As you can see from the upper-left hand corner chart,
Lagging Indicators
When you buy a house the information isn’t reflected instantly. Unlike a stock, with a liquid market, once a stock is bought or sold the price is adjusted accordingly. What can I get for Microsoft stock today? Just log into your brokerage account and you will find out. However with housing this is not the case. The asking price may be $500,000 but the current bid may only be $400,000. If no one purchases and the seller stalls, then nothing really happens and the market continues down its path. When you sign a contract, the process is only beginning since you will need to acquire funding, produce title paperwork, and get all papers sorted out before escrow can close. This can be anywhere from 30 to 60 days. Once this process is concluded, then the data is reflected in current median prices.
This time is different since only in early March did we face the sub-prime meltdown and Wall Street shutting the doors on risky mortgages. The appetite is no longer there and the excess hasn’t filtered down to the data. In addition we have a new legion of highly paid unemployed industry workers looking for new employment. Take a look at this recent LA Times article about those laid off from New Century Financial. I’ll give you 2 nice little quotes:
“Brad Cottrell was a paramedic when a friend introduced him to the high-rolling world of sub-prime mortgage lending.
Within three years of landing a job with Ownit Mortgage Solutions Inc. in Agoura Hills, his salary had tripled. His wife quit working and they bought a 3,000-square-foot house in
And another:
“Erica Olsen knows it. She was an underwriting manager at New Century, and Monday marked the third time she had been laid off by a sub-prime lender. "It was just devastating," she said.
She didn't give up on the industry, though. The La Palma resident teamed up with a friend and colleague, Cece Sarno of Garden Grove, to start their own loan-processing outfit, CE Processing Group. Their goal is to grow so they can hire other workers who got pink slips from sub-prime lenders. They processed their first loan Tuesday.”
Let us examine these two cases. First, we have people making inflated bubble wages. We have someone making six-figures only by pushing an inflated asset. Now that the industry is well done like a steak, where else is he/she going to find a similar income? Somehow I doubt many of these folks have bachelors or masters degrees in some high paying profession. Then we have two women who still believe they are going to make it in the mortgage industry! Likely, their frame of reference has always been a positive [manic] real estate market and they have no idea what they just lived through is a once in a lifetime mania. They will no longer make what they once made, at least in housing, and this will be a hard fact of reality. What else can they do except open up another mortgage shop (yes, we need another one). Did I mention that delusions in Southern California run beyond
Sales Massively Down
If that 30%+ sales drop doesn’t shock you it should. Sales are drying up like
Only Higher Priced Homes Moving and Fraud
In addition only better priced homes are moving and square footage price is dropping. So the homes that do sell keep the median price floating high while the delusional sellers build up inventory with homes no one wants or could afford. In addition we know of many sub-prime $30,000aires buying over inflated homes assisted by desperate brokers and lenders. Mortgage fraud is peaking at a crescendo and stories are now hitting the mainstream media about folks getting over leveraged into homes they had no chance of paying. Even if the housing pundits want to run with this new peak price, let them. They are delusional and their rhetoric is like a pit-bull being cornered; but we housing bears are just as ferocious and like making money too. We smell their fear and realize that their time is up. They had plenty of warnings and signs were everywhere. But greed is strong and looking at the data we realize that they kept feeding the beast. Now the beast has a clogged coronary and no doctor is within site. Time for the battle of the housing bears and the housing bulls.
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15 Comments:
Dr. Bubble,
I have first-hand experience that these median numbers are bunk. I put my Irvine house on the market in May 2006 at a LOWER price than what the Realtor wanted. After a brutal summer, I sold at about 100k less than original asking. I lived in Turtle Rock, which is Irvine's high-end neighborhood, and Irvine is pretty high end for Orange County. The home wasn't a dump either. After the bloodbath was over, I noticed the median for Irvine had INCREASED! So I took a 10% hit after having the house on the market 6 months, saw the other sellers in the neighborhood do the same... and the median increased! Obviously something is broken here.
I should say that I still made an outrageous profit on my house, and bought a great place with an actual yard (2/3 an acre) in a Southern state without a housing run-up. I feel so blessed and lucky I was able to convert the funny-money into real money, and wasn't caught with my pants down when the music stopped.
Dr. Bubble: Why are the low end houses not being purchased? I'm guessing that is why the median is still going up, even thought prices are going down in every market slice.
carl,
You did the absolutely right thing. You took your massive equity gains from Southern California and bought elsewhere. This is the ideal scenario. Because if you were to buy another place in California you would only be trading one inflated property for another not really cashing in. Like they say, if you leave the money on the table long enough it will be gone. You need to cash those chips and you did.
Irvine is a very nice city but homes in the city are not worth $1 million dollars. You did the smart thing because I have many friends who have sold in Newport and Irvine and have done relatively well. Those selling now are having a harder time. So that 10% may have not been such a bad thing in the overall scheme of things.
Low end houses aren't being purchased because typically these are the bread and butter of 1st time buyers. Now that the credit markets are tighter, these buyers are becoming less and less. Just take a look at the massive drop in sales. Prices remain high, but overall a majority of folks are opting to not buy. Eventually prices will catch up to sales numbers.
I wouldn't say I was smart, as much as very, very lucky. I bought the house when it was over-valued, then I sold it when it was EXTREMELY over-valued. I was actually experiencing some serious anxiety about it before it sold... I couldn't believe I could make so much cash for sitting on my ass. Basically I dodged a bullet. It is unnatural, and now I think of it as my once-in-a-lifetime bonus. In fact, I made, after taxes, almost as much living in my house than I did working. Now I have an actually NICE house, reasonably valued, and I expect nothing more than an inflation hedge out of it.
Many people made uninformed purchases like I did, but they will not be as lucky as I was. I have no pity for "investors", but for peope like me, who lived in the house for three years in good-faith, some of them will be ruined and I do feel sorry for them.
My wife and I do want to come back to LA or OC in a few years. We're thing maybe 2010 would be the prime time to buy. At that time, we could probably easily afford Newport, or East Costa Mesa... Pasadena or Santa Monica also come to mind...
I noticed your update to the numbers last night. Even without the info on the sales numbers, LA was down from last report (wasn't it at 7.something last time?). The other numbers to note were that the negatives for San Diego and Ventura continued their downward moves, defining trend rather than aberration. All the other counties were essentially flat. Even these numbers confirm the end of bubble gains and at best lead to the flattening of the curve (we know better, but you can't spin it rosier than a flattening).
You have clearly outlined the lagging indicators for some time and the sales numbers just show you know what you're talking about, Dr. HB. A 45% drop in sales...couldn't we characterize that alone as a "crash"?
Those two stories are sad and pathetic. The paramedic couldn't have done worse, a fake high paying job and now stuck with a real mortgage on a fake house (in value terms). Think he gave himself a sub-prime type loan, believing his house would go up and up?
The Subprime loans are gone, subprime services the poorest home owners and they buy the cheapest homes. With the subprime gone you have lost those who buy the cheapest homes and the cheapest homes are the ones not moving. Thus the homes that are moving are the expensive ones and since sales are nearly nonexistent you don’t need to move too many million dollar homes to make an impact on the “Median Price”. Think about it, Median Price means 50% of homes sold for more than this and 50% sold for less. If you sold 70 million dollar homes when 1,000 homes was the total the 50% mark is a long way off, but if only 100 homes sold and you managed to sell 40 million dollar homes you will probably make an impact. Yes my example is a bit simplistic and exaggerated but it should make clear what is taking place, and why it’s not an indication that things are improving.
Eventually the slow down on the cheaper homes will work its way up the chain and affect the prices of the more expensive homes but like Dr.HB said houses are not stock they don’t sell quickly and their prices are more elusive. If I have a share of Microsoft stock and you have a share of Microsoft stock we have the EXACT same thing, with the EXACT same value, and those EXACT same stocks are bought and sold every second on the stock exchange so we know the value of what we have at any moment. Homes are more difficult to price, first no two are EXACTLY the same, even if they are on the same block, same KB home, same floor plan and color they have different addresses and have different neighbors thus the price could vary. Now you mix in the average price of a “Single Family Homes” as a guideline. You could do a thread just on the definition of a “Single Family Home”, something which I find covers just about any structure that a person can live in that is not physically attached to another structure.
sed,
In my view it is a significant drop. But apparently the media is still focused on inflated median prices. In addition, this goes to show the double whammy of the situation. Most of these brokers, delusional by their own environment decided to jump into the housing market as well. After spewing this crap day and night eventually they indoctrinated themselves to believe what they were selling. Now that they will lose their jobs or have significant salary cuts, that home is also depreciating and getting to reset. The perfect feedback loop is setup. How many would you guess have diversified in numerous areas? The stats don't look kindly on these folks.
It is like the tech workers who not only lost their jobs with the NASDAQ crash but also their wealth in stock options tied up in one industry. It is the Bruce Lee kick to the groin, then a nice roundhouse to the face.
roger,
I think you bring up a good point in the universality of price in stocks. One stock of XYZ company is the same in California as it is in New York; this cannot be said for real estate. In addition, real estate is completely illiquid. Many folks don't realize that buyers do not want to catch a falling knife and with funding being cut-off, who will they sell to? If you want to chart market sentiment in real estate, we are currently going on a parabolic jump of denial to negativity. It will happen quick, according to the public and mainstream media, but we've all been seeing this come a long way in advance.
Instead of bailing out over-their-heads subprimers, I would like to propose the establishment of a congressional fund so that the MSM CAN GET SOME DAMN MATH TUTORS!
Am I the only one who said WTF when the mortgage broker said she was "devastated" at having lost her job for the third time? If something happens twice to me, I generally am not surprised by it happening a third time.
I do not agree that this housing bubble is a once in a lifetime occurence.It is unprecedented,nothing like it has happened before in us history.The only regional bubbles that are comparable are LA in the 1880's and florida in '25 and '26.This bubble is not just nationwide,but encompasses much of the world.as far as good news,drought induced fires may bail out many fb's in socal this year.
TS,
Absolutely, this is not uncommon. When I say it is once in a lifetime many folks have not lived through a depression or serious financial downturn in the economy especially a nationwide real estate downturn. We've had prior contained bust such as 1987, the S & L crisis, and the tech decline but these things didn't impact everyone. 70 percent of the US population is a homeowner and the other 30 percent rent, so in one way or another everyone will feel this downturn.
It is worth noting that at the end of the second quarter of 2006, only 23% of all California families could afford a starter home, defined as one at 85% of the median price. That was using an ARM loan instead of a fixed-rate loan, and with only 10% down payment.
California’s Department of Finance recently indicated that in 2005, for the first time in a decade, the number of residents who left California for another state exceeded the number of newcomers who moved there. California recorded a domestic net loss of about 29,000 people in 2005—the first negative flow of residents since 1994 when the state’s weak economy precipitated an outflow of about 350,000 residents to other states. Anecdotal evidence suggests the high cost of housing was the primary reason people left
California.
http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=322182
Interesting statistic, and not a good sign for California's economy.
We all have heard reports of this anecdotally (for example, U-Haul reports more empty moving vans coming INTO California, and fully-loaded vans LEAVING California, charging an additional fee to LEAVE California, etc). Nice to see a figure from elsewhere that confirms this trend.
It's not just about first-time buyers leaving California, (since they were priced out, even as highly-trained professionals who've recently graduated and are starting a career). No doubt many people think "what a shame", and continue with their day.
You need to understand that it's also about people who've SOLD their homes at the peak in California (San Diego, etc), and are figuratively and literally CASHING OUT of California: they're taking their windfall capital gains from the sale of their house, and buying in another State that hasn't been equally run-up during the bubble.
Now you have a FB who moved IN to take their place, and a cash-laden buyer who's moving OUT to spend it elsewhere. That means all of that windfall cash WON'T be spent inside the local California economy, and that's a double-blow to these overpriced areas.
To demonstrate how crazy it's gotten: I know someone who owns a house with surrounding land out in Rosamond (past Lancaster/Palmdale, CA, in the Mojave Desert) who bought it for $100k about 5 years ago. He recently sold for $350k and moved out to Missouri, buying a much-bigger house for $100k. He's now got alot of cash in hand to start in a business, etc.
I've seen that story repeated many times, and I think many people don't see the long-term results of this.
Talk about unintended consequences, and the hidden costs and damages to this unfettered bubble. California is thus even more primed for a downfall, as a result.
Damn, Dr. HB, I like your site, but my browser blocked 100 cookies when hitting your page. I use the feature to block cookies from specific sites, such as adbrite.com, specificclick.net, etc.
Tuesday's One-Two Punch at http://infohype.blogspot.com
Sh1t, they are on to us in this market man. Let's go inflate education loans instead: http://www.nytimes.com/2007/04/17/business/17sallie.html?ref=business
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