Sunday, May 04, 2008

Quiet before the summer storm?

This is the time of year that the real estate market is in a transition from the Spring selling season to the summer selling season. Typically, 'knowledge workers' surge to put their homes on the market starting two weeks before school lets out to a few weeks after school lets out. So there is typically an inventory lull right now. A break if you will and we're seeing that in all of the inventory.

Sales data comes out next week and the week after. So I'm not going to discuss that as much as I planned. Basically, the forward looking indicators are up compared to a month ago. I still believe the stats are not pretty... But as best I can tell we're taking a few branches off the fall from the ugly tree; in other words, the market isn't pretty, but the fund injections seem to have delayed the day of reckoning from the inventory side.

Can we afford homes by historical standards?
Let's start by looking at afford ability. Wells Fargo has been calculating this the same way for an extended period of time. Search through their archives and you can find data going back decades:

Some areas are improving in the sustainability of homes. But none are back at the historical norm. If you look at the link, median incomes have gone up only gone up a bit since 2000.

Now what about Case-Shiller?

You can see that by historical measures, prices are still high but as a group everything is falling. There is not one city in the 20 monitored that hasn't lost value in the last six months. Only three remain at 200% or more of their January 2000 prices. To think, incomes have only gone up by ~20%... That implies more correction is required. Some of the 'less bubbly' areas saw incomes remain flat, so that isn't necessarily good.

I like to plot the trend of price drops per month in a number of markets. What we see is a flattening off in the price drops. Basically in the 2.0% to 4.0% range with two outliers in Las Vegas and the Bay Area. I could only speculate on the SF Bay Area at this point. Las Vegas is so overbuilt that it was doomed to an extraordinary collapse.

But notice something about DC. Of the large markets identified as bubble markets, it looks like it is having the least pain. Its quite possible that it has matured into a large enough urban area that the fraction of the population that can afford a home has dropped (a la LA, NYC, and the bay area). I could only speculate on where its final affordability plateau will be; but I do not expect it to ever hit 80% again! (Yes, a bear stating a city might have moved to a new threshold.) Where? Its not ready to hit LA's 50% upper bound. Not this cycle. Perhaps prices will stop their decent at 60% to 70% affordability.

But then consider LA... If any city has a risk of breaking the pattern and going to very fast price declines, it would be the least affordable city in the nation (world?).

National Inventory

Its ugly, but it hasn't yet broken into uncharted territory. Its unseasonal... and scary. Note: Ziprealty only covers about 1/3rd of the homes for sale.

LA, in the south Bay

Inventory isn't break away... but its high. This is a classic area where traditionally the inventory builds up pretty quickly as the kids are about to leave school. So now that I know to look for that phenomenon... I'll make sure to get a few data points a week this year! I'm amazed at how fast home prices have been dropping despite inventory not being as super high levels. I think that single digit affordability and banks now having to verify loan qualifications might just be doing the damage. Probably the same effect is being seen in the SF Bay Area.

DC and Houston

Houston is easier: Its income has been flat for 7 years, but so were prices (ok, Dallas is up 20%... Nearest city in Case-Shiller)

DC has high inventory too. But the distribution is interesting. I project that 2.5% to 3.0% price declines per month will be standard for a while until afford ability breaks 50%.


What about that distribution of inventory? Its still high inside the beltway. I pick Arlington because ziprealty data and MRIS data align (they do not for Alexandria city).

The inventory would be high on its own, but not extreme. But there is that large outside the beltway inventory that is becoming attractively priced. This is worth watching.


Phoenix was late to the game, shot up quickly, and is now plunging back down to earth. While the mega inventory is no longer flirting with multi-year levels, until Phoenix can pull inventory below a year, its price declines will continue to hover at high levels. But afford ability is lurking. The big unknown with Phoenix is that so much of its employment is tied to growth. With another year of slowing growth ahead... do we have a death spiral a la Las Vegas?

That's it for this weekend. (Ok, 00:20 Monday...)

In quick summary, inventory remains high, but below record levels. We're seeing the normal early May drop in inventory but we should expect to see a ramp up of inventory until the end of the summer selling season in most areas. Case-Shiller is pointing to rapid declines in similar home prices. I'll be very curious to see if there is any 'spring bounce' break in the price declines.

Overall, its a waiters market.

We're not seeing any signs of a turn around. If anything, its only evidence that the rate of pain increase has halted.

Got Popcorn?


Rob Dawg said...

Who reports inventory? Who wants to control information? Inventory is no longer reliable. Pocket listings, failure to enter REOs in the MLS, etc.

This is the victim falling off the cliff and bouncing off the cliff wall and reading the results as a slowing of the fall.

wannabuy said...

This is the victim falling off the cliff and bouncing off the cliff wall and reading the results as a slowing of the fall.


It could be. I decided to keep the article from getting too long and discussing hidden inventory. Where I want to buy there are eight homes *that I know of* that would go on the market tomorrow if the prices just went back up 5% from today's prices. Not 5% above peak... but 5% above today's prices.

Those home will hit the market... the owners are being greedy and will pay the price of greed. I didn't put 'owner' in quotes for per propertyshark, four of the eight own outright (or close enough to it for discussions sake).

I agree with CR, by 2010 we'll be at prices close enough to the bottom to be ok. No... I haven't forgotten about the baby boomers and their declining needs for housing. ;)

Got Popcorn?

Rob Dawg said...

Ask an agent about "a condo" and then look at the board full of lockboxes. Go back AND SEARCH THE MLS FOR THE 74 OTHER BOXES IN THAT SAME BUILDING. Same for any residential development that still has a sales office open. 1-2 bait houses, dozens for sale.

You are so correct about the "buffered inventory." That goes both ways. No real declines or increases. Prices go down; people pull. Any hint of sales and supply will backfill.

Next up are the retail defectors. People with equity who decide to join the REOs in price just to move product.

credit savvy said...

it is all s**going to hit the fan

credit repair

The Anonymous said...

Neil - I appreciate the starkly objective comments about DC. No problems here.

I do have a question about Miami. From what I read, I heard that place was a special circle of hell with something like 10 years of inventory! However, it looks like it is settling in at 2nd best on the rate of burn down for bubble markets. Any idea on why it isnt much worse?

wannabuy said...

Hey everyone,

I did reply in my own comments... and somehow it was eaten!

To answer The anon:

Miami had prices fall earlier; an early drop will be more orderly. Then again... Case-Shiller has a quirk. On both the upside and downside if a property sells too far out of the 'expected range' its weighting is severely reduced. Now, when every selling property has a low weighting factor, it will accurately show the metropolitan area's value. Right now, I think a few slightly discounted homes are masking the lower weighted sales.

Also, Case-Shiller excludes from the weightings foreclosures/REOs. Or more precisely, because of these two effects, Case-Shiller can have a lag under certain conditions of showing the property value declines.

Overall its a great index. But every index has its quirks and I'm one of the nuts who likes to know the 'whys behind the whys.'

Got Popcorn?

The Anonymous said...

Neil - actually there is something else you and I both missed about Miami - the severe overhang is in condos and for whatever reason CS doesnt include condos.

Its really a shame, a 10 year overhang suggests the true price drops there could be among the worst of all markets. However, because that part of the market is not accounted for, CS wont show it to us (at least not directly).

wannabuy said...

However, because that part of the market is not accounted for, CS wont show it to us (at least not directly).

True. So that market will be slow until others are more certain.

Got Popcorn?