Tuesday, February 27, 2007

Stocks Down Sharply, Fear Up Sharply, But Some Good News for Bears

As most of you are already aware, stocks suffered their worst loss today since the tragedy of 9/11. In total, more than half a billion dollars in stock value were wiped out. Markets were down world-wide indicating a broad scope of weakness.

Bears, it looks to me that our stock market just got a whole lot riskier. But don’t take my word for it.

There’s an interesting index called the CBOE Volatility Index that measures option prices on one of my favorite investment vehicles, the S&P 500 index. This volatility index is often referred to as the “investor fear gauge”, a whitepaper from the CBOE explains why:

“Historically, during periods of financial stress, which are often accompanied by steep market declines, option prices - and VIX - tend to rise. The greater the fear, the higher the VIX level.”




This index rose 64% today on extremely heavy volume, indicating a dramatic and wide-spread decrease in investor sentiment related to the stock market. And an increase in investment fear.

Prices down sharply, fear up sharply. Not good news for the stock market. So what’s a bear to do?

Well, I think the answer to that depends a lot on your particular situation, but I’d offer that the most important things for bears right now is to preserve their capital to be used for their eventual home purchase. Less risk and more liquidity are the order of the day. I wouldn’t hazard to make any specific suggestions, but I will share with you what I’ve done.

Up until this point, I had the HB Bear Family Fund (the collection of our assets including our future down payment) allocated roughly 70% stock ETFs, 20% bond funds and about 10% cash, what many would consider to be an aggressive portfolio. As of the end of trading today we are at about 45% stocks (including a significant new short position on QQQQ), 25% bonds and 30% cash--what I would consider to be a good allocation, if slightly too aggressive, for my 73 year-old mother.

Yes, I am investing like an old woman, but I feel good about it. Our return on these investments has been very good, but as the saying goes, “hogs get slaughtered”, and my down is too important to expose it and our other assets to unnecessary risk.

One ray of sunshine at least from a housing bears perspective is that contagion that struck subprime loans is spreading to “A” rated securities as well. We’ve all seen the BBB rated credit swap charts dozens of times by now, but no one seems to be showing the “A” rated credit swaps; so here it is:

Down, down, down. Meaning the cost of insuring against losses is up, up, up which likely means that this market will be tightening, just as the subprime market already has. If credit tightens for this segment, you can bet that demand will dry up even further, possibly profoundly so.

So take good with the bad, talk to an investment adviser about your situation, but most of all remain vigilant. The Chinese have a curse said in disdain to their enemies that loosely translated says, "May you live in interesting times." Friends, these times are becoming more intresting than I think anyone would like.

Monday, February 26, 2007

Wither February Sales? (Revised)

Thanks to Mrs. HB Bear for pointing out I made a rather huge mistake in my first post. Sorry readers.

DataQuick reported 2,400 All Homes sales in the month of January, but only 2,246 sales for the 22 business days (about a month) ending Feb 7th, or roughly 150 fewer homes. Unless we have an uptick in sales toward then of this month, this February's number will be lower than January's, which is consistent with historical trends.

What's going to be different, is that if February does come in lower than January, it will be the lowest level of monthly sales for ANY month in the last several years. If this does happen, I will see it as a strong indication that we've reached a stand-off between buyers and sellers, where whoever blinks first loses.

Bears, steel yourselves. We can not and must not buy until prices are more affordable. Remember, sitting on the sidelines is making you money and prices have no where to go but down.


A Call for Data and a "Data Commons"

As part of our effort to level the informational playing field for buyers, OC Prudent Bears is looking to expand the set of data that we use to perform our analyses. So far, we've been able to find some fairly good published data and have posted what I believe to be useful and beneficial analysis and commentary on that data, but when we're foraging (foraging bears, LOL!) for data we can only get so far. Frankly, I'd like to up the game.

With that in mind, I'm putting out a request to the community at large to share data. If you or someone you know has data on pricing, inventory, rental levels, demographics, housing stock, closed deals, current deals, terminated deals, square footage of homes for sale/sold or any other data, I'd like to hear from you.

We are primarily looking for this data at a county and ZIP level and the more years of data the better. It doesn't matter if the data is culled from the web, taken from some kind of publication, the census, a university study, something you have under license, data your company sells as long as it's legal.


I wanted to float another idea in this post well. My guess is that there's a lot of redundant data gathering effort going among the members of the blogger/buyer community. I think it might make sense to also talk about the creation of a "data commons" where interested parties could contribute to and benefit from a "master" database of real estate and demographic data. As I see it, the more data we can aggregate in on place, the less work it will be for each of us and the more roubust analysis, better insights we can provide to the buyer community.

You can contact me by clicking on the Mail Your Blogger link at the bottom of this page.

Sunday, February 25, 2007

The Subprime Meltdown and You

Normally, I focus my postings around pricing and inventory analysis, but every once in a while, it’s a good practice to poke our heads up and see what’s going on in the world around us. Today were going to have a look at the apparent collapse sub-prime mortgages and discuss the implication on the housing market in OC.

I think that everyone who frequents real estate blogs has heard from at least one source or another that the subprime mortgage business is in dire straights as of late. In one sign of weakness, no fewer than 24 subprime lenders have gone bankrupt, closed doors or are no longer operating independently since December of last year. The news gets worse.

In the
Faber Report on CNBC, David Faber refers to subprime lending market as being in a state of meltdown and shows how the stock prices on subprime lenders have been plummeting over the last several weeks and days.

Now, I don’t have an accurate total at this point, but based on the earnings reports, realized losses have to have crossed well into the low billions by this point and certainly, they are in the hundreds of millions. I can’t see how lenders in the face of losses like these can go about business as usual. Certainly they will have to make changes in lending policy in order to stem the flow of red ink. An article in the Washington Post offers some insight into how this might play out.

“Higher interest rates and less access to cheap mortgages lie ahead, particularly for young people…with shaky credit who are seeking to buy their first homes…”, said Joseph P. Mason, a Drexel University finance professor..

In that same article, Joshua Rosner, managing director at Graham Fisher & Co., said the credit crunch could be worsened, ironically, by new rules from banking regulators requiring banks to tighten lending standards. The crackdown is likely to make it more difficult for hard-pressed borrowers to refinance, while further pinching home sales to first-time buyers, he said.

But do these professors and study authors know what they’re talking about? Will the default of some of the sub-prime lender really lead to a tightening of credit? The answer is yes and it’s already happening:

In a memo to its lending partners, First Franklin, a subprime lender advised: “Effective Monday (2/26/07), our minimum score for 100% Full Doc Owner Occupied Purchases and refinances will be 620 [up from 580-619 minimum]” They go on, “Also effective Monday, our minimum score on Stated 100% Purchases will be 660 [up from 640-659], and W2 stated borrowers that are 1st time buyers will be maxed @ 95%.”

Act Mortgage Capital is a bit more direct, and in a corporate e-mail it states “…Effective Februrary 28th, 2007, ACT Mortgage Capital will no longer offer any Subprime products.” None Period.

These are just a couple of examples of lenders tightening their lending standards. Clearly other banks, acting in the interest of the shareholders and themselves will follow suit leading either to the complete or nearly complete removal of “toxic” loan products from the market. The removal of “easy credit” mortgages from the market is going to leave many borrowers and future home buyers with few options.

To reiterate what our experts are saying and to elaborate a bit, I see the situation in the subprime market leading to a decrease in demand and an increase in supply here in OC. Here’s why:

1. Sadly, many borrowers bought their homes on subprime credit will not be able to refinance their homes under the new, stricter guidelines, leading to greater rates of default and foreclosure for some and the reluctant sales of their home for others, leading to an increase of housing inventory.

2. Many future owners who would have liked to buy a house are now going to be unable to get their first purchase financed, leading to a reduction in demand.

3. In order to cover the losses incurred by the subprime portions of their portfolios, banks may choose to raise their mortgage interest rates, leading to a decrease in affordability accompanied by a decrease in demand.

4. I think that some percentage of fence-sitting sellers will recognize what’s going on with credit availability and put their homes on the market to try and beat their neighbor’s to the punch.

Weak demand and strong supply are key ingredients in the classic ECON 101 recipe for increases in inventory and decreases in prices--good news for us bears. But remember it takes the RE market a lot longer to digest information than the stock market, we may not see any material effects of this “subprime meltdown” for a couple, maybe a few, months. In my opinion, If prices or sales have a little recovery, don’t panic it’s likely a dead cat bounce, there’s too much too wrong for prices to recover any time in the new future.

So my advice to you:

1. Stay the course, bide your time. It is NOT the right time to buy a house here in OC.

2. Do all you can to improve your credit score. When this market does recover, you’re going to need a good FICO in order to finance your purchase.

3. Save all you can toward a down payment. There are already indications in the market that lenders are going to require some/larger down payments than in the past.


For complete coverage over the subprime meltdown visit what I consider to be one of the best and most robust blogs on the topic,
The Mortgage Lender Implode-o-meter.




Saturday, February 24, 2007

Inventories at 23,000+ in August 2007?

I got offered a bet by a real estate agent friend regarding housing inventory levels for this year. He wanted to be me $100 that OC real estate inventory won't pass 20,000 units at ANY point this year. I didn't know if that was a good bet or not, so I built a crude (yes, crude) forecasting model to see whether or not I ought to take the bet.

The results were a little surprising:

The bars are color-coded in two ways, first by season (red is Summer; Orange is Fall, Blue, Winter and Green, Spring), and then the darker bars are actual figures where the lighter are the results of the forecast (also with an E at the front of their label.) Cool, huh?

I took as an assumption that because sales are so strongly seasonal, that one might be able to take the January inventory levels and use it as a "baseline" inventory number for the year. So I compared to inventory levels in Jan 2006 to each of the respective months, giving me a relative inventory increase from January by month. I then used a tampening factor to adjust the forecast downward so that it would come out to where we will be at the end of this month. I know, not very fancy or inclusive, but it's better than a Scotch-inspired guess.

Well, the model came up with some pretty interesting numbers, namely in the inventory levels for the months in and around summer:

E Jun-07 21,724
E Jul-07 22,721
E Aug-07 23,111
E Sep-07 22,743
E Oct-07 21,669

So my model, such as it is, predicted that we'd probably have five months with inventories over 20,000; so, this morning I gave my agent friend a call and accepted his bet. With that said, if inventories actually do break through 20,000 units, I think the $100 bet is that last thing either of us will be worrying about....


Thursday, February 22, 2007

OC Inventories Up for 6th Report in a Row!

In a break from our regularly scheduled programming...

I read an article and saw some associated postings where real estate agents have been claiming that they have seen rather significant increases in buyer interest and traffic at open houses. So, I go to wondering if either of these factors was actually translating into an increase in sales and a subsequent reduction of inventory.

So, I clicked over to my favorite inventory blog and see what the folks at Bubble Markets Inventory Tracking were reporting and found the following data:

A quick look at this data shows that inventories have been consitently trending upward since the beginning of the year. That leads me to be believe that the increase in traffic really isn't translating into many deals. Must be a lot of looky loos, or maybe a little wishful thinking on the part of some realtors desperate for a little good news.

A couple of other interesting nuggets from the Bubble Markets Inventory Tracking site.

Inventories compared year on year are up dramatically with 13,302 unit of inventory reported for January of 2007 versus only 8,430 for last year, for an increase of nearly 58%! Sales transactions were also down January on January with 2,868 sales last year year versus on 2,400 this year with nearly 500 fewer transactions.

Soft prices, increasing inventory, sales transactions down. Yikes. Sellers gird your loins!




Tuesday, February 20, 2007

Media Stats Hiding Blood in the Streets?

In my last post, I wrote about how sellers may have reacted to prices changes as reported by the media. Today, I’m going to have a look at how sellers might be reacting if the media were to report those figures just a little differently.

In my last post, we had a look at the price performance here in OC by comparing January 2007 price levels to those in January 2006.


We noted that the data looked relatively neutral for the most owners but that there was some relatively bad news for flippers and condo owners. All in all, sort of a mixed bag.

This kind of year-on-year monthly comparison seems to be very widely reported and sort of the sweetheart stat of the media when it comes to reporting on housing price trends. In addition to, or maybe as a result of that fact, the YOY stat seems to be the stat mostly often referred to in discussion around the blogs--for or whatever reason, the YOY comparison seems to the gold standard of price comparators.

But what if the media reported the figures differently? What if instead of reporting the data on a year on year basis, they reported the current price levels against the entirety of the prior year? Would the data look different?

You be the judge.

Using this method of comparison, the All Homes median has gone from flat to down sharply; SFDUs have shifted from slightly up to slightly down, condos performance appears worse and new home results have shifted from a massive price increase to a massive reduction. And while we didn’t have the price/SQFT data for our YOY comparison, the 5.1% reduction in price per square foot shown here is pure bad news for prices.

This set of metrics indicate extreme softness of pricing; (something around the consistency of hot oatmeal), but if we were to also throw in a greater price reduction of SFDU then we’d have pricing quicksand.

The increased scope of the prices declines is just as dramatic as the declines themselves. We went from mostly green to nearly entirely red for this set of metrics, indicating a dramatic increase in the geographic area included in price declines. What’s more, the scope of declines for All Homes median price and Price per SQFT actually both exceed 60% of ZIPs!

What a difference! Our mixed bag has turned into full-blown pricing hemorrhage.

So, getting back to our question. If the media reported prices stats like this, and sellers were to see these kinds of price declines in print and hear about them, what would happen? I’ll offer my take and then suggest a method we could use to validate my speculation.

In my opinion, a price report like the one we saw above would cause a significant amount of distress in the seller community. The last hold out flippers would certainly flip, as would a good many of the investors in real estate for the shorter term (less than three years.) Any owner looking to maximize his profit would have to seriously consider selling, particularly condo sellers. Builder’s, despite their current bravado, would begin to pour on the incentives even further.

Prices like these would also affect credit availability, foreclosure activity and a host of other areas all of which would tend to make some homeowners in unfortunate circumstances much more likely to sell their homes.

This all leads to more supply.

But, all in all I am not sure that a price report like this would cause a full blown panic to occur, but I think it could very likely lay the foundation for one, particularly if inventories continue to rise.

So, as bears looking forward the decline in housing prices, should we encourage Lansner and the rest of the media to publish numbers like these? Wouldn’t it serve our purposes better? Maybe, but it would prove to be totally unnecessary.

As I will write about in my next post, and what you may have already figured out by reading this post, is that the price “flatness” as reported by the media is going to prove very illusory. In the months leading up to summer, prices are set to drop and drop hard. And that decline, as much as 6.5% by June, is going to happen even if the All Homes price doesn’t drop a dollar from where it is today.




Sunday, February 18, 2007

January Data Bad News for Flippers, Condo Owners

Normally, I focus my posts around pricing trends with the commentary centered around buyer behavior. Today, I wanted to shift gears and speculate about how sellers might be behaving in the coming months based on the DataQuick January numbers as reported by the media.


If we look at pricing performance between Jan 07 and Jan 06 prices look relatively flat on average. The Median All price is exactly flat at 0.0% and SFDU eked out a gain of .7%. Condos didn’t fare well, dropping about 3% which was bad news for condo sellers, but new homes zoomed up 14.9% after dropping precipitously last month which may have been heartening to the builders. On the whole, one could rightly come to the opinion that prices as reported last month were flat.

I think many potential home sellers picked up their newspapers last week, saw the zero-appreciation headlines and felt while it wasn’t any good news for homes; there also wasn’t any bad news either. But this news wasn’t good news at all for three groups: flippers, investors and condo owners.

Zero percent appreciation on real estate makes virtually ALL investment alternatives more attractive and has the potential to significantly affect both the supply and demand side of the housing inventory equation. On the demand side, I see demand from flippers and investors completely drying up to the exclusion of an optimistic few—it’s just too easy to make money in the stock market or even in a money market these days. On the supply side, I see more and more flippers and investors liquidating their real estate holdings and reinvesting in other asset classes increasing the number of non-owner-occupied dwellings on the market markedly.

For condo owners, whether investor or occupying-owner the year-on-year news is even worse. Condos are actually depreciating according to these data not only making them unattractive not only as investments, but also increasingly less desirable housing options as well. Some preliminary data also seem to indicate that condos may be entering defaults at higher rates than SFDUs which could increase supply even further, potentially causing what I'll call a condo crisis.

It’s my position that this decrease in demand and increase in supply will increase inventory levels in the coming weeks and months further increasing downward price pressure. Furthermore, I would expect these declines to be relatively wide-spread given the high proportion of ZIPs with 50% or more metrics down.

This is good news for we bears, not that we needed another reason to celebrate.

In my next post, rather than comparing the January 2007 numbers to January 2006, we’ll compare them to the 2006 median. I know it sounds boring as hell, but when you see that this one little change causes every metric to shift to red, I think you’ll find it more than interesting.




Thursday, February 15, 2007

OC Bears "Holistic" Savings Nearly $79,000, So Far!

In an effort to offer an accurate a picture as is possible of the benefits of renting in the current housing market that is OC, I have decided to build a more comprehensive set of calculations for OC renters.

This new model incorporates the effect of inflation on "real" housing prices, interest expense costs, property taxcosts, tax benefits of ownership and the changes in the DataQuick pricing history methology. I believe this new savings number reflects a more inclusive, comprehensive and accurate estimation of how much we bears have saved already by not buying at the price peak. In an effort to be as unbiased as possible, we have pulled the pricing data from the OC Register and loan specifics from Eloan.com.

Let's have a look at the summary of the numbers for the seven-month period since the peak:



Nominal Amount Saved Since Home Price Declines: $ 42,500
Housing Price Decline Due to Inflation $ 15,050
Savings on Acquisition (Closing and Rate Buy Down): $ 7,705
Savings on Renting Versus Buying: $19,239
Investment Income on Down Pyt+Savings $ 1,461
Tax Benefit of Owning - $ 7,297

Net Benefits on not Buying at the Peak, so far: $78,657!

That's on hell of a lot of money. If we weren't prudent bears we could take that amount and buy a very nice car, go on a long vacation, stock the wine cellar and still have some money left over. But being that we are in fact prudent, we'll take the extra $28K in extra cash (rental savings, acquisistion costs, ROI) we've saved by renting and on acquisition costs and invest it, waiting for the right time to buy.

Remember, hosing prices are officially flat now and as I have said many times before, I think they are headed down further. There is NO hurry. Bide your time, demand a good and fair price and if you don't get it walk. As you can see, patience is not only a virtue; it is a virtue that is rewarded.

If you'd like to have a look at the details of the calculations, click here. I believe all of these numbers are correct, but if you find an error in anything you see, post a comment and I will correct it immediately!

Wednesday, February 14, 2007

OC Bears Typical Savings Approaching $50,000

As was reported in the OC Register today, the "all homes" median price dropped to $600.000 for the month of January. Quite a Valentine's Day gift for us bears.

Congratulations once again to OC’s prudent bears! The savings by deferring a purchase and biding your time, keep on rolling in! Let’s have a look at these savings (all homes) your patience has earned you so far:

Savings Compared to Last Week: $4,000
Savings Compared to Last Year: $27,000
Savings Compared to Last Month: $42,000
Savings Compared to All Time High: $46,000

With prices down as broadly as I found in my last study I’m not at all surprised to see prices continue to drift down and, as I have said in the past, I think they will continue to do so for quite some time.

Another very, noteworthy fact from this last report is that our “all homes” price is at exactly $600,000. I think this is a profoundly important number in terms of sellers’ psychology. If we break through this number, even by $500, I think it very well may cause sellers to realize that prices are in fact dropping, getting them off the fence and helping them see their way to pricing their homes in a more affordable fashion.

Once again, Congratulations Bears! Have a great Valentines Day! You have earned it.

Tuesday, February 13, 2007

Orange County: Love It? Like it? Loathe It?

There's a been a lot of talk on the blogs about how we Orange County residents feel about our fair county. The perception seems to be that there is a significant minority of people living in OC, that actually don't like living here. It follows that members of this minority don't like one or more aspects of living here whether it be traffic, the economy, crime, pollution or some other facet of life in OC.

Now, I'm certain there are some people in OC that feel that way. There are people everywhere in the world that feel that way and that some level of dissatisfaction with environment is unavoidable and universal. And, even if a little discontent turns out some how not to be universal, we all know we've got out malcontents here by what we've read on the blogs. But do they represent a significant minority of OC residents?

I'd like to find out just how people feel about life and quality of life here in Orange County; so I've posted a poll that basically asks the question: "How do you like living in OC apart from the housing prices"?

Now for purposes of this poll, you have separate the two things. If you like living here but hate the prices, vote that you like the place. If you think it just sucks here, but are enamored of our prices, vote that it sucks. We'll have pricing polls in the future where you can weigh in on pricing, but for now just vote on the quality of life aspects.

I'd invite everyone to take the poll, make a comment and we'll post the results with a bit of the commentary in a future blog. Note that the votes are going to be mapped to show where we're getting votes:

This should be very interesting.

Monday, February 12, 2007

Prices Down in Most Areas of Orange County II

As a reminder, and to tee-up today’s post, I want to review the metrics we’ve been looking in prior posts. They are listed below, along with percentage of ZIPs where the metrics showed decline:

· $ Price Change from 2006 (55.4% Down),
· $ Price Change from Dec 2006 (59.0% Down)
· $ Price Change Year on Year (48.2% Down)
· $ Price Blended Average (51.8% Down)

Given that the majority of ZIPs showed three of these metrics down, we concluded that pricing declines were wide-spread and that, along with county-level price declines, there was an implied lack of firmess in OC housing prices.

For the next few days, we are going to continue our analysis of the scope of price declines in some ZIP codes a bit further, but this time we're also going to begin to peel the onion back a little and get a glimpse of the preponderance of negative performance of our metrics (those listed above) by ZIP code.

We’re going to start by looking at is at the count and percentage of metrics down in each ZIP code. Here’s the summary of our measures:

· Number of ZIP codes with NO metrics down: 20.5%
· Number of ZIP codes with at least one of our metrics down: 79.5%
· Number of ZIP codes with two of our four metrics down: 56.6%
· Number of ZIP codes with three of our four metrics down: 45.8%
· Number of ZIP codes with all four metrics down: 32.5%

Just to be clear, let's have an example. If a ZIP showed decline in the "$ Price Change from 2006" mertic and the "$ Price Change from Dec 2006" metric but the other two metrics were up, we would say that it had two metrics down. And, in terms of the measures, we would we include our hyptothetical ZIP code in the measure "Number of ZIP codes with two of our four metrics down."

Let’s start with our first measure, "Number of ZIP codes with NO metrics down." It shows that only roughly 1 in 5 ZIPs had no decline in any metric. That means that whether we were looking at the prior month, prior year or the same month in the prior year, prices held firm—strong performers across the board and at least for the study period: our “uberzips.” But again, only 20.5% of the ZIPs had this level of strong pricing performance and, in my opinion, implied pricing strength.

(As a side note, these same ZIPs, maybe not surprisingly, enjoyed very strong absolute and relative price appreciation for the period of study as well. It would seem that strength begets strength, but more about that in another blog.)

Our second measure shows that a far greater number of ZIPs, 79.5%, showed a decline in at least one metric (for future reference "potential problem ZIPs").


What this means exactly, I don’t know, but I’d guess that this metric may very likely be a high-level pricing firmness and volatility indicator that likely drops, maybe considerably, when a market is experiencing both positive and consistent price increases and rises with declines in prices and increased volatility. But like I said, I don’t know; I think it needs more research. But whatever we end up deciding it means, I think that, at its current level, it likely doesn’t say anything positive about the firmness of prices of real estate in OC.

My last thought for today has to do with the proportions of our first two metrics. While I don’t believe we fully understand the implications of these metrics yet, I find it fascinating that there are four times as many ZIPs with at least one price metric down than there are ZIPs with no price metrics down. Over the long haul, if the data proves out that having a single metric down implies even a little pricing softness, this proportion could prove very, very interesting. In the mean time, I suggest that a 4:1 ratio also says nothing positive about home prices here in OC.

Later this week, we’ll continue to look at more of the data, moving our way down from our "uberzips “ and "potential problem ZIPs" we covered today and into darker reaches of OC price performance.

Sunday, February 11, 2007

Prices Down in Most Areas of Orange County I

In yesterday’s blog we showed using a variety of metrics that, on average prices in Orange County are falling. In today’s we that show that prices are also falling in most areas of Orange County as well.

Today we’re going compare the latest DQ “all homes median” data with three different benchmarks at ZIP code level. By looking at three comparisons, rather than one, I hope to remove some of the statistical noise associated with this kind of analysis, trying to take a broad a sample as possible, with the three resultant metrics being:

$ Price Change from 2006 ($2006)
$ Price Change from Dec 2006 ($Dec2006)
$ Price Change Year on Year ($YOY)

We’ll also include, the $ Price Blended Average, which is simple a weighted average of first three metrics, with two parts $2006 (largest sample), and one part of each $Dec2006 and $YOY. I know, it’s not horribly sophisticated, but I believe it will help us generalize about and remove some of the noise from price trends within a ZIP. So let's have a look at the data:

Metric: % of ZIPs Down
$ Price Change from 2006: 55.4%
$ Price Change from Dec 2006: 59.0%
$ Price Change Year on Year: 48.2%
$ Price Blended Average: 51.8%

On the whole, it would appear that the widely-celebrated, very-inclusive appreciation party here in OC has come to an end.

With nearly 60% of the homes down month-on-month, and more than 55% down from last year’s median and with the generalized, blended average nearly at 52%, I don’t think it’s a stretch to say that prices are also falling in most areas of Orange County. This is significant because it reinforces the price declines we’ve seen at the county level.

Were prices declining at the county level but most ZIP were showing appreciation we might rightly be tempted to say a few poorly-performing areas are pulling down the market. But when more than half of the ZIPs are showing prices declines one can’t write off the drop in prices so easily because the scope of price declines is so very broad.

Taken together, I believe that the combination of poorly-performing county-level and ZIP level pricing metrics indicate weakness in price levels in Orange County. It is also my opinion that this weakness will translate to a further drop of prices in the coming months and that deferring a home purchase until prices drop further is a very prudent choice.

Friday, February 09, 2007

OC Home Prices Plummet 5.9% in January! Average Buyer Bear Saves Nearly $40K!


I predicted in prior posts that prices for OC homes were headed downward; I just didn't realize it was going to happend this fast or with such a vengence.

The median home price for all homes dropped fully 5.9% from December’s prices, lead by a precipitous drop in new home prices of nearly $188,250 or -23.8%. While I don’t have the numbers to prove it, I would speculate that a drop of 5.9% has got to the worst one of the worst month-on-month performances in all of OC history!

Now, the bulls are going to are get riled up and point out that on a month-on-month basis, the prices of existent homes and condos aare flat. They’re right, they are. But looking at the data from a year-on-year and this month versus 2006 basis, the story is different.

On a year on year basis, both resale houses and resale condo prices are down, .6% and 2.8%, respectively. If we compare this month’s data with all sales from 2006 (a larger sample) we also see that prices have also dropped, 3.1% for resale houses and 3.3% for resale condominiums. Remember, these numbers are on a nominal basis and if adjusted for inflation, the prices drops would be much greater. To wit, numbers from friend of the blog, graphrix;

Year on Year Numbers Adjusted for National Inflation Rate:
Resale homes -3.2%, Condos -5.4%, New homes 11.5%, All homes .3%

Year on Year Numbers Adjusted for OC Inflation Rate:
Resale homes -4.9%, Condos -7.1%, New Homes 9.8%, All homes -1.4%

More imporantly, however, are the real cost saving bears garnered by being patient and not jumping into the fray. By waiting one month and not buying in January the prudent buyers have already saved about $38,000 on the 'average' home purchase. Compared to the 2006 median, bears saved about $23,000. Compared to the all time high of $646,000, prudent bears saved a whopping $42,000. No matter how you look at it that is one hell of a lot of money.

Congratulations to all the bears who resisted the 'priced out forever' rhetoric and stayed on the sidelines! You have been richly rewarded!

Now, it's going to take a while for the market to digest these lower-priced comps, so we may see an upward blip in prices in the next DQ report or two, but stay the course. Over the medium term housing prices appear to be poised to fall further--patient and disciplined buying behavior looks very likely to be rewarded further with even lower home prices in the near future.

To see the gory details in all their glory, click on the image below:

Finally from the OC Buyer Bear Gloat Deparment: Bears have been saying all along that the ‘all homes’ prices were being artificially boosted upward by the ‘new homes’ numbers and that once new homes prices dropped, the ‘all homes’ price would adjust accordingly. The bulls said we were crazy, but these month-on-month numbers prove we were, yet again, right.

Thursday, February 08, 2007

Don't Listen to the "Bull"--Prices are Heading Down, Down, Down!

Buyer Bears, the bulls are at it again, trying to talk up the market saying that prices are going up. BBs know that the market is in a slow, but sure steady path downward and aren't swayed by the rantings of bulls bent on keeping prices high despite the loss of any personal credibility.

Here is a summary of indicators showing from just about every perspective imaginable the undeniable truth that prices are headed south here in OC. Next time a bear tells you prices are up, you may want to point them to this page:

First, from the nominal perspective the DQ year-on-year medians:

Resale houses $670,000 +1.0% FLAT
Resale condos $438,000 -3.7% DOWN

Second, from the real perspective prices adjusted for national inflation rate.

Resale houses -1.5% DOWN
Resale condos -5.7% DOWN SHARPLY

Prices adjusted for OC's rate of inflation.

Resale homes -3.2% DOWN
Resale condos -7.4% DOWN SHARPLY

Thanks to graphix for inflation-adjusted numbers.

Third, from a price per square foot perspective and as reported in LA Times:

Average 2006 Price/SF All SFDU: $434/SF
December 2006 Price/SF ALL SFDU: $412/SF
ALL SFDU Price/SF Difference: -3.2%
DOWN

Fourth, from a market segementation perspective, again with LA Times data and comparing 2006 to Jan 2007:

% of OC ZIPs with Price/SF Down: 61.8%
% of OC ZIPs with SFDU Price Down: 59.2%
% of OC ZIPs with Condo Price Down: 57.8%
% of OC ZIPs with At Least One of Above Down: 93%
% of OC ZIPs with SFDU and/or $/SF Down: 86%

VERDICTS: DOWN, DOWN, DOWN, DOWN and DOWN!

If you'd like to see the data set for these last six metrics click here.

Remember, the same way that Buyer Bears don't buy overpriced homes, they also don't buy the rhetoric of the "bulls." Prices are heading down, albeit at a slow, rational pace for the time being. Keep an eye on the market, demand lower prices and in the mean time enjoy renting a house that would cost you twice as much a month to own.

Sunday, February 04, 2007

OC Affordability

There's been a lot of discussion about affordability of homes in here in OC. By most measure, affordability, on average, is relatively quite low, but that is better in some areas than it is for others. But how much better or how much worse? Quite a bit more than you might imagine

I took average household income from the OC Register and combined it with 2006 median prices from the LA Times. I then divided the median housing price by the average household income; giving a measure of relative affordability I'll call the price/income ratio. Having a look at the data, you quickly realize that affordability is by far the lowest for the less-fortunate among us, while if is much less of an issue for the well-to-do. I don't think this is much of a surprise to anyone. What I think you might find surprising, however, is just how much worse affordability is for the less-fortunate.

In one Santa Ana ZIP code the price/income ratio was 21.8, meaning that the median house price was about 22 times that of the average income indicating a profound lack of affordability. While I am sure there are SOME people in the ZIP code that can afford to buy, I would hazard to guess they are few and far between and that many or most of the properties sold in those areas are likely sold to investors.

In stark contrast, the price/income ratio for Newport Coast is 6.95, meaning that the median housing prices is merely 7 times as much as the average income. Compared to our Santa Ana ZIP, affordability is three times greater, making home purchasing very accessible to the local residents and worlds away from the circumstances of less-affluent areas. So how do things look for the balance of the ZIP codes? Well, it depends.

For the least-affluent ZIP codes, with average incomes less than $50k/year, relative affordability is rather grim with price/income ratios largely above 15 or very unaffordable. Between 50k and 75k the ratio improves to roughly the 14 to 12 range or somewhat more affordable and has and then improves again around the $100,000 range of about 12 to 10. And then after $100k, affordability generally improves, but gets dispersed.

The graph below shows the price/income ratio by average income plotted for OC Zips. .

So when talking about affordability, I think it's safe to say that in general housing is relatively unaffordable but keep in mind there are many areas either prohibitively or severely unfaffordable.


Saturday, February 03, 2007

OC Buyer Bears Market Perspective

In the short term, the data and news seem to indicate that prices are either flat or sort of drifting down, depending on the specific data being evaluated and whether or not those data are in real or nominal terms. So there isn't much pricing risk. Cashflow-wise, renting is also very cheap compared to owning, which is nice. And, interest and mortgage rates are flat, negating any apprarent interest risk.

Looking out to the medium term, we see several factors that lead us to believe that housing prices are set to drop, among them: short-term price decreases, reduced sales volumes, decreasing affordability, tightening of sub-prime credit, the culling of "flippers" from the market, increasing housing inventory, the reduction of the attractiveness of OC real-estate as an investment option and net emmigration from the county among them.

From where we sit, if even only some of these factors were were to put downward pressure on prices, they would drop, but given they they are all are in play and have the potential to exert downard pressure on prices, we see the question of a downward price trend, not as a question but of whether it will happen, but rather a question of how much and how soon.

There is every reason to wait to buy, sit on the fence, watch the market, let inventories rise and prices soften. There's no hurry. The market is flat now and it has every indication of getting worse.

Thursday, February 01, 2007

Sellers Bearish on Real Estate Market

Think it is only buyers that are bearish on housing prices? No, based on a survey out, virtually half of all Americans think we're headed for a bubble, including 43% of homeowners!

Don't beleive it? They say actions speak even louder than words; look at what SELLERS are up to:

--List Price Reductions: Roughly half of all listing.
--Multiple Price Reductions: Very common.
--Accepted Offers Below Asking: Virtually all transaction.
--Rate Buy Downs: As common as "Want fries with that?"
--Builder incentives: Up to absurd, media-worth levels.

If the market isn't headed for a correction, then why all the concessions on the sellers’ part? Can't they just wait out the bears and get every last dollar they can for their homes? No, they can’t and know it. That’s why smart sellers are maximizing their gains by selling their properties before the correction gets any worse. Sellers are making concessions en masse, indicating that the power at the negotiating table has shifted to buyers.

 
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