Case-Shiller Bay Area Update: Value of $600k Home Falls to $341K... Predicted to Dip Under $300k by September

(Click Graph to Enlarge)
The January 2009 numbers for Case-Shiller were released today. I updated my monthly graph which includes the Chicago Mercantile Exchange futures data for the index.

As shown above the price of a home that was valued at $600,000 at the peak of the bubble is now down to $341,613 (nearly $16,000 less than last month).

More interesting is that according to the futures it will drop below $300,000 by September (>50%) and keep falling through the end of the year.

For comparison purposes, here is last month's graph:

Realtor Sings the Praises of Leverage... But Ignores the Downside

Back in February I linked to a Press Democrat article where a local agent, Logan Adams, was claiming that buyers realized that there was "no waiting any longer for prices to bottom out" for homes under $300,000. Anything under $300,000 was "gone".

In the comment section, 'Out at the Peak' was quick to link to several examples disproving this claim.

Given that housing prices continue to decline, I was curious to see what advice Mr. Adams was giving his clients looking to buy a home.

The advice at his website highlights exactly what I find so disturbing about some Realtors. Part of the reason the country is in the financial mess it is in is that Realtors over-hyped the returns on real estate. It is here, I feel, his website provides a case study of this practice.

He states that as a general rule housing prices go up about 5% a year, but if you take a second look it is actually much better than this. I'll quote him directly at length (click here and then 'Buyers' to access this page):

Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $40,000.

At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent.

Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.

Your rate of return when buying a home is higher than most any other investment you could make.

Did you get that? A "whooping twenty-five percent" return... "higher than most any other investment you could make."

Yes, leverage will increase your returns. But it also has a downside, namely, you can also lose more than you invest.

If the $200,000 home in the example above were to fall by 30% to $140,000 you would lose your down payment of $10,000 plus an additional $20,000. That's a return of NEGATIVE 300%. [And if you feel this is an unrealistic price decline please click here and here.]

If you are in the market to buy a home it's important to understand the risks. Obviously these risks get amplified by higher housing prices and lower down payments. There is no such thing as a free lunch, and as the last two years have shown if someone is pitching you an easy way to make an annual 25% return hold on to your wallet.

50% Decline at Windsor Town Green

Heading a few miles north to Windsor we find that condos on the Town Green have now fallen 50%. 538 Emily Rose Cir is a 3 bedroom, 2.5 bath is now priced at $250,000.

It last sold for $497,500 in August 2006.

With several other condos at the Town Green sitting on the market, it will be interesting to watch how long it takes for this area to find a bottom.

Median Sales Price in Sonoma County Down to $282,000

DataQuick just released their February 2009 numbers. Sales are way up over February 2008 but the median price of a home has dropped by $118,000.

More Price Drops

In January we took a look at two 'condos' on North St, one priced at $260,000 and another nearly identical unit priced at $180,000.

It turns out the lower priced unit wasn't quite such a deal at $180k. It has now fallen to $160,000.

So now we can definitively say that the first unit is at least $100,000 overpriced... and probably more. It is still on the market and can be seen here.

Comparing $2 Million Homes

Over the past few weeks we've looked at a few homes in Healdsburg priced around $2 million (here and here).

For that reason this post caught my eye about a 15-bedroom, 17-bathroom, 16,330 sq. foot home near San Diego that failed to get even one bid at $2.275 million.

There are a couple of lessons here: A) Just because you put money into a place doesn't mean you will get it back (this place cost $10 million to build) and B) Price declines around California are going to catch up with Healdsburg. Sure, Healdsburg is nice. But if someone were really looking to spend $2 million on a home an extra 14,000 square feet might get them to sacrifice location.

Here are the details (via Patrick.net):

It’s a bad sign when a new home that cost more than $10 million to build fails to attract even a single bidder at a foreclosure auction.

Yet that’s what happened Feb. 13 when Chevy Chase Bank put a 15-bedroom, 17-bathroom Encinitas property on the block with an opening bid of $2.275 million. The 16,330 square-foot home, which has a library, yoga room, swimming pool, fountains, lush landscaping and much more, is described by local foreclosure experts as the county’s current largest home foreclosure.

Sold!... No, wait... make that: For Sale!

The saga of 1720 Canyon Run continues. According to Redfin it was sold on Feb 26th for $382,500, making it the most recent sale in Healdsburg according to the site.

However, it is also the newest listing in Healdsburg. It was put back on the market on March 14th for $429,000.

If anyone has any insights as to what's going on with this place please enlighten us in the comments.

Will Healdsburg's Housing Inventory Surge This Summer?

Redfin has a great graph for Healdsburg showing the number of homes for sale in the city. I've republished it above highlighting some of the trends.

As you can see homes normally get pulled off the market in the winter months and then get put back on the market in the summer.

Are we set for a surge in homes hitting the market like years past? If so, this would make it even tougher for sellers. Notice that the current inventory of homes on the market is HIGHER than it was in the summer of 2007.

Updated Mortgage Rate Reset Chart

Here's an updated version of the mortgage reset chart via the Financial Times.

It really is amazing that this is just getting started and Sonoma County is ground zero.

Just look at these quotes from the article:

Sue Troll, credit analyst at T Rowe Price, who in 2006 forecast the subprime meltdown, describes Option ARM mortgages as “subprime on steroids with their underlying quality in many instances having been worse than subprime, despite involving higher quality borrowers”. She says approximately 80 per cent were low- or no-documentation.

Mr Tilson expects resetting Alt-A and Option ARM loans to push default rates even higher, further flooding the housing market, and putting further downward pressure on housing prices.

Another $2 Million Listing

Another multi-million dollar listing (actually $1,995,00) has hit the Healdsburg market. The details are over at Redfin.

Just like before, for only 30% down ($600,000) and $10,000 a month for the next 30 years this 3 bedroom, 2 bath on 1/2 of an acre could be yours.

Obama Housing Plan "does not bode well for the vast majority of Sonoma County homeowners"

From the Press Democrat:

What is known of Obama’s plan does not bode well for the vast majority of Sonoma County homeowners.

Under the plan, homeowners cannot owe more than 5 percent of what their homes are worth. Many Sonoma County borrowers bought near the 2005 market peak and are too far under water to qualify. The median price has been cut in half over the past 3 1/2 years, hitting $315,000 in January.

Update on Auction at 515 Tucker

For those interested in the details of the 515 Tucker Street auction, this came in a few weeks ago from Tom:

Went to the auction today. It was supposed to start at 1pm, however as the auction personnel were not on-site, it was delayed until around 1:20pm. Not great considering the rain. Once the auction personnel showed up, and after a few technical difficulties (Internet issues since they had an online bidder), the auction started. Although there were quite a few people there (maybe 20-30) only a few seemed to be serious bidders. The price quickly jumped to 600K, after it hit 700K, it could not be pushed to 800K so went in 25-50K increments and then to 10K increments. Final price: 760K plus 5% buyers commission.

The property itself is quite interesting and I am not sure what the buyer is going to do with it. It is currently three rentals. They could turn it back into one house (plus granny unit) but that will take some work. Also, the outside of the property looks good, but the inside (at least first floor) is in pretty bad shape. It will take quite a bit of work to get it up to standards. Then again, given the current rental rates of the property, they may just leave it the way it is, as the rent may almost be able to cover the mortgage.

Note that this was a home that was orignially listed for $1,175,000 in April 2008.