Thursday, August 24, 2006

CAR Sales Stats Released for July

Just finished reading an article on the California Association of Realtor's home page regarding sales figures and median prices for the last year. The article left a lot of room for interpretation and assumptions, and one could easily finish reading the article and think things aren't so bad after all. I want to take a few minutes and give you my take on things and hopefully help you see what I read and learned from the story.

"Home sales decreased 29.9 percent in July in California compared with the same period a year ago, while the median price of an existing home increased 5.1 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today."

The drop in sales is no surprise as we all pretty much expected that. I honestly didn't expect nearly 30% though in just a year, but this does give some credibility to those viewing the market in less than positive terms.

"The median price of an existing, single-family detached home in California during July 2006 was $567,360, a 5.1 percent increase over the revised $539,840 median for July 2005, C.A.R. reported. The July 2006 median price decreased 1.5 percent compared with June’s $575,800 median price."

Ok, here's where it gets a little grey in my opinion. Your average realtor will read this and repeat the first sentence to their buyers they are helping to find a home for under the pretext that home values are indeed going up and now is still a good time to jump in the market. After all, 5.1% is still an attractive amount of equity gain in this market.

When I first read the stats about the 5.1% increase, I was a little amazed since all I've seen are reports of drops over the past year in the majority of California markets. I reviewed the numbers for Sacramento County, and then the light suddenly came on with respect to where the increases came from. Click on the link below and follow along good reader:

Scroll down to Sacramento County's listings. You'll see that of the 11 cities mentioned, only two reported median price increases for the last year (Galt and Rancho Cordova). What sets these two cities apart when compared to the other cities is the amount of new housing development that has taken place over the last year. For example, in the Rancho Cordova area there are a couple of new developments that have recently sprouted with some extremely large (4,000+ sf) homes starting in the $700K range. Up until those homes went up, you would be hard pressed to find a $600K house in Rancho Cordova. So, when you run the numbers, it should be easy to see what's really going on. The influx of large homes and their respective median prices has had a severe impact on the pre-existing median prices of homes in those areas.

Still not sure? Take a look at the other areas, Fair Oaks for example, which reported a 5.6% drop in median price. Last time I checked, there were maybe two or three areas in Fair Oaks that builders could find enough acres to build a few new houses on during the last year. Compare that to Rancho Cordova and Sunrise Blvd/Zinfandel Drive and you can see a vast difference.

I would suspect that the newer homes are responsible for the majority of median price increases around the state. I've yet to find an article that says the exact same house in the exact same neighborhood increased any value in Sacramento County over the last year.

Enough of that, I want to touch on that $567,360 median price for a California home. That is quite a bit of money! This same CAR article reported the 30 year fixed mortgage at 6.76%. Principle and interest alone are $3,683 a month. Add in insurance of $100/mo and property taxes of around $500/mo and you're now at $4,342 a month! I don't know about you, but that's quite a bit of money for a house payment. I think you may now understand the popularity of all the interest only and neg am loans. Just for grins, let's see what an interest only loan's payments would be on this same median price. The payment (interest only) is now $3,196 a month, nearly a $500 difference compared to the principle/interest payment. And how about those teaser loans, where they start out 2% less than the going rate and increase 1% a year? If we calculate the principle and interest payment on $567,360 at 4.76%, we get a payment of $2,963 for the first year.

Doesn't take long to figure out why people can only hang on to their homes for a year or two at best with these prices.


Melody said...

Great article, thanks. I will take a few more months to see the collapse.

Melody said...

I = It... sorry

Max said...

I would suspect that the newer homes are responsible for the majority of median price increases around the state.

What are also left out of the stats are the incentives the builders are offering. Landscaping, pools, and kitchen upgrades aren't tracked in these numbers.

Another reason could be the reduction in volume itself. Consider these two columns of numbers:
       1       1
       1       2
       1       2
       4       3
       5       4
       6       9
       8       9
Avg: 3.7     4.3
Med: 4       3

The right-hand column has a higher overall value than the left hand one, even though its median is 25% lower. The point is, the bigger the spread between numbers, and the fewer numbers you have, the less useful the median becomes.

AgentBubble said...

Yep, the median is a number realtors and NAR may come to rely on more and more as time passes for these very reasons.