~Welcome to the Econo-Almanac~

I started this website in mid-2004 to chronicle San Diego’s spectacular housing bubble.  The purpose of the site remains, as ever, to provide objective and evidence-based analysis of the San Diego housing market. A quick guide to the site follows:

  • New visitors are advised to begin with the Bubble Primer or (if wondering about the site name) the FAQ list.
  • Housing articles I’ve written are found in the main section below.
  • Discussion topics posted by site users are found in the “Active Forum Topics” box to the lower right.
  • This website is an avocation; by day I help people with their investments as a financial advisor*.  Market commentary, an overview of our investment approach, and more can be found on my firm's website.

Thanks for stopping by…

A Warning Light on OC's Dashboard

Submitted by Rich Toscano on January 20, 2006 - 10:31am

The OC Register has an interesting piece on a surge in delinquent property taxes that has the Orange County treasurer a little worried. The treasurer, who seems like a pretty sharp guy, wonders, "[A]re we observing the beginning of a trend or is this a blip?"

People who rely on "traditional" measures of economic health, such as wage growth or unemployment, are missing a big piece of what makes the SoCal economy go: home equity extraction. Lacking a good city-specific way to measure home equity extraction, one of the best ways to get a handle on the health of a given area's homeowners is by observing rates of change of property tax and mortgage defaults. We are only now beginning to see increases, but I believe that with the amount of adjustable-rate debt out there, we will start to see a lot more homeowner fiscal trouble in 2006 and beyond.

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We Are the Champions

Submitted by Rich Toscano on January 18, 2006 - 10:28am

The latest PMI Risk Index is out. I think these reports are hopelessly optimistic—for instance, after an unbroken winning streak in which prices more than tripled despite the lack of any demographic reason to have done so, San Diego is designated as having only a 59% chance of seeing even a tiny price decline. The reports do have some utility, however, in that we can at least get a sense of what the mortgage insurers think are the relative risks between different areas. We Southern Californians should be unsurprised to see that, as with China's Olympic swimmers, our artificially pumped-up home team has dominated the winner's list. For your convenience I have assembled a table below that shows both the PMI Risk Index results for local areas along with a column indicating each area's level of housing valuation relative to historical average (see these valuation charts for more background).

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The U-T's 2005 San Diego Housing Wrap-Up

Submitted by Rich Toscano on January 17, 2006 - 10:24am
The Union-Tribune is running a great article on the state of the San Diego housing market. The article includes two sidebars that I found extremely interesting: a graphic showing appreciation by area, and a PDF file rounding up home prices for the entire county. Fellow data-nerds should find hours of amusement combing through these two files.
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Visions of the Future

Submitted by Rich Toscano on January 16, 2006 - 12:22am

This Voice of San Diego housing prediction roundup, along with a commenter's question on the topic, has motivated me to write about forecasting, vis-à-vis whether it is is a complete waste of time. And the answer is: yes. Or no. Or, it depends, I guess.

Alright, let me start from the start, using a familiar graph as a jumping point:

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When Bubbles Burst

Submitted by Rich Toscano on January 8, 2006 - 7:02pm
Housing bubbles typically take years to deflate completely. In today's LA Times, however, an article on the burst of the Shanghai housing bubble demonstrates that even real estate is not immune to dramatic turns to the downside. After a period of rampant speculation and overbuilding that drove Shanghai home prices to double in three years (not terribly far, I would note, from the 5 years it took Southern California real estate to do the same), the market has rapidly taken a turn for the worse, with some condo prices having dropped 50% since March. That's not a mistake—prices have dropped 50%. Don't the Chinese realize that real estate only goes up? Perhaps we should send someone from NAR over to let them know.
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Stated Income Loans—Now There's a Great Idea

Submitted by Rich Toscano on January 7, 2006 - 9:13pm

The folks at the Voice of San Diego are on a rampage with their continuing series on articles on housing-related chicanery. Their most recent piece focuses on mortgage fraud—specifically, the ever-popular stated income mortgage, otherwise known as a "liar's loan." While it's impossible to know how many people are overstating their incomes, the article quotes one mortgage professional as estimating (conservatively) that 25% of stated-income mortgages are fraudulent. Another mortgage executive acknowledged the "let it go" culture within the industry, supporting my frequent assertion that people tend to turn a blind eye to fraud as long as everyone is making money. This is an important topic, and we have by no means heard the last about it.

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Housing Slowdown Starting to Cause Real Pain

Submitted by Rich Toscano on January 7, 2006 - 12:45pm

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:

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Are Interest Rates About to Drop?

Submitted by Rich Toscano on January 6, 2006 - 8:03pm

PIMCO's Bill Gross has written an interesting, if somewhat dense, piece in which he opines that both short- and long-term bond yields are close to topping out. In (very) brief, his thinking is that the lagged effect of rate increases to date will soon start to cause the type of economic slowdown that has historically preceeded lower bond yields.

I find it troubling to question the wisdom of the world's biggest bond investor, and more troubling still to maintain that "this time is different." That said, it seems to me that Mr. Gross' analysis does not fully account for the fact that U.S. interest rates (at least on the long end) are largely controlled by foreign investors. This dynamic—or, at very least, the magnitude of its effect—truly is a new development. Foreign investors in U.S. debt, most especially central banks, have a different set of priorities than Treasury buyers of yore, and it's not clear to me that a U.S. economic slowdown will induce a decline in long rates this time around. Foreigners may find reason to sell U.S. bonds regardless of the state of our economy.

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Piggington Goes North

Submitted by Rich Toscano on January 3, 2006 - 8:43pm

Southern California is our beat here at the Econo-Almanac. But when an enterprising reader sent me a table full of data on the San Francisco Bay Area, I couldn't help but throw it into a graph. I figured that with the effects of the dot-com boom and subsequent bust, the Bay Area would be an altogether different animal than SoCal. But that wasn't really the case at all. While Bay Area home prices took off sooner and have proved a little more volatile, the end result is very similar: home sale prices rose much faster than rents.

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Appraisal Reform Efforts: Too Little, Too Late

Submitted by Rich Toscano on January 3, 2006 - 9:00am

The Voice of San Diego has run a followup story on appraisal fraud, this time discussing the middling reform efforts currently underway. As an example, the state senate is considering a bill "that would require any person who initiates a mortgage to have a certified broking license."

While it's encouraging that the appraisal fraud issue is being recognized, I don't think that a few grasping attempts at further oversight will solve this problem. It is the nature of end-stage speculative bubbles: there is too much to be gained by continuing fraudulent behavior, and too much to be lost be halting it. Once the bubble is deflating in earnest, the appraisal fraud problem will fix itself. By then, however, the damage will have been done. I can only hope that the powers that be use the opportunity to put in place a regulatory system that will prevent fraud from getting out of control during the next housing boom.

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The Dangers of Exotic Loans in San Diego

Submitted by Rich Toscano on January 1, 2006 - 9:56pm

The San Diego Union-Tribune has run a really good article on the risks of creative mortgages. As a matter of fact, my eyes nearly welled up with tears as they beheld the following paragraph (emphasis mine):

One product that concerns federal regulators is the pay-option ARM. It is "one of the most aggressive loan products out there to countermand the prices of homes," Smith [president of the local chapter of the California Mortgage Brokers Association] said. It gives borrowers the flexibility to choose how they make monthly payments. They can make a low payment that allows the principal to grow, increasing the amount owed. The theory behind that choice is that home appreciation will outpace rising debt. "That is a calculated gamble a lot of people have taken."

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Housing Market Report: December 2005

Submitted by Rich Toscano on December 31, 2005 - 6:10pm

The housing market gave us some mixed signals this month. Below I will attempt to interpret the various—and sometimes conflicting—messages provided by price levels, price breadth, sales volume, and inventories.

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Fraud and the Home Appraisal Business

Submitted by Rich Toscano on December 30, 2005 - 11:16am

The Voice of San Diego is at it again, this time with an article about appraisal fraud.

In the past, appraisers would estimate the fair market value of a house based on comparable sales, construction costs, and various other methods. If the appraised value came in too low, the mortgage would not be approved because the bank would want to ensure that the collateral on the loan (i.e. the house itself) was worth a certain amount in comparison to the loan amount.

Now, though, many appraisers claim that there is enormous pressure from some mortgage brokers to appraise homes based not on their actual value, but on the figure necessary to close the loan. The mortgage brokers, after all, are not the ones lending the money, so their main incentive is to close the deal. And since they are often the ones who hire the appraisers, it's possible to see how there would be a conflict of interest.

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The Real Estate Agent Bubble

Submitted by Rich Toscano on December 28, 2005 - 5:43pm

Much ink has lately been spilled on San Diego's burgeoning glut of housing inventory. Today, the Voice of San Diego spills some ink on our glut of real estate agents. We learn that the number of California real estate agents has grown by 55% since 1999. More frightening, 15% of Q2 2005 GDP growth nationwide was due to real estate commissions—and as usual, you can bet that the percentage is a lot higher in real-estate happy Southern CA.

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A Message from the Yield Curve

Submitted by Rich Toscano on December 27, 2005 - 8:22pm

The yield curve briefly inverted today: for a moment, the yield on longer-dated bonds was actually lower than the yield on shorter-dated bonds. To be specific, the yield on the 10-year Treasury briefly dropped below that of the 2-year Treasury, before rising up to close barely above the 2-year yield.

This brief foray into yield curve inversion is getting a lot of press, and for good reason. According to economist Paul Kasriel, a yield curve inversion between the 10-year and 3-month Treasuries has preceeded every recession over the past 45 years. Over this period, there were only two periods of yield inversion that did not precede a recession, versus six that did. That's a pretty decent economic indicator, though as Kasriel notes, it's a better predictor of economic activity in general than recessions in specific.

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