Exposing the Southern California Housing Numbers and the DQ Special. DataQuick Numbers and 2007 Examined.
|
All Home Sales |
Median December 2006 |
Median December 2007 |
Percent Change |
Nominal Price Drop |
|
|
$525,000 |
$470,000 |
-10.5% |
$55,000 |
|
|
$630,000 |
$565,000 |
-10.3% |
$65,000 |
|
|
$432,000 |
$355,000 |
-17.8% |
$77,000 |
|
|
$370,000 |
$315,000 |
-14.9% |
$55,000 |
|
|
$495,000 |
$430,000 |
-13.1% |
$65,000 |
|
Ventura |
$590,000 |
$525,250 |
-11.0% |
$64,750 |
|
SoCal |
$490,000 |
$425,000 |
-13.3% |
$65,000 |
For the first time this decade, all Southern California Counties were down in double-digits on a year over year basis. This isn’t a surprise given that median home prices are always a lagging indicator of where the market is going. Why is this? Well for one, you’ll notice that the data is for December. Second, most of these homes were purchased in October or November since closing records take time to be publicly recorded, normally two months. Also, the trend started in 2006 with significant drops in sales which is a leading indicator and a better predictor of future market activity. Sales numbers are still dropping at record levels:
|
All Home Sales |
Number Sold December 2006 |
Numbers Sold December 2007 |
Percent Change |
|
|
8,479 |
4,430 |
-47.8% |
|
|
2,985 |
1,731 |
-42.0% |
|
|
4,542 |
2,503 |
-44.9% |
|
|
3,357 |
1,518 |
-54.8% |
|
|
3,823 |
2,468 |
-35.4% |
|
Venture |
1,023 |
590 |
-42.3% |
|
SoCal |
24,209 |
13,240 |
-45.3% |
This is rather astonishing given that 2006 was already a slower year and we are still seeing sales declines of nearly fifty percent. It has finally seeped into the market that the only thing that will move homes is lower rock bottom prices. But given the amount of inventory homes are still not priced right otherwise homes would be moving and we would be seeing improvements in the sales numbers. So what do the folks at DataQuick have to say about these horrifically bad numbers?
I love this. Decreasing sales numbers are nothing new since they’ve been occurring since 2006 and this isn’t a trend? Since we are in “turbulence”, we really don’t have any inkling to what is going on so we will need to wait to find out since the market is so nutty right now. Are you kidding me? Could it be that the housing bubble built over this decade is finally popping due to the credit crunch that we experienced in August of 2007 or the fact that
“The big question now is whether the cycle will play itself out in 2005 with a soft landing or with a turbulent crunch. Right now the soft landing scenario appears the most likely,” Prentice added.â€
There we go again talking about turbulence. What is going on with the airplane metaphors? Regardless, even three years ago these same people made a prediction at the height of the buying frenzy that most conservative investors saw as unstable yet they went out on a limb and predicted a “soft landing.†Why is it that predictions can only be made when things are going up and not going down. We are at the inverse of 2005 so all you need to do is replace soft with hard and your back in business. Let us take a further look at the bubble over the past few years:
|
Year |
SoCal Median Price |
Percent Change |
|
December 1999 |
$198,000 |
|
|
December 2000 |
$220,000 |
11.1% |
|
December 2001 |
$247,000 |
12.3% |
|
December 2002 |
$289,000 |
17.0% |
|
December 2003 |
$346,000 |
19.7% |
|
December 2004 |
$424,000 |
22.5% |
|
December 2005 |
$479,000 |
13.0% |
|
December 2006 |
$490,000 |
3.3% |
|
December 2007 |
$425,000 |
-13.3% |
Clearly the peak was reached sometime in 2006 given that the percent increases were dwindling for two consecutive years. After double-digit growth for six consecutive years, how can you call this anything but a bubble? Incomes were not rising at this pace. This correction is rather obvious and we can easily make a prediction in the light of all this “turbulence†and instability. Given the low sales numbers, high inventory, tighter credit markets, declining prices, rising foreclosures, and market sentiment we’ll make the assessment that housing is still trending downward and we can see this accelerate given that March of 2008 will see the largest number of subprime mortgages resetting. Even prime mortgage defaults are rising. I’m sure most of you can see the trend or is it too crazy out there to make any predictions?
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26 Responses to “Exposing the Southern California Housing Numbers and the DQ Special. DataQuick Numbers and 2007 Examined.”
Wow, that chart showing sales prices from Dec 99 to Dec 07 tells the whole story. It’s disgusting. Someone in a $200K home being able sell it for $500K just 7 years later?
My question: in the next 2-3-5 years, how low will prices drop? Seriously. I mean, will they drop to 2003 levels? 2001 levels? 1999 levels?
With job losses, gas prices, etc….. I can’t imagine that even the 1999 levels are a given.
I know somewhere (maybe here?) a few months ago I read – from someone I deemed very credible – that prices would be no more than half of today’s prices by 2010. Do people think that? As rational and reasonable as it sounds, I just imagine a ton of resistance and outcry from homeowners (everyone from credit-crunched flippers to retired mom-and-pops.) No one wants to see the majority of his net worth go up in smoke.
Just wondering what people really see the SoCal housing market looking like in 24 months. Thanks.
Dr. HoBub – you are the man. I’ve been reading your blog for a little over a year and have found it to be the singular most informative site regarding this bubble. Clearly, you grasp the economic principles at work, but have an uncanny ability to use language that is clear, concise and entertaining. Thank you for all of your hard work!
DQ put lipstick on it….but this thing is still a pig!
Dr Housing bubble, I really enjoy reading your blogs, Being a Southern California native I knew that the house market was going to crushed eventually, Now homes prices are more realistically priced, I used to tell my children about this issue and their reaction was, No way that will ever happen, I think now they are thinking that mom was right. My husband was just relocated to a small town in Arizona but I’m scared to buy a home here since I will always want to come back to my Southern California. I wish you had a house blog on the Arizona house market.
Dr. HB:
Thank you for another thorough, succinct and humorous analysis of the California housing bubble. Of the many bubble blogs out there, I find yours by far the most readable and informative. Each post focuses on a specific, timely issue backed up by data from a neutral perspective. I believe that brick-by-brick you are building an irrefutable case that this housing bubble is real, is deflating quickly, and will be protracted by market interference.
If you have the time, I would really appreciate your short take on affect of the following possible scenarios (likelihood, affect on home prices/inventory/builders, etc.):
1. A Bush/Bernanke Economic Stimulus Package that, according to Bernanke, must be “quickly implemented and temporary so that it won’t complicate longer-term fiscal challengesâ€.
2. Massive Federal Reserve intervention bringing interest rates close to zero.
3. Election of a strong Democratically-controlled White House, Senate and Congress.
4. Mainstream public acknowledgement of a Recession bordering on Depression.
1999 was probably the last “normal” year for socal housing, and represents a good baseline to think about where prices go.
trendline growth is probably ~ 5% long term. that suggests the normalized price in socal at YE07 should have been $292k, not $425k.
in theory socal home prices should drop another 30-35%. practically speaking, that may not happen. sellers will resist lowering and there are enough knife catchers to spread the decline out over time. in the meantime, steady income growth (or inflation) will allow the “normalized” home price to creep up.
if we assume nominal prices bottom in 2010, the normalized price should be somewhere ~ $345k. that’s another 20% down from here, and 30% down from the peak. that is consistent with what the big mortgage players (FNM, FRE, WM, CFC, JPM, S&P, etc) are predicting for CA.
furthermore, this analysis (if correct) would suggest that anyone who bought from 2001-2007 would have been far better off renting and investing their down payment in bonds. point to point, the appreciation rate from 2001-2010 will have been ~ 3.8%. the annual cost to carry the mortgage and the opportunity cost on the equity was > 6% and property taxes were 1.3%. maintenance & insurance probably added another 1%. so all in, home purchasers in 2001 paid about 8% per year to own an asset that will only have gone up ~ 4%. given that rental cap rates during this period were
Ahem, Doctor. It’s Ventura. Other than that fine piece. Personally I think the peak was probably Oct 2005 and what we saw in 2006 was a shift in product type and condition that held the median by changing the character of the median home that sold.
Dr Housing Bubble,
Wow! That is a great illustration of what a bubble it was in Cali. From my calculations, the prices could fall another 40 – 50% given the huge appreciation percentages given since 2000…yikes!
There are alot of explainations why the housing market went up really fast. There is no doubt that gains in excess of 10-15% are quite abnormal for any market. Lendors should have put the brakes on the home gains by requiring more down. Got out of control due to low or no down, non-stated, sub-prime lending. Some of the reason for the large gain is that LA/OC realestate suffered more than average losses in the early 1990-1997 due to the large unemployment rates. Going into the 11998-2007 price growth, homes had decreased by 20%, while incomes had raised by 20% due to high local unemployment. Relative to the previous peak in 1990, homes had dropped by 30-40% by 1998 in addition interest rates were in the 8% range. Employment gains create higher home prices due to added demand. OC/LA unemployment went down to 4% causing a huge demand for realestate. Approx 1% change in employment causes 5-10% increase in home prices, the opposite during a recession or declining economy. Recession and economic downturns normally cause homes to drop in price due to job loss. So overall, when you combine employment gains, lower interest rates, inflation, and the effects from last downturn in addition to easy credit this caused the firestorm. Relative to previous housing peak, home prices were about 10% higher, most of this due to “affordable loan” (creative loan) practices. Now all of this is going backwards. Higher unemployment with a recession possible, higher rates due to higher inflation, and tight credit. End effect is a sharp downturn. Someone needs to jumpstart the housing market, but no-one really knows how. We will likely see an overcorrection (huge losses), followed by a 10% gain as we search for the correct price. Alot of people are sitting on the fences waiting to buy. If interest rates stay reasonable or we get higher conforming limits, with unemployment
@DannyBoy,
How low can things get? My belief and I’ve been echoing this since 2006 on this blog is housing prices need to reflect the income of local areas. We are nowhere in the vicinity of calling a bottom. The market got hammered today and WaMu is looking like the next Countrywide. Plus, the Fed is essentially saying they will do anything to make this work and politicians are getting the printing presses warmed up. Get ready for the USD to go in tandem with housing downward. Too much excess is in the markets. People can cry and scream all they want but what is the government going to do? Send everyone a $200,000 check in the mail? On second thought…
@Zack,
Appreciate it. My expertise is more in consumer behavior and when you are in a bubble, economic fundamentals fly out of the window and greed and psychology take over. Economist then try to explain the bubble out with rational models but a bubble is irrational in nature. A pig with lipstick looks good compared to the loan portfolios of these companies.
@Lucy,
Home prices are not even close to being realisitically priced. We have a lot further to go. Keep in mind we’ve been on hyper drive since 1999. Fundamentals are all the same whether here in California or in Arizona. Incomes have to match the price of a home in some sensible fashion. Without these exotic mortgage products the crutch of the market is gone. We are now seeing as Buffet tells us, who has been swimming naked.
@Frosted_flake,
I wish I could say that I have no bias but I am clearly biased against having a reasonably priced housing market. However you are right, looking at the data is important and I assure you, if it makes sense to buy I will be the first to say it. I own myself so a decline in prices doesn’t help me either but that is why you can’t have all your money in one asset. Our economy has been a one trick pony. I think many on here and fiscally conservative folks are appalled by what has been transpiring over the decade. In regards to your points, first Boom Boom Ben is telling us that making the Bush tax cuts permanent is not recommended. Agreed. Look at the Gini Coefficient for the U.S. – the middle class is being annihilated under a pile of debt while the extremely wealthy get richer and richer. I think the Fed at this point has abandoned any monetary discipline and is going to cut rates like a maniac. The problem here is we are already at such a low rate that any cuts will not do much except kill the dollar further and push up commodities further. Think who the cuts go to. It primarily benefits banks who are responsible for this damn bubble!
Now we are looking at revving up the printing presses and sending checks to every American. This would be comical if it wasn’t so backwards. You know in all previous election cycles were we were in a recession/depression the opposing party won. Even without economic problems, this is a very heated election and get ready to see politicians bending like Gumby for any votes. In times like this, your integrity will be tested and you will be offered gold for your values. Don’t go for it.
@Taylor,
Normal in SoCal? We’ve been so far from normal that we need Dr. Phil to give us some therapy…oh that’s right, he was here in the area but guess what? He isn’t even a licensed psychologist! Bwahaha! We have pseudo “professionals†in the housing industry acting like they know what they are talking about but have such a poor understanding of history and economics and this is panning out. This is only the inevitable consequence of vapid greed and mismanagement. The comeuppance is what is happening and sadly many will carry the burden unjustly because of their greed. You think it is bad now, there is now talk about making the requirements on Fannie and Freddie a little more lenient. If this goes through we are in for a world of hurt. Let us not even talk about the Pay Option ARMs.
@Rob Dawy,
Thanks Rob for catching that. I shouldn’t be writing articles at midnight. Correction spotted and fixed. I know you are out in the area so how are things with the Countrywide debacle in your neck of the woods? Any word on the street?
@MassBubbleGirl,
Even a few years ago this seemed impossible but we overshot so much, a 40 to 50 percent drop isn’t out of the question. Peak for LA County was $550,000 so a 40 percent cut would put us at $330,000 which sounds about right given local area incomes in many of the lower to middle class areas. These will drag the market down.
I have to agree that a soft-landing scenario is likely to occur. We won’t see chaos.
Dr. Housing Bubble, you are always so right on!!! Just think, if the Fed Chairman read your site, he could have figured out what was wrong with the economy a couple of years ago instead of last week! But, now he and President are going to give us rebates so the doops can send in their loan payment for one more month on their upside down mortgage to the Fed Chairman and President’s banker/wall street friends. How nice! Your comment on the airplane analogies really gave me a good laugh. Thanks
“My question: in the next 2-3-5 years, how low will prices drop? Seriously. I mean, will they drop to 2003 levels? 2001 levels? 1999 levels?”
I believe best case scenario for the biggest bubble cities is a return to 2000 prices and worst case 1997 prices.
Hi that is the question. Schiller Case has historical data that suggests in recession driven corrections such as the aerospace industry collapse in SD in the 70s the drop is 25=30$ Of course then aerospace engineers were forced to sell not speculators and $15/hour gardeners. Since CA is in recession the minimum drop will be the 25-30% What is the bubble factor? I would say 2 which would be a stretch but that would get us to a 50-60% haircut which I believe the good Dr would agree housing then is affordable again. Look for 2001 pricing IMO
In regards to Countrywide, my husband has a friend who works there and yesterday all employess got a memo that starting TODAY no loans will be approved without at least 10% down. Sounds like Ken is already starting to shake things up. You can still get an 80/10, but no more 80/20’s. I can see it becoming even more tight in a few months as people who supposedly had “equity” in their homes start to default in higher numbers. Should be interesting.
USA Today earlier this week brought up an issue I have been thinking about for sometime and that is the demography of the housing bubble. The baby boom generation entered its peak earning years around 2000 and that is now over and done with. Retirement is next. Other than low income Latin American immigrants and a far smaller number of high income immigrants from Asia there is no ‘follow on’ demographic cohort capable of buying the homes of the baby boom retirees. Toss in an eroding fiscal situation in Washington as the Social Security and Medicare funding issues become real and a likely ‘gro-cession’ in the national economy for the next 5 or 10 years as a result of our credit binge in 2000-2007 period and I don’t think housing prices will ever recover.The concept of a house as an investment if over.
I have to disagree and say that if you REALLY look at the percentages it appears the peak was in 2005 somewhere! It’s not about “double digits”… you’ll notice the difference between Dec. 2004 and Dec. 2005 is nearly a “double digit” number. All this means is that this problem arose in statistical form much farther back than the information you are presenting here. It has been a much slower decline… not some huge bubble pop… more like a leaky balloon. You’ll notice that the median home price is only back in the late 2004 early 2005 range. It’s people reading information like this that continues this downward trend! The real estate market works in cycles, sometimes its a buyers market (like now) and sometimes it’s a sellers market (like 2003 and 2004). Presenting some historical data on this site going all the way back to the 50’s may prove my point by showing approximately 10 year cycles. We will rebound from this! For now I suggest buying while prices are low with little competition!
“We will rebound from this! For now I suggest buying while prices are low with little competition!”
And your qualifications to make this suggestion are? Let me guess. You sell RE. It’s not the media’s fault. It’s prices and the economy. That’s all.
I apologize if this is a double post:
Lauren, do you sell real estate?
The $145 Billion bailout is at hand.
Does anyone really believe that this money will go to increased consumption, rather than paying off bills?
And who are the bills paid to? The financial sector.
With CC balances and defaults rising, the ‘stimulus package’ is really designed to bail out the banks which lent / are lending to over-extended borrowers, both mortgage and consumer credit. It will shore up the balance sheets of firms like Citi, Amex, Visa, etc, and help keep the bond insurers and flip side hedge funds from having to pay out on defaulted mortgages and CC’s until the next administration is in office. Notice that it will NOT eliminate those payouts – just defer them – unless more money keeps going to the borrowers to pay down the debt while at the same time these borrowers do not INCREASE their debt load, but pay it down. Right – like that’s going to happen. People borrowered on HELOC’s to ‘pay off’ their CC debt, and are now underwater. Maybe some will continue that absurd behavior, but I suspect many more will use the cash to pay down their current debt and not go out to buy new crap.
Unless and until the debt load is reduced / eliminated, the psychology of debt and impending poverty will tend to keep people from going out and spending – the bulk will try to keep the wolves at bay.
Again, this primarily helps the card issuers and secondarily the mortgage holders.
And as far as Lauren is concerned, everyone is entitled to their opinion. So long as she pays cash, it’s her money if she buys, after all. Now, if she uses debt, and we as taxpayers have to bail her out from a declining market – now then we can make snarky remarks about her opinion. So Lauren – have anything in escrow right now, either as a buyer or an agent? If you do, put your money where your mouth is and use figures to justify your opinion.
@ Lauren
I’ve got some Kool-Aid for you.
Historical data supports the DR even more so when you go back to the 50s (or earlier).
Wow, Lauren, you just don’t get it.
You suggest buying while prices are low with little competition? Then let me suggest any SoCal buyer needs to wait for at least a 30% more hit to prices before he/she could consider prices to be “low” by any objective measure.
You say “It’s people reading info like this that continues the downward trend!” Amen, sister, and let’s pray for more.
Property in a SoCal knife-n-gun club neighborhood like Compton or West Covina shouldn’t be selling for $400/sq ft. Only a (about to be unemployed) realtor or mortgage broker would think so.
I know you are out in the area so how are things with the Countrywide debacle in your neck of the woods? Any word on the street?
Honest, there is a complete blackout at every level. The most anyone has talked about it is the Dir of Econ Dev in T.O. saying… wait for it… yep the takeover won’t have any effect because… wait for it… yup the Conejo Valley has a diverse and robust economy.
When it happens it will be fast and deep and hard. Interestingly tthat IMO is the best we can hope for. More likely is between now and Q3 a covenant failure and no takeover. Kmer Rouge City.
@All:
I’ve just posted the latest SoCal short sales report:
http://www.doctorhousingbubble.com/forum/viewtopic.php?p=401#401
Short sales now make up a whopping 9.37 percent of all inventory on the market. Just for a quick reference of how quickly things are deteriorating back in September short sales made up 5 percent of the total market.
@Lauren,
Blaming the media or data for the market going down is absurd. I didn’t here the media telling people to exercise caution while this bubble was inflating. Take a look at the data and by the way, we have a $14 billion short fall in California. How this is good for housing is a stretch of the imagination.
Housing prices IMHO depend upon prevailing interest rates. If the bond insurers Ambac and MBIA eventually go bankrupt, losses will be so high that the Federal Government may have to back up the banks to prevent widespread failures. The US Govt debt load will then be so high that the ten year treasury yield could rise to 20%. That would surely have a depressive effect on housing prices. How many of you can afford a 500K house with a $8300 monthly payment?
Dear Lauren,
Please ignore all these people, you are the chosen one!
History will prove you right, that housing will rise again, in 10 years. Oh never mind how low it will go down to…
Hi John Q,
You raised a key point – interest rate has been too low, artificially or not.
Low interest rate discourage saving and encourage leverage. That is why we are in this mess.
If one day interest rate does come roaring up, it will certainly kill the housing industries, encourage saving, and probably even marginalize the credit industry. Think about it, if mortgage rate is 20%, how much credit card carrying rate will be. FBs using their cards and houses like cash machine will be like walking in shallow water with shark.
But of course, if high interest rate stays high, that will depress all spending and depression will entail.
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