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.

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