There have been two topics in particular I have seen repeated across the blogs this weeks. One, of course, relates to the wacky goings-on of that two-headed monster, Case-Shiller. The latest results from the index that never sleeps came in, but more on that in a moment.
The really big news on the blogs seemed to be that Google updated its PageRanks (PR). For those of you unfamiliar with Google PageRanks, let me try to explain.
I have absolutely no idea what it means.
But, I am getting the sense that I should, or I should at least care what mine is. Now, the fact that this whole web site ranking system is foreign to me may come as a big surprise. It certainly does to my husband. While the reality is that I am tenaciously trying to remain straddled atop the bell curve of technology, Steve thinks I am a computer science genius. This is because he has seen me perform some amazing feats such as reboot without unplugging the power cord, resize photos without scissors, and, with a simple series of keystrokes, insert the little ® after Realtor®. And Case-Shiller®. Most recently, he even watched in awe as I Googled “how do I find my Google Page Rank” and with great success.
My PR is 5.
Now, a 5 sounds pretty good because, best I can tell, this is on a scale of one to ten, ten being reserved for Google.com. (It is, after all, their system.) That would make our site half as good as Google’s. Well, not really, because it appears they use some fancy logarithmic grading scale, making my 5 a tremor that no one feels as compared to their death and destruction 10, a 10 marking total global domination. And it seems that I am in good company. Google appears to dole out 5’s like Costco doles out free potsticker samples. Sure, Realtor.com boasts a 7. So, too, does standardandpoors.com. But then, they have Case® and Shiller®.
The Standard & Poors/Case-Shiller Home Price Indices®®® use a methodology which is almost as decipherable as Google’s. We tried to shed some light on it here. For our purposes in San Diego, you need only understand that our trend line is still heading south. Without beating the micromarket horse, our metro area as a whole continues to see its index drop in double-digits (down 19.2% for the year). Out of the 20 metro areas surveyed, only Phoenix, Miami and Las Vegas saw bigger drops. Unlike Google PR, however, bigger isn’t better.
Here’s the overall composite trend line:
Did I mention I also know how to stand charts on their heads? I think I like this one better.
It’s a great time to buy!
{ 9 comments… read them below or add one }
Andrew Mattie
05.01.08 at 10:36 am
I absolutely love that last graph and the tagline!! Gave me a good laugh for the day.
I’ve seen a lot of agents use the upside-down graphing method lately. From my experience though, they don’t usually tell me that the graph is flipped upside-down, and they usually remember to flip the text so I can read it.
Great writeup!
Kris Berg
05.01.08 at 10:44 am
Dang! I thought I was original. I guess that’s why Google won’t give me a six.
Steve Berg
05.01.08 at 12:05 pm
Attempts at humor (weak as they are) aside, it’s worth remembering that there are micro-markets out there, Scripps Ranch being one of them. Besides the core Beach areas such as La Jolla, Del Mar, etc., Scripps is holding up as well or better than any inland community. With only 91 active (detached) listings out of more than 8,000 homes, we do not have much inventory. When you take out Stonebridge listings (I still don’t know why this is considered part of Scripps Ranch instead of Poway), we are left only 78 actives. Even at an anemic 20 sales a month, there’s not much inventory to burn.
Jakob
05.01.08 at 12:16 pm
Best post ever! If only all Real Estate Professionals® had this much humor and sense. Send that graph to the NAR, maybe they’ll use it in their next ad campaign.
Sven
05.01.08 at 3:54 pm
Something to note:
Scripps houses are more…expensive than most of the homes in San Diego. The Median sales price in the 92131 area code for all 272 homes sold last year was $750k according to SandiCor. I believe the median price for all of San Diego was around 500k (citation needed). According the Shiller index for just San Diego, from the peak (Nov-05) prices have dropped about 32% for homes priced under $405k, about 26% for homes between $405k and $609k, and only about 17% for homes over $600k. This means that percentage-wise, wealthier homes have experienced a fraction of the price reduction that cheaper homes have.
In other words, the only reason Scripps hasn’t been hit as hard as the rest of San Diego is because houses cost a lot there. Why the higher priced market hasn’t been hit as hard is a subject of much debate. My personal theory is that higher priced homes are usually owned by wealthier people (duh) and wealthier people tend to be more responsible with their money. (or they wouldn’t be wealthy for long) Because of that, they probably didn’t overextended themselves as much, and are less likely to slip into foreclosure. Foreclosures are the main driver of price reductions right now with other sellers being content to let their house collect dust for 200+days waiting for the martians, er I mean buyers to come back.
I think overall, even the top markets will eventually correct at the same percentage scale, it will just take longer. So we’ll eventually see a bottom in the lower priced houses with the high priced houses continuing to show declines.
Price/Rent
05.02.08 at 9:27 pm
(In response to Steve, not Kris)
Why buy when you can rent for cheaper? Until the price-rent ratios come back to some sane/historic level, I’m still not understanding why it makes sense to buy even in the micro-markets that are “holding up.” It seems to me that it makes LESS sense to buy in areas whose values are still “holding up.” Rents will have to rise for quite some time to make buying at these prices attractive.
I imagine that I may be able to answer my own question as to why people will buy nonetheless: the scarcity effect, which I believe is a hard-wired evolutionary phenomenon dating from our hunter-gatherer days. Scarcity effects are what drive bubbles. People want to buy before it’s gone! Oh no! There’s only one condo left in that building! I better buy it, before someone else does! Oh, there are other bidders! Well I’ll keep bidding them higher and higher! I NEED this. I can’t LIVE without it. But in a world with perfect information flows, you will clearly see that buying at any price doesn’t make sense when there is an attractive alternative like renting for ludicrously cheap rates in comparison to the purchase price. Of course, the fact that rents were flatlining during the bubble while sales prices skyrocketed should have been a HUGE red flag. But the covetous buyer sees only see scarcity.
I believe scarcity effects are what drove the housing bubble, and what is currently driving the bubbles in commodities (see: food availability decline & hoarding, as opposed to “famine.”).
I am reminded, at times like these, of the words of a former professor of mine who taught (and authored the definitive treatise on) transnational financial law: “Would you really be so foolish as to invest in land?” Clearly he was being hyperbolic to drive home the risks of securitizing mortgages (a risk we have now seen played out). However, if realtors want to sell people the idea of land as an “investment,” they should then be held to the same standards that brokers are, i.e. required to consider the suitability of an investment for a particular client. I heard a radio ad last night extolling the virtue of land doubling in value every 10 years historically; i.e. a 7% return annualized, which is lower than the over 10% annualized return on the S&P since 1975. Selling a house to someone who can never afford it, with the siren call of rising prices due to high demand and it’s a great “investment”, is unethical, and it should also be illegal. Especially when the Price/Rent ratio is so unbelievably high as judged against historical values.
Kris Berg
05.03.08 at 8:01 am
Sven - The higher priced homes haven’t been hit as hard in certain areas, true, but look at the high end in Chula Vista and the lines are already blurred. In general, however, I tend to agree that buyers of the million dollar properties typically didn’t get there with 103% financing and negative amortization. The distress sales being a big factor in price declines, it stands to reason that more distress among the lower end properties would mean more price pressure at the lower end. But, it ultimately will effect everyone. If I can’t sell me entry-level condo, I can’t afford to move up, and the owner of the move-up product will be unable to sell and so on. For the higher price ranges, this becomes more of a supply/demand problem.
The difference I see is the need versus want. I may want to trade in my 3,000 sf for 5,000 sf, but if the market isn’t cooperating and I am not in a financial pickle, I may just chose to wait. On the other hand, it my principal balance is going up every day while prices are going down, I will have to eventually bite the bullet, and thus become the next comp. This is what we are seeing at the lower price points.
Then there is the micromarket issue. When prices got out of hand, people naturally migrated to outlying areas in search of affordability. No one really wants a 60 minute commute to work, but in 2005, they may not have had a choice. So when prices soften, demand naturally returns to the more centrally located areas, and the Ramonas and Temeculas and Chula Vistas get hammered. Scripps and even the coastal communities are not immune to market corrections, but because of location alone, I think they will continue to be more insulated.
Price/Rent - Thank you for addressing that comment to Steve. It is far too long for me on my first cup of coffee.
Steve Berg
05.03.08 at 12:44 pm
Price/Rent - “Why buy when you can rent cheaper?”
You actually did a great job of answering your own question. We spent a lot of time and words on this issue in numerous previous posts, so I’ll try to summarize. Don’t buy if you don’t want to!! Kris’ title was obviously a sarcastic shot at those agents and organizations who are always making the case. We don’t. But there are alwys reasons to buy and that’s why there is a market.
Some people don’t want the insecurity of having a lease run out every 6-12 months. They don’t make the decision as to whether they can stay. Others enjoy the net benefit of the after tax cost even though it may be higher than the rent for an equivilant dwelling. There are even those who like the idea, old fashioned as it may be, of paying down debt, thereby imputing equity. Or better yet, eventually paying off their mortgage and owning the property free and clear.
Too many people tried to become “investors” in the purchase of their own home, using 100% financing, limited monthly payments, etc., thinking that the market would never fizzle. Many are now paying the price for being wrong. Listening to agents, mortgage brokers and/or others who (wrongly) suggested prices would always rise does not relieve the ultimate responsibility from the buyer. No one forced their hand at the signing table. Kris and I have repeatedly mentioned a few of our own clients, whom we cautioned and advised NOT to buy in late 2004 and 2005, not because they weren’t qualified, but because it was obvious they were buying for the wrong reason. They had visions of $$ signs dancing in their heads. Nothing we said would have changed their minds. Even without the Crystal Ball, it was becoming clear to us that the potential for a reversal in prices was inevitable
Regarding the bubble, the run-up wasn’t as much supply driven (as in lack thereof) but extraordinary (and artificial) demand brought on by the loose financing. Regarding the purchase of land, it’s like any other investment which is way different from buying a home for oneself. Professional investors don’t always succeed. Amateurs should do a LOT of homework before plunging in without a good plan and proforma.
Thanks for your comments!!
Smithers
05.03.08 at 6:16 pm
“but look at the high end in Chula Vista ….”
(There’s a “high end” in Chula Vista?)