Friday, February 20, 2009

Finding Bottom?

With sales numbers increasing, and prices falling dramatically in many areas, it's time to start looking for bottom indicators. I've been struggling to find signs in my data, but with so much action taking place outside the MLS market, there are challenges.

One idea I came up with is a comparison of final listing prices of homes that actually sold, with the actual sales price. If discounts are being taken, that would indicate a disequilibrium in favor of buyers. Conversely, if buyers are paying a premium over asking, that would indicate asking prices have fallen too much, and houses are attracting offers above asking. With that in mind, I offer these graphs for your consideration:



The first graph shows the average quarterly discount over final asking price for each zip code with more than 200 MLS sales for 2008, while the second graph shows the average price these houses sold for in the same zip code and time frame. As you can see, all the zip codes began 2008 by accepting offers below asking, some well below. However, as 2008 progressed, the discounts declined until buyers were offering a premium above asking price. Also, average sales prices declined throughout 2008 in every zip code, some by as much as 25%.

While the quarterly sales price declines continue to outpace any premium or discount being offered, it is clear that at these particular price levels, sellers are regaining some leverage. I will have more to say on this data in the next couple of weeks.

**Edit**

I forgot to include some selection criteria that you might find important. Listing/sales pairs were excluded from the averages if there were more than 180 days separating the last listing date and the sale/recording date. In addition, any pair that had a greater than 25% premium over asking or a greater than 19% discount below asking was excluded. These ranges were chosen in order to exclude REOs or houses priced far below market as a gaming tactic.

14 comments :

Buying Time said...

You rock Max...this is good stuff.

Max said...

Thanks, BT!

patient renter said...

if buyers are paying a premium over asking, that would indicate asking prices have fallen too much

I'm not sure I can agree with the thesis entirely. Sellers can "underprice" their homes in an attempt to attract higher offers. Also buyers can pay over asking in anticipation of boom times returning again soon.

While it's true that value is whatever someone is willing to pay, there is still plenty of irrational exhuberance that has yet to fade, and value will change once this occurs.

Max said...

Sellers can "underprice" their homes in an attempt to attract higher offers. Also buyers can pay over asking in anticipation of boom times returning again soon.

Absolutely true, but it's impossible to parse out the motivations of interested parties, so what we're left with is the data. During the boom, almost every buyer was irrational, and that's what caused the crash. However, no one would argue that 2005 was a bad time to sell. :)

All this data tells us is buyers and sellers are finding a middle ground. As Sippn has constantly pointed out for the past few months, sales are up. We know prices are down. Therefore, there must be buyers that find these prices reasonable.

If prices continue to fall, I expect sales will rise further, but I do expect an increase in higher-priced inventory later this year as the Alt-A people start showing up.

We've all seen the 5/1, 7/1, neg-am amortizing payment chart, so this may prove to be a false dawn for the market. There's also the recession, macro effects, layoffs etc. You can't deny we're finding a local equilibrium though.

patient renter said...

You can't deny we're finding a local equilibrium though.

For some areas maybe, for the "desirable" areas, I don't think so.

But equilibrium or not, the current situation is such that prices will probably decline further anyways. Equilibrium was meaningless on the upside when other factors were driving things - so too should I expect it to be meaningless on the downside.

Deflationary Jane said...

Max, check the CR entry on falling rents. There is another whole leg down to go.

anon1137 said...

Max, you're at least 5 y too early for this type of analysis. Home prices are still falling, unemploment is going up, economists are comparing these times to the Great Depression and we're barely 2 y past the peak of the biggest home price bubble in history. They're still rounding up the crooks. Next time you start thinking about a bottom, just sit quietly until the feeling goes away.

BTW, sales are up, but a huge % of those sales are to investors. That's not a sign of a recovery, it's a sign that the real estate market is still being used as a casino.

Max said...

Max, check the CR entry on falling rents. There is another whole leg down to go.

The wild card of course is the recession, but so far the data points to an equilibrium being reached. In my opinion, we're rapidly approaching the social event stage of this downturn, and the future is incredibly hard to predict. Right now, the politicians are desperately trying frame the debate as an alignment of interests between the home debtor and the banks, but the bulk of the people aren't having it. If job losses mount, this effort will fail, and any market predictions will be moot.

Given where we are on pricing, I'm not too surprised that we're finding stability. The government hasn't been laying off a whole lot yet, and that's what keeps this area afloat. Notice the governator didn't rescind the 20,000 layoff notices even after the budget was signed. (I know people with >4 years of state service that got one.) These people will not be buying houses any time soon.

I guess what I'm saying is, yes there's a huge downside potential, but the data is showing some pricing stability. Take it for what it's worth.

Dean said...

Hello there. Not sure what you mean about "so much action taking place outside the MLS market" - Please clarify. Is there another place for me to buy homes outside of MLS? Thank you.

Anonymous said...

"Max said...

I guess what I'm saying is, yes there's a huge downside potential, but the data is showing some pricing stability. Take it for what it's worth."

Thats why I check your site Max. Thanks for having the courage to call it as you see it, even if it isnt what some of us who are renters want to see.

Fact of the matter is, whenever the true "bottom" is hit, (be it now, 2010, 2014, whenever), you are going to get comments "this is just getting started" or "weve got a whole nother leg to go", or whatever.

For those of us who are just looking to get on with this and buy some day, I appreciate your honesty. Please continue to call it as you see it, no matter how irked that may make your readership.

Max said...

Is there another place for me to buy homes outside of MLS?

To get you started:

http://reosearch.fanniemae.com/reosearch/
http://www.homesteps.com/
https://www.gmacmortgage.com/reo/search/index.htm
http://www.countrywide.com/purchase/f_reo.asp

Max said...

Thanks for having the courage to call it as you see it, even if it isnt what some of us who are renters want to see.

Thanks anon. The ultimate goal of this site is to frame informed debate. During the bubble it was hard to find data that wasn't manipulated or biased in some way that supported the NAR agenda. That battle is over, and the REIC is retrenching in the halls of government looking for subtler ways to keep itself in demand.

Ironically, stability in the market will render many of the more insane bailout proposals moot. I've argued before that Sacramento was being used as a test case by the banks on how to clear a market, and it seems to be working. I think right now the only thing holding back the final bottom is the hope (by the banks) that the government will bail them out through asset purchases.

We shouldn't fear the market bottom, and we should use our data to help us make good decisions for our future and our families' future. The lessons of the bubble still apply of course, but owning a house isn't all bad. :)

Buying Time said...

"I guess what I'm saying is, yes there's a huge downside potential, but the data is showing some pricing stability."

I agree! As a fellow data-junkie, whose judgement I trust, I was glad to hear you think so too.

Tom Stone said...

Thank you Max,I always appreciate your data and evenhanded approach.