Is it just me, or does the 5:30 commute on 395 from South Reno to I-80 seem lighter to you these days? Yesterday I had lunch with some colleagues at a an upscale restaurant in South Reno. I arrived at noon and ended up waiting a half hour as the rest of my party was running late. The restaurant was near empty. By the time my party arrived at 12:30, I think only four out of 30 tables had people at them, eating lunch. This fine restaurant used to be filled with professionals. I hope a lunch crowd this small isn’t typical for them because if it is, the business won’t be able to support itself.
The other day I took my daughter to Meadowood Mall so that she could pick out her birthday present. All the stores were open, but very few people were out shopping. I don’t know if that’s normal for a Monday after 5:30 pm, but my daughter noticed immediately that no one was around and remarked that she’d rather shop on the weekends when there were more people.
That same evening we hopped over to the Sierra Summit, where again, hardly anyone was out. The Abercrombie store was fully stocked with four employees, lots of inventory, pricey halogen lighting, an expensive stero system, and we were the only ones in the store. As a former business owner who used to run payroll and pay all the bills in a retail location, I cringed on behalf of whatever corporation owns this store and wonder how long this can go on.
I had a long conversation with my financial planner back East who manages my 401K. He was so concerned about the sorry state of the credit markets, the housing markets, and all the ripples yet to unfold throughout US and world as result of this mess, that he called to suggest another line of income I could pursue to help me get through these next few years. I wished I had recorded the conversation for podcast because he was so well informed… but then again, for you regular readers of the blog it would just serve to confirm what you already know.
Noah Rosenblatt over at Urban Digs in Manhattan recently posted an update on the credit situation from the front lines.
Meanwhile, back in Reno, 89511 is beginning to seriously correct. I’ve seen a couple of bank-owned properties hit the market recently at real lowball offering prices. One, 770 Sandoval, a 3000+ sq ft home in Southwest Vistas, decent inside, hit the market at $499K, producing at least four bids for its banker owner. My clients bid higher than asking, but not high enough, and another party walked off with the escrow. I imagine this property will close in the lower-mid fives, but we shall see. Its cousin, 410 Octate Circle, another bank owned property, at 2500+ sq ft recently closed for $490K. Even Arrowcreek is not immune, as one of the bank owned Bella Terra homes listed for $200K less than the two neighbors for sale down the street, someone promptly stepped in with a strong offer and opened escrow. Just perusing MLS sales in that area since March 1, I see 18 sold, 14 of them under $1 million. Of those 14, the average sale price per square foot was $190, with a low of $153, and a high of $274. That’s pretty dismal for Area 165, one of the most popular, upscale neighborhoods in town.
But the big shift I’m seeing now is that banks are getting serious. Once they take back the keys, they list them low, respond quickly, take the best offer and open escrow. No more hemming and hawing… they seem to finally be getting down to business, and this will be the year that they blow them out the door.
Buyers in this market need to be poised to pounce on these best deals, they need to be prepared to compete and they need to be highly qualified with fantastic credit scores and 20% down. Sellers, I’m sorry, but if you have bank owned properties in your neighborhoods they will be comp killers. Until we flush the foreclosure pipeline, banks will drive down prices to meet demand.
smarten
Wow, you’re now seeing that banks are getting serious?
So my questions:
Is there a proven path to get to the banks BEFORE they list their REOs with their agent of choice? If so, IMO that’s the direction to go.
Are you able to determine from your data whether the banks are taking back purchase money financing as part of the purchase price? Or are buyers relegated to pursuing their conventional alternatives?
Thanks for the useful info!
Sully
I agree that the banks are starting to get serious, but hardly blowing them out the door. They know the current situation is about 1/3 into its cycle. Better to lose 15% now then 25% later.
My source tells me to expect two more major waves, before this starts to smooth out. The next one may come as early as June. Short sales are still a joke and the bankers might be starting to panic.
I have seen some re-pricing in the areas I’m looking in, but not enough to warrant more than a casual glance.
And yes, sellers will have to compete with the bank REO’s and will have to price accordingly – or get out of the way.
As for area 165, I think it was smarten that said there are only so many cardiologists and neuro surgeons in town that can afford this area.
But then, there is always the dumb, rich Californian. 🙂
Ann Onn
A couple of random observations: Traffic seemed noticeably light on South McCarran on a recent weekend; I wondered if gas prices were keeping people home. But Sierra Summit seemed full Sunday afternoon, and there were crowds there waiting to be seated or pick up meals at BJ’s Restaurant at dinner time.
Jimbo
Diane,
What you are seeing with your daughter is the effects of a regional and national recession. The retail sales numbers (or lack thereof) are lagging and therefore what you see now will be confirmed by news in the coming months ahead.
Throw on top of that an historic housing correction, record fuel prices, a falling dollar, a bearish stock market, poor consumer confidence, and you have a dramatic drop in the consumer wealth effect.
Nearly all recent recessions started with a housing crash, a spike in fuel costs, or a dramatic loss in jobs and job growth. We now have all three at once. For those who are calling a bottom in the real estate market – take heed. You may hit a pricing bottom at some point in time but where do we go from there? Most who want to call a bottom want to see the days of increased demand and growth again – which may be much father off then the bottom they seek.
MIke Van H
Hey Diane!
Maybe you just don’t hang at the hip places. I eat lunch at Amendment 21 downtown on average 3 times a week because it’s so close, and it’s packed every time. Starbucks still has a long line snaking out of it every morning.
I think a lot of people are starting to take sack lunches to work. Yes, that sounds corny, but it’s true. I have 5 business associates who all have bit the bullet, and taking home-made sandwiches to work instead of spending $10-$15 on lunch every day. And these are people who make upwards of $60,000 a year. So if THEY are hunkering down their spending, I would imagine the average folks who are in the $25,000-$50,000 range are REALLY hunkering down.
Regarding the traffic, or lack thereof, I think the answer is the price of fuel. People don’t venture out unless they have to, people are consolidating errands and shopping. I feel for anyone right now who has a car that gets under 29 mpg.
A lot more people are shopping online…you can save gas, get free shipping usually, and spend less than in a store. That seems like a no-brainer to me, unless one actually like the ‘process’ of shopping in a store (I do have a few friends like that). And Mondays aren’t typically prime shopping days in retail, in fact Mon-Tues-Wed are considered the slowest days of the week on average.
Tom
Mike referred to changed discretionary spending for people “…who make upwards of $60,000 a year. So if THEY are hunkering down their spending, I would imagine the average folks who are in the $25,000-$50,000 range are REALLY hunkering down.”
This trend can be seen at all levels to some extent. In the suburb of Los Angeles where I live, there are several upscale restaurants, with live dinner music in the evenings, which are now available on a walk-in and sit-down basis, rather than call in advance and reserve a table. Never before. This is in a neighborhood of physicians and senior partners at professional services firm, where all the kids are grown and moved-out, and these families are long-time owners with small remaining mortgages. Yet these people are cutting down on discretionary spending. I don’t think they have to do so, those neighbors aren’t people who are living on budgets. But they do seem to have changed routines. Everyone senses the economic uncertainty ahead; if that attitude continues to grow at all levels, than we could be going into a severe recession.
NAS
Diane-
Thanks for the “spoonful of reality.”
I live in an L.A. coastal area. A couple of things have caught my full attention about this economy/market:
My local shopping area is palpable with signs of distress. Between Talbots, Pottery Barn, and Restoration Hardware, only sales people were in the stores. The Sharper Image store has large, red banners declaring “store closing” sale. The big reality check was to have a friend call and tell me the house I sold two yearsago is back on the market. I hope the end results are positive, but at present, thehouse isn’t worth theprice for what it sold.
And, I hate to break the news, but most of the people I know with plans of retiring are postponing, hanging onto their incomes and staying put.
konvpalto
Diane, so what the advise of your adviser? Where is the next bubble?
BTW, see http://www.harpers.org/archive/2008/02/0081908
Lynne B
My husband and I go out to dinner every Friday night, and for the past two months or so we have not bothered with reservations and have not had to wait more than 15 minutes. It doesn’t seem to be any one particular restaurant but ALL of them, has anyone else noticed this?
Back2Basics
New bubbles:
According to CBS evening news, crude oil is the next biggest thing for investors, hence the $120/barrel sticker price (about $20 jump in one month). It was suggested that the oil bubble may eventually burst just as dramatically as the housing bubble.
Other possible bubble: grain. Story tonight on CBS news on how price of rice has doubled in about a month. Investors want something tangible to sink their money into, and because real estate isn’t it, now comes the next most essential parts of life: food and fuel.
DERRICK
slowdown? what slowdown! I still go downtown and gamble 4-5x/week, make a point to go out for lunch and dinner 3-5x a week.
My wife and I love to go to summit sierra now n then for shopping..( I love williams sonoma). Its great not dealing with any lines! Not to mention, that parking spot upfront I never seemed to snag is always available now!
did someone say slowdown? I just bought a new car too (2008 infiniti g-35) and are plans to build a pool in the backyard are still on track!
DERRICK
” the dumb rich californian” heh heh thats pretty funny I have to admit it.. especially when you consider the source!
thank god for the tech boom in the late 90’s huh!!
Bob
next bubble: alternative energy.
Darrin
Speaking of bubbles, this one is still bursting!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDyYp9o4DMGI&refer=home
Perry
Diane,
It looks like you were ahead of the curve. From today’s WSJ.
Restaurants Feel Sting Of Surging Costs, Debt
Perry
Someone claims to know how to predict the bottom.
http://www.oftwominds.com/blogapr08/RE-bottom4-08.html?ref=patrick.net
SmartMoney
Nice link Perry! That article makes a lot of sense and that is exactly why I sold my house in July 2005 for top dollar (I have been a renter since). And as we all know, when a bubble collapses, prices dont’ go to “fair value”, rather, prices fall below fair value (all bubbles have ended this way). So no doubt we have a ways to go before we see the bottom.
SillyRabbit
I walk to work most mornings, or ride my scooter in order to save gas or just get exercise. I cross Plumas St. at about 8:45 each day and have definitely noticed that there are fewer cars on the road. At first I thought it was a school break but then realized that there are more cyclists waving hello as well. As a frequent pedestrian, I’m glad there are fewer cars because they generally don’t stop for crosswalks and the air quality might improve a bit. Long-shot but I can hope that the price of fuel will encourage more people to walk or ride.
NAS
Perry-that’s a good article. I’d like to hear from contributors as to what they think
about the multiples in factoring the quality/return of the investment.
smarten
Okay, I’ll take a stab NAS.
By and large I disagree with Mr. Smith.
He states that we’ve reached the real estate bottom when we can “mak[e] a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates–and make a profit on day one in cash-accounting terms. If you can’t rent the property out for a profit from day one, it isn’t the bottom.”
The only way you can purchase anything in the San Francisco Bay Area [or high end Reno/Sparks SFRs]; rent it out from day one; and make a profit disregarding tax write offs; is to put up 50% or more of the purchase price as a down payment, and finance the rest at conforming loan amount owner-occupant rates. AIN’T GONNA HAPPEN. And this game plan has NEVER been the case in the San Francisco Bay Area in at least the last thirty years since I started purchasing property. Had we all been sitting around waiting for positive cash flow from day one, we would have missed many bubbles and bottoms, and we’d effectively be priced out of the market forever.
And it AIN’T GONNA HAPPEN in Reno/Sparks either! If everyone can purchase a SFR with a minimal amount down, at the bottom, as Mr. Smith asserts; and rent it out for break even cash flow from day one; THERE WOULD NEVER BE ANY RENTERS!
And here’s more news for Mr. Smith. In Palo Alto $1,500/month in rent gets you a room in someone else’s home. PERIOD! There are no small homes nor apartments [even one bedroom ones] that can be rented for this paltry sum [Diane will attest to this observation].
Remember, we’re talking about when the market hits bottom; not when it makes sense from a business proposition point of view to become a real estate owner-investor.
I submit that when we hit the SFR bottom in Reno/Sparks, you WON’T be able to purchase that home with 20% down; secure non-owner occupant purchase money financing; and rent it out for break even cash flow [disregarding all tax benefits] from day one. If I’m wrong, please remember to let me know because I’ll be a buyer every day of the week.
I’ve stated many times before that as long as the cost to rent remains a small fraction of the cost to own, especially in a declining market, it makes little sense to own. Only when that ratio exceeds 60%; or we’re in a rapidly appreciating market; IMO does it make financial sense. Given the dismal state of the Reno/Sparks SFR rental market, I can’t imagine the cost to rent/own ratio reaching 60% for a very, very long time to come. But that doesn’t mean we will not have long before rebounded from a market bottom.
Oh, I do agree with something Mr. Smith stated: “calling the bottom won’t be that difficult; it requires only patience and simple arithmetic.” That’s why I selected January 11, 2009 [see, it’s simple]!
Perry
Here’s another sign of the times. This is a pretty nice Granite Ridge home. It was previously listed and now is bank owned. The virtual tour may stop working soon as the listing agent switched when it went bank owned.
I was looking at the yard and thought how nice the yard looked and the he-lock it must have taken to get the job done. When I looked at the previous sales price I saw the old owner and connected the dots. Bugcia Landscaping did a lot of subs in Reno including mine.
http://www.visualtour.com/applets/flashviewer2/viewer.asp?t=1192579&sk=30
$603,900
MLS# 80006159
6580 Mahogany Ridge Drive
DERRICK
“And here’s more news for Mr. Smith. In Palo Alto $1,500/month in rent gets you a room in someone else’s home. PERIOD! There are no small homes nor apartments [even one bedroom ones] that can be rented for this paltry sum [Diane will attest to this observation].”
not quite smarten, A quick search I did pulled up about 15 apartments NOT shared houses for rent in palo alto for UNDER $1,500. try doing some research next time!
NAS
Thanks Smarten. Good info.
smarten
Derrick –
I know Palo Alto; I lived in the Bay Area for 30 years.
Palo Alto [as opposed to East Palo Alto (two very different cities)] is one of the most expensive housing places in the South San Francisco Bay Area. Median priced housing runs well in excess of Incline Village’s.
My comment was figuratively speaking. Even you with your big fat business man’s gas guzzling Lexus SUV and over improved Spanish Springs McMansion wouldn’t be satisified living in a $1,395/month Palo Alto studio apartment. Or do I have you pegged wrongly?
A $165K thirty year mortgage at 6% APY [a rate you’ll never get as a non-owner occupant] results in a monthly mortgage payment of just under $1K. Assuming a 20% down payment, you’re looking at a $207K purchase price. Even at today’s depressed CD rates, the $41.5K down payment loses about $112/month in interest income [of course for a stock market wiz like yourself, the loss of income on this down payment totals many times the $112/month]. Let’s throw in real property taxes of $150/month, real property insurance premiums of $65/month and just for fun, ZERO out-of-pocket closing costs and 100% occupancy; and I get $1,327/month in housing costs [exclusive of any income tax benefits].
So even in Reno/Sparks Derrick, tell me where can I purchase a $207K SFR that I can rent out tomorrow for $1,327/month?
Now let’s go back to my Palo Alto example. That mythical $207K Reno/Sparks SFR would cost you in excess of $1M. Of course then your monthly costs would be well in excess of $1,327 [your real property taxes alone would be roughly $1K/month].
So my point was and is that if you rely upon Mr. Smith’s reasoning, the housing market NEVER hit bottom. Given we know that’s not true, neither is Mr. Smith’s analysis.
Of course you knew this all along, didn’t you?
derrick
way to go out on a limb to insult me smarten.you can try to back out of you comments all you want.. but you were plain WRONG.. can you realize that? nahh I didnt think so /
derrick
also its cheaper to rent than own, thats why smarten pays 2,700/month for rent. nevermind my gas guzzling SUV which an infiniti g35 is not (more great research by smarten).
Just like you can assume nobody would be interested in the bungalows, and cabins for sale in lake tahoe for under 500k, hey wake up smarten not everyone has your taste or needs. but for you to even say something like that shows your arrogance SO WELL!
CalBoomer
If all Californians are so dumb, why am I reading this blog on a regular basis? It’s certainly not to read sarcastic comments from dumb Nevadans.
KingBud
As a prospective buyer in today’s market, I think you have to look at historical sales prices and the pricing of bank-owned properties like 770 Sandoval mentioned above to get a true estimate of fair value. And of course, the worst thing a buyer can do in the current market is overpay for a property, underestimating the degree to which prices will likely correct in the next several years.
According to Trulia, 770 Sandoval sold for 594K. In 2004, this property sold for 544K. That’s an annualized nominal return of 2.2%. The real return (which factors in inflation), would actually be slightly negative.
Think of all the Reno properties on the market right now that were purchased in the 500K’s-600K’s in 2003 or 2004, where the seller right now is asking 750K’s-900K’s, sometimes even higher. Even after the realization of the credit crisis that is continuing to evolve since last summer, asking prices in this segment often represent 30-40% premiums over 2003 purchase prices.
Using the 2.2% annualized return assumption, homes purchased for 500K in 2003 should sell for about 560K now. The 600K home in 2003 should sell for about 670K now. The 700K home in 2003 should sell for about 780K now.
For those looking at homes with current asking prices between 700K-1mil, I think the Sandoval comp (sample size of 1, I grant you) is important because bank-owned property valuations should represent the ceiling beyond which no buyer should be willing to pay any more for a property. I think many of these homes are still at least 20% overpriced, even in the current difficult credit environment, and sellers need to get real if they want to get their properties off of the market.
MikeZ
Using the 2.2% annualized return assumption, homes purchased for 500K in 2003 should sell for about 560K now. The 600K home in 2003 should sell for about 670K now. The 700K home in 2003 should sell for about 780K now.
A straight line extrapolation from ’04 onward presumes that ’04 prices weren’t already inflated. But the credit orgy in Reno was well underway in mid ’03.
Factoring in that additional price inflation puts the final resting prices (post-correction) even lower.
3 Wombats
“770 Sandoval, a 3000+ sq ft home in Southwest Vistas, decent inside, hit the market at $499K,. . .”
We saw 770 Sandoval in November when we first came to Reno looking for housing. It was well overpriced at that time being listed for $699,999 and had been on the market 538 days at that time.
The inside was ok however the yard was really more suited to Sir Edmond Hillary and Tenzing Norgay than a family. About 15 feet from the back door there was a wall of boulders, 35 to 40 feet high, that curved around the entire backyard so you were in a bowl of rock. Great if you wanted to open a private climbing school from your home.
I am curious what it finally sold for; the bank took it back at 594K. I think the 544K price in 2004 was over priced then, so maybe the market hasn’t really started to correct enough?
Sully
CalBoomer, I assume its my post you are referring to. If thats the case then I will wear the hat.
BTW, I’m a NATIVE Californian that spent decades there. Lived in my last house for as long as smarten claims to have been in the Bay Area.
Also, I made the comment with an adjective, read it again.
It was meant as a tongue in cheek, but now that you have opened pandoras box; with a population of 34 million, you can’t possibly think there aren’t any “dumb” Californians.
As far as sarcastism goes, whats your beef. If you spent even half the time I have there you would know exactly what I’m talking about.
So if you’re thinking of moving to Nevada, try Las Vegas area, the politics might be more in line with yours.
NAS
Wombats-
Washoe assessor site (still) lists the bank as the current owner. Curious to note the
previous owner’s name-been popping up lately on a lot of things.
MikeZ
He states that we’ve reached the real estate bottom when we can “mak[e] a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates–and make a profit on day one in cash-accounting terms.
Right… until rents degenerate further. I know, I know, like home prices, rents NEVER go down! LOL.
Economics 101, people: rents follow prices upward… and they follow them downward, too.