Inventory Threat Level: What Color is Your City?

Sorry I haven't posted in a while, my day job has me on planes, trains and automobiles lately. I'm still slammed, but I want to get out this post on inventory threat levels.

I've spoken in my last two posts about inventory levels and how they might be leveraged in negotiating prices with sellers. In order to synthesize those posts together, I've developed a simple scoring and rating system that can be used to determine how inventories for given areas compare to the county as a whole.

It's a pretty simple system, it takes into account the "month of inventory" and "percent of home listed" stats and creates a compound ranking out of them and then classifies them into a "inventory threat level" grouping. The inventory threat indicates, in my sometimes humble opinion, the amount of risk of significant price decline a city may endure in the medium term. If an area is classified as as blue or green (there are none at this point) there is no or little risk of a significant price decline. If it is yellow there is a moderate risk; orange indicates a strong risk and red a severe risk.

Please click the chart for a larger, readable version.

My suggestion to buyers is to print this out and carry it with you to open houses. Then ask the Realtor about the price of the house, and then wince as though you just got a shot. Then present this handy-dandy little guide and tell them something along the lines of, "Sorry, but this city has an inventory threat level of orange; so, I would need to make an offer of 15-17% less than asking. Would you entertain such an offer?" Now, here's where your choice footwear becomes important.

The agent and/or seller are likely not to like you, your threat level chart or your offer very much, possibly inciting them to rage. If you're in a pair of CFM stilettos or slick-bottomed leather shoes, you're not likely to be able to run away at a safe enough speed to evade these enraged bulls. So, I suggest a good running shoe or a high-quality cross-trainer; they have the traction you'll need.

Vivo los Osos!

More on Orange County Housing Inventory Levels

In a prior post, I wrote about the surprising inventory data I found out on Homeseekers.com. Today, I am going to continue looking at inventory, but I've also pulled some census data so we can not only look at the months of inventory on the market but also the total percentage of homes on the market.

We saw in my last post that there appears to be a lot more inventory on the market than has been reported. We also saw that within the county, the amount of inventory on the market varied very, very widely with some areas like Seal Beach with just a couple of months of inventory and others like San Clemente with over a couple of years of inventory. But months of inventory is only one measure, so maybe some areas aren't really getting a fair break.

With that in mind, I decided to pull some demographic data and have a look at the proportion of homes for sale, settling on Total Housing Units the most "fair" basis for comparison. Here are the results:

You will note many of the areas with the highest percentage of homes on sale are also areas that added a lot of housing units in the last several years. Given that the Housing Unit data is from the 2000 census, there is a reasonable argument that could be made that the percentage for high growth areas is likely overstated. I think it probably is, but with some cities having more than twice county average percentage of homes for sale, I think that argument only goes so far.

If you were do a comparison of both methods, you'd note that many of the cities listed here as having the highest percentage of homes for sale also had the great number of months of inventory as well. To save you the effort, the cities of Dana Point, Laguna Niguel, Yorba Linda, Lake Forest and San Clemente all fared very poorly in both methods of analysis. Other cities fared realtively well under both methods, including Fullerton, Seal Beach, Buena Park and Garden Grove. And, of course, there were many citites that showed strength in one measure in weakness in the other.

In a post later this week, we'll take even a closer look at these two inventory metrics and how they interplay in different Orange County cities. We will also discover that some of these cities have much more in common than just their inventory levels.

Are Inventories Actually Higher than are Being Reported?

I decided to pull some data yesterday from Homeseekers.com to have a look at what their data says about the housing inventory situation here in Orange County. They have a feature that lets the user pull lists for cities either including or excluding properties that are in escrow; so, coming up with "in escrow" counts is a pretty simple, if time consuming, process.

What I found blew me away:

First, note that there isn't data for all cities, just the largest, those for which there was a decent sample size of listings and those where the data made sense (there were very few homes listed in Fraudera Ranch.) But once you get past that, the data is pretty amazing.

If the Homeseekers.com data is correct, there are a total of 13.9 months of inventory currently available in OC largest cities. This is more than double what is being reported in the media elsewhere and over a year's worth the homes already on the market! I have to wonder what a seller might think if he were to know that number--he just might be forced to get serious about selling his home and cut his price.

On the other hand, his level of panic may be influenced, as well it should, by his LOCAL conditions. Have another look at the chart. Some cities like Seal Beach and Laguna Hills have few months of inventory, while other areas like San Clemente, Newport Beach and Lake Forest have have huge amounts, at over 2.5 years of inventory a piece.

There seems to be a general pattern here. In-land cities, in general, seem to have fewer months of inventory than their coastal counterparts while southern OC, seems to have much more inventory than northern OC. With that in mind, I would NOT want to be trying to sell a house in Dana Point or San Clemente at this point.

On the other hand if you're a buyer and want to cut your best deal, print out the worksheet and take it with you when you go to open houses. Ask the your seller (in Dana Point?) if he plans on keeping his house on the market for 27 months and ask him to consider an offer that will get his house sold before the glut of homes hits this summer. Just a thought.

Now like I said before, these data look very different from what I've seen on Lasner's blog and elsewhere so somethings going on. It could be:

1. Homeseekers.com data is unreliable. (I don't think so.)
2. Homeseekers.com classifies houses in escrow differently than others. (Could be.)
3. We're on the cusp of the largest inventory run-up in OC history and I beat the mainstream media to the punch by reporitng it first. (THAT would be cool.)

Have a great weekend.

Vivo los Osos!

Prudent Bear Renter Savings $70,000

With the aberration of housing prices rising as they did last month, renter savings dropped a little month on month, but are still extremely strong at over $70,000 since June last year.

A drop in interest rates also benefits bears.

Congrats prudent bears, you've managed to save over $70,000 by not buying the RE-industry rhetoric, sticking to your guns and waiting to buy a home on your own terms. Here's a quick break-out of your savings since June of 2006:

Savings on Purchase Price $ 47,300
Total Closing Costs $ 7,705
Rent Benefit $ 22,844
Investment Income $ 1,742

Tax Benefit ($9,254.13)

Total: $70,337 dollars.

For the details click here.

In an interesting turn of events interest rates for "typical" home also dropped an eighth of a percent, meaning that if we were to buy today, (which no one is planning to do, right?) we would also have saved tens of thousands on the life of the loan. So all things considered, the savings we've incurred are actually up month over month. More good news for bears.

As we go through the transition in buyer demographics, prices for the homes being sold may make it appear as though they are heading up from time to time. It's an aberration causing by demographics and the tiny number of homes being sold. Remember inventories are up and sales volumes are down and things are about to get a lot worse for sellers.

Irvine Renter, a fellow OC blogger, posted a great article on his blog regarding how the credit crunch is going to affect real estate demand side, while loan resets are going to create more supply. It's a must read.

Vivo los Osos!

Prices Down in All So Cal Counties!

On a price per square foot basis, prices are down in all So Cal Counties both in nominal and real terms.



WTF with Santa Barbara?

Would You Buy a House from this Man?

The CEO of the nation's #1 builder, D.R. Horton's Donald Tomnitz, told Wall Street analysts, according to The Associated Press: "I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year."

You have to love this kind of candor from a CEO. Let's face it, the guy has the balls to call it like he sees it, damn the torpedoes. Him, I like. But, more importantly, I find myself thinking that I could TRUST him.

Unlike most in the RE industry at this point, he's not trying to sell me some BS, pie-in-the-sky rhetoric about why I should buy a home now so he can land a couple of transaction. He's looking at the longer term, recognizing the fact that what he says today will be remembered tomorrow. He KNOWS that his reputation and credibility are on the line and he's behaving like a professional and telling like it is. There is one huge lesson here for everyone in the RE industry.

There's a saying in the Sales profession:

You buy from people you trust. You trust the people you like.

When I buy my home, you can be it bet it will be from parties I trust. Case in point, if I decided to buy new, my first stop is going to be at a D R Horton development. They have earned to right to try and win my business. These other developers? Not so much.

The same logic applies when you are buying an existing home. Why buy a home from a realtor where they're trying BS you about the market? If they're not being honest about the market, what else aren't they telling you? When a realtor tries to pump up the market, he is acting in HIS interest not YOUR interests. This ought to be a HUGE red-flag for you and you ought to really consider heading for the door.

Realtors have got to realize that every sales transaction requires TWO parties, both a seller AND a buyer. No buyer, no transaction: it's that simple. Yet, all the propaganda is coming out of the NAR is all bullish and pure bullshit. No self-respecting well-informed buyer is believes this nonsense and it is killing their credibility. Many agents aren't any better. Take these two yahoos as examples:

"Here we go again! For those of you who speculated a drastic decrease in residential property sales and prices... think again! Prices are increasing as I type this "opinion" and will once again result in a mad scramble for anything in Orange County with four walls and a roof. It likely won't be as ridiculous as it was last year however, but it will be similar. Buyers should buy now before summer prices escalate. Sellers should list their property around the beginning of April." As Quoted in Realty Times.

For buyers who have been waiting "for the bubble to burst," it's not looking very hopeful," says Realtor Vicki Lloyd. "For the beginning of the year, it is starting to look a lot like last year, but with higher prices. County-wide, our inventory levels have fallen back to less than two months supply, and well-priced homes are again selling within days of coming on the market." As Quoted in Realty Times.

Do I even need to point out how severely these two are wrong? I won't bother. But I will ask you this question: "Would you buy a house from either of these people?" I wouldn't and I won't. If they can spread BS around like this, how could possibly consider involving them in a transaction of several hundred thousand dollars? They have NO credibility and I, for one, do not trust them.

We may be bears, but we have memories like elephants. We are going to remember who tried to manipulate the market and who was honest. If you're a realtor and you ever want a chance to earn our business you'd better start shooting straight.

Vivo los Osos!

Are Buyer Demographics Skewing Home Prices?

The Orange County Register reported that the median price for an existent home inched up to $675,000. Some bulls seem to be rejoicing.

Like I predicted in a prior post here, the price for existent homes is starting to inch up a bit. My theory is that due to the tightening of non-prime credit, the "typical" buyer has become more "upscale" than in the recent past. Buyers today are likely more affluent and have better credit ratings than the average buyer last year and are also buying larger, nicer and most importantly more expensive homes. I'm not alone on this, Jon Lansner over at the Register would seem to agree. This skew toward higher-end homes, I'd offer is hiding the fact that home prices here are much weaker than they appear.

With ever-tightening credit markets and sales volumes reduced to a trickle, this skew is going to continue to worsen, possibly to be point where looking at the median says almost nothing about the underlying value of the typical home, but only serves to describe the demographics of buyers. Until we can all agree that the median is un-skewed, I think the better metric is likely price per square foot.

I have to sit here and wonder what's going on with the price per square foot this month. I don't have the data for Feb yet, but as I've discussed on this blog the price per square foot was down 5.1% comparing January 07 to all of 06. On a $600,000 home, that represents a $30,000+ decrease in price and that's compared to the full year and not to the peak. This is a lot of money by any stretch of the imagination. While I don't have the data to prove it, (data commons anyone?) I would speculate that once the data is available, we will see price per SQFT drop in February as well

So, if a bull tries to make the argument with you that prices are inching up, tell him, "Yes, that's right, they have. We bears have been expecting that..." But also add, "...but what's going to happen when all the well-heeled buyers to be have purchased and there's almost no one in the county with a FICO score above 650 AND an income above $150,000 looking for a home?"

New Poll: At What Median Price Would You Buy?

I’ve been talking a lot lately. Today, I’ve decided to take another opportunity to listen.

I’ve posted a new poll that asks another pretty simple question which is essentially at what price level would you seriously consider buying a the “typical” home in Orange County. The median price for last month was $600,000 and sale transactions were at a trickle, the slowest sales pace since 1995, so clearly that price level isn’t very motivational for most of us.

Would you be very likely to buy at $575,000? $550,000? Are you holding out for $500,000 or less?

Take our poll and let us know! As feel free to add a comment or two about your response and your reasoning behind it.