San Diego, Stay Classy
Chuck Ponzi May 16th, 2006
Over the past few days, we’ve had the chance to review the proverbial Canary in the Coalmine, San Diego. It doesn’t look good. The spring bounce that has come so often in years’ past has failed to materialize with Sandicor’s reporting of 2,626 sales recorded in April 2006. This is 17% lower than any April in their published records, and a full 34% lower than last years’ April amount. While we agree that the market cannot sustain itself on last years’ price, many in the industry have reassured us that we are not having a slump. This is most definitely not what the data is showing us.
Most noticeably, inventory has been continuing its parabolic rise. It surpassed its all-time record set in July 1995 of 19,250 some time late last month. The population adjusted inventory record will likely be surpassed within 1 month, give or take a few weeks. Still, the professional assure all San Diegans that there is no weakness here; everything is just fine.
Median prices have been flat for at least a year, with considerable weakness shown in recent months that show down since summer last year. Housing analysts agree that houses are not like stocks, and prices will not go down because they have intrinsic value that is not like a piece of paper like stocks.
True, houses are not like stocks in every way, but a market is still a market, and certain attributes of a house ARE different than a stock.
One of the biggest differences between the typical house purchase and the typical stock purchase is that most homes have substantial holding costs while stocks often have little or none (not opportunity cost, just the cost to keep someone from taking it away from you). This is your burn rate. With flat or shrinking equity, time to sell means over time, you lose money, even if you are just standing still.
OK, so let’s look at some hard data:
1. According to Bubble Tracking, Current inventory stands at just over 20K and last months’ sales were 2600. That puts us at roughly 7 3/4 months inventory, a decidedly bad place for the local area to be in.
2. In recent months, the average payment homeowners committed to was just over $2700/month. If you take the premise that the average home is going to take nearly 8 months to sell, the selling opportunity (new holding costs) for the current strike price could be as much as 7.75*2700=or about $20K If inventory goes higher to 10 months, it would be $27K. Keep in mind the average new payment includes equity rolled in, so we don’t really get a lift from current equity.
3. Interest rates are most likely on the rise. We demonstrated that the average spread between Fed Funds Rates and 30 Year rates were about 3%, current rates are about 2.5% too low (payments should be about 50% higher than they currently are). With net out-migration, don’t expect expanding rents or newcomers to handle the coming inventory.
The burn rate for many San Diegans should start to get difficult to handle in the near future….
What’s that? What about foreclosures?
They are picking up steam in the area. California foreclosures are up nearly 30%, and we haven’t even started to feel any pain of losing jobs, the economy is still growing. San Diego notices of default came in nearly 60% higher over last year according to Dataquick.
All this leaves us asking, how is the canary doing? Has anyone seen him lately, because it sounds like he’s not chirping anymore.
Hmmm. Interesting. Maybe you can help make the blog better… what specifically is over-the-top?
Too zealous? That’s interesting. No, really, I wouldn’t have expected that considering this is most definitely one of the tamer sites related to the housing bubble. I would invite you to look at the dark underbelly of other housing sites to see what kinds of postings and comments are available.
While I am certainly not the global hotspot of the housing bubble, it was never intended to be that way.
Unfortunately, everything that could have been said about the bubble has already been said, and likely I am just rehashing some of my better posts. This is one of the reasons that my posts have become more infrequent. The other is that I have a full-time job that prevents me from devoting too much attention to it. OH, and my wife is 9 months pregnant doesn’t help too much either.
Still, please leave feedback on how to make the site better if you feel that it needs to be said.
Hey anonymous: spin this.
Oh, sorry, you don’t like CNN?
Ok, let’s stick to the data.
You don’t have to spin when facts, logic, and time are on your side, brother!
How is the trend in OC? Similar?
In OC, the trend is also quite a bit slower. However, since San Diego seems to be the Bellwether for the housing bubble (it started the earlier trend upward, and has a large head start in inventory and lagging sales), I would say that there isn’t yet a lot of pain in OC.
On the same token, the MSM is much more careful what it reports about the local market, and the OC MLS does not publish statistics that non-MLS users have access to. Much of this is because the credit industry in OC is unbelievably large. See my more recent posts in the past 2 months where I reference Jonathan Lansners posts in the OC register. He’s about the only straight shooter who actually backs up his claims with numbers and interviews with industry insiders; all of the other articles at his establishment are primarily RE fluff that is regurgitated national statistics or conjecture based on minimal data points.
My dad just put his San Diego house on the market for 940K. It’s a reasonable 4 BR tract home in PB in a quiet, mostly student-free, condo-free neighborhood. It has no view though, and a smallish yard, and the plumbing needs major work. 18 months ago, when he was first considering selling, his realtor said he could get 650K for it.
Is this insane or what?
Given the slowdown in the market, I should have pushed him to accept the 825K offer from a friend of a friend who will cover the plumbing upgrade himself and is ready to buy NOW. The realtor is very good, but I’d be surprised if the house takes less than a year to sell — and 825K may seem like a good price by then.
Two Words “Great Post”
I may want to refer to it.
Mish
MISH,
Truly an honor to be visited by you. Great post? Thanks for the compliment, but I feel that lately my posts have been a bit labored. There are plenty of other tainted real estate bubble sites out there, and many attract boomer-hating bitter renters. They often do little to analyze data, but yours is one of the great blogs that I visit at least once daily.
Getting good data is the hardest part of putting together great posts. Letting it speak for itself, regardless of what it says is just natural. Thank you so much for your kind words. May I be inspired to have even higher quality posts such as your own on my site someday. (although I fear that after the bubble pops and prices retract I may have to start a new one and focus on a new challenge) Regional economics in the context of Global events is perhaps the next logical step. It just happens that SoCal’s industry, economy, and future currently rest on a very shaky real estate bubble.
That canary has been cruising along the past two years in a perfectly executed “soft landing”, as is readily apparent by the nice, steady, sustainable median price gains which you studiously ignore since it contradicts your preconcieved notions of how the market “should” be behaving.
I completely agree that SD is, indeed, the canary in the coal mine, and that is a harbinger of a nice, orderly transition to sustainable single digit price gains.
Anonymous said…
That canary has been cruising along the past two years in a perfectly executed “soft landing”, as is readily apparent by the nice, steady, sustainable median price gains which you studiously ignore since it contradicts your preconcieved notions of how the market “should” be behaving.
I completely agree that SD is, indeed, the canary in the coal mine, and that is a harbinger of a nice, orderly transition to sustainable single digit price gains.
Trajectory is the difference between a hard and soft landing. At current course and speed, the chance of a soft landing is 0%. YOY for SD is currently at 4.5% with comparable interest rates. Current rate trands point to 2-3% higher mortgage rates (40 to 50% higher monthly payments for the same loan amount) within 1.5 years. You have 2 options to try to create a soft-landing (not have prices go down nominally)
1. 40-50% wage inflation (uh…what’s that large sucking sound from China and India?)
2. Reduced affordability to close to 4%. (Noone can buy a house, but at least it’s worth that much, right?)
Try backing up your argument with some data please.
What is the historical average appreciation rate for real estate? Yep, about 4.5%. Sound familiar? Oh, yes, that’s what SD housing appreciation is running, isn’t it?
Your statement that housing appreciation which tracks at the historical norm of ~ 4.5% APPRECIATION rate constitutes a “hard landing” exposes you as profoundly ignorant, does it not?
Your conjecture as to where mortgage rates will be in two years would need to be viewed against the accuracy of your past documented predictions, would they not?
“At current course and speed, the chance of a soft landing is 0%.”
Dude, SD has been in a soft landing for TWO YEARS. Stating that there is 0% for a reality which ALREADY EXISTS is moronic even for us bubbleheads.
What is the historical average appreciation rate for real estate? Yep, about 4.5%.
Not in our country it isn’t. Robert Schiller has soundly proved that the last 50 years is an anomoly. Oh, don’t like the time frame? Is is that it’s different this time?
Sound familiar? Oh, yes, that’s what SD housing appreciation is running, isn’t it?
Your statement that housing appreciation which tracks at the historical norm of ~ 4.5% APPRECIATION rate constitutes a “hard landing” exposes you as profoundly ignorant, does it not?
To your own point, one month does not a trend make. One month at 4.5% appreciation doesn’t mean squat. Next month it’ll be different, higher or lower, but most likely lower. It’s not one month that matters, it’s the course and speed. By the very virtue that some anonymous troll from the internet can spout off average year-over-year appreciation rates and they just conveniently be the same as the current month just proves how much the average idiot is personally invested in the real estate bubble. Truth is, we had internet trolls 6 months ago spouting how 10% was historical average (conveniently when we were experiencing 10% yoy), and again 8% 2 months ago (again, conventiently when we were matching that rate).
Your conjecture as to where mortgage rates will be in two years would need to be viewed against the accuracy of your past documented predictions, would they not?
In a word no. If you are arguing that mortgage interest rates won’t be 2-3% higher in 2 years, that would also be conjecture, wouldn’t it. However, historically, we have seen what happens after oil shocks and inflation concerns arise; something we haven’t seen at present levels for at least 20 years. If you want to go check what rates were back when we were experiencing the same set of monetary concerns, I suggest you do so, it might help resolve some of your concerns.
Still it surprises me how some people preach day-long about peak oil, but believe that interest rates will need to stay low…ok, how’s that going to work out if we have a deficit. There’s only so much debt monetization the world can handle before they flee from our currency due to bulging money supply. That will have a much larger impact than some poor little S&Ls.
surfer-x said…
“At current course and speed, the chance of a soft landing is 0%.”
Dude, SD has been in a soft landing for TWO YEARS. Stating that there is 0% for a reality which ALREADY EXISTS is moronic even for us bubbleheads.
Ok, dude, whatever you say. It was less than 24 months ago that we had less than 1 months’ inventory in San Diego. I fail to see how yoy growth in the area of 24% is a “soft landing”. “Landing” in the dictionary means: To descend toward and settle onto the ground or another surface: (per Websters). At what point does 24% increase per year equal “descend”?
I suppose that if you consider 50% appreciation per year “normal” you could also consider 24% per year appreciation to be a “soft landing”.
The last 50 years were an anomoly you say? God help anybody who depends on you for sound advice.
One or two months of data worthless you say? Of course it is. Don’t take the word of a “troll” about SD, listen to one of your own. The SD = soft landing reality is shown, among many other places, here:
http://themessthatgreenspanmad.....while.html
Tim, a card-carrying bubblehead, concedes SD has performed a “near perfect soft landing”.
Regarding mortgage rates and the belief that no other outcome is possible but your own (”0% chance”) - I’m not the one making predictions extrpolated from pure conjecture going out 2 or 3 years, you are. And that is simply the mark of a normal teenager or a profoundly ignorant adult. Which are you?
Your response to surfer dude is incomprehensible. Your statements of 24% or 50% YoY = soft landing appear to be random hallucinations.
The mark of the end of a true bubble is only punctuated by the loss of its greatest opponents that it will ever pop. The loss of tim’s belief does not make the bubble any less likely to pop; it’s one man’s opinion.
BTW, if I must explain all answers to you, I might have to make a separate post dedicated to your questions. 24% was 1 year ago’s YOY appreciation rate in April 2004 (per Sandag, Dataquick published 27.4%) . I’ll make the math simple for you 24%-4.5% equals -19.5% drop. Current course and speed identify trajectory (or lack of one), not current position. Yes, current position is still positive. But, San Diego already has 2.5% decreases from late last year at the current month with very low volume and very high inventory. Do you still think 4.5% is sustainable for the whole year? Or, are you suggesting that the additional sellers with more than 7 months’ inventory will have no downward price pressure?
While I enjoy a spirited debate, please, bring data. Hiding behind Tim’s change of opinion does not change the facts of data and statistics (even ones offered by MSM and the Real Estate Industry itself) If you are not going to back up your points with anything more than childish name calling, please go troll somewhere else.
Any further trolling without posting something of substance will invoke the delete key.
Prices are already going down in some areas on San Diego! And how can you be so certain that we will reach a perfect ’soft landing’? For now, let’s not consider the fact that every single economic and housing indicator (record inventory, rates climbing, # of interest only/ARM borrowers in SD, % of people who can afford to buy and on and on…) currently points to a precarious situation here that could see huge declines. Let’s merely consider the fact that logically there are an endless number of outcomes that might occur (EG: Up 5%, Down 1%, down 2%, Down 30%…) and your soft landing scenario is merely one of them! On what basis have so many of you bought into the soft landing scenario?
Any of you “Prices will go up my Realtor told me so” chickens%$%$$ want to put money where your mouth is? I will pay for the trust (where we stick they money) and we both put in 5k to the the one who is right after 2 years? Sorry I don’t accept home “equity” as 5k cash. Most of us on this site understand “equity” is as good as the appraiser’s college GPA (Non-Existant).
I like free money and any of you P^$$&s who want to give more to me, you can contact me at zachsdca@yahoo.com
Good thing is you “Realtor Believers” are too broke or chicken$#$# to do or say ANYTHING that involves money.
Thanks for Being a CHICKEN*#*#& and not responding and proving my point.
An Intelligent Person on the site
Spam Diego is JUNK! My family had to move away because they had few good jobs. Much fewer jobs that paid enough to buy a home.
3 years later it is even worse. San Diego is truely a great city and I hope it stays intact in the largest bust of all time.
P.S. I’m talking about 6 figure jobs that I currently have elsewhere…
Yo, CA dudes,
I find it funny that all the San Diego dudes and surfers who, like, know their homes are worth like almost a mil, dude, are, like, getting so testy, and turning, like, crybaby, when it comes to real estate. Hubris about personal home values will be SUCH a catalyst for panic when reality finally sets it that SD isnt so f-in great as to warrant going to the poorhouse. Believe me, as an outsider, its fun to visit but wouldnt want to live there..There’s anger in these posts, but whose? Overextended agents? People who paid 650k for a condo? YOU”VE BEEN HAD. The US is all about legalized robbery in many forms, its called the free market.
oh yeah, here’s the funny part….what if the MACROeconomic forces of all the debt and financial shenanigans create a meltdown at the top. Suddenly, in a year, you’re staring at a nut-kicked economy, and there isnt a hard or soft landing, just no landing period, and prices go into freefall, cuz noone has any savings or money, and the only EQUITY people have is locked up in their homes. Wow, that will be a great buying opportunity (after the blood drains out of the carcass).
First post on your Blog, and feel a point of interest exposing my perception relevant.
In 1989 I purchased a condo in Tustin CA. with first wife. Purchase price 120K. Divorce and stuck with condo, struggled for 4 years re-married kid on the way, complex severely denegrated, consulted lawyer $50 bucks walk away=credit wrecked but FHA so no recourse. The above transpired at ages 22-26. Like units were selling for 65K on HuD loans. (And of course when I bought everyone was telling me RE only goesup LOL).
Rented for 2 years than bought a brand new vacant home in Riverside area known as Lake Hills. Interesting thing was that it had been vacant for 6+ years, the Builder had gone Bankrupt(paid 137K original asking price 225K, said 6 years prior).
2 Years later purchased a house in Orange near circle elderly couple had passed away 225K.
2.6 years later purchased home in Anaheim Hills for 306K. Laid in bed at night as the F-16(911) flew overhead debateing on signing the papers the next day. Was probably the wrong decision , but things end up fine.
I am a corporate VP and Facilities manager for a very high end manufactureing facility. The following 2.6 years were as hard as I remembered living through. Haveing lived through economic houseing instability my wife and I decided to sell the home in the summer of 2004 and got 565K. Sure its gone up another 150K but our lifestyle has changed we are basically debt free and saveing money.
We now rent a house for $2150 on the better side of Santa Ana Canyon. Homes in the neighborhood list for 800K to 985K. The insane seperation from carrying costs and Rent should be quite eye opening.
OK there is my history here is my addition to the discussion.
In the 1988-1996 houseing debaucle, the total # of houseing related and manufactureing jobs together at the peak were the same as it is now with Houseing being the Lion and manufactureing the cub this time. I am already seeing friends and or their spouses lose jobs in relation to the mortgage industry, declining incomes for those who are direct realtors. The next stage IMHO will be the contractors and builder area’s of employment. This grouping of individuals has been a major player in purchaseing of homes and driving of prices.
Job loss going forward in this area and more importantly a slowing of job creation, will create our houseing deflation. It will be a self fulfilling prophecy. Add the affordability #’s and the probable tightening of credit standards and we may be looking at a perfect storm.
Before the Anon Troll slams me for my foreclosure, the birth of my first child was not covered by insurance . Married in November wife signed up on the insurance December 1 pregnant end of december. The legal standards that year allowed insurance companies to view pregnancy as a pre-existing condition so it was not covered for 12 months
Note: Son was born in september law was changed January 1, 3 months later. The 12K I did not have forced my foreclosure. Still it is probablly the only thing in my life i feel shame for, but thats my fault. I did learn from my life lesson, and hope my story may be found of some interest.
Ok, bring data:
188 deals sold in last 5.5 years. Avg hold 22 months,
Avg gross profit 1100%
Based on my numbers, California is past the top of the Xmas tree! And if you did not take your Xmas gifts of funny money, the down ride will be just as fast and just as costly (negative % deflation).
Mr VP…
Please use spellcheck…
Or, drop the “e” and add ing.
LOL
First time to post any thing on-line. Reading through the past few months of stats, differing opinions and lack of class on the part of some make me unsure I should participate. That said, market trends are cyclical. Short term ups and downs are expected and normal. We have seen 5-7 yrs of strong growth. The market is shifting and attitude has changed. It will take some time for recovery to take place. Such fast growth, however, is not normal. I do not live in SD but near Los Angeles. Our market has seen almost the same growth rate during 2004/05- 15% or so. Our prices are now back to the pricing of 12-15/mos ago and I anticipate they will be back to two year ago pricing within the next 6/mos. Inventory is high, new builders are absorbing every buyer they can find through huge incentives. I sold a house of under 1,200sf for $280k about a year ago. I have one for sale now on the same street for $269k and it’s about 250sf larger. That is a real life indication of where we are from 12/15 mos ago.