Media Stats Hiding Blood in the Streets?

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

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

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

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

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

You be the judge.

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

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

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

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

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

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

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

This all leads to more supply.

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

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

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

January Data Bad News for Flippers, Condo Owners

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

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

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

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

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

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

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

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

Prices Down in Most Areas of Orange County II

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Prices adjusted for OC's rate of inflation.

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

Thanks to graphix for inflation-adjusted numbers.

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

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

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

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

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

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

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

OC Affordability

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

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

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

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

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

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

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

OC Buyer Bears Market Perspective

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

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

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

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

Sellers Bearish on Real Estate Market

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

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

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

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