Case-Shiller High Tier Comes Alive

Submitted by Rich Toscano on May 25, 2010 - 7:59pm
After languishing since last summer even as the mid- and low-priced tiers rallied, the high-priced tier of the Case-Shiller home price index finally showed some signs of life.  The high tier of the index, comprising the most expensive one-third of homes sold during the measurement period, leapt 2.9 percent between February and March. 



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Submitted by sdrealtor on May 26, 2010 - 1:41pm.

What I found most interesting can only be seen in the full article. The first graph really focus on a very narrow view and is likely subject to statistically insignificance. On the 3rd graph its clear that things got bubblicious between 2003 and 2008 particularly on the low end. When you look at the long term graph the 3 tiers are back in sync and close to the longer term trade line to boot.

ANy chance we can see further back than 2000?

Submitted by Fearful on May 26, 2010 - 3:21pm.

I keep the Case-Shiller data back to 1989. I can send you the spreadsheet if you are interested.

The three tiers basically diverged beginning about 2001 and re-converged about 2008.

The latest blip up in the high tier looks like it is outside the noise, but it is hard to judge: In deference to Mr. Toscano's comments about Kremlinology, the entire second hump in the long term graph is outside the noise.

How many billions of dollars did it take to buy the second hump? If it took that many billions to make that teeny second hump, how much of a distortion did the entire first hump represent?

I cannot let myself believe that the Fed and Treasury ever wanted anything more than a soft landing for housing, so I remain optimistic that the price supports will be steadily removed from here on out. Stupidly optimistic, right?

Submitted by Rich Toscano on May 26, 2010 - 3:49pm.

sdrealtor wrote:
What I found most interesting can only be seen in the full article. The first graph really focus on a very narrow view and is likely subject to statistically insignificance. On the 3rd graph its clear that things got bubblicious between 2003 and 2008 particularly on the low end. When you look at the long term graph the 3 tiers are back in sync and close to the longer term trade line to boot.

ANy chance we can see further back than 2000?

http://www.voiceofsandiego.org/toscano/a...

Submitted by sdrealtor on May 26, 2010 - 4:06pm.

Thanx Rich!
Looking at that graph makes me question how much more the high end will adjust relative to what has already happened on the low end. I still gotta beleive there is a nice drop ahead in the $1M+ plus market and moreso above $2M. But I wonder how much more declines we will see between $450 and $1M.

Submitted by pemeliza on May 27, 2010 - 6:26am.

These graphs make the high end look better than it is IMHO. I am seeing houses close at prices that are well below there inflation adjusted 1989 prices in prime areas. Here is an example.

http://www.sdlookup.com/MLS-100021137-16...

The house sold for $575k in early 1989. Inflation adjusted that is $1,010,928.83 in 2010 dollars according to the governments CPI inflation calculator. Meanwhile the house just closed for $925k.

I agree with Rich that the high end (> 900k) is as close to a free market in housing as we have currently and it has probably going to over-correct to the downside.

When you consider the interest rate differential between today and 1989 (probably at least 400 basis points higher in 1989) these examples tell us that on a monthly payment basis that some houses at the high end have not inflated at all since the late 1980's.

Submitted by DaCounselor on May 27, 2010 - 9:59am.

sdr - if you could add just one more tier, would it start at $1 mil and up?

I have some trouble accepting upper tier data with a starting point at $466K. I don't see properties in the more desireable zips in SD at this level that could be categorized as high end or high tier. I'm not surprised to see a hot market in a range up to the $600's, and maybe, maybe into the $700's. I'm wondering if the more numerous deals up to this range are skewing the numbers. The inventory data I have seen re the $1 mil plus market indicates very low sales v. inventory.

I agree with sdr, seems like the true high end, the 7 figure market, is set to drop nicely.

Submitted by Rich Toscano on May 27, 2010 - 10:05am.

"I have some trouble accepting upper tier data with a starting point at $466K. I don't see properties in the more desireable zips in SD at this level that could be categorized as high end or high tier."

The high tier is not supposed to represent houses in a given zip code or your interpretation of what "high end" means. It's the most expensive 1/3 of homes sold -- that is the definition of the high tier of the Case Shiller index.

Submitted by sdrealtor on May 27, 2010 - 10:20am.

If I could add one I'd add two. I'd stop the current top tier at around 850K. The next tier would be 850 to 1.25M and then 1.25M+. Of course as Rich pointed out Case Shiller is only looking at the market in 1/3rd's and this would be far from an equal distribution. My tiers reflect more of how the market actually behaves.

Not to state the obvious but one last point, even when the real high tier drops, its still expensive. $3M homes dropping to $2M would still be far out of the realm of all but the wealthiest. I get the sense there are still some folks expecting to see prime oceanfront homes and RSF estates (the one link to above is far from one) for under $1M which I dont beleive will ever happen.

Submitted by DaCounselor on May 27, 2010 - 12:52pm.

Thanks guys. I understand the distribution aspect of CS's chart. My point is that the upper 1/3 tier is not a good representation of what is happening in the higher end (in my view the $1 mil+ range) in SD. That's all. I think sdr has is right by setting tiers as the market actually behaves as opposed to equal distribution. But CS can only go into so much detail I suppose.

Agree w/sdr re wishful thinking that prime properties as decribed will tank to a 6 figure level. Or even close. It does beg the question (with I think an obvious answer), however, using the hypothetical of a prime $3 mil house falling to $2 mil - what happens then to the "lesser" house that was worth $2 mil? If it falls to $1.5, then what happens to the "lesser" house that was worth $1.5? And so on.

Submitted by sdrealtor on May 27, 2010 - 4:52pm.

I guess you have hit upon a hypothesis put out by an old time poster known as the Butterfly Theory that I never bought into (probably was the only one who didnt) which says all markets are connected. I just dont beleive it is that simple. I beleive most people seek a home in their comfort range and conduct more focused searches (hence all RE mkts are local).

I always use my area as a frame of reference so here's an example or two. A young professional family in the NCC area with school age children wants to be in a nice family oriented neighborhood with good schools and kids close by. Even if prices were to fall into their price range in Olivenhain or RSF most dont want that more isolated lifestyle. They never consider that as an option because it doesnt fit their lifestyle so they search in the areas that fit what they want. While falling prices in Olivenhain or RSF would ultimately exert some downward pressure in Encinitas/South Carlsbad because some buyers will make the switch, the fall is far less than on a 1:1 basis. The other factor is that there are more buyers as you move down so the demand holds prices firmer in lower priced markets.

What you end up with and what we are now seeing is price compression. I see it in my area where you can get a 3500 to 4000 sq ft 4 yr old home for just a little more than a 2800 sq ft 10 yr old home.

Submitted by DaCounselor on May 27, 2010 - 5:45pm.

I would say I buy into a modified butterfly theory, because I think you are right sdr about the fact that different higher end locales attract a different demographic to such an extent that not many will cross the boundary line, so to speak.

I'm personally only interested in 4 areas but I track many more areas to see how they are faring as well. For a growing family, what is happening in the high end Downtown condo market, in RSF or in Coronado may not be very instructive for the very reasons sdr states - but I watch them nontheless to get a feel for the components of the county.

In any event I remain on the sidelines as I am a move-up buyer with my sights on a higher end property, and I think we're going to see some nice reductions over the next few years.

Submitted by sdrealtor on May 27, 2010 - 7:24pm.

Whether or not we see general price reductions, we will see some nice individual/isolated opportunities. The key is finding them, recognizing immediately and having the confidence to seize them when they pop up. Tracking multiple areas helps you do this. Get good help too.

Submitted by pemeliza on May 27, 2010 - 10:11pm.

"(the one link to above is far from one)"

I agree sdr. I picked that house to illustrate my point that certain high end properties have not even kept up with inflation over the last 20 years and examples are starting to pop up in prime areas.

Submitted by cyphire on June 3, 2010 - 11:29am.

pemeliza wrote:
These graphs make the high end look better than it is IMHO. I am seeing houses close at prices that are well below there inflation adjusted 1989 prices in prime areas. Here is an example.

http://www.sdlookup.com/MLS-100021137-16...

The house sold for $575k in early 1989. Inflation adjusted that is $1,010,928.83 in 2010 dollars according to the governments CPI inflation calculator. Meanwhile the house just closed for $925k.

I agree with Rich that the high end (> 900k) is as close to a free market in housing as we have currently and it has probably going to over-correct to the downside.

When you consider the interest rate differential between today and 1989 (probably at least 400 basis points higher in 1989) these examples tell us that on a monthly payment basis that some houses at the high end have not inflated at all since the late 1980's.

Very poor example... That is the busiest stretch of road in RSF. I used to drive that all the time, basically, you come out of town and merge onto Via De La Valle, the road through everything. There is a reason that the bank owns it.

Biggest problem of the bubble is that VERY bad properties (Locations), got very expensive upgrades (see that house), but will NEVER sell in a down economy and real estate market. You can't use that house as an example - it's a nightmare of a location. I saw this in Carmel Valley (houses on the main drags), I saw this in La Jolla ($1,000,000 + for a house on Ja Jolla Blvd next to a taco bell, and just saw it last week in Coronado (921 Pomona) - also bank owned will sell for 1.1M at a steal (If you want 4 houses looking into your tiny back yard and have trucks go by every 30 seconds... But these are the exceptions rather than the rules. That house doesn't count (except for a developer to flip when times were good).

Submitted by sdrealtor on June 3, 2010 - 12:01pm.

Welcome back Cy,
BTW, Knightsbridge is still selling between $1.6 and $2M. Havent been any great homes lately but they seem to be holding their own up there.

Submitted by pemeliza on June 3, 2010 - 12:21pm.

You make some great points cyphire. In a down market buyers' have a hard time overcoming a bad location regardless of the price. Meanwhile they still seem to pay up for the prime spots.

I have other examples to illustrate my inflation point but they are currently mainly in 2nd tier areas like Carlsbad. Here is one:

http://www.zillow.com/homedetails/3335-V...

Bought for 615k in 1989 and closed recently for 962.5k.

According to bls.gov in inflation adjusted dollars 615k in 1989 is $1,081,254.31 today. That price range in Carlsbad is getting hit hard.

Submitted by sdrealtor on June 3, 2010 - 12:41pm.

Good example, my only issue is you are comparing a peak bubble purchase in 1989 with what looks like or close to a trough in a down cycle which distorts things more than a little.

Submitted by 34f3f3f on June 3, 2010 - 1:06pm.

I don't know how relevant theories are anymore, but as Rich pointed out the lower tier has started going down. In many of the 20 city composites the downward trend has sliced off the rally's peak already. The tax credit's effect was felt and now we are seeing a waning as it expires. I recently asked Lawrence Roberts, author of "The Great Housing Bubble", whether he would revise his predictions in view of the tax credits, and low rates. He said that he would, but that it's more due to the very large number of the foreclosed still living in their homes. The stock markets would probably have taken flight on this revelation, so I'm not sure the Butterfly Theory holds true so much for Real Estate, as the Elephant Theory. Lumbering, and slow to react.

The question for places like California is to what extent resilience is being mistaken as a hankering for the past? Repeating history repeats itself is obviously too repetitive for some.

Anyone watched Glen Becks history lessons on Fox? He keeps repeating things like "Only on Fox", but fails to understand the irony of that statement. Now there's tactical repetition ad nauseum, that is beginning to sound like a Kosmomol Sunday School.

Submitted by pemeliza on June 3, 2010 - 1:08pm.

sdr, my examples are in reference to Rich's graph "Real San Diego Detached Home Prices low-, mid-, and high-priced tiers; CPI-adjusted" that shows inflation adjusted prices going back to 1989. According to the graph 1989 is the base line at 0% (It looks like the market peaked in 1990 not 1989 but Carlsbad may have been different). Anyway, overall the high tier looks to be a solid 20-25% higher than the 1989 prices (inflation adjusted). The point that I was trying to make is that once you get above 900k (probably more what we would call the true high-end) that the situation is actually worse than his graph indicates. To me, this is further evidence that the 900k+ market is getting hit much harder during this downturn than the 450-900k market. In my opinion this is because the lower price points have received much more government support in terms of tax credits and interest rate subsidies. This is something that most of us already knew but I was trying to be a bit more quantitative.

Submitted by sdrealtor on June 3, 2010 - 1:32pm.

No problem pem and I mostly agree with you. However I would be cautiouis making a blanket statemetn that 900+ got hit worse than 450 to 900 as I think we could examples of both sides for and against. It really depends upon the area and property type. I woould on otherhand agree that the 900+ market is worse than the graph shows.

My point is that someone shouldnt run off and claim your example (flat inflation adjusted pricing on the high end since 1989) is more meaningful than it is since we were looking at or close to extremes of market cycles there. I'd want to look at cycle midpoints to make a more meaningful comparison. Problem is the MLS data only goes back to 1996 and data before that is pretty limited/sketchy.

Submitted by pemeliza on June 3, 2010 - 1:46pm.

I'm not sure how many people on this board actually believe that we close to a bottom in this cycle given where interest rates are. I have heard statements like we are going down another 30-40% if interest rates normalize to "historical" levels. What this really means if you look at the numbers is late 1980's nominal pricing and interest rates were 9-10% in the late 1980's. So people saying interest rates going to 7-8% would result in 30-40% price declines just doesn't add up to me.

Submitted by Juana B. Free on June 3, 2010 - 4:56pm.

I'm not sure about the expectation that home prices should increase by the same rate as inflation. Does your car increase in value as time goes on? Your computer?

At the end of the day, average (or median) home prices should be directly proportional to the average (or median) family income in that area...because a family still has to be able to PAY for a home. Have family incomes increased at the rate of inflation over the years in San Diego? I sincerely doubt that the average income during this brutal recession even kept up with the tepid inflation rate.

San Diego houses are still WAY too expensive relative to renting. We're renting 4-BR house in University City for $2900/mo. This same house would probably list for at least $750K right now (>21x annual rent). There's no way I could justify paying $750K for a house we can keep renting for $2900..it wouldn't make sense.

There appear to be some halfway-decent values on the MLS right now...but the appropriately priced house go fast (for a good reason). I do think that many people are overpaying for others that aren't "appropriately" priced.

Watching foreclosure.com, I still see MANY new NODs being issued every week. Sure, maybe not as many as during the same time last year....but I suspect that only a small fraction of the delinquent mortgages from last year until now have since been cleared through the MLS. The "shadow inventory" in San Diego county is large...and growing each week. Most of these folks will never be able to get out from under the huge debt burden they've built up...not without MAJOR help from their lenders and/or the federal government (even more than they've gotten thus far).

Wait until interest rates start to rise (they can only go UP from this point)...prices will fall further. Especially as more and more inventory comes on board.

This is going to be a long, slow and painful slide back to "normalcy."

Submitted by pemeliza on June 3, 2010 - 5:40pm.

"There's no way I could justify paying $750K for a house we can keep renting for $2900..it wouldn't make sense."

If you are happy with your rental house and think there is some long term stability in both your ability to keep renting the house and the rental price than I agree you should keep renting. Renting gives you the tremendous benefit of mobility. We bought our house because we want to pay it off and retire in it so I guess we had a different viewpoint. If you don't find something that you could see yourself living in for a very very long time then by all means don't buy.

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