Friday, February 08, 2008

Its not different here.

To understand this article, you need to first understand a little about the Case-Shiller data. Basically, it tracks the trend of regional real estate values based on the sales of homes that have sold before. The weighting is heaviest towards homes that sold more than six months after their last sale but recently.


When I sat down to write this article, my intent was to show how a bunch of different markets were progressing on their own. Instead I took the derivative of the Case-Shiller home vales and saw how the western markets are marching to their doom together. Similar percentage drops in value per month! Note that I've inverted the y-axis. A higher value means that the market is losing value faster. Notice a trend? We're no longer bleeding 'value' out west, its a regional flood!



Note: this data is averaged over three months with a two month lag in data reporting.

How can one explain how these five large metropolitan areas are moving in concert? Only Las Vegas seems to have done a little early jump in equity evaporation. Now they are falling together as if jointly pushed off a cliff.

These regions are now losing 3.0 to 3.5% of equity per month! All of them! Now I have to note a mistake on my part: I thought the peak equity loss for these cities would be 2.5% of the homes 'value' per month. So the question is, will the rate of home value lost, expressed as a percentage of the current home value, turn over toward the 2.5% I have been predicting for a long time? Or will we see a break away? I'm very curious to find out.

What about other regions?



DC is an interesting market. It, like the conjoined western markets, is a large metropolitan area. Its been slowly bleeding equity for a bit. But notice the uptick. Has it decided to join its western friends?

Why is this happening? Supply and demand. Here is the latest national inventory chart:



We now have an acceleration in the loss of home values across all of the metropolitan areas tracked by Case-Shiller. It appears that this equity evaporation is starting to go in phase but is not yet nationally falling at the same rate. Obviously, this is due to the tightening of the credit market. Now what's going to happen when the employment market weakens?

Got popcorn?
Neil

13 comments:

sm_landlord said...

Hi Neil,

That's not "equity lost per month" unless there is no leverage. Leverage works both ways, so I think it's a lot worse than it looks. Or did I miss something?

wannabuy said...

sm_landlord,

LOL. You're right. At 3% a month, whatever down payment... is already gone. So now its lost equity for the bank.

Got popcorn?
Neil

tj & the bear said...

Considering that Californians were the "equity locusts" that powered the rampant speculation in LV & PHX, it doesn't seem much of a stretch that the markets are synching/sinking.

IOW, IT'S ALL THE SAME PEOPLE!!!

wannabuy said...

TJ,

I was waiting for your comment. :)

This is why the nice areas will crash. All of the 'rich' and their multitude of 2nd homes are suddenly going to have to step off the HELOC train. That's not a fun thing to do at 250kmh.

Got popcorn?
Neil

Rob Dawg said...

This is the "stair step" I've been predicting. A sudden downdraft followed by a grinding multi-quarter 0.5-1.5% steady loss environment. This is going to trap a whole lot of ordinary folk who were thinking of getting out with their skin and nothing else.

wannabuy said...

This is going to trap a whole lot of ordinary folk who were thinking of getting out with their skin and nothing else.

Dawg,
I recall your predictions. What amazes me is the last drop on record, November, was higher than my previous predictions (which I thought were fundamentally based) and in November. Not the whack of January or February.

Got popcorn?
Neil

Bye FL said...

Hey Neil, why are house prices sticky in north Georgia, east Tennessee and many other states?

It's good to see prices crashing in FL, CA, AZ, NV but what about the rest of the states?

tj & the bear said...

bye fl,

Not speaking for Neil, but my take is that the level of speculation simply didn't reach the absurd levels it did here. Prices here were totally bubble-dependent. How else do you explain people buying at 10-15x income?

Not that there aren't excesses elsewhere, but I would suspect the prices there will be much more reactive to the coming economic downturn than the end of the bubble.

Have patience; they'll come down everywhere in time.

wannabuy said...

TJ,

You're analysis is good enough. The coastal cities were flipping havens. Maybe not in their own cities, but they invested into Phoenix and Florida.

Its coming down everywhere. This credit crisis is only in the 2nd inning.

Got popcorn?
Neil

smf said...

OK, Neil, here I am!

(BTW, don't use my name, I am in the industry.)

1. Relatives in Mexico City are having financial problems due to real estate...

2. Relatives in Ecuador were telling me about condos ($600K!) that are not selling.

The bubble went far and wide.

3. About 80% of the mansions for sale in the Sacramento area appear to be flippers.

4. Gained 20 lbs. from eating popcorn...

41cadillac said...

Any thoughts on SLC Utah? Thanks

Rob Dawg said...

Dawg,
I recall your predictions.


Thanks for that. I am in some never world where people seem to just slide over my contributions. Good to hear some are still listening.

Any thoughts on SLC Utah?

Nigel is eating his words. They are just a year behind most. Of course Nigel will say he is just a better market timer than anyone and only stayed bullish until the timing was just right.

wannabuy said...

Any thoughts on SLC Utah? Thanks

Huge bubble. As credit tightens it will lock step with the rest of the west.

3. About 80% of the mansions for sale in the Sacramento area appear to be flippers.

4. Gained 20 lbs. from eating popcorn...


ROTFL

I toured multiple mansion flips this Sundary for the fun of it. The Realtors (tm) of course knew we weren't serious. But to have six mansions on one block for sale was too much to drive by.

Oh, I was lazy. I know of two other areas that have concentrations of $5M+ homes built either on speculation or for flippers.

Schadenfreude does require more workouts. ;)

Got popcorn?
Neil