Buyer Demand: Running on Empty!

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.

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

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?

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

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

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

Please click the chart for a larger, readable version.

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

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

Vivo los Osos!

More on Orange County Housing Inventory Levels

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

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

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

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

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

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

Are Inventories Actually Higher than are Being Reported?

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

What I found blew me away:

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

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

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

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

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

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

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

Have a great weekend.

Vivo los Osos!

Prudent Bear Renter Savings $70,000

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

A drop in interest rates also benefits bears.

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

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

Tax Benefit ($9,254.13)

Total: $70,337 dollars.

For the details click here.

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

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

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

Vivo los Osos!

Prices Down in All So Cal Counties!

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



WTF with Santa Barbara?

Would You Buy a House from this Man?

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

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

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

There's a saying in the Sales profession:

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

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

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

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

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

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

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

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

Vivo los Osos!

Are Buyer Demographics Skewing Home Prices?

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

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

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

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

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

New Poll: At What Median Price Would You Buy?

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

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

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

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

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

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)

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"

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

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?

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!

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?

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.

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

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!