DQ news, July

I mentioned before that July and November are two months where the data should be just lumped into the quarterly numbers. Unless something had really broken out, the data for those months can be very noisey.

So I charted data from dqnews.com. Sales aren't great for a July. But nor were they bad.

Price per square foot is back to 2004/early 2005 levels. I notice 90278 is slipping back to 2003 values. This could be interesting.

From my perspective, I find the linear drop in price per square foot in 90275 very interesting. Its a linear trend down. $17/ft^2/MONTH! The trend was for zip codes of interest to be dropping $30/ft^2/YEAR! I will be very curious if this trend continues. Since 90278 and 90274 did not drop as 90275 did... I suspect its a trend that is about to be broken. As a potential buyer. :( But then again, one more month of this trend erases a bubble year, in four months!

Basically, nothing broke the downward trend. We have only August left of the 'sales months' of the year. Overall, the dq data (LA times) showed a lot of areas struggling to sell.

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Neil

Inventory

I've been lazy tracking inventory. One data point in a month. oh well... at least I have detailed past data to compare with. The quick summary is that inventory is starting to climb up in many areas, but is still low compared to the last few years.

Note: DC and Houston are starting to look quite healthy; since their job situation is 'ok,' they could be done with the downward trend. The only question is hidden inventory.

Here in California, 9% of the mortgages are in default. That's a HUGE hidden inventory. If those mortgages are fixed so that the 'owners' can afford the mortgage, that's the same as cutting the home sales price.

Note on the upgrade market: Its dead here in California. I do not expect it to return for 5 to 7 years. Since the areas I want to buy are at inventory levels at or near the levels before everything fell apart... and Alt-A is just starting to tickle the market... I'll wait.

I still think the bottom in prices (National and South Bay LA) will be February 2011. I expect a long 'churning flat' after then as ALT-A and prime implode. Between now and then... we exit this 'calm of the storm.' I'm coasting until I see the August data (in September). July is a non-event for Real Estate in California. No conclusions should be made off July data (good or bad, same is true for November). But to get through this storm, we have the seasonal October-February "Buyers Market" to get through.

Let's just say the OC Register's attempts to make it sound like bidding wars are the norm amuse me; the best strategy for a home seller is to price below market and let the market work (bids up the home to market). Yawn. I've been suggesting that strategy to sellers for two years. Now let them mention how many chase the market down...

Keep in mind Realtytrack's latest on foreclosures:
"In spite of the industry-wide [foreclosure] moratorium earlier this year, along with local, state and national legislative action and increased levels of loan modification activity, foreclosure activity continues to increase to record levels,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes’ are now worth represent a potentially significant future risk…."

There is no Real estate price recovery until incomes improve.

But the whole point to my plotting data if for you to make your own conclusion. Just realize how hard it would be to do a worse investment than SoCal Real Estate during the last five years.

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Neil

Local Sales Data

Home prices continue to drop. All of the zip codes I plot dropped in $/ft^2 terms. Only 90275 had decent sales volume (of course, where I wish to buy). I set up trend lines months ago on $/ft^2 and have not had any reason to adjust them. The market appreciated about $70 per square foot anually on the way up. Now its dropping at the rate of $30 per square food anually on the way down. Or is it...

May, June, or August are the three critical months of the local sales year. In terms of $/ft^2, May and June have been weak. This implies either buyer resistance/fear or that the market is about to capitualate. I think its the later, but the data does not *yet* prove it. It does look like 90275 has broken below $450/ft^2, but let us wait for August data to confirm that.

I should mention a little about the local selling seasons. I'll post July's data, but I'll warn you there are two months locally that do not deserve to have any conclusions made on their data: July and November. November is due to the holidays. The data could fluctuate any which way that month and it wouldn't tell us a thing. July is a weird month. Sales can spike or plummet in July and it would probably correlate best with vacation packages or the price of steaks at Costco; its certainly not a month that produces numbers of interest (locally). Yes, this July is also impacted by 'Bear Chits' (California IOU's) too. Hence, we'll make conclusions after August's data is available. February is the darkest month of the bad selling season (October-February). However, December does have a spike in closing, but I speculate that is just for tax advantage and does not compare to June-August closings. The exception being December 2007 (with the market turning south).

Another caution: While prices seem to be turning down since April at a faster pace, I would hesitate to make a conclusion before seeing the August data. If you cannot tell, I'm expecting no surprises that waiting buyers wouldn't like to see. But I'm not yet ready to declare a major change.

Note: Some friends & coworkers are noting its tougher to procure a mortgage above $417k locally too. Rumors are that mortgage insurance above $417k loans is tough to find. If that is the case, prices in this region of 10% down payments is going to make a huge belly flop. I suspect everything possible will be done to bring back the 'conforming jumbo' ASAP with 10% down. I do not think that any effort will work out, but the REIC will try. (I'm a fan of *real* down payments to stabilize a society.)

We could see the dollars per square foot drop pretty quickly soon... or it could be a blip. Stay tuned.

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Neil

The graphs:
Note that the slopes on the sales trendlines are calculated by excel:

Inventory

I'm chuckling reading the comments from my last post. Yes, Inventory is down, but I still find it interesting. I also find there is a disconnect. Homes show up in the local MLS already with an offer. While I can only point to one agent doing this, I wonder, are homes being marketed before being put on the MLS? Significant? I doubt it, but interesting.

Ok, Inventory is way down. Everywhere I've been tracking. Heck Phoenix is below 40,000 (I lack detailed historical data as OCRenter used to have great data before that blog went private, so I didn't bother to track it.) Remember when it was 64,815 in Phoenix? 3/26/2008 is the peak I recorded. But there might be a day when it was fractionally higher. Today Phoenix is at 37,828!

Palm Beach (which by Ziprealty includes areas too far away to really be palm beach, but I was lazy and just used their inventory) peaked at 132,636 on 2/28/2008 (which was estimated to be a multi-year inventory at the time). Now its at 90,478. So Palm Beach county is still in deep chit.

Do note my south Bay LA only includes Torrance, Redondo Beach, RPV, PVE, Rolling Hills, and Rolling Hills estates. Yes I realize Hermosa and Manhattan beach would be among the high end areas... but I skipped to only tracking where I wish to consider buying.

Oh, I've been recording data since 11/9/2006 just for the record.

So in celibration of the Bear chit (California IOUs), I bring inventory graphs!

June Real Estate Emotions.

Well... I missed the transition to Capitulation. But in the zip code I care about, you can see a roll into it starting a week ago. Why do I say this? People I know who own and I thought could afford multiple homes are now putting their *primary* home on the market. Families I know who proudly held onto oversize homes are suddenly finding an urge to downsize and move closer to grandkids. Quite a few people just decided to 'retire' (business dried up) and move full time into their vacation home.

While Capitulation seems to be happening is Phoenix and a few other cities, it certainly isn't national. Ok. We're towards the last part of the best time of the year for sellers.

For California, the budget debacle will probably be blamed for tipping us into Capitulation. But I do not think the budget is the root cause. Its just a coincident event. Any tax increase will just be an excuse to cut unprofitable business ventures. Any layoffs will be minor compared to what is naturally happening.

I'm seeing more people going to mocking buyers. We've been hearing this since 2003. Its not going to work on the people that held out that long. Investment emotions have to be worked through. It is a process that cannot be skipped. We've gone from being too invested in real estate to 'doubling down.' Instead of investing in infrastructure, we've extended the bubble. Which as kept the builders building... which lowers the final bottom price. :)


The latest update by Fitch is that CA real estate prices will drop 36%.

Their national prediction seems reasonable. I would have put California price drops, in a longer timeframe, at 30%. We'll see which is right.

In December I noted: "What I'm noticing is that no one seems to be willing to say real estate is a bad investment!" 40% of the local homes are selling to investors!

What I'm seeing is homes that are well priced and qualify for a FHA loan are selling quickly. But what really interests me is that the 'well priced' home is getting better month by month. Local sales are pitiful. Where are the months that break 100 sales per month? That used to be typical for many of the local zip codes? Ranch PV (90275) Sold a mere 17 homes in May at a Median price of $970k. Wait... that is a conforming loan with 20% down! There is an absolute wall above conforming+20% down. Heck, conforming +10% down is slow.
DQ-link, updates to latest (no archive)



But then we see rates on jumbo and jumbo conforming disconnecting from the standard product. Not to mention the jobs situation. Nothing like a dose of financial reality to splash cold water onto the local market.

What I'm seeing is people are willing to jump in (FHA). If they miss-bet... well, it was only 3.5% and they're planning to keep 10% of the home's price is a crush fund.

As I noted before, the home market is still worse than I expected. I'll repeat what I've been saying: "For those waiting for the crash in house prices in high end neighborhoods, the big drops happen during Capitulation." You have only a month or two to wait until the start of Capitulation and then another year for the emotion to do its job. We're rolling into the emotion. Let's face it, at today's prices, a buyer must go 'all in' to purchase. Any financial hiccup and they lose their down payment. Should it surprise anyone the market is retreating to FHA? Oh, a few are trying to get ahead.

I'll update this figure when we're into capitulation. We're so close I can almost taste it. The buying season is dying off. Pretty much everyone I know has a close friend who has been hit hard by this downturn. Heck, everyone I know also knows someone with a failed flip.



















1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak) Peaked in late 2005/early 2006
5. Anxiety (I'm a long term investor, not a speculator. Lasted ~10 months)
6. Denial (Reached in October of 2006 until mid-May of 2007, ~8 months)
7. Fear (Reached in mid-May of 2007 to mid/late February 2008, ~9 months).
8. Desperation: since mid/late February 2008 to late September 2008 (~8 months)
9. ****Panic*****: Current state, started Late September 2008.
10 Capitulation: Spring 2009 Mid to late summer (update) 2009 well into 2009.
11 Despondency (start of market price bottom) Not before Summer 2010 (updated). Possibly as late as end 2010 (unchanged). Much more uncertainty here.
12 Depression (end of market price bottom) Not over before summer 2011, probably later. It could be as late as 2014. Don't let anyone BS you into buying soon. There will be a long market bottom.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (The worst is over...) about 2017
15 Optimism (cycle starts again)




I created this graph on emotions and value, for its not really a sin wave, its much more of a rounded sawtooth...
















I wonder if everything falling apart won't correct house prices like the stock markets. Oh... there will be a six month delay (or more). We're on an accelerated cycle. Panic started barely within my fall prediction. Each emotion is supposed to be for a year in a normal environment. Well... The housing bubble overshot the normal levels, so the downside will be more severe and is happening fairly fast. At most 9 or 10 months per stage (on the way down).

I miss prediced too short of a panic (six months, it looks to be 10). We're just now blending from Panic into Capitulation. Remember, Capitulation is the time of the greatest price drops. I'm referring to total rate of dollar value drop off. I'm thinking Lancaster might be close enough to the bottom.



Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, there is a chance of a protracted downturn than the last one. I would love it if someone who point out a forward looking indicator that isn't ugly.

To think, the majority of layoffs lie ahead.



Now, there are some positive indicators out there.
But look at CR's latest on DC.

Prices track incomes.

Thus, why I think there are a few areas worth buying into. For most, wait.
The #1 indicator I'm seeing is that some of the loudest 'Prices always go up' people I know have put their homes on the market. These homes would have easily sold for $1.3M to $1.7M during the peak. All quickly drop their prices to below a million. Some then sell, some are still sitting. All above a million... sit. Its the homes that were going for $1.9 to $2.2 that seem to be able to fetch $1.3M right now.

The local equivalent of Case Shiller has been dropping fast. I'm really going to be interested to see the $/sqft for September 2009-February 2010 (see two posts ago). It has the feel of a sharp turn down coming (not yet here).

Until employment improves, housing will tank. Too many areas are near or breaking 10%. What I'm worried about is that people I *never* talk economics/housing with are scared of depression. That meme has taken hold. I'm talking about parents I interact with to be a parent. Around the kids, it should only be about the kids. But too many parents are fearing for their job.

I'm going to remember this spring bounce of optimism. It was interesting. It makes it clear why my fellow bears insisted emotions last a year. I will modify that, they can only change if the seasonal mood helps enable the change. For the stock market its 'Sell in May and go away.' For housing, the spring selling season is quite the drive.

Oh, five friends have admitted selling every stock, mutual fund, etc. They have retreated to T-bills. I'm talking everything (including 401k's). Too many have not made money for two decades in the stock market. While this could reverse quickly... it indicates a sharply changing emotional state. Of those I know who invest in real estate, only a small fraction have any capital left. With 40% of sales to investors... it will get interesting.

Late edit: I notice the latest REMax commercial is sellers 'waiting for the market to heat up' instead of 'buyers kicking themselves for not getting into the market.'
Rotfl. While I appreciate the Realtors (tm) must advertise to both sides of the market... I think their advertising board might be accepting reality.

Got Popcorn?
Neil