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Wednesday, May 07, 2008


What's really notable about this pending sales report is the regional pattern that showed up in both February and March. Sales in the west are stabilizing as sales in the south and the northeast continue to fall. For the last three months, the pending index in the west has run 93.8, 92.5 & 92.1. Compare that to the 07 average of 92.4.

But in the west sales are coming at the cost of very rapid price declines. What's happening is that the foreclosures and other forced sales (REO, NODs, shorts, etc) are coming on the market in such numbers that they are the bulk of moving homes in many areas.

These are two year list price trends for some CA MSAs (data from Housing Tracker, Apr 06 to beg May 08):
Low: $445,333 -> $330,000

Med: $579,666 -> $450,000
High: $805,300 -> $675,000

Orange County:
Low: $529,900 -> $375,000
Med: $694,833 -> $529,900
High: $973,333 -> $849,000

Low: $349,600 -> $215,000
Med: $435,000 -> $299,000
High: $577,500 -> $410,000

Low: $344,833 -> $199,000
Med: $439,500 -> $305,000
High: $594,833 -> $489,000

San Diego:
Low: $399,000 -> $289,900
Med: $537,666 -> $419,000
High: $749,946 -> $675,000

San Francisco:
Low: $499,983 -> $349,875
Med: $654,663 -> $525,000
High: $891,325 -> $799,000

San Jose:
Low: $599,966 -> $427,900
Med: $739,333 -> $575,999
High: $1,098,833 -> $799,000

Santa Cruz (from Aug 06 to beg Apr 08):
Low: $599,000 -> $450,000
Med: $769,166 -> $685,000
High: $1,098,500 -> $1,049,000
Santa Cruz is small enough to make their numbers less reliable - total inventory is under 2,000. Generally you have to get over 4,000 before the data is reliable. Below that matched sales and true comps are the best measures.

Here is the one year trend (Apr 07 to beg May 08):
$425,800 -> $330,000
Med: $546,000 -> $450,000
High: $749,600 -> $675,000

Orange County:
Low: $499,720 -> $375,000
Med: $649,920 -> $529,900
High: $921,780 -> $849,000

Low: $330,940 -> $215,000
Med: $415,760 -> $299,000
High: $544,920 -> $410,000

Low: $309,124 -> $199,000
Med: $399,720 -> $305,000
High: $566,610 -> $489,000

San Diego:
Low: $389,400 -> $289,900
Med: $509,780 -> $419,000
High: $737,115 -> $675,000

San Francisco:
Low: $463,000 -> $349,875
Med: $600,345 -> $525,000
High: $825,780 -> $799,000

San Jose:
Low: $577,100 -> $427,900
Med: $687,970 -> $575,999
High: $910,590 -> $799,000

Santa Cruz (from Aug 06 to beg Apr 08):
Low: $577,200 -> $450,000
Med: $749,200 -> $685,000
High: $1,103,200 -> $1,049,000
The bottom brackets are dominated by the outlying areas (long commutes to work) and condo hell. Condo hell can best be described as being forced to pay HOA on all the vacant units. Condos are unique in that in bad markets, frequently the annual carrying costs rise sharply. Not a good thing, and it gets even worse when special assessments occur. Then the local board is faced with rent, and drive prices down, or don't rent, and drive fees up, which drives prices down.

Here is a helpful table showing the price DECLINES by area and bracket:
MSA 2 Yr Decline 1 Yr Decline

Low 25.9% 22.5%
Med 22.4% 17.6%
High 16.2% 10.0%

Orange County:

Low 29.2% 25.0%
Med 23.7% 18.5%
High 12.8% 7.9%


Low 38.5% 35.0%
Med 31.3% 28.1%
High 29.0% 24.8%


Low 42.3% 35.6%
Med 30.6% 23.7%
High 17.8% 13.7%

San Diego:

Low 27.3% 25.6%
Med 22.1% 17.8%
High 10.0% 8.4%

San Francisco:

Low 30.0% 24.4%
Med 19.8% 12.6%
High 10.4% 3.2%

San Jose:

Low 28.7% 25.9%
Med 22.1% 16.3%
High 27.3% 12.3%

Santa Cruz (from Aug 06 to beg Apr 08):

Low 24.9% 22.0%
Med 10.9% 8.6%
High 4.5% 4.9%

As you can see, the declines are concentrated in the last year. That's because lending standards changed, causing resales potential to be limited. It is the change in lending standards (which is necessary and driven by rising defaults) which is causing the decline.

As this wears on, the declines will continue and will work their way up the brackets. For one thing, the top brackets have a lot more loans like OAs that will reset later on, forcing a roll-out to the market. Declines of these magnitudes do make housing far more affordable and thus open up new sources of demand. So the rapid price declines will stabilize sales. Far more people can afford to buy at $250,000 than at $350,000, that's for sure.

The market peaked in many areas earlier than 2006, so total losses for lenders will be higher than shown. If you have to foreclose and then sell, to the declines shown above you should probably add another 10% for starters.

Aside from legal costs, there is the broker's fee, there's usually a 5% discount for foreclosures, and then there are the costs of utilities, vacant home property insurance, taxes, etc. It doesn't pay you to keep your REO smiling on the shelf. Last year it seemed like many lenders were letting these sit, hoping that the market would pick up later and that they could then move them without too much trouble. This year, that fantasy is seen for the fantasy it was.

Do 'pendings' still mean anything? We've been house hunting 4 out of the last 5 years (no, I did not pray for patience, however I am now)and until a few months ago, kept houses in my favorites to watch for price reductions. Now it's more interesting to watch and see if 'pendings' go through. Hope all is well in your world!
I think they do. As prices fall it brings far more people into the qualifying bracket.

The limiting factor for many of these places is that you need a decent-sized downpayment.
Pendings are very misleading. If it takes twice as long to close pendings get double counted.

Next leg down; running out of buyers. The universe of qualified and interested is being winnowed from both ends. Fewer qualified and those that are qualified and interested are buying and thus reducing the pool. The next wave of REOs will go begging unless they instantly cash flow and even then I'll let somebody jump in first.
Rob - that's what I'm wondering.

In a way, most of CA is a special case. The state has a very low percentage of home owners, so a lot of possible demand.

Of course, what percentage of those people are recent immigrants?

But you're right. The best prospects will get sucked up this year. They have money in the bank and have been looking to buy for years but haven't thought it makes sense. As the good stuff comes on the markets at substantial discounts (and it isn't rare to get 30-40% off), they buy.

There's another cohort behind those. They have good jobs, but maybe not as much money in the bank. They can save up, but will need some time.

I don't see prices bottoming in CA overall until about 2010. The problem is that you almost have to sell REO at what will be the bottom price, or close to it.
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