Off a Cliff in January

The tone for 2008 seems to be pretty well set, whether you're looking at MB sales data or at a bigger picture. Home sales are slow. Really slow.

This story line could get old, but we must report it, particularly when a respected data source calls January 2008 the worst in 20 years. That's what Dataquick said Wednesday (click for the press release). Indeed, for all anyone knows, the truth could be even more grim – Dataquick's numbers simply start in 1988.

And this was not just the slowest January in their system; the "sales total was the lowest for any month in DataQuick's statistics" (emph. added).

Specifically, in LA County, the number of sales (3,398) was down 50.1% compared with January 2007. This time, LA County underperformed for the region – our drop was somewhat worse than the total drop of 44.9% for all 6 counties of Southern California.

Now let's get local. In MB, data from the MLS (via Kaye Thomas) show a 57% drop in sales year-over-year, from 30 SFRs in Jan. 2007 to 13 in Jan. 2008. (That's all of MB, not just west of Sepulveda.) Say what you will about small monthly data sets, but this graph is pretty striking. (Click to enlarge.)

Casting a wider net, tax records show 15 SFR sales in MB, 2 TH's and 1 more residential sale that appears to be a family transfer. We use the MLS-reported sales here to compare apples to apples – our historical data is all from the MLS. As you can see, the MLS will tend to slightly understate the true number of sales.

This slowdown is a continuing trend. As MBC noted in "Slower, Slower, Slower," the 4th Quarter of 2007 was the slowest of the decade. We had 18 SFR sales in October, 13 in November, and 18 again in December, after a year in which the average had been 33 per month for the previous 9 months.

We should remind ourselves that closed sales are a lagging indicator, because the deals were all reached about a month prior to the report of a closed sale. At MBC we record pending sales/new escrows as they happen each month in our subject region west of Sepulveda. This provides more of a real-time measure of market activity. By this measure, MBC saw 9 SFRs go into escrow (and stay) in December – many became a part of those 13 closed sales in January. We recorded 7 new escrows in January and 5 so far in February west of Hwy. 1.

These numbers suggest February sales will also be quite weak. March data (from deals reached in February) could improve – compared to Jan./Feb. – if the market picks up even a little in the second half of this month. (We hear of at least 3 deals that are close or pending, but none has posted yet.)

What's the local read? We see busy open houses, but few sales. Kaye Thomas is blunt in this article:

Just so we are all clear.. real estate sales in Manhattan Beach so far this month are.. dismal.. rotten and just plain lousy.

In this LA Times story, Leslie Appleton Young, chief economist for the California Assn. of Realtors, says:

I don't think February will see a dramatic change, but there might be a change in March.

She means to say that the next report, on February sales, will bite, too, but she's hopeful that this month's activity will be a spark – in a relative sense.

Another piece of the puzzle: supply of homes for sale.

Inventory has now reached 83 SFRs west of Sepulveda, matching exactly the highest total MBC recorded in 9 months of 2007. We had 83 SFRs at the end of June, too, but sales (new escrows) that month totaled 17, and 24 the next month. In those months, absorption beat out the supply increases.

You don't really need MBC to connect the dots, but we'll do it anyway. Higher supply and lower demand will generally lead to lower prices. You'd want to know that that's the outlook whether you're selling, buying or just observing, right?

60% Think Prices Will Drop 25%+

Online polls are not scientific (not even a bit), but it's intriguing that this morning's LA Times poll (click for a link to current results) is, at this moment, showing that 60%+ of respondents believe that "Southland" home prices will drop by 25% or more.

Yes, it depends on what you mean by "Southland."

The poll jumps off of a front-page story (see "Homeowners' big question: How low will prices go?") offering more predictions about the future of the housing market.

There's agreement by the analysts that the Inland Empire is toast. The disagreement is over the Westside and luxury markets. And here, we have a little USC-UCLA rivalry (timely!).

First, one expert (a Berkeley guy) says:

... in areas where there is very little new housing, where it's hard to build and a lot of wealthy people live, there will be little decline or maybe none at all.

With which the USC person, Delores Conway of the Casden Real Estate Economics Forecast, concurs, with the Times noting her view that "demand remains high in affluent, established areas such as the Westside and Newport Beach."

Naturally, both Christopher Thornberg – formerly of the UCLA Anderson School – and Ed Leamer, currently at Anderson, are quoted, and cited as "are among the most bearish of analysts" – in part because of their edgy opinion that "the recently ended housing boom pushed prices out of sync with incomes." (Emphasis added.)

"Recently ended housing boom" – how about that? Do you like how the Times just slipped that in the middle of a story? They don't ring a bell or print 3-inch headlines when the peak has passed, do they?

Thornberg is said to view the Berkeley-USC hypothesis as "wishful thinking," saying:

Every place takes the hit in the long run.

In a sidebar, Thornberg is also quoted:

If you sit around and pretend you will be immune from the downfall, you're fooling yourself.

Leamer's got data from the 1990s downturn in L.A. that shows that, eventually, the priciest areas declined to the same degree that the cheapest areas did.

There is some question in the story about how long the downturn lasts (no one looks beyond 2010), some hand-wringing over the fact that the declines are happening absent a broader economic recession (so far!), and the obligatory statement that: "If the U.S. falls into a recession, all bets are off."

Meanwhile, the note of optimism (we think) comes from the California Association of Realtors, predicting a 4% drop statewide next year. (An opinion they've offered before – see "Outlooks Getting Gloomier.") Sorry, no data for the "Southland."

Today's predictions for the Southland strike us as consistent with broader market analyses (see "Getcher Predictions Here"), but the online poll respondents are suggesting a big break in consumer and homeowner psychology.

In April 2007, a scientific poll by the LA Times found that 83% of all Americans expected flat or increasing home values over the next 6 months. And in June, more than half thought their homes were worth more this year than last year. (See "More Faith in Rising Prices.")

One online poll is but a thread of evidence that expectations are shifting – a glacial process, but one which had to begin in response to the onslaught of downbeat news and data of the last few months.

Outlooks Getting Gloomier

From time to time MBC checks the broader housing market's pulse by seeing what the experts are saying. (See "Getcher Predictions Here.")

A couple weeks ago, the California Association of Realtors set this party line:

Tighter credit standards, affordability concerns, and a continued standoff between buyers and sellers will contribute to continued weakness in the market going into next year.

Specifically, CAR expects a 4% decline in the statewide median price in 2008, after a 3.5% increase this year. This qualifies as optimism, we suppose: 2007 and 2008 are a wash, so 2009 is just 2006.

Monday, a more bearish assessment by Goldman Sachs suggested that homes in California are "overvalued" by as much as 40%. Money quote, via the Bloomberg story:

Prices in the state "have proven surprisingly resilient, given the severe curtailment of credit availability and rising unemployment,'' the analysts said in a note to investors. "However, we believe that a downturn is imminent.''

As you scroll through various assessments of the market, like this LA Times story last week, it's increasingly common for folks to call the bottom for 2009 or so. (Psst! Remember, 2009 is just like 2006, so we're not talking about a big decline!)

Another respected Wall Street analyst, Ivy Zelman, thinks prices could keep falling till 2010 or 2011. Her money quote, again via Bloomberg:

We'd be better off if prices corrected all at once. It will get worse before it gets better.

Oh Ivy, that's rich. You know as well as we do that home prices don't correct magically or "all at once," but through the slow and grudging, step-by-step, highly emotional actions of home sellers.

And let's be honest – as a group, home sellers are among the least sophisticated of all financial market participants. We're talking about regular folks who happen to own a home. The only thing they care about in selling is not selling for less than they absolutely must. That's why these things take time.

Of course, none of the commentary quoted above is specific to MB. (That's your job, readers.)

But there is this looming threat of a writers' guild strike, and resulting paralysis in the entertainment industry. Our high-flying RE market benefits from the funny money of the industry, so a stoppage there could put a real dent in activity here.

Uh-oh, was that a prediction? We promise, it's worth every penny.

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.

Is MB an 'Oasis Micro-Market?'

We all know there's something special about MB. Not only is it beautiful and wonderful for a hundred reasons, we have a real estate market that some would say defies gravity– no easy feat.

Today's LA Times carries a story with a darling tag we might attach to our little burg: an "oasis micro-market." Now, before we get carried away with Manhattan Beach exceptionalism, let's see if we meet the criteria:

* Close-in, established neighborhoods convenient to the urban center's employment and cultural attractions. They don't require residents to make long commutes, sit in traffic for hours or worry about gas prices.

These criteria are toughies for LA. One of the examples given is Chevy Chase, MD, a clear A-plus match. What is our region's "urban center," and how close is MB? Who here doesn't have a long, or at least annoying, commute? Next?

* Above-median-income areas -- often well above -- with home prices to match... Educational levels of residents exceed regional norms, local school systems are highly regarded, and crime rates generally are low.

Check.

* Prime mortgage territories, with little to none of the negative neighborhood impacts of rising foreclosures caused by payment-shock loans going sour.

"Little to none" – sounds about right.

So, now that we're an "oasis micro-market," what should we be seeing in the market?

Prices and sales are up this year over last, and plenty of buyers still want to move in.

We'll get to the data on that (again) separately. With median price that may be the case. No doubt about the buyers wanting to move in, though.

Now, can "oasis micro-markets" keep defying gravity as the broader housing market declines? Even if they seem to be now, says a Miami realtor:

"In my 38 years in real estate, I have never seen a market where more expensive properties have stayed relatively healthy, while entry-level houses are the toughest to sell."

We'll take that as a "no" about the defying gravity thing.

Still, the notion of MB as, officially, an "oasis" is going to help us digest breakfast a little easier, after this story in the other Times (NY) made everyone feel queasy. (Hint: Save the scary stuff for weekdays!) According to some pointy-heads, by 2009:

In California, prices are expected to decline 16 percent — or about 20 percent after taking inflation into account.

You know things are deteriorating when David Lereah, late of the Nat'l Assn. of Realtors, admits he got the market wrong, what with his "the real estate boom will not bust" boosterism. Best he can say:

“The bears were bears way too early, and the bulls were bulls too late. You need to know when you are straying from fundamentals. It’s hard, when you are in the middle of the storm, to know.”

It's hard to know.