Pollyanna Returns
Many of you who read this blog already know that Kris likes to irritate me by accusing me from time to time of being too nice or giving the benefit of the doubt to people who may not deserve it. She calls me Pollyanna, which really means, “Steve, get a grip!” But I am really having a Pollyanna moment right now. Actually, it’s lasted for the past 24 hours ( A Pollyanna Day?). It started yesterday at sunset. I was sitting in my backyard and due to the Santa Ana conditions we are having the sky was crystal clear, and the view was all the way to the coast. The water was shimmering in the late afternoon sun. Now, to fully appreciate this day, you would need to know that I do not live at the beach. In fact, I’m about 15 miles away. THAT’S how clear it was. I could stand up and see the hills of Tijuana. Yes, that would be Mexico, 40 miles away. But here is the clincher. It’s December 2 and the temperature was 74 degrees at 4:00 pm. Do I say this to brag while most of the rest of the country has just suffered through it’s first winter storm of the season? Am I just reveling in the Chargers victory today in Buffalo, where the temperature at the start of the game was 34 degrees and dropping as the snow started to fall? No and No! It’s because I feel blessed, and yes, it’s also because of the Bubbleheads.
It is hard to place a value on the fact that the temperature today, December 3rd (like yesterday and the day before) is 74 degrees and that it is forecast to be sunny, clear and 74 degrees for the next five days. This is where the Bubbleheads lose it. Real Estate, like all markets has shifts. It has been so long since we have had a downward shift in values that some people (i.e., Bubbleheads) think it’s Armageddon. What about the oil market? It was $78 per barrel just 2 months ago, then it went to $57, then rebounded up to $63. Did the oil market bubble burst? No way. Has the demand for oil dried up? Of course not. Did it get too pricey for the market? You bet. And so did the cost of a home in San Diego. This is called “volatility”.
What is hard for the Bubbleheads to understand is that San Diego has the best year round climate of any major city in the world. It’s a tangilble, intangible, if you will, that people will always pay a premium for. It’s also why there will always be a demand for homes here. Now, it’s 4:30 pm, so I gotta go outside and check out another fabulous San Diego December sunset. Priceless!
December 3rd, 2006 at 5:55 pm
Steve - Doin’ the same thing from the East County.
December 3rd, 2006 at 6:21 pm
Jeff: All I can say is, “Enjoy!”.
December 3rd, 2006 at 6:28 pm
Well crap. I’ve been swashbuckling in the comments on Housing Panic half the day, and finally pull myself out and read this!
Talk about working smart and not hard. Well played sir, well played.
December 4th, 2006 at 10:56 am
Huh? You’ve got any examples of bubbleheads denying that San Diego has one of the best climates on the planet? Do you even have an example of a bubblehead who doesn’t think that the weather deserves a premium? Without an example what you have done is called building a strawman.
At least you have a little more basis for your subsequent claim of demand. Yes, there will always be demand for housing. There’s still demand for housing in Buffalo, NY. I myself have seen instances of bubblebelievers making the spurious claim that demand will go to zero. Clearly hyperbole not a mathematical prognisitigation. That said, the more common claim is that the demand seen the last few years is far more than is sustainable. You do a diservice to the discussion by treating the issue as if it is nothing more than a personality defect of people with whom you disagree.
December 4th, 2006 at 1:21 pm
Robert: My comments were admittedly on the Pollyanna’ish side as proclaimed in the title. Too much time in the intense sunshine, I suppose. The recent weather in SD (while always a threat for brushfires) has simply been a reminder of why we live here and others wish to. This is a demand dynamic that is not shared with many other major cities in the world and is difficult to quantify. The Bubbler’s overplay their hand when they constantly try to claim that the “end is near”. The reality is that the statistics just do not bear out the Bubbler’s case. When you have had such an admittedly unprecented run up in prices over the past eight years (over 100%, cumulatively), a 10% or even a 15% correction is simply not a bubble bursting and for the record, we have not yet seen even a 10% adjustment. Far less actually.
For your convenience I have checked and updated year-to-date (11 months) average sale prices (per sq. ft.) in one of our main markets in SD (92131) versus the same period last year. The result: a whopping -3.1%. This is particularly interesting when measured against the 30% reduction in sales. It illustrates an amazing inelasticity of pricing in the face of severely reduced demand. Of course the demand over the last two years constitued a feeding frenzy and, of course it was/is not sustainable, nor should it be.
It’s the Bubblers lack of hard stat’s backing up their claim(s) that gets people’s attention. That’s a defect in mentality, not personality.
December 4th, 2006 at 1:51 pm
the weather in San Diego sure is nice. In fact, in the last 5 years it got roughly about 100% nicer, for what ever the reason. So a home that was $250,000 in 2001 is now $500,000, and a home that was $500,000 is now $1 million. Because the weather got 100% nicer, there have also been a 100% increase in population over the last 5 years. And because of the strong economy here in SD, everyone got a 100% raise over the last 5 years.
these are facts and hard data and stats that bubbleheaders just do not have.
December 4th, 2006 at 1:58 pm
oh, btw, while the weather in SD improved by 100% over the last 5 years, the weather in Compton really got better, by about 300%. That would explain why a home that was $150,000 in 2001 is now half a mil in beautiful Compton.
December 4th, 2006 at 2:27 pm
Welcome back, Jack. We missed you! I can tell you’re feeling better as prices here continue to moderate and get closer to your target purchase price. I don’t know about Compton, but I can reasonably assure you that prices in SD will not be retreating to 5 years ago anytime soon. Thankfully, an added benefit is that interest rates continue to behave extremely well at the moment. So, when are you going to let me (or Kris) help you find your dream home?
December 4th, 2006 at 2:56 pm
thank you steve. recently there seem to be a 15% worsening in the weather here in SD compared to last year, specific to areas where there’s a lot of new home construction. as the foreclosure rate continues to increase, I foresee the weather getting a bit worse especially in the next year.
incidentally, I noticed you and kris sold a detached condo in 4S ranch for $560,000 in 8/2006. there are now homes of the same model asking for $490,000. I do believe that’s a 8.75% price drop in 3 months. I did notice the weather got about 8.75% cooler in the last 3 months though.
December 4th, 2006 at 3:02 pm
The home we sold in 4S Ranch had nothing to do with the weather. The seller just had superior agents.
December 4th, 2006 at 3:22 pm
December 4th, 2006 at 4:11 pm
Okay. Now that we we have the mea culpa and the weather premium is universally acknowledged and clearly no discussion of sales going to zero is either possible or useful, what’s left? Seems we have the people that last year were saying real estate never goes down versus those that said real estate was poised to go down. To date we’ve got everyone admitting to down and the discussion has shifted to one of leveling out versus more down. Hardly a tough call going forward.
December 4th, 2006 at 4:42 pm
Steve,
Same stats in North County - Prices are only down 3.3% in my market place of Carlsbad, Oceanside, and North Vista.
But we have unrealized losses starting to pile up - look at sellers whose list price is well below recent sales but haven’t sold yet, that is a troubling fact.
Yes it’s true, if sellers don’t have to sell, they don’t have to lose, but how many sellers really NEED to sell? I’m guessing it’s a lot more than we know.
The next sign we’ll see to indicate the level of motivation/panic in sellers is how many new listings come on in January. Here’s how SD County did the last three years:
Jan. 2004 2,630 new listings
Jan. 2005 2,931 new listings
Jan. 2006 4,574 new listings
I’m guessing we’ll see 6,000 in Jan. 2007, and if we do, the panic is on, because sales will come to a screaming halt. I say that because I’ve been tracking it on my blog the last 14 months, and every time there is a surge of new listings, the pendings slow down. Buyers get spooked by the excess supply.
We could be in for a long cold winter.
Like your blog though.
December 4th, 2006 at 5:37 pm
Following up. The data indicate a -0.92 correlation twixt inventory and sales. If Mr. Klinge is correct than sales will indeed go as close to “zero” as to make the difference not worth arguing over.
Prices in the sister area of Ventura County are down 3.1% as well. A couple points does not make a trend but this many breaks in trend do make an inflection point.
December 4th, 2006 at 7:57 pm
Jim and Robert: I’ll try to respond the best I can somewhat “globally” to both of you. Yes, the downtrend continues, but maybe at a slower pace, at least at the moment. Is this just the usual seasonal thing? It remains to be seen. Another concern for me is what does not show up in the stat’s - Concession’s. It actually might account for another 1% drift. That, together with the usual inventory spike in January could make things interesting. The big question is how much inventory build will we see through March or April, the traditional upswing in listings ahead of the summer season. We could very well confirm the inflection point that Robert refers to. If that’s the case (and I think it is), ‘07 will, indeed, be another challenging year. My friend Jack will definitely feel vindicated.
December 4th, 2006 at 9:12 pm
I wonder if the folks on Crystal Oaks who bought their house in late 2004 for $1.56M feel prices are only down 3.3% after watching it sell for $1.35M this month.
December 5th, 2006 at 7:26 am
Agreed! But one home does not make a community-wide average. Over the past few months we have seen several examples of a 15-20% loss of value, almost exclusively in some of the higher end homes sales. We also saw a home that should have sold for $925k-$950k sell for $1 mil. (IMHO). Very strange market, indeed. But there are examples of a 10% hit in the mid-range segment, as well. At this point in time it has not yet filtered to the majority of home sales. We shall see.
December 5th, 2006 at 7:32 am
Sleepless,
I am very familiar with the home you cite, as it is located two blocks from mine. (For the record, mine is in a slightly different price range). As a point of clarification, I believe what the “boys” are talking about here is year-to-date price change (January through November). Looking back to November, 2004 is a much different story. The Crystal Oaks home sold for $1,513,000 in late 2004 and sold again this past month for $1,350,000, a decrease of about 9 to 10 percent. By comparison, the average sale price per square foot in Scripps Ranch in November, 2004 (according to the Sandicor Multiple Listing Service) was $334, versus $304/sf in November of this year. This, again, is about a 10% slide. A bitter pill if you were the guy who bought it in 2004, but not unlike the market as a whole for that same period.
December 5th, 2006 at 7:35 am
Sleepless - Looks like Steve and I were doing the simultaneous-comment thing. Guess we should talk more.
December 7th, 2006 at 5:19 pm
Steve, we all know your admitted figure of -3.1% is understated due to seller concessions and incentives, but more importantly, when you add Real Inflation, which may be as much as 5.5%, you end up with an 8-10% decline in prices. A typical bust, or correction if you prefer, cycle will last an average of 6 years. The curve is smooth like a roller-coaster compared to a jagged stock market curve. Because of the smooth curve, the rate of change is less at the beginning and the end and is steepest in the middle. So, if we are in the 1st year of a corrective cycle, expect the rate of devaluation to increase.
The last bust saw a 40% drop in some places, certainly a minimum of 20% in nominal terms. Over 6 years, yeah, 3% seems about right. But again, this is only the 1st year of declines. Expect these to be the most painless.
If your point is that it has hurt that bad (yet) …. I suppose I am in full agreement.
December 7th, 2006 at 6:46 pm
You guys are progressive realtors - I think you’d agree that we, as agents, have a duty to answer some specific questions that our clients can rely on for guidance.
I’ll answer these on my blog, and I’ll encourage you and other realtors to answer on theirs so we can collectively get the good word out:
1. What are the most accurate indicators to watch to follow the market?
2. What is the best way to measure appreciation/depreciation?
3. Shouldn’t I wait to buy - aren’t prices going down?
4. Shouldn’t I wait to sell - won’t it get better in spring/summer?
5. How do I find a good agent that is worth their commission?
That’s a start, if you have any others, let me know!
Jim the Realtor
December 7th, 2006 at 9:29 pm
InfidelSix: Thanks for your comments. I certainly hope you’re wrong about this being a six year cycle, especially one like the early ’90’s. Maybe I can give you something to soften the blow. First, for whatever reason, the monthly CPI does not include or reflect real estate sales. If it did, obviously at this point in time inflation would appear much tamer. Second, the local economics were much different from 1990-1996. Remember, we were in a major recession at that time. General Dynamics and most of their sub-contractors pretty much evaporated in a twenty-four month period. The result was over 100,000 jobs lost in San Diego in a relatively short period. Brutal! Today, while the local economy is not blowing the doors off from an employment standpoint, we are relatively stable. A very different environment than the early ’90’s. Oh, and BTW, interest rates were about 10% then, for the record. Conversely, today, we have a low interest rate environment and a decent economy. I think the biggest problem for real estate in San Diego today is that there was “irrational exuberance” (to borrow an expression from Allan Greenspan) over the past couple of years. Sale prices for homes simply got too high and unaffordable. So, now prices are coming down to a point where equilibrium (i.e., sanity) will prevail again. How much of an adjustment that is and how long it will take is the BIG question. But as long as interest rates stay attractive and the local economy sustains itself at a reasonable level I really don’t think we are in for the same cycle that we suffered through during the early ’90’s. But then again, I guess that may be why Kris calls me Pollyanna.
Jim: Since it’s getting late (at least for me) and I’m tired, I’m going to “cop a plea” and take a pass on your survey until the morning when I am a bit more fresh. For the record, I think all of your questions are excellent and very relevant to the people we are supposed to be serving. Thanks.
December 8th, 2006 at 10:55 am
You’re welcome Steve. I’m always interested in intelligent commentary and debate. On you’re point regarding the unique situation in the early 90’s, I like to strip away the impetus (decreased military spending>loss of Aerospace contract, etc) and focus on the resulting market forces of supply and demand. Really, it can all be boiled down to the question of “How does this affect Supply and Demand?” In the early 90’s then, it increased the Supply (people selling and moving away) and lessened the demand. Kind of a double whammy.
Well, we are effectually seeing the exact same thing today as the large speculator pool are all trying to get out, but prices are so high, and affordability so low, that the vast majority of 1st time buyers have been priced out. The real difference (and great unknown) is the speed at which it will happen this time. We know it happened very fast in the early 90’s. It’s impossible to predict for sure, but one factor that has changed the environment is the internet. The information that is available now will certainly only quicken normal corrections.
The real indictment against optomism though is that everything you’ve stated about interest rates, employment/economy is true. All these #’s look ideal and STILL prices are dropping. The question is: What happens when one of the legs of this tripod goes out?
FYI - full disclosure, I’m a 38 yr old married renter. I’m a database programmer and b/w my wife and I, earn 3x the median household income for CA an have no debt. I believe a “normal market” is when an average guy/family can buy an average home. I’m well above average and am nowhere close to being able to buy an “average home” (prolly 750K in Pasadena) I can’t pay over $4k on a house note every month. It’d be a Ramen noodle fest for years!
December 8th, 2006 at 3:25 pm
First, for whatever reason, the monthly CPI does not include or reflect real estate sales. If it did, obviously at this point in time inflation would appear much tamer.
Ummmm, no. Exactly the opposite. THe CPI includes a componet caller OER, Owner Equivalent Rent. -If- the CPI had continueed to track actual housing costs as they did in past decades CPI reported inflation would be several times, that’s several times, higher. “The Big Picture” and Calculated Risk” blog archive provide massive detail on this issue.
December 8th, 2006 at 4:20 pm
Robert: Agreed re: CPI over the decades and housing appreciation. My comment regarding “tamer” inflation was a “relative” term (i.e., relative to the year before and the fact that home prices have adjusted downward in SD). We had been discussing the “relative” short term trends, also comparing them to the recession of the early 90’s and trying to examine the future based upon these trends. Re: the OER, at the moment there is an inverse relationship in San Diego between home prices (adjusting downward) and rents (going higher). Therefore, at least the San Diego component of the OER may be somewhat deceptive by putting an upward bias to the CPI at the same time home prices are coming down.
December 8th, 2006 at 4:53 pm
InfidelSix: It is suppy and demand. But it’s not because San Diego has an oversupply of homes. It’s because we have an oversupply of homes at too high a price. The high prices have squished a good chunk of the demand. We have heard your story a lot lately (see Jack Tong’s comments). Excellent income, no debt, but still facing prices that are too high. There is always something to worry about regarding the timing of a home purchase. That’s why it should not be speculative. It is an investment, but it’s also your primary shelter (physical as well as tax shelter). Let’s hope that all of the legs of the tripod hold up. I’m not sure what else to say here. Many of our buyer clients end up buying something less then their dream home just to be able to begin owning a home. The smart ones are not speculators who buy with the intent of flipping for a profit in a year or two. For whatever it’s worth, Kris and I bought our first home (a very modest one) in Scripps Ranch in 1989 (at age 37 w/no kids/no pets). It, too, was not our dream home. Just about the next day, the market tanked for 6 years. I had hoped to live there for 5 years (now with 2 kids and a dog), then move up to a bigger home. I ended up loving the home and was there for 11 years. After the worst recession in my memory (at least for home prices), I ended up selling it for a (small) profit, plus got back the 11 years worth of principal paydown. It wasn’t the perfect home by a long shot, but it worked and it helped me get into my next home. I’m not sure what else to say…
December 8th, 2006 at 5:04 pm
InfidelSix: One more thing for the record: Notwithstanding my Pollyanna’ish attitude, Kris and I are NOT the type of agents who make the claim that EVERY market is a good one to buy real estate. It depends on each buyer’s indiviual situation and motivation. You have got to want to buy AND you have got to love what your buying. If you feel (as many do) that the timing is just not right, then wait until you are comfortable. We are not yet done with the “flushing” process regarding prices. Hopefully, the gap will close to your price target soon.
December 10th, 2006 at 2:24 am
Just reading all your postings and i wanted to share something with you all. This past friday, Dec 8. I took a little ride up to the 4s Ranch. I was offered an eighty-thousand “bump” on a 3B/2Bath 1600 detached that was listed at $610K…my wife and I took our %20 downpayment, our preapproved loan from USAA for 550,000 and drove back to our $760.00 a month 2 bedroom apartment on Mississippi street in North Park . Last I counted on my street alone, just the stretch between University and Upas near Morley Field…there are 6 homes for Sale, 3 that used to be for sale, now for rent, and one that has a Bank owned sign on it…you can talk about percentages and statistics all you want…what potential home buyers are seeing right now is the Real Estate Industry doing everything in it’s power not to drop the price of homes…eventually, when all these little “incentives” don’t attract buyers…what next? I actually had a representative 4S stable suggest that I should “jump on this 80K incentive before this weekend, because monday, it’ll be renegotiated down to $40k” I could hardly compose myself, she was suggesting that I see a property on friday, and hand her 530,000 on Saturday? “lock it in at 80K”. This is what “potential” buyers are seeing from the Industry right now, desperation. If I have Anthony Napoli send me one more piece of mail I’m seriously going to raise hell, because I know he got my name and address from Our Lady of the Rosary Church in Little Italy…that shitbird.
December 10th, 2006 at 9:00 am
Chunky,
Yes, there is unfortunately some desperation out there among agents. I would suggest that these are not the top-rung agents, as the more experienced and estabished will continue to survive and even prosper in any market. Regarding the “Industry doing everything in is power” not to drop prices, I would suggest that it is the seller that establishes asking prices. While we certainly advise on pricing, we ultimately take our marching orders from the sellers. There would be NO advantage to an agent to holding the line on high pricing that is artificially or unrealistically high. We do not make the market; we simply market. I wish I could wield this much power.
Regarding the unsolicited mail from a church mailing list, shameful, if that is indeed the case.
December 10th, 2006 at 1:09 pm
Hey Kris, I know this is a blog for real estate agents/brokers so I’m aware of the waters I’m swimming in. I like reading what you guys (and gals) have to say. It’s important to me to learn as much as I can about the market and where it’s going, what other (more imformed) people are saying in confidence. I will tell you this much. My wife has been on my back for 3 years now wanting to buy a house, and not until I drove her up to the 4S ranch did she back off. For her it was being able to actually see what a potential buyer is paying for, and meeting that real estate representative helped a little too. That provided the much needed breath of reality to my wife. So now we’re both on the same frequency. And this is who we are. We’re both 30. Our FICO scores, mine low 700, her 890, our combined income as nurses is about 150K a year. We have too much money in the bank doing nothing for us. We own both our cars, we have no debt. We use our credit cards just to have an active account of credit. Our rent here in North Park is $760.00 for a 2B2B in a nice neighborhood, close to our jobs, close to everything. Why would we jump into the market now? Like a said, I’m a nurse, and I’m pretty tuned in to human emotion, especially disappointment and pain…when I go out and look into the eyes of these home owners or agents trying to sell me property, and not wanting to budge on the price…i see the same look in thier eyes when I tell them “thank you for your time”. We’re waiting. No granite counter top or wood floor is going to get me to budge off my line. And I think that’s what most potential buyers are thinking.
December 11th, 2006 at 8:16 am
Chunky,
First, this is not a blog for just real estate agents/broker. It is commentary from “civilians” like yourself that make things most interesting around here, so you are always welcome.
Second, you have obviously carefully thought through your situation and determined that making a home purchase is not in your best interest at this time. That means that you made the right decision - for you. It sounds like you have positioned yourselves well for the time when it make sense for you. You will never hear Steve or me suggest that home ownership is always the right decision for everyone at every point in time. Many agree with your wait-and-see posture, and there is nothing wrong with that. Many, however, for numerous reasons are seriously shopping and are buying homes in this market. That is what makes the world go round. And you will not see disappointment and pain when you look in my eyes; I am doing just fine, thank you, because pressure selling is not a component of my business model or my nature. It has been days since I have forced a home shopper to make a purchase at gunpoint or body-blocked them in the driveway of a listing to force a contract and pen in their hand. I am just a facilitator. When someone decides buying or selling is right for them in any market, it is my job to help make that happen. Steve held an open house yesterday and had 18 groups through (our best turnout in a long time), most of whom were very seriously looking to buy, for whatever that is worth.
December 13th, 2006 at 9:49 pm
I’m sure people are out there looking, I watch the numbers Kris, that’s all, just the numbers. Like the Central Bank keeping rates the same tueday (phew). I suppose to someone selling property people being out looking would be a good sign, I just want to know how many of those 18 people put down a bid or secured the property with a downpayment? Are we seeing the “bidding wars” of 2003 return? I guess we all have our system, some people I talk to just think this is the normal winter period for the housing market…business as usual. I predict a 7.8% negative correction before the next Fed announcement…which will probably be a .25% rate increase. At which time my wife will promptly remove my nuts.