Elk Grove, Pot Houses, and the "Flipper Effect"

By Max and Agent Bubble

Elk Grove, CA is a suburb of Sacramento located in the southern part of the county. The last four years has seen Elk Grove more than double in size as thousands of new homes were built. Recently, Elk Grove was rated the fastest growing city in the United States.

Elk Grove has also been a hotbed of flipper activity. Currently, there are 341 flips on the market there, with 36 flippers in trouble. That is twice the rate for Sacramento County.

Recently, there has been a large number of major marijuana busts in upscale neighborhoods in Elk Grove. The Sacramento Bee has published several stories on the subject:

Police uncover pot farms in raids of two Elk Grove homes
Seven indoor pot farms raided in Elk Grove
Four people arrested in raid on indoor marijuana farms

We were curious about the neighborhoods these pot houses were in. Logically, you would think an illegal drug person (seller, producer etc.) would be attracted to neighborhoods with a lot turnover of residents. A flipper neighborhood would be the perfect place, since nobody who owns there really lives there, and the place is upscale enough that you wouldn't expect this kind of activity. Luckily, the Bee published the addresses or neighborhoods where the busts took place. So, we decided to look at the housing turnover in the last three years to see what would pop. What we got was the following map:


As you can see, each neighborhood was a hotbed of real estate transactions. The pot houses/neighborhoods had an average of 20 house sales, mostly in the last two years. Here is a close-up of two of them:


The news articles mentioned that the owners of the houses were suspected of being the drug people. So, how do marijuana-growers choose to finance their piece of the American Dream? How about with no money down:


(The question remains: if the DEA seizes your property during a drug bust, do they pay off the 100% mortgage after auction, or does the bank take the loss?)

Also according to the news articles, police learned about these pot houses after accidentally stumbling upon one when it caught fire. Subsequently, the police released a bulletin asking the public to report any suspicious activity they noticed in their neighborhoods. This led to tips which led to more busts.

It could very well be that these neighborhoods are stabilizing. Now that the residents have a stake in what happens on their street, they are paying more attention to stuff like this. However, it never hurts to do a little research before you buy. Just because the place costs $600,000 doesn’t mean there isn't a pot farm next door.

****Update****

There was *another* bust in Elk Grove on Castro Verde Way. Here's a map of the recent sales there:

Notable Listings

I come across some interesting listings from time to time and figured I'd share them with you folks. Look for more "Notable Listings" articles soon!

Here's a listing I came across when looking over some REO/short sale/pre-foreclosure properties over the weekend. It appears smart money management is a thing of the past.

8/29/01 - Purchase @ $354,000
7/30/04 - Refi @ $550,800
11/30/04 - Refi @ $646,000
05/31/05 - Refi @ $731,000
06/30/06 - Added second @ $40,000

6/16/06 - Listed @ $899,000
7/9/06 - Reduced to $875,000

Located down a private lane is this Spanish Retreat on 6.28 acres. Strong frame support this 4 bd 3 ba hm that was converted to 8 bd family home. Lot's of TLC needed - Bring you hammer. Sold in it's As-Is'' condition. Value is in the land and in the majestic views. Remodel to create your dream home!

Wow, only $875,000 for 6.28 acres of land and majestic views. Another thing that gets me is all of the spelling and grammatical errors. I'm no expert, but come on people, at least read it after you entered it in MLS.

Sac Bee Article on Short Sales

Article Link: http://www.sacbee.com/content/homes/re_news/story/14308559p-15198889c.html

Highlights:

Sam Webber had it all during the real estate boom. The former accountant bought old houses, fixed them up and resold them for more than he paid. It was a good independent living until four months ago when the bottom fell out of his game.

Now as home prices have declined 5 percent from last year in Sacramento County, Webber is what analysts call "upside down." He owes banks more than his two remaining fixer-uppers are worth. He's missed mortgage payments on each. Worse, he's tied up his entire savings and previous profits in remodeling the houses.

"The house in North Sacramento, I'm $305,000 into the bank, and it's worth $280,000. I'm trying to get the bank to agree to $280,000," he said. Webber says he has a buyer at that price. If the bank agrees, it would avoid not only the lost time and legal expense of foreclosure but also the financial risk of resale in a depreciating market.

Although mortgage bankers and federal agencies offer few statistics on the phenomenon, its re-emergence shows how hard, fast rules that normally govern the real estate game can become flexible as buyers and lenders alike teeter on the edge of declining home values.

Agents say many banks are being stern and even resistant as they gauge the depth of the slowdown. But most believe short sales will increasingly become a safety valve for sellers -- and source of better deals for some buyers -- as more investors or homeowners end up in Webber's shoes.

"I made a decision to do this as my livelihood," Webber said recently as he begins a job search at age 47. "All my income was coming from the houses. This time it's burned me. I've tapped out every dime I have."

Across the region, say 1990s-era short sale veterans, homeowners are facing serious financial setbacks from illnesses, divorce, job loss, and car or home repairs. But this time many also have risky financing because they borrowed to the very edge of their ability and took out home equity loans. In Watkin's words, they have an "albatross that's dragging them under" at the same time their home values are falling.

It's little wonder many are stressed. Last year up to 77 percent of capital-area homebuyers used riskier adjustable-rate financing to help them buy homes they couldn't otherwise have afforded. Many are falling behind on mortgage payments. In April, May and June, Sacramento, Sutter and Placer counties showed some of California's biggest increases in missed mortgage payments, according to La Jolla-based researcher DataQuick Information Systems.

Williams expects the game is just getting started. Recalling the 1990s, he said: "Twenty percent of the homes in Sacramento then were short sales. We had a five-year downturn. Prices dropped 25 to 30 percent, and a whole lot of people had no equity."

Sacramento Area House Listings Inventory For August 26, 2006

Inventory levels held steady over the last week, with a slight decline from 18,849 to 18,756:


Pending activity also held steady at 7.3% of market, which is only 1% higher than the Summer low of 6.3%:


So how are our leading indicators doing? After an interesting discussion over on Bubble Markets Inventory Tracking, I ran the following comparisons of flipper asking profit margin spreads between April and today:



More proof that the flipper market is deteriorating. In both counties, the percent of flippers asking for a 25-50% gain has dropped by half, and the flippers in trouble ratio has tripled. Interesting fact: If you are a flipper in Placer County that bought within the last few years trying to sell today, there is a 22%+ chance your are taking a loss. The number in Sacramento is not far behind at 20%.

I’ll add this indicator to my regular weekly statistics. I wonder how the flippers will do in the Fall?

Editor's note: Ooops. I did the posts out of order, so I'm tagging on the other graphs to the bottom of this post. Sorry about that!

Short Sale Activity

I started tracking short sale activity about a month ago. In the most basic form, a short sale occurs when a seller doesn't have enough funds to cover the selling price of a home. I've long felt that short sale activity would gradually pick up due to the creative financing epidemic we recently went through. Here's a snapshot for Sacramento County:



I can tell you with 100% accuracy that this number is actually lower than it should be. In our MLS system, there's a status that agents are supposed to use when entering a short sale so that it's clearly marked. I've seen countless listings where the agent simply adds "short sale" in the "Agent Only Remarks" section and leaves it at that. With so many new agents out there, I think most of them probably don't even know that status indicator is available.

Anyway, stay tuned for follow up reports on this very telling statistic.

Will Interest Rates Save the Day?

From today's (8/25/06) Sacramento Bee:

"Home loan interest rates fell for a fifth straight week, federal mortgage giant Freddie Mac announced Thursday, offering a sliver of good news for wary buyers and nervous sellers in the capital's troubled housing market."

"The dip announced Thursday means monthly payments on a $300,000 home are already $63 lower for buyers today than they were a month ago. The current rate is still well above a year ago, when 30-year mortgage rates were 5.77 percent. A $300,000 loan taken out in August 2005 cost $1,754 a month compared with $1,892 today."

"I think it has had an effect," said Bob Bronswick, president of the Sacramento-Tahoe region for Coldwell Banker Residential Brokerage. "We've seen a little spike in activity over the last 10 days. I'm not 100 percent sure interest rates have something to do with it, but something has stimulated buyers, particularly in the higher end."

"Folsom homebuyer Richard Laethem said he'll get a fixed-rate loan to buy a home in the $500,000-$550,000 range in coming months. But his belief that prices will keep falling still outweighed any motivation to buy now because interest rates had dipped.
"Right now the reason (we're waiting) is we haven't found something that we're really smitten by, really in love with," said the self-employed software support specialist. "The second reason is we're still afraid prices will drop more."

"Amy Crews Cutts, deputy chief economist at Freddie Mac, said Thursday that she thinks falling interest rates will eventually pry more buyers off the fence and into deals.
"My belief is we'll see a little mini-boom in the home purchases market," she said. "People who have held back thinking they can get a bargain, now they can get back in the market."
David Lereah, chief economist of NAR, called the lull in mortgage interest rates "unexpected" and in a statement, predicted it "could help stimulate the housing market."
But in Sacramento County, where median sales prices have dropped 5 percent from the same time last year, Bob Bader is not so sure. Bader, owner of Arden Mortgage, said he hasn't seen an uptick in mortgage activity after five weeks of falling rates.
"I kind of think the urgency factor for buying a house just isn't there," he said. "It's a welcome trend, but is it enough? Probably not."

Full Article: http://www.sacbee.com/content/homes/re_news/story/14307356p-15193991c.html

Call me naive, but I just don't see how a change in interest rates is going to reverse the housing trend we're seeing today. Most buyers are getting smarter and are starting to learn a thing or two from their friends who bought with creative financing and are now regretting it. Think about it, who doesn't know someone that's in over their head right now with their mortgage? And most of these folks have interest only, adjustable, or neg am loans. Look at it this way, when values were going up, people bought because they thought they could make some money. With prices dropping, people are now thinking they can save some money.

I have a Bay area client looking to buy in Sacramento right now. He has used me 5 or 6 times in the last 10 years to buy/sell properties. He called me about 4 months ago looking for a property in Elk Grove, so I took him around and showed him some listings. I also showed him some statistics on inventory buildup and price declines in the hopes of having him see that perhaps then wasn't the right time to buy. He saw my reasoning and now calls me every month to thank me for the information I gave him. He also asks if "now is the time" and I again give him some stats and let him decide. It pays to be reasonable and patient.

I suspect if any realtors are reading this, alarm bells may be going off. "Is he also telling sellers to sell before they lose money?" they might ask? Panic selling is the term you may be thinking of, and no, I'm not guilty of it. As a realtor, my job is not to advise my clients on any direction they should take, whether it's listing their property or lowering their price. However, I will give my clients information to better help them in making such a decision. I don't always agree with their decision, but I can rest assured knowing they had all the unbiased and available information at their disposal when they made it.

Yes, I drifted off topic there. So, will interest rates save the day? I don't think so. People may not necessarily understand real estate market dynamics, but they do understand trends. That's why so many people bought when the going was good, hoping to squeeze a few more bucks out of their recently purchased house. That's also why there's such a high level of inventory.

Looking forward to the August numbers!

CAR Sales Stats Released for July

http://www.car.org/index.php?id=MzY0OTg=

Just finished reading an article on the California Association of Realtor's home page regarding sales figures and median prices for the last year. The article left a lot of room for interpretation and assumptions, and one could easily finish reading the article and think things aren't so bad after all. I want to take a few minutes and give you my take on things and hopefully help you see what I read and learned from the story.

"Home sales decreased 29.9 percent in July in California compared with the same period a year ago, while the median price of an existing home increased 5.1 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today."

The drop in sales is no surprise as we all pretty much expected that. I honestly didn't expect nearly 30% though in just a year, but this does give some credibility to those viewing the market in less than positive terms.

"The median price of an existing, single-family detached home in California during July 2006 was $567,360, a 5.1 percent increase over the revised $539,840 median for July 2005, C.A.R. reported. The July 2006 median price decreased 1.5 percent compared with June’s $575,800 median price."

Ok, here's where it gets a little grey in my opinion. Your average realtor will read this and repeat the first sentence to their buyers they are helping to find a home for under the pretext that home values are indeed going up and now is still a good time to jump in the market. After all, 5.1% is still an attractive amount of equity gain in this market.

When I first read the stats about the 5.1% increase, I was a little amazed since all I've seen are reports of drops over the past year in the majority of California markets. I reviewed the numbers for Sacramento County, and then the light suddenly came on with respect to where the increases came from. Click on the link below and follow along good reader:

http://www.car.org/index.php?id=MzY0OTY

Scroll down to Sacramento County's listings. You'll see that of the 11 cities mentioned, only two reported median price increases for the last year (Galt and Rancho Cordova). What sets these two cities apart when compared to the other cities is the amount of new housing development that has taken place over the last year. For example, in the Rancho Cordova area there are a couple of new developments that have recently sprouted with some extremely large (4,000+ sf) homes starting in the $700K range. Up until those homes went up, you would be hard pressed to find a $600K house in Rancho Cordova. So, when you run the numbers, it should be easy to see what's really going on. The influx of large homes and their respective median prices has had a severe impact on the pre-existing median prices of homes in those areas.

Still not sure? Take a look at the other areas, Fair Oaks for example, which reported a 5.6% drop in median price. Last time I checked, there were maybe two or three areas in Fair Oaks that builders could find enough acres to build a few new houses on during the last year. Compare that to Rancho Cordova and Sunrise Blvd/Zinfandel Drive and you can see a vast difference.

I would suspect that the newer homes are responsible for the majority of median price increases around the state. I've yet to find an article that says the exact same house in the exact same neighborhood increased any value in Sacramento County over the last year.

Enough of that, I want to touch on that $567,360 median price for a California home. That is quite a bit of money! This same CAR article reported the 30 year fixed mortgage at 6.76%. Principle and interest alone are $3,683 a month. Add in insurance of $100/mo and property taxes of around $500/mo and you're now at $4,342 a month! I don't know about you, but that's quite a bit of money for a house payment. I think you may now understand the popularity of all the interest only and neg am loans. Just for grins, let's see what an interest only loan's payments would be on this same median price. The payment (interest only) is now $3,196 a month, nearly a $500 difference compared to the principle/interest payment. And how about those teaser loans, where they start out 2% less than the going rate and increase 1% a year? If we calculate the principle and interest payment on $567,360 at 4.76%, we get a payment of $2,963 for the first year.

Doesn't take long to figure out why people can only hang on to their homes for a year or two at best with these prices.

Appearances Are Everything

Hello everyone...A big thank you to Max for allowing me to be part of this wonderful blog. A little about myself: I've been a real estate broker for about 10 years. I've qualified for the Master's Club twice during that time and feel I have a pretty good grasp on the market for Sacramento County. However, I certainly don't share the same beliefs as the majority of my colleagues when it comes to the current situation of the real estate market. I like statistics and feel they are a good indicator of where things are headed. One of my favorite sayings is "Statistics don't lie, people lie" which about sums up most of the biased reporting we've been reading lately from some real estate bigwigs supposedly in the know. As Max indicated, I'll be submitting posts based on experiences I've had with clients, realtors, builders and any other folks I can think of that will provide some insight on the market conditions. Also, as a realtor, I have access to current MLS data, so I will certainly be running some numbers that give a good overview of any trends that I'm noticing. If there are any lists/stats that you as a reader would like to see, just post a comment or e-mail me at agentbubble [at] gmail [dot] com and I'll see what I can do.

Now, on to my first little tidbit, more of an anecdotal finding, but still interesting (at least I hope).

My wife called me the other day and told me her friend of many years was considering selling her house because she and her husband could not afford the payments any longer. The house is your standard tract home in a decent Sacramento neighborhood. It's 3,045 sq. feet, 5br/3ba. The owners paid $372,000 for it in July of 2003. They took out loans in the amount of $300,000 and $56,000 initially. The put a pool in during March of 2004 and refinanced the second from $56,000 to $119,000 (hey, pools are expensive!). They refinanced the second again in August of 2004 at $147,000. They're now into the house about $450,000. The good news is that the house will probably sell for around $600-625K based on the comps I ran.

I just got a call earlier that these folks made a call to a lender friend of theirs (I'm questioning the word friend though) and the lender suggested an interest only loan which would allow them to save a few bucks a month and still make their house payment. The sellers agreed that was a good idea and felt that in a couple years they would be able to refinance again into a fixed rate. When my wife asked her why she just didn't sell it now, take a profit, and go rent for a while, her friend replied "we'll be able to save $250 a month and put it back on the house as principle during the next 2 years, and we really don't want to be renters."

Nothing surprises me anymore. I have plenty of stories just like this and will continue to share them with you from time to time. I'm currently working on an interview with a builder/contractor/flipper that I know who has agreed to answer some questions on his view of the market. Based on our conversations to date, I think you'll be surprised at his take on the market.

Agent Bubble Joins Forces With Sacrealstats

AgentBubble, (aka Anonymous) has graciously decided to combine forces with Max at Sacramento Real Estate Statistics. He brings a wealth of insider real estate market analysis and commentary, and his contributions should provide an excellent complement to the data presented here.

Look for AgentBubble’s first posting very soon!

Sacramento Area House Listings Inventory For August 19, 2006

Inventory levels decreased slightly w-o-w for the first time since January in the Sacramento region, with 1% and 2% decreases in Placer and Yolo counties, and no change in El Dorado and Sacramento:


Regional inventory dropped by 48 to 18,849, which was still far higher than the population adjusted record of 17,913. While only three weeks long, this trend is highly suggestive of a market top, and we could be seeing an early end to the summer selling season in Sacramento. Not surprising, considering the relatively few number of pending sales in Sacramento County:


Market activity picked up only slightly over last week, with pendings up 1% from a low of 6.3% at the end of last month. Combined with a 5% drop in median house prices and a record low number of total sales, this does not paint a pretty picture of market conditions here in Sacramento.

Sacramento Region Home Listings Inventory: August 14, 2006

Inventory growth slowed yet again for the second week in August, with an increase of 339 house listings over the four-county Sacramento Region. This put inventory at 18,901, or 99 short of the all-time, ultimate, record-setting inventory high:


While inventory growth slowed, pending sales in Sacramento County were stagnant, sitting at 6.9% of total inventory. Coupled with reports of declining sales, it looks like overall market activity is slowing down. The next few weeks should be interesting.

Sacramento Area Price Level Inventory For August 14, 2006

Flipper positions continued to deteriorate across the Sacramento Region over the last week. Placer County flippers were still the worse off, with over 22% of all flippers asking at a loss. Sacramento County closely followed with 18%.

Since April 9, the Sacramento flippers in trouble ratio has more than doubled, going from 8% to 18% of all flippers.

Sacramento Region Home Listings Inventory: August 5, 2006

Sorry about the late posts this week. I am on vacation in the northern part of the Eastern Time zone, and apparently there are still places that never heard of things like “DSL” or “high-speed” connection. Needless to say, these two posts took an hour to make. I will be back by next week in my full high-speed glory, never fear.

Well, Sacto hit the usual end-of-the-month listing expiration binge, so levels were flat between 7-28 and 8-05. Consequently, I missed my 19,000 target projection. We have a decent chance of hitting it next week, however:


Also, pending sales showed barely any improvement over last week, managing a lousy 0.5% increase over last week:


For grins, I did a 2005-2006 Sac County inventory level comparison:


If we follow last year’s pattern, inventory should stabilize around September 30, level out over the month of October, and drop continuously until the end of the year. Last year Sac County peaked out at 9,986 listings on October 30. However, we are in uncharted territory, so old precedents might not apply.

Sacramento Area Price Level Inventory For August 5, 2006