What do these diverse words have in common? Nothing actually. Well, almost nothing…
Bubbleheads - They are forever espousing that we have entered the Nuclear Winter of the real estate market. “Don’t buy! Don’t buy!” is their mantra. The San Diego Bubbleheads predict as much as a 30% drop in sale prices and ten years until the market is stabilized. I think their bubble is getting a bit fogged from all of the hot air and they can no longer see clearly. Sorry to burst their bubble (pun intended) but as someone I know used to say, “it ain’t gonna happen”, at least not nearly to the extent they may think. Kris and I and other San Diego real estate agents saw the market shifting to the downside as early as July, 2005. It had not yet shown up in the stats, but the sentiment was clear as day and our instincts were put on alert. Both buyers and sellers were getting jittery, very jittery. As agents, we don’t have the luxury of living in a bubble. We literally see, hear and experience the sentiments of the buyers and sellers who are ”The Market” every day. And, after 15 months of living with the Bubbleheads, I can tell you that we are sensing a shift in the winds. A subtle shift, but a shift nonetheless. We see too many buyers wanting and waiting for the right value. Already, in many cases that point has been reached, and they have happily moved ahead with their purchase. It’s going to start showing up in the stats soon. Not in a big way (it never does), but in the same way we noticed 15 months ago. Subtly.
Prognosticators - The problem here is multifaceted. Everyone has a prediction. Most people who know me know how I feel about economists and forecasting (the perfect job because you’re never wrong, the assumptions just changed). The problem here is that the big headline numbers (sales and sale prices) are always trailing indicators. Although “pending” indices are helpful, they are not as reliable. Companies providing real estate information and trends like DataQuick are pretty much confined to the “objective past”. We (the agents), on the other hand are dealing in real time and get a large dose of the “subjective present” . Advantage agents! Why? Because buyer sentiment is an extremely valuable leading indicator that stats companies don’t/can’t measure. The monthly University of Michigan Consumer Sentiment Survey just doesn’t reach into real estate or local real estate markets.
Shrinkage - No, not the shrinkage made famous by the Seinfeld episode, but shrinkage as in Inventory. For example, in my little part of the world in San Diego (Scripps Ranch), the inventory of detached homes for sale has been steadily dropping for three months from a high of 158 in July to the current 114 today (11/7). Now here is a stat for our Bubbleheads - a 28% drop in inventory in the three months. Blasphemy! Yes, a portion of this shrinkage may be attributed to listings that expired or cancelled, but many/most of those sellers were discretionary - “I’m only selling if I can get my price”. Most of these have just about disappeared now. And yes, it is still a buyer’s market, but as we have predicted on many occasions, more and more homes are now priced correctly for TODAY’S market and are starting to sell. Also interesting are the year-to-date sales/sale price stats from SANDICOR for 92131 (Yikes! I’ve become one of THEM, an economist!”). Although total sales are down 30%, the average sale price (per square foot) is actually up 1.8%. Take that, Bubbleheads!!
Note to DataQuick - Please start using sale prices expressed as “per square foot” instead of the median sale price. It provides a much more accurate picture of the market.
The moral of this story is that trying to anticipate the future market and precisely when may be the perfect time to buy or sell is a losing proposition. We, as agents, do have an advantage over all those who are writing the doom and gloom newspaper articles and preparing economic forecasts with only the objective historical data (think Zillow). Our advantage is embodied in the instincts we derive from the everyday “in the trenches” experiences we have simply by listening to buyers and sellers. It might be a mistake to ignore the benefits of these experiences.
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Jeff Brown
11.09.06 at 9:57 am
Steve - First, great post.
San Diego is now the fourth region to produce this picture. The other regions are located in Arizona, Virginia, and Idaho. I think your instincts are in sinc.
As far as Zillow goes, I wrote a post on them this week. I’m assuming we don’t disagree.
http://bawldguy.wordpress.com/2006/11/08/zillow-is-the-pong-of-real-estate-valuation/
Athol Kay
11.09.06 at 7:56 pm
I’m just tired of the bubblers. They have no alternate course of action suggestted except… I dunno hoard canned goods or something.
My area in Connecticut never really zoomed up in value, and basically just has hit a flat spot in price thats thrown sellers off a bit. I expect things to pick up as sellers either repostion their price back down to what they would have gotten in 2004/5, or decide not to sell.
Good post.
Jack Tong
11.12.06 at 1:40 am
for san diego county inventory. in 2005, the fall-winter inventory drop starting in september was 12%. in 2006, the fall-winter inventory drop so far has also been 12%.
in all likelihood this winter’s seasonal inventory drop will be much more than last year because this year’s “testing the market” crowd was also much more. “testing the market” crowd do not like to keep “testing the market” during the holiday season.
it took 5-6 years to reach record high inventory during the last downturn. it took 2 years to do so for this cycle. a lot of the listings were a direct response to the record high prices too. the problem is when the “testing the market” crowd leaves for good and is replaced by steady increasing amount of “need to sell” folks, that new inventory peak will be a true peak that will not so easily melt away during the wintertime.
true buyers don’t like to wait, and many will jump and catch the falling knife. to wait requires a lot of discipline and a lot of homework to study the numbers and the trend. one thing that will start coming out is just how much mortgage fraud is truly out there. mortgage fraud created artificial demand, and thus artificial price increases. these mortgage fraud will turn into foreclosures, and turn into “need to sell” inventory that will replace the departing “market testers.” the news regarding the true prevalence of mortgage fraud will also further damage buyer psychology.
I’m expecting a lot of quietness until the end of the year. I’m looking at 19,000 homes by the end of the year for SD, still 5000 higher than same time last year. the key to which way the market will turn will be how inventory behaves after 1/1/2007.
sdcellar
11.15.06 at 2:43 pm
Many other zip codes in San Diego (as I’m sure you know) tell a different story using average price per square foot metric. While I agree that it’s a better metric than median sales price, it does suffer notable limitations based on exact properties. Specifically, it does not capture lot size and other location related premiums.
To test the theory out, I went ahead and looked at each individual sale in 92131 for the month of October and found that, indeed, a suprising number of those properties were better than average locations. Specifically, half were on cul-de-sacs, and about 5 more were on either large lots, end lots, or view lots. As one might expect, the better lots fetched more per square foot. I know these numbers are small (5, for example), but when there were only 15 or 16 sales (hard for the layman to tell), that’s the best I can do.
I wouldn’t think this would be the typical mix of homes normally, but I’m also not surprised as one would think that in this market, the premium properties would tend to move first (and most).
Steve Berg
11.15.06 at 3:12 pm
Ageed sdcellar! If I had not been so lazy, I would have taken it to the next logical metric and broken out my per sq. ft. #’s by home size (i.e., 1,000-2,000 sq.ft., 2,000-3,000 sq. ft., etc.). Beyond that we get into Anti-Zillow land - location, views and upgrades, which, I agree are important. I just wanted to take it one important step beyond the DataQuick’s of this world to demonstrate that these widely published numbers should not be taken to the bank. It selfishly also reinforces why I have a job, a job that’s getting fairly busy right now, BTW.
Jim Lundberg
07.20.08 at 5:06 pm
Seems to me that the “Bubbleheads” were correct. And the dropping continues. Remember that if you start with 100,000 and go 50% up, going back down to 100,000 is only a 33% drop!!!! Also the deflation of the value of the dollar means that homes are selling for LESS than we started with when this Federal Reserve Chairman took the reins. So NOW they say they should control the loans more…..
Steve Berg
07.20.08 at 7:40 pm
Jim: I can only say that you’re correct. The magnitude of adjustment was and is greater than many (not all) expected. The magnitude of mortgage problems that were revealed in August, ‘07 was the 2nd shoe to drop. Living and working through the preceeding years that led up to last August, I remember wondering how so much money was being pushed out the doors of lenders and the many conversations Kris and I had, thinking “this is too easy.” Well, it was and now the price is being paid big time by many people. This period is becoming a case study that will/should be in every college business school in the country of how not to run a financial/mortgage-backed securities system. It’s not over and it continues to unfold as we speak…