Monday, June 02, 2008

Sacramento Regional Real Estate Trends for May 31, 2008

Bifurcated conditions continued to persist last week, as evidenced by the stabilization of inventory priced at the sub $200K level, the widening spread between median and average asking prices, and the dropping of overall inventory. Seller stress still seems to be a major driver of market participation, although SIT levels seem to have stabilized at around 50% of the market.

Data this week is skewed somewhat by the normal periodic expiration of listings at 30-90 day intervals, so big end of the month changes should be taken with a grain of salt. However, recent end-of-the-month drops in inventory have not been replaced this year as they have during past Spring run ups. Four-county inventory is now well below both 2006 and 2007 levels for late Spring.

The change in the behavior of inventory levels aside, I think it's worth pointing the apparent seasonality in price movement. I think everyone is familiar with this chart:

You can see that prices appear to level off for a while, drop, then level off again. Here's a new chart I put together looking at weekly price change over that same period:

Over the last three years, including this one, prices have tended to drop throughout the year until the spring. Prices then stabilize or increase for a few weeks before dropping once again by midsummer. This Spring, median prices have not increased at all, unlike 2006 and 2007.

This lack of Spring median price recovery is further evidence that the market is not in recovery mode as of yet. Seasonal median price increases have failed to materialize, and there is no reason to assume prices won't drop again by the end of Summer.


Max said...

Interesting comment on Calculated Risk today:

And on Countrywide: the deal may remain "compelling" to Lewis, but I wonder if he has asked why the Countrywide REO inventory is declining - while REOs for everyone else are increasing substantially? I've heard a rumor that Countrywide has simply stopped foreclosing on loans, and some analysts think they might be under reporting their delinquencies.

Buying Time said...

"You can see that prices appear to level off for a while, drop, then level off again."

I noticed this in your charts last week as well. However, the big difference was that last year, inventory was still climbing. This year it is actually falling. Less inventory and more sales, is likely to slow down the pace of the price drops.

Max said...

Less inventory and more sales, is likely to slow down the pace of the price drops.

One would think, but the jury is still out. I'm just surprised that there hasn't been any asking price increase this year.

The market definitely has an "eye of the hurricane" feeling. Like Mike Morgan says, it's all about cash flow. Case in point:

1109 Los Robles St
1115 Los Robles St
1119 Los Robles St

This guy bought a vacant parcel in Davis, took out a construction loan, and built three houses. Once they were finished, he took a 90% mortgage on all three, paid off the construction loan, and has a $20,000 payment each month. They were listed at the same time over two months ago, and he's dropped his asking price $20k on each place.

How long can this guy last before he's broke? A bleed rate of $20k a month is more than most people can tolerate.

There's still a lot of underlying stress in the market. I guess we'll have to wait and see.

Anonymous said...

"This year it is actually falling."

Is it though? Max has already pointed out in previous posts that there is an enormous shadow inventory out there and many banks are marketing and directly selling their own inventory via their web pages, house auctions, etc. thereby bypassing the MLS and Realtors entirely. These numbers on Max's page now have to be viewed suspiciously.

Also, as mentioned above, it appears as if Countrywide is now under-reporting foreclosures and may have even stopped foreclosing on loans. Surely they aren't the only ones doing this. And this maneuvering is unstable and unsustainable and can't be viewed positively. All it means is that when they finally go under, there will be a tidal wave of non-performing assets that someone (BAC?) will have to deal with. A bank simply cannot exist when they have loads of non-performing assets, whether or not they choose to recognize them as such.

IMHO, the worst of the RE bloodbath is still to come and the more knife-catchers that exist just proves the point that the bottom is NOT in. No bottom can be formed until their is a common notion amongst the average person that RE is a terrible investment and always goes down. That would represent capitulation and despair and I'm just not seeing it. I see more vulture capitalism, denial, and greed. And of course a bifurcated market as Max has pointed out.

Buying Time said...

I dunno, I am seeing a couple homes where purchase makes more sense than what we are renting at. So I imagine others are as well (but they may not have the $$ saved up for the down payment).

I looked into the shadow inventory last year, by tracking MLS sales compared to sales in the Sac Bee I don't think its anything new to this year (but I certainly appreciate Max's effort to quantify it!).

If you ask me, there will be some additional deppreciation at the higher end...with a little more at the lower end....then we are in for a long period of the continued foreclosures will prevent price appreciation for several years.

Anonymous said...

What about the impending rates going up? What's that going to do to home resale market? It will crush it even further! Remember, there are fools holding out and will have to sell into the higher interest rate market. That's another flood. Oh, h'bout the prime borrower starting to default?
No way the real estate market bottoming anytime soon. This is a crazy world where home owners are forced to become poor.

Sold in '05- Bought in '09 said...

"Less inventory and more sales, is likely to slow down the pace of the price drops."

I disagree. More sales means that price drops will continue. Sales in my area are hopping and price drops appear to be accelerating.

It is all in the "comps". EVERY sale happening today makes the appraised value of tomorrow's sale ever lower. This is a downward price spiral and it is re-enforcing itself, just like it did on the way up.

Inventory doesn't matter right now. There are plenty of homes for sale and plenty more still being built. There is not now (and never was) a shortage of homes in the Sacramento area. Inventory is going down in the resale market in large part due to the inability of current homeowners to sell their homes for what they owe on them. No one wants to take a loss and most still hold out hope for the return of 2005 prices. The trouble is, some people have no choice and some others see the mistake they've made and are walking away. This leaves the market price to be set by these distressed sales. There are no other comparables to use.

What I am seeing in my search area (Roseville 95747) is an implosion in the price structure. Clean houses (and even some not so clean) have been selling fairly briskly since the beginning of the year. BUT the ones that are selling are in certain price ranges. $399k is smokin' hot with some feeding also going on at $499k. As summer has gone on the previously vacant $299k price point sells everything that is placed there. Everything above these price points is freefalling toward them. Looking at the $500-550k listings, they are now chalked full of homes that are in the 3500-4500 sq-ft range and overlooking golf courses. These homes were in the $750k range at the beginning of the year! The higher end places seem to be falling faster than anything else. Maybe the owners are better off financially and can better afford to take the loss, or maybe they are more ruthless in a business sense and know that when an asset is losing value, you need to dump it.

We considered buying earlier in the year, but have now decided to wait at least another year, by then we will be able to afford a much nicer place in an even better neighborhood.

Anonymous said...

Sold in '05,

Great post. I've never understood the mentality that the high end of the market will see significant price pressure but that the low end will just see a little bit more downward pressure. IMHO, this simply compresses the market in a strange way where you can get significantly more house for just a little more money and doesn't seem like it would result in a natural price curve.

In other words, if these 4,000sf monsters that were 700k are now 500k, what does that do to the house that was 2,500sf and was 500k. Logically, it would have to come down a similar percentage.

So what we're seeing with this bifurcation is that basically there is a price point (200K?) where a lot of folks can actually afford a house with current income levels and the buying is brisk in this range, but anything too far beyond this will come down significantly as there is no interest. To use exaggeration to illustrate the point, what house would you buy, one that was 1,000sf for 200k or one that was 4,000sf for 300k?

Point being that it is a see-saw effect and if the high-end stuff drops enough, then the lower end stuff will have to drop even more to remain competitive with the much bigger/nicer houses. We just haven't seen the first complete cycle of this effect so folks don't understand what the dynamic is yet.