Sunday, July 20, 2008

Bay area housing market begins to crack

It's about time! See Calcuated Risk for further discussion. (Note this data covers some regions which are quite far from the bay itself.)

Standard bubble wisdom: they last longer than you think is possible, then pop faster than anyone expects.

I've been calling the bay area bubble since as far back as 2004 / 2005 (actually, from before I started this blog!). I expect the last bubble market to pop will be Manhattan, but pop it will.

It must hurt to think that a house you purchased a year ago might be worth a third less today, with still further to go.

SF Chronicle: Across the nine counties, the median price paid for resale homes, new homes and condos in June plunged 27.1 percent from a year ago to $485,000, dipping below the half-million-dollar mark for the first time in four years, DataQuick Information Systems of La Jolla (San Diego County) reported Thursday.

Among resold homes, bank-repossessed foreclosures - which usually are discounted - accounted for 28.7 percent of all existing-home sales, up from just 3.5 percent in June 2007. Solano County, with foreclosures at 57.7 percent of all resales, had the highest percentage; San Francisco, at 3 percent, had the lowest.

Affluent areas such as Marin County and San Francisco, which until now had resisted most price erosion, saw existing single-family home median prices fall by about 11 percent. Including new homes and condos, the Marin County and San Francisco medians fell about 12 percent to $846,000 and $726,750, respectively.

"This is pretty grim; double digits across the board," said Christopher Thornberg, principal at Los Angeles' Beacon Economics. "It was eminently predictable if you had a realistic view of the world. I heard a lot of people say the Bay Area was never going to see prices fall, San Francisco was untouchable; in San Mateo, it was impossible; San Jose, not with all the tech money, blah, blah, blah. But prices at the peak relative to people's incomes never made any sense."

Note the 27% figure for change in median price is a bit tricky to interpret: it's alway possible that the composition of units sold has changed, with a lot of owners of high end homes sitting on them, refusing to accept the current market price. In that case the average price decline would be less than 27%. It is typical in a real estate crash for sellers to remain in denial for some time, during which the big decline is in number of transactions rather than actual price levels. It's only after the sellers have capitulated that the big price drops occur. In light of that, it's rather ominous that only 7,178 new and resale homes changed hands in June - the lowest June figure since 1993 :-)


Anonymous said...

Manhattan? I don't know. It depends on the rate of dollar depreciation. As the dollar falls Manhattan real estate will be bought up by second homers the world over.

gs said...

I've been calling the bay area bubble since as far back as 2005...

This and this suggest it's just as well that when you called the bubble in 2005, you didn't go massively short. (Or so I assume. Hopefully I'm not putting salt on a wound.) See also this and this.

Any conjectures about the bottom?

Steve Hsu said...

I haven't done the calculation, but are there really enough rich people in the world shopping for second homes in NYC to keep the real estate market afloat? I suspect a back of the envelope estimate would conclude otherwise.

It only takes a little brainpower to identify a bubble. To call a top or bottom (with high confidence) takes special talent!

The fact that you can get badly burned betting too early against a bubble is one of the reasons they persist longer than informed people would expect:

gs said...

I take it that, late in the process of unwinding a typical bubble, prices tend to undershoot fair value. At some point it becomes a good bet to initiate a dollar-cost-averaged long position. Maybe identifying that point is a more tractable technical problem than identifying the bottom. Of course, a financial analyst could get fired well before her 'correctly' optimized cost-averaging strategy began paying off. Such vulnerability tends to increase the probability that the market retains inefficiencies wrt cost-averaging.

(Dollar-cost-averaging short sales does not immunize against margin calls.)

Anonymous said...

John Morgan and Markus Brunnermeier lay down some fundamentals to back up the conventional wisdom.

Anonymous said...

I actually don't think it's going to be that bad in the bay area or New York. The reason for the "collapse" is that people who have good credit and should be able to borrow lots of money can't. That's because the credit markets are shut down. Credit will be back.

In some areas, insane loan practices clearly led to a bubble. But I don't think there was as much of that around here. Which is why the foreclosure rate on the peninsula is very low.

Think of it this way. A lot of households in the bay area have two adults making $100K or more each. $100K may seem like a lot, but it's not in the Bay Area. For example, the County of Santa Clara had over 3300 employees take home $100K+ in 2007. The starting pay for firemen in Redwood city is over $100K. Nurses, contractors, everyone in high tech, and many gov't workers make $100K plus.

That household income can support a $1.4 million loan at 6%. All you need is a down payment and you're good to go.

When the credit is back, the housing market will pop. I would say buy now, but you can't get the loan.

Steve Hsu said...

The bay area housing market is way out of line on metrics like price to rent ratio and price to average family income. That is, even taking into account high average incomes, housing is overpriced.

See links here:

Anonymous said...

Good job!: )

Anonymous said...

Hi all,

Here's an interesting one for you.

An analysis of the current economic crisis we are all unfortunately facing but looked at from a slightly different perspective.

This analysis looks at past banking crises and how they have effected various aspects of the economy.

It is titled The Banking Crisis - Where are we now? (follow the link should you be interested) and has particularly interesting points about how the previous banking crises has effected assets including property prices.

Hope you enjoy.

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