How Are Sellers with the 2-Year Itch Faring?

It was a long morning for MBC (the 10k) and a long day around the fair, but we do a have an update to offer you before the weekend's out.

Some time ago we ran a story about home sellers looking to cash out after just two years in their current residences ("Getting the Two-Year Itch"). We also ran this update a few weeks later.

As we noted in the first installment, one reason folks may be selling at the 2-year mark is to draw the maximum tax-free profit:

Thanks to our tax code, you can reap up to $500k in capital gains (for a couple) on a home sale tax-free. You just have to have made it your primary residence for 2 years.

To which we say, more power to you.

The real purpose of tracking like this is to watch for market price trends. This is roughly how the respected Case-Shiller index works – they track same-house sales over time in several markets and use those, rather than median price or PPSF, to gauge degrees of change.

In our case, we have a still-small sample, but the results are becoming intriguing. (Click the graphic to enlarge; if that isn't legible, click here for the 1-page PDF.)

We have 24 examples of two-year itchers, of which 11 remain active listings, 10 are pending or sold, and 3 dropped out.

Let's look first at the 10 solds, which might begin to tell us: How has the market changed in 2 years?

Of the 5 biggest gainers (16%-61%), 3 were major remodels. One more (132 18th, +25%) was in an outstanding location on one of the city's best streets. And one (2500 Pacific, +16%) was actually purchased in 2005 for well below its VRM asking price range. In 2005, you didn't see many cases of people paying 20% below asking. Of the 5 big-gainers, only 18th St. offers a reasonable answer as to general market trends – and even they took $245k off asking this year.

Four more sold homes, which remained much the same over 2 years, rose in value by 7%-16%. (One is pending.) With more data, the range of 7-16% would be a good answer to the question: "How much did homes increase in value over the last 2 years?" Right now the data are mainly suggestive.

The 11 active listings show us a group of sellers that largely began by seeking much more than 7-16%. (Note: We are showing the start prices only in the chart, to track how good or bad sellers' guesses were of their homes' increased value.)

The full range of price increases sought is 11%-79%, with the +79% house being a big remodel.

All of the actives have been on the market at least 90 days, some significantly longer. (For details please see the MB Market Update spreadsheets.)

The headline coming out of this group is large, nearly-new 3011 Elm (click for details), which is now listed for less than the 2005 purchase price. Elm (pictured) began May 2 at $3.095m (+$295k/+11%), but on Thursday it re-listed at $2.795m, $5k less than the July 2005 price. These folks apparently need to get out.

Similarly, 601 Larsson is now listed below the Sept. 2005 purchase price – by $151k. (That's no headline because MBC readers know too much about that house by now.)

Most of the rest of the actives now show reduced ambitions (price cuts), but there are obstinate ones:

• 505 3rd has never shifted price from $1.949m (+$349k/+22%)

• 1400 Elm is down only slightly at $2.295m (+$595k/+35%)

• 1313 Oak is down $100k, but still seeks $2.390m (+$865k/+57%)

We're going out on a limb here to say that 20% to 50% markups aren't going to draw a lot of interest in the market that's evolving now.

MBC notes the contrast between folks selling after 2 years – most will make money – and the examples we gave last week of sellers getting out after 1 year, most of whom will lose. Even with small samples, these contrasting stories may tell us that our local market's price peak was between 1 year and 2 years ago.

Getcher Predictions Here

Some new conventional wisdom is forming around the future of the housing market. It ain't pretty.

But this shift in mood is inviting a range of people to speculate – er, let's try a better word – predict what's next.

Oh, predictions, what perils they hold. You may some day be held up as a soothsayer, or fool. Here are some of the most intriguing of the last week:

Housing prices down 7% in 2007, and 7% again in 2008 (using the Case-Shiller methodology, which differs from median-price measures). This one comes from Goldman Sachs researchers. They also put forth several specific estimates of declines in new housing construction and sales, existing-home sales, and residential investment (a broader economic measure – they are extremely pessimistic on this one.)

Housing prices down 16% in California, 20% adjusted for inflation, by 2009. This one is from Global Insight, a private forecasting firm (hey, it's what they do), via the New York Times last week. That story has gone pay now but this quickie references it.

Housing prices down 30-40%. This is courtesy of Edward Leamer, director of UCLA's Anderson Forecast. We assume his timeframe is peak-to-valley, no dates as of yet. His view, via Bloomberg:

Leamer said in an interview today [Aug. 31] at Jackson Hole that some former "hot markets,'' such as pockets of California, may see declines of 30 percent to 40 percent.

Hey, now, we resemble that remark.

Housing prices could drop by half. This is part of a paper prepared by Robert Shiller (Yale economist who is credited with calling the dot-com bust) for the Kansas City Fed for this weekend's Jackson Hole conference. Click here to go to the conference website; the Shiller paper is the second on the list of downloads. Money quote:

[T]he examples we have of past cycles indicate that major declines in real home prices – even 50% declines in some places – are entirely possible going forward from today or from the not too distant future. Such price declines have happened before. In the last cycle in the United States... real home prices fell only 15% from the peak in the third quarter of 1989 to the fourth quarter of 1996, but some cities' real prices fell much more. Los Angeles real home prices fell 42% from the peak in December 1989 to the trough in March 1997.

Best time to buy will be 2009. That's the considered opinion of SoCal RE investor Kyle Kazan, splashed all over Sunday's Daily Breeze. (How to describe an article that was literally teased above the masthead on Page 1?) The article is a must-read for its local angle and its explosion of descriptive language: "perfect storm," "death-spiral," and the enigmatic, "The South Bay is a microcosm unto itself."

Best time to buy will be 2010 or 2011. In perhaps the least analytical of our links, "The Great Loan Blog" says you'll be in the best position after pretty much all of the ARMs now in the pipeline have adjusted.

Notice how we've scrubbed any reference to a national economic recession. Those predictions are flying everywhere these days, too.

Housing decline and recession seem to be intertwined in many analysts' predictions, but we're focused on one issue here – local home values – as best they can be deduced from these big thoughts.

Surely there are contrary views...


UPDATE 9/4/07: The Robert Shiller paper is now quoted above and a link is provided to download the whole paper.

Hockey Sticks

After you've seen "An Inconvenient Truth" – perhaps the best film ever about graphs & charts – one image lingers: That of Al Gore mounting a cherry-picker to rise up and show the off-the-chart peak of a graph depicting the sudden, sharp rise of global warming.

Just as the climate crisis has its "hockey stick" graphs, so, too, does housing.

This week, readers of Time magazine are presented with one such graph, depicting the rise in home prices since the 1950s – adjusted for inflation. (Click here for the full Time story.) This probably gives the data its broadest audience yet.

Your humble correspondent recognized the Time chart as a slimmed-down version of one the New York Times ran somewhat recently, presented here as well. (Click to enlarge; it's worth it.) The chart goes back to 1890. Yes, 1890.

We don't actually do much in the way of "bubble talk" here, despite the subtitle for the blog. (We're pretty micro-focused.) Let's just say this: It's no surprise to anyone that home prices in MB have doubled – or more – in the last several years. What's striking is to see how unprecedented the comparable national trend has been.

NY Times on Housing Downturns

Let's break away from our little burg, where no one seems to be hitting the housing panic button just yet, and look at some bigger-picture data.

Sunday's New York Times Business section featured this article by Floyd Norris discussing the history of housing booms and declines. Norris notes:

There are few economic trends harder to measure than home prices, given that every home is unique, and a house in one area can cost far more than an identical one in another location. All such measures show the market has weakened, but some do not yet show a broad national decline.

One index does show national declines, the Case-Shiller index, mentioned here last week. Norris compares today's national data to those from a previous downturn that began in October 1989:

Prices are falling more rapidly this time, just as they rose more rapidly coming into the 2006 peak than they had a generation earlier...

(Follow the NYT story link above to see some graphs you'll find terrific and a bit scary.)

Norris reports that it was not for 99 months – achem, 99 months – that prices returned to their peak levels.

To some of us in MB, all that talk sounds like it's from another planet, not just another time. Price declines? Eight-year slumps? Not here!

No question, MB seems to be insulated from some of the nastier trends out there today, but can we really defy the national market completely? Local RE leaders would say yes.

FYI, if you are inclined to read more doom-and-gloom, er, analysis, on the national housing market, a mid-year analysis over at Calculated Risk provides both chat and charts worth your time.

Appreciation Has Ended, S&P Says

There's a reason people believe that real estate values always go up.

For 16 straight years, home prices appreciated to some extent every year, according to a measure known as the Case-Shiller Home Price index.

Tuesday, Standard & Poors issued the newest version of the index, and it shows "negative annual returns."

If we dissolve down the fine print, that means that nationwide, homes sold in the first quarter of 2007 were sold for less money than homes sold in the first quarter of 2006. Home price appreciation has ended. (The graph doesn't show prices, but rates of change year-over-year. Click here for bigger version.)

According to S&P:

This is only the second time in the quarterly national index’s history that the annual growth rate has fallen into negative territory.

The last time was in 1991.

Of course, this is a national index (3 measures go into it), and all real estate is local.

Are Manhattan Beach home prices now generally below 2006 levels? That's one big question MBC is trying to address over time.

Let's not pretend that answer is easy, either way. Everyone seems to know that the market has turned strange (many realtors call it "normal") and there is contradictory, confounding evidence.

Clearly, the news that appreciation has ended will affect future resales. Buyers will balk at big markups on homes that were recently purchased, and they'll have even more reason to worry that their assets will depreciate, depressing their motivation – as if they weren't already hesitant.

MBC's next "Market Update" will be out shortly, along with analysis of the Spring Bounce (Bounce?) west of Sepulveda. What the tea leaves suggest, we'll share.