It has been a wild 6-7 months – ever since March when mortgage rates dropped under 5%, the buyers have been very active. Many here thought that worsening economic news would temper buyer enthusiasm, but lately it’s ramped up instead.
Why?
In our first installment we noted the biggest reason – prices are lower than they used to be, and apparently there are motivated buyers that want/need a house bad enough that prices must be low enough for them.
We also noted how the internet has empowered people to search for homes, and serves as a gut check when people see properties they like, go flying off the market – the anxiety starts rising.
The realtor shenanigans being deployed don’t seem to turn off the motivated buyers, if anything they appear to get more anxious the next round, and bid stronger. Their realtor should control the situation, but they get anxious too, and tell the client to keep bidding higher.
Then you have people who just buy because they want to buy real estate, and in many cases don’t put any more thought into it.
In summary, tread carefully, but keep looking!
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The CAR president sent a letter to realtors this week that Kris quoted on her blog:
The upshot is that, statewide, we can expect the median home price to rise 3.3 percent to $280,000 in 2010, while sales will moderate to a more sustainable pace, posting a 2.3 percent decrease next year. 2010 should mark the beginning of a “new normal” for California’s housing market, and likely will feature a steady stream of sales driven by distressed properties in the low end of the market, coupled with moderate home-price appreciation.
I commented that the guy is talking out his ear, and that 2010 sales in San Diego would be 20% higher than 2009 – maybe we’re different here? (I don’t think so). I know that might sound somewhat bullish, but I’m not enthusiastic about prices increasing.
I think as prices go lower, next year’s demand will get even hotter, as long as the Fed doesn’t mind throwing another trillion or two at MBS market.
Here’s why. Increasing sales counts will be fueled by the lower-end, but even the higher end buyers should be delighted to see more REOs coming to market, giving some relief to the stand-off.
Look at this chart of SD attached and detached sales, and cost-per-sf:
| Year | # of Sales | $-per-sf |
| 2001 | 35,421 | $213/sf |
| 2002 | 39,922 | $228/sf |
| 2003 | 43,666 | $267/sf |
| 2004 | 43,390 | $356/sf |
| 2005 | 41,267 | $372/sf |
| 2006 | 31,331 | $365/sf |
| 2007 | 25,501 | $346/sf |
| 2008 | 29,764 | $259/sf |
| 2009 | 25,905 | $219/sf thru 3Q |
If we just see the same number of closings in 4Q09 as we had in 4Q08, this year’s total will be 34,392, a 15% increase Y-O-Y. But with the tax credit motivating additional November sales, this year’s count should end up even higher. Here is how monthly sales look on average, using the nine months of 2009:
Buyers have already been reading in the MSM that prices have been going up for 4-5 months straight, and when they hear that sales are spiking, it’ll provide more anxiety. If they don’t extend the tax credit, I think we’ll still see more sales, buyers have the fever. If they do extend, look out!
The lower prices go, the more sales there will be!
Great post, and I generally agree with your conclusion: “The lower prices go, the more sales there will be!”
But policy makers don’t care about sales volumes, they care about inflating asset values. So the question is: will 2010 be another year of artificially low inventory and interest rates? Tell me what happens to these variables and I’ll have a better view of how 2010 will play out.
If the current policy can’t last forever, it won’t. I’m just interested to find out who has more staying power, the Feds or me. On the one hand, the feds have to deal with international bondholders, but I have to fight off the wifey. Hmmm…Advantage: Feds (haha). Actually my wife is on board, mostly. Once we get passed 2010, all bets are off.
Jim, why aren’t you enthusiastic about prices increasing? Frenzy seems to me to indicate demand is exceeding supply. That would argue for higher prices, wouldn’t it?
JtR,
Do you have any sense or insight on buyers perhaps becoming fed up with the frenzy and going back to the sidelines rather than feeding into it?
It seems that, after possibly getting frustrated from missing out on multiple properties while rents continue to fall, buyers might pack it in and wait for the frenzy to be over.
Do you have any sense or insight on buyers perhaps becoming fed up with the frenzy and going back to the sidelines rather than feeding into it?
In the next two weeks wife and I to decide on stepping up and actively looking for a home, or moving into a bigger rental.
I think it was a post on CR that summarized my thoughts the best. A year ago the banks were all going under and on the brink of complete financial collapse. A couple of accounting rule changes later, and some printing press action – and now banks are posting record profits. What? Record profits? Does that make sense?
Last three months have been record number of foreclosure filings. Record number, worth repeating. Unemployment is still pushing records. Lots of bad news – which is worrisome.. but personally to me not as worrisom as the fact that there IS a frenzy for housing again, so soon, and so entirely artificial.
Got a haircut yesterday – 3 of the ladies working there in the background were talking about how great of at time it is to buy right now, and how hot the market is. I asked the lady cutting my hair how business was, and she said it’s been dead slow.
At least personally, we are not actively in the market yet – the plan was to start aggressively end of this year. But the fact that there is a frenzy right now at is very likely to keep us on the sidelines.
So I’m with duncbdunc – who has more staying power? The fed, my job, or my wife’s patience?
sosad,
Here are my thoughts on why we won’t see price increases for years, mostly dealing with pent-up supply:
1. Lots of sellers on sidelines, just holding on, and what is probably record failure to sell properties:
Expired, withdrawn, and cancelled listings:
2008: 38,855
2009: 19,970 YTD
Sure many of those have re-listed and sold by now, but there are others that have never listed who are waiting for the moment prices go “up”.
For every 2010 sale there will be another seller that thinks they can beat the odds, and lists too high, just to muck up the momentum.
2. You don’t see the REO pricing changing, they’ll stay at or just below comps, and be leading the market. There should be a substantial increase in REO inventory now that moratoriums and loan mods have run their course.
3. There will still be plenty of short sales, and they’ll have to be priced lower to sell.
4. Once the tax credit ends, there should be some hangover – like cash-for-clunkers. It should be reflected in pricing of solds.
Are buyers backing away?
I think they get more determined, especially when they bid over list price repeatedly and keep losing.
They have told their friends and family about their trevails, and they want to bring home a medal – they want to succeed, and show people that they did it.
I’ll address sdnerd’s comment about it being entirely artificial. I disagree in places like Carmel Valley. The FHA loans aren’t needed, and few qualify for the tax credit. The Fed-buying-MBS-to-keep-rates-lower certainly helps, but I think you’d still have demand in CV at these price points, even with higher rates – up to just under 7%. With the big down payments being used, the mortgage payments aren’t as affected by rate bumps.
It was asked a few days ago – how many miles do I drive?
30,000 miles per year (and the gray ghost runs a solid 18 MPG!).
A bit off-topic now, sorry.
Real housing market recoveries do not happen this quickly. This is nothing more than a micro bubble within a larger bubble.
The low interest rates and Uncle Sugar subsidies will NOT last forever. When these are taken away… housing prices will dive and bye-bye buyers.
Great Post Jim. Very informative with a lot of good advice!
What are your thoughts on vacant land? Do you think land prices will continue to fall? Have we reached the bottom? Do land prices typically run up more than home prices during a housing boom? Do land prices overcorrect per say on the downside as the housing market falls?
My question was more geared toward second and vacation home markets when it comes to land prices?
30,000 miles per year (and the gray ghost runs a solid 18 MPG!).
That was my question — thanks!!!
…as long as the Fed doesn’t mind throwing another trillion or two at MBS market.
Nice caveat, too. 😉
I’ve been looking to buy in encinitas area for about a year now and have “lost” about 5 homes (I wasn’t willing to get in bidding war on 2, wasn’t willing to put down 5% deposit on other, other was a POS, etc etc). I’ve been watching all the “pendings” lately and I just can’t believe the prices some are willing to pay right now.
For example, 1720 Caliban Dr., 3 bed, 2 bath, 1319 sq ft built in 1973, no upgrades. Listed at $595k and pending. Assuming 20% down, jumbo at 5.5%, that would put mortgage, insurance and taxes at around $3,400/mo. A friend of mine lives a block away and rents a bigger remodeled house with a view for $2,000/month. Why in the world would someone buy that house for $600k?
I think we’re going to try renting until things calm down.
Jim, do you have a sense of whether the pool of qualified buyers with big down payments is shrinking, growing, or static? In other words, for every person buying a big non-FHA house in CV is there a new family there to replace them?
I strongly believe that pent up demand formed during the bubble years, either because people got priced out or wanted to avoid losing a couple $100K on a stucco box (“the pool”). Now that prices are falling, families have begun to jump out of “the pool” and into home ownership. Because we’ve had artificially low inventory levels, price can be sustained (relatively speaking) as these fence sitters trickle back. But when inventory gets back to normal levels, will there be enough support to sustain current prices in CV?
Maybe in the short-term the answer is yes (for reasons you’ve discussed many times — usually referring to the high number of interested and qualified buyers – “the pool”). But once “the pool” gets depleted back to normal we should get back to affordability driving home price.
With the economy limiting growth in organic buyers (move-up equity and new liquid/wealthy first time buyers) I think coastal San Diego housing will be in for some bumpy roads ahead. This doesn’t even consider the slinky effect of peripheral regions getting cheaper or interest rates rising.
Interested to hear others’ thoughts…
Jinx,
Probably because all of the other homes are priced that much higher.
When I look at the inventory out there, the vast majority are clearly not priced to sell. That leaves a relatively small amount of well-priced inventory for all the buyers to frenzy over.
If the frenzy slows down (post credit hangover?), and distressed properties continue to rise, prices could very well continue to decline, it’s just a matter at what pace…
As JtR states in comment #5 point #2 above, “You don’t see the REO pricing changing, they’ll stay at or just below comps, and be leading the market.”
leading the market in which direction?
Jim, Thanks – great info. WSJ had an article today and seems to confirm your conclusions about prices and inventory. Their ‘Concentrated Risk Map’ is especially telling.
http://online.wsj.com/article/SB10001424052748703816204574487240805281318.html
‘I’ll address sdnerd’s comment about it being entirely artificial. I disagree in places like Carmel Valley … but I think you’d still have demand in CV at these price points’
For CV, I’d agree with you. The commute, the schools, and it’s in that price range that is ‘just affordable’ for a lot of dual income families as well as big money ballers. Very, very strong combination that’s extremely rare in SD.
20-30% off peak and I think you are pretty good in CV and the demand will be there in force. The problem there is just the supply… there needs to be more.
That said – I work with a couple people renting out their 2004-2006 CV purchases at a loss each month. They are all counting on 2006 prices to be here any day now, so they can sell and get out.
They can’t afford their artificially low ARM payments of 3.x%, which they can’t refinance – but they can afford the monthly loss while renting cheaper elsewhere.
I was starting to think about coming off of the sidelines, probably in 2010, until I heard the word ‘frenzy.’ Now I guess I’ll be renting for a while longer. Non-issue I suppose, as I love my rental and the community around it. I’d be happy renting there the rest of my life if there were some way to secure that.
I was curious about the dirt market as well, but the blog post that I asked the question in got censored by someone’s wifey. I just recently started looking at lots, but I have zero idea on pricing and what to be cautious of, other than erosion.
That $ per sf chart trips me out. It makes it look as if we’re back near 2001 pricing, but half of the houses I look at (online) want a premium over peak pricing.
Genius, same here. A few years ago, I targeted 2010 as the optimal purchase date. At the time, I thought I was being too conservative. Now, it looks like I might have been too aggressive.
Depending on how long this “frenzy” continues, I may have to adjust my target date to 2011. Time to call the landlord…
Now that I think about it, I should actually try to talk all you fence sitters into the market so I can enjoy less competition next year. Buy now or be priced out forever!
duncbdunc,
Your wife called. Said that she’s in charge. Wants to look at houses.
If she finds one she likes, you’re not going to say no, are you?
Genius – the same goes for you, doesn’t it? My nitch (guys who drive ’66 Chevys don’t say ‘niche’) is 92067 from $1,000,000 to $1,700,000.
How does that sound?
If you like the Heights, no problem. I’m there too, and have a little home-remodel video coming.
Oldtimer,
Let’s note on that map they pegged San Diego at -4.1% off peak pricing. Did we have a spurt nobody saw?
Has to be at least -20% overall.
I got on another TV spot today, this one for a documentary being shot by the Canadian Broadcasting Corporation. He asked about off-peak declines. I said:
Carmel Valley -10% to -15%
Carlsbad -20% to -25%
Oceanside/Vista -30% to -60%
He said up-front it would only be 30-60 minutes, so I didn’t mind. I asked at the end when it would air, and he said September, 2010. Huh? I think a lot is going to happen in the next year.
leading the market in which direction?
I’m feeling enthusiastic today, check back in December….
Thanks Jim!
relax folks, lots of foreclosures still in the pipeline
Jim,
I’m BUSTED! I was laughing out loud at your response to duncbdunc and the wife caught me reading the blog.
I’ve concealed my reading this blog to save the wife from getting too “excited” about buying a house and the ensuing frustration if we don’t.
Now, I just got the lecture about how if I wanted to rent my whole life I should have stayed in PB (she doesn’t realize reminding me of the glory days doesn’t have the guilt effect I think she’s looking for). I heard a new one this time though, she’s buying a house and buying me a Winnebago. Uh-oh.
I wonder how many sideliner’s or fence sitters are/were targeting this real estate off-season as a time to get serious about a buy, and conversely, how many owners are targeting the upcoming spring as a time to sell. There is some discussion of this here. The results in the coming months will be interesting.
Anywho, my target date to get serious about buying just moved forward a bit. I better call you before the wife does.
BTW, Thanks for the great site!
I think you have me confused with someone who is married and rich. Dammit Jim, I’m not a doctor. When I buy it will be for a bit under $1mm… unless some lonely cougar willing to adopt a cub finds me first(and navigates passed my gf somehow).
92067 is for squares. 92014, 92037 or 92075 please. And tell them to lower their prices. Apply the baseball bat and zip ties if necessary.
I drove a ’72 Chevy in high school. My dad still has it. I dig the ’66.
Looking forward to the remodel video.
Jim, you are way too funny. That line just might top sdnerd’s “ultimate nut shot” post a few months ago. Pow!
Actually, no I take that back. Close second though!
Thanks for the post Jim!
Unfortunately – I dont think the train of well funded buyers will ever really stop. Go to any blog and you can quickly tell who the veterans and the newbies are.
The vets have been there since 05-06 are tired. With the exception of a few delusional permabears who will sit forever, the vets know its a matter of time till they capitulate and move into the market.
The newbies come in and think the bubble really started when they discovered it – they think prices “still” have 40% off to go and will be sitting til that happens.
This process will continue to renew itself. The old bubble sitters tire and buy, the new bubble sitters sit, accumulate wealth, and then buy when they become the old bubble bloggers, replenished by a new crop. The cycle continues.
Thus, I dont think well ever see the # of well heeled buyers diminish for years to come. The issue thus is inventory. If it stays diminished like this, we will have a long slow, dragged out bottom where prices dont move up or down in either direction. If in the unlikely event banks do dump a flood of inventory, watch out.
Jim, Your right, the WSJ numbers look wrong and there’s no explanation. You’ve probably seen the DQ 9/09 chart listing monthly median price change YOY on SFR resales.
Carmel Valley down -9.6.
Carlsbad (broken out by 4 regions) from up +13.8 to down -6.4.
Encinitas down -14.3.
You’re estimates of prices declines look right to me. Anyone have a chart from peak trough? DQ can make a custom but $250.00 is a little steep…
http://www.dqnews.com/Charts/Monthly-Charts/SDUT-Charts/ZIPSDUT.aspx
Half of Jim’s 30k miles are from him driving to and from Pala. 😛
I’m guessing you own a house JT. Amirite?
‘the new bubble sitters sit, accumulate wealth, and then buy when they become the old bubble bloggers’
Remember though, a fair amount of demand is probably being pulled forward with the tax credits, etc.
Also the number of move-up buyers is struggling to get off the floor.
Unemployment is up, wages are down. College graduates now are entering one of the worst job markets in decades.
Interest rates are pathetic, so cash savings aren’t really doing much for people.
Rents are down though, so if you can stay employed and live below your means for a few years sure you could save up a DP.
Don’t get me wrong – I’m a big believer that there is a ton of cash out there, and people making lots of money. But I think the ranks have been thinned out a bit, and there could be a decent gap ahead.
‘the vets know its a matter of time till they capitulate and move into the market’
Stop reminding us. 🙂
I’ve always been told housing was a lagging indicator. Guess that was wrong. Right now looks like housing is pulling us kicking and screaming OUT of the recession.
I’ve always been told housing was a lagging indicator. Guess that was wrong. Right now looks like housing is pulling us kicking and screaming OUT of the recession.
Jakob | October 23rd, 2009 at 11:06 am
A tax credit is helping. Need to see how the end of handouts and an inevitable release of distressed/foreclosed properties into the market affects the buyers and sellers.