San Diego Housing Bubble News and Analysis

The Case-Schiller price declines are extremely modest compared to the actual market, in my opinion. I wonder if the Case-Schiller algorithim excludes same-home sales that are in a state of foreclosure, surmising that these homes are in a significant state of disrepair making them unrepresentative of the market. If that is the case, Mr genius Schiller needs to re-program his computer. I hope those who invest in the Case-Schiller futures are intimately familiar with the algorithim as it may not be exactly perfect just yet.

So, we couldn't trust the Median reports because they are not representative of the market and now we can't trust the Case-Shiller index ?

I disagree. I think both are decent indicators of the market. They just lag what you are seeing on the streets. The 4th quarter numbers from Case-Shiller will likely contain the data supporting your assessment of today's market.

I'll check in to the foreclosure issue, but I think that these are included. There are several factors that might hide declines. First, there is not capture of rebates, covering of closing costs, ect. as far as I can tell. Home builders are clearly using these and there is certainly some action in the resale market as well. Second, resales that occur in less than six months are not used. The reasoning is that such transactions may represent something other than arms lengths transactions (e.g. a parent buys a house and then "sells" it to his/her kid a short time later). I was not totally happy to see this because I think it downplays the speculative aspect of the market. However, it may well be that by not including these six month or less sales that the CS index actually failed to fully capture the extent of the boom in the run-up to the summer softening. All of the crazy "buy in march, sell in april" sorts of sales were not included in the weighted index. The third thing to remember is that it is a rolling index of the last three months of sales...as FSD states above, the fourth quarter awaits.

If I could put in my own two cents...I do sometimes think that folks on this board and other bubbleblogs have a mirror image mentality with regard to the boom. Many expect the bust to be sharp, fast, and exciting. I admit I find myself harboring the same hopes. However, this is a form of speculative thinking. Housing busts generally seems to be slow, boring, long affairs in which much of the downturn occurs from inflation eating away value. As an LA professional earning nearly 100k and not able to afford to buy, I too wish for a fast 40% correction. I just don't think its going to happen that way. (ps. addendum to my first post, I should say "data" are plural...since I work with data every day, its an embarassing mistake!)

April 2007 Case-Schiller Data out today:
SD:
-6.70% YoY
-0.27% one month
-7.07% since November 2006 peak
S & P commentary (pdf)

Those last numbers (down about 7% YOY) seems about right.

If you look at the historical prices for San Diego (using the Case/Schiller index), you can make a case that the bottom will be in 2009 or perhaps not until 2012 using a "normal appreciation" of 6% from when the market was fairly valued. The problem is determining at what point the index was fairly priced. Was it 1995? 1998? 2002? I know the market doesn't go up or down gradually, but if we get 2 more years of 7% declines, the market would be what I consider fairly valued for a 10 year period.

BTW, I thought San Diego was cheap in 2000 and overpriced by 2004 without benefit of any statistics.

If you add 6% a year to homes that were bought in 1998 @ 300k they wouldn't have reached today's 700k levels till 2013. If prices drop 20% between now and 2009 then they will be just about in balance. That seems like quite a likely scenario.

(adding 6% a year)
$300,000.00 1998
$318,000.00 1999
$337,080.00 2000
$357,304.80 2001
$378,743.09 2002
$401,467.67 2003
$425,555.73 2004
$451,089.08 2005
$478,154.42 2006
$506,843.69 2007
$537,254.31 2008
$569,489.57 2009
$603,658.94 2010
$639,878.48 2011
$678,271.19 2012
$718,967.46 2013

May 2007 Case-Shiller Data out today:
SD:
-6.96% YoY
-0.36% one month
-7.41% since November 2005 peak

July 2007 Case-Shiller Data out today:
SD:
-7.78% YoY
-0.73% one month
-8.26% since November 2005 peak

The original post from November 2006 is interesting with the statement:

There's also a video clip of shiller up at bloomberg. He mentions that the traded index futures are "predicting" a 5% or so decline YOY for next august.

The prediction wasn't right in principle, if somewhat conservative (~5% predicted YOY decline for August and we are at a 7.8% decline as of the July data).

Where can one see the traded index futures? I would imagine they are pretty confused at this point with the whole credit crunch and the threat of government intervention.

Hi - you can check out the indices at the Chicago Merc. I think you have to register with their site, but I think you can get charts of price data without having to pay any money. Someone more savvy than me probably knows other routes (Bloomberg?) as well.

Edited for accuracy. I originally said "wasn't right in principle" when I meant "was." Freudian slip?

The original post from November 2006 is interesting with the statement:

There's also a video clip of shiller up at bloomberg. He mentions that the traded index futures are "predicting" a 5% or so decline YOY for next august.

The prediction WAS right in principle, if somewhat conservative (~5% predicted YOY decline for August and we are at a 7.8% decline as of the July data).

Where can one see the traded index futures? I would imagine they are pretty confused at this point with the whole credit crunch and the threat of government intervention.

Hi -- I was on the page with you, I could tell it was a mis-type. Yeah, I remember a year or so ago when discussing this that many thought that the declines were too little, too slow. My take then (and now) was that the housing bust is going to be pretty boring....long and slow. Actually, it has been alot faster and more "exciting" than I ever imagined (in 2005, early 2006) that it would be....

BTW, I thought San Diego was cheap in 2000 and overpriced by 2004 without benefit of any statistics.

According to Global Insights SD was below its historical intrinsic value all the way up thru 2002, but was 25% overpriced by 2004. As of 2007-Q2 it is 18% overpriced, which is down from its worst of 39% in 2005.
FWIW, LA is at about 50%, down from its high of 61% in 2006.

-one muggle

Could anybody recommend a futures broker who trades CME housing futures based on the S&P Case-Shiller index? My discount broker can't do that.

I am very seriously interested in this, and I would appreciate any feedback on the issue. I know the trading volumes are very low, but I've traded in iliquid markets before. And anyways, I'm not planning to open a large position (about 15 contracts, perhaps).

Thanks very much,
Daniel

Hey fellas, really, nobody can recommend a broker trading CS futures? "All show and no go" on this site, huh? OK, I'm just kidding, no offense to anybody.

But honestly, my question is very serious, I'd like to know if there are people familiar with the practical side of trading these instruments.

Thanks again,
Daniel

Hi Daniel - I'm not really a commodities trader sort of person, but here is what I know. I believe that the CS futures are traded on the chicago mercantile exchange (or, maybe CBOT, but I think Merc). So, any full service broker should be able to put in a trade through either their own house or an affiliated agent with a seat on the exchange. I don't think it is anything exotic. Apparenetly trading is very thin, but looking back on its short history it has "forcast" actual CS index levels pretty well.

New Numbers out today from S&P - these are the numbers for price changes in August. Twas a bad month for SoCal. San Diego was down 1.28% and LA was down 1.06% for the month. YOY, San Diego is down 8.32%, while LA is down 5.75%. I am sure Rich will be posting a more authoritative post at some point, but I believe that these August numbers still don't reflect most of the summer credit crunch, which should be reflected more in the September data.

Just for reference, the typical August Case-Shiller price change from 1986-2006 was +.71% for SD and +.86% for LA. Using the Case-Shiller data, August is the fifth strongest month for San Diego. So, this really puts the -1.28% change for SD in an even worse light.

brian_in_la-

You had "LA, +.1% from august, +7.1% YOY."

Correct me if I'm wrong but I calculate a 1.062% decrease in price for LA from July 2007 (260.84) to August (258.07).

For YOY (September 2006 to August 2007) a 5.973% decrease. Ratios of 273.94 and 258.07 respectively. 11 consecutive months of price drops since October '06 for LA.

I'm noticing more and more foreclosures all the time. I hope and expect the rate of price drops to accelerate through the slow season and continue for several years, but I too wish it would happen faster. Though relatively, 5/9% decline YOY is pretty significant considering real estate prices "never go down."

If you add 6% a year to homes that were bought in 1998 @ 300k they

You cannot add 6% a yr, how did you arrive at the conclusion that it is the right amount of sustainable appreciation? Prices follow income fundamentals, and income has not risen very much at all since 2000. At least in my line of work (IT) companies are still offering hte same salaries they were offering in 2000.

Infact if inflation of essential commodities, oil, food, energy etc. is high then affordability will decline further.

Hey Coop...it looks like you looked at the long-ago original post on this thread from 2006 rather than the most recent postings.

Check out the new posting just up two from yours for the august 07 numbers, etc.

"San Diego was down 1.28% and LA was down 1.06% for the month. YOY, San Diego is down 8.32%, while LA is down 5.75%."

You're right I did, and your post today had the same numbers as I came up with. Nearly 6% in 1 year, the first year of declines in LA. With the amount foreclosures showing up and loans sitll to reset I expect to surpass that.

Sept 2007 Case-Shiller Data out today:
SD:
-9.64% YoY
-1.72% one month
-10.99% since November 2005 peak

money.cnn article

Hey Scott - did you peak at the tiered data? The low end in SD was down 3.5%. Ouch!

LA still not declining as sharply as SD. But, close to 2% declines in the low end here in LA as well. SD is 6-12 months ahead of us.

It is going to be a brutal winter.

Just ran some of the tiered numbers: zing!

Tier LOW MID HIGH
MoM 3.56% 1.17% 1.54%
YoY 15.76% 10.31% 5.59%
Peak 16.43% 12.30% 7.22%

Tier cusp change:
Low: -$7467
Mid: -$2657

Kind of feels like I made an extra $7467 in September.

Can someone briefly summarize (AGAIN) the exact C-S method.

I read a VOSD article that seemed to say the C-S method compares actual selling prices of homes that have sold versus what they sold before.

I thought it was based on the same set of houses being re-appraised over and over (regardless of whether they were actually for sale)?

TIA

Just ran some of the tiered numbers: zing!

Tier LOW MID HIGH
MoM 3.56% 1.17%1.54%
YoY 15.76% 10.31% 5.59%
Peak 16.43% 12.30% 7.22%

The MoM HIGH and MID categories look inverted from previous data. Am I reading this correctly? This might be interpreted as an indication that the scarcity of Jumbo loans is beginning to have an effect. Relatively few people can pay $700k+ with a conforming loan. The lack of credit, in the end, could be more important for price trends in "core" (read pricey) areas of SD, LA, etc. than the sub-prime crisis, foreclosures, or even (dare I say it), a recession. No loan = no sale --> BIG downward pressure on prices.

Tier LOW MID HIGH AGGREGATE
MoM -3.7% -3.1% -1.6% -2.6%
YoY -17.9% -12.1% -5.8% -11.1%
Peak 16.43% 12.30% 7.22% -13.3%

Tier cusp change:
Low/Mid: -$12644
Mid/High: -$9459