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.


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.

The Good, The Bad, The Ugly

Originally Published April 24, 2008
We have survived the first quarter of this very crazied year. After looking at multiple data points and items, I have a brief summary. The Good: Median Prices are up in both county and city. The Bad: Consumer confidence in the real estate market is shaken and may take some real time to recover. The Ugly: In neighborhood after neighborhood throughout Albemarle and Charlottesville, prices per square foot are down across the board. For the first time in recent years, median prices and actual prices are not trending the same at all.Not a day goes by that another agent doesn’t ask me what I think of the market. Realtors are relying upon each other more than in recent memory to help price homes, get a pulse on the market, or help explain a listing that just won’t sell. Pricing has never been more difficult or less precise. The issue at hand is that some houses are going under contract after multiple offers in the first week, and other, seemingly attractive homes that are well priced are not being shown

The first quarter of 2008 was by most standards a good quarter. If you look purely at the statistics upon which we usually rely, the quarter was actually, quite stunning. In the city limits, among detached homes, the volume of closed sales is up from last year nearly 10%, and the median price was up over 7.5%.

The county of Albemarle had mixed statistics with volume down 13% but median prices up 4% from the same period last year. The median price in the county was up to $288,000 from $267,500 in the first quarter of 2007.

These are positive trends that many will cite to claim that we have hit the bottom of a very small dip in prices and the overall market now moving in the positive direction. Some will claim that the market is healthy again, and that any fear of collapse is now a concern of the past.

I hold a more cautious view. The market is still showing signs that it is fragile, and that while we may not be sliding, we have no proof that we are in the clear quite yet.

A quick review of the mortgage market today: Mortgage rates are at some of their lowest points ever (hovering around 6% for 30 year fixed rates). The economy in Charlottesville is extremely strong. Unemployment is amazingly low. These three factors should lead to an extremely active real estate market. But right now, the credit crunch is making it harder to get loans. Six months ago, a borrower who had 5% for a downpayment could borrow 80% on a first mortgage, and 15% for a second mortgage. This 80/15/5 loan is no longer being offered by banks. If you are not a top credit risk, finding money is extremely difficult. As an added deterrent, short term loans in the form of Adjustable Rate Mortgages (ARMs) are still available, but, the rates are inverted meaning that short term borrowing is more expensive than long term borrowing. Again, if you can’t qualify for a 30 year fixed loan, you have no “affordable alternative.”

Back to the Charlottesville sales market. When I delve deeper into the numbers for the first quarter, the concern that is raised is that the median price is rising, but most Realtors will tell you that prices are dropping in certain areas of the county and possibly even the city. So how is the median price going up if prices seem to be falling?

For the next item in my study, I looked at 8 subdivisions in Albemarle and 7 neighborhoods in the city. Subdivisions and neighborhoods were selected to be representative of the economic diversity of the area, as well as the geographic regions.

I took each home sale in the neighborhoods and converted them into a price per square foot of finished space. I then sorted the sales by date, and arrived at an average price per square foot of every quarter based on the 12 months prior sales. For this study I went back to the 1st quarter of 2005 for data, thus arriving at 12 month averages beginning in the 4th quarter of 2005 and going through 1st quarter of 2008.

I then took each quarter per neighborhood and identified a peak price point for that neighborhood. I calculated a price depreciation from the peak point to today. I also calculated a cumulative price appreciation since the 4th quarter of 2005. As you will note in Figures 2 and 3, in every single neighborhood in the county, and in 6 of the 7 city neighborhoods, prices have retreated from their historic highs. See figures 5 and 6 for the trend lines for the neighborhoods.

The county’s low performers have been Grayrock and Western Ridge, both in Crozet. In the city, the Greenbrier neighborhood was the first neighborhood to hit a peak, and has since fallen over 15.5% from that peak in mid 2006. Red-Hot Belmont is down nearly 12% from mid 2006, but has been on the rise for the last two quarters. The flip side, just off Rugby, the Venable neighborhood has had one quarter that showed a sign of a drop in prices, only one half of one percent, and then it bounced up 2.5% the next quarter, and ended the first quarter of 2008 at its historic high.

Therefore, I have identified that any increase in median prices is most definitely not due to price increases throughout the county. The only way to increase the median price of homes while the actual prices drop is to change the mix of homes sold. In essence, stop selling homes that are moderately priced, and continue selling more expensive homes.

For those trying to sell homes above the $400,000 median, this should be good news. And because of these buyers with little economic sensitivity, we continue to have a semi-liquid and healthy market. However, in the long run, if we cannot get funding to our entry level buyers, there will be a slowdown throughout the market, and it will take significant time to work through. Keeping the high end market alive is good, but we must restore liquidity into all sectors of the market.

If the lower rungs of the market cannot obtain some liquidity, then the second tier of homes will be unable to sell next, as the step up buyers pull out. Additionally, if prices do continue to drop, we have a question of short sales becoming more and more common.

Here comes the good news for Charlottesville and Albemarle; but again, tempered with caution, as we are on shaky ground. In figure 4, I show the most recent published data from the Mortgage Bankers Association breaking down subprime lending trends and foreclosure rates across the 50 states plus D.C. You will note that Virginia is 10th (1 being the best) in actual foreclosure rates. However, among outstanding subprime loans, a past due rate exceeding 18% indicates that foreclosures are likely to rise. Note that in Ohio, roughly 19.4% of subprime loans are past due, but over 14% are currently in foreclosure. Virginia has close to the same delinquency rate, but our foreclosures are still only 9% of the subprime loans. If unemployment jumps (as in the Midwest) we could move from high delinquency to high foreclosure rates.

I also studied the unemployment and foreclosure rates across the country and found roughly the same cause:effect ratio as subprime loans as a percentage of total for states. This means that if you give a person a bad loan, but keep them employed, banks carry roughly the same risk as a person with a good loan but who loses a job. Charlottesville’s #8 ranking in the US for low unemployment then would indicate we can avoid the foreclosures made to good loans. But again, we are on the edge should the unemployment rates rise.

But, to flip the other direction, I recently saw a number that 36% of homes listed in the Charlottesville MLS are vacant. That is a huge percentage, and is sure to indicate a drop in value over time to clear the inventory. A drop in value can cause high loan-to-value (LTV) borrowers to walk away from their loans rather than pay to get out from underneath the loans.

If you look at the 3 yr. appreciation rates for each of the neighborhoods, you will notice that 6 of the 15 neighborhoods have dropped in value since the 4th quarter of 2005. Not just a single quarter of drop, but a cumulative drop. These homeowners may well have to bring money to the table to close should they be able to sell their homes today.

So where do we go? That is going to depend on the Fed and their insistence on keeping rates low, the market’s willingness to adhere to those low rates, consumer confidence, continued economic vitality in unemployment sector, and perhaps which way the wind blows.

On Thursday, new unemployment figures came out that dramatically overstepped The Street’s expectations. In fact it was a record period with over 80,000 jobs lost in the U.S. Rather than reassure the market, Fed Chair Ben Bernakne’s response was to announce that the Fed will not continue cutting rates. But already, the interest rate curve is inverted, and ARMs are no longer being taken. There is no longer an “affordable” loan program available.

Keep an eye on local unemployment numbers as the best harbinger in coming quarters. We are better positioned than most regions in the country and state, but we still have to work through the next few months.


Please e-mail me for a pdf of this report that includes all of the charts and graphs.

Keith Davis

Keith is a sales associate with Real Estate III in Charlottesville, in its Faulconer Drive Office. He holds an MBA from UNC’s Kenan Flagler Business School and is licensed to sell real estate in the Commonwealth of Virginia.


Back to top

Twitter links powered by Tweet This v1.8.3, a WordPress plugin for Twitter.