Some days, I have so many words that I just can’t get them out fast enough. Other days, I’ve got nothin’. This being one of the “other days”, it seemed like a good time to delve into the Scripps Ranch real estate trends.
Summer of 2005 is an event like the first moon landing (or, for our younger audience, the announcement that Wham! would be disbanding) - You always remember where you were and what you were doing that “day”.
To an agent, mid-2005 marked the peak of our most recent real estate boom. With prices and, more importantly, the number of home sales having steadily declined since that historic summer of love, estimating a home’s value in today’s market is becoming increasingly challenging. Sometimes we find that we must resort to the “you paid X and the market has since done Y ” approach. (Math hint: Y is a negative number.)
So, what is “Y”? Yes, I know it is negative, but how negative? Thanks to Altos Research, we know what the sellers are up to. Asking prices are still trending upward which, as I noted recently, is counter-intuitive to our current declining market. However, it is the sold side of the equation that gives us the insight into all-important buyer behavior.
Using data from Sandicor, our San Diego Multiple Listing Service, here are the trend lines for Scripps Ranch, 92131. This information represents third-quarter activity from 2003 through 2007.
Average price per square foot and median sale price, at least in Scripps Ranch, have not declined as dramatically as the media would have us believe. The number of homes sold in our little community is another story. For sellers (and agents, I might add), competition is fierce.
So why aren’t the buyers buying in the same numbers? Interest rates have been fairly stable, recent lending “crisis” aside. In any case, you can’t blame the poor performance in the 3rd quarter of 2006 on strict underwriting policies or tight lending practices. Is it affordability? I don’t think so. Prices have come down slightly, but the buyers who are buying are not paying dramatically less on average for the homes they are purchasing.
The average sale price graph above, showing a slightly sharper dip than the median price graph, tipped me off. Remember, larger homes will typically command a lower price per square foot (as the biggest component of value in our market is the dirt). I think this next chart says a lot.
What buyers want today, always want, is value. Those who are committing to a purchase aren’t necessarily spending less, but they are expecting and getting more for their money. Value.
Perceptions, like markets, are cyclical. Today, everything the consumers hear and everything they read suggests that purchasing a home in this market is about as good an idea as having polka music at, well, anywhere. Demand for housing (unlike polka music) of course will continue to exist; the demand will remain latent however until value is widely perceived.
{ 5 comments… read them below or add one }
Steve Berg
10.16.07 at 7:24 pm
Kris - Being a stat’s kind of guy I actually like these graphs, as opposed to previous attempts that were, how shall I say, not quite as meaningful to me (dibs on the couch tonight). But the most important point you made was the “perception” thing. The psychology of buyers is, to a certain extent, a function of the herd mentality. How many times over the past year have we heard the visitor to the Open House say, “I love the home, but I think I will wait until prices come down some more”? It’s called consumer sentiment resulting in large part from all the media. These are the buyers looking for the bottom and there are many out there, sitting, waiting, really rolling the dice.
That’s okay. Meanwhile more than 8,000 people have purchased homes (detached) in just over the past six months here in San Diego (SANDICOR). Were all of these people shielded from the media? Were they all without education? Of course not. These are people who are generally buying for the right reason with reasonable financial strength and financing scenarios - something that in the recent past was perverted by indiscretions of both speculative buyers and lenders who accomodated them with ludicrous loans. And, yes there were a few agents who accomodated these transactions.
The current cleansing process was overdue and sorely needed. It’s happening very quickly and the benefit generally goes to the buyer right now. But I will bet that few, if any, of those 8,000 buyers over the past 6 months are regretting their decision. Many purchased at well below the peak prices of 2005 and, while it may or may not be the bottom, they will all enjoy the benefits of ownership.
If history is any lesson, and it always is, once the herd decides to come off the sidelines they may as well look in their rearview mirrors to see the bottom, because they will have missed it.
Rational expectations
10.17.07 at 12:22 am
“Average price per square foot and median sale price, at least in Scripps Ranch, have not declined as dramatically as the media would have us believe. The number of homes sold in our little community is another story.”
… uh, yeah… This might be the moment where someone in sales might want to consider cracking the dust jacket on an introductory economics textbook, or just paying attention to the two sentences … AND PUTTING THEM TOGETHER.
Prices clear markets. When realtors fail to explain explain this basic point to sellers, there is no sale, and no commission. Woopsie.
“So why aren’t the buyers buying in the same numbers?”
At 11 times median household income, homes had become just a tiny bit pricey (ya think?). At these prices, homes were only affordable if one was rich (and had modest housing needs), or the pyramid scheme of rising home prices continued indefinately.
“What buyers want today, always want, is value.” Sure, but this is not an explanation for the market downturn, as you claim. A constant does not explain a variable (basic logic). The desire for value also fails to explain the more toward larger houses, which are limited to those who are less dependent on non-traditional financing (or any financing). The reason median price continued to climb in 2006 _was_ because financing. As pricing climbed, lower income buyers could no longer afford to buy, EVEN WITH ESOTERIC FINANCING.
Perceptions may be cyclical, but this is only descriptive, not analytical. The perception spread quickly in 2006 that prices were done rising. That meant for most people that buying an overpriced home in the hopes of cashing was at an end. Buyers will return when they think they can sustain their purchase, either because prices are affordable again (which will take time and cause pain to sellers), or if the pyramid scheme is restarted (not likely, despite attempts by the Fed). So, the best thing for everyone will be to get the pain of falling home values in gear and get the market working again. Realtors who fail to share this brutal reality with their clients are doing no one a favor (that realtors are still clueless is not hard to demonstrate — look at NAR, revising their market estimates downward every month).
Rational expectations
David G from Zillow.com
10.18.07 at 10:26 am
Very interesting analysis, Kris.
These charts beautifully illustrate how problematic it is to use median sales data to learn about home value trends. In a changing market, the types of homes that are selling is constantly changing and so, recent sales data is skewed by this change in the mix of sold homes. In this case, since you’ve seen an increase in the rate of sale of larger homes, the reduction in the relative value of all homes is actually greater than what the median sales analysis suggests. To get a slightly truer reflection, you could recalculate median sales using $/sq.ft.
It explains why the DQ and NAR data seldom agrees with the housing indexes (OFHEO, Case Schiller etc.). The indexes try to compare a constant set of homes and so are a more accurate indicator of value trends. Median sales analysis dampens the impact of changes in the market. That’s why the indexes pick up on trends sooner than the median sales analysis does - and it’s why the index’s also report larger swings in home values.
So, here’s the Zillow plug: Zillow’s Zindex also considers the change in values of all homes, not just those that have sold. Unlike the other housing indexes, however, Zillow publishes Zindex data at the Zip code level and because the Zindex is a median it effectively excludes potentially wacky Zestimates. Personally, I think the Zindex is the unsung hero of the info we publish on Zillow.
Kris Berg
10.18.07 at 11:12 am
David, Thanks for stopping by, and I agree that the Zindex is very enlightening. When your data for the last two quarters was released, I praised your unsung hero here.
Now, what good is a shameless plug if you don’t link? I’ve done it for you here.
Steve Berg
10.18.07 at 7:10 pm
Rational e - Since you are on the other (consumer) side of the market rather than the service provider (agent) side it might seem easy to say “that Realtors are still clueless” (to the drop in prices) and reference NAR’s revised estimates. What you don’t say is that NAR has been projecting the correct direction, just not the magnitude of the current market adjustment. Far be it from me to defend NAR, but you may want to cut them a bit of slack. As a national organization, it’s inherently a very macro look through the window. Locally, our unofficial pricing projections and forecasts have been fairly accurate, although we were a bit off on the # of sales side of the equation. For that, I humbly apologize.
We may also ask where the National Association of Mortgage Brokers has been in the projection department? They were, after all, the organization that had the best chance of understanding the magnitude and details of subprime, ARM and Neg Am loans approved in the face of slowing price appreciation. I don’t have enough fingers to point in all of the directions where things have gone wrong (lenders, agents, NAR, NAMB, buyers, etc., etc.). Everyone has to take responsibility.
We, as agents, are certainly responsible for ensuring that our seller clients have the benefit of the current market data, trends and sales comp’s. I believe that most actually do a decent job of explaining pricing. The part you missed, though, is that the client/seller has the ultimate decision regarding pricing, not the agent and not NAR. One of the toughest parts of an agents job is to properly manage expectations of our clients. Lately, it has been most challenging.