Thursday, October 18, 2007

Hot Market gets chilly in Bakersfield

Hot real estate market gets chilly in Bakersfield

Housing inventory quintuples as boomtown of 2005 returns to Earth

BAKERSFIELD, Calif. (MarketWatch) -- Just 12 months ago, this sun-baked Southern California city was one of the hottest real-estate markets in the country. With inventories at razor-thin levels, properties would sell in a matter of days, sometimes even hours, as multiple bids poured in on each home. "For Sale" signs were almost nowhere to be found.

Those days now are dust in Bakersfield's gusty winds. The housing stock nearly has quintupled and prices are virtually flat when compared to last year's levels. Home sale time-frames now are measured in months, not days.

"Yeah, we miss those times," Darrell Muhammed, a local agent, said of last year's market.
While average prices have yet to tumble, concern mounts that an ever-increasing housing inventory, coupled with coming hikes for variable rate mortgage holders, could send the market south in a hurry.

Trouble signs are everywhere. At Lennar Corp.'s (LEN:
Lennar Corporation

They compete with dozens of other new houses Lennar is building in later phases of the same development, which agents say makes the older homes tougher to sell. Six of the resales are within view of each other on the same street.

"It's very tough market," said Joginder Gill, the agent trying to sell one of the six houses. "If you look at past history, it's going to go way, way down."

Sudden rise
Tucked into the southeast corner of California's San Joaquin Valley about 90 minutes north of Los Angeles, Bakersfield suddenly became a hot real estate market two to three years ago when prices in the L.A. region skyrocketed out of reach for entry-level buyers. See full story.

Those variable mortgages with low initial interest rates catapulted most homes in the L.A. area past the $500,000 mark. Meanwhile, Bakersfield remained somewhat more affordable with a good selection of homes still under $300,000 for those willing to brave the long-distance commute, or others lucky enough to find work nearby.

The region also captured a lot of interest from investors looking to make a quick buck. As many as one in four homes bought during this time were from out-of-town investors interested mostly in flipping properties, experts say.

The city led the charge of eastern California towns like Fresno, Modesto, Visalia and Merced where home price hikes beat out more high-profile areas to the west such as Los Angeles, San Francisco and San Diego in percentage gains.

According to the Office of Federal Housing Enterprise Oversight, Bakersfield edged out Las Vegas in the first quarter of 2005 for highest average property growth with a 33.7% increase. Las Vegas was up 33.3%.

More recently, OFHEO ranked Bakersfield 19th and Las Vegas 83rd during its survey for the first quarter of 2006. For the first quarter of 2006, OFHEO said Bakersfield's average home price rose nearly 27% when compared with the year before.
Flat pricing?

Local experts say those figures are outdated.

Gary Crabtree, a local appraiser who compiles a monthly report on Bakersfield market trends, says median home sale prices in the region rose 2% in July compared with the year before.
The time that unsold inventory remains on the market has jumped 400%, from 1.7 months to 8.5 months. And the time homes have spent on the market has more than tripled, from 12 days to 38 days.

Even that last figure can be deceiving, Crabtree says. He thinks agents are playing what he calls the "re-listing game," or taking a property off the market and then putting it back on again so that the "days on market" clock starts anew.

One property he was eyeing spent more than eight months on the market. But through several relistings, it appeared to buyers as though it never spent more than a couple of months up for sale.

Crabtree, though, says the market should be put in perspective. Last year was extraordinary, with property values skyrocketing in the face of high demand and extremely low supply.
"We're back to being normal again," he said. "We're tracking right along with the rest of the state."

Leslie Appleton-Young, chief economist for the California Association of Realtors, said sales are down 30% statewide from what they were a year ago. She said the market is correcting but it's not recession-fueled. The interest rate environment remains favorable.

Simply put, the market that saw 40% jumps in housing prices the past two years has gotten a wake-up call.

"It's been completely unsustainable," she said.

To many, the Bakersfield situation was inevitable.

"Why shouldn't there be retrenchment in housing?" said Stuart Gabriel, director of the University of Southern California's Lusk Center for Real Estate. "It's appropriate that housing take a breather."

Competing with builders
Karen Siggel probably wishes it wasn't happening now.
She's tried to sell her spacious, two-year-old custom home in an east Bakersfield development for almost five months now. She's competing not only with other resale homes, but the builder in the neighborhood, Corky McMillan Companies, is offering incentives to move the new homes it's building.

So she's looking to do the same, carrying some of the closing costs for buyers, as well as other options.

"We've drastically lowered the price, too," she said. Corky McMillan officials didn't return phone calls.

Many agents insist the Bakersfield market isn't crashing. To them, it's simply behaving like a normal market with a reasonable supply of homes - more than 2% of the housing market compared with last year's levels that were a fraction of a percent.

"It's what I would say is balanced," said Don Cohen, president of the Bakersfield Association of Realtors. "You're seeing what I saw in the '90s but you haven't seen since 2000."

Chuck Doremus, a longtime Bakersfield agent, said sellers are getting a reality check.

"We're seeing people put out their price based on what things have sold for," he said.

Others, however, wonder whether the Bakersfield real estate market adjusted too quickly and will keep heading down. Agent Ryan McDonald said the jump in inventory is disturbing.
"I don't think it's normalized," he said. "I definitely think it's reverted to the buyers."

Price cuts
Gill, the real estate agent trying to sell the home in the Lennar tract, says it was about a year ago that the market started turning. He's about to take over as agent for one home that was put on the market a year ago for $950,000 -- a high price for the region. It, like many other homes, has been reduced several times. He's about to re-list it for $785,000.

Another house listed in late 2005 was on the market eight months. It had to be reduced from $390,000 to $345,000.

The Artisan/Terra Vista home sits on a street where five other houses are on the market. It was an investment vehicle that the owner now is trying to flip for a profit, but may end up having to cut expectations.

Complicating his job is the fact that Lennar keeps building, as do other homebuilders in the area.
"People like to go to the new homes," Gill said.

Lennar spokesman Marshall Ames said in an e-mail that "we do not comment on individual markets in between our quarterly conference calls [with analysts]."

Lennar is seeking anywhere from $365,555 to $461,555 for homes ranging in size from 2,148 to 2,969 square feet. It has 19 homes listed as available for sale on its Web site, but it may find it difficult to sell those.

Just a few blocks away, a tract built by Centex Corp. (CTX: is offering a wider range of home sizes at lower price points. A home at 1,821 square feet starts at $279,990 while the largest Centex offering measures 3,518 square feet and tops out at $433,990.

Centex officials didn't return phone calls.

No building slowdown
Despite the more competitive climate, it doesn't seem as if builders intend to slow down at all. Jim Eggert, a city planner, says there only are about 300 to 350 fewer building permits taken out throughout Bakersfield when compared with last year.

They're still out building, but I don't know if they're selling," Eggert said. "These prices have to come down a little bit. They have to."

One impetus for builders is that the region's population continues to grow. Metropolitan Bakersfield had 451,800 residents at the beginning of 2005. That grew to 467,900 a year later and is expected to reach 483,800 on Jan. 1, Eggert said.

Does it all mean that current trends will continue to snowball, sending the Bakersfield market crashing? The next 12 months should be revealing, said Crabtree, the appraiser.
He said the bulk of variable-rate loans issued three years ago will start to mature. That means buyers will start paying several hundred dollars more each month for their homes.

"I do think we're in for a period of some foreclosures in 2007," Crabtree said. A flood of resold homes could also hit the market.

"It could very well be that some of these people are looking at these interest rate increases and are trying to get out," he said.