Collapse Recount


The collapse in U.S. home prices that stoked the worst recession since the Great Depression wasn’t quite as severe as initially estimated, according to data from S&P/Case-Shiller.

Property values nationally fell 26 percent from the February 2007 peak to the December 2011 trough, not 34 percent as previously reported, revised data showed last week. The index will now be issued monthly rather than quarterly.

The change is the result of CoreLogic Inc. (CLGX)’s $6 million purchase of the S&P/Case-Shiller index from technology company Fiserv Inc. in March 2013. Case-Shiller has spent more than a year retrofitting its model with CoreLogic’s bigger, higher-quality data set, leading to a change in how the index looks.

Peak Pricing Coming to CV

There have already been a smattering of CV sales at or above peak pricing, and I said today that within two years the 92130 detached-home sales will be at or above 2006 prices:

Sept 2006: 32 sales, $370/sf.

Sept 2012: 43 sales, $326/sf.

Statistically, we’re only 13% apart in the numbers above, and we could make that up by the end of next summer. When the inferior homes are gaining steam that it really becomes apparently that prices are on the move.  True, the house featured in today’s video hasn’t sold yet, but with only 22 resales listed under $1,000,000, it stands a decent chance of selling.

The same model two doors down from this one sold for $935,000 at the very peak, July, 2007.

This is listed for $929,900:

NAR Still Doesn’t Matter

From HW:

The National Association of Realtors is in the midst of revising its core home price index. While the move may be a concern to some, fellow HPI service Zillow said it isn’t affected by the revisions.

“NAR’s rebenchmarking is not impacting Zillow at all,” said Zillow Chief Economist Stan Humphries. “We look at closed sales from public records. NAR is a survey. We’ve never used NAR’s numbers for our analytics.”

NAR is currently revising downward its index in what it labels a normal rebenchmarking process. Humphries said Zillow requires no such revisions and stands by his firm’s numbers.

The economist also denies the Zillow numbers, what it calls Zestimates, look at housing through rose-tinted glasses. Zillow calls May 2007 the peak of the housing boom. Since then prices collapsed 23.7%.

Other home price indices are more severe than Zillow’s. CoreLogic calls the peak in April 2006 and accounts for a 32% decline. Lender Processing Services calls the peak in June 2006, with a 30.2% decline.

(JtR’s prediction from September, 2006 here)

Zillow’s numbers follow 83 million homes in about 2,500 counties nationwide, Humphries said, but aren’t as harsh as other HPIs for one simple reason: they don’t include distressed properties.


Regime Change?


Meet the new boss, same as the old boss.

While Jim the Realtor is on a well deserved and long overdue break he has foolishly handed the helm over to me.  Rob Dawg.  

When last we did this it was a different world.  Think back to the halcyon days of 2007.  A bucolic time when people were still discussing “if” there was a bubble and anyone predicting 10% declines was checked for drug abuse.  We certainly have mostly burned off the excesses in normal residential housing.  It still remains to see if the high end will join the rest.  I’ve loved reading JtR getting an education about San Diego and lots of laughs in the process.  


So, today’s question:  Are there any more shoes to drop on Southern California?  And please, not the old earthquake meme.  


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?

Coffee Bet 2

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?”

And a photo of the after-party, where staffers carried on all night – what a bunch of partiers!

Grand Poobah of Predictions

Admittedly, this prediction and about four bucks will get you a cup of coffee today.  However, if in a few years we look back and I was right, I’ll be happy to take the credit.

From a logical standpoint, there is no way these prices can be sustained – let’s face it, if you want to buy a decent house today you have to spend a million dollars – how many people can REALLY afford that?

But there are intangibles that are hard to assess.  Let’s look at what they are and attempt to assign a value to them, because if we can, we can predict the future.


Let’s use santa monica’s number of 33%.  In the last downturn, most everywhere in Southern California saw prices roll back about 33% between 1990 and 1995.

What about over-shoot?  Aren’t buyers going to be so scared that prices will have to actually go down a little extra, before they have the guts to jump back in?

On June 9th we talked about ‘The Big Split – the Flight to Quality’ (see journal archives).  We’ve seen it happen all year, and I don’t think it’s going to change – that the inferior properties are taking a bath, but the high-quality houses in great locations do a lot better.

Combine the Big Split with over-shoot, and it looks like this:

Inferior properties go down 40% to 50%

Superior properties go down 5% to 10%

Blended rate of decline of median sales price from peak = 33%.

This is where the real estate industrial complex is going to shoot ourselves in the foot – the median sales price will be submarined by the inferior properties.  Where the MSP has been holding artificially high the last 12 months due to fewer sales in general, once the bottom falls out of the inferior homes, the MSP will drop like a rock.

The foreclosures are pouring in right now, and the bulk of them are the inferior properties on the low-end.  The ones that were bought in the last 1-2 years with 100% financing are most susceptible – those homeowners have no skin in the game and are the least likely to find a way to save the house.

If you are a waiter or landscaper, the only way you can handle an additional pop in your monthly payment is if your parents help out, you add a lot of roommates, or you hit the lotto.  True, there will be plenty on the upper-end in trouble too, but they are more likely to find a way out.  People with more affluence have more resources available to them, and if they have a high-quality home, there are more buyers.

It’s all relative, but if this year is a snapshot of things to come, the low-end is going to be hit harder.  That’s in direct contrast to my previous article on Feb 8th called ‘the big squish-down’.  I thought for sure that the million-dollar market would cause all the trouble, but that hasn’t happened so far.

Three general reasons the high-quality properties will do better:

1.  They’re older houses, owned by older people, with less debt

2.  They have it so good, there’s no better place to go

3.  Buyers are holding out for the good stuff.

Because of these three reasons, the supply-and-demand curve is much more healthy in the high-quality-home market.


A.  If there are serious, meaningful changes in loan underwriting and/or elimination of currently available loan programs, then knock off another 10%.  Not very likely in my opinion, but I’m probably in the minority of those reading this.

B.  Major terrorist attack or earthquake, knock off a temporary 10%, but it’ll come back within 1-2 years.  We were back in business within 3-6 months after 9/11.

C.  Complete failure of pension/retirement systems, and healthcare cost.  Even if you have your house paid off, if those two categories go nuts, you could run out of dough and have to sell your house to live.  God help us all if it gets to this point.  It is possible though, so it’s on the board.

Those are the big three negative intangibles, now for the positive:

A.  Interest rates under 6% would help a lot, and I think they’re coming back.  The recent boom was the hottest when rates were the lowest.  It’s both a financial and a psychological benefit that helps get buyers off the fence.

B.  Sales over the next 1-2 years will be determined by buyers who care more about buying the right house than the bubble.  Whether they are ignorant about the bubble, or just don’t care about the bubble, it doesn’t matter.  If the bubble talk doesn’t bother you, then you probably won’t insist on waiting, or driving the price down another 5-10%, before you buy.  Because people need to live somewhere, there are reasons to buy that can supersede money.

C.  Lower prices should help those who rent to be able to buy – both the first-timers and the bubble-sitters.  Especially the bubble-sitters.  I don’t think there are any previous homeowners that don’t want to own, they just don’t want to buy at these prices.

D.  The OpenMLS would help alot.  If it were easier to find good deals, we’d have more sales.  If there were one centralized, super-duper website open to everyone, not only would it be easier to find deals, the novelty alone would spur activity. is an embarassment, and the realtor community deserves to be left behind if we can’t do better than that.

 Those four intangibles could greatly temper any steep decline.

But who cares, all that matters is how you can take advantage, right?


1.  If you know you’re moving in the next couple of years, see if you can move your plans up a bit.

2.  You can’t move your house, but see if you can get it into a higher-quality bracket.  Fix it up nice, that’s what buyers want.

3.  Be more attached to getting out, than getting your price.


1.   Set your goal at getting a high-quality house at 33% under peak prices.  Who are they, and where do I find them?

         A.  Distressed sellers with both high loan balances and equity

         B.   Long-time owners who still think a half-million is a lot of money

         C.   Dumb listing agents you can take advantage of

2.  Stay educated on the market, especially on recent sales.  That education gives you confidence that you’re doing the right thing when making offers.

3.  Be persistent, but patient.  Be prepared to make 100 offers, and hopefully you’ll only have to make 5-10.

4.  Know what you’re looking for, and keep looking!  A good agent can help.

That’s what I think, what do you think?

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