Saturday, March 10, 2007

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?"


Markus Arelius said...

The last line of your post was very sad: about the income requirement of $150,000.

The median income level in Lake Forest, CA is $75,000 per annum,
yet average single family home prices here remain at the $600k to $700k level, with some evidence of a downward turn since January 1, 2007. Therefore, the vast majority of residents here cannot be, should not be, and in the near future due to tighter lending standards, will not be, home debtors.

Soon the pool of potential homebuyers in OC will have been sliced by MORE than half.

If ever you ever needed a catalyst for lowering the $600k or more home prices,well, there you have it.

Ironically, many realtors and mortgage lenders who made outlandish claims about the future OC housing market growth ASSumed that one important variable in the entire equation would remain fixed: low mortgage lending standards and potential borrowers' access to easy money at the chump windown.

Now that ridiculous game will be turned on its head.

Another good question is what happens later in 2006 when the dollar slides further, inflation roars and Bernanke must raise rates?

HB Bear said...


I have to agree. It really is a sad state of affairs here and in many other places. Good honest, hard-working people can't begin to afford the typical home here, or even an atypical home in a neighborhood that very well would be unsafe for their families.

With the tightening of credit, as you point out, the pool of buyers is going to shrink and shrik dramatically. Another factor that no one seems to be talking about is the affect of depreciation on the "trade up" buyer.

A very nice family just moved in next door to my mother, paying about $800,000 for their homes. Speaking with the new owner, he conceded that their home purchase was only possible due to the large down payment they hand due to the EQUITY they earned from the sale of their prior home. At zero to negative appreciation, these kind of folks are going to become increasing rare.

So circumstances have pared down the number of new buyers and buyers looking to trade up. Who does that leave? The retirees looking to down-size? Not much to get excited about there.

I worry a lot about inflation as well. I decided early on to avoid politics on this blog, but there are clearly SOME parties in the power that have engaged in some of the most deleterious fiscal policy in modern history and eventually their mistakes are going to come back and bit us in the butt. I hope it can be managed and things don't get too out of hand. I'd prefer to have a nice, gentle deflation of the bubble rather than a full blown explosion.

My nightmare scenario, that I believe could lead to massive Nixonesque inflation is that old Bernanke tries to drop rates to boost the RE market, causing dollars to flood the market, causing us to have to boost rates higher to absord the new inflows. This of course hurts businesses and we get to live with stagflation, which I can tell you from the first time around, completely sucks.

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