Bubble

New UVa Study on Foreclosures

Last week, William Lucy (author of the Safety in Our Cities study) and Jeff Herlitz have issued a new study on Foreclosures and the economy. The UVa professors put forth that as much as 66% of the total losses in real estate in 2008 occurred in California, and 21 percent from Florida, Nevada, and Arizona. California had 10% of the housing units and 34% of the foreclosures.

However, this does not come as any solace to the many who have lost their homes here in Virginia and Charlottesville in particular. I think what does surprise me is this thought.

Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.

Wow. That’s the shocking thing about leverage. We borrow money once, and the banks resell it 20 times, and the loses are staggering. Amazing.

Stealing A Home

Originally Published February 1, 2009

I was reading The Bubble Blog as I do most days, and as normal there were various comments that readers made that I thought were interesting, insightful, and sometimes spot on. But there are also the comments that make me think for a while and say, “Why?” In general, readers of the Bubble Blog are in agreement with the authors and support the notion that Charlottesville prices are too high. Given the current stall in sales, I tend to agree that movement is necessary in prices. But I’m not sure why everyone on the Bubble Blog is so convinced that it is all the Sellers who need to move. No, I’m not arguing that we have hit the bottom and we are about to skyrocket to 2005 price appreciation rates.

A year or so ago I was approached by another local Realtor who asked if I would be interested in selling my home. I told her, “Absolutely.” And I then proceeded to quote her a price somewhere North of 40% above my assessment. She said, “You’re crazy, your house isn’t worth nearly that much.” Well, she was right and wrong. It wasn’t worth that much on an open market, and it wasn’t going to be worth that much to her client, but to me, it’s absolutely worth that much. I had no interest in moving, and I still don’t. If someone wanted me to move, they were going to have to make it so worth my while to move that I would never have thought twice about it. And for me, that was about a 40% premium. And frankly, I’m not even sure I would have sold it for that.

Right now, I have lots of buyers looking for a steal. They don’t want a fair market price, they want a steal. They want to know that in five years when they look back at this period, that they took advantage of some pathetic seller who had no choice than to sell, at an absurd price. Today’s buyers want to know that there was no blood left. Well, guess what… today’s sellers aren’t all that desperate. Some are, but not all.

I have sellers who want to sell for various reasons. Some to move up, some to downsize, some who have been offered jobs in other areas, some who are having more children and want a bigger house. But on the news, you hear all about the millions who are losing their houses to foreclosure, and the banks are willing to sell for less than the debt. Not all sellers are bankrupt, and not all are willing to bleed for you to get your steal.

Market value is not just the price that a buyer is wiling to pay. It is also the price at which a seller is willing to sell. When the seller wants too much, or the buyer is willing to pay too little, no transaction occurs. It doesn’t always mean that the seller is over pricing. It can mean that Buyers are not wiling to pay market value.

And that brings us to the last few months of real estate. Buyers are convinced that Sellers are going to drop prices, but they haven’t. And when you look at my research into the city neighborhoods, most have not fallen in price more than 5%. And that does not represent the “steal” that buyers are looking for. Sellers on the other hand, may or may not have to sell. No one wants to be taken advantage of. Sellers are willing to drop prices when offers are being made that are fair and represent a market value transaction. But few are asking to be robbed.

I am not saying that values have not fallen in the Charlottesville area. They absolutely have. On Thursday night on 29 News I said as much. Transactions are occurring below assessments, and in 2009 we should expect to see that spread widen. But there is no indication that we are in a free fall, or that we should expect 20% price reductions anytime soon.

For Sellers, my recommendation is to seriously look at your reason for moving, and set your price accordingly. It could be that you won’t sell your house. But if you don’t need to sell, you certainly don’t need to be robbed in the process. For Buyers, assess why you are purchasing a home. For many, this is purely an investment decision. To you, I say watch for the short sales and foreclosures. You may not get the perfect home with the perfect view in the perfect school district, but you will find a good deal. There are many to be had. But don’t search for the perfect home, and then expect to steal it. It rarely happens that way.

Afordability Index

Originally Published January 31, 2009

I just saw an article from the NY Times that was addressing the affordability of housing across the nation. Click the follow through for the chart and some explanation. Interesting numbers. Could be very positive for the outlook.

Granted, these numbers come from the National Association of Realtors, who I try to quote as little as possible. They are always trying to spin things positively, and I respect their position, but not always impressed with their USAToday quality stats. This chart, however, got my attention for two reasons 1) Because the NY Times found enough interest to put it out there, and 2) Because it is a 35 year look at housing in America.

The NAR has taken a look at Median Income in America and compared it to the income needed to qualify for the Median home price in today’s market. So this looks at home prices, income, and mortgage rates. Back in the 80s when mortgage rates were 18%, the median family had only ~65% of the income needed to buy the median home. From 1989 until the run up in 2003, that number remained between 105% and 120%. As the prices went up in mid part of our current decade, the numbers dipped as low as 100%, but with mortgage rates lower than any time in 50+ years, the Median Family now has nearly 160% of the income necessary to purchase the median home.

This should mean that there is access to more and more first time home buyers to enter the market in the near future. It all relies upon consumer confidence now. Mortgage money is flowing. Wages support the purchase of new homes. The question still falls back on whether people are willing to take the plunge or not.

Half Price Housing

Originally Published January 4, 2009

Cars are now Buy One Get One Free, so why not houses. Over the past year, that is almost what we have seen. I was talking with an agent in my office on Friday about a listing of his that was six or seven months old. It was for a nice attached home that went on the market at $249,000. It is now down to below $220,000 and the owner expects to get between $205 and $210 for it this Spring. Lucky for him, he was actually expecting an offer when we spoke. But this 15-20% drop got me thinking about the real costs of home ownership and what these price drops in conjunction with interest rate drops means to the average home buyer. Take a look at what the final pricing really is….

Looking at this one home as an example, we will use $250k and $210k for ease of use. I could look at alternative uses of capital, etc.. but that would be overkill for this posting. Let us assume that Joe Buyer had the 20% ready to go on the townhouse 6 months ago, and was going to put the same $50,000 down today. Here is how things stack up. A decrease in the mortgage rates from roughly 6.500% to 5.125% today for 30 yr. and 5.000% for 15 yr. notes. 6 months ago, the buyer would have been paying $1264 a month for a 30 yr note, today, that payment would be $871. A 15 yr. note would only run $1265… a whopping dollar more than 6 months ago for double the term.

However, not many buyers want to put down more than 20%, so let’s be realistic: The buyer would have kept $8,000 in his savings account and gotten a full 80% mortgage, and the monthly still would have dropped $349 a month.

But let’s look at the 60th month. The buyer 6 months ago, would owe $187,000 on his townhouse, the 30 year note holder of today would have saved more than $23,000 in payments over the 5 years, and had a remaining balance of only $147,000. The buyer who opted for the 15 year note, would have paid $68 more over 5 years, for a remaining balance of less than $120,000.

If you can pay off a house in 15 years for the price of a 30 year note just a few months ago, I would actually call that pretty compelling.

Seasonal Adjustments

Originally Posted December 19, 2008

I suppose that this isn’t really an early Christmas Present, but it is a special issue of my Wrap Up, and it is coming right before Christmas, so Merry Christmas!

I have been looking for the last month or so at our sales numbers at CAAR. As most of my readers are well aware, in the Spring, the sales numbers go up (hence the “Spring Selling Season” term) and in the Winter, sales go down. This is all good and well, but the problem arises when we look at the Months of Inventory that CAAR publishes each month. It’s not very accurate due to the market fluctuations.

First a little method to my madness: The correct way to calculate seasonal adjustments is an X-11 Variant calculation. To do this correctly, would require years and years of data. I have only 4 years with which to work, so I have adjusted the calculations slightly. I pulled the sales numbers for 2005 – 2008 for Charlottesville, Albemarle, Fluvanna, Orange, Nelson, and Greene by month. Along with actual number of closed transactions, I pulled the end of the month inventory as well.
I then looked at every month and calculated out the percentage of sales for the year that occurred in that month, adjusting as if that month were always the sixth month of the year. So, September’s percentage was calculated on an April thru March calendar.

I then determined the average of each month’s percentage to determine the season adjustment ratios. This ratio was then multiplied against the actual number of sales to determine a “Annual Projected Sales” number. I then divided this number by the Actual Inventory to come up with the Seasonally Adjusted Months of Inventory and have plotted this for the 4 year period.

The end result are two graphs that follow. The first graphs the CAAR numbers to my numbers. You will note that the seasonally adjusted numbers take into account the regular ebbs and flows of the market and provides for a more even curve.
The second graph is the one that really matters. This is the curve of current inventory against months of inventory. Note that in October and November, we had very few closings. I’ll address December in just a moment.

season12season21

November was the first really horrendous month we have seen. And horrendous it was. There is now a 20+ month supply on the market.

The Days on Market is now up to 120 days, up from 92 in November of 2007. Part of this is due to the fact that we are finally keeping good records of Days On Market and part of it is that is the slow down of the market.

I think what should most concern investors is that we have the highest Months of Inventory… well, ever… and our inventory has been going down six months in a row. I have talked with my good friend Jim Duncan at RealCentralVA.com and he is working on Shadow Inventory so I won’t touch on it here.

What does 2009 and on hold for us… Well. December first. Sales in 2007 for December so far have been 68. Assuming nothing else closes (which is absolutely not the case) then we are projecting a drop of over 60% from the year prior. In fact, seasonally adjusted, this would account for a 21% drop from November. However, even if there are ten closes between now and New Year’s Day that have not been recorded, that is still more than 10% drop over the last month, and a 55% drop in Volume since a year prior.

So, what does 2009 hold. Everything for buyers and not a bunch for sellers. Prices will continue to fall (projections after I get more data) and volume will be down. Projections are showing volume down as much as 37.5% from 2008. This is not a great picture of the new year, but I think it is pretty realistic for where things stand right now.

All we can ask for right now is a little bit of a leveling off of the panic. With mortgage rates at 5%, buyers with a long term perspective are in a good position. Any buyer with a horizon of less than three years should be sitting tight.
See you in the new year.

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