First published in The Mortgage Pages – June 19th 2009
- SF Bay Area Median House Price Jumps 12.3% — Mid-to-high end sellers begin to capitulate
- More transactions will reduce prices for the mid-to-high end price bands
- Mid-to-high end transactions increasing substantially as a pct of total, may put continued pressure on Case-Shiller
- CA May House Sales Anemic — only 2.9% m-o-m. Half of sales are foreclosure-related
- Organic sales languishing down 70% from peak levels
- Y-O-Y sales inflection point coming in July
- Mid-to-high end market cracking. Bid and Ask prices never wider
**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.
It’s Groundhog Day — feels a lot like 2007 with respect to mid-to-high end housing. In 2007 sales slowed considerably in Q4 through Q1 2008 when all lenders pulled exotic loan programs at the exact same time. House prices were hovering near record highs and the market was immediately re-priced according to the much lower affordability offered by the new vintage loan programs. As sales picked up, prices fell catastrophically — down 55% from the peak mid 2007 within 18-months. The wash out from this fall will be felt for years through loan defaults and foreclosures due to the epidemic negative equity in created.
Here we sit again but this time with the mid-to-high end properties staring into the abyss. They have not fallen anywhere near what the low-end has mostly because high-end borrowers were given more exotic, high-leverage loan programs such as Pay Option ARMs, 5/1 interest only loans, and 100% HELOCs to live off of. Arguably they have more reserves and better jobs, which have kept them paying for the depreciating asset much longer than with Subprime borrowers. The Alt-A and Jumbo Prime borrowers simply have loans that afforded them more time. But that has all changed and defaults across this space are surging. Foreclosures are coming, but not before the market begins its slide that ultimately will take the mid-to-high end market down 50% to 70% from its peak 2007 levels.
May CA Home Sales Anemic
This morning, DataQuick’s CA May home sales report was released to show an anemic 2.9% m-o-m increase in total sales to 39,051. It was the weakest May m-o-m reading in years. A total of 19,950 were foreclosure resales and 19,091 were organic sales — me selling a home to you.
Organic sales gauge the true health of the housing market and are off 70% from peak levels. Since the beginning of 2009, CA has enjoyed double digit y-o-y comp sales increases but the gap is narrowing and an inflection point is coming in July unless sales can find a way to increase sharply going out of the busy season. I think many will be surprised when the media is reporting negative CA comp sales in July through year end.
Below is a chart of 2006 through 2009 CA house sales. Yes, 2009 (red) is above 2008 (yellow), but 2008 was one of the worst years ever…2006 (blue) was a good year. Total 2009 sales are not as strong as they should be with all of the stimuli being thrown at the housing market.
When overlaying new Notice-of-Defaults, which are averaging 45k over the past 6-months and foreclosures, which have been held artificially low for the past 6-months, it is obvious that supply is everywhere. And foreclosure-related supply typically only accounts for 35% to 40% of total supply — the bulk of housing supply is from organic sellers trying to sell in order to move and re-buy. With foreclosure-related and potential foreclosure-related supply alone still greater than total sales, a true market bottom is not near.
The chart below highlights the sales mix — foreclosure resales vs. organic sales (blue). Organic sales near an all-time low underscore the epidemic negative equity in the state and are a leading indicator for the mid-to-high end market. Remember, most have to sell a home in order to re-buy.
- SF Bay Area Median House Price Jumps 12.3% — Mid-to-high end sellers begin to capitulate
Additionally, this morning DataQuick put out a report on the Bay Area house sales showing a price surge of 12.3%. DataQuick attributes the spike to more Jumbo houses selling. This is the first definitive sign that the mid-to-high end housing market is going through its dramatic revaluation period. The takeaways are:
- Total Bay Area Sales at 7447 in May vs. 7139 in April — up 4.3%
- Median price rose 12.3% to $341k from $304k
- Median price down 33.9% from $517k in May 2008 and down 48.6% from July 2007 peak
- 25.5% of home sales were in Jumbo category
- 983 properties over $800k were sold — 13.2% of total. In April only 699 props over $800k sold or 9.8% of total
Until a few months ago, sales at the mid-to-high end were very low and foreclosures almost non-existent — sales are still much lower than new Notice-of-Defaults in the Jumbo price bands. Coming into this year, most mid-to-high end homes that did sell were the best of the best — those that could afford to buy, bought the house they wanted.
Sellers by and large have been unrealistic about their ask prices and remain that way. But over the past few months, transactions are finally occurring because of the more stable Jumbo financing, lower rates, tax benefits, short sale opportunities and massive supply to chose from. The National Assoc of Realtors recently cited high-end housing supply at 40-months nationally.
The chart below show the ask prices and where sales occurred for Danville, CA. For those not familiar with Danville, it is the city where the pilot who landed the plane in the Hudson is from. It is a SF bedroom community with average list prices still over $1.3 million but sales are going off in the mid $800k’s. The price point at which sales are occurring is the market and where values will gravitate as sales occur. This is a big problem.
Remember, volume precedes price. Mid-to-high end sellers remain unrealistic about the values of their properties — likely because so many owe so much more than the homes are worth. But those with equity that are ok with the past 20-years of price appreciation or who know that they can steal a home in another area are accepting offers this selling season far below list prices. Others are opting for short-sales to which the banks are warming up. With rates down and prices down finally, two years of pent up demand in the mid-to-high end market is manifesting in more transactions. This is having the effect of pushing up median prices.
The chart below shows how prices crumbled as sales volume increased in 2007/2008. In Jan/Feb 2008 values were only down 20% from the peak. As sales picked up and first timers and investors bought all the way down, values plummeted another 45%.
This is the exact dynamic we will see with the mid-to-high end market. Transactional volume will drop prices considerably but because of a relatively stable demand for low-priced foreclosure-related properties, the sales mix will have the effect of pushing up median and average house prices. However, because the Case-Shiller looks at pairs sales, as mid-to-high end transactions increase as a percentage of total sales it should have the effect of pushing down the index. Is anyone prepared for rising median and average prices and a plunge in the CS?
Bottom Line: Mortgage and housing news flow is about to get really interesting.
Ps — Something to keep an eye on…in every mid-to-high end area that I have studied there is an overwhelming number of once listed properties coming up for rent. The thought process is “lets rent for a year or two and sell when the market comes back”. We know that won’t happen — but what will happen is that the massive supply of mid-to-upper end rentals priced very reasonably relative to the cost to buy and own will pull prices down faster and further.
Best Regards,
Mark Hanson
Mark@MHanson.com
July 3rd, 2009 at 8:10 am
Hi Mark, I always check your site, it’s great.
Any updates on “shadow” invetories in CA and elsewhere? Thanks
July 3rd, 2009 at 8:18 am
Mark,
One of the things that I am noticing is that there are a lot of NODs, Trustee Sales and Bank Owned Homes, but little for sale or going to auction. I’m reading blogs that lenders are purposefully holding back on moving to foreclosure auctions, putting auctions off and sitting on bank owned homes.
There is talk about the PPIP now either folding or not going through as planned.
All the pending AltA/Option Arms out there are of little significance if the banks take a bury the head in the sand approach and just let the water behind the dam really build up. My sense is that if the dam breaks, it breaks with a fury that no one the housing blogs can imagine. Question for you–at what point must it break?
PS–do you have in Blackhawk?
July 3rd, 2009 at 8:46 am
Mark, I think one of the big items that is overlooked is the fact that MLS listing inventory is not comparable to any other period. There are so many homes underwater that the owner has dropped his listing–does not understand a short sale or knows he is far underwater. We also know that many REO properties are not listed but are still for sale.
In prior periods, the house would remain listed, right up to the foreclosure in the hopes that the owner could capture a few $ of equity or save his credit rating by paying off the bank. The owner knows he does not have any equity or even close.
It is obvious that delinquencies continue to increase which tells us the problem is still building.
This problem is concentrated in California, Nevada, Arizona, Florida, Michigan and other states that have had large price declines–MLS listing data today does not tell the story about the # of houses that need to be sold in those markets. As you know total national MLS listings remain near record levels–if the distressed listings were there; we would be way beyond current numbers.
The appraisal and financing problems continue to cause “sales” to fall out. This means that the sales # is not comparable either. The months of supply is much larger than the realtors think.
Alex Sinclair
July 3rd, 2009 at 9:08 am
Hello Mark, First thank you so much for your site, you have saved my family and I from financial ruin. If you could see my beautifull little three year old girl smile once, you would feel pretty good about yourself and the work you have done.
I was wondering about the new Obama plan of offering loan mods to home owners 125% above appraisal value. How strongly will this effect the coming Alt A recasts? what consequences will this hold in the future? Will it stem foreclosures? Is it just another bank bail out? The banks have to be completely insolvent by now. Sincere thanks again for your insight.
July 3rd, 2009 at 11:09 am
MM – another great, insightful analysis. I think my home city of Irvine, CA is in a similar situation to Danville, where asking prices are still in LA-LA Land and people here think we are immune to any price corrections. You have shown in previous articles that the mid-to-high end wave is building, and now you show that the wave is heading towards shore.
The frustration I have is a lack of information. I am not in the real estate business, so I don’t know where to get the data. Where can the general public get real-time sales and foreclosure numbers? Sites like yours provide great analysis of the numbers, but I would like to do my own analysis as well!!
July 3rd, 2009 at 12:27 pm
JC,
Try this article regarding updates on “shadow” inventories. It’s more focused on Sacramento, but has some stuff about CA and elsewhere…
http://sacrealstats.blogspot.com/2009/07/deutsche-bank-sacramento-resale-market.html
July 3rd, 2009 at 12:44 pm
Mark,
I am currently renting and looking to buy soon and have been following your blogs as well as another doctorate of the housing bubble site that forsee a bottom not until 2011 and have come to the same conclusion that the mid and upper end housing is still due to correct.
With the coming Alt A resets coming, as well as higher unemployment, and still tough to get or much higher % jumbo/jumbo lite loans, logic would dictate that prices in this range have further to fall. However, being a San Ramon resident myself (the town next to Danville, for those not from the area)I have noticed a lower than normal inventory for the season and the inventory priced $800k range and lower are quickly moving, some with multiple offers in the newer developments in the area. Are these people clueless as to what is to come, or is it the artificial short term effect of stimulus (lower rates, incentives) and lack of REOs/Short Sales due to recent moratoriums, banks holding back on listing forclosures (shadow inventory) either on purpose or due to clogged pipeline creating near term artificial demand?
Also, I am wondering if the recent accounting rule changes on mark-to-market have so much lessened the need for these banks to move bad loans and properties off their books quickly, that it is prolonging the housing decline by preventing prices to fall to their natural lower levels more as fast as they should be.
Looking for your insight, especially since you are so familiar with the area.
July 3rd, 2009 at 2:00 pm
Mark,
Thank you for your work.
I tell my wife that I read geniuses on the web everyday, and I count you among them.
We are selling our home (in contract) in an upscale town on Long Island, NY, and will rent a house for 1- 4 years, depending on the market(s). I fear perilous times are ahead, with massive drops in home prices assured, even the “fortress” towns surrounding New York City.
July 3rd, 2009 at 6:14 pm
before every tsunami , the water recedes way back and gives the people smart enough a chance to run and take cover, those not smart enough or just too curious for their own good, never make it out alive…. THIS IS YOUR 4 MINUTE WARNING !!!
July 3rd, 2009 at 6:16 pm
Sutton,
When hyper inflation HITS us, as im sure it will , especially with Timmy Tax Cheat and Helicoter Ben at the helm , you will want to have debt and hard assets in todays dollars….you may already missed the timing of getting out of housing, it may be best now to stay in your home ….Good Luck !
July 4th, 2009 at 5:55 am
I watch one town, ground zero for foreclosures.
They are keeping inventory low.
38 set to auction
30 postponed
8 sold to bank
4 listed on MLS
4 closed escrow
everyday is like this in the town I watch.
The shadow inventory are those sitting in the house
and the bank taking no action. The owners are no longer
maintaining the homes, neighborhoods getting worse, most
sold become rentals.
What is going to happen, are they going to flood the market
one day soon?
I don’t like the feeling of this, seems like calm before the storm.
July 4th, 2009 at 8:15 am
Dear Mark,
I have been reading your website for several years now and you are consistently on the ball. The other two websites I read on the topic of RE are Patrick.net and Housing Bubble Blog which are also informative. Of the three, yours is the most informative however and gives practical information to anyone who reads your great website. Your Houses of Genius with brief commentaries make me absolutely howl! After reading only one of your articles anyone should definitely put any idea of buying a house on hold for at least half a decade and, if they still have equity in most cases in the appropriate states, dump that baby before they eat a huge loss.
Carry on!
July 4th, 2009 at 8:26 am
Let the fireworks begin..! Happy 4th of July!
As the credit jail gets packed..can I get an early release on good behavior?
July 4th, 2009 at 9:13 am
Javagold,
Yes, a hyper-inflation is something I have tossed and turned about as I prepare to let go of my 30 year fixed.
Still, real estate is a market is a like oil, nat gas, coffee ,etc., and after they go parabolic, they return to absolute levels(70-80% off its peak level), like we’ve seen in the hyper fast energy arena.
Good Luck
July 4th, 2009 at 9:19 am
Hyperinflation won’t hit housing, it will be food and energy. I don’t see min wage being $50 per hour. Hyperinflation is due to too much cheap credit (exotic loans, even unemployed got loans), now we have no credit with cards maxed out, no credit due to BK and/or foreclosures. My banker told me yesterday he is shocked about how many of his clients (upper middle class) are declaring bankruptcy.
Everything you need goes up, things you don’t need like RE stay flat or decline.
July 4th, 2009 at 9:27 am
Kim
Here’s my early Christmas wish:
Banks will hold onto these inventory through the rest of the hot summer selling season. Then come September, they will let it all out, dump em all, flooding and I mean FLOODING the market with foreclosures at deep groundbreaking discount, to encourage buying. This will continue for another 12 months or so, pushing price down another 30% – 50%. On top of that, Obama realizes that his stimulus plan hasn’t worked the way he had hoped and therefore, extends the housing credit to next year as well, maybe even increasing the amount to encourage buyers.
So my prediction is: There will be opportunities to buy at huge discounts and thus, we’ll see lots of buying in the next 18 months. Then comes the end of 2010, the RE market will bottom and prices will slowly move back up. Mid 2011, prices will appreciates a bit faster and faster and faster all the way to 2012 where prices will be where it was the peak in 2006. Then people like ex-owners will be out of credit jail and will jump in once again to buy at the peak, but this time they will push prices to historical high. Then in 2017, the foreclosure process will start again and we will again hear “victims” like ex_owner blaming gas pricing for losing his home.
July 4th, 2009 at 9:46 am
2006 price = 2012 price??? WONTON what r u smoking??
Even If I got an out an early release from credit jail, I would be in no hurry to buy nor would I put an offer in at more than 30% bellow today’s price!
HOUSING IS DEAD, AT IN 2012.. PRICES WILL BE 80% BELLOW 2006 BUBBLE PRICE!
WE’RE IN STAGFLATION…I absolutely agree with Kim!.. necesities going up in prices, assets (real estate included) GOING DOWN!
WELCOME TO THE GREATER DEPRESSION!
July 4th, 2009 at 10:01 am
…SOME PLACES HAVE ALREADY HIT 85% BELLOW PEAK PRICES..
July 4th, 2009 at 11:03 am
We’ve already had our so-called “hyperinflation”. It was in stocks, bonds, energy and housing prices. Namely, they were bubbles. The bubble period is over. It’s busted and won’t come back.
People looking for hyperinflation (another bubble) are going to be disappointed. If it was really going to happen, Gold would already be $3000 an ounce and the Dow would be 20K, not 8K.
All the money printing Ben (and Tim) are doing is only patching the unlimited number of holes in this sinking ship called the US Economy because of excessive debt which can’t possibly be repaid. Their efforts to inflate are paradoxically causing the deflation to gain steam.
We are actually going to be in a period of long term deflation where EVERYTHING goes down with the dollar……
Watch!
July 4th, 2009 at 11:50 am
I know we’re printing a lot of money, but hyperinflation I’m not so sure about. Between the output gap, and capacity utilization at extreme or all time lows, how can we have demand pull or cost push inflation?
July 4th, 2009 at 12:29 pm
“…SOME PLACES HAVE ALREADY HIT 85% BELLOW PEAK PRICES”
In all honesty ex_owner, I don’t care about “some places”, only MY PLACE. You know, like owning a stock, you don’t necessarily care about the stock market. You only care about your stock.
Having said that, I was only playing with man. I don’t know where we’ll be in 2012 and wouldn’t even try to guess.
July 4th, 2009 at 2:10 pm
Great article……but…..
I won’t stop sweating until I see S.D. inventory rise from these extremely low levels and stop hearing about 10 to 15 offers on decent houses.
I am sweating even though common sense tells me the current prices CANNOT be supported.
July 4th, 2009 at 2:24 pm
To the people who think inflation is off the table.
It is absolutely true you can’t get people who are broke to borrow and banks wouldn’t let them if they could, which is what our fractional banking system is all about.
But…if you have increasing unemployment, people who use to produce goods and services sitting at home watching TV because they can’t find a job, and are just now consuming other peoples labor, at what point does inflation begin?
You may not be able to get unemployed Joe consumer to borrow but you can just send him a check and spend it he will.
The government can and is giving increasing amounts of money to those who no longer produce but now just consume. And, the Federal government is doing the same on a massive scale, it produces little but spends newly minted money daily.
Increasing amounts of money spent, increasing amounts of idled workers.
This is how inflation is going to occur.
July 4th, 2009 at 3:50 pm
Mark,
Thanks again for the wonderful research.
And a happy 4th to all.
July 4th, 2009 at 4:54 pm
Martin, so you’re suggesting demand pull inflation from people on welfare or unemployment? I would suggest this could not happen unless somehow these payments were increasing in amount. Why would they, as there would be no wage pressure with high unemployment. Furthermore, if real estate wealth destruction was continuing to occur, that would constitute deflation.