A good friend of mine named Ramsey enjoyed a multi-decade career in the San Diego real estate industry before more recently becoming a full-time stock trader. Between his knowledge of the local housing scene and of economics and financial markets he is able to routinely come up with some very interesting analysis. He usually shares his insights with me over beef tendons, pig ears, jellyfish, and other frightening "delicacies" during our weekly meetings at local Chinese restaurants with questionable ratings from the Department of Health.
Today, however, he spared me the entrail-eating experience and sent me an interesting email in which he posits that the local real estate industry is already experiencing "layoffs" of a sort due to the housing slowdown. Ramsey’s email is reprinted below in its entirety:
Maybe this is a good time to revisit the impact of real estate to the San Diego economy.
Paul McCulley, in his recent article:
Q: PIMCO is following the U.S. housing market very closely, forming a research team and sending people around the country to observe regional markets for signs of a slowdown. What did the team have to say at the December Forum?
McCulley: At the December Forum, Scott Simon, our mortgage guru, gave a special presentation detailing the work of his group on the state of the housing market and the mortgage market. Their key conclusion is that the leading indicators of a slowdown in housing have clearly turned. Going back to September, the group identified the leading indicators but those indicators had not yet turned at that point. The leading indicators for the housing market have now turned and we anticipate that the market itself will be turning in the months immediately ahead.
That is exactly the case for San Diego. The market clearly turned during the last quarter of 2005. The following data is via a broker friend using the MLS. Since not all properties are transacted through the local brokerage network, the actual sales should be higher if you use a source like dataquick. Therefore my analysis understate the impact, not over.
MLS reported 42,809 sales during 2004 vs 39,950 during 2005, a decrease of 2,859 year over year. However, there were 9,789 sales during the last quarter of 2004 vs 7,083 for the same period 2005. Therefore, the entire decrease year over year came during the last quarter of 2005. In other words, 2,706 of the entire 2,859 decrease occurred during the last 3 months.
What does that mean in terms of dollars?
For my calculations, I am going to use an average price of $600,000 per transaction, with the buyer putting 10% down payment, financing 90% and an average commission of 5%.
Revenue generated for the industry per transaction:
$30,000 — broker commission
$5,400 —- loan origination
$350 —— appraisal fee
$50 ——- credit report
$2,600 —- title insurance (both lender and seller)
$3,000 —- escrow fee (with some allowance for garbage)
$41,400 — TOTAL
$30,000 — broker commission
$5,400 —- loan origination
$350 —— appraisal fee
$50 ——- credit report
$2,600 —- title insurance (both lender and seller)
$3,000 —- escrow fee (with some allowance for garbage)
$41,400 — TOTAL
I did not include a ton of other revenues such as termite, flood reports, courier services, notary, home inspection etc. that generate income for many.
There were 2,706 fewer sales during the last quarter of 2005 as compared to the last quarter of 2004. Multiply 2,706 by $41,400, that is $112 million less that in revenue.
Sequentially, the 3rd quarter of 2005 had 10,442 sales, 3,359 more than the 4th quarter. Using the same numbers above, multiplying 3,359 by $41,400 equates to a $139 million revenueshort fall for the industry.
Let us look at these numbers from a different perspective. I am going to use another extremely conservative assumption of $10,000 per month as the average labor cost of a person working in the real estate industry in San Diego.
$139,000 million divided by 3 months = $46 million per month.
$46 million divided by $10,000 = 4,600 people did not get paid.
$46 million divided by $10,000 = 4,600 people did not get paid.
I opine that regardless of how that is absorbed and accounted for in various government reports, the bottomline is that 4,600 people were “laid off” last quarter. In addition, as I stated above, these are only MLS numbers and the actual sales are higher. I would also have to add on an estimate for the termite, home inspection and others that I named above. Finally, if I am paid to be accurate, I need to estimate a multiplier effect for business such as Home Depot, the plumbers, the granite counter tops, etc etc.
Why are we not seeing this in the newspapers? I believe the reason is the nature of this business. There is a disproportional large number of independent contractors, small business owners and other self employed individuals in real estate vs something like engineering. For each EMPLOYEE who is officially laid off, how many have unofficially taken an involuntarily pay cut?
This is a very well
This is a very well constructed argument. The real estate market has been like a super tanker with a full head of steam. When it begins its turn the motion is almost imperceptible. Nevertheless, vast amounts of water are being displaced. The highly fragmented nature of the real estate business further masks the effects that are already occurring.
We all know what comes next. Captain Obvious will declare the bubble is bursting-film at 11.
My friend sells condo
My friend sells condo conversions in SD and said his boss just switched everybody from commision + salary to commision only. He’s going to try his hand at the notary business instead.
Many of the residential
Many of the residential appraisers are already feeling the pinch from the lack of volume. Some are looking for other lines of work, and I know of a few who have already been starved out. Fortunately I don’t have to deal with mortgage brokers, but I’m hearing that some of them are getting starved out, too.