Posts Tagged ‘walnut creek’

Lies, damn lies and statistics

April 7, 2008

It’s been interesting to see how both sides of the housing bubble are putting their spin on the monthly real estate numbers. The same statistics can show a positive trend and a negative trend. You’d think that’s impossible, but it’s really pretty easy and underscores the adage of ‘lies, damn lies and statistics’.

Lies, damn lies, and statistics

One of the phrases I hear a lot lately is ‘pending sales’ are going up. Realtors grab hold of this and use it as evidence that the market is picking up. “It’s time to get off the sidelines before it turns into a seller’s market and/or loan rates go up.” Sure enough, in February, pending sales were up … from the month prior.

In Walnut Creek, it looks like pending sales in February 2008 were up a whopping 40% from January 2008. Hey, hey, the good times are back, right?! Wrong. Compare that to February 2007 and pending sales are actually down 10%!

The natural real estate cycle will make some of these months look good if they’re presented in the right context. But do the digging, compare them to last year and even the year before that. And don’t look at one statistic in isolation. Look at pending sales, actual sales, inventory, days on market and price all at once to get a sense of the market in your area.

Extra credit? Read up on the difference between median price and average price. Yes, it can be important.


Highest Consumer Delinquency Rate Since 1992

April 3, 2008

A quarterly study by the American Bankers Association found that Americans are falling further behind on consumer loans.

… the percentage of loans at least 30 days past due rose to 2.65 percent in the fourth quarter from 2.44 percent in the third quarter, and from 2.23 percent a year earlier.

Anyone who thinks about the housing crunch shouldn’t be surprised by this type of statistic. It’s not like you’re going to pay your car loan first and then short your mortgage! Many Americans are on ARMs that are adjusting or simply took on too much home during the housing frenzy. Now, they’re struggling to keep their houses, leaving them with less money for other loans. I’m guessing this is going to get worse before it gets better.

The Mortgage Monster

But take this one step farther and I think it becomes a bit scarier. If Americans are putting more of their income towards a home, and they’re still trying to keep up on other consumer loans (but faltering), how much is left for consumer spending which accounts for 2/3 of our GDP?

I know I sound a bit like chicken little but … higher ratio of income going to housing, increasing consumer debt, inflation and a soft job market. This isn’t a rousing mix of ingredients in my opinion. What say you?

California Home Prices Declining $400 A DAY

March 27, 2008

It’s always interesting when you take a figure or statistic and slice and dice into a different presentation. Today it’s being reported that California Home Prices are declining $2,800 a week!

California Prices Decline 2800 A Week

It’s just a repackaged stat about the 26% decline in prices in California. Yet, $2,800 a week sounds a lot more dramatic than 26%, doesn’t it? And what if you take it down to the day, like I have in the title of this post?

I know the news outlets are just using their normal fear tactics to keep you listening, but in this instance I think it’s a public service. Too many people seem to be inured to the high prices of homes in California, and still don’t quite get that the market must continue to correct so more working Californian’s can truly afford a home.

The real question is how much longer will this decline continue?

Show For Backups

March 19, 2008

Last weekend, a glutton for punishment, I went out to see a few Walnut Creek open houses. One was a surprise since it had been removed from MLS. The realtor acknowledged that they were under contract but that if contingencies weren’t removed other offers would be entertained.

Think about that. How confident do you think they are that the offer will actually pan out if they’re holding an open house? For the state of the property I’m guessing that contingencies might not be removed.

Back On The Market

A number of recent properties are showing up as pending “show for backups”. I believe this is because there is more breakage as loans dry up or buyers simply get cold feet and use contingencies as their parachute. Sellers and agents are wise to the fact that offers, even with pre-approved buyers, may not come to fruition in the shrinking credit market.

The breakage on pending sales will cause some delay in showing the true sales activity in the market. In fact, I’m noting at least one pending property returning to the market after 30 days pending.

Do you believe the breakage on pending sales will increase in 2008?

Electronics Sales and Housing Prices

March 12, 2008

A recent USA Today article uncovers a correlation between a decline in electronics sales and housing prices. They essentially bumped NPD research on electronics sales with National Association of Realtors data.

Electronics Sales and Housing Prices

My first thought was a rather unenlightened one: “no duh.” I just figured that whenever there was any sort of economic downturn that you’d likely see some sort of contraction in these mid-to-high level products. But I read on and found the following:

Nearly every area with a decline in electronics sales also had falling home prices, says NPD analyst Stephen Baker. That’s a big change. Unlike many other products, electronics sales have weathered all downturns in recent years. U.S. sales rose 72% from 2000 to 2007 — a period that included the dot-com bust, says the Consumer Electronics Association, a trade group.

So even during the dot-com bust and 9/11 they saw electronic sales increase. Could it be that electronics sales are a leading indicator of home prices? I’m dubious to a certain degree. The evidence here shows a strong correlation but not causality. It makes a lot of sense mind you, and I tend to agree, but one quarter doesn’t make a trend and consumers seem all to ready to take out the plastic despite financial position.

That said, could we be seeing a change in how people are dealing with credit? Have ‘house poor’ homeowners, as a growing segment of society, now been forced to change their spending behavior? There has been speculation that the subprime meltdown (and the housing bubble in general) could spill over into other markets.

Essentially, to make the mortgage payment, consumers default on car payments or credit cards and simply don’t consume nearly as much as they used to. The latter item in particular would have a big impact (negative) on our economy and might add an accelerant to the falling housing market.

Time will tell – so take your time!

Shiller Home-Price Index

March 7, 2008

Have you heard of the Shiller Home-Price Index? I hadn’t until I started to poke around, wondering about whether it was the right time to buy. Robert Shiller is a Yale Professor and academic economist who says that this is the biggest housing boom since records began in 1890. Here’s a good graphic to drive the point home:

Shiller Home Price Index

Since 1890, the index usually bounced between the 90s and 110s, maxing out in the 120s. So after more than a century we now see the index fly up to 185. That’s the 2005 figure. I’ve seen the 2007 figure clock in at about 160.

What you have to weigh here is whether after 110 years we’ve reached a new plateau or if the housing market will continue to correct downwards and find it’s way back to the historic norms of the index.

Nothing is for sure and sometimes the pattern is broken. But given the financial enormity of a mortgage, why not wait and see what happens over the next 4-8 months.

Conforming Loan Limit Decrease = Higher Rates?

March 6, 2008

Like many of you I initially cheered when I heard about the economic stimulus bill and the increase of the conforming loan limit. If you’ve been under a rock, this means that the $417K limit on conforming loans will increase 125% based on your MSA (Metropolitan Statistical Area). It could mean that the loan limit would rise to as much a $729K in some areas.

The big deal here is the difference between the conforming loan rate and the jumbo rate.

Mortgage Rate Snapshot

Right now the spread is about 1%, which is a lot of money if you’re taking on a mortgage of this size. So why am I not cheering now? First off, the change puts a lot of strain on the already financially precarious Fannie Mae and Freddie Mac. (I know, it doesn’t seem like it would affect you, but stay with me.)

The thing about mortgages is that they are part of a larger financial market, where investors are going to determine the risk of such investments against the potential returns. Here’s what one poster (Cal) had to say in response to an L.A. Times blog post about Junior Jumbos.

I also forgot to mention the other obvious reaction (unintended consequence) of this action … higher mortgage rates.

The market for these securities isn’t unlimited for them to attract more capital (since they are rescuing the market, they are writing more loans, right?) they must increase yields. There is a cost for everything, it doesn’t come free.

If they mix the “conforming jumbo” in with conforming, the people buying the bonds will price all of them as if they were a jumbo risk. If they break them out into jumbo and conforming then the higher risk jumbos will get higher rates. Either way the savings wont be nearly as pronounced as some might think. It will probably reduce the current spread about half (from 1 % to .5%)

Okay, so maybe this guy is a crank, right? Maybe you and I shouldn’t take stock in what they have to say. Problem is some leading lenders have already signaled this will be the case. Sources tell me that a major top 10 lender has warned brokers that a stair step rate may be used on these ‘junior jumbo’ loans. Something akin to an extra .25% between $417K – $500K, .50% between $500K and $625K and so on and so forth.

In this case, the market is reacting (rationally) to this government intervention. They are suspect of the financial health of Fannie Mae and Freddie Mac and just got burned (and bad) by the subprime mess. The result is an unwillingness to blindly place the same risk on these junior jumbo loans just because they’re backed by the government. Fool me once, shame on you, fool me twice, shame on me.

Thankfully this would ensure that the true conforming loan rate would remain low, otherwise the rates would go up as they mixed risk across the total conforming loan portfolio. It also means that those looking at loans over $417K will still be paying a premium, just not quite as much as before. The gold rush we all thought might happen is looking more like tin.

Inflated Median Housing Value to Income Ratio

March 5, 2008

A recent article at Homeguide123 shows what median home prices would look like if the bubble never happened. Here’s the main portion of their supposition:

Historically, median home prices and median incomes have always shared a close relationship. From the mid-1970s to 2001, the historical ratio of median housing value vs. median household income was consistently between 2.6 and 3.0.

What this essentially means is that median home prices were (on average) 2.8x the median household income for the last 30 years. Using this 2.8 formula, it is very easy to estimate what median home prices would be if the most recent bubble never happened.

The results show that the median home price is 35% above this metric, and California a whopping 61%. But perhaps Walnut Creek is a bit different, right? We probably have higher incomes and then there’s the whole supply and demand equation that might skew things for the Bay Area in general and Walnut Creek homes in particular.

So, I dug up some information at that shows that the bubble has clearly been felt in Walnut Creek.

Walnut Creek Median Home and Income

So, let’s do the math. In 2000 the ratio was $391,200/$63,238 or 6.2. This is clearly more than the national average and shows the premium that we pay for living in such a great area.

However, let’s to the math for 2005. $862,200/$69,000 or 12.5! That’s double the ratio from just five years prior and I doubt highly that the numbers have changed for the better in 2006 or 2007. To put it another way, income rose 9% over the 5 year period while home values rose 120%!

I ask you, does this sound logical? Does this sound sustainable? Walnut Creek Housing Bubble? Oh yes.