Sunday, August 19, 2007

Sacramento Regional Real Estate Trends for August 18, 2007

Another week of modest inventory growth, as four-county inventory increased by 0.6% to 18,246:


Asking prices continue to decline across the board, and (with the exception of El Dorado County median) there's been new two-year lows nearly every week this year:


The bottom is definitely not in quite yet.

On another note, Bubble Sitter and Gwenster have called into question my two-year cutoff for the definition of a "Flipper In Trouble". The two-year cutoff was originally based on the assumption that a normal (non-investor) person wouldn't try and sell a house before the two year capital gains exemption took effect. At the time the data bore that out, with over 90% of FITs identified in the data having bought within the last two years.

Since then, the market has changed drastically. Here is a graph showing the two-year vs three-year Sacramento County FIT inventory since April 2007:


(Note: This graph was the result of a rough query of my database, so FIT inventory numbers here might not match exactly with other data on this site.)

In hindsight, the emergence of the three-year+ FIT makes perfect sense as we've seen asking prices falling into the late 2003 range in some areas. Clearly, this issue needs to be addressed, and graphs updated to show the magnitude of this trend. My goal is to do that by the end of this coming week.





23 comments :

Bubble Sitter said...

Wow, FITs is almost 15% of the Sac County market. When you expand the definition to 36 months from 24 months, the true stats will emerge. This market just keeps getting worse every week. No reason to even think about buying a house for 1-2 more years, and then, only if prices have dropped to the equivilent of what rent costs.

Gwynster said...

I wouldn't say I called your data into question as much as I was seeing people hitting 2003ish asking prices as the market worsened.

Great analysis as always.

Anonymous said...

Always great analysis. One comment: by extending to three years, you will begin to dilute the term "flipper."

3 years is a lifetime in a bad marriage(divorce sale), can lead to a routine job transfer in some industries, and can simply be moving up due to life changes. A newly married couple might be replacing the newlywed home with a larger one once baby #2 is in the oven.

None of those things makes the person a flipper.

Gwynster said...

Anon,

Most of those now at 3 years are sellers that wanted out at 2 yrs and haven't been able to sell. Do you for some reason want that 3yr+ to remain hidden?

Slick50 said...

Anon...
'None of those things makes the person a flipper.'

I'll have to disagree with you there. Although they may have purchased with different intentions (on the surface), they are in fact flippers now because they have to sell. It really doesn't matter why they need to sell, the key issue is that they do.

If you really trace these purchase discussion back (for most single family buyers), you'll probably find that they were operating on the same principles as the flippers. "The market can only go up... who cares if the mortgage becomes unaffordable in 2 years you can sell at a profit beforehand, who cares if you need to relocate or need a larger house because of kids... this house will sell in a hot minute and we'll have all the appreciation $$$ we need for the next." Flipper mentality baby, all the way. Sure they wanted to live there, sure it may have been home but the purchase decision wasn't based on reality (if their decision was based in reality, they never would have purchased in the first place based on fundamentals and price alone). It was based on the fiction that house prices will always go up so better get in now.

Let's face it, the house prices have been beyond reason and affordability for the last 5+ years. Practically everyone purchasing in that time frame was gambling on the future.

Steven said...

I agree with anon.

In my opinion a "flipper" is someone who does not intend on holding a property for more than a few months. If you expand the time period to 36 months then you are no longer showing only "flippers."

As an example, I'm on my third home purchase and we sold the first one after 4 years and the second after 3 years. The first time was a relocation, and the second was a move up.

Max said...

If you expand the time period to 36 months then you are no longer showing only "flippers."

I think this argument is a good one, which is why I think a hybrid approach might be worth pursuing:

I think it's safe to assume that if a person tries to sell their house within two years of purchase, but is unsuccessful, they should still be counted as a flipper even if he tries and sell again during the third year.

One key part of the the "flipper" definition is the intent of the seller. Since it's impossible to ask each seller why they're selling, some assumptions must be made. At this point, I don't think the two-year cutoff alone is enough to capture all of the "flippers" in the marketplace.

What do you guys think?

Anonymous said...

Hi Folks - (Anon was me earlier)

The longer period of time you pick, the more likely you are to catch "non-flippers" in the net. If 3 is good, why not 5 years? At some point you need to make a cutoff. 2 years was un-arguable. (Is that a word?) At two years, you capture the occasional person who planned to live there forever, but died, divorced, or had other reasons that plans changed. But, at two years, the error rate is low and balanced by plenty of speculators just past the two year point.

Is 3 years accurate? Maybe. Is 5 - nope.

Also, let me tell you my story. Just because someone bought in 2004 at insane prices does not make them irrational or a flipper. We moved from one home to another in early '04. #1, paid 166K, sold for 299K, bought #2 for 490K. Thinking about selling and moving to Folsom. IF (big IF right now), we decided to sell and move, we might actually be "under water" price-wise. But, we were working with much equity extracted from the first home. At the time, I knew we were over paying for "intrinsic value" of the home, but we needed a larger home and we made out on the sale side. As a side note, we are excellent savers, and have plenty of dry powder for a buy. And our current LTV ratio (assuming we are back at the 2004 price) is under 60%.

One way of looking at it is this: We paid $490-$140 = $350 for a house worth $500 today, if you carry forward the old equity. But that's not reflected in the screen you would use if we were included.

My point is that every transaction is complicated with specific history and rational for the move. Not everyone has/had their eyes shut and plans on retiring on home equity. As you stretch the criteria out further, you add people who were not and are not "flippers" but are just rational ordinary people living their lives through changes that include houses.

To me, a flipper is someone who bought, intending and expecting to make a quick buck with ever-rising real estate. What's your definition?

I hope this made sense. :)

-EJ

Anonymous said...

EJ Again -

I'm very aware I neglected taxes and transaction costs in my earlier discussion - just so we are clear. It was only meant as an example of a thought process.

:)

-EJ

Bubble Sitter said...

Flippers in Trouble, Forced Sellers, Divorce Specials....none of the reasons matter. The one fact that is important to all of us is the market. Are prices still declining? Have we hit a bottom? How bad are the losses?

This I would like to see every house where the purchase price exceeds the current asking price. One main purpose of this blog has been to counter act the MSM and "Flip this House" fallacies. Real estate is not a game. Your home is not an ATM. Real lives have been and will be destroyed.

Max, I implore you to give us a complete list of Upside Down Sellers (UDS for short)

Gwynster said...

Ok so I was right EJ, you have an agenda.

Let's take my favorite, Davis, as an example. Lots of people bought here in 03 and 04 to house their little scholar while they were in school. The plan was to flip the property in 3 or 4 yrs and use the proceeds to pay for Johnny's education. I don't care that they held it longer then 24 months. A flip is a flip is a flip.

ps. the folks who bought daddy houses are screwed. They used a heloc to fund the second house transaction in most cases which makes the primary residence a recourse loan now - ouch.

Anonymous said...

Hi Gwyn, me again, (EJ)

I'm not sure I have an agenda, but point it out if I have a blind spot here. I'm honestly hoping for a melt down. I'd love to buy at $33/sqft or $50/sqft or $100/sqft. I am not afraid to lose money on what is my residence now. Money is almost always made on the downside - that's when the rational investing begins in anything.

(I don't want anything hidden!)

My point, if I can make it, is this: There are two types of buyers: Primary residence and all-others. Each time I (and others) have discussed primary residence, we get pushed back with an "all-others" example. A second home (or first time buyer), whether it is vacation, college-cum-investment-dorm, rental, flip-a-mansion, fix-a-turd, or whatever is completely different from a residence where there is movement from one home to another home for a family to live in.

Holding onto your primary residence is not evil or wrong. Holding is the middle ground of the scale we are discussing: sell-it-all-renter, holder, and speculator-bought-more-than-one-home and his cousin first-time-buyer-at-the-worst-time.

Maybe this is my agenda - I'm suggesting that I'm agreeing that first time buyers in 05/06 were stupid. I'm agreeing that speculators in 04/05/06 were stupid. I don't agree that everyone who didn't sell was stupid.


-EJ

Patient Renter said...

"I think it's safe to assume that if a person tries to sell their house within two years of purchase, but is unsuccessful, they should still be counted as a flipper even if he tries and sell again during the third year."

This I agree with.

Steven said...

Max:

A hybrid approach would be one solution, but how would you account for each individuals intent when they purchased the property?

The real problem is that when you started this blog most of the people who were upside down were flippers. As this downturn in the market drags on more and more people will be upside down. Just because someone is upside down does not make them a flipper.

I like Bubble Sitter's term of "upside down seller (UDS)."

AgentBubble said...

How about "Sellers in Trouble" or SIT! Personally, I don't care about the intention of the seller. I'm more concerned with the position they are in (how much are they losing if they sell now).

Darth Toll said...

I'm inclined to agree with gwynster and slick50 on this one. Anybody that was trying to sell after two to three years is likely a flipper, and just because they can't sell right now doesn't mean that aren't a flipper wannabee. The reason is very simple: Nobody would jump into the market in '04-'05 with those insane prices and affordability ratios if they didn't plan on selling for a profit within a short time frame. A possible exception to this would be people that didn't actually want to sell but assumed (wrongly) that they could simply re-fi forever or those who got displaced due to job, death, etc. The evidence for this is the huge percentages of Alt-A mortgages in use at the time, many with 2 or 3 year resets to much higher conforming rates.

The flippers knew full well that they would never be able to afford the reset, but they didn't care. The reason they didn't care is that they fully expected to sell at a profit in the near future - classic flipper mentality.

Sure this is a generalization and not everyone fits into this category as noted above. But as time goes on it becomes clear that the vast majority do, in fact, fit into this category in terms of the THINKING process that went into the purchase and to not count them as such would be ludicrous. We can argue all day long about various degrees of flipper-ness in each transaction but the basic flipper mentality was intact the entire time for this group. Even EJ is still a flipper, albeit a more fiscally prudent one than most.

Someone that buys a house PURELY as a place to live, and has no intention of selling is not a flipper. A trade-up could be considered a flipper of sorts as they plan on flipping their house for a profit in a short time frame and using the proceeds to buy a bigger one (EJ.)

5+ years probably couldn't be considered a flipper as the mentality is just too watered down at that point, IMHO.

Gwynster said...

Exactly AB.

Underwater is underwater, spin it any way you want. I just want data. leave the shadow statistics to the gubment >; )

Max said...

How about "Sellers in Trouble" or SIT!

I like, I like. Here's the breakdown:

For 2007-08-18, all four counties:

SIT Count: 2795
FIT Count: 2111
Two year flipper count: 3715

Where an SIT is a seller asking for less than they paid, and an FIT is a SIT who first listed their property less than two years after the last sale.

I'll have graphs and details later this week.

Max said...

Oh, one more thing:

SIT ratio on 2006-08-19: 2.2%
SIT ratio on 2007-08-18: 20.3%

Anonymous said...

Not all sellers who are asking for less than they paid in 2-4 years are in trouble. If they've owned real estate and rolled over into the current house for sale, they've been in the market much longer.

Selling for less than you paid does not imply trouble for everyone. It could mean you are market-neutral. You owned a home, bought a home, are selling and buying another one, for whatever reason.

If prices are climbing, you benefit on sale, but pay more during the buy. If prices are declining, you get less on a sale and better price on the buy. Effectively, Market-Neutral.

Slick50 said...

Anon...

"Selling for less than you paid does not imply trouble for everyone."
_________________________________________________

The point is, it's a loss. You've been taxed at a higher rate because of the inflated value of the house. You're paying more interest because the loan is larger etc. Now that the market is down you'll also be even more in the negative thanks to high agent commissions etc. It's a loose loose situation. Sure it's money that was funny and never real. But tell that to the State that taxed you at the sales price, or to yourself when you find how much extra you're paying (every month) just to maintain a loan which value you'll never recover in the sale.

_________________________________________________
Anon...

"If prices are climbing, you benefit on sale, but pay more during the buy. If prices are declining, you get less on a sale and better price on the buy. Effectively, Market-Neutral."
________________________________________________

This would be true if all the areas of the market where in sync... they are not, however, in sync. Some areas are drastically down from others based on many factors. (Look at the four county median home price variations to see just how unleveled this playing field is.) Until the housing markets stabilize, this argument doesn't really hold true as your new home may still be inflated at a higher level than the home you've just sold.

(Another aspect of this is sell-ability. If your current home won't sell, it doesn't matter what the other homes could be purchased for. Sellers are really in a hard spot because their money, or what's left of it, is tied up until somebody buys.)

smf said...

"How about "Sellers in Trouble" or SIT!"

How about 'Selling House in Trouble,or SH...never mind...

Difficult to say what constitutes a flipper. The better measure would be to get the pre-bubble statistic of how long people would stay in their homes prior to moving.

If, for example, you find out that the typical homebuyer (before bubble) would stay in their house about 5 years prior to moving, you can figure that FITs could also apply to those in homes for 1-4 years.

DrDoom said...

For Max or agentbubble...shouldn't we also be looking at a "months of inventory" graph? FIT and SIT are interesting but isn't it the inventory level relative to sales the driving factor? If prices continue to decline ever house will eventually be SIT. I have read that if MOI is above 6 months prices do not keep up with inflation. At about 9-10 months prices fall in real dollars. At 12 months it is probably a gusher. Will we see the MOI improve before the prices improve? What does the MOI look like over time?