interest rates. I mean, most of the late 20 somethings grew up during the 90's, which (generally) was a great time, economically speaking. Most of us don't realize that the Oldsmobile 1986 POS, which got handed down as a first car, was originally financed at 14%.

Case in point - A friend of a friend of mine is buying a condo with his girlfriend somewhere in Howard County, MD. He sells whole life insurance, she's a teacher.

Price of condo: $600,000

Her father is putting the down payment down (he didn't say how much it was - I'll assume 10%) since neither has any considerable savings. They're financing it with an interest-only ARM.

The kicker was really his comment to me. "In a few years, it'll be worth at least $800,000."

Sam S. Park said...

Hey Chris,

Good to see that you're in my generation and someone who really takes the time to see above the noise. I guess there is some hope for our generation afterall. I like that last part about your friend. This condo must have like 6 bedrooms or something to justify that $800K expectation.

Chris Fischer said...


I don't think anywhere near that big. Judging from what he was saying, I'd say he's basing his expectation on things the fact that it costs $600,000 now, it's in a great area, and real estate always goes up. It's just him and his girlfriend, and they aren't having children anytime soon. I'm sure it's a nice place and all, with the marble countertops and the subzero freezers, etc.

I think people are numb to just how much money a $600,000 mortgage generates.

The thing that really scares me about the real estate is I'm afraid it could become a death spiral. Once interest rates rise, and the housing market cools a bit where we don't have record amounts of home sales and escalating prices, people like my friend above I think are in real trouble.

I don't have hard numbers on this, but don't we think local governments in places with a high transfer tax (like Philadelphia and Pittsburgh, at 4%) are benefitting from the housing boom as well, between both the higher turnover in homes and elevated prices? Even with that, a lot of our local/regional governments are having a tough time. What happens when that income stream starts to dry up? Raise real estate taxes, further stressing this homeowners with giant mortgages?

Again, this might end up ok, I'm just not sure how.

Sam S. Park said...


I completely agree that a death spiral is a possibility given that our economy is walking on thin ice. I’m just hoping it won’t be that bad. There is some major flaming torch juggling act going on, but I’m not sure who’s doing the juggling… Is it Greenspan, or are there more participants? So what happens when someone in the act trips?

As DaleW mentioned on Jeff’s OSTK thread, there are various biases that influence investor psychology. I think many of our fellow younger generation have fallen into that bias trap. The flippers have that overconfidence bias; and like you said, most of us younger folks haven’t experienced the tough times when markets fall. We elude ourselves to think that prices will keep moving up, and we don’t want to miss the ride. I’m no real estate expert, but I think your friend is jumping on the bandwagon few years too late.

You’re right to ask: what happens when the gov't income stream runs out (I don't like the sound of higher real estate taxes), because the outlook doesn’t look too peachy. Speaking about income streams, I’ve compared the rate of housing price movements relative to personal income growth… and housing price rate changes have been consistently outpacing that of personal income since first quarter of 2000, especially in the “hot” markets. I don’t think this is a good sign.

Like you, I’m not sure how things will turn out, but I don’t like the signs. I suggest holding tightly, because we’re about to go for a bumpy ride. Yee Haw!

BelowTheCrowd said...

Case in point that I illustrated in my blog. 800K townhome. Virtually no equity put in. They guy buying says he's not worried because he's in for the long term, and doesn't need to worry about what happens in the next 3-5 years.

But to afford it he had to finance with all floating debt: A 3 year ARM, a second mortgage which is a 1 year IO ARM, and an equity line to pay for upgrades and improvements post-purchase.

He's making the classic financing mistake. Buying a long term asset with short term debt and not acknowledging the risk that is inherent in this mismatching of timeframes. I cannot think of a single example of this kind of thing working out well for the borrower.

This is typical of the first time homebuyers in California. Most of them could not possibly afford the houses they're buying if they had to take on a conventional, 20% down, fixed rate or even 5 year ARM. So they mismatch the timeframe of the asset to the timeframe of the debt and don't even think about the risk that generates.

I believe this is regional. On the coasts it's insane. My friends in Utah and Ohio are far more rational and conservative.


Project_Guru said...


You either have a very small circle of friends or are a very old person to only know people with no or very small mortgages. Or do you live in a small town in the middle of the US that has seen no price appreciation?

You obviously have no clue of what is going on in California. I just sold my condo in Long Beach to a young girl who did an IO mortgage for the full $500k asking price. This was a place that was worth less than $175k only 4 years ago. Can you tell me that she is paying a good price that will only continue to appreciate? Or that she could have bought for this price if banks weren't more than willing to extend her credit with no basis in reality that she could pay it back without more appreciation?

People are building a house of cards in So Cal among other hot cities. How can you be so obtuse and not see it? I'm actually very tired of people like you that can't see the writing on the wall.

rajesh said...

actually there was a song about sacramento. it's from a band called "middle of the road".

Middle of the Road
There's something about the weather
That everybody loves
They caII it the Indian Spring of Sacramento
And when the sun is up in the sky
The wind is blowin' by the river side most everyday
You're in Sacramento a wonderful town
Sing sing sing din din din

There's something about the people
That everybody knows
That gives you a tender feelin' of confusion
Your feelin' lonely but you don't know
Until this other feelin' here inside you starts to grow
You're in Sacramento, a wonderful town
Sing sing sing din din din.

Now that spring is here again
And your thinkin' if only you were not so lonely ooh ooh
But you can ease your restless mind
Ease your restless mind
All the people are a lovin' kind,
In Sacramento.

There's something about the weather
That everybody loves
They calI it the Indian spring of Sacramento
You're feelin' Ionely, but you don't know
Until this other feelin' here inside you starts to grow
You're in Sacramento, a wonderful town
Sing sing sing din din din.

Sacra me..........nto.

Jeff Matthews said...

I expected interesting anecdotes from real estate hot spots in California...but not in Maryland. Very interesting.

For the record, on Toll Brothers' conference call last week they said that 58% of their homes are bought with Adjustible Rate Mortgages.

ARMs are not, by definition, a speculative means of financing a house. I bought my first house (in the 1980s) with an ARM because rates were 12% and I thought they were coming down.

The speculative portion of ARMs, in my view, is the interest-only portion, and Toll identified 38% of their ARMs as being interest-only.

Do the math and it tells you that 22% of Toll Brothers' houses were being financed with interest-only loans.

In my very simple-minded view, this means that about 1/5th of current housing demand is speculative--consisting of people who either could not afford the price level or who intend to flip the house.

The Housing Bubble does not have to end in disaster for everyone, including those souls identified by "whydibuy" who haven't raided their home equity or bought a house on a shoestring.

The Internet Bubble did not end in disaster for everyone--just for the knuckleheads who spent beyond their means to play the game. And it appears that about a fifth of the people playing the housing game are spending beyond their means.

I could not close without noting "rajesh," who came through big-time by finding that a song devoted to Sacramento does indeed exist. As Mr. Burns would say, "Excellent, Smithers."

BelowTheCrowd said...


Buying with an ARM when mortgage rates are abnormally high makes a lot of sense. Doing the same when mortgage rates are at or near all time lows, with the Fed still tightening does not.

Yet people do it, and in doing so, they completely mismatch the timeframe of their assets and debt. The reason is that ARMs, even conventional ones, are cheaper to service in the short term, so they are chosen by people who can't afford the payment associated with fixed mortgages.

There are various degress of speculation and risk. I'd agree with your assessment that 20-25% of purchases I see in SoCal and Las Vegas fit into the category of "pure speculation." There's another chunk, at least as big, that falls into the category of "not purely speculative, but depending on long term price appreciation to get them out of the hole." The friend I cited in my blog entry from yesterday fits into that latter category. He says he thinks he'll be fine because he only needs 3-5% appreciation for the next few years in order to get out of the worst pieces of his financing puzzle.

Not sure if you saw this item from the LA Times on Sunday:

The quote from "economist" Lereah is scary.


leewhee said...

(I believe this is regional. On the coasts it's insane. My friends in Utah and Ohio are far more rational and conservative.)

It's easier to be rational when your local market is rational

Here in California, irrational markets (boom/bust) lead to irrational decisions.

I ran a communications biz in SF during the dotcom daze. Talk about irrational. Since I wasn't 20, and had seen a few things before, I had a pretty good idea about how it was going to end. But it was extraordinary how many young people drank the Kool-Aid. They truly believed it was sustainable, all evidence to the contrary. They assumed that making $75K-$150K right out of college with a B.A. in English made perfect sense.

I don't expect housing prices to go the way of dotcom stock prices here. RE has a built-in value based on imputed rent/income. But right now in the Bay Area, that imputed income is about 30-50% of current valuation. So there is plenty of room for prices to come down. I expect 25-30% nominal declines over a period of years and up to 50% real declines (vis-a-vis inflation) over a longer period.

stealthelephant said...

The Fed, stock market analysts, and trade officials attempt to explain real estate as an aggregate market. This is misleading and tends to give listeners on both sides what they want to hear. I believe most of Jeff's readers will admit there are regional bubbles that have disproportionate effects on the market as whole. Just because you're not experiencing rampant housing inflation in Austin, TX or Topeka, KS doesn't mean investors ought not to be concerned about south Florida, California, Chicago, or New York city/burbs markets. Chris Fischer's point is exactly the right one. Furthermore, real estate prices are sticky because of the time lag for price discovery. It takes a long time for the gas to come out of the bag. There is no selling climax or instant liquidation as there is in the stock/bond/commmodities markets. Hence, the aggregate consequences of speculating home/condo buyers will take a much longer time to play out on the economy, the stock market, consumer spending/demand, credit delinquincies, bankruptcies, etc. One may expect a few markets to end with bangs (those levered to condos) some with whimpers (Sacramanento perhaps) but I expect others will experience something akin to a frog in still water slowly heated up to the boiling point. The Joe-Schmo speculator won't know he is cooked until somebody sticks a fork him.

Aaron Koral said...

You know what else is interesting? I don't know what it is like in other neighborhoods, but here in Mt. Prospect, IL. I live next door to a condo complex. For every one for sale sign that is "broker listed" (i.e., Century 21, ReMax, et. al.) there are at least three or four signs that are FSBO. If this FSBO trend is popping up around the country (for condos as well as houses), what does this mean for the future earnings growth of companies like CD and IACID? Shorts, anyone?

Jeff Matthews said...

aaron: I notice a similar trend in parts of Connecticut, although not at a 3 or 4 to 1 ratio.

I expect the Craigslists of the world will disintermediate the housing industry the same way they are doing to the classified ads business, eventually.

Little Billy said...

Just a little info about what I see from the front line. I work as loan officer for a regional bank in New Jersey and as soon as it seemed that the amount of home equity credit lines were on the decline, the bank had lowered its income standards. As of right now, If you have good credit score,say 675 and up, we can do a credit line at essentially no cost to customer for up to 250K without income verification. I have seen $9 hour security guards ask to take out a credit line so they can make 200K just like their buddy did last year flipping porperties. This scares me. Since they only have to make interest only payments, they fail to adequately assess the risk involved in doing this. If rates on mortgages actually increase in the future, and home values do indeed fall, many of my customers will essentially own a enormous tax deduction. The effects of giving people these credit lines is like giving a monkey a machine gun.

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