The canary in the Southern California housing market signifies a sizeable home price decline for 2011 – Collapse in year over year home sales and $8,500 away from a 10 percent price decline for Southern California home prices. Freddie Mac online rent versus buy calculator doesn’t even allow for a 1 percent annual price decline.
If housing has any leading indicator data point it would have to be with sales. In the most simplistic sense of economics, a month with weak sales likely means there is an imbalance between home prices and market demand. Of course, many were unable to remember more normal trends in the last decade because the market was incredibly stimulated with toxic loans that created an artificial mania. It is hard to call data with option ARMs and Alt-A loans flooding the market as somehow normal. Today, we are seeing a similar trend that occurred in 2007 when the median home price peaked yet sales collapsed for Southern California. It is unlikely that we will have unlimited bailouts or other expensive gimmicks to juice the housing market. Those have all been expensive experiments in failure. The housing market can only recover with a healthy employment market yet the banks have dominated the dialogue in terms of guiding bailout policy. In the month of July of 2007 Southern California reached its median price peak of $505,000. In that same month, year over year home sales fell by 27 percent. Our latest figure for October of 2010 shows that sales fell by 24 percent year over year. What does that mean going forward?
First, let us put this October in context:
There is a strong seasonal side to housing so we need to take that into account when measuring trends. This last information shows the second weakest October in the last ten years. The slowest month above was in 2007 when the median price was at $444,000. A year later the median price was at $300,000.
Sales have fallen by 24 percent from last October even though the median price is only up by $3,000 in that same timeframe. We are going to see yet another year over year nominal median price drop in the next few months. On the record, January and February are typically the slowest sales months but we won’t see that data until February and March. Yet this leading indicator is telling us that we are going to see price declines coming up. Sales have been declining strongly since June and we are now into our fourth consecutive month where less than 20,000 homes have sold (and we have yet to hit the weaker two months in the winter).
Now that the no-doc, subprime, Alt-A, and option ARM junk is no longer being originated, we have to assume that people at the very minimum have to show some sort of income to get a loan. With 95 percent of the market being backed by government loans, at least that standard is in place even though you can get away with a ridiculous FHA insured loan with 3.5 percent down. Even at that level, this is what is happening:
Prices are now stagnant but sales are collapsing. The last time sales fell like this in October of 2007, we went from $444,000 to $300,000 in one year (a drop of 32 percent). A sales collapse like we are seeing takes 6 to 12 months to work through the system and register in prices. What does this mean for October 2011 prices? What it likely means is that prices are going to move lower but the question is by how much. I’ve been on the record many times talking about a collapse in home prices in 2011. It seems like more are seeing the light:
“(Housing Wire – November 15th) Standard & Poor’s analysts believe home prices will drop between 7% and 10% through 2011, erasing any improvements prices have recently made.â€
Keep in mind S&P is looking at nationwide prices. Given the current collapse in sales, we will likely see a year over year drop of 10 percent as a minimum. How farfetched is this? It is closer than you expect:
SoCal:
May 2010 median price:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $305,000
September 2010 median price:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $295,500
October 2010 median price:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $283,000
Given the typical weakness of January and February coming up, is it possible to see an $8,500 decline in the median price? Of course! Because if the median price drops by $8,500 from where we stand today and stays that way until May of 2011 there is your “outlandish†10 percent drop. That is why I actually think Southern California has a lot more dropping than some people expect. The trend is rather obvious. The buyers who jumped in 2008 and 2009 thinking it was the bottom didn’t realize it was a trap. Now that demand has dried up, the market is coming to a tough realization. Of course you have plenty of people in amazing denial but just look at the comments of some of the articles from 2007 when sales collapsed but the median price was still near the peak and the employment market was much healthier back then. They were driving down the highway and looking in their rear view mirror.
We can see the seasonal pattern in sales clearly:
We are entering the weak selling seasons of fall and winter. These preliminary numbers are not good coupled with the outright fraud perpetrated by the banks and the public hearing about robo-signers and other shenanigans. Given one –third of the market is foreclosure re-sales do people feel confident buying a foreclosure from a bank that used some lower level worker to sign away as if they were a Hollywood artists signing autographs for fans?
Thanks to online information and the fact that the masses wake up one by one through reasoning, people are finally understanding the nature of the bubble; prices were and are too high. This has always been the problem:
“(LA Times) San Diego real estate agent Jim Klinge, who maintains the popular blog Bubbleinfo.com, said the key behind the sales slowdown last month was simple: Prices are just too high.
“Sellers are too optimistic on price. They think the market is better than it is, and they think they deserve more money,” Klinge said. “The buyers are smart. The Internet has leveled the playing field, and buyers are paying attention — they are checking the comps closer than ever, and they are not going to overpay for a house.”
I was listening to Planet Money on NPR a few days ago and they had some ex-Freddie Mac worker apologizing about the housing fiasco. He mentioned that Freddie Mac had an online rent versus buy calculator that didn’t allow you to input a negative appreciation rate! Given the few years of depreciation I would think that one of the big GSEs which is practically the entire mortgage market with Fannie Mae would get this one thing right. Surely after a few days of airing this it would be fixed. It is not:
Keep in mind this is an organization that we now virtually own and has cost us hundreds of billions of dollars with more losses in the pipeline. Their rent versus buy calculator won’t even allow you to run a negative one percent annual depreciation rate which is absolutely going to happen to Southern California (last month prices fell by over 4 percent!). No wonder why things are so screwed up. Even the calculators have denial built into them.
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46 Responses to “The canary in the Southern California housing market signifies a sizeable home price decline for 2011 – Collapse in year over year home sales and $8,500 away from a 10 percent price decline for Southern California home prices. Freddie Mac online rent versus buy calculator doesn’t even allow for a 1 percent annual price decline.”
Your yearly maintenance and insurance costs seem mighty low.
Layoffs are still coming fast and furious. Two of my neighbors, who both had secure jobs (“My job is safe. Company would have a hard time replacing me. My experience in the field makes me vital”) thought they would retire with their companies.
Until Friday afternoon, when they got called to the cafeteria, and told to bring their wallets and purses with them. ” Don’t go back to your desk. The guards will escort you out.”
Do NOT buy now. This whole recession has NOT bottomed out.
Rick, this must be a mistake. The recession ended over a year ago. It’s all sunshine and rainbows now.
Green Shoots!
You’ve just confirmed what I already know. Your smoking crack to have that belief. Just as the feds denied us being in a recession for the first year and a half of the current one. Give it a few years and they will come to the realization (admit) that this was a depression as opposed to a recession.
We’ve yet to see the worst of it considering how DEEP our debt is. Anyone who believes otherwise is a damn fool.
I love the Freddie Mac, screen cap.
I love that Freddie Mac screen cap too. Except they really don’t need a mortgage calculator. Just a pop up window that says “Am I Better Off Renting” with a giant YES in bold red!
Doc, great job on that last Freddie Mac graphic…..what a joke. Keep up the solid forensic work on the So Cal housing market – I appreciate it. – Tom
Come on we are in a depression, buck cut in half, no jobs, housing way out there.
The gov can only print so much before it collapses further.
Quantitative Easing Explained « Tea Party NM http://teapartynm.wordpress.com/2010/11/14/quantitative-easing/
Say it ain’t so—Doc!!!!
The price has not changed a hell lot much, and some areas in San Diego still have prices of 2006. once it is up there, it’s like to take a pound of flesh from someone for the price of their home to fall. It may take another 5 years to see the bottom of this. also, its up to the banks to take the loss, and they don’t want to take the loss, unless the homeowners send in their keys. Now the homeowners learnt that they can stay without paying their mortgage. Hey, why the hell not? if you can stay in a million dollar home without paying a cent per month, why not?
By the way, all these freddie stuff (the low end homes) has declined about half from their peaks, and it appears stable in their prices. there might be a bottom or close to a bottom for those homes. It’s the high end homes that are waiting to take the loss.
Thanks Sandy for that link. It’s time to put Goldman Sachs out of business as well as the Fed Reserve. And prison time for many running both.
Thanks for sharing that information doc. Despite reading about VERY weak sales since summer, graphs do help make the picture clearer. As is usually the case, home prices will trail the sales trend, and the last few months are indicating another major decline to come over the next couple of years.
Due to the higher rate of unemployment (since 07) and the decreasing in the number of quality jobs, I think it’s a safe bet that price lag will come sooner than later. The economic environment was already in deep trouble back in 07~09, but there was still more spending and ‘stimulating’ back then, as well as sellers who were willing to hold out just a little longer. In today’s environment, there is a higher chance that those prices will lose traction under a year than the 1~2 year lag on the charts.
Whether this lag will be longer (or the price drop less shallow by percentage) for the nicer neighborhoods would be another great question to answer. Any thoughts?
I love it. Check out http://www.housingtracker.net/asking-prices/los-angeles-california/ for some interesting numbers on inventory and the drop in asking prices from peak (April 2006) to present. Fun stuff. OC numbers and other locales are also available, just move up one directory.
Not sure how legit those numbers are, as they appear to decline every month since April of 2006. Here’s what appears to be the peak (SFR + Condos) for LA on that site (it’s actually the starting point for their tracking):
Columns are Month/Year, Inventory on the Market, 25th Percentile Asking Price, Median Asking Price, and 75th Percentile Asking Price.
Apr 2006 31,133 $445,333 $579,666 $805,300
Current:
Nov 2010 38,530 $251,333 $366,633 $588,333
OC peak:
Apr 2006 11,569 $529,900 $694,833 $973,333
OC present:
Nov 2010 14,191 $299,967 $436,000 $673,000
This piece absolutely has me scratching my head. Especially near Countrywide’s home base. Wow. They have closed all inventory channels and have managed to squeeze these levels in the process. When does the dam burst? How many medical marijuana cards are out there…30 million?
Focusing on 1.2 billion unemployment burn rate per mo. in Ca. Click wicked.
This shift in sales volume as leading indicator should warn would be buyers. But there is another concept that is equally troubling and only slightly more complicated. A buyer today should relate a home purchase price to the price of a treasury bond. The face value of a bond depreciates about 15% when interest rate yields rise 1% on bonds. So you if you want to sell a bond in a latter market when yields are higher you have to discount the price.
The same goes for buyers that purchase a home in this artificially low interest rate environment. There is a huge down side risk to the value of real estate purchased at today’s low rates. The USA is getting lots of negative attention globally and the foreign purchases of our bonds has declined…QE2 is designed to artificially fill the void to keep bond demand high, rather than raise the yield return to attract REAL demand.
BE CAREFUL…The Washington and Big Bank Machine is still looking for victims to slow the decline in home prices. Don’t be caught in the extend and pretend trap. There is deleveraging and unemployment that will drag prices down further.
Between Dr. Housing’s interesting and factual numbers and your analysis, you found the right tune and — there is a piper to pay, and the US Government and Federal Reserve will make sure that new borrowers and new purchasers pay in full, whether or not interest rates rise or fall, and whether or not housing prices reach equilibrium or not. Oh, the folly of it all, to pay for the folly of those who bring us all to ruin.
Sounds about right. The vampires need more blood, so they will suck as long as possible.
Eerily familiar. I was living in PHX from 2005 to 2009. I witnessed housing prices collapse in the less desirable areas beginning in 2006. Places like Scottsdale and Paradise Valley only declined about 5% while the area I was in was down 35%!
Then, about Sept of. 09, 3 years after major price declines, things cracked in the “desirable areas”. In the course of the last 15 months or so those areas suddenly plunged.
I get that same feeling here in S.D. today.
I live in a nice area in Woodland Hills with a lot of large lots, 1/2 acre and acre. Recently a rather sketchy woman was taken in as a tenant a few houses down. It took about a month, but now there are two enormously large, old, dirty buses parked in front of the house, and suddenly there is a huge tent in their backyard. I don’t know how many people are now living there, but they have bonfires at night and play music. It cracks me up. This is like Steinbeck territory in the 21st century. This place is going downhill. I think I need to read Grapes of Wrath again, to see how this story ends…
My neighbor just found a way to make a few bucks while “P*****g” off all his neighbors in one long week. We rent a home on a ranch for the peace and privacy expecting the normal sounds the come with agriculture. To make a few bucks for himself he rented out his 3rd world appearing ranch to Paramount to film parts of thier super secret Speilberg Abrams movie… If you were concerned, Steven is doing his best to employ everyone in the industry – we’ve never seen such a huge waste of money ever. Millions of dollars to film a few short minutes of the film. Thanks Guys, thanks for tearing up our road, all the delays getting thru our road, all the dust, light, noise… And nothing for us! We live 100 yards away from the area and we got nothing! No one even came to talk to us. At least Hollywood is alive and making money here in So. Ca.
So if you can’t make your house payments, let the movie makers blow it up – and get Paid?! Something to think about.
Somis, provided you’re close enough to the shoot, here’s what you can do. Make as much noise as humanly possible throughout the day and night as they are shooting. Have a leaf blower/lawnmower/weedwhacker? Run them all at once!
Just make as much noise as possible to inconvenience the film production, and hopefully they will come over and try to pay you off.
Well, why do you think they owe you something. Why does everybody think they’re owed something? If Spielberg’s production is willing to invest a few millions into 2 minutes of film then they have good reasons. It’s their money and they tend to know that it makes sense. Spielberg is no charlatan plus the film industry is very labor intensive and feeds a lot of mouths.
So they were shooting there for a week- big deal. This great advice from some genius Noobz to make noise and throw spotlights around will definitely get you into the trouble, btw. Just try it out 😉 I think this is the perfect anti-social behavior we’re seeing here, expecting hands out wherever one can – because you couldn’t hear ‘agricultural’ noise for a week?
You should be aware that it’d be a lot cheaper to shoot the very same scene, with a brand new ‘distressed’ farm built to blow up, in Bulgaria or Romania or Morocco or even in Canada. We should applaud that Spielberg shoots in California in today’s market. It’s good for the economy and therefore it’s good for YOU!
Uh oh! Hide the kids, hide the wife, hide the husband, hide the dog! Sounds like you’ve got a gypsy infestation!
Sounds like the hippies have moved in! But why would hippies want to live in The Valley?
Well, cheer up Straight Man/Woman!
At least it’s not The Valley’s Most Lucrative Industry moving in.
They rent out houses in the “nicest” parts of The Valley, I’m sure you’ve heard.
I think nowadays Japan looks like a pipe dream! They may have long term deflation, but their unemployment rate is at 5%. I honestly don’t know where we are going to go. I have also never seen such a bunch of dumb politicians. One side wants to give tax cuts to a bunch of people who are offshoring all our jobs anyway and the other is like Cher in clueless.
Europe’s troubles have started up again . Lets see how it goes.
Careful, there. The unemployment rate is low in Japan but from what I understand the labor force is 20-30% part time desiring full time work.
(Sigh)
Everyone in the Real Estate and Banking fields are so desperate to stay in denial that they’re drinking their OWN cool-aid.
Hold on to your hats. The foreclosure waterlevel keeps rising behind the dam. When it does break, the flood of foreclosures will turn everything upside down. Home prices will drop dramatically, while rents begin rising. Nobody will want a house, unless it’s already paid for (owned..) Instead, people will be scrambling for rentals.
http:www.westsideremeltdown.blogspot.com
This key is jobs and unemployment, that is the only way out of this mess. I keep asking myself “what will turn things around and have business hire and unemployment go down?” I still don’t have an answer to that question. I seriously think high unemployment is here to stay. With outsourcing, recent ponzi economies, awful politicans, entitlement packages gone wrong and unsustainable debt at every level how in the world are we going to turn the corner. Everybody in this country needs to take the medicine and realize life isn’t what it was…and then maybe we might make some progess.
The solution is simple – our own history provides a guide. Our country has been the most prosperous when taxes were the most progressive, ie, punitive against high earners that saved rather than reinvested their money in their businesses. Reagan’s massive tax cuts resulted in 30 years of asset bubbles and the decimation of the middle class. Too bad it doesn’t make it to Fox News.
My husband and I rent in Burbank for $2500 per month (excluding utilities we which we pay). We have a downpayment and enough combined income to support a mortgage comparable to our rent. However, consistent with Dr.Housing Bubble’s site, we are wary to purchase in Burbank where a comparable home 3 br 2 bath is still nearly $550,000 for a decent location / quality. I have been watching prices the past year and they seem stubborn, we don’t really want to rent for more than another six months or so. Are mid range houses like Burbank expected to make a significant drop or is the commerce and residential appeal of this locale likely to keep housing costs high for a while? Basically trying to decide how long we should wait if any have advice for our area. Thanks!!
In reference to earlier reply from Noobz, thanks for the great ideas! That and some well placed spot lights should get thier attention… Thanks!
I’ve been looking for a 4 unit building in Los Angeles and a few areas I am familiar with. I was told from several people that whenever a worthwhile unit comes out, there are multiple offers and the unit is sold at higher price than what it was asking for initially. I don’t think the price investment properties would be lower any time soon. Any ideas?
Bobwire, I live in Chicago. In good desirable neighborhoods, when investment properties go into the short sale phase or the reo phase, people will trip over themselves to buy.
Just by running the numbers, I see it is a money loser. But a lot of investors still believe in nonsense like “well people have to live somewhere”, “everybody needs shelter”, etc…
What makes Chicago even more unique is that from 1998 to 2007 we have seen a tremendous amount of new condos/new units built in our city. Further adding to the inventory.
Nimish, here in Cook County, the “shadow” inventory is about 25X the size of the visible foreclosure inventory. According to Michael David White at Housing Story.Net, there are 1200 foreclosures visible on the market in Cook Cty, but over 28,000 foreclosed properties in Cook that don’t show in the listings. I’d be willing to bet that a huge percentage are condominiums in the South Loop, Des Plaines, Rogers Park, West Ridge, Edgewater, Uptown, and Lakeview.
I’m waiting to buy a condo until all this stuff starts to hit the market. It would be extremely interesting to see what would happen to condo prices, especially in the South Loop and Rogers Park which are epicenters of foreclosure in Chicago, were all this inventory to go on the market. Everyone else is waiting, too, because everyone knows it’s there.
Bobwire I agree. I myself was looking to buy a multi unit building. I thought it would be easier if I stayed in one and rented out the others-at least there would be income.
But looking at the bigger situation, I have decided to hold off. i really don’t know where this country is headed. Are we looking towards a long term Japanese style bust. A short collapse and then go back up or stay down? There is absolutely no private demand and the repubs want to choke off all govt spending-so where is the demand going to come from. ireland tried austerity and it looks like they are close to default and another bailout.
I don’t know. The good thing I guess is in this market/economy/world, it is nice to have cash in hand. I guess I am just lookin for some sign that the economy has stabilized. Some sign that we have reached bottom-I just don’t see any and I don’t see either political party offering any sensible solution.
Good presentation. But the Obama Administration has their boy Ben printing money and devaluing the currency(to cheat the Chinese). Ben’s banking friends hope that the excess money will cause inflation so they can get paid. This could really happen. If Ben is wrong on his QE2(not the get away ship) then your analysis is generally correct. But it could be a lot worse. We could have years(e.g. 5 or more) of low prices. It reminds some people of the 30’s. Maybe Obama’s wife is right about having your own vegetable garden. Perhaps she has that “depression” feeling.
We left San Diego County for Montana five years ago partly because we knew the bubble had to burst. We were able to purchase twice the house for half the money. There was no real bubble to burst here and our current house is still worth more than we paid for it. We rode out some smaller California bubbles while living is the same house for 18 years. Those smaller bubbles are what told me the run up would eventually run down. I’m glad I’m now outside looking in.
Well QE I was what triple the size of QE2 ? if that did not do anything for the economy, why does one think QE2 which is only 1/3 the size going to do anything?
Inflation comes from massive demand or massive collapse of currency-eg Zimbabwe. The first part is non existant and unless jobs come back it is not going to come back. Now the second part is a posssibility-who knows the republicans and dems may have a battle and refuse to raise the debt ceiling -thereby causing a massive loss of confidence in the dollar-now that will bring hyperinflation . Not of the good sort. Then forget million dollar houses, we may have to pay a million dollar for a loaf of bread. It happened to germany-did lead to some nasty stuff later.
Kinsast – do you feel better about yourself now? I hope you get help for what ever it is that is consuming you! Honestly, reach out to some one and get help…
God Bless America!!
I have been saying this for a year! People are in such denial… The market has yet to crash. I agree with you 100%
In Chicago I am not better off renting, I am better off buying the right place. But I still think prices will come down this fall again. And they continue to drop. But I notice that there is a threshold. Once a one bedroom hits 50 – 60K in my neighborhood it sells. Once a 2 bedroom hits 75 – 100K it sells, mainly to investors wanting to rent it. The properties you can’t rent because of the association are dropping 10K every few months. The question remains “Is this the bottom?” For me it doesn’t matter as I am paying cash for a two bedroom to live in and it must be way cheaper than rent comps (if it were a mortgage.) Hopefully I get a two bedroom for 50 – 70K cash that I like and only pay asses and taxes.
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