Monday, May 14, 2007

Proof that the Real Estate Picture is being sugar coated

I have been watching our own little world right here in Jacksonville. The press releases and the information that I kept hearing just didn't match up with what I was reading right on our own MLS! I knew the national story was bleak too after spending countless hours in newsgroups and doing research. I came across this article and thought it was finally giving some concrete numbers to the dreary picture I have been seeing. See if you don't find the article below VERY credible.

Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55 percent of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22 percent if you compare sales over the last 12 months to the prior 12 months. On a straight year-over-year comparison, the decline is much more.

Mortgage Bankers Association (MBA) Data: The MBA seasonally adjusted purchase application index, which is a measure of the number of people filling out loan applications to buy a home, is down 18 percent from its peak in September 2005. With presumably more applications being filled out by borrowers who now have to shop around for a loan, how could sales have fallen by less than 18 percent?

Builder Data: The nation's two largest home builders, D.R. Horton and Lennar, are reporting that orders have declined 27 percent to 37 percent year-over-year. D.R. Horton and Lennar have dropped prices significantly in many markets to generate sales, while the resale market has not. How could their sales have fallen more than the resale market, even if new-home communities tend to be in fringe areas?

Realogy Corp. Data: Realogy, which is the parent company of Century 21, Coldwell Banker and ERA, participated in roughly 1.9 million brokerage-related transactions in 2006 compared with 2.3 million in 2005, representing a year-over-year decline of 18 percent nationwide.

2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28 percent drop in Florida, 24 percent drop in California, and a 28 percent drop in Arizona. Our data, however, shows the sales have probably dropped by 34 percent, 27 percent and 38 percent, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested.

New-Home Data: The Census Bureau calculation of new-home data does not calculate sales net of cancellations, and cancellations are running much higher than normal right now, which is why the sales numbers overestimate actual sales. The preponderance of evidence shows that the housing market in vibrant areas where home building is prevalent has corrected much more than some people believe it has.

In summary, we believe that the Fed should know that the housing market correction has been quite steep and is also not showing signs of bottoming out, as evidenced by all of the above information, as well as significant additional research we have conducted. While the Fed has far more to consider than housing, it should know that the housing market could sure use some lower interest rates to help achieve stability soon.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.

Thank you John, for giving me some new, updated info.

5 comments:

David in JAX said...

Very interesting information. I agree. The local media has continually sugar coated the Jacksonville area housing market for the last year. The Times Union has continually gone out and published fluff pieces that might as well be advertisements for NEFAR and NEFAHB. I can’t even count the number of times I’ve read/heard “it can’t happen in Jacksonville” or “Jacksonville is doing much better than the rest of the country” and “the local economy will keep the Jacksonville housing market strong” when the data show that Jacksonville is actually one of the worst RE markets in The United States. The data show BIG price declines coming this way for the area, but the local media acts like nothing is happening.

With that said, I disagree with your thoughts on The Fed. It is not The Fed's job to help out the housing market, especially when the market completely lost touch with it’s fundamentals over the last several years. The Fed’s sole job is to control inflation. With inflation at higher than expected levels, The Fed should increase interest rates and increase the reserve requirement to help combat problems we are seeing with the Dollar. We also have to remember that home prices are not counted in the consumer price index. Rents are used in lieu of monthly mortgage costs even though about 2/3 of Americans are homeowners. If you add in the increased cost of home ownership over the last several years that most American’s are experiencing, you can see that The Fed must hold or increase rates to force home prices down to combat another area of inflation.

My prediction (as an untrained economist) is that The Fed will increase rates in late 2007 or early 2008 if home prices do not come down faster and if CPI is not held in check.

Ronda said...

David, I agree with your assertion that the Feds shouldn't try to "fix" the current real estate situation. The actual author of the article I quoted, is quite a Guru in the industry. I usually agree with him across the board. This time, I don't. I think the market is trying desperately to correct itself, but I see no end in sight. I agree with you that the Feds will raise the rates this year. What that will do(?) I don't know. All I know is this: To call a 228K home a "starter home" is insane. How many newlyweds, or new parents do you know that can afford a $1500(+) house payment? Wow!

David in JAX said...

The market will do what it always has done since the commerce department began tracking home sales in the 1890's. That is, home prices will revert to the mean. The mean increase in home values in Jacksonville has been about 3% / year over the last 100 years. With this said, home prices must and will fall back to these levels that were the norm before the most recent housing boom. This means that the median single family home price in Jacksonville must fall to around $130k before prices begin to stabalize. Another historic indicator is that the median home price should be about three times the median income for the area. This again would put the median price for a Jacksonville single family home around $130k.

So, to make a long story short, the median home price needs to fall about another $50k before prices begin to stabalize. History has always repeated itself in the RE market, and the latest boom that recently ended will not be different than any of the other RE booms and busts we have had throughout our history. As to when this will happen, that's the big question. It may take another increase in the overnight rate to wake up sellers.

Ronda said...

If the price of homes only has to drop another $50K I will be delighted. I read a pundit yesterday that said he predicts a drop of 50% of current list price by mid 2008. Meaning (I suppose) that a house currently listed (and not selling) at 450K would be on the market in mid 2008 for 225K. Of course, the seller only paid 180K for it, so even if they sold it for 225K, they would make a little money. I'm horrible with math, but a 50% decrease in asking price would seem a like a lot! I'll try to find the article and quote him. He is a muck-a-muck with ReMax so you kind of have to wonder if he isn't on the right track. Who knows? I'm still waiting to see how much more the prices will drop out here at the beach. Some parts of town are somewhat immune, but I'm sure that even those areas are going to see a big "shift" in prices.

I appreciate and enjoy your posts! I can tell you're a "numbers guy"! I learned a lot from your statistics and the break down of numbers you used. I think 50K would be a minor adjustment that the market could easily bear. We'll just have to wait and see. I keep hearing "25 year cycle". I suppose that means that prices will drop and then take 25 years to get back to the crazy days of the early 2000's when bidding wars were going on. I was kind of hoping for a 25 MONTH adjustment! :)

David in JAX said...

It is only guesswork at this point, but Jacksonville did not go up 100% above the mean (which would mean a 50% drop). If the market were to overcorrect it may be possible, but it is very unlikely. As a buyer, I would love to see it happen, but history tells us otherwise.

It's very simple to take the FAR numbers and plot out the median home price in Jacksonville over the last twenty years. You see 3% appreciation until about 2001-2002. Then the median sales price shoots up until June 2006. From there is has come down about 10%. If you take the numbers from the pre-boom times until now, prices are not double, so they more than likely will not be cut in half.