Monday, September 18th, 2006 at 12:09 PM
Rate of Change
Let’s recognize that when talking about a depreciating market, there will always be ‘lucky’ sales. The right buyer might pay top dollar for a killer one-story house, nestled among a group of low two-story sales.
But generally-speaking, how fast will the market re-calibrate?
Appreciation/Depreciation = change
Velocity = rate of change
My program (superior 5-10%, inferior 40-50%, blended 33%) is the change, and it’s already in place. Buyers determine the change, and they are thinking these numbers today.
Cote’s program (20% initial change, 7% each year thereafter) is the velocity, or rate of change. The sellers determine how fast they are going to subscribe to the buyer’s program, and they’ll be slow to catch on. Hence, the recent 30%-40% drop in sales. The sales that are happening are a combination of lower and lucky sales.
I think Cote’s 20% initial change will be spread out over 2006 and 2007. We’ll either have a 10% drop in the median sales price over the next few months, or we’ll see sales slow to a crawl. It’ll really depend on your neighborhood – where sellers NEED to sell, they’ll lower their price. Where sellers don’t NEED to sell, or get bad advice, they won’t sell. Occasionally, they’ll get lucky, but it won’t be the trend.
The peak around here was July 2004, and it’s been flat since. Plug in your peak price for the 100% mark, whenever that was.
We’ve seen a 2% drop so far in the median sales price, so I have 98% noted for August 2006.
This prediction shows a continued drop off in median sales price until February, then flat to August 2007.
I’m showing flat for all Feb to Aug periods, because that’s the traditional selling season, and once buyers start hearing about the 10% drop from the previous off-season, they’ll come back around to see what’s happening. Hopefully, some will buy a house.
What happens after August 2009 will depend on rates and how bloody it gets between now and then. If the mortgage can devise a fix for the resetting ARMs, I’ll guess that we’ll see a prolonged flat spell after 2009.
None of this matters unless you can find the right house though.
I’d like to see the primary focus be on buying the right house. A house that is so well-suited to your needs that it will last you a lifetime, just in case.
There will be buyers that will find the perfect house for them, but not buy it because they want to wait until prices come down more. But even if prices continue down, will you be able to find the right house?
You’ll think, if prices were to get better, then I’d get a better house for the same money! That will be tempered by more competition between buyers, and there are plenty of buyers waiting. If frustration sets in, and you settle for a house that won’t last a lifetime, then you’ll have to go through this all over again a few years later.
My point – keep looking, because finding the right house is TOUGH!
Posted on Monday, September 18th, 2006 at 12:09 PM in Thesis, Thinking of Buying?, Thinking of Selling? | 8 Comments » | 
Print
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
Jim, we are on a first name basis, call me Robert.
Anyway, I was perusing the DatQuick listings
Robert Cote | September 18th, 2006 at 3:34 pmhttp://dqnews.com/ZIPSDUT.shtm
for the premium location properties and I see some huge median declines in places like Del Mar. Now I know there needs to be some huge shift in which houses are selling but still it makes your superior property premium theory look incomplete. That’s okay, I was looking for my inital 20% to be reported in October for Q3 ’06 and that ain’t gonna happen either. Your area flat for almost two years now? That bodes well for your not having to take a haircut upfront and that will probably keep your market calmer than others. I’m patient but I want some definitive data rather than all these soft fuzzy head fakes.
Robert,
You point out the big problem with us talking about the macro-theory. In the micro-analysis, it’s hard to see the trend.
Look at those 92008 numbers:
Median sales price = $755,000, up 9.8%.
But that’s on 14 sales.
And 6 of the 14 were $1,000,000 and up!
The week-to-week or month-to-month stats won’t ever show the true picture – the median sales price is a weak measuring stick, and with fewer sales, will we ever have solid proof?
We can probably sum it up by saying that there will be a large chuck of depreciation early, and it will mellow over time as the re-calibration fine-tunes as needed.
When and how much will be decided by the market.
Look for more head-fakes, and misleading median prices.
The ‘change’ I described is here, but for now sellers will just have to take my word for it, I guess.
Jim the Realtor | September 18th, 2006 at 4:04 pmA question:
There is a great bunch of charts and graphs at Matrix Blog (http://matrix.millersamuel.com/?p=859).
One of them is the “Net Mortgage Equity Withdrawal”.
Could the huge increase in “Net Mortgage Equity Withdrawal” include those homeowners that have “cashed-out” of the market?
These transactions would have been different than typical transactions. They would have a Buyer who would create a new mortgage, and a Seller who did not create a new mortgage.
from Mission Viejo, OC | September 18th, 2006 at 6:05 pmThis sounds like it could be a “net” equity withdrawal, adding an unknown amount to the total.
Speaking of head-fakes and dead-cat bounces….
A couple of days ago I speculated where the bottom is.
I mentioned the La Costa condo that sold for $380,000, and have found out since that the new owner is flipping it and has found a buyer already. The $380,000 sale hasn’t even closed yet!
The other, the house on Sierra Morena that the guy paid $410,000 for and re-listed for $487,000? I said the $410,000 is his own comp, and wondered if he’d have any luck at $487K.
Well he hasn’t yet, but his neighbor, who has the same 1,471sf, 2-story floor plan a few doors down (on the same side of the street), went pending over the weekend.
That list price? $509,000.
There are the uninformed, and there are buyers who find a house that fits their needs well enough that they forget the bubble talk, and step up and buy.
If this ends up being a soft landing, and guys like David Lereah say ‘I told you so’, I’m going to puke.
Jim the Realtor | September 18th, 2006 at 6:11 pmSometimes all it takes to sell a $5000 cat is to have two people selling $5000 cats.
The other thing to keep an eye out for is the fake sale. Like perhaps your $380k La Costa? I’m seeing more and more of these where the flipper and the "buyer" close and split the cash and the buyer disappears. Not even a first payment. There’s even more of the off those books deals that plump the sales price but give back under the table.
Soft landing? Check this out:
http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=1382618
I don’t care who sold them the 9th mortgage, who sold them the third or fourth?
Robert Cote | September 18th, 2006 at 6:46 pmRobert,
Great link. That is exactly what I have been thinking has been going on in this market. People using credit cards to pay their mortgages and then rolling it back into their home loan. You just need to look at the numbers, average income in San Diego for a family of 4 is around 60K, median home price 500K, doesn’t add up. Now that the “equity” is gone, bad things are going to happen. Don’t worry Jim, there will not be a soft landing.
I know we have to take into account that he works for a sub-prime lender, but I think a lot of the loans done over the past few years have been sub-prime. In his one week sample of 100 applicants, 78 with a debt to income ratio of 55% is crazy! I personally wouldn’t want to be over 40%, which should be the norm. From those numbers I would guess there will be a possible 80% foreclosure rate on the people that office deals with. 100 apps a week, times 52 weeks. 5200 x 80%, so we are looking at 4160 possible foreclosures over the next year from just that one office of 8 employees.
Actually the Husband and Wife example could end up being 5 foreclosures from just them alone! And I don’t believe a registered nurse pulls down $9500 a month unless she is doing tons of overtime, I have a few friends that are Nurses and don’t make anywhere near that amount. Even giving her the benifit of the doubt, their combined income is only 135K, how did they qualify for $3.4M of loans, that is over 25 times their yearly income?
SMC | September 19th, 2006 at 6:35 amInteresting article on the Sub-prime market as it relates to Fannie Mae and Freddie Mac. Look at the numbers and trend over the last few years, they bought up a lot of sub-primes, which was not their traditional MO. This is why I think eventually all us tax payers are going to end up eating this one!!!See below excerpt, link to article is at the bottom.
Subprime exposure
Fannie has traditionally specialized in higher-quality, fixed-rate mortgages, which are less vulnerable to interest-rate fluctuations and volatility in the housing market.
But the company has been investing more in subprime MBS in recent years. Subprime loans are sold to home buyers who fail to meet the strictest lending standards, so this area of the mortgage market is expected to be hit harder by any housing downturn.
Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, Md.-based publisher that covers the home loan industry.
In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.
http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7B843C8E17-B688-452B-96A8-524381ACC223%7D&keyword=
SMC | September 20th, 2006 at 1:58 amBe on the lookout for this tidbit. When they buy those sub-prime loans, are they buying the whole thing?
Back in the day, Great Western Bank would sell the bottom 80% or 90% of the loan, and keep the riskiest top portion, plus retain servicing.
I don’t know if that is still done, but that would cushion the blow.
So would a vigorous buy-back program. I believe all lenders have a 12-month buy-back provision, I wonder if Fannie or Freddie got any longer buy-back for sub-prime? In other words, how much did the originating lender have to give up to sell to Fannie?
My guess is not much, if any. Both Fannie and Freddie appear to have been on the hustle the last few years, it wouldn’t surprise me if they bought everything they could, blind as can be.
Jim the Realtor | September 20th, 2006 at 3:32 am