Home Prices Have Stopped Falling: The Statistics Are Skewed
This excerpt from a response to the Sacramento Bee real estate blog gives me doubts concerning the “accuracy” of the median price data of the current crop of existing home sales. If you are a regular reader here you know I have been tracking the Sacramento area real estate market for several months. If not, use my real estate category for background.
The Sacramento market has been surging in home sales for the last 4 months with year-over-year and month-over-month gains for each of those months. The sales gains have been on the back of bank owned properties, making up to close to 70% of the existing home sales. During this same time frame the median sales price has continued lower at 4% to 5% per month and now sits about 30% lower than a year earlier. The opinion stated below leads me to believe the “real” price decrease is much less than the published data.
I am purchasing bank repos, adding up to $20,000 in repairs and selling the homes for a 10-20% gain in just a few months.
With all the bank repos on the market it is lowering the “average” sales price. If you have a nice home with all new appliances, granite countertops and new carpet, paint, interior doors, garage door, updated windows, central heat and ac then it will sell 40% above a similar bank owned property. People need to realize the bank owned properties are rarely livable and need much work, you can't compare that to your own home. I have data to prove it.
Mike Roth
Realtor, General Contractor
El Dorado Hills
My reasoning on true values goes something like this: Repo sales have gone from almost nothing to 2/3 of the market. If the value of a cared for home is 40% higher than a comparable bank sale then most of the median price decrease (.40 x .66 = 25%) is due to the increasing numbers of foreclosures being sold. Add the fact that there is almost no activity in the jumbo mortgage price range to pull the median up and I believe that an owner occupied home with everything current and cared for is probably worth the same amount it was a year ago.
If my rough analysis is correct, home prices have bottomed and there is definitely money to be made in purchasing and rehabbing foreclosures. Existing homeowners should sit tight and wait for the bank owned property to work its way through the system.
The further good news this week is that year over year sales increased in both Southern California and the San Francisco Bay area in July for the first time since 2005 give further evidence that the California real estate market is at or near the bottom. Another plus (unless you are a home-builder) is that California home-builders will build the lowest number of new homes in 2008 and 2009 in 50 years, further moving the supply/demand equation in the favor of ownership. SF link here.
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This article has 24 comments:
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jgoodguy
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1 Comment
Aug 21 02:41 PMKeep in mind that comps will reflect the foreclosures and drag the price down. Not to say the investors will ability will prosper, but will most of the investors? Or if a bunch of RE investors rush in to bid up the desirable properties.
Also keep in mind that a bottom don't mean an upslope, just that a bottom has arrived.
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Matt Blackman
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175 Comments
My Website
Aug 21 03:21 PMAs you can see from Chart 2 at
tradesystemguru.com/co... median existing home prices increased from January through June 2007 but those who used this rise as an excuse to buy were deceived. The rise was not supported by the S&P Case-Shiller home price index that has continued to show paired home prices falling (see tradesystemguru.com/co... ). In fact, the rate of decline has continued to accelerate.
It is important to remember that the average real estate cycle is 18.5 years long with drops lasting at least 1/3 the number of years that it took for the increase. It is also important to realize that every bear market is punctuated by violent bear market rallies that tempt investors to say the worst is over. Just look at the Japanese Nikkei225 that experienced at least three strong bear market rallies in which the index gained more than 50% only to drop each time to a lower low.
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westwest888
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32 Comments
Aug 21 03:34 PMThe "green zone" for house prices is a maximum of 3x income or 120x rent. By either measure in any top 20 US city, we'd still need to fall another 50% to be in the green zone. But that's not the bottom, that's just the MAXIMUM affordable, sustainable home price. The bottom in some cases is 1/4 current asking prices. As for REO inventory, you'd better hope private equity approaches these banks and buys 50,000 houses from them in bulk with financing. Like $0.50 on the dollar, $0.10 down, 80% financed. A call option. LOL.
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HARM
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130 Comments
My Website
Aug 21 03:34 PMbp0.blogger.com/_pMscx...
www.housingwire.com/wp...
But, hey, if Tim wants to be a falling knife catcher, more power to him! Knife catchers are my friends, since they set the new comps... all the way to the bottom.
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westwest888
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32 Comments
Aug 21 03:39 PMHome price year 0 = $400,000.
Home price year 5 = $400,000.
How much did the home appreciate?
Answer: It depreciated 26%. There was inflation.
In a more likely scenario it depreciates AND gets eaten by inflation. Hello 50% off.
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TheRealBull
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22 Comments
Aug 21 03:46 PMPerhaps there are small pockets in the US that has found housing stability, but I would say the majority of the market is still in free fall. Let's test the logic behind home prices bottoming.
1. The economy has recovered and all's well?
Nope, in fact it's getting worse.
2. Inflation is in check and discretionary income is rising?
Nope, inflation is heading in only one direction - to the sky - while median incomes are falling or remaining flat.
3. There is a lack of supply of houses to meet a surging demand?
Nope, the housing bubble over built the market and in some areas you have years of inventory.
4. Home foreclosures are in decline and home prices have stabilized.
Nope, the amount of home foreclosures are continuing to rise along with home inventory.
5. The price of oil has come down enough to make over built areas, such as the central valley attractive to long distant Bay Area commuters?
Nope, and I would consider this the death nail in the central valley and a lot of Southern California's housing market. As oil continues to move northward with no end in sight, that massive overbuilt inventory created for all those long distant commuters who could not afford to buy a house where they worked is going to make that market unattractive for years to come. In addition, the suburban hell we created in many parts of California is too spread out, not well supported with nearby local markets, and is going to look like the biggest waste of money around when people realize they can't afford the gas to drive several miles to the store to buy extremely high priced food while maintaining a McMansion that has an energy bill going parabolic.
It is in my belief that the only way this housing market is going to recover is when inflation makes the materials of the house more valuable than the dollar.
That day is coming soon, but is not for another year or two. Until then there is no bottom in this housing market.
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bds231
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31 Comments
Aug 21 04:01 PM1) Assumption: Mike Roth's data is accurate. We have no idea who this guy is, where he's getting his data from, what the geographical distribution of the data is, how large a sample he's using.... We don't even have the data itself! Hey Tim, I just sold my house for a 500% profit! I guess there's a new housing bubble... yay!
2) Logic Gap: Roth implies that adding "all new appliances, granite countertops and new carpet, paint, interior doors, garage door, updated windows, central heat and ac" will add $10k - 20k to a house. I don't believe it - show me the data.
2.5) Logic Gap: Mike Roth states that the difference between a bank owned house and a "nice home" is, again, "all new appliances, granite countertops and new carpet, paint, interior doors, garage door, updated windows, central heat and ac." I don't know exactly how much that's worth, but it's clearly worth something. So it does not follow to imply (as the author does) that a home is worth 40% less simply because it's bank owned -- the home is worth less primarily because it's not as nice a home! I would not be surprised if there's some additional "penalty" to the value because the bank wants to unload it quickly and is willing to lower the price to do so, but that penalty is less than 40%.
3) Logic Gap: The reduction of the average caused by the sale of bank-owned houses is very much a real reduction that affects anyone who is going to sell. If my neighbor's house was sold by the bank for 60% the cost of my house, my house is worth less. Maybe not 40% less, if it had nicer appliances, fixtures, etc., but still less. If I then sell my house WITHOUT foreclosing on it, then the houses of my other neighbors are worth less, this time depressed by a non-bank owned sale. And the cycle continues.
4) Assumption: As astutely pointed out above by westwest888, this analysis assumes 0% inflation.
I'm sure there's many more, but I'm tired of this article.
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ubocruss
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2 Comments
Aug 21 05:39 PM-
Jshmoe
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1 Comment
My Website
Aug 21 06:10 PMpoint blank = Forclosure or Short sale
Solution Increase Income ! Opps forgot , I got laid off two months ago
Option one Pack up and Leave
Option Two Stay until Law Enforcement Pack me up and then Leave
Option 3 Drain my Bank account until I have 0 money
Option 4 Die
add Inflation to all this and I will still owe money even if I was Dead , Now thats what I spent the last 40 something years Planning
all because some people figured a way to convince people the american Dream of owning a home was back in the 50s' , Its All Changed to where the Have and the Have not's removed the last lock on middleclass wealth and separated the rich from the Poor , At Least thats what the new world order has been trying to do for the past 100 years is get rid of the pesky Middle class
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Sippn
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5 Comments
Aug 21 06:43 PMInvestors paid dearly for anything they could get their hands on. Lenders threw money at tract homes using computer models to establish values, no matter whether there was a golf course or crack house next door - the computer valuation services couldn't distinguish.
Now the crap is getting flushed while lenders are almost completely refusing to lend above $417K, killing sales on the high end. RE is not a liquid asset that can be traded like the stock market, but if you get in a hurry, you have to discount.
Case Shiller relies heavily on income ratios to make their charts work - beware. There is talk that their charts are heavily skewed towards volatile markets - hmmm. Manipulation? Follow the money.
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User 247556
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2 Comments
Aug 21 06:52 PM-
Basic Finance
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14 Comments
My Website
Aug 22 01:32 AM-
tcornelison
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90 Comments
Aug 22 08:59 AM-
spectrum
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2 Comments
Aug 22 09:06 AMcondos/homes and are making them difficult to buy- so many
brokers are no long showing them.
First of all they often use brokers who are not on the scene- ie in
another town- these brokers have many units and often don't
pay attention to calls for showings.
Then the "stupid"bank... make their paperwork vague and
difficult. One client of mine had $20 k in escrow for three months
only to have his contract (which was for the fulll listing price)-
rejected- the bank tried to raise the price $20k after he had waited for
them to close for three months- (Countrywide.)
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nobull
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25 Comments
Aug 22 09:14 AMBest case scenario is prices will stagnate for another 4-5years until inflation slowly works its way and makes them attractive again.
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neeb??
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97 Comments
Aug 22 09:25 AM-
Dr. Jackpot
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22 Comments
Aug 22 10:33 AM-
ArnoldCountry
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64 Comments
Aug 22 10:57 AM-
Octogenarian
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23 Comments
Aug 22 11:08 AM-
neeb??
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97 Comments
Aug 22 11:25 AMThis brings up the question of who these buyers might be. I suspect people who watched those spec homes go through the roof only to come back to near earth orbit....
People who could have actually SAVED their money for a REAL downpayment and (could we say HONEST) mortgages?
And if this be so... ...in the paraphrase I remember from a certain writer......'...and yet they live....'
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ReEconomist
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17 Comments
My Website
Aug 22 01:00 PMLand values in bubble areas have come down 30-80% from 2005 levels. Meanwhile, construction costs have come down 15% . In high cost areas, land comprises as much as 60% of the cost of a house.
Builder today, can buy land, build houses, and sell the to consumers at prices 30% -50% below 2006 prices.
Specifically, in Sacramento area Pulte and Centex recently unloaded a huge chuck of land for homes. They sold it at a 80% off their purchase price. This works out building lot prices in 2008 at $32,000.
Add a 35% profit margin when the investors sell the land to a builder and you have building lot for $43,000. The estimated 2008 materials and building costs for Track quality home in this zip-code is $94 a square foot with $48 per square foot for the garage.
Total housing costs: $43,000 land+ $167,904 structure = $210,904.
For a new 1616 square foot home with two-car garage. Is this indicate a bottom? Check out the Home Price Replacement Cost Fundamental here.
ushousingmeltdown.org/...
You can type in four quality levels of construction including Basic, Track, Custom and McMansion and get the 2008 construction costs per square foot. Add this to recent land sales and you will have an idea of new supply price scenarios in the pipeline. For the story on
the Pulte and Centex land sale find the article in Land Price Reality Check.
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Tim Plaehn
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185 Comments
My Website
Aug 22 01:31 PMMy analysis above was not meant to be rigorous, I just read the quote and thought it would make an interesting discussion. Today Gov. Terminator just added Sacramento to the list of areas where 1st time buyers can qualify for low rate financing on repo property. The state has $200 million in the pool and it will go fast to suck up another 1000 bank owned homes.
For those who haven't visited my blog (shame on you) the Sacramento market has had YoY sales increases for 4 straight months and repos are being sold 3 times faster than new foreclosures. I believe the market will be in pretty good shape in another 6-12 months and those buying now will be happy they did.
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jegan ;-)
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760 Comments
Aug 22 02:22 PMI own a rental near Florin and I-5 in Sacto.... I also own a home up in Grass Valley. Although the comment is interesting I'd like to point out that my Sacto rental is in a typical tract area. It would have sold for $230 last year. It might sell for $140 now. It is in good condition with a new roof, paint, interior, insulation and windows... Many banks are now 'spiffing up' their repos with a quick paint job and sometimes an overlay roof etc. But, I am still competing against lower priced repos as well as lenders who have the wherewithal to finance their sales. Schwatrzenneger's activities may help the banks, but it only makes it more difficult to sell my property.
As far as regular homeowners are concerned, we have more down side in Sacto. Your sales figures are skewed with repo numbers.
jegan ;-)
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Steve Dorenta
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5 Comments
My Website
Jan 02 01:43 AM