Housing Bubble 2

Surging home values, affable financing, market manipulation—Sacramento's seen it before. But how will things end this time around?

Frustrated first-time homebuyer Chris Raynes (right) meets with Century 21 real-estate agent Stephen Costello at a Citrus Heights open house. Raynes has put in six offers on homes in Sacramento County, but can’t compete with a bullying crush of cash investors.

Frustrated first-time homebuyer Chris Raynes (right) meets with Century 21 real-estate agent Stephen Costello at a Citrus Heights open house. Raynes has put in six offers on homes in Sacramento County, but can’t compete with a bullying crush of cash investors.

photo by Steven Chea

Crowded around a Natomas porch with more than a hundred open-house regulars on a sunny Saturday in April, Chris Raynes waits for his name to be called.

For more than a year now, the first-time buyer has unsuccessfully tried to join the homeownership ranks. Despite a chunky savings account, devoted real-estate agent and solid lending company, a mysterious crush of cash-fat investors keep elbowing the 43-year-old state worker out of the way. Hundreds of aspiring homeowners can feel his pain.

“I live in Natomas. It was swamped by investors,” he told SN&R. “And the ridiculous part is [many] weren’t from California. They were out of state.”

A lifelong renter, Raynes missed out on the first housing-bubble blockbuster that dropped six years ago. His mother, who now lives with him after losing her home to the banks, did not. But Raynes has a front-row seat for what may end up being the soul-sucking sequel. And like most sequels, it’s all about maximum commerce and shock-and-awe thrills.

The Sacramento region is one of a number of markets nationwide that “are in danger of some minibubbles,” observed Daren Blomquist, vice president of California-based real-estate marketplace website RealtyTrac.

The premise of “Housing Bubble 2” is dual-pronged: As investors gobble up cheap real estate—in sometimes shifty fashion—they shunt regular buyers to the side.

And while banks seem to be clearing their foreclosure portfolios at a steady clip, big-money investors buy these properties, hoarding them and artificially boosting home values. This market manipulation makes the inventory appear shallower than it is, creating a bubble that could pop once prices hit an inflection point and sellers flood the market.

After years in the foreclosure graveyard, median home values in Sacramento County streaked to $218,750 last month, an 8 percent improvement over February and a 32 percent high jump from last year. How long before the gamblers cash in their chips?

“I’ve been doing this a long time, and I’ve never seen a market like this,” said Tom Pool, spokesman for the California Department of Real Estate. “The investor with cash is king.”

In the meantime, people who would buy homes if they could are trapped in increasingly expensive rentals, said Sacramento Housing Authority executive director Bob Erlenbusch. Some lower-income renters get priced out of that market altogether and end up on the streets, he added.

For the first time since maybe the Great Depression, both property and money are cheap, but it’s the rich who benefit, not regular folks like Raynes.

Dirty deals done dirt cheap

The cash-for-homes trend exploded in 2008 and streaked to a 10-year high in December 2012, when cash buyers accounted for nearly 40 percent of Sacramento County’s home sales, according to the Sacramento Association of Realtors. Since then, these buyers, most of whom are investors looking to rent or flip purchases, have continued to rule the market, accounting for 39.5 percent and 36.4 percent of all home sales in February and March, respectively.

“I feel for all the people in the world like me trying to bust into the market,” Raynes said. “It’s hard.”

And even harder when not everyone operates on the level.

Since 2009, Gordon Cuffe has run www.sacramentowholesalehomes.com. A veteran of the real-estate trade, he acts as an intermediary between individual investors and real-estate agents looking to unload single-family homes priced below $150,000. He gets alerts from realty-listing website MetroList the moment such properties are listed in Sacramento and Placer counties. Lately, though, these listings are phantom ones, disappearing almost as quickly as they go up.

That suggests a voracious investor appetite for low-cost real estate, but also something more insidious.

Horror stories abound of agents not listing properties until after they’ve tipped off an investor, several industry insiders told SN&R. It’s a practice known as “pocket listing,” Blomquist said, because it allows the agent to make money off of both listing and sales commissions.

“Several hundred homes never see the light of day,” Pool added.

But why would sellers take the first investor offer they solicit when the market is witnessing such sharp gains?

“It could be a greed, money, back-pocket type of thing,” Cuffe suggested.

It’s also a comfort thing, according to real-estate and banking representatives. Sellers and real-estate agents are more apt to accept cash offers because they dodge the uncertainty that comes with banks or lenders vetting loans that may get scuttled 10 days into escrow.

“These guys have been starving for a long time,” one local bank manager said of the realty crowd. “Now they’re cutting the deal any way they can.”

The manager, who wasn’t authorized by his employer to speak publicly, actually has firsthand experience. Last December, the manager put down the highest bid on a house in Lincoln. But the bank that owned the home accepted a lower cash offer, the manager said, for end-of-the-year tax purposes.

The manager ended up getting the house, though, when the investor turned around and cut a deal for the higher bid price. Without laying down a single dollar, the investor pocketed 60 grand doing what’s called “double-ending the deal,” said Blomquist.

And while that all may be scummy and downright unfair, none of it is actually illegal, Pool said.

That’s not to say his office isn’t seeing a growing number of complaints.

The California Department of Real Estate is the regulatory agency responsible for licensing real-estate brokers and salespeople. There are 413,000 such licensees in the state, down from a high of 550,000 when home prices peaked.

Even with fewer licensees, however, Pool said the department set a record last year in handing out disciplinary actions, “and we’re either on pace to match or exceed the previous year.”

An unprecedented 1,109 real-estate licenses were suspended, surrendered and revoked in the fiscal year ending June 2012, a 100 percent increase compared to five years earlier, when there were actually more licensees. The department also delivered a record 213 desist-and-refrain orders that same year, a whopping 170 percent increase over 2007.

Through the first three months of this year, the department handed out 198 disciplinary actions in the Sacramento region alone.

Even with the increasing rebukes, Pool’s office is starting to see more applications from people trying to get into the real-estate business. The money is just too good.

Unless you’re an average buyer, of course.

Raynes has submitted a half-dozen offers, including one he compared to “online shopping,” because he rushed to email his bid before a bank’s East Coast deadline. But each time he’s been burned by a faceless investor with a briefcase full of green.

Charting the shadow

The key to whether Sacramento is in for another housing bubble and bust comes down to how large its “shadow inventory” is.

The term refers to the number of bank-owned housing units that have yet to be put on the market, and it’s a difficult figure to track—hence the name.

Since 69 percent of homes that start down the foreclosure road end up being auctioned, sold by the banks or returned to them via short sales, industry watcher RealtyTrac considers all homes going through the foreclosure process as part of the shadow inventory.

SN&R employed a more conservative method, counting only homes that were actually foreclosed. Taking that approach, a shadow does extend over Sacramento, but it’s lighter than in other parts of the nation.

That could change.

Re/Max Gold real-estate agent Harold J. Frink (center) gives Micah and Kristine Lacy a private tour of a home in Carmichael. To level the playing field against rich investors, Frink will only sell homes to those who attend his open houses.

Photo by Steven Chea

Through the end of March, there were 69,000 bank-owned properties in California. “That’s a pretty high number still,” Blomquist allowed, but it’s down 28 percent from a year ago and way off the November 2008 high of 245,000.

More telling is this figure: Over the last 10 months, banks are selling off this inventory at a rate of 25,000 homes per quarter.

In the Sacramento area, there were 5,816 bank-owned homes at the end of March. Banks are selling an average of 2,381 such homes a quarter—or roughly every three months—giving the area a bit more than a seven-month supply before that inventory is depleted.

“There doesn’t appear to be a lot of holdback [by the banks],” Blomquist said.

By comparison, Florida has a 19-month shadow inventory, even though the state is turning foreclosures into sales at a speedier clip than either Sacramento or California.

So if the banks are dutifully unloading their supplies, where’s the bust coming from?

Blomquist said it’s the bulk-buying institutional investors like Blackstone Group LP, which control large swaths of this housing inventory and may be waiting for the right time for a massive sell-off, flooding the market and drowning prices.

“Yes, I do think that’s a possible risk down the road,” Blomquist said. “Hopefully these investors are smart enough to not sell this inventory all at once, but you never know.”

Media outlets earlier this month reported Blackstone’s $200 million acquisition of more than 1,200 homes across the Sacramento region. The company has turned most of these homes into rentals—for the time being.

A sudden Blackstone sell-off would have “a very big impact,” Blomquist said. It could submerge a number of current and new homeowners in negative equity, especially if they benefited from Federal Housing Administration loans that only required 3 percent down payments.

“A group of homeowners may be stretching themselves to buy in this market,” Blomquist said. “There is some risk that the values could dip.”

But this wouldn’t cause a new foreclosure crisis on its own, Blomquist believes, so much as a minibust that’s destined to be part of our volatile recovery.

Ironically, what could make the road ahead even bumpier are new consumer-friendly laws slowing down the foreclosure process.

Right now, it takes California banks an average of 335 days to foreclose on a home, which may seem like a long time, Blomquist said, but is nowhere near the 853-day average of Florida, where the shadow inventory looms largest.

Florida’s shadow inventory is so large because every bank foreclosure has to go through a lengthy court process first. This means there’s a large stash of soon-to-be-foreclosed homes that will flood Florida’s market at some point, watering down values.

While California isn’t one of these judicial-foreclosure states, it did recently enact the California Homeowner Bill of Rights, which went into effect in January and halts the foreclosure process for occupants trying to refinance their homes.

It’s too early to tell what the new law portends in California, but Blomquist said a similar law adopted in Nevada in October 2011 caused something of a boomerang effect, hindering foreclosures that should have probably entered the market two to three years ago. The delay has the side effect of making it appear there are fewer homes to buy than there otherwise will be, artificially juicing values.

RealtyTrac is watching to see whether, now that these delayed foreclosures are finally coming to market, values will dip with them.

“It’s hard to reason against the law when you have so many examples of lenders foreclosing on people who shouldn’t have been,” Blomquist said, “[but] it’s one of the reasons we’re so concerned with California.”

Buyers’ exodus

Back around the Natomas porch, Raynes gets the one thing that was missing from all his other failed purchase attempts: his foot in the door.

On this afternoon, he finds himself at a modest one-story residence in a neighborhood hugged by a community park, perfect for a first-time homebuyer. The owners are going through that rare real-estate agent who will only consider bidders that actually show up for the one-day open house. On Saturday, April 20, about 140 guests signed in and clustered outside to be called in for a one-on-one tour. Interested buyers were also required to submit personal letters describing their interest, something Raynes has done for every home he’s submitted an offer for. It took three hours and 20 minutes to accommodate each interested buyer.

The personal touch was Harold J. Frink’s doing. A 12-year veteran of the real-estate trade, Re/Max Gold’s Frink does this to give buyers like Raynes a leg up over the rich investors, who usually skip the open houses and phone in their winning offers.

“Most [real-estate agents] don’t really care, [but] I want everyone to see the house,” he told SN&R.

“All-cash buyers have had a little bit of a stranglehold on what’s being sold out there and pushing the first-time buyers to the side,” Frink added. “[But] at a certain point, the cash buyers are going to slow their roll.”

That’s already starting to happen to a certain degree, the real-estate agent believes. At the end of the afternoon, 30 offers came in, five of which were for cash. A home Frink sold around Christmas attracted 17 cash offers.

Raynes’ bid was one of the 30. He thought he had a pretty decent shot this time around. He offered $24,000 above the $215,000 asking price—good, but, as it turns out, not good enough.

“This last house, I think it was my best hope,” he reflected after learning his offer wasn’t accepted.

This is Raynes’ first foray into the cutthroat real-estate market. He started bidding last spring when he felt home prices couldn’t drop any lower. A current renter in River Park, he’s since widened his search beyond established homes and short sales—with all their required paperwork, Raynes quipped they should be called “long sales”—to include new constructions, even though it’ll mean waiting the better part of a year to move in. He’s scoured College Greens, Elk Grove, West Sacramento and Natomas, where he moved to attend Sacramento State in 1990 and has considered his home ever since. The Bay Area native would prefer to stay here in the floodplain capital, but knows he can’t be picky. Not in this ruthless climate.

“It is frustrating because the industry is so offset. There are so many more buyers than there are homes,” he said. “It’s all over in Sacramento.”

Competing fortunes

Ross Hendrickx lives in a home in Del Paso Heights that’s currently worth less than he paid for it. He’s not in danger of losing it, but he is waiting for the market to rebound to where he’s no longer underwater and might be able to sell it for close to what he put down.

As a Roseville-based title officer who deals with short-sale and foreclosure properties, Hendrickx sees a lot of clients who are worse off. They’re just barely treading water and hoping the banks will agree to short sales. But because the market is climbing and values are up, it’s more likely these banks will just foreclose, he says.

“They gamble, and they get foreclosed on anyway,” Hendrickx said.

It’s a fragile web, the area housing market. Each pluck of a strand—by a real-estate agent on the make, an investor looking to profit, a builder gathering entitlements, or a buyer trying to muscle their way into the bidder’s bazaar—reverberates through the entire tapestry.

Yank one strand too hard, and the entire fabric snaps, Blomquist says.

Pool thinks there’s enough pent-up demand that when the shadow inventory is released, there still won’t be enough to accommodate interested homebuyers. The bubble may flutter, but it won’t bust.

But no one knows for sure.

While rising home prices can’t come fast or furious enough for the foreclosure-endangered, there is a risk that prices, if spiking too rapidly, could arrest the market before it has time to heal. Prices are already growing too rich for investors, Frink reminded.

“If this clip keeps up, it could price first-timers out of the market,” he added.

Leaving those like Raynes waiting even longer for their ship to come in.

“I’m 43 years old, and I’m finally trying to get my feet wet,” he told SN&R. “I’m fortunate I wasn’t ready [to buy a home when the bubble popped].

“But now I’m ready, and so is everyone else.”