OC Prudent Bear

Threat of Japanese Intervention Stops Fall of US Dollar, For Now

2009-11-27T08:37:00.000-08:00

Market fears of a possible intervention by the Bank of Japan to support the dollar helped the U.S. currency recover its poise Friday after it hit a 14-year low against the yen.

By mid afternoon London time, the dollar was up 0.3 percent on the day at 86.82 yen. Earlier it had sunk to 84.81 yen, its lowest level since mid-1995 as currency traders sought the sanctuary of the Japanese currency amid mounting concerns about the fallout from Dubai's financial problems - a government investment fund, Dubai World, asked creditors if it can postpone payments on $60 billion in debt until May.

Read the whole story here.

Inflation in the US: The Candy Bar

2009-11-26T22:52:00.001-08:00

So, I thought I'd lead off the story of the declining dollar buy illustrating how inflation has slowly but surely eroding our purchasing value. I'm choosing to illustrate this by borrowing from my own life and talking about the price of candy bars.

When I was a little kid, say six years old, I was able to buy a candy bar at the local grocery store for ten cents. I can be sure of this, because my dad used to give me a quarter and I would ride my bike up to the local Lucky's and I would buy two candy bars and pocket the nickel in change.

Last week when I was a my local super, candy bars we're priced at $.99 a piece.

What this means of course is that in 35 years, the price of a candy bar has risen ten times! Or looked at another way, on average, the price of my candy bar has gone up about 6.7% every year. In Econ 101, Professor McKibben told us that inflation between 2.5% and 3% was normal. So what gives?

From what I can recall, I believe that I was paying about $.50 for a candy bar just three years ago. That means that nearly half of the price increase in candy bars has come in just three years, for about a 24% increase in price per year.

This is an example of what I (and others call) insipid inflation. Prices rise, and dramatically so, but because the government say inflation is low and contained, we believe them and go about our business.

It is precisely this kind of inflation that shows just how weak the dollar has become, but as we'll see in the coming months, this is the tip of the iceberg.

Shifting Gears: The Declining Dollar

2009-11-26T12:48:00.000-08:00

I've decided to fire up the old blog again, but this time I am going to be re-focusing my posts broadly around the weakness of the US dollar.

Why the reason for the change? I think we're on the cusp of a very tumultuous time in world economic history. In the same way that a basket of factors lead me to believe the real estate market was going to collapse three years go, I now see a different set of factors that is leading me to believe that the American dollar is about to be worth less than it has in quite some time.

For example, the dollar slid to a new 14-year low of 86.27 yen, while the euro pushed up to a fresh 15-month high of $1.5141.

I think this is just the start, the implications are epic and that there is a great deal of risk coming our way; there's also the possibility some opportunity as well.

Over the coming months, I'll share my thoughts with you and would invite you to share yours.

We Bought a House!

2009-09-19T23:07:00.000-07:00

I know that over the last couple of years I have been one of the most ardent bears relative to the real estate market. But I want to share with the small handful of readers that I've got left that as dour as I have been, my family and I just took the plunge and bought a very nice house in Huntington Beach. Nice property, great location, saved hundreds of thousands by avoiding the peak...kids and the wife are very happy.

I may have bought before the bottom, I may have been slightly late. I may be making a great hedge against inflation, I may not be as well. At the end of the day, none of that really matters. I am just happy that I finally get to live in a house and in a neighborhood that I really like and for less than it would cost me to rent. What's not to like?

Conidering Buying A Bank-Owned Home?

2009-02-05T09:44:00.000-08:00

If you are considering buying a bank-owned home, particularly one from Chase Bank, you have to check out this blog. It tells the story in sort of a novella format about a family that got royally screwed by Chase Bank.

Check it out here: www.unethicalchase.com

I've seen some weird shit in my day...

2008-10-01T19:27:00.000-07:00

This is even more, um, entertaining.

How Much Is It Worth?

2008-08-14T17:57:00.000-07:00

I've been scratching my head a lot lately wondering how to estimate a fair market price on properties for sale here in Huntington Beach.

Asking prices are out-of-touch with the market and seem to be driven delusional, denial-based wishes of homedebtors. Take as an example this listing from Redfin:

1,100 cramped square feet for $629,000 or $554/sqft where other properties in the area are selling for under $400/sqft. No wonder the house had been on the market for almost half a year.

Comprables properties are of some value, but are problematic because with property prices plummeting as they are, any property sold more than 30 to 60 days prior is no longer reflective of current values.

Then there are also comprables where the buyers, IMHO, paid much more than they needed to for properties thus biasing values upward. These buyers are like the idiot who split sixes at the blackjack table when the dealer has a ten showing: not only do they screw themselves but they also mess up the game for everyone else

So, if asking prices are meaningless and comprables are of rapidly diminishing value and subject to the influence of knife-catching, sixes-splitting idiots, how can one value a home? I'm not certain but I think I've found something that can help.

I was visiting one of my favorite blogs papermoney.com last night and found a remarkable home pricing tool.

It's a home price calculator that uses the past sales price of a house to estimate its current market value. The way it does this, is by comparing the Case Shiller Home Price Index at the time of last purchase and extrapolating the current price and future price of the home by the looking at the current trading price and futures price for the index, respectively. Being a quant and a big fan of Case Shiller, I think this tool is pretty damn cool.

It's really easy to use. Select the region your suspect home is in; in our case it is the CS Los Angeles market, type in the last sale date of the property you're interested in buying and the amount at which it sold--that's it. The tool will then calculate its past, current and future value (3 and 6 months out) for the home.

Let's do an example together. Here's a house I had a passing interest in over the last few weeks.

It's a nice house on a cul de sac, almost 2,400 sqft, very serviceable with a price reduced down to $625,000. Even for this market it almost seems like a good deal at $264 a sqft. But is it really?

By scrolling down to about halfway down the Redfin listing, we can find the sale history for the home:
So we type these values into the calculator and what do we find but that, at least according to this calculator, this price is still roughly $60,000 over market. I showed this to Mrs. HB Bear and we agreed that we'd pass on this fine little number on Autumn Circle.

So, fellow ursines, when you're considered making an offer at a home in the future, be sure to check out this fine little tool first. (I've added a link to the Cool Tools section of the blog for your convenience.) It may not be an exact estimate of the value of a home, but IMHO it is far more accurate than unrealistic asking prices and short expiry comps and just might prevent you from making a big, big mistake.

Viva los Osos!

Right Time to Buy: 2014

2008-08-10T18:42:00.000-07:00

A great article came up in one of my news feeds today that I wanted to share with readers. This provocative Business Week article, says, among other things:

Prices will only stabilize once foreclosures and sales volumes stabilize first.
While some areas will stabilize as early as 2010, national prices won't stabilize until 2011.
For the "bubbliest" of markets, including the author's home turf here in OC, prices may not stabilize until 2014.
When prices do stabilize in OC in 2014, prices very well could be lower than in the early 90's.

His and my advice to buyers in SoCal is simple: wait.

Viva los Osos!

HB Comp Killer - 6202 Point Loma Dr

2008-08-06T19:56:00.000-07:00

6202 Point Loma Dr Huntington Beach, CA

Sold For: $550,000 (06/27/2008)
Beds: 5
Baths: 2.5
Sqft: 2,276
Price per sq ft.: $242

I've seen a lot of comp killers over the last several months, but this one takes the cake. Five bedrooms, two-and-a-half baths and almost 2,300 sqft of living space in one of the nicer/nicest parts of West Huntington Beach for only $550,000. That, friends and neighbors, is mind-boggling even to me.

At the peak, $550,000 wouldn't have bought you a sub-1000 sqft bungalow fixer-upper, on a busy part of Heil that may have had some foundation issues relative to "liquefaction." Seriously, it wouldn't have.

But, now the proverbial tides have changed and 2,300 sqft can be had in a nicer part of West Huntington Beach, in at least in one instance, so far, for only $550,000.

Now, particular property does have its issues. Even from a drive by the place I could tell that it clearly needed some work; it would be fair to call this house a "fixer-upper." It also backs a "major" street, Slater which means moderate noise. The property is also is at the entrance to the tract which means heavy traffic. Landscape rennovation would be required. Certainly there must be other issues that I couldn't grock on a drive by, but even when you consider all the negatives, this property still sold for only $550,000.

It's just amazing how much more house one can get today in west HB than he could at the peak for the same amount of money. I am actually dumbstruck by the enormity of it all.

(I have more to write about this property. Once I can gather my thoughts and get some work done for a customer, I will hit the blog with an update. Just imagine the impact on comps in the area....)

HB Haircut - 5091 Linda Cir

2008-08-02T10:10:00.001-07:00

Beds: 4
Baths: 2
Sq. Ft.: 1,750
$/Sq. Ft.: $357
Lot Size: 6,360 Sq. Ft.
Property Type:Single Family Residence
Style: Traditional
Year Built: 1959
Stories: 1 Level
Area: Northwest Huntington Beach
County: Orange
MLS#: S520813
Source: SoCalMLS
Status: Active
On Redfin: 177 days

***Update: This property went into escrow in the last couple of days; it will be VERY interesting to see what they got.***

This single story cul-de-sac home has been remodeled and was spared no expense in the quality of materials and workmanship used throughout. It boasts nothing but the best. New Custom Landscaping, New Custom Vinyl Patio, Custom New Hardscape, Newer Carpet, Seperate Laundry Room, Recessed Lighting, New Interior doors, Baseboards and Moldings, Solid mahogany front door, Formal Dining Room, New Anlin Energy Efficient windows/sliding door, new central heat and water heater, new paint, new exterior, stucco, and new interior texture. Located in a family friendly neighborhood within walking distance to the distinguished Village View Elementary School and Marina High School.

Original List Price: $749,900
Previous Price: $649,999
Search Price (High): $649,900
Search Price (Low): $624,400

Months ago I toured this property and as the description says, it's a pretty nice home (this kitchen is quite small, however) and on a great little cul-de-sac here in my neck of the woods, West HB. At the time they were asking $749,000 for the home.

At the time, before the comp killers came en masse to West HB, I though the property was worth maybe $660,000 or about $90,000 less than they were asking. Had they priced it at that level, IMHO the house would have sold. But they didn't. Instead they introduced range pricing and brought to price of the home to the $749,000 to $699,000 range--lower, but still more than a prudent buyer would pay.

The house languished on the market and, unfortunately for this seller, the comp killers began to show up soon thereafter. In response, they dropped their price to the $699,000 to $649,000 range, but the price damage from the comp killers had already been wrought and the house was no longer worth $649,000 and so the house sat on the market.

Now they've dropped the price to $624,400 to $649,000 range. And guess what? I think the price is still to high. With the number of CA Option ARMS set to reset and the most recent comp killers, I wouldn't pay more than say $565,000 for the house at this point or about $90,000 less than I thought it was worth originally and about $200,000 less than the original asking price. Now, some knife-catcher might pay more, but that will be his loss; not mine.

Had the seller priced his property correctly in the beginning, he could have walked away with tens of thousands of dollars more than he'll get in the fullness of time. Sellers ought to know by now that pricing a house aggressively is the only way to sell it and that greed is punished severely in the market today.

So here's the take away from today's post. Buyers, if a house seems too expensive, it probably is; be patient, the market will nudge sellers in the right direction. Sellers, if you're not priced well-below the most recent and comprable comp killers, your house won't sell and every month you wait costs you....

Viva los Osos!

Case-Shiller Futures Bear Porn

2008-08-01T13:58:00.000-07:00

Beautiful, isn't it? I wouldn't go as far as the kid in American Beauty, but to a died-in-the-wool bear, there is something vaguely comforting about this graph.

Case-Shiller Bear Porn

2008-07-29T12:14:00.000-07:00

McCain = Bush = McCain

2008-07-25T16:37:00.000-07:00

I've kept the blog largely apolitical, but after watching Obama's masterful speech in Berlin, I had to post this. If you'd like four more years of Bush, by all means vote for McCain.

If you want change then Obama is your man.

Interest Rates Rise, Housing Death Spiral to Ensue

2008-07-24T17:29:00.001-07:00

Due to the problems that housing and lenders have had as of late, interest rates for California home purchases have gone up, way up, in the last couple of months. Have a look at this graph from BankRate.com

It shows that the interest rate for a "typical" home in OC has gone up from about 5.7% to about 6.5% since May. When I run the numbers, this translates into a roughly 9% higher mortgage payment! My guess is that this change alone will cause 10 to 20% of those that could have qualified for a loan in May to now be unable to qualify.

Put another way, the recent run-up in interest rates has reduced the effective demand for homes in OC by 10 to 20%. Now, if we assume that housing prices are unit-elastic, this change in interest rates/demand ought to cause home prices to drop between 10 and 20% more.

Then there's the compounding effects of the price/demand declines. If prices drop, more people will walk from their homes. If more people walk from their homes, then there will be more inventory on the market and if there's more inventory on the market, prices must drop to meet demand.

Not to mention the fact that, banks seeing a greater increase in foreclosures might use the same inscrutable logic as they've used in the last couple of months and raise their rates in response, which leads to fewer people qualifying and so it goes...

It's called a death-spiral friends and neighbors and the banks are bringing on themselves with the help of the White House...but guess what? You, me and all the rest of the American tax payers are going end up paying this particular bill in the form of bailouts and every other manner of Republican Socialism the Bushies can muster.

How much more of this crap are we going to take?

Are Your Bank Assets at Risk?

2008-07-19T18:23:00.000-07:00

Regulators learned in the 1990s that the higher a bank's Texas Ratio the more likely it is to fail. Is your bank on this list? If it is, move your money. And call mom and dad to be sure that they don't have any money in these insitutions either.

Using this ratio, regulator say as many as 150 financially strapped institutions could fall over the next 18 months. You do NOT want to be one of the "statistics" in this fallout.

The (Un)Natural (De)Evolution of the Blog

2008-07-17T15:47:00.001-07:00

As I have mentioned before, the cratering of the OC RE market is now so obvious, I find it uninteresting to comment on it any further. Once things start to turn, I'll be back on topic, but for the moment I still want to blog about something, though I have no idea what.

Until I figure it out, or the market turns, I'll just try out some random concepts and see where they go.

I've always enjoyed the message and simplicity of the "Wear Sunscreen" song. If one were absent a defined moral or ethical perspective, I think one could use its message as a reasonable surrogate, at least on a short-term basis. It is definitely better than MOST ethical systems I have come across.

While "Sun Screen" is fairly light-hearted , Chris has made an even more light-hearted parody of the video. Some might consider it profane; I think it's funny and it contains a few good nuggets of wisdom. Having traveled to Amsterdam as much younger man, I will also offer that based on first-hand experience central premise of Mr. Rock's video is most certainly true...

90% Marginal Tax Rate for the Middle Class

2008-05-11T19:55:00.000-07:00

I gave some thought about how those making above $160K (for a couple) aren't welcome to receive the $7,500 First Time Buyer's tax credit and realized that we're actually getting more screwed than I originally thought.

You see, the phase out for this tax credit starts at $140K runs to $160K; so it's a total of 20K in income that determines whether you get the full $7,500 or zilch. It works the same way for the Bushie tax credit: with two kids at $140K in annual income you'd get $1,200, but at $160K in income again, you'd get zilch. That is one expensive $20K in income, but how expensive is really?

On 2oK we suffer the following losses and taxes:

$7,500 exclusion from First Time Buyer's Credit
$1,200 exclusion from Bushie Tax Credit
$7,200 Federal Taxes (would have paid regardless)
$1,800 State Taxes (ditto)

For a grand total of $17,700 in taxes or loss of tax credits or the equivalent of a 90% marginal tax rate. 90%! I defy any reader to find a single group in America that pays the same effective tax rate as this 140K to 160K income group.

Have we all done something to offend those in power? If so, how did we manage to piss off both sides of the aisle and the legislative and executive branches of government at the same time. (Let's remember that is was W who had us excluded from the "stimulus package" and it was Speaker Pelosi who sponsored this lovely First Time Buyers legislation.)

Well, I really don't think we've done anything to offend any one. I'd like to think of it as an 'oversight.' That our lawmaker's didn't mean to screw us and that some of the details fell through the cracks and that the 90% effective tax rate is just a big mistake. And mistake that ought to be rectified immediately.

I've already emailed Bush, Boxer, Feinstien and my Congressman Dana Rohrabacher; I'd invite you to do the same. No group in the US should be asked to pay a 90% marginal tax rate. It's unfair, it's unAmerican and it's anti-capatilist.

Call or write your representatives today!

Feds Set to Screw OC's Middle Class Again!

2008-05-09T10:51:00.001-07:00

Many of middle-class families in OC are still stinging from being excluded from Bush's tax rebate program. While many of our friends got checks of up to $1,200, we got nothing. The reason? We made a bit too much money to be included and were summarily "phased out" of that particular gravy train.

Guess what? You're about to be "phased out" again.

Yesterday, the House passed HR 3221 aka the American Housing Rescue and Foreclosure Prevention Act of 2008 on May 8, 2008. This piece of homedebtor rescue legislation spends billions helping those folks in trouble keep their homes, to refinance existing mortgages, for cities buy blighted properties and so on. So, if you're were unfortunate enough to have bought a house that you couldn't afford, the taxpayers are here to bail you out.

You're welcome.

Then there's this little provision called "First-Time Homebuyer Credit" which essentially says that if you are a first-time homebuyer then you can get a $3,750 federal tax credit if you are an individual or $7,500 if you are a couple. That, unless you're middle-class, then you get nothing.

That's right, if, as an indvidual, you make more than $90K a year or a couple that makes more than $160,000 a year, then your tax credit amount falls to zero. Zero as in nothing. Zero dollars, zero help, zero consideration by your legislators. Zero, just like the tax credit you got as part of the Bush stimulus package.

That's right, once again the Congress has left the American middle class out in the cold. If you're Bear Steans, the feds fall all over themselves to throw our tax dollars at you. Buy a house you can't really afford, never mind the feds will finance it for you at taxpayer expense. But work hard, attain some level of success and then exercise fiscal responsibility and all we get from Congess is a big F#@K YOU!

The middle class pays an egregious amount of tax. We're in higher tax brackets based on what earn, but lack the resources and tax shelters of the rich; so we're left paying more than those less fortunate than us and more than those more fortunate than us. If anyone needs a f@#king tax break is it us, the middle class. But yet again, we're left out in the cold.

As you can probably gather, I am mad as hell about this and I'm not going to take this sitting down. I'm getting ambiguous information on the state of the bill in Senate at this point, but if hasn't passed yet, I am going to call my Senators and give them a piece of my mind. If it has, I am going to place a call to W's office, supporting his presumptive veto. Once I get this sorted out, I will post my efforts to this site.

I am going to be damned clear that the tax credit phase out, as written, is affront to the middle class in America. I am going suggest either doing away with the income restriction all together, raising the limit to $125,000 per indiviual or $250,000 for a couple--that is to say, inclusive of the middle class.

Once I get this sorted out, I will post what I've found and names and numbers of those we need to hold account here.

This is bullshit and I am not going to take it any more.

You shouldn't either.

Why are OC Inventories Flat?

2008-05-03T20:41:00.001-07:00

I've seen some anecdotal evidence that inventory levels of are essentially flat since the end of January this year and on year-on-year basis as well. This causes me a great deal of cognitive dissonance; it may do the same to you.

As examples, I'll site the inventory graph from IHB which show inventory levels flat for Irvine and the OC inventory numbers found on Bubble Tracking which show inventory flatness for OC.

If you have a close look at the OC inventory data, what you're going to see is that according to Redin on Jan 30, 2008 there were 17,151 homes for sale in OC; on April 30 there were 17,358. A couple of hundred more homes in April than January, a bit more than 1% which I would call essentially flat. So for the year, inventories are essentially flat.

Even if you don't consider the 1% increase to "flat", I'd point out that in the same period in 2007, we saw inventories rise 28.5% rise from roughly 13,200 units to just under 17,000 units and that historically a rise in inventories as we enter Spring is typical. But this year we don't seem to be having any seasonal run-up inventories.

And, I'm sure you've already noticed the coincidence that we have roughly 17,000 homes for sale both now and one year ago as well, meaning of course that inventories on OC are flat on a year-on-year basis as well.

I have to say this is strongly counter-intuitive to me. I mean, we have only a trickle of homes being sold compared to last year and I would expect almost every other year on record, showing that demand is weak. On the other hand, we also have a glut of bank-owned, short-sale, foreclosure-avoidance properties on the market meaning that supply, at least for those segments of homes, is strong.

So, I pose these questions to readers:

Doesn't weak demand and strong supply at least [i]imply[/i] that inventories should be on the rise?

And if not that, then shouldn't we at least have our normal, seasonal run up of inventory?

Is it the case that a lack of "discretionary" home sales have lead to stable levels of inventory?

Does anyone have any OC-level data that shows something different? Maybe from the MLS?

Any information or insight would be welcome.

Moving On...

2008-03-31T13:02:00.000-07:00

Today is my last day with my current employer. With that in mind, I've pulled some of my favorite work-related video clips together for your viewing pleasure. Enjoy.

Contest: Predict the Day the OC Median Drops Below $500K

2008-02-22T18:37:00.000-08:00

I'd like to have some fun and encourage some discussion here on the blog; so I am going to sponsor the first-ever OC Prudent Bears Real Estate Prediction contest. Here are the rules.

Readers of the blog will try and predict the day that the median price of the Orange County All Homes Median Price as reported by DataQuick will fall below $500,000.

Readers are to add a comment to this post that includes the date that he predicts the median will drop below 500K and their nickname as they are generally known around the RE blogosphere. (See example prediction in Comments section)

The reader guessing closest to the actual crossover date (actual event date, not reporting date) will be considered the winner.

If two or more readers guess the correct day, the reader who entered his guess first/earlier will be considered the winner.

Readers can revise their guess as many times as they like, but only a reader's last and latest prediction will be considered for purposes of determining if he is a winner.

Winner will be announced as soon as practical following the $500K median crossover date.

For the hell of it, I'll throw in a Starbucks gift card for the first place winner. If anyone else has a "junk drawer" item they'd like to throw into for a prize, let me know.

It's Funny Because It's True

2008-02-20T18:13:00.000-08:00

Another classic posted by Trooper on IHB.

Oh, and Treasury Secretary Henry Paulson, feels as thought the "worst is just beginning" for housing which, depending on your perspective may or may not be more funny than the comic above:

Bernanke Bearish on Economy

2008-02-14T09:22:00.000-08:00

Helicopter Ben seems more than a bit dour on the prospects for the economy:

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so." Bernanke also said that the "virtual shutdown" of the market for subprime mortgages — given to people with blemished credit histories or low incomes — and a reluctance by skittish lenders to make "jumbo" home loans exceeding $417,000 have aggravated problems in the housing market.

Unsold homes have piled up and foreclosures have climbed to record highs.

"Further cuts in homebuilding and in related activities are likely," Bernanke cautioned.

Read the full story here....

S&P: LA/OC Home Prices Set to Drop 17% in 2008

2008-02-09T16:39:00.000-08:00

If there are small children or LA/OC homeowners in the room, you might want to have them leave before you have a close look at this chart:

I think we've covered the methodology for interpreting this kind of chart frequently enough that we can dispense with any explanation. The net-net is that the S&P futures market is predicting that real estate prices are set to drop in the an additional 16-17% in 2008 in the LA/OC market.

With the current median selling price at just under $600,000 for the median existent SFDU in OC, that means that we can expect to see prices drop an additional $100,000 for a median EOY 2008 price of just under a half-million dollars.

I will write more on this topic later, including the fact that these S&P number align very-closely with reader-poll-derived predictions from this blog, but I have to head out to Costco and pick up a bottle of Dom for me and Mrs. HB Bear. We have some celebrating to do.

Viva Los Friggin' Osos!

A Little Fed Humor for the Weekend

2008-02-08T20:52:00.000-08:00

A great find from our friends at the Irvine Housing Blog.

Just hilarious.

Shiller: Current Housing Bust Comprable to The Great Depression

2008-02-03T10:16:00.000-08:00

If you are buying or selling a home, the video below should be considered mandatory viewing.

Readers Say Prices to Drop 15 to 20% in OC!

2008-01-31T16:18:00.000-08:00

The results of January's reader poll are in and they paint a very dismal picture for OC's housing prices for 2008.

Thanks to everyone who voted in the January poll regarding their predicition on this December's YOY pricing change. While being a died-in-the-wool bear myself, I have to admit that even I was a bit surprised by the outcome as reader's of this blog have an such an overwhelming negative view of pricing strength here in OC.

As one can see from the chart above, the most common sentiment (30%) expressed in the poll (the mode) was that prices in OC were set to drop between 16.1 and 20%. The weighted average of the votes (the mean) expressed that readers felt collectively that prices would drop 15.6%.

If you recall, the median price dropped in OC 10.2% between Dec2006 and Dec2007. So, the largest plurality of poll respondents seems to believe that this year prices will drop between roughly 150 to 200% as much as last year! And on average they expect to see prices by 150% as much!

Pricing optimism was very hard to find in poll responses--only 11% of respondents felt that prices in OC would drop 8% or less this year; actually, more respondents (14%) think prices will drop 24% or more!

All things considered, I would offer that this crowd on the whole seem to believe that prices will drop between 15 and 20% this year. Quite a drop and quite the boon for bears if our collective wisdom is correct.

Stock Market Sees OC's Economy as Weak

2008-01-22T15:51:00.000-08:00

From the Bloomberg.com website:

BLOOMBERG ORANGE COUNTY SNAPSHOT

"The Bloomberg Orange County Index is a price-weighted index designed to measure the performance of Orange County's economy. The index was developed with a base value of 100 as of December 30, 1994."

The most-current performance is plotted here:

If Bloomberg is correct and this collection of local stocks is reflective of OC's economy, it would seem as though the stock market has a very poor opinion of our short term prospects.

Last year we actually had a net job loss here in the county, is the stock market predicting more?

New Poll: Where are Prices Headed?

2008-01-16T17:33:00.000-08:00

The last pricing poll had too many votes toward the high end of the scale, so I've rejiggered the categories to be more expansive and inclusive of higher rates of decline.

Please vote again!

Lies, Damned Lies and Realtor "Statistics"

2008-01-06T09:57:00.001-08:00

I went to an open house in my neighborhood today, just to check it out. While I was there the realtor made the comment that "any home purchased in OC has appreciated over a five period." I'm not going to call the guy out by name, though I am tempted to, but I am going to call bullshit on this oft-cited "statistic."

Have a look at the chart above. It shows the Case-Shiller index for LA/OC for the period Jan 1990 to Dec 1999. The line in this chart shows the relative price for homes in the area on a monthly basis. Does it look like a house purchased any time in 1990 had regained it's value 60 months later? How about 1991? or 1992? No, no and no. In fact, it's not until roughly the Spring time frame of 1993 that they typical home purchased would any appreciation over a five-year period.

Put another way, for roughly 39 months starting in Jan '00, the typical home did not seen any appreciation over a five year period. In fact, for the poor bastards who bought in Jan '00, had to wait 10 years for the market to just break even. Seems like our Realtor's claim collapses under the weight of data/facts.

What's even more important, loyal Reader, is that the aforementioned period was at the beginning of that downturn and maps EXACTLY where we are with today's downturn. If history is any guide, I submit to you that it is more downside risk in buying a home today than any time in since 1990, or the last 18 years. (Will have to write more about this later.)

Another Realtor myth laid to rest, another self-inflected head wound to Realtor credibility.

Viva los Osos!

Off Topic: Lester Burnham and Mike Huckabee

2008-01-04T13:10:00.000-08:00

Have you ever noticed how you never see fictional American Beauty character Lester Burnham and presidential hopeful Mike Huckabee at the same party?

Coindence?

Maybe, maybe not.

Price per Sqauare Foot Off 12% in OC

2007-12-23T12:36:00.001-08:00

I was tooling around the DataQuick site and found an interesting stat I thought I'd share with readers.

According to the most-current data found (October LA Times chart) on the DataQuick website, prices per square foot are down versus the 2006 median a whopping, mind-bending 12.2%. This is more than double the change in the of the median which was reported at 5.2% for the same period.

The disparity between these two numbers leads me to believe that:

The change in housing prices for OC as reported by the median is historic in magnitude, but is still under-reporting the actual decline in housing prices. As a result, many sellers are still pricing their homes at $/SF prices above the market rate.
Seller's, once they understand that they are actually priced above the market (in $/ft) they are going to lower their prices further, and possibly dramaticaly so, in an attempt to undercut one another, exacerbating pricing weakness. There are big pockets of this activity in OC already, but I expect it to become far more pervasive next and the go-to strategy for all REO property.
Buyers, if they analyze the $/sq ft data and see it dropping precipitously, are going to be even more scared than they already are, further deferring the purchase of a home and reducing period demand.
We have a death-spiral interaction of mutual positive feedback loops between the phenomena described in #3 and #4 above: they both feed and gain energy from one another. Prices will drop and buyer's will balk and nothing short of the arrival of true affordability and improved access to funds is going to change that.

Prices are already dropping at a precipitous rate. A 12.2% decline is epic in its magnitude.

Given the analysis above, I am strongly inclined to believe that prices are set to drop more and drop faster next year. 2009 isn't looking too pretty either.

I'm not exactly sure what to call the phenomenon we're about to go through, but the words "panic" and "crash" come to mind. Scary words. Let's just all hope it doesn't get too bad, too fast--that won't be good for anyone.

Viva los Osos?

OC Median Asking Price Down Almost $120,000

2007-12-16T10:32:00.000-08:00

I poured myself a cup of coffee this morning and decided to have a look at asking price data at one of my favorites sites Housing Tracker.

According to the data at Housing Tracker, the median asking price for homes in OC reached it's peak in May of 2006. At that point, the median seller was asking nearly $700,000 ($694,600)for her home. Today, she is asking nearly $120,000 less.

Over life of a 30 year loan at 7.5%, a buyer purchasing a home at today's median versus the median at the peak will save almost $300,000 in principal and interest. That buyer would also save rouhgly $53,000 in property taxes, for a total savings of about $350,000.

That is an amazing amount of money and a tremendous reward exercising bearish prudence. You should be proud of yourself.

Viva los Osos!

OCPB/Lansner Reader Demographics

2007-12-03T08:17:00.001-08:00

Quick summary of the survey results; details of bet later.

In general, when I consider the 'icon' associated with my current outlook on OC residential real estate, I consider myself:

Bear 93.9%
Bull 6.1%

In terms of political party, I most consider myself to be a part of:

Registered Unaffiliated (Independent) 31.8%
Republican 30.3%
Democratic 27.3%
Other Party 10.6%

Which best describes your living situation:

I rent or lease the property I live in. 62.5%
I own the property I live in. 37.5%

Choose the location that best and most-specifically describes the locale in which you live?

I live in Orange County 67.2%
I live elsewhere. 15.6%
I live in Southern California 10.9%
I live in California 6.3%

Help Me Setttle a Bet!

2007-12-02T07:49:00.000-08:00

A buddy of mine and I are using reponses to a survey to settle a bet. I can't tell you anything about the bet, in part because my buddy is a bit of a cry-baby, and also because we don't want to bias the results.

The survey is very, very simple and is only four questions long. It takes less that minute to complete. We don't ask for any personal information and there's no need to register, provide an email address or anything else that might make a respondent uncomfortable.

So, please, do a Bear a favor, take a minute to answer the simple survey. And remember, let's keep things honest :)

Click Here to Take the Survey

Thanks!

S&P: Home Prices to Drop 7% Next Year

2007-11-29T18:32:00.001-08:00

7% reduction in OC home prices - Priceless.

Shaving roughly $40K off the price of the typical OC home - Priceless.

Saving nearly $100,000 in PIT over the life of a 30-year loan - Priceless.

For increasingly cheaper housing there's the implosion of the OC RE Market, for everything else there's MasterCard.

Regular readers will recognize this format of chart as being sourced from our friends at http://www.paperdinero.com/. The chart shows the S&P Case-Shiller price index for by month for the last few years as well as the monthly predicted index value as derived from futures prices traded on the index. The line of demarcation between historic values and predicted value is the left-most of the vertical dashed lines on the right-hand side of the chart.

This chart is pretty easy to understand given that each of the predicted values is at roughly -7%. That means for the futures market expects prices to be off 7% on a year-on-year basis at least for the next 12 months. At the current price of $570,000 for the typical OC home, an additional 7% off would mean a savings of a whopping $40,000.

Personally, I think we may be looking at more than 7% YOY. Particularly post-May next year, when the resets hit in mass, I think -10% YOY is rather likely.

Regardless, if the decline in price is only 7% and that keeps me from paying roughly $100,000 in principal, interest and taxes over the life of a 30-year loan, I guess I can live with that.

Viva los Osos!

Profiting from the Weak Housing Market

2007-11-28T08:00:00.000-08:00

Bear or bull, there's money to be made in the declining real estate market.

I found a great little ETF that allows investors to short the DJ Real Estate Index. By definition, because the ETF shorts the index, its price goes up with the DJ Real Estate Index goes down proportionately. Conversely, if the index goes up, the price of the ETF falls. The name of the ETF is UltraShort Real Estate ProShares and its trading symbol is SRS.

Now, from where I sit, there is very little positive to say about the housing market these days. And, if I am to believe what I read, things look primed to be much worse next year. While there are few guarantees in life and nearly none in the stock market, it seems like betting against the DJ RE Index makes a lot of sense.

What I find so interesting about this ETF is that that it can benefit those bearish on the RE market whether they own a home or not. For owners, buying an ETF like this one can act as a hedge against dropping home prices. For future owners, it's a way to potentially increase a future down payment.

Now with all of that said, this is still a risky investment. It's non-diversified, relatively-lightly traded, has relatively few shares outstanding, is subject to price volatility and it shorts an index that risen for most of its history. So, if you're considering getting into the ETF, discuss it with a licensed professional before you do, keep your investment to a small percentage of your portfolio and for God's sake, dollar cost average into it--it is way too volitile to try and time it.

(By means of disclosure, I invested in this ETF several weeks ago and the returns, while volitile, have been quite good. Furthermore, I am dollar-cost averaging into the ETF, buying on a dip, every few weeks.)

Viva los Osos!

Must See TV: Home Prices Tumble

2007-11-27T14:44:00.000-08:00

Home Prices Tumble

What Do You Make Out of This?

2007-10-20T09:12:00.001-07:00

I wrote the following in late October and wasn't going to publish it, but a buddy convinced me to get it out. Sorry it's more than a bit late.

I find this graph fascinating:

It shows a snapshot of recent year-on-year (YOY) price and volume changes for four segments of OC Real Estate: new homes, existing homes, existing condos and then an 'all' category encompassing the other three. The horizontal axis is used to plot year-on-year price changes ,while the vertical axis plots YOY changes in volume/demand. Thus, line the plots the YOY relative change in demand versus the relative change in price for each of our four housing segments.

This first thing I noted on this graph was the fact that prices of new homes had fallen the most of any segment while prices for existent houses had fallen the least. I believe that difference is caused by price different price 'stickiness' between those to segements and that prices for new homes are more 'fluid' and reponsive to market changes than prices for existing homes. Put another way, prices for new homes have dropped more YOY because builders have done more to adjust their prices to reflect today's market conditions than their homeowners counterparts. Why?

Builders generally have a specified period of time in which they want to sell their inventory of homes. A homeowner, who is not in a distressed situation, may choose to sell or to wait (wisely or not) to get a 'better' price in the future.
The getting a lower price for a home has a far smaller impact on a build that a homeowner. For a builder to get a lower price on a house may mean a difference of .00025% in the equity position of a builder. While if an owner takes a 10% loss on a single house, that may mean a loss of 25% or more of his net worth. That's a tough pill to swallow.
Many homeowners have to get a certain amount for their house for practical reasons, for example to buy a trade-up house, pay-off their mortgage or avoid a shortsale. Builders have no such constraint.
Builders are dispassionate in their pricing decisions, pricing their homes in order to sell the homes in inventory. Homeowners are often heavily emotionally involved, pricing their to get as much as the guy down the street, x% over what they paid or acheive some other emotionally-satisfying threshold.

With all of these factors working together, home prices for builders have already adjusted to today's market conditions, where prices for homeowners are still lagging, probably by several months. It is my contention is that it is only a matter of time before homeowners' prices catch up with builders' prices.

"Theory and speculation!" you might say. "You're comparing apples (new homes) to oranges (existing homes)", you might say and you might be right. But on the other hand, if new and resale houses are more or less interchangable in a buyer's mind, resale houses in order to catch up to their prior sales pace are going to have to decline appreciably and maybe by as much as 30%. After all, new homes are down 25% and they're still down 10% in volume.

Smart sellers are going to beat the neighbors to the punch and price their homes very aggressively. Those that don't will suffer the death of a "thousand pricing cuts", trimming prices here and there a little at a time until the market bottoms and they get bottom dollar for their homes.

Smart buyers are waiting to buy all together or negotiating extremely aggressively on price, conditons, terms, services of any deal and only buying where the own/buy cost ratio is reasonable.

Vivo los Osos!

Couldn't Have Said It Better Myself

2007-10-11T17:57:00.000-07:00

California Association of Realtor chief economist Leslie Appleton-Young was quoted recently as saying, "“We’ve had a fundamental change in the mindset of the buyer,” she says. “There is no reason (for a buyer) to act.”

I couldn't agree more. Of course, I was writing about that very topic on this blog back in February.

Would seem Ms. Appleton-Young's trend indicators seem to be lagging mine by about eight months.

So, in case you're wondering, Ms. Appleton-Young, the next eight months are going to be epically bad. The vast majority of buyers lack the interest, means or both to buy a home. Smart buyers are going to continue to sit on the sidelines at least through 2008. They are too smart to be interested in buying. Those buyers that aren't so smart are going to try and buy, but many, many of them will not be able to qualify. They will not have the means to buy.

The implications are that: volumes are going to slow to a trickle, real prices are going to drop much further, seasonally-adjusted inventories are going to be much higher, the numbers of defaults, foreclosures are REOs will all rise, possibly dramatically, come summer.

No "bounce", no "inverted year", no "firming." Just a good old-fashioned, worsening buyer and financier-led real estate slump. And you can quote me on that.

Viva los Osos!

Formula 409: Wiping Out Dirt, Grime AND High House Prices

2007-09-09T10:56:00.000-07:00

Back in May, I posted an analysis on the remarkable similarities between the prices declines we are seeing now versus the last housing price decline we saw in the early 90's here in Orange County. In that post, I showed that during the last decline, according to the Case Shiller index, prices fell fully 40% over the course of roughly nine years.

With all of the talk about prices "stabilizing" and "bounces" set to occur next year, I thought I'd better come up with an easy way for people to remember the depth and duration of the last decline, lest they forget and make bad decisions in the absence of that context. The last decline wasn't pretty and to be quite candid, I'd to see as few of my friends and neighbor burned this time around as is possible. My guess is that if you're reader of my blog, you probably feel the same way.

So, here goes. With a 40% price decline ('40') over nine years ('9') and a little concatenation ( '40' & '9'), we get the handy mnemonic '409'; just like the cleaner of the same name.

Just to get things off on the right foot in committing this little ditty memory you ought to just go ahead and say it: "409." I'll wait...Now, you're going to need to exert more effort than that to remember '409', but I'd like to point out that remembering this handy phrase will benefit you in many ways:

You will have an accruate grasp of the extent and duration of the last OC RE price decline.

You will be able wow your friends and colleagues with your knowledge of OC RE history.

You will have historical context when considering how far prices might drop this time.

You will have a quicky and handy ready retort for many bullish rants on Lanser's blog.

Not that it's of any relevant value, but you will also know the area code for SE Texas.

One menomic, so much value.

Now, one way to use the valuable information provided by 409 is for your own benefit. There are a lot of shills operating in the OC RE market these days with "7% in the bag", "inverted year", "bounce scenario", "shallow decline", "price stabilization", "good time to buy" and "get off the fence" rhetoric. Before you buy into their bullshit, ask yourself these questions as sort of a first-line filter:

Do I think that this decline has fully ran its course?

Do you assume this decline is going to be roughly half as bad, as bad or worse than the last?

If you assume this decline is only going to be half as bad as the last (prices down 20%), has this market gone down 20%?

If you assume this decline is only going to be as bad as the last (prices down 40%), has this market gone down 40%?

If you assume it's going to be worse, do you have all of your money in gold bullion and sliver dimes?

If you can't answer "yes" to at least two of these questions, (#2 & #5 don't count) it is NOT a time succumb to the shills and purchase property in OC. The shills words are a siren's song, but if you consider 409, along with your beliefs about the current market

The other way to use 409, is to share it with your friends, colleagues and neighbors. If you hear someone you're acquainted with talking about housing, tell them immediately about 409. In fact, you might want to let anyone you who is considering buying a home about 409 to save them from the fate of those unfortunate enough to buy in the early 90's. Tell someone about 409 today!

Housing Sales to Drop 25% in 2008?

2007-09-08T09:21:00.001-07:00

It was reported in the Orange County Register that executives at Countrywide Funding expect retail loan volumes to drop 25% next year and that they are going to lay off 12,000 people as a result. I don't think it's any stretch to say that this also means that there is going to be a 25% drop in home sales as well.

Let's have a look at July sales for the last three years and my estimate for 2008 based on Countrywide's figures:

Clearly sales in Orange Country are falling precipitously year on year and will continue to do so at least into 2008.

What's most striking and a bit difficult to derive from the graph, is just how far housing sales volumes are going to drop from their peak in 2005. In 2005, OC saw 4,341 homes change hands, based on estimates derived from Countrywide's numbers, we we only see anemic sales of only 1,793 units in 2007 or over 2,500 fewer units. That's a decline of nearly 59%.

UPDATE: Based on recent sales figures, I'm going to revise my estimates and am calling for monthly volumes under 1,000 units for some months next year.

So ask yourself this question: "Would I want to buy stock in a company where sales were going to drop nearly 60% over a four-year period?" If you answer "no", then you shouldn't even consider buying a house this year or next. If you answer "yes", I've got some .com-era stock options I'd like to talk with you about.

Viva los Osos!

Deadly RE Sins: Gluttony

2007-09-03T10:55:00.000-07:00

Every day or so, Redfin sends me updates of market activity in a few areas of OC that I care to study. In essence, these updates tell me two things: new properties that have been listed and properties where their prices have changed for one reason or another. I always enjoy seeing what properties are coming on the market, but I've got admit, I find the prices changes the most interesting.

As I've been reviewing the pricing changes, I've found that there are essentially three elements to a price change: direction, magnitude and frequency. Direction is simply whether a seller is lowering his price or raising it, magnitude is the amount of the change and frequency is essentially how often the seller adjusts his prices.

Today, I thought I'd noodle a little on that first aspect of price changes: direction. And I'd thought I'd start by looking at people clever enough to raise their prices in today's market, and introduce the first of our Deadly RE Sins: Gluttony.

You might be tempted to believe that no one at this point in the market is raising the price on his home. And you would be wrong. Believe it or not, there are home sellers, some of whom have had their homes on the market for very long durations (90 days+) that are actually raising their prices. Here's an example:

20857 Cabrillo LN #7
HUNTINGTON BEACH, CA 92646
Days on Redfin: 123

Previous Price: $799,00

New Price: $899,000

I mean, seriously, how does conversation go around the dinner table?

Husband: "You know, dear, the house has been for sale for over four months now. And we still haven't gotten it sold."

Wife: "Yeah, hon, I've noticed that, too. Maybe there's something wrong with our pricing."

Husband: "Well sweetie, maybe people just don't realize what a primo condo this really is. Maybe if we raise the price, we'll attract a better class of buyer, the way a Four Seasons resort attracts blue-bloods!"

Wife: "You're right dear. If we're ever going to sell this house, we're going to have to raise the price..."

If we are to believe that the conversation went something like the conversation above, I think we'd have to come to the conclusion that our hypothetical couple just aren't particularly bright or are completely economically naive. Frankly, I don't think that's the case. Instead, I believe that people raise their prices when their homes aren't selling for one simple reason: economic Gluttony.

They want more for their house and damn the torpedoes, they are going to get it!

Rather than focusing on the reality of the market, I think some sellers convince themselves that can get a higher price for their home just because they are asking for it. Maybe the feel elite, may be feel lucky or maybe they feel entitled to earning better ROI, but somehow, they don't seem to feel that the prevailing economic conditions apply to them. They are WRONG. Their house is not going to sell for a dollar more than the market thinks it is worth.

By raising their price, they're seeking to line their pockets with more silver, but in the process they are decreasing the demand for their home! In a market where there is a lot of inventory and many substitutions for a given commodity (i.e. houses) demand elasticity is remarkably high. So, what I don't think they realize is that by raising their price by 15%, they likely are dropping demand for their home by more like 30, 50 or maybe even 90%.

Ironically, given that we are in a declining market, the greed that inspires them to raise the price of their house is the precise cause they will end up getting less than their original asking price.

In The Purgatorio penitents for Gluttony were forced to stand between two trees, unable to reach or eat the fruit hanging from either. What these sellers don't realize it that they are volunteering themselves to play out the same penance with their equity.

OC Inventory Passes 20,000 Units

2007-08-30T14:13:00.000-07:00

Consider this: two years ago, in August, we had 7,209 homes for sale in OC. As of yesterday, ZIPRealty.com showed that there were 20,024 homes for sale in OC, or nearly three times as many as we had just two years ago. Three times as many properties and probably a third as many interested/qualified buyers--its a recipe for an epic market decline.

In February of this year, I wrote about a bet I had with a real estate agent friend. In that post, I explained that he and I had a bet as to whether or not the total amount of inventory of residential properties for sale would pass 20,000 units at any point in 2007. We kept the bet friendly at $100. I spoke my Realtor friend this morning (who I think was kidding when the threatened me with bodily harm if I revealed his name (besides, I could take him)) and he's agreed to pay on our bet.

Now don't get me wrong, the $100 is nice. Being right is even nicer. But 20,000 homes is one hell of a lot of property. With the profound tightness of the lending markets and the exodus from California at this point in time and history, I have to wonder who in the hell is going to buy these homes. And, with the loan resets coming due later this year and all of next, I can only see more inventory in the months to come. But where will the buyers come from?Unless both prices and interest rates drop precipitously, I think the answer (apart from the odd ex-pat foreigner) is nowhere.

Houses are too expensive, the market too weak and rents too cheap to even consider buying right now. In my opinion, even houses 10% below market are unattractive. For housing to rebound, we would need prices and rates to conspire to effectively lower prices an additional 15-20% before buyers are going to jump in with both feet.

Agents, you've seen me joke about it, you've heard me prod, but now I am being dead serious. This market is not going to recover until the cost of homes drops dramatically. If you want transaction counts (read: commissions) to rise, you have to convince sellers to lower their prices today. Talking up the market is only delaying the inevitable decline in prices and keep you from earning your commissions.

More Help for the NAR

2007-08-29T21:28:00.001-07:00

According to the data available from the Melissa Data website, unit sales volumes are down dramatically over the last two years. According to them, in August of 2005 5,227 homes were sold in OC while last month only 2,253 were sold. That's a reduction of nearly 3,000 units or 56.9%. Brutal market.

Another interesting stat I was able to create from the fine Melissa Data information was the total value of homes sold by month here in OC. In August of 2005, roughly $3.65 billion dollars of residential real estate changed hands. Last month, only $1.76 billion worth the residential real estate was sold. That's a reduction of nearly $2 billion dollars. Epically brutal market, especially for RE agents.

Consider this, with a reduction of roughly $2 billion in transactions, at a 6% commission rate, Realtors collectively made $120,000,000 LESS in commissions than they did just 23 months ago--those poor bastards.

I've tried to help these poor souls in the past, but they keep on with their 'buyers on the fence', 'good time to buy' drivel trying to spark demand and get their transactions/dollar volumes/commission back up. Based on the inventory levels in OC, this strategy clearly is not working. But, don't worry guys, I am here to help.

At the top of this page, you'll find the latest installment in the OC Prudent Bears' 'Discuss it with a Realtor' campaign. Realtors, feel free to share this with ALL of your sellers, help your clients sell their homes and earn yourself a commission!

More than a Year of Inventory in OC RE Market

2007-08-27T16:23:00.000-07:00

Steve Thomas at Remax Real Estate in Aliso Viejo calculates Orange County now has 12.2 months of inventory of homes currently on the market. Inventory numbers are certainly very high compared to the last two years, but the real culprit here seems to be a collapse in OC housing demand.

The following areas have inventories of less than ten months: Anaheim Hills, Brea, Canyon Areas, Cypress, Foothill Ranch, Huntington Beach, Laguna Woods, Mission Viejo, Rancho Santa Margarita and Seal Beach.

The following areas have inventories greater than fourteen months: Anaheim, Corona Del Mar, Dove Canyon, Garden Grove, Laguna Hills, La Habra, Lake Forest, Portola Hills, San Clemente, San Juan, Santa Ana, Talega, Tustin, Villa Park and all ranges above $2 million.

A Tale of Three Markets

2007-08-19T15:32:00.000-07:00

There's been a lot of hoopla lately about the median home price in OC bumping up close to historic highs. The data, such as they are, seem to indicate that is the case, but remember here, that's true only if you're looking at the county-wide median price.

In the past, you've seen me and others deride the county-wide median price stat because of the sheer size and/or heterogeneity of OC. Talking about the county as a whole, particularly when using the flawed median as a metric, just doesn't tell one a whole lot. Parts of the county could be collapsing, while other parts rise, but when you throw every neighborhood in the county into one big bucket, all of that movement is washed out, all of the uniqueness statistically smoothed over. County-level stats just aren't granular enough to truly convey any meaningful information.

For the vibrancy and dynamism of the market to be seen, we need to analyze the market by segment. Simply by bucketing areas of the county together by similar characteristics and then analyzing them, patterns that betray notion that prices in the county are strong quickly appear, particularly if you look at homes by price segment.

I decided to divide OC's ZIPs into three segments based on median price: ZIPs with median prices less than 85% of the county-wide average (23 ZIPs) , ZIPs with median prices between 85 and 115% of the county median (33 ZIPs) and the last group with prices more than 115% of the median (27 ZIPs.) I then looked at the number of ZIPs in each group where the YOY sales volume and/or price were down. The results were dramatic.

In the ZIPs with the lowest prices, essentially all of the ZIPs were down in terms of price (91%) and volume (96%)--a profoundly weak segment. In the middle price group, both price and volume were down for 70% of ZIPs--a weak to very weak segment. While the most expensive ZIPs showed volumes down less than half of ZIPs, at 41%, and a relatively equal number of ZIPs (52% down) with price declines--a neutral segment. Clearly, OC is not one market, but at least three, varying from neutral to very weak in terms of their market strength.

Just to emphasize how different OC's price segments are performing, ZIPs in the lowest price range were roughly twice as likely to be down in terms of volumes and price as the most expensive ZIPs. Twice as likely.

Now, my personal area of interest are the middle ZIPs: white picket fences, middle class, 2.3 kids, regular folk. Fully 70% of those ZIPs have have dropped in terms of prices and volume. At 50%, we'd be at parity, but at 70% were in the midst of some serious volume/price weakness. As half a dozen Realtors told me today at open houses, this weakness could be a sign to buy, but as I explained to them, I don't think so. After all of the mortgage resets occur next summer and sellers panic, that may be a time to buy.

In the mean time bears, eschew claims that the "OC prices are strong", keep your financial powder dry, your FICO score up and enjoy another 12 months of cheap rent. Next summer if the middle is collapsing like the bottom price segment is today, it might, just might be time to get a great deal on a distressed home.

Viva los Osos!

How Many Can You Find?

2007-07-22T20:10:00.000-07:00

Fourteen for sale signs (and two others)at the corner of Saybrook and Heil last weekend. Seems though HB's Harbor area is getting a little, if you will forgive the pun, liquid.

My guess is that this intersection has got to have the highest concentrations of for sale signs in the county, but I bet there are some that have nearly as many or maybe more.

If you find an intersection, stretch of road or a street corner with a lot of for sale signs, send it to hbbear at ocpredicts dot com and I'll post it on the site.

HB Joins the 1,000 Club

2007-06-15T16:18:00.000-07:00

Huntington Beach has joined the ranks of infamy by passing 1,000 real estate units for sale within its borders. To get just a little idea of how happy this makes your blogger, click on YouTube vid below...the video is fun, but the music conveys, partially, the joy in my heart!

Are They Sure It's "A Good Time to Buy"?

2007-05-26T09:13:00.001-07:00

We've been hearing a constant stream of propoganda from the NAR, NAHB and unscrupulous agents that it's a good time to buy. I submit it is time for them to put their money where their mouths are.

We've seen the ads in the paper and on TV and also heard them on the radio where those who benefit to profit from housing transactions are claiming it's "a good time to buy." You've seen me write about how absurd and unethical I believe their claims are, but yet the assault on our sensibilities continues. Go figure.

Clearly these salespeople must know something we don't. Maybe huge amounts of inventory, increasing defaults and foreclosures, historic credit-tightening and affordability actually don't matter and all those years of studying finance and economics have be, in fact, for naught. Apparently, these guys are on to some big secret that they aren't willing to articulate outright, but that feeds their certainty that real estate is still an excellent investment. But they aren't sharing, are they? Must be some kind of, ultra-pervasive, iron-clad non-disclosure agreement they all must have signed. It must be very frustrating to have this secret knowledge and not be able to share it with buyers.

I feel their pain. But I think I have come up with a way that they can convince us that is indeed a good time to buy; it's called a price guarantee and it works like this:

A buyer makes an offer that is accepted by the seller, the house goes through escrow and the buyer takes possession of the property. At the end of five years, the buyer is required to hire a professional appraiser who will determine the market value of the home. If the appraisal for the home comes in below the price the buyer paid, the agent/Realtor/clerk who sold the house would be required to reimburse the buyer for the difference. If the appraisal is above the sales price, the agent/Realtor/clerk who sold the house is off the hook and is under no further obligation.

Can you see the beauty of this? Realtors can now demonstrate their certitude that they believe it's a good time to buy by guaranteeing the price themselves! Now, the price guarantees would have to be collateralized in some way, preferably with some non-real estate asset; so, the NAR may have to place a few billion into a restricted use account to keep the RE clerks liquid. Of course, the clerks/NAR may want to spread the risk a little; so, maybe the could ping Lloyd's of London to see if they want to get in on the action. They're clever folks, they'll figure it out.

Now, it's going to take some time for this idea to spread, but I think if there's enough buyer demand for the program, it'll get legs. So, the next time you're looking at a house, ask the agent about a price guarantee. You will probably have to explain them, (clapping out the big words might help) but if you're patient, I am sure they will understand. Under the unlikely circumstance that they aren't willing to offer a price guarantee, ask them if they'd consider an offer of 20-25% under asking instead. It's got the same net-effect and doesn't have the burden of being a little difficult to understand.

I'm going to go try it out a couple of open houses today and encourage you to do the same.

Vivo los Osos!

Mission Viejo Breaks 1,000 Inventory Units

2007-05-24T11:29:00.000-07:00

Congratulations to the newest member of the One Thousand Club, Mission Viejo!

According to ZIP Realty, Mission Viejo joined the infamous ranks of inventory-laden cities this morning at 1,007 units of inventory for sale. If you're shopping for a home in that city, be sure to whack an extra 10 or 15% off of your offer.

Mission Viejo sellers, gird your loins, you officially have lost ALL leverage in any price negotiations. Good luck.

Vivo los Osos!

OC Inventory Passes 18,000!

2007-05-20T11:10:00.000-07:00

ZipRealty shows that there are more than 18,000 units for sale in OC.

We all have already heard that cities like Anaheim, Santa Ana and Irvine has more than 1,000 units for sale, but did you realize that there are other OC cities getting ready to join the 1,000 Club?

Leading the pack are Mission Viejo at 993 units and Huntington Beach at 930 units; that these cities will pass 1,000 units for sale this year, is a foregone conclusion.

At over 650 units for sale each, I would say that Garden Grove (732), Fullerton (681), Orange (753) and San Clemente (692) have a better than even money chance of passing 1,000 units this summer.

20,000+ units and unrestrained seller panic, here we come!

Everyone Selling a House in OC, Raise Their Hand!

2007-05-16T07:39:00.000-07:00

According to ZIPRealty, the total number of properties for sale in Orange County is 17,779 which is already higher than the peak amount seen last year of 17,758. Not bad, considering it's only May16th and last year's peak happened at the end of August. Looks like it is going to be a long summer for sellers.

All of this is great news for buyers. Though it's still far from a good time to buy, things are lining up for some real bargains, maybe as early as next summer. Be patient, you will be rewarded.

Vivo los Osos!

A Modest Proposal for the NAR Marketing Team

2007-05-14T19:27:00.000-07:00

This is one of my favorite posts from the past. I enjoyed writing it so much and the response to it was so positive, I thought I'd throw it up to the top of the list. If the NAHB keeps up with their nonsense, they may be next. Enjoy!

There I was, sitting on the couch, feet up on the ottoman, relaxing with a nice glass of single-malt, watching a little Letterman before bed and then it happened...a commercial from the NAR came on.

There were attractive families from an inclusive range of demographic groups, touring well-staged houses with up-beat music and some fairly good production values. The families all appeared happy and ready to sign on the dotted line for a home. The voice over for the ad among other things said that "When you have a family it is always a great time to buy", "prices are favorable" and "interest are at historic lows", but thankfully I'd only had the one Scotch and was able to resist the temptation to phone up the local 24-hour broker and place a bid on a home.

This bit of theatre was brought to us by the National Association of Realtors as part of their public awareness campaign titled: "Good Time to Buy." This multi-million dollar print, radio, outdoor, web and television campaign is designed to convince the public that buying now the smart thing to do. They even have banner ads for local agents to put on their sites, with my favorite banner being:

Now, don't get me wrong. I'd like to have a fence of my own some day, too. I'm not sure how proud I will be of my fence, but I think it were a good fence and it played nicely with the other neighborhood fences, I might be able to well up with pride like this fella in the ad. There's also a print version of the ad, that does a little better job of conveying the message, but only a little.

These ads are all target at we "fence-sitters" and are designed to compel us to join the fray and buy a fence (and possibly a home as well) of our own.

(Which I think raises a very important question. If we're fence-sitters, but we don't yet own our own fence, exactly whose fence is it that we're sitting on? Is it okay with that person that we sit on her fence? Is it considered a trespass to sit on another's fence? What if that fence borders a common area or is subject to an easement, are we okay then?)

The ads try to speak to the heart, playing on emotions, using messages and images of pride, choice and family security so we feel good about buying a home. They also address the head, telling us rates are low, prices are favorable (for whom, they don't say) and that there are a lot of choices (read: a lot inventory) so that buying at this point is the rational thing to do. But the ads fail on both counts and won't end up compelling a single person off the proverbial fence and into the real estate office.

It's not that we bubble-sitters don't understand all the social, emotional, status and (at some point in the future) economic benefits of home ownership--we do and we don't need to be sold on them and trying to do so is simply a waste of money. What they NAR needs to understand is that, while we appreciate the benefits of ownership, we aren't willing to pay today's price for those benefits. In other words, the cost/benefit ratio is out of whack and until it's corrected, we fence-sitters are not buying.

This may mean a redirection of their advertising dollar from the buyer to the seller.

I've heard many a realtor bemoan the fact that their sellers are unrealistic in their pricing expectations. Based on what I've seen on the market and the lengthening DOM for properties, I have every reason to believe that the Realtors are right. If the NAR were to spend as much time, energy and money educating owners on pricing and the benefits of pricing their homes correctly as they did reselling buyers on home ownership benefits, I think they could really impact sales volumes. With the price benefits ratio in alignment with buyer's expectations, home would start to sell and the commissions would start rolling in once again.

Now, I realize that our friends at the NAR have thrown down a lot of scratch on the "Good Time to Buy" campaign and that they might be a little tapped at the moment. So being the populist humanitarian that I am (we all need to make a living, right?), I thought I'd come up with some ideas, at no charge, to get things rolling. Below you will find some print ad examples for my pro bono seller campaign, "Discuss it with a Realtor."

This first piece is directed at a new seller (click on it for a larger image):

While this piece is directed toward price-stubborn sellers:

And this last piece is to motivate sellers in distress:

I'd like to invite our friends at the NAR to use these pieces, in any way they see fit, to help bring some life back to the real estate market. As I said before, I'm not looking for any payment for these ideas, I'm just trying to do my part.

Sorry So Long

2007-05-02T16:36:00.000-07:00

Dear Readers,

As I write this from Terminal 'K' at Chicago Ohare Airport, I want to apologize for the long absence, but the day job has me on planes, trains and automobiles frequently. With that, and trying to be a good dad and husband and the desire to have a modicum of a social life, I just haven't had the time post lately. Hopefully soon I will find the time to catch up on the market and post a little analysis and commentary.

I have to be honest as well that I've lost a little of the steam behind my motivations for posting. You see, I started this blog to debunk the idea that housing prices were going to continue to rise in LA/OC. Now that I consider it a foregone conclusion that prices are set to drop and the bulls have been acting more like geldings, some of the passion's gone. But don't lose heart. I am certain that some some bovine idiot will say something stupid in the days to come and that will stoke my ire, causing me to make the time for the odd posting now and again.

In the mean time, keep the faith, offer bulls percussive maintenance when they need it and for crying out loud, wear sunscreen.

Buyer Demand: Running on Empty!

2007-04-08T20:03:00.000-07:00

With the best of intentions, I asked readers in March's poll to tell me the price level at which they were very likely to buy a house, but things didn't work out exactly as planned.

You see, I posted the poll to test a theory that I had where buyers would be willing to buy at prices points much lower than I had anticipated. In fact, I had already begun writing (at least in my head) a story about how sellers could access significant incremental demand, just by lowering their prices a little. Well, the data didn't work out that way. Here's a graph of the responses:

The results of our poll indicates that nearly 80% of people responding will not seriously consider buying a house until prices drop below $450,000. The balance of the responses fell between $475,000 and $600,000 with a very pronounced skew toward cheaper prices.

The way I interpret these data, is that people believe that prices are set to drop very significantly over the next few years. The other thing I see in the data is that people aren't willing (and under new lending standard may not be able) to stretch comfortably beyond their economic means. I applaud this insight and this economic discipline--readers of this blog are clearly Prudent Bears.

This isn't good news for sellers, of course. If 80% of us are going to wait for prices to drop 25% or more before buying, demand is going to fall even further. I reported the other day that the pace of housing sales has dropped to an eleven year low here in OC, with these data in hand, I can only believe that I will write another posting at this time next year stating that demand at that point is at 12 year low.

Bears, during our last housing downturn in OC, prices dropped 30% over the course of six years. Clearly we are looking for some of that same magic to happen again. Keep your powder dry, stay the course and keep your eye on the market. Your discipline will be rewarded.

Vivo los Osos!

Housing Inventory Spikes! Demand at 11-Year Low.

2007-04-07T09:25:00.000-07:00

Just a quick bit of news, prompted by a phone call from an old friend. Thanks, Tom.

Going largely unreported, inventories of homes have continued to sky-rocket with the month-over-month increase in inventory of an amazing 11.8% between the end of February and the end of March. 11.8%! If that rate holds, we will see inventories double from their current levels by Aug, 30.

Also going unreported, is the fact that at the end of March this year, we had more homes for sale than we did at the end of May of last year where we are generally well into the selling season. Clearly, the intelligent bearish sellers are trying to beat the Summer rush, beating their neighbors to the punch.

Have a look at the source data by clicking here.

On the flip side, Lansner is reporting on his blog that home sales are at their slowest rate in 11 years here in OC. Clearly, buyers are utterly rejecting the absurd prices asked for by sellers and are waiting until the inventory situation comes to a head before considering buying.

Supply is up; demand is down. Prices are certain to fall. Readers, today may be the worst time in recent economic history to buy a house. Do not even consider buying a house today, unless you can get it a tremendous discount, say ~30% from last year's comps.

Vivo los Osos!

Pricing Weakness Epidemic in OC

2007-04-01T19:03:00.000-07:00

I took a look at a handful of pricing metrics for Orange County and I have to say that even as a died-in-the-wool housing bear, I was pretty shocked by what I found. Let’s start with our three key metrics:

% of ZIPs with median price down year on year: 77.3%
% of ZIPs with median price down from 2006 median: 80.0%
% of ZIPs with price per square foot down: 62.7%.

Astounding. Fully four in five ZIPs show price declines between February and all of 2006 and nearly that number on a year on year basis. Four-in-five. I can remember not long ago when that number was closer to two in five. Things certainly have changed.

Looking at the data another way, fully 92% of OC ZIPs showed weakness in at least one of the three above metrics, with five lonely ZIPs having been spared the from pricing contagion: Laguna Beach’s 92651, Trabuco Canyon’s 92679 , Fullerton’s 92835, Newport Beach's 92660 and Villa Park’s 92861. If you don’t live in one of those four ZIPs, PRICES IN YOUR AREA ARE FALLING by one measure or another.

The data also show that not only are price declines widespread, but they are much more severe than I think people realize after having been fed a steady diet of “prices are flat” bull in the media. The media takes a single figure, the year on year median and proclaims that prices have essentially moved no where from last year. I say fuck the county-wide year on year median! The number is next to meaningless and anyone who would be lazy enough to rely on it as a basis from home appreciation is a lackadaisical moron.

Here’s what a careful analysis of the February medians versus 2006 medians show:

Percentage of ZIPs with increase in price: 20%
Percentage of ZIPs with decrease in price of less than 5%: 37.3%
Percentage of ZIPs with decrease in price 5 and 10%: 18.7%
Percentage of ZIPs with decrease in price 10 and 15: 12.0%
Percentage of ZIPs with decrease in price of greater than 15%: 12.0%

That’s right roughly 40% of homes have seen a decline of less than 5%, while roughly that same number of have seen a decline of 5 or more percent. In addition, nearly 1 in 4 ZIPs has already seen declines of more than 10%. What’s in God’s green earth is FLAT about that?

I get a kick out of some of the permabulls seen around Lansner’s blog an elsewhere claiming that a 10% price decline here in OC is absolutely unthinkable. They bristle at the very idea. But for one in four homeowners in OC, 10%+ price declines HAVE already happened. And one in eight already wishes their price declines would have ONLY been 10%.

Some will call these declines a blip; others an indication of things to come. What would I call these declines? About the same I would call a busload of lawyers (sorry, Bob) going over a cliff: a good start. I believe that these declines, as significant and widespread as they are, represent only the very beginning of a long and very severe correction in housing prices.

In fact, based on what I’ve seen in this data, I would be at all surprised to the majority of ZIPs down from the 2006 median at least 10% a year from now, and a quarter of all ZIPs down 20-25% for that same period and some small percent of ZIPs, maybe 5%, down 25% or more.

Bears, it’s a great time not to buy a house. Prices are falling! Rent is cheap! If you must, bid, please consider not what your heart tells you the home is worth today, but what your head tells you it will be worth 2 to 5 years down the road.

If you'd like to see the data for your area, click here, but I'd pour a nice single-malt first--if you're a future buyer you have some celebrating to do, if you're a seller it might help and drown your sorrows.

Vivo Los Osos!

Inventory Threat Level: What Color is Your City?

2007-03-29T08:56:00.000-07:00

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

2007-03-19T20:56:00.000-07:00

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?

2007-03-16T16:47:00.000-07:00

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:

Homeseekers.com data is unreliable. (I don't think so.)
Homeseekers.com classifies houses in escrow differently than others. (Could be.)
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

2007-03-15T20:14:00.000-07:00

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!

2007-03-15T08:12:00.000-07:00

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?

2007-03-11T10:01:00.000-07:00

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?

2007-03-10T10:01:00.000-08:00

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?

2007-03-02T08:52:00.000-08:00

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.

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

2007-02-27T21:35:00.000-08:00

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.

Wither February Sales? (Revised)

2007-02-26T12:51:00.000-08:00

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"

2007-02-26T07:19:00.001-08:00

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.

The Subprime Meltdown and You

2007-02-25T13:48:00.000-08:00

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.

Inventories at 23,000+ in August 2007?

2007-02-24T09:40:00.000-08:00

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....

OC Inventories Up for 6th Report in a Row!

2007-02-22T17:13:00.000-08:00

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!

Media Stats Hiding Blood in the Streets?

2007-02-20T22:29:00.000-08:00

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.

January Data Bad News for Flippers, Condo Owners

2007-02-18T21:56:00.000-08:00

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.

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

2007-02-15T10:33:00.000-08:00

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!

OC Bears Typical Savings Approaching $50,000

2007-02-14T10:33:00.000-08:00

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.

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

2007-02-13T17:23:00.000-08:00

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.

Prices Down in Most Areas of Orange County II

2007-02-12T08:00:00.000-08:00

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.

Prices Down in Most Areas of Orange County I

2007-02-11T11:49:00.000-08:00

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.

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

2007-02-09T12:31:00.000-08:00

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.

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

2007-02-08T09:02:00.000-08:00

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.

OC Affordability

2007-02-04T10:26:00.000-08:00

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.

OC Buyer Bears Market Perspective

2007-02-03T22:34:00.000-08:00

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.

Sellers Bearish on Real Estate Market

2007-02-01T16:12:00.000-08:00

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.

Weak Signal: OC Poll Suggests Housing Price Drop of 7-9%

2006-11-06T08:55:00.000-08:00

The Orange County Register recently conducted an informal survey of readers in an online poll regarding the fate of OC's home prices during the next calendar year.

Readers were asked to choose one response from a list of five that they felt best described their prediction for housing prices in Orange County for the period Jan 2007 to Dec 2007. Here's how the responses broke out:

•1.6% Up dramatically (gains of more than 10%)
•8.5% Up a bit (gains between 2% and 10%)
•11.2% Essentially flat (from down 2% to up 2%)
•33.5% Down a bit (losses between 2% and 10%)
•45.2% Down dramatically (losses greater than 10%)

Nearly 80% of those responding that housing prices would go down and nearly 90% responding that the market would be flat or down. Only slightly more than 10% felt the market would be up either a bit or up dramatically. Clearly, the overall sentiment of those taking the poll here is overwhelmingly negative.

But, what is the consensus of this crowd regarding of this crowd regarding housing prices in OC over the next twelve months? Well, and I hate to start out on the wrong foot here, but it's sort of hard to tell given the nature of this survey.

Normally, in order to derive the wisdom from a ranged-category poll, we need to compute the weighted average response for that survey. But, with this survey, things aren't that simple.

The first issue is that this survey has open-ended categories making it difficult to ascertain what a repsondent really voted for. Take someone who repsonded, 'Down dramatically (losses greater than 10%) '. Did that person believe that the market would go down 11% or 17% or did they think that housing prices are set to drop 25% or more? It's hard to say.

The second issue is that so many people (45.2%) responded for one of the open-ended categories: 'Down Dramatically.' So all of the sudden, we find that we have nearly half of the repsondents weighing in a category that is difficult to measure. Naturally, this exacerbates the first problem and makes estimating the common or consenus opinion that much more difficult.

The third issue is that this poll, because it's not randomized, but that's a bit beyond the scope of this post.

Having run the numbers several different ways, the math estimates that the crowd of OC Register poll takers collectively predict that housing prices in Orange County will drop between 7 and 9% next year. I realize, it's sort of a fuzzy range, but as we incoroporate more wisdom from more crowds going forward, the number is going to change, regardless.