Friday, August 22, 2008

Repost of this month's inventory, affordability, and SoCal foreclosures

This is a long post and it took a bit of work to create. So rather than have it lost after so other posts, I'm bringing the charts back to the front. 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 1992... 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. Edit from the first posting: I have no charts to 100% prove this. Believe or not. My main prediction is that 2009 will be the year of the greatest price drops in US real estate. We're not quite yet in the timeframe of the greatest price drops, but we will be soon.

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.

Other bloggers are noting the bottom will be a two to three year bog where prices stay low due to the economy and credit tightening. I see no reason to debate that.

Got Popcorn?


The Anonymous said...

Neil - since you are re-posting this entry, I am carrying our former debate here.

"Neil said -
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?"

Because it does a good job of tracking "high end" via price tiers. With respect to the claim that "high end" was immune to the last downturn, until late in the game, Case Shiller says thats simply not the case.

"Neil Said -
You always step back and ask for more evidence... and more. Always dismissing the horde of what's been presented."

Now you see why I ask, especially in light of compelling CONTRARY evidence. If you look objectively at your past comments, youve pretty much treated the "high end falls last" as axiomatic truth from day 1 - and thats fine, its just when I see something compelling that tells me otherwise, I would be completely remiss not to ask. And now that I see your evidence is based mostly on personal experience and unpublished reports, you can see why I believe the way that I do.

It doesnt always have to turn into a battle - it can be a learning tool to say "hmm, you know what, this is not the way I remember it, this is interesting because it tells me going forward xyz will happen..." Hopefully what I have provided you with here will challenge you and allow you to refine your views accordingly.

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

Your macro level focus is outstanding - no doubt. I have neither the time nor the energy to track as much as you do (thats why I like your blog). And even on a smaller level - I want to give you props. You saw the (DC is not as bad as the others) on your charts WAY before I did. Its probably only been within the last month that I truly "saw" what you were talking about.

Its just some of the micro things that I disagree with you on. Like Alexandria & Arlington for instance. The reason I bring them up is because they serve as perfect counter examples of so many things we see on a macro level. You say inventory is exploding - I say look here it isnt. You say foreclosures are causing hidden inventory - I ask but what if the foreclosures were nil to begin with?

I will admit, I am absolutely BAFFLED about these areas. I have NO IDEA how they are able to hold up as well as they do. So, short of simply accepting that they are immune, I suggest, well maybe jobs is the real key here, or maybe fuel prices are more important than we think, or maybe that idiot Lance was right about one thing - this whole urban renewal thing is causing far more rapid chances to "core areas" than any of us realize...God I hope he is not reading this!

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

Thank you for the compliment and again on a macro level I agree with you probably about 90% of the time. Yes the big picture matters but that wasnt the point of the debate, and neither was "precious alexandria" and you know that - you are better than that.

The reason I brought this one (and only one) detail about the "high end areas fall last" comment is because I think the factual evidence I provided shows it was wrong. Let your readers see that and let them form their own opinions - and maybe it will shape your views going forward. In my opinion, you rely wayyy too much on the prior LA downturn to tell us what is going to happen here. Yes you lived through it, so it makes sense to rely on personal experience, but there are so many differences now that need to be accounted for...Back then job loss preceeded housing drops, now its the reverse. Then energy costs were hardly a concern - its clearly a different world now. Then credit was not nearly as available to as broad a segment of the population as it is now. Then builders were small and didnt have the capacity or economies of scale to overbuild they way they do now. How does all of these additional factors (and more) change the way things play out?

I was reading a comment from the LA Times bloger about the 90s downturn and he brought up some of these points up as well. I found one comment of his particularly telling. Something like "For all the long time natives out there in LA Land, you may be thinking you have seen this movie before - this is just a remake. Well let me tell you right now - this is no remake, its a sequel - and we have no idea how this one is going to end!" Something to think about...

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