What’s the likelihood that the much-hoped-for "spring rally" in home prices will take place? It’s a question we’ve been examining for quite a while in the monthly reports. This week’s column in voiceofsandiego.org (née Voice of San Diego) discusses the general tendency for prices to rise in spring… and the reasons why it will be tough for a the market to mount a meaningful spring rally this time around.
In summary, compared to this time last year–which was the launch point of a price rally, albeit a very small one–inventory has almost doubled, demand has dropped by about 25%, and rates on ARMs (which the large majority of San Diegans utilize) are up substantially:
Check out the article for some fun math (pertaining to the loss of purchasing power represented by the mortgage rate rise) along with other details…
At least your voice article
At least your voice article didn’t use the souffle metaphor. Why Rich did you choose to focus on prices instead of inventory at the start of the spring selling season?
Josh
Here is something to
Here is something to consider regarding the new interest rate environment. Personally I think the FED recognized there was a housing bubble two years ago. They have raised rates 15 times. I think what caught everybody by surprise were the effects of the “Carry Trade” I distinctly remember at the beginning of 2005 the bewilderment that the 10 yr note was so strong in the face of the FED tightening. In essence I think the FED really wanted the bubble to Pop last year and was caught off guard at the foreign demand for the 10 yr note. That kept mortgages artificially low for another year. I also don’t think the FED realized that lenders were going to be so aggressive mass marketing suicide loans. This will prove to be devastating. The money that propped up this bubble came from Japan. Japan’s central bank has had a policy of zero percent interest rates plus they flooded their economy with money to break the spiral of deflation. Even with that policy people in Japan did not begin to borrow until very recently. Where did all that money go? US Treasuries and with those gains that money went into mortgage backed securities, REITS, among other investments. The people at the FED and the NAR know what happened. Bascially the FED played with fire by lowering the fund rate to almost zero. So instead of having a camp fire to keep everybody warm on a cold night the fire spread into the trees and now we have a forest fire called the Housing Bubble.
Now the dynamics of the “carry trade” changed significantly when Japan indicated it will begin the process of tightening. They are still at zero percent but have greatly reduced their reserves. Combine that with Europe tightening and China communicating they are reducing their purchases of US Treasuries, now you have downward pressure on US Treasuries especially the 10 yr note which mortgages are tied to (at the time of this writing yields on the 10 yr have jumped from 4.54% to 4.87% in one month). Even as housing tanks the FED will not be able to lower interst rates in the face of tightening in Europe and Japan in order to preserve the dollar. The point I am making is that there aint going to be no Spring Rally this year.
I guess there won’t be any
I guess there won’t be any Spring Rally here. For an extreme illustration of the effect of ARMs and I/Os, this might be interesting:
http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_4578247,00.html
Cheers!
I think there may be a mild
I think there may be a mild spring rally. The only reason I say this is that I’ve heard a couple of prominent permabulls say, “we’ll know more when we get the March data.” (I don’t remember which ones; if I knew I’d be posting this, I’d have written down their names). And I don’t think those bulls would say that unless they had some knowledge that things were going well in March. Because if they say that, and then things tank or stay level in March, then they have to admit that things don’t look so good. Which, of course, they never want to do.
That said, I don’t think too much should be read into a spring rally if it happens. There’s still plenty of time for mortgages to reset and fear to take hold. Also, if prices go up 2% every spring and down 7% every winter (or level off every spring and go down 10% every winter), prices will still be down significantly in a few years.
Preliminary data in my area
Preliminary data in my area points to y-o-y volume decline of about 30% and a decline in the median price of 2% y-o-y.
Which areas do you service,
Which areas do you service, and what was the YOY volume and price last month.
Do you see a trend developing ?
The YOY volume and price
The YOY volume and price last month (FEB) were about the same. Usually we see a nice uptick in volume from Jan to Feb (we did) and then a spike up in March (we didn’t). However, It seems like the Spring Rally is starting as we speak. In the last 2 days, 11 single family homes went into escrow in 92009 (So Carlsbad) and 92024 (Encinitas). Four of these were over $1.3M! Five were around what I would consider the median or below the median and two were slightly above the median. In the attached market there were 13 sales with most of the action from $400K to $500K. We havent seen activity like this in months. Personally, I am in negotiations on a listing I had for months with no offers. I now have two well qualified buyers bidding on the property.
I concur. Before closing
I concur. Before closing escrow last week our condo had an increase in visitors the last 2 weeks it was on the market. In fact after receiving no offers we had 3 interested parties at the last minute (when it rains it pours). I can’t tell you how excited our mortgage broker was that we were purchasing a new home. She sounded desperate for new clients.
There will except under
There will except under extreme circumstances be spring rallies. People prefer to move during the summer, when their kids are out of school. In other parts of the country, homes look more inviting in the spring/summer and people would rather move during the summer as well.
This is why you have to look at year over year numbers.
maybe more important than
maybe more important than rates, the mania is just plain over with. this is what happens when manias end, people just all of a sudden lose interest and say “what on earth were we thinking paying that much for —–?”. tulips, land, silver, stocks, etc., … the masses finally wise up and the music suddenly stops!
Rich
Most people I know got
Rich
Most people I know got the 5/1 ARM, but they are in more affluent zip codes. Do we know the distribution of the 1yr/30day, 3/1 and 5/1 loans? I would guess that first timers, less educated took the short end, while the more affluent took the 5/1 loans. It would great to see all those rates on a graph. heres one graph of 5/1 from hsh.com, the leading library of consumer loans: library.hsh.com
“that’s going to be a slow
“that’s going to be a slow process for RE… there are still a lot of buyers out there.”
I totally agree that the denial stage is rampant in both sellers, and frankly clueless sellers. I still hear too many people thinking they should buy now when prices are softening before they go higher. May people think this is a slowdown before prices shoot back up.
Simmssays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
The Second Great Depression
The Second Great Depression by Warren Brussee. I just finished it, a great read that goes into some very good detail with national figures on ARMS and the real estate dillemma facing this country. I highly reccomend this read. It was enlightening to say the least.
He predicts a depression starting in or around 4th qtr 2006-2007 and continuing until 2020. Real estate bubbles play a large part in the scenario he is drawing. However expensive real estate is or will become, he believes the precipice will be overloaded personal debt and higher strangling interests rates. That will get the ‘ball rolling’ so to speak and a full on depression by 2013.
He also goes on to say, we wont recognize any part of the current real estate market by 2008.
I tend to agree with him.
Im not pushing a book here. But information is power.
I don’t think that market
I don’t think that market declines will be even or consistent. I think they’ll come in fits and starts, with little hesitations and backsliding. People buying now have obviously gone for NARs soft landing hook and think that the market will remain at least stable or maybe even increase in the near term. Otherwise why would anyone buy now?
I think that everytime it softens up there will be some people who will think “this is it, the market has bottomed out and it’s going to take off again”. Sooner or later they’ll be right. I just happen to think it’s going to be a lot later than sooner.
I called mistress Cleo last
I called mistress Cleo last night and she said….. Oh wait no I didn’t. But maybe I should.
Josh