Sunday, August 24, 2008

Parallels Between the Southern California and NNY Real Estate Market

There was a good piece in Sunday's NY Times highlighting the problems of Merced, CA where 3 out of 4 homes sold recently were foreclosures.

When you hear about the stories of unbridled growth in Watertown consider the following:

"But hardly anyone in Merced planned very far ahead.

Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.

Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all. (Does this sound familiar?)

Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation.

And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.

“Owning a home is the American dream,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their dream.”"

It's a classic mistake in real estate. Professional developers saturate a market and let the individual homeowners take the hit down the road.

In the three years since housing peaked here, the median sales price has fallen by 50 percent.

Unfortunately, the impact of a weak housing market is wide and eventually, it will cut very deep. Municipalities around the country are starting to feel the pinch as tax rolls fall.

During the good times, Merced built up a $17 million rainy-day fund. Now the city has a revenue shortfall. “We’ll bridge that gap by using the reserves,” says James Marshall, the city manager, “but over time the bridge ain’t long enough.”

When you flip through the local paper and note the surprisingly high number of homes listed in Northern NY above $200k (and many surpassing $300k) consider that our median income is just slightly higher than that in Merced.

He was selling houses for $300,000. That means a buyer would have needed a household income of about $100,000 to comfortably make the payments. But Merced’s per capita income of $23,864 ranks among the lowest for metropolitan areas in the country. “None of us paid much attention,” Mr. Glieberman says.

It isn't an exact match to the NNY real estate market but the warning signs are on the wall - rapid increase in prices, limited change in fundamentals of the local economy and investors/contractors driving prices up.


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