[powayseller]

Stagnant to flat housing prices shut down the consumer ATM. There will be a 0-18 month lag, but signs are beginning.

Casinos, cruise ships,and retailers are feeling the pinch.

So we will see declining sales and falling stock prices in all businesses which serve consumers. 6-12 months later, we will see declining sales and stock prices in businesses which serve businesses, i.e. production and manufacturing. Next comes capital spending. Layoffs at each level.

[powayseller]

We have a problem with sellers thinking their house is worth what their neighbor got last year. They do not understand the market shifted, and are digging in their heels. In the end, they are only hurting themselves, as they chase the market down.

Think abou this factoid: A few years ago, we had 1 buyer for every home. Now, we have one buyer for every 8 homes.

If I knew I had to compete against 7 other people, because the buyer will choose only 1 of us, I wouldn’t price my home too high. But realtors talk until they are blue in the face, and seller greed and ego are stronger than logic. The same factors that created the bubble: greed, ignorance, lack of rational thinking, are causing the long days on market.

If all homes were market priced, would our sales be at last year’s levels? Maybe.

[powayseller]

Million dollar sales puff up sfr resales, cheap condo conversions bring down new home sales. It all gets mixed up in medians.”

Problem is, the cheap condo conversions are not selling at the same rate, reducing the number of sales at the low end.

When I attended the UCLA Anderson Forecast in May 2006, I met a realtor who specializes in helping investors 1031 out of SD properties into other areas which are still appreciating. They will keep their money in TX and other areas for 3-5 years, and then come back into San Diego when prices are down 50%. Perhaps this interests you, since it sounds like the tax bill on a sale would be intense, and you don’t want to roll over into other SD property.

The guy is Chris from the Mackey Sales Team, Prudential California Realty, 858-794-3157, http://www.MoveSanDiego.com

[powayseller]

Prices have been falling for a long time. My own experience is that my house would be very competitively priced at $830K in October 2005. This is not a overvalued listing, but a realistic price based on the last comp sale just 3 months prior. My realtor had sold the comp, and knew how it compared to mine. Important point is it was a realistic pricing. I had lots of traffic, so I was priced well. One buyer walked when I said I would not consider offers under $780K. WE had range pricing $780 – 830K. I had 2 offers at 780. Took the 2nd offer. So I took a 5% drop. Meanwhile, median was still going up.

Look at the bubble blogger links, for more stories of prices dropping. Most sellers are getting 2005 or 2004 prices. Those who bought in 2004 or 2005 and are selling, are bringing money to closing.

Yet, today’s U-T shows SFR is up 2% from last year.

First, this is a distortion of the inside story. Each individual home is down to 2004 or 2005 prices, but the rich people are still buying, skewing the distribution of homes sold. So while it is mathematically correct that the median is rising it DOES not mean that each house is worth 2% more than last year.

Second, the median was rising for the summer of 2005 and then dropped. It has been dropping since last fall, but the median is reported as year-over-year. So you don’t see the median reported as falling until it has been negative for ONE year.

This is so different from the way other economic data is reported. CPI, unemployment, and many other indicators, are reported month-to-month. I think a month-month indicator, along with yearly, is useful.

A more useful gauge of the housing prices is the data that Rich uses, the OFHEO data. It gives the price of the SAME house sold since the database started several decades ago. It tracks the price of the SAME house, not the change in the distribution of homes sold.

The OFHEO will show declining prices, but it is published many months late. It takes the government so long to collect the data.

Leading indicators are months supply, which incorporates inventory plus demand, and second is HAI.

By 12-18 months lagging, I mean that it will be the end of 2006 or middle of 2007 before the median for SFR homes is down 5%, the amount that my home was down in December 2005. So while home prices were down by 5% last winter, the public won’t be informed of this fact until 18 months later.

The DataQuick and NAR people are not interested in giving us accurate data, only in promoting real estate. We have all been misled. The only reason I know so much is because I have too much time on my hands and some good and smart friends who are realtors and figured this stuff out.

[powayseller]

It really is…Reporters in bubble towns really need a realtor license and MLS access, so they can do their own research. This is too important. Instead, they rely on Dataquick.

OTOH, if I were a seller, I would be very grateful of the optimistic slant given by the median and the U-T article. I was sweating bullets last January, while the headlines were still screaming “Real Estate is UP Again”. If I were a seller and the U-T was publishing facts, and giving us the real story inside the median, I wouldn’t be able to sleep. I’d be too worried that my buyers would catch on to the ponzi scheme and bail…

[powayseller]

murray, what is your response to the median price explanation?

For col, sell your rentals while you can still get almost top dollar. I’m trying to help you…

[powayseller]

I went to 95% cash, and have some play money in COP, and waiting for a gold buy position. I subscribe to Chris J’s bond futures trading service. All my economic experts to which I subscribe, including the $350/year Yamamoto Forecast, are recommending 100% stocks.

If you want to keep a stock or commodities position, and are hands-on, you might like Zeal, a commodities research company that is followed by some of the smart people on this forum. Their luck so far is due to their early entry into commodities and oil, and I don’t know how they will do during the commodities sell-off during the recession.

The stock market is overvalued, and that is why it hasn’t moved. It was overpriced A LOT in 2000, and is simply overpriced now. Interesting you mention Graham in the same paragraph with overpriced stocks. Didn’t he teach value investing? Where do you find value today? It’s all overpriced…

I cashed out my Vanguard index funds, my Bill Miller mutual fund, my Rubio stock, etc. Kept BRK.B, bought COP. Like I said, just a little bit. Most of my money is in various CDs and in a money market that I must move to CDs. The money market is not FDIC insured, and when Fannie Mae blows up, the money market can be history too. Writing this reminded me I need to get rid of my Vanguard money market fund.

Cash can be CD, T bills. Why risk losing a big percentage in the stock market when cash pays 5.5%????

[powayseller]

murray, I know that the median is up 2% from last June, but what does that tell you? Do you really think that a house can fetch 2% more than it could last year? When I sold my house last fall, I fetched 5% below a very competitive market price on 2 offers. My house sold for the same amount as a 30 year old home on 2.5 acres; mine was brand new on 5 acres. The realtor said based on the newness and the gourmet kitchen and 5 acres, mine should go for $830K. Both my offers were $780K. A 3rd buyer asked if I would go under $780K, and when I said no, they walked. So I started to experience the decline myself.

I wondered, howcome my house sold for 5% off, when the median is still going up? My curiosity led me to ask many people, until I found the answer online in Bob Casagrand’s newsletter. He explained what happens with the median, and that you have to dig inside the numbers.

The median is mathematically correct but doesn’t tell the whole story. Let me try again to explain the median.

Say you’ve got 3 CEOS each buying $2mil, $3mil, and $3 mil homes, and you’ve got 2 engineers buying a $300K home and a $500K home. The median is $ 3mil.

Last year the median was $500K, because we had 20 people buying $500K homes. Last year, interest rates were low, and more middle income people qualified. Now these people are priced out: fewer buyers. Sales are down 30%, and that is mostly in the low end. The high end is Hot. THE HIGH END IS HOT!!!

Does everyone get it now? The rich are still buying, because their income is not dependent on wages, and they don’t care if interest rates go up and housing prices go up.

But know this: the $3 mil house was worth $3.8 mil last year, and the $2 mil house was worth $2.5 mil last year. It’s all going down, but the distribution is changing.

So the median is going up because the distribution of homes sold has shifted. But each individul house is worth less today than it was in 2005. The $3 mil home was worth $3.5 mil last year, and the $2 mil home was worth $2.38 last year.

No offense taken with the public school comment, but I have an MBA and computer science degree, and I ran circles around your logic. You’ve got a lot to learn about medians, murray.

likewise, in 2012, when the market turns around, the median willl still be going down, although prices have turned up on individual homes. The median will tell us prices are still dropping, when they are actually going up. So DO NOT Rely on the median, if you want to be ahead of the masses. Smart investors use the leading indicators, not the median. Medians are for dummies!!!

[powayseller]

aguho, I admire people who live in their means and get a mortgage much less than they can afford. You are my role model.

You also made a light go off in my head: I read that 60% of San Diego purchases were ARMs, but how many ARM refis do we have? Is it possible that 20% or 50% of ALL San Diego homes are ARM refied????

I remember snooping through the foreclosure database, and found 3 foreclosures in Poway, whose owners bought in 1982 – 1985, and started refinancing all the equity out during the housing boom years. I don’t know what kind of loan they got, but those wouldn’t count as new purchase loans, right?

This ARM thing could be bigger than the $2 trillion. Is it? Does anyone know what is included in the $2 trillion resets in the next 18 months? CA led the nation in ARMs, so how many are in SD County?

[powayseller]

Please read my post in the U-T thread, where I describe the disservice the media and DataQuick are doing with the median. Here is a reprint of a portion of it:

The biggest disservice that the media is perpetrating on the public is the pounding out of the median price. While mathematically correct, it does NOT tell the whole story. The + $2mil home market is hot. Those buyers are not affected by interest rates, but by stock market returns. There is weakness in the low end market, because those buyers are sensitive to higher interest rates and rising home prices. This reduction in lower end homes sold and increase in $2 mil and up homes, is skewing the median up. [In reality, each home is worth less today than it was in 2005. Most are priced at 2004 values.-my comment]
Some say that our inventory will shrink this fall, as it usually does, and our market health will return. False. Demand is declining. Inventory is not as important as the demand/supply relationship. The months supply is more important than the inventory number, and the months supply is growing. Inventory will drop in September, but so will demand. The adjusting ARMs have the potential to be a real big deal.

So you see, the median is telling you nothing about the value of each of your rental homes. To find out the value of each of your rentals today, call a realtor. You will fetch 2004 prices, today.

Did you follow Japan’s property bubble? It was even bigger than ours, and people were in a mad rush to buy anything in sight, because they belived there was a land shortage and “everyone wants to buy in Japan”. Their land prices have dropped for 18 years, and are now 50-70% off the highs, and have just recently started turning back up.

Did you read Rich’s bubble primer? What do you think of the graph which shows per capita income/median home price? Do you think that it is possible that prices will NOT correct this time?

I think you also have the same illusion that I suffered for so long: how can prices be falling, when I read that the median is going up? This question sent me on a quest, and I found the answer when I found Bob Casagrand. He explained this all to me. Well, I await your response. I love a good debate, and you raise good questions.

[powayseller]

Hi, sorry to have doubled your post.

[powayseller]

Demand has dived off the cliff. We used to sell 42K homes per year, this year we are on track for 30K. People are leaving SD. Check U-Haul rental rates, they are much higher to leave SD to any city, than the other way, because SD has a glut of UHaul vehicles.

Sales are down 30% over last June, and the rate of sales decline is INCREASING. Q4 05 was down 10%, Q1 06 was down 20%, and Q2 06 is down 30%. I think Q3 06 will be down 40% from 2005.

Demand is down, and that is the only reason inventory is high. If we were still selling the same # of homes, then our inventory would be at 16,000 like it was last year. The reduced demand is accounting for the high inventory.

I already gave you the Census Data.

Stories abound, like the haircutter who went to 4 days because so many clients left SD. My friend who’s a realtor said in a recent showing weekend, he heard 5 sellers talk of leaving SD after they sold.

San Diego employers are having trouble filling their vacancies. Qualcomm has 500 openings they cannot fill. I posted an article last week, about a story that doctors are not moving here, and even surgeons and ear/nose/throat specialists are not coming here to take available jobs, because they cannot afford to buy a house here.

Although people want to live here, there is a limit to their ability to pay. We are past that limit, so the tide has shifted. People WISH they could live here, that is true. But they are not able to make that wish a reality.

If you look at the HAI (housing affordability index), the only city in the entire country with a more expensive rating is Santa Barbara. Only 6% of San Diegans can afford a median priced home, so that puts the demand way down.

Also look at what’s selling. The $2mil and up market is hot, but everything else is really slowing down. Even the $2 mil and up market is seeing big price declines, but those buyers are still able to buy homes because their income comes from the stock market, not the low wages we have here. Our city just doesn’t have the types of jobs or salaries for these current prices. If you were an engineer offered $85K to work at Nokia or $85K to work for a firm in Dallas, which would you pick? Most pick Dallas, while the few that pick SD, end up renting. That’s the sunshine tax.

Anyway, the data that I found, and I looked high and low and spend many hours every day researching this stuff, is that demand is down, down, down, and there is nothing on the horizon that would indicate a reversal.

Now I am curious. What data do you have to show that demand is up?

[powayseller]

Good for you! The LA Times had more courage, and went to the heart of the matter. I saw the link on Ben’s Blog. The U-T took a conservative stance.

These reporters should really get a realtor’s license and MLS access, so they can research their own stories. They rely on the Dataquick reports, and interviews from Karevoll and Ms. Young. Thus, they are easily misled, and mislead others.

Everything that follows below is credited to my friend, who wishes to remain anonymous.

The biggest disservice that the media is perpetrating on the public is the pounding out of the median price. While mathematically correct, it does NOT tell the whole story. The + $2mil home market is hot. Those buyers are not affected by interest rates, but by stock market returns. There is weakness in the low end market, because those buyers are sensitive to higher interest rates and rising home prices. This reduction in lower end homes sold and increase in $2 mil and up homes, is skewing the median up. [In reality, each home is worth less today than it was in 2005. Most are priced at 2004 values.-my comment]

Some say that our inventory will shrink this fall, as it usually does, and our market health will return. False. Demand is declining. Inventory is not as important as the demand/supply relationship. The months supply is more important than the inventory number, and the months supply is growing. Inventory will drop in September, but so will demand. The adjusting ARMs have the potential to be a real big deal.

Another myth, propagated by economists, is that so few people have ARMs, and so many people own their homes outright, that the $2 trillion of ARMs adjusting will be a blip on the radar. What they fail to realize is that the homes on the market set the value for the entire market.

Let me explain. San Diego has about 1.1 million homes, and 55% are owned by the person living in them. That gives a housing inventory of 750,000 homes. But each year, only about 42,000 homes are sold. That is 6% of the market. (BTW, it also indicates the average San Diegan stays in his home for 13 years.) This year we are on track to sell 30,000 homes. This small percentage of San Diego homes is setting the value for the other 1 million homes.

Now consider, that 60% of San Diegans last year used ARMs. If even half of the listings are ARM sellers, who must sell (or bank REOs or foreclosures, this will impact the resale market severely. This will impact all homeowners, whether their home is paid off or not. The resale market drives the price.

So the next time someone tells you it doesn’t matter about the ARMs because they are only .01% of the market, you say, “Yes, but they are 50% of the resale market, and the resale market sets the price for all homes”.

That’s the end of my myth busting for today.

I sent this to the U-T writers (my 2nd e-mail to them today), and ended with this:

“I hope I have educated you, because you certainly are NOT educating
me!”

[powayseller]

Thanks for your response. I have a different perspective. The last Census Bureau showed over 44,000 San Diegans moved out i the year ending June 30, 2006.

Most employment in the last few years was in construction, real estate, and lending, and in retail and restaurants as people took our the home equity of ever rising home prices to go on shopping sprees. As housing cools, tehse industries that have been our major growth, will keep weakening. Our manufacturing sector is shrinking. Nokia is now thinking of leaving. Before that it was the Sony plant in RB, Buck Knives in El Cajon…

The 44,000 people per year leaving has left many vacancies for doctors, police officers, engineers, cashiers. I keep seeing Hiring signs at so many stores. I read that high housing prices are making it harder for SD to recruit surgeons! The outlook for the San Diego job market is bleak. My hope is that biotech will some day take off again. Our biotech companies are small, and my friend who is a manager at one of them, is concerned for her job prospects and is interviewing in the other big biotech cities.

Rental prices are based on income, and cannot be artifically boosted by funny money. I saw a news story this morning: a mother said her grown children live with her, because rents are so high, and forget about saving for a down payment on a house. The story said you need an income of $40K to afford a median 2 bedroom home, which is about the median wage of San Diego. Only 5 other US cities have higher rents than San Diego, and the ones I remember are Boston, New York, San Francisco, San Jose.

Landlords can ask for the moon, but rents which exceed a person’s ability to pay, will be vacant. San Diegans will move in with their parents or leave the area before they pay higher rents.

The same news story interviewed the young man from UCAN, Michael Shames. He said that San Diego has the same wages as other big cities, but a much higher cost of living in gas and housing. This is known to San Diegans as the sunshine tax. He said San Diegans are well aware of this tax, and people moving here find out about it the hard way.

If I owned rental property, I would cash out now. I think the correction will be huge, rental pricing cannot go up, and it will be another 50 years before we see interest rates below 6%.

[powayseller]

Market excesses correct and revert to the mean, sometimes overswinging. The NASDAQ was at 6000, and is today at about 2000. It was wildly overpriced, and is probably at equilibrium today. When will it reach 6000 again? I believe in markets correcting to equilibrium, because that is what history has shown always happens.

The lower interest rates created a liquidity glut, because they were below inflation. Inflation was 3-6%, but interest rates were 1%. Why would anyone save money? Just borrow and spend.

I started working and investing in 1988, so I didn’t follow the 1990 recession. The last recession was a mild one, in 2000-2001. It was due to a decline in capital spending. But consumer spending stayed strong, thus it was a mild recession. Nonetheless, it spooked stock markets around the world, and stocks and commodities sank as capital spending declined.

Why did the Fed let rates go so low? I am not smart enough to know this. There are many guesses. I’ve read to avoid deflation. To avoid a recession after the dot com collapse and the terrorist attacks.

What the Fed knows and what they say are two different things. I spoke with my smart friend this morning (who wants to remain anonymous here), and he said that the reason the Fed is raising interest rates is to stamp out the housing lending bubble. Since the exotic lending was tied to the LIBOR and other short term rates, they needed to raise the short term rate. This is working.

Another problem is that inflation is rising globally. I don’t understand why it is rising now, and not before. I have a question why did it wait so long to rise. But the fact is that many central banks are raising interest rates to reduce inflation caused by rising input prices. In the 70’s our inflation was caused by rising wages. This inflation is caused by high prices in oil, commodities, and rents. What is not showing up in the CPI is contributing even more to inflation: food, health care, housing costs, insurance, tuition. If you put a real basket of consumer goods into the CPI (instead of doing hedonic adjustments and substituting rents for housing prices), you’d see inflation has been closer to 6-9%.

Bernanke talks about the importance of keeping expectations of inflation low. Inflation gets a foothold only if people expect inflation to be a reality. So you have to dampen the perception of it existing. They didn’t care about high inflation, until it showed up in the CPI. Now the Fed must keep raising interest rates until the CPI is in a comfortable range of under 2%, so that we all believe it is low, and act accordingly. So the Fed must keep raising interest rates as long as the CPI is above 2% (Bernanke’s target), and the high commodity and oil prices are feeding through to producer prices, and low unemployment could put upward pressure on wages.

Greenspan talked about froth in the housing market many years ago, but right after that, came out and promoted ARMs. He wanted to be liked. That was his biggest problem. His desire to be popular was bigger than his desire to do the right thing. Volcker was unpopular for raising interest rates in the 1970’s to 19% (?), but Greenspan lacked the will to do the right thing. He was our bubble man.

I have learned all this since coming to piggington in November, and I don’t understand a lot of this stuff. But like you, I started with housing and found that the global economic policy is the basis for understanding it.

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