Wednesday, August 20, 2008

Affordability, Inventory, and SoCal foreclosures

This is a long post. Please grab a drink as there are a ton of charts to wade through. But I ask you the reader to look at them as a group; they're related. We're in a new point of the market. You'll find sales and foreclosures for DQ news, afford ability from Wells Fargo, and inventory from ziprealty and the MRIS.

If you're not a bit scared after reviewing these graphs... I think you've missed something. We have proof of tight credit, foreclosures exceeding sales in more and more markets, and a general bear market that is entrenched in real estate. In California, foreclosures are happening faster than sales. In other words, the current sales spike that is foreclosure dominated isn't enough to slow the decline nor even the driving forces behind the decline! California and Florida on their own are going to end the mortgage market as we knew it. Too many Billions have been destroyed as is.

Do remember that during the 1990's SoCal downturn, the communities that were immune through 1993... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally.

Affordability is shooting up. But wait... this assumes income measurement are following the historical pattern! Please, do not get me wrong. I appreciate Wells Fargo Keeping the same methodology. But one assumption about these charts is that grey market income is *not* declining. Can we assume that anymore? Certainly not in Southern California. I believe, as with many metrics, that the change in incomes is being under-recorded. I do not fault Wells Fargo, they are doing the best job possible. LA is also in trouble due to Hedge funds cutting the funding of "Hollywood." Also, do you see advertising spending going up or down in 2009? Advertising has been keeping the Westside market alive. If that revenue drops significantly, expect things to get worse quickly.

I've selected the same cities for a while. Notice the spike up in affordability. Its all due to a drop in sales price. Mostly due to foreclosure sales and

Here is a close up on the latest. Do review the previous graph of where affordability has been historically. Note: For some cities (e.g., DC), I expect the new plateau to be at a slightly lower level of affordability (due to the city establishing 'economy of scale' in the world market).

National inventory isn't growing like it used to. If it wasn't for all of the markets with huge amounts of 'shadow inventory,' I would think this downturn was closer to being done than it is. We'll hit a bottom; but not before 2011 and more likely in 2013 or so.

If there is one thing to scare you, it should be the drying up of the Jumbo mortgage market. Look at the hit SoCal is taking. Thankfully, DQ News has published information on the distribution of mortgages.

I'm going to be posting this chart I from Deutsche Bank over at It really shows how the real estate market is in a brave new world:

We're at the point where many markets are now driven by foreclosures. Since there is better data for Southern California than many other markets, I'm plotting my home region. But these charts plot a trend that would be true of Florida, Arizona, Nevada, Ohio, Michigan, Virginia, and a few other markets. Its brutal now for a home owner to try and sell. The competition from foreclosures will even impact the 'immune' markets. I'm seeing high end properties skip foreclosure (jingle mail) and go straight on the market as bank owned.

I'm plotting California sales and foreclosures by quarter to take out noise in the data. Compare this graph to the next one and Note that foreclosures exceeded sales in California in the first and second quarter! California is getting ready to really implode.

Compare this graph to the above one:

Now on to other cities. Sales are down, but not too bad:

But note the Median price is down. I haven't been in DC for a year, but I'd bet bargain hunting is going on:

Las Vegas is in a later stage of implosion. I know of too many people holding on in Las Vegas who should be selling, so the small drop in published inventory is masking a rising shadow inventory. Once the recession really gets going, expect the next wave of the Tsunami to spank Las Vegas. US Air 'de-hubbed' in Las Vegas for a reason: The Origination and Destination market is dying.

Phoenix has been the poster child of the bubble for a while. IIRC, 40% of the jobs in Phoenix are for growing Phoenix. I'm an airline fan, so I wonder if US air will get into trouble in Phoenix too.

Overall, DC's inventory hasn't climbed much over 2007. But look at Case-Shiller prices, inventory is too high in the region to sustain current prices overall. Counter is that DC's median income has gone up ~6%.

Houston is an interesting case. I posted before how it has the fastest job growth in the USA. But how much is due to the commodities bubble? Part of the reason I'm curious about Houston is that high end manufacturing and IT outsourcing is drifting to the city. Is it enough to insulate it during the later parts of this recession?

This is where I plan to buy. But there is a disconnect between official inventory and what I see on the street. Can we say shadow inventory? ;) Seriously, prices peaking at 11.2X income was insane! Ok, Wells Fargo put it at 9.3X income and now at 6.3X income. Per Wells Fargo, the last recession hit a trough at 3.5X income. My oh my... that leave a lot of downside. Note: Per Wells Fargo incomes have dropped ~3%. Personally, I think the income drop is accelerating.

I've skipped a lot of comment, but note that LA's decline in inventory is mostly due to foreclosures taking homes temporarily off the market. Mostly in the ex-urbs.

This is quite a bit to review here. I ask my readers patience to note the pattern these graphs lay out. Its showing the impact of the credit crunch, income loss, and the recession we are in. I still make no definitive predictions until we get to "Fall, probably late Fall." But soon we will see data showing a major transition. Soon might be November data... Heck, late Fall technically is until 12/20, so it could be in the December data; but I suspect it won't happen at the end of Fall.

Got Popcorn?


The Anonymous said...

Neil you present a decent case, and I would be inclined to agree with you about the entire nation were it not for counter examples like Arlington...More on that in a later comment.

For the time being, I want to focus on this comment which you have made many times:

"Do remember that during the 1990's SoCal downturn, the communities that were immune through 1993... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally."

Do you have ANY evidence for this? I ask because when you look at Case Shiller, it says the LA "High End"

(1) had a HUGE DROP from early 1990 to the end of 1993 (100.86 on Feb 1990, down to 74.12 Dec 93)

(2) had a SMALL DROP from early 1994 to bottom in 1996 (74.12 Dec 93, down to 70.97 Feb 1996)

I know you like graphs so here it is in graph form too:

So I have to ask, do yoy have any evidence that it went down the way you claim (other than realtor quotes or personal anecdotes)? I will admit, I have no personal experience on that downturn - however, the only data I have suggests it was actually much different than you suggest. Any comment?

wannabuy said...

The anon,
But the housing downturn quickly overtook the high-end and coastal areas with a vengeance. By February 1991 DataQuick admitted that "the high end of the market had dropped off much more profoundly than any other part of the market." Bel-Air house prices had dropped 50% in 18 months. By May 1991 the L.A. Times reported in a special South Bay edition that both sales and median prices were down by 16%. By November 1992 peninsula foreclosures were selling for less than half their peak price.

Gee... I only remembered a 40% decline in the neighborhoods of interest. I forgot Bel-Air dropped 50%. FYI, 'The peninsula' referred to in the quoted LA Times link is where I want to buy. However, the areas that dropped 50%... are not where I wish to buy. Where I want to buy *only* dropped 40%. However, I don't have a link proving they dropped less than 50%. ;)

You always doubt... so much information about the previous downturn is googleable on the web. Please start to provide evidence supporting your arguments. I've proven real estate diffusion, substitution, and showed how this downturn is a mega-version (or worse) of the previous one. It isn't for me to keep proving... what I predicted is happening.

Palmdale and Riverside were recovering by 1994. Hence why Case-Shiller didn't show the collapse of Beverly Hills, Bel-Air, Palos Verdes, and Redondo Beach.

Now, some areas were different. Manhattan beach went from being cheaper than Redondo to more expensive thanks to a new freeway, re-allocation of refinery land to park, a major beach cleanup, pier repair (including a rebuilt shopping district) and a few other improvements. Cest la vie. Hence why I'm looking at five different zip codes!

Serioulsy, 90275 wasn't down in 1993 by any notable amount. By 1996 it dropped 40%.

This time is different. This time we're seeing short sales in the best neighborhoods years before it happened if we were to keep to the pattern of the last cycle. As best I can tell, the nicer areas of DC are following the pattern of 90275 in the last downturn. Lagging, but in peril.

Its something that when you live through it and see people you really care about crying... One doesn't forget. Ever.

Oh, the "Any evidence" was silly. You've commented on similar links before. Feel free to look back at my June archives. You've seen the evidence on my side; Start providing historical evidence of your own to support your arguments.

You'll find when you look at the history it opens up ones eyes. In the last 30 months, I've changed my predictions for good reasons; I grew. 30 months ago I wouldn't have even considered investment emotions as a primary driver. Now I know better.

Take some time to review Bearmaster's archives. The amount of information there is staggering. Scary too.

Got Popcorn?

The Anonymous said...

Neil im going to say this as gently as I can as I think part of the issue here is not reading carefully. Let me summarize...and relax the caps are not yelling...its just emphasis...partcularly emphasis on DATES and TIMING...OK

1. On your blog you say (summarized) Immune areas were OK THROUGH 1993, then they had late price drops

2. I said - Neil - Case Shiller says big drops were BEFORE 1993 then SMALL 1994 to 1996...Comments?

3. Now You say "By February 1991 DataQuick admitted that "the high end of the market had dropped off much more profoundly than any other part of the market....By May 1991 the L.A. Times reported in a special South Bay edition that both sales and median prices were down by 16%. By November 1992 peninsula foreclosures were selling for less than half their peak price...

So in sum, You say big drops AFTER 1993 - I say big drops BEFORE 1993 - you respond with stories from 1991 and 1992...See the problem here? Do you want to try that again?

wannabuy said...

The Anon,

Ok, more links:

A nice *old* PDF on LA home prices. See figure

Look at figures 8 and to a lesser extent 8. Note: Those are medians. During the darkest days buyers were getting steals on upgraded properties.

On Wednesday May 3rd, look at the Southland home price chart. Damn flat until 1993. It was overall only an 18% drop from there, but the drop started late:

North Redondo (which is less prestigious than South Redondo):
See the average sales price chart:

50/50 before/after 1993. (at end of article)

Do you really think the first global real estate bubble will spare your precious Alexandria? Please look at that chart of Mortage bonds again. Root cause...

I'll have to ask bearmaster to resend one of the links that I've miss-placed that really put it into perspective.

I might have the year off by one. Cest la vie. e.g. Malibu dropped from $700k in 4Q 1992 to $500k in 1994. Cest la vie. The previous peak was 1989. This peak was 2006. Don't forget, it was famous (and obvious) how during the bust buyers were getting much better deals.

We're not to 1992 equivalent yet... that's next year. ;)

Got Popcorn?

The Anonymous said...

Neil - First off, lets not get off track by discussing my “precious alexandria” now - thats neither here nor there regarding the emphasis of this thread...Lets stay on topic please – lets by looking at your evidence of high end being immune early and then falling big late. Next:

"A nice *old* PDF on LA home prices. See figure

Correct me if I am wrong but all I see here is some city graphs that start in the first quarter of 1992. Case Shiller says the peak was very early 1990 and (my claim) most of the drops occurred during the 1990-1993 time period.

Again, your graphs don’t start until 1992. How big were the drops in 1990? How big were they in 1991? Here the graphs are of no help...Next:

"On Wednesday May 3rd, look at the Southland home price chart. Damn flat until 1993. It was overall only an 18% drop from there, but the drop started late:

OK a much clearer graph and with the right time period...But hold on for a second...what started this was the claim "high end” was immune and then falls last. Now your evidence here is a graph is for ALL areas in LA county including neighboring Riverside and San Bernadino counties. You and I know fully well there is plenty of garbage in these counties – certainly not anything here to tell us what happened to the “high end”... Next:

"North Redondo (which is less prestigious than South Redondo):
See the average sales price chart:
50/50 before/after 1993. (at end of article)"

OK Maybe (and I stress maybe) I see something here. Still by your own admission this isnt "high end" either. Here we are trying to glean percentages based a graph without much resolution...We have a 100K dollar spread over a height of one centimeter (on a 12” computer screen). The difference in price in any two years a matter of millimeters...and we are trying to determine percentages from this?

At best we can agree this “less prestigious area” had its biggest drops 91 to 92 and 93 to 94. 50/50 before and after 93 as you say...Ill buy that.

Still a report of a "less prestigous area" isnt very good support for the theory of high end being “immune through 1993” is it - especially in comparsion to what case shiller suggests, and the articles you sent me highlighting big drops in 1991 and 1992.

Now you did say, maybe you had the year "off by one" but again, meaning they were immune through the end of 1992. However, I dont know if I can buy that either - and especially so now that you sent me those reports showing big drops in 1991 and 1992 - not exactly immune in my book.

Thus in sum, if you have anything else, please do share it with me. However given the totality of the evidence so far, I have very little to believe high end was Immune through the end of 1993 and some evidence (case shiller & your reports) suggesting high end fell first. Is this not correct?

The Anonymous said...

Neil - I just saw your quote to try to explain the Case Shiller paradox that clearly shows high end fell first:

"Palmdale and Riverside were recovering by 1994. Hence why Case-Shiller didn't show the collapse of Beverly Hills, Bel-Air, Palos Verdes, and Redondo Beach."

A good theory. However, take a gander at this article:

The best part about it is it was written in April 1993 and uses data through Feb 1993. Some of my favorite quotes, and remember, Feb 1993 data:

"House prices in Beverly Hills, Brentwood and the Palos Verdes Peninsula have receded all the way to below 1988 levels"

"According to Dataquick, a median-priced home in Beverly Hills (zip code 90210) hit a peak of $1,485,000 in November 1990. But as of February 1993, that figure has slid to $780,000, a 47.5 percent plummet."

"In Brentwood, the price as of February 1993 had tumbled by 34.7 percent from its June 1990 peak, and in the Palos Verdes Peninsula, by 31 percent from its June 1990 peak."

This shows they were "immune" through 1993 or even through 1992 if you prefer??? Back down to 1988 prices is immune??? You note a 40% drop in Palos Verdes...31% of the drop was before Feb 1993 and yet the big drops were after this???

Do you have anything to say?

wannabuy said...

Yes, PV was a mixed market in 1993. Were you talking Rolling Hills, PVE, RPV, or RHE?

Since you disagree so strongly and obviously I didn't see what I did. Buy your precious Alexandria home. Obviously its immune to the 1st global real estate bust in history! ;)

It has to be different than NYC, LA, San Francisco, Spain, Sydney/Melborne. I've posted links for you before on how the price/income is well outside of normal bounds and how the baby boomer's poor savings rate requires them to sell.

I've also suggested reading a book called 'The Hungry Years' to better understand a deep recession (although, that is on the depression). I'm in the process of reading a book Called IKE by Michael Korda. It does a better job of describing government cuts during the depression than any other book I've read in a long time!

Yes, the big drops (in $/sqft) were after 1993! Now, I'm talking prime ocean view properties. Since the NAR/CAR does everything they can to avoid publishing that data... I'm never going to convince you. So please, put your money where you mouth is Buy now!

Or look at the graphs I just published and the seasonality of real estate is pretty obvious. We're entering the time of year that is seasonally a buyer's market. Obviously Alexandria is so strong it will survive the near end of mortgage securitization, overvalued price/income, and the building foreclosure wave with the associated credit crunch/bank failures.

But do understand one thing. EVERYTHING you post are conversations I heard in 1992/1993 on PVE/Rolling hills. Did you read the links I posted for you on Florida 1925-1930's? Tons of good information there.

Please read the book 'Real Estate Cycles.' It seems your missing some prime concepts on the historically cyclical nature of real estate.

Got Popcorn?

The Anonymous said...

Neil - your becoming a bit unhinged my friend - I have asked (extremely nicely I might add), if the big downturn in the "immune" areas was 1990-1993 or after. As evidence for my claim I have

1. Cited data from case shiller clearly and definitively indicating the high end drop was mostly 1990-1993 and

2. Refuted your halfhearted attempt to dispute the Case Shiller data (i.e. Lancaster/Palmdale were up while the Peninsula was down) by pointing you to a report showing it the big drops were pretty much over by early 1993.

In light of this clear and convincing evidence you respond by:

1. Helping me prove my point by posting how bad it was in 1991-1992 with no mention of after 1993.

2. Providing me with 3 graphs - the first which doesnt go back far enough in time, the second which has no relation to high end whatsoever and the 3rd which shows a mixed picture on a "less prestigous area".

Your most recent posts have been little more than a diatrbe on items completely IMMATERIAL to this ONE SINGLE ISSUE....

"Precious now its immune to the 1st global real estate rout...NYC, Spain, Australia are all this book about whtat happened during the depression...ive heard all this what happened to florida 1925-1930...your missing some prime concepts regarding the historically cyclical nature of real estate......."

Wow Neil - just Wow. Every once in a while when I put someone up on the stand to impeach their testimony this sort of thing happens. They realize they are caught in an error, and after they make a very sad attempt to restate it, they then go off on a complete rant of items absolutely immaterial to the principal issue.

At that point I normally get the witness excused so the jury can let what just happened all sink in...its devastatingly effective...I havent lost a single one of those cases...ever.

So I will now again step away and let everyone examine the wreckage of this exchange. Its obvious that you have no real evidence of your claim - other than unpublished data on square footage and conversations you heard in 92-93 on PVE/Rolling Hills.

You will excuse me if I continue to rely on the very clear Case Shiller data and the published reports versus what you have provided me with here. I think you can clearly understand why.

So its at this point that I will step away from this thread...Feel free to now tear into me all you want about "Precious Alexandria" or the 1925-1930 florida crash, or about whatever else you think is relevant to this discussion.

That said, if you ever want to have a real debate over the merits of the principal issue here, please let me know. Have a good weekend.

wannabuy said...

The anon,
I answered. The downturn was after Fall 1992. :)

You yourself have made fun of Case-Shiller being too course over too large of a geographic area. I've conceded that in the past, so why the focus now?

Seriously, you argue one way one day and the other the next as if the previous conversations never happened.

You always step back and ask for more evidence... and more. Always dismissing the horde of what's been presented. I have no doubt your a good debater.

I state again I watched homes in prestigous zip codes sell of LA selling in late 1992 for near peak prices and watched the market fall apart in the next few years.

I argue the graphs as a group tell a clear story. I'll let other people read the charts and make their own decisions.

You seem to be the type who has to always when their argument. Fine. Your argument always comes to one point: Alexandria. What's that buy for me or my readers? What new information? What progress moving forward? This is a global downturn.

I work in a career path where if you wait for the 100% clear answer, the competition has already passed you buy. I'm pretty dang good at keeping ahead. ;)

But one neat thing.

I have made no prediction about what happens right now. Yet so far my predictions have done pretty well. You have to admit that.

Soon we enter the scariest time. Soon we enter the darkest days.

You're very good at debating the details. But its the big picture that matters. The charts show a very clear big picture.

Got Popcorn?