At the panel discussion the other night, the methodology of the Case-Shiller Index was questioned.
Do they include every repeat sale they find, or just the recent ones?
Because the long-time owners, ones who paid $33,000 in the 1960s, and are now selling for $700,000, could really skew the index. Thankfully, the folks at CSI have published their methodology:
They exclude properties that were resold within six months, though the REOs being held longer than 6 months are going to be included. The “purchase price” recorded by the banks at the trustee sale, in almost all cases, will be quite a bit higher than the final sales price – their purchase price was based on appraisals almost a year prior to the eventaul REO sale.
The CSI also excludes those sales which they can’t find a previous purchase price, which will eliminate many of the long-time owners, and they also exclude new homes that were resold too.
The CSI also assigns ‘weights’ based on time between sales, but they said that 85% to 90% are unweighted. If they are downweighting the older ‘sales pairs’, there has to be some extra emphasis in the index on the more recent pairs.
Wouldn’t that make the index somewhat biased to the negative?
The classic half-timbered home, built beginning in 1914, was a ramshackle relic when it was purchased a decade ago for $5 million by Kelly Porter, a television executive turned Internet investor. He and then-wife Christina, a designer, took to its renovation with the artistic flourish of William Randolph Hearst, spending tens of millions of dollars on a dot-com-boom-financed face-lift.
But Stonebrook has become an inadvertent monument to a residential downturn that has spread to the highest-end homes and touched buyers and sellers of considerable wealth.
Porter, divorced and ready to move on, put the home on the market in January 2008 for $45 million.
With no takers, he lowered the price in July to $38 million — an amount that matches the most expensive California sale logged in public records that year: a six-bedroom Bel-Air mansion that sold in October. (This year, the record is $31.5 million for a Beverly Hills mansion that sold this week.)
*******
Porter gave a flurry of tours to buyers when Stonebrook went on the market; then they slowed to a couple each month. Since the beginning of April, however, five have toured the home, and real estate agent Decker and Porter spent four hours on a recent evening trying to put a deal together.
Like so many wealthy owners, Porter could bide his time. “He owns the house free and clear,” Decker said. But he may be ready to sell.
“As long as my energies are here, it holds me back from moving on and doing new things,” he said.
And if Realtor Miller’s adage applies to this topsy-turvy market, Porter may not have to wait long for a sale: The high end has traditionally been, Miller said, the “last to feel it and the first to recover.”
No mention of Kelly and Will from voiceofsandiego.org being the ones that first broke the story, instead, they only reference the previous article by the U-T.
At last night’s panel discussion the question was asked,
“When will the Case-Shiller index hit bottom?”
Other panelists politely side-stepped the question, so I took the plunge. My last prediction was the infamous coffee bet from September, 2006, where I guessed that superior properties would hold up better, sliding only 10% in value, and inferior properties would get hammered 40% to 50% in value. The jury is still out on how far off that prediction will be.
Last night I said that the Case-Shiller index would bottom in December, 2011, and be 25% lower than it is today.
Today’s index is 148.25, about what it was in August, 2002.
Knock 25% off and it’ll be 111.19, or about what it was in February, 2001.
The highest reading was 250.34 in November, 2005, so the 111.19 reflects a 56% decline.
I don’t like making formal predictions, let alone ones off-the-cuff. What was going through my head in the 2-3 minutes preceding my statement?
Oceanside is the test case. The market has worked perfectly in Oceanside, and properties in any condition, and in any location, that are priced at 50% to 60% off are flying off the shelf.
Will the rest of San Diego County need to hit 50% off to reach bottom?
I don’t think so, but we’re talking about the Case-Shiller index.
If Oceanside is the example of what to expect elsewhere, then we’ll see a marketplace dominated by bank-involved sales. Instead of ‘giving their house away’, individual homeowners who are comfortable will find other alternative to selling, and the vast majority of the homes selling will be those that the homeowners can’t afford anymore.
It could cause sales to shrink in older neighborhoods, which could have a stabilizing affect on pricing. The neighborhoods I mentioned in the coffee bet are holding fairly well, though Davidson’s La Costa Oaks has a couple of short sales in the works.
The index measures the decline between the last two sales prices of the same house.
If the older neighborhoods have fewer sales, then the number of REO and short sales of homes built in 2004-2006 will probably be the determining factor of the Case-Shiller index. The newer McMansions loaded with HOA fees and Mello-Roos are in everybody cross-hairs, and it’s likely that we’ll see further price erosion for the next couple of years.
But the banks are squeezing the REOs out little by little, dragging out the inevitable. That’ll continue for another 3-4 years at least, but, just like in Oceanside today, there should be over-shoot, so by December 2011 the index might hit bottom.
There are enough buyers patiently waiting for the higher-end homes to drop, and the second half of equasion is how much lower will prices have to go to get them to step up. I think there is enough enthusiasm, plus the tempting low rates, that many buyers would be buy a home today if they could just find decent ones at 5% to 10% off. Because the Case-Shiller will be loaded up with bank-involved properties that were purchased in 2004-2006, I think it’ll read worse than it is, but that might be too optimistic.
That’s my justification of a wild guess last night, but who knows?
The Case-Shiller index has been going down 4-5 points per month lately. It only has to drop 37 points to be 25% less than it is today, so conceivably at this rate we could have a 25% decline in the index by early next year.
I’ll stick with the 25%, when it happens…..?
Here is a youtube of Rich answering the question, “What indicators do you watch?”
The group of bank-owned properties in North SD County was published here on February 6th, and there were 688 on the list that day.
Here is the fresh list below, with extra zip codes included.
To compare apples and apples, the towns on the previous list were Cardiff, Carlsbad, Del Mar, Encinitas, La Jolla, Poway, Rancho Santa Fe, Solana Beach, West RB, RP, Carmel Valley, and Scripps Ranch.
On today’s list there are 681 properties in those same areas.
We’ll keep checking on these in the coming months.
These lists are generated by compiling the results of the trustee sales. In the cases where an individual purchased the property at the courthouse steps, they are listed as the owner, instead of the bank who would have taken it back – and some of them go back months or years.
WASHINGTON — Troubled financial institutions and the Detroit auto makers continue to spend heavily on lobbying Congress while accepting billions of dollars in U.S. government money, reports to Congress suggest.
General Motors Corp. spent $3.3 million on lobbying in the fourth quarter of 2008, a period that coincides with the government committing $13.4 billion to the ailing auto maker under the Treasury’s Troubled Asset Relief Program. In all of 2008, GM spent $13.1 million on lobbying, down from $14.3 million in 2007. GM’s reported lobbying expenses for 2008 were only slightly less than combined spending by Ford Motor Co. and Chrysler LLC.
“Lobbying is the transparent and effective way that GM has its voice heard on critical policy issues…that companies should not be required to forfeit if they receive federal funding,” said GM spokesman Greg A. Martin, who added that no funds lent from the Treasury would be used for lobbying.
Bank of America Corp., whose heavy losses prompted it to appeal to the government for a second bailout this month, spent $4.1 million on lobbying last year, nearly $1 million more than in 2007. The bank spent $820,000 on lobbying in the last quarter, about one-fifth less than in the third quarter. Bank of America is in line to receive a total of $45 billion from the government, including $20 billion committed by the Treasury this month.
Merrill Lynch & Co., which was acquired by Bank of America Jan. 1 at the government’s urging, spent $1.2 million on lobbying in each of the last two quarters, and $4.7 million for the year, $280,000 more than it spent in 2007. Merrill’s losses last year were another reason why Bank of America appealed for a second injection of taxpayer money.
“Our last year numbers reflect to some degree costs resulting from our merger with Countrywide,” said Shirley Norton, a spokeswoman with Bank of America. “We are now reducing our lobbying expenses…consistent with bank-wide efforts to reduce expenses.”
When the U.S. placed government-sponsored mortgage giants Fannie Mae and Freddie Mac into federal conservatorship in August, the two entities, once among the financial services industry’s biggest lobbying spenders, were required to stop lobbying. In October, American International Group Inc., which is nearly 80% held by the government, said it would voluntarily stop federal lobbying after criticism from Congress. But Congress has placed no similar restraints on other recipients of taxpayer money, though some lawmakers favor that.
“Clear restrictions must be imposed on firms receiving assistance,” said Sen. Dianne Feinstein (D., Calif.). “These include tougher reporting requirements, lobbying prohibitions, and a ban on lavish and unnecessary expenditures,” she said.
Lobbying spending by GMAC LLC, GM’s auto- and mortgage-lending arm, more than tripled to $4.6 million in 2008 from 2007. GMAC has received $6 billion in government money to help stave off a financial crisis. GMAC has suffered heavy losses in its mortgage unit, Residential Capital LLC, or Rescap. GMAC spent $1.5 million on lobbying in the fourth quarter, about $400,000 less than in the previous quarter. GMAC is 51% owned by private-equity firm Cerberus Capital Management LP, which also controls Chrysler.
Toni Simonetti, GMAC’s vice president for global communications, said the firm spent more on lobbying last year because it was lobbying on more issues than before. “I think it’s obvious that the increased spending on Washington-related activities was related to the environment and the restructuring that we are going through,” she said.
Chrysler spent $1.2 million on lobbying last quarter, and $1.9 million on lobbying in the third quarter. The White House committed $4 billion in loans to Chrysler in December.
“There has been significant demand from legislators and government officials for education and information on Chrysler,” said Mary Beth Halprin, a company spokeswoman.
Ford spent $1.9 million on lobbying in each of the last two quarters. It spent $7.7 million on lobbying for all of 2008, about $600,000 more than in 2007. Ford’s Washington spokesman Mike Moran said that although the company didn’t take government money and says it doesn’t need it now, it joined the other two domestic auto makers in pressing for a government rescue. “Should one of the other companies falter, that would have an impact on the entire auto industry,” he said.
Congressional filings show that lobbying by American International Group, which the government took control of in September, continued in the fourth quarter, despite the government’s holding 78.8% of the company. Congressional filings show that AIG spent $1.08 million in the fourth quarter. AIG’s 2008 lobbying spending was $9.5 million, $1 million less than in 2007.
AIG spokeswoman Christina Pretto said the company’s fourth-quarter figures include spending on state-level lobbying and trade-association activity. AIG stopped federal lobbying after criticism by Congress in October, which was the reason for the 2008 decline in spending, she said. The company continues to lobby on insurance issues and legislation at the state level, but activities must be approved by the company’s general counsel and chief regulatory and compliance officer, she said.
In October, after the Wall Street Journal reported that AIG was lobbying states for more favorable interpretations of a law that would place new controls on mortgage originators, Sen. Feinstein and Republican Sen. Mel Martinez of Florida introduced legislation that would ban recipients of taxpayer money from lobbying. The two lawmakers are seeking sponsors for a House version of the bill.
He has his usual colorful charts and commentary – here are a couple of his notes:
(T)he housing market — particularly in the mid-to-high — is highly unbalanced with supply outpacing demand at levels never seen before.
Unless sales demand more than doubles from here, this market will remain under significant pressure. But the doubling of demand would take total sales back to peak levels seen in 2005 and is unrealistic.
While I think we’ll all appreciate his reasoning, I disagree with his last sentence here. I think the doubling of demand/sales is VERY realistic – and PRICE IS THE ANSWER!
For an example, let’s look at Carmel Valley. To confirm his ‘doubling of demand’ to get back to 2005 levels, let’s look at the period March 15 to April 15:
Year
# of sales
$-per-sf
2005
52
$393/sf
2009
24
$345/sf
It would actually take more than doubling of sales to get back to 2005 levels, but we have foreclosures to help get us there! We saw 36 foreclosures brewing in the CV shadow inventory, what price will it take to move them?
Of our 24 closed sales this year:
TWO were under $300/sf, and both were bank-owned.
Thirteen of the 24 sales were under $340/sf, and their average time on market was 10 days from their last price reduction.
The banks don’t have a problem listing at the right price, and if 36 REOs came on the market EVERY month around $300/sf, I don’t think there would be any shortage of buyers. If you’re on the street, you’ve seen hordes of folks looking at the marginal buys, and jumping at the good buys.
Take a good look at his charts, because the evidence is clear – there are loads of foreclosures coming to the county. It’s great news for the buyers who have been waiting patiently for better pricing, and there should be enough to go around.
WASHINGTON (Reuters) – The Treasury Department is considering giving banks and investors billions of dollars in fresh incentives to modify troubled mortgages and save homeowners from foreclosure, sources familiar with official deliberations said.
Under one scenario, investors in second liens would receive a cash payment if they agree to ease the terms of troubled loans and accept a smaller return on their mortgage investment, the sources said.
During the height of the housing boom, some borrowers were able to buy a home with no downpayment by adding a second lien and many of those loans are now failing as the economy and housing market struggle.
Some on Wall Street will likely be angry if Washington doles out money to investors who hold the high-risk end of a home loan.
“Second-lien holders should get zero,” said Bill Frey, president of Greenwich Financial Services in Greenwich, Connecticut. “Why should a second lien holder get anything if the first lien holder takes a loss? That’s not the way the contracts work, that’s not the way privatization works, that’s not the way America works.”
OTHER AID
Officials also envision giving fresh subsidies to encourage ‘short sales’ in which the lender accepts a payment that does not cover the entire loan amount, according to the sources, who requested anonymity because they are not authorized to disclose details.
Fannie Mae and Freddie Mac, the mortgage finance companies, would administer the new program to resolve problems with second-liens under one plan being considered, they said.
A senior administration official declined to comment on Tuesday, but said the Treasury expected to unveil further details of its homeowner-aid program “soon.”
The official said the Treasury Department is also considering ways it could resolve problems in the mortgage insurance industry battered by mounting foreclosure losses.
“We are aware of the difficulties in the industry and we are analyzing different options to deal with” those difficulties, the official said.
In February, President Obama outlined a housing rescue plan that he said could move as many as nine million homeowners into more-affordable loans by both refinancing and modifying their current mortgage.
Homeowners normally must settle all of a home’s debts when they refinance a mortgage but a modified loan may hold the second lien in place.
A bulk of the Obama housing rescue plan involves modifying loans but officials have decided that they will try to ease those second lien payments in order to ease the costs of homeownership, the official said.
“Their debt overhang will be brought down,” the official said. “We will have that program shortly.”
Thursday’s panel discussion at 6pm has been moved to a slightly larger facility, the Joan B. Kroc Institute for Peace and Justice at the University of San Diego.
According to the moderator, Scott Lewis:
There is no charge for parking. You will be directed to the Lower West Lot. Shuttle service runs from the Lower West Lot with a stop conveniently located at the Front Plaza of the Institute for Peace & Justice. On street parking is available throughout the campus, as is a large, central parking facility a few blocks from the IPJ. Please allow extra time for parking.
Because I am the low man of this esteemed group (Rich Toscano, Ryan Ratcliff, and Kelly Bennett), they are considering bumping me from the panel, in order to help out with parking – they know that I drive a mean shuttle bus!
