Providing data is not the same as providing an analysis, a conclusion, or a predicted outcome. Data is pointless unless it is correctly analyzed; you draw conclusions and make predictions based on analysis, not data.

Why do you take your child to the doctor when he has a high fever?

Because a high fever is only a piece of data, it is not a diagnosis. The doctor is trained to collect the data about your child and then use his or her professional training to review the data in context and then conduct an analysis. Then he or she uses the results of the analysis to make a diagnosis. Then, based on the diagnosis, he or she provides the likely outcome (prognosis). That method (a variation of the scientific method) is used by all legitimate professionals who are responsible for evaluating information and drawing conclusions. Data leads to contextual analysis, analysis leads to conclusions, and conclusions lead to reliable predictions.

One of the first tricks salespeople learn is how to manipulate data without providing contextual analysis. People look for confirmation of their bias, so when someone provides data that implies that confirmation, they want to accept it and in doing so, feel relieved (ignorance is bliss).

So let's put our ignorance aside for a minute and try a contextual analysis of the "facts" about supply and demand in the San Ramon market.

Is inventory really that low in San Ramon? Let's collect the data from the MLS using Redfin.com, searching on Single Family Residences (SFR) with 3+ bed, 2+ Bath, 2500 + square feet, and price range up to $1.25M:

http://tinyurl.com/yhvpk9t

Wow, there are currently only 34 resale homes in San Ramon that fit this description. That's a very low supply in comparision to the demand! Must be a red hot sellers market right?

Hold on, let's get a little more contextual data before we start jumping to biased conclusions.

We've all heard about "shadow inventory", referring to homes that are going through foreclosure, but that have not yet made it onto the resale market. If there were a lot of these "shadow" homes in San Ramon, then the supply and demand equation could be artificially skewed, making it look like supply is lower than it really is.

So, how much shadow inventory exists in San Ramon? Let's collect the data using the exact same profile as we did for the resale inventory (above): Single Family Residences (SFR) with 3+ bed, 2+ Bath, 2500 + square feet, and price range up to $1.25M:

http://tinyurl.com/yh9o548

Wow! There are SIXTY SIX properties in some phase of foreclosure that have not yet made it onto the market. That nearly TWICE the available resale inventory, meaning that the "facts" stated below are only considering 1/3 of the supply.

So, now we've collected the contextual data and the analysis shows that supply is actually understated by 66%. Instead of considering the potential supply as 34 homes, you should be considering it as 100 homes.

So, the informed conclusion is that supply is artificially low.

What about demand? We've already collected and analyzed the data on demand, below. Demand is artificially high because of unsustainable government policies, such as tax credits, foreclosure moratoriums, loan modifications, absurdly low interest rates, etc.

So the contextual analysis is that the San Ramon market is experiencing artificially low supply and artificially high demand, neither of which are justified by traditional market conditions. As a result, home prices remain overinflated. As foreclosures come onto the market (increasing supply) and the government policies expire (decreasing demand), the supply will go up and the demand will go down, significantly driving down prices.

Ignorance is NOT bliss when you are putting your life savings on the line to make the biggest purchase of your life. And don't trust a salesperson who stands to make as high as $70,000 for closing a single transaction*. With that kind of money involved, it's almost impossible to be objective.

* assumes dual agency (6%), plus a 1% mortgage broker fee, on a $1M home.

Awesome facts Pacita. I like facts better than analysis. Always do analysis by yourself rather than relying on others.

Stephen and Bear

I just posted the graphs for your review.
http://www.trulia.com/blog/pacita_dimacali/2009/11/where_is_…

Pacita and Bear:

Thank for your hard work. A data is better than 1000's words.

Using data provided by Clarus Market Metrics, and comparing information on market listings/sales/inventory for the last two years Oct 2007-2009, here's what I found (too bad I can't upload the charts as a response -- I may do that later)

Let's compare Oct 2009 to what it was in Sept 2007 for simplicity.

Number of properties in contract:
2007 - 44
2009 - 120 (159% increase)

Average days per month on sale before property has accepted offer
2007 -- 62
2009 - 45 (drop of 29%)

Months supply of inventory (less than 6 months inventory generally points to a seller's market)
2007 - 8.8 months
2009 - 1.1 months (a drop of 88%)

Median sold price
2007 - $712,500
2009 - $597,250 (drop of 115%)

Number of SOLD properties (remember: this is October month comparison)
2007 - 42
2009 - 66 (increase of 24%)

Number of For Sale properties
2007 - 522
2009 - 251 (a drop of 271%)

Correlation: fewer homes for sale, increasing number of homes sold --- lower supply, higher demand.

What do these tell you?

It has now been eight months since I posed my original question. I figured I would revisit my unscientific survey using redfin. Let's see what has happened since March 2nd:

Again, I looked at the reported sales and listings of homes in San Ramon in the 2,500-3,500 sf range:

Sales (over previous 3 months):
March 2nd: 29 sales for an average of $278 per sf
March 31st: 26 (-10.3% M2M growth) sales for an average of $262 per sf (-5.8% M2M growth)
April 29th: 21 (-19.2%) sales for an average of $263 per sf (+0.4%)
May 30th: 40 (+90.5%) sales for an average of $262 per sf (-0.4%)
June 30th: 52 (+30.0%) sales for an average of $268 per sf (+2.3%)
Aug 1st: 53 (+1.9%) sales for an average of $275 per sf (+2.6%)
Sep 1st: 57 (+7.5%) sales for an average of $272 per sf (-1.1%)
Oct 4th: 54 (-5.4%) sales for an average of $273 per sf (+0.4%)
Nov 1st: 38 (-29.6%) sales for an average of $276 per sf (+1.1%)

HUGE drop in number of sales. In fact the largest drop since I have been tracking the San Ramon market. The price per sf has ticked up slightly and is now as high as it has been since March. Seems like multiple forces are contributing to the slow down: School year has started, tax credits are drying up, and inventory is extremely low (see below).

Listings (current)
March 2nd: 71 listings for an average price of $313 per sf
March 31st: 75 (+5.6%) listings for an average price of $306 per sf (-2.2%)
April 29th: 67 (-10.7%) listings for an average price of $299 per sf (-2.3%)
May 30th: 55 (-17.9%) listings for an average price of $327 per sf (+9.4%)
June 30th: 46 (-16.4%) listings for an average price of 328 per sf (+0.3%)
August 1st: 40 (-13.0%) listings for an average price of $319 per sf (-2.7%)
Sep 1st: 40 (0%) listings for an average price of $310 per sf (-2.8%)
Oct 4th: 32 listings (-20%) listings for an average price of $318 per sf (+2.6%)
Nov 1st: 26 listings (-18.8%) listings for an average price of $317 per sf (-0.3%)

Listings are also dropping like crazy. Two months in a row with nearly 20% drop in number of listings. In fact, there hasn't been an increase of listings since march. Perhaps this is the bottoming process, or it could just mean the San Ramon market is dead until spring/summer next year.

What are your thoughts?

As always, timing is everything. But the more important lesson is that blindly hanging on with a bullish or
bearish view is a flawed strategy. Every investment has a window of opportunity; unless that window can be
identified, leaving the money invested is somewhat like gambling. That said, the window can be relatively
long—sometimes spanning months or years.

“Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that’s who. Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area schoolteacher’s recurring ‘dream of homeownership’ could not come to pass. Shimon’s down payment was a tiny 3.5 percent. This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about, not surprisingly, the sad shape the FHA finds itself in.”

“Much of the blame for the housing bubble-then-bust goes to these government agencies. Kenneth Donohue, inspector general of the Housing and Urban Development Department, seemed to be shaking his head. ‘What does the FHA think it is doing by asking only 3.5 percent?’ he asked. (FHA is part of HUD.)”

“But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to ‘keep prices from falling too fast.’ Thing is, we can’t support real-estate values with shabby lending practices. That’s what got us into trouble.”

Good news. It has already gone down 15%. It was listed 1.2mil, but recently just sold for 1.03mil.

Rouriel,

Not sure if you checked the market today, but it’s tanking big time and if that continues through the closing bell, the DOW will have lost over to 400 points this week. Why? Because folks are realizing that the “jobless recovery” is nothing but smoke and mirrors, propped up by unsustainable government policies, most of which are either ending or losing their short term effect on the economy.

Once the government interferes with a naturally correcting market, it runs the risk of creating a false recovery that will lead to an even larger (and/or) longer correction. This can lead to a “sagging W”, where the first dip is a recession style correction, followed by the artificial recovery (from stimulus), which is then followed by a much deeper and longer second dip that can become a depression.

Renowned UCLA economists Harold Cole and Lee Ohanian recently published evidence that the FDR’s “stimulus” policies actually extended the Great Depression by over SEVEN years. Why? Because:

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,"…"salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge…

Sound familiar? That is exactly what is happening right now.

You are happy that the price for a NEW Santorini is increasing when every other economic indicator shows that it should be going down by another 15 – 20% (at least)? That's frighteningly short sighted.

And the reason none of you will be specific about when, what, and how much you paid regarding your new home purchase is because any new home purchased in the last three years is worth far less now than the price paid to buy it. You are all underwater on your mortgages (and understandably defensive about it).

One of the biggest current threats to the San Ramon mid high range housing market are “zombie” owners, who are still able to pay their mortgage even though their mortgage is hundreds of thousands of dollars more than the current market value of the home. All it takes is a job loss or relocation and these folks are stuck trying to sell short or just walking away and allowing foreclosure.

The last time I refreshed my Windemere resale listings, every single resale home on the market was selling at loss to it's close adjusted sales price. Perhaps I'll refresh that list later today.

There are only two choices, but both have the same result. Add more stimulus to further delay the correction, which will delay the economic recovery and extend the recession. Or, stop the stimulus and allow the market to correct. Either way, we will have the correction, sooner or later, and prices will fall substantially. Don't believe the false bottom, it's just the middle hump of the W.

Rouriel,

The comment about agents having to sell three $200k homes where they used to sell one $600k homes is as ludicrous and as it is underinformed. Even in the real estate boom half the agents who were licensed couldn't sell coats to eskimo's or ice cream in hell. Has income dropped for the next 25% yes, have the top producers seen their incomes drop as well, of course. Funny thing about that is so have many people in the rest of the country.

I don't even know where to begin with explaining what is wrong with that statement but let me say, it couldn't be further form the reality.

coffee break time

http://2.bp.blogspot.com/_pMscxxELHEg/Suru6GthhkI/AAAAAAAAGr…

Which one is you?

HawkEye,
Please keep posting your Analysis , they are really very informative. Reaction of Folks lie you who already missed boat is natural. And also it is the fact there is upswing currently in Windemere Market so they have a point to make .

"If housing market recovered why are Builders begging congress to renew the Home buyers credit . Why there is a need to keep interest artificially low why not let the free market forces work . I think no market can remain immune from broader economy and people are realizing about the stock market at that it has good to far too soon."

The entry point to housing market was first half of this year. On average it was down 10 to 15% right after crash. Right now global stock market has bounced back to pre-crash level. Housing market also recovered most of lost ground. There is no doubt a correction will come. But that will be only a correction not another crash. You shall take a dive to jump into either stock or housing market first half of this year. Too sad, you missed both of them. But, be patient, you deserve a second chance, because you are a PROFESSIONAL.

Mike/Hawk and whoever else that have bought but thinks Windemere will keep going down. Enlighten us with your home research experience and price. We'll all track the price of those homes and see if it keeps going down. If it does, then you can prove us all wrong. All the other stuff you're saying doesn't offer any help to the buyers here in the forum

I don't think people like to share the personal house transaction information here. But the reality is that builder does increase the price in Windemere. Hawthorne sale price is about Oct,2008 level.

Peter/Rousen and whoever else that have bought but thinks Windemere will keep going up. Enlighten us with your home buying experience and price. We'll all track the price of your home and see if it keeps going up. If it does, then you can prove us all wrong. All the other stuff you're saying doesn't offer any help to the buyers here in the forum.

Peter,

Please ignore hawkee. He has serious problem. If he is really helping buyers, he should provide analysis of peninsula where slum houses are selling at $500/sq. ft. Looks like he is waiting for long to buy house at windemere but can not make decision. Also, he has plenty of time to do these dirty tricks. Lets enjoy the class life at windemere. He has no idea what he is missing everyday :)

which one am I? bitter buyers? world is much greater than what your view can possiblly comprehend. guess I over-estimated you, looks like you didn't even have a grip of an elephant's toe.

I am one of the happy home owners(who represent significant majority of home buyers). my home buying history:
'93 - 1st home bought in sunnyvale ;
'99 - moved to mission san jose ;
'09 - moved to windemere ;

again, go get a real life.

HawkEye,
Please keep posting your Analysis , they are really very informative. Reaction of Folks who already bought house is natural. And also it is the fact there is upswing currently in Windemere Market so they have a point to make .
If housing market recovered why are Builders begging congress to renew the Home buyers credit . Why there is a need to keep interest artificially low why not let the free market forces work . I think no market can remain immune from broader economy and people are realizing about the stock market at that it has good to far too soon.

OMG, bitter buyers or jaded Realtors, to be or not to be.

Peter, what's your problem?

I do this for a living and happen to think that non-expert folks should have access to the same kind of data that industry professionals and the wealthy use to maintain their status.

Note that, for the most part, the only folks who are rebuffing me are either bitter buyers or jaded Real Estate Industry folks (Bob and Carl excepted).

So, which are you?

To Hawkeye -

Have you truly seen, and know what an elephant look like, as a whole?

And are you providing your free market analysis to other potential home buyers, or you have an agenda?

Either way, if you think your posts can make an impact, you need to take your medication.

and if the later, then you worth even less than a real estate agent.


Go get a decent house and enjoy with your family. You may get the home price crash you've calculated & anticipating, in another 10 yrs. But by then your kids may already went to college, what's the point of getting a nice house then. In that regards, you know any home buyer is smarter than you're.

Rouriel, please take your medication. That's not a joke, this is a joke:

Two women were walking through the woods when a frog called out to them and said: “Help me, ladies! I am a real estate broker who, through a curse, has been transformed into a frog. If one of you will kiss me, I’ll be returned to my former state!”

One woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The other woman said, “Didn’t you hear him? If you kiss him, he’ll turn into a real estate broker!”

The second woman replied, “Sure, but these days a talking frog is worth more than a real estate broker!”

Another joke:

It should be no surprise that the steep drop in home prices means a realtor has to sell three $200k homes to make as much money as he once made selling one $600k house. Add to that fewer sales, and it turns out a lot of realtors are moonlighting or leaving the business. The Wall Street Journal wrote on this topic (subscription required).

Mark has a great point regarding flippers. He's a good analyst with a macro focus, coming from the perspective of a mortgage banker.

http://mhanson.com/blog

In essence, the investors who buy foreclosures and flip them are skewing the sales numbers, because in a relatively short period of time, the house can sell three times before it is actually purchased by a "real" homeowner.

Sale #1 happens when the bank buys the house back in foreclosure. Sale #2 happens when the investor buys the home from the bank. Sale #3 happens when the investor finally "flips" the home to an actual buyer (who intends to live there).

That series of transactions skews the sales figures by 66%, since only one of the three sales is actually a "traditional" market purchase, yet all three are counted in the "percent of home sales" figures that the media and CAR are throwing around.

PS: Rouriel, did you take your medication? If you are going to attempt to inject levity, at least tell us a joke. Something like:

The Devil tells a Real Estate Agent, “Look, I can make you richer, more famous, and more successful than any Real Estate Agent alive. In fact, I can make you the greatest agent that ever lived.”

“Well,” says the Real Estate Agent, “what's the catch?”

The Devil smiles, “Well, of course you have to give me your soul,” he says, “but you also have to give me the souls of your children, the souls of your children’s children and, as a matter of fact, you have to give me the souls of all your descendants throughout eternity.”

The Real Estate Agent laughs and says, “seriously, what’s the catch?”

Hi Bob,

I think I mentioned in my various prior posts and threads that the segment I'm tracking is the "mid high" range, which we currently define as $750K - $1.2M (i.e. superconforming, depending on down payment and loan type).

My colleague tracks the "luxury" range and she is saying the same thing as you. Prices in the luxury market are seeing the significant relative downward pricing pressure and the trend is gaining momentum.

As prices in the luxury market drop down, folks in the mid high market will begin to have access to inventory they could not previously consider. The demographic for the mid high range typically has more liquid assets than the lower ranges, so as prices in the luxury market come down, the mid high range buyers will be tempted to liquidate assets (for larger down payments) in order to push out of the mid high market and into the low luxury market. Why buy a Santorini for $1.2M, when you can wait a bit and buy a small estate in the hills of Blackhawk that is trending down to the $1.3M range (previously sold for $1.7M):

http://www.redfin.com/CA/Danville/4310-Quail-Run-Ct-94506/ho…

We call this trend "transition gapping", where a significant change in one segment drives people into another segment. When the markets are changing relatively rapidly, the gap between segments narrows so much that folks can make the transition to a lower or higher segment.

It gets especially dangerous for the mid high range if folks are leaving on both ends. Top mid going to low luxury while bottom mid goes toward the conforming segment. This can result in a lack of buyers in the $900K to $1.1M range, as the demographic moves either up or down, out of that segment. We call this type of trend "simultaneous divergent transition gapping" and it can create significant price instability, often the tipping point for "punctual" price adjustments (i.e. big changes in a relatively short period of time).

Hawkeye,

Way ahead of you on the sales data. Posted this on my blog before you posted a response to me.

http://bobbyg94596.blogspot.com/2009/10/schizophrenic-sales-…

Again the stipulation that the price point from 800k and up are risky purchass now is the important point that is nowhere in any of your posts. On that we agree.

A recent analyst spoke to our RE/MAX office. I am paraphrasing but she basically said that the market over 3 million will see price declines as high as 50%! The implications are that it is going to get real cozy between 900k and 1.5 million. I have several interested parties in this price point and am advising them to be very patient and settle for nothing less than perfect.

Bob,

Let me be clear (as I thought I was from my prior posts): I am tracking the mid high market, which is from $750K to $1.2M (which is mostly the superconforming market). All of my analysis are based on this market.

I agree with you that in a non-bubble period, a home should be purchased for its utility value and as home values track against wage growth and inflation, it is essentially a forced savings account.

But neither apply if the home prices are artificially inflated as they are now. Yes, the market over the summer was relatively active, but I believe that was due to the normal summer season, which was compounded by the current unsustainable policies that are artificially delaying the continued correction (tax credits, foreclosure moratoriums, absurdly low interest rates, loan modifications, etc.).

And apparently I'm not the only one who thinks this, lot's of news this week about the housing market:

1. Today the DOW lost 120 points and NASDAQ lost 56 points on news that new homes sales are down and that the recovery is not based on fundamentals, but instead on unsustainable injections from the government (as I have been saying for six months):

"NEW YORK (Reuters) – U.S. stocks tumbled in a broad sell-off on Wednesday, sending the benchmark S&P 500 lower for a fourth straight day, after weak data on new home sales heightened concerns about the pace of the economic recovery."

http://news.yahoo.com/s/nm/20091028/bs_nm/us_markets_stocks_44

2. Today the Mortgage Broker's Association reported a 12% decline in originations, as upside down loans failed to qualify for refinancing and the artificial stimulus of the tax credit waned (as I've been saying for six months):

"Mortgage applications dropped a third week for the week ended Oct. 23 as refinancing cooled and the end of the tax credit for first-time purchases drew nearer. The Mortgage Bankers Association’s index of applications declined 12 percent to 562.3 from the prior week’s 641."

http://sanfrancisco.bizjournals.com/sanfrancisco/stories/200…

3. And even your buddies over at the California Association of Realtors announced Monday that "Bay Area Home Prices Continue to Slide", noting that Contra Costa County had the biggest slide (13.5% from last year) as the artificial effect of the tax credit began wearing off. In that article, CAR admits that:

“The success of the federal tax credit is clear. Nearly 70 percent of first-time home buyers report that the tax credit was ‘the most important’ or a ‘very important’ factor in their decision to buy a home.

http://sanfrancisco.bizjournals.com/sanfrancisco/stories/200…

Guys, the things you are saying are based on "normal" markets that track inflation and wage growth. In those cases, I generally agree with what you are saying.

But there is nothing "normal" about this market. Come on, even the MBA and CAR admit that sales are being artificially inflated by forces that cannot be sustained and as those forces crumble, so will the market. This house of cards will fall unless the government renews and expands the tax credit, continues to enforce foreclosure moratoriums, continues to support loan modification, continues to support absurdly low interest rates (zero percent fed rate?!), etc.

If you want to drink the coolaid, go ahead. But when the seasonally adjusted October numbers come out, you all owe me a beer.

Hawkeye,

Eventhough Real estate and Stock market has same dynamic one should not consider. For example, in housing bubble and burst goverment may jump in and rescue, in stock market it does not happen. The rate of mortgage (which is driven by treasury and now mbs) is pretty much controlled by Fed now a day, that was not the case in past. Now world is flat, past is not present, things are different in different time. Dollar goind down has a much effect at world level than local real estate market. People (mostly foreigners) literally come to buy house with suitcase full of money.

Hawkeye,

The problem is two fold. The first was resolved in Prad's post about about what I argue as the base valuation of real estate and the fact that people throw the word "investment" around too loosely with regards to their home. I still hear a lot of that in this thread. If anyone cares here is the link.

http://www.trulia.com/voices/Home_Buying/_sqft_living_area_b…

A home is not a stock or a pure investment. It is an asset that should be treated like an investment but the mathematics are totally different.

In the above thread Hawkeye argues that a home is a net liability. From a pure investment evaluation that is true in many ways. Bob Brinker on the otherhand characerizes that net liability like a forced savings with a return at the mortgage interest rate. (Assuming a fully amortized loan). As people pay the liability down they "earn" 5% or 6% or whatever the interest rate on their mortgage is, as the principal is paid down. ( I'm agreeing with you here Hawkeye). Additional appreciation from inflation or market conditions becomes additional return.

A house is also a home and a stock is a stock. Bubble dynamics only applies when one paints with such a wide brush to render his arguement meaningless. In San Ramon below superconforming there are multiple offers on almost every well priced home. This fact alone should tell one that quoting regional numbers about incomes and values doesn't apply here. The demand outpaces supply and appreciation will increase faster than incomes and depreciation will be less there than in other areas deemed less desireable.

I am going to repeat this here on this thread from the above link:

"Lets say (that is the recovery will happen by) 2015 as CAR expects. 60 months of rental (5 years) at $2000 per mo is 120k. Do I think prices are going to fall 120k on homes below 600k? NO! (all things being equal)"

This means that so long as there are superconfoming loans around and interest rates stay low, that the market up to about $750k will remain stable. We are seeing multiple offers on almost all homes up to this price point and the median price of homes has moved up since last October due to liquidity in these price points and lower. Do I see 800k homes falling to 680k? I really dont. Larger homes in that price point are currently pending at $210 per square foot and smaller as high as $335. Average time on the market is 35 days (very short still) with the median being mroe telling at 18 days.

The market is going to have to crash or interest rates are going to have to spike to make Hawkeye correct. The demand is still there for homes in San Ramon.

If you do believe "government will have to pull back on the stimulus" and "the market will begin correcting again", stop searching for a house now. You better bet all your saving shorting stock now especially financial stocks. You can easily make millions out of it and buy wherever and whatever you want in Penny.

That was not a comparison between stock and housing, it was a demonstration of "bubble dynamics", which are consistent regardless of the market invovled. Bubble dynamics predict the behavior of people and markets that experience a bubble...it doesn't matter what the market is (housese, stocks, beenie babies, etc.).

The real estate bubble is behaving very much like the stock bubble, because they have very similar dynamics (even if the markets are very different).

Sk, you are correct. As long as the government continues foreclosure moratoriums, tax credits, low interest rates, etc., the correction will stall and possibly even reverse (re-inflating the bubble). However, we currently running massive deficits that make it impossible to continue that stimulation indefinitely. At some point the government will have to pull back on the stimulus and without that artificial support, the market will begin correcting again.

The same dynamic happened during the dot com bubble, when Venture Capitalists kept injecting funds into failing companies, propping them up when they should have failed. Eventually, the VC's pulled out and those "zombie" companies finally died. The government is the equivilent of the VC's for the housing bubble.

And yes, a "W", rather than "V" style recession would be a disaster. There is no such thing as a "jobless" recovery, despite the spin that folks are trying to put out. The only way the economy can grow is if folks are employed and wages are outpacing (or at least matching) inflation.

Stephen,

I am still here. Very interesting discussion. This thread has taken on a life of its own!

I will be making my monthly update in a few days.

What's wrong with the people comparing stock with real estate, both are different animals. It's like comparing apple with oranges. House is primarily purchased to live (atleast for most of us), Stock is primarily for investment.

I know people make lot of analysis back in Mar when stock market down, all pros were talking it will take long time to recover, look where we are at now, nobody is rewinding those analysis.

Correction is coming. When it arrives, it will surprise everyone. Act before it is too late.

HawkEye,
I know the Stocks never recover to 2000 level and your analysis is correct about people chasing the false bottom during those days. Based on your Analysis do you see any time line for such correction taking place in Bay area Housing market , It seems govt. is going to extend the housing credit again and they are in no hurry to increase the interest rate even so Dollor is declining.

In San Ramon even so the Housing prices are not reflective of income levels but there are other factors in play which will resist any downward presure untill there is a double dip recession in that case there will be lot more things to worry about than Home prices.

Another one, everyone who buys stocks is purely for investment purpose.

The only difference is that you can't live in a "stock" and you get kicked out of your "stock" you can't rent another.

Not the best analogy.

It's funny.

In 1998, when venture capitalists were artificially inflating the value of dot com companies, we were telling folks that the market fundamentals did not support the stock prices. We said "don't buy and if you own, sell".

At that time, folks said, "you are wrong! Look! The stock price keeps going up! You missed the boat and are just PO'd".

Then the first phase of the market crash hit in March of 2000. But it wasn't a total crash. It was actually a series of mini crashes, followed by mini recoveries.

For nearly six months, there were a series of false bottoms where smart folks shed their dot com stock, while other (not so smart) folks misinterpreted the relatively low prices as bargains in comparison to the previous highs and bought their shares.

All the while, we were telling folks not to buy, because market fundamentals did not support the current prices, even if they had already corrected by almost 40%.

During that period, everyone said "you are wrong! Look! The price is almost half what it used to be! It can only go up from here!...it's a great time to buy!!".

Sorry, not so. From September 2000 through December 2000, the "real" crash began. The venture capitalists realized that they could not continue to artificially prop up these companies and they stopped doing so. The end result was nearly a 2000 point drop in the NASDAQ.

Yikes. People's life savings were cut in half. Instead of playing golf, Grandpa was filling out an application to work at Walmart, so that Grandma could at least stay home and not have to go back to work.

Even more amazing is that in 2001, folks were still calling false bottoms in January, April, and September, buying these stocks as they continued to tank (thinking they were relatively good deals based on their former value).

In fact, the market bottomed a nearly a year later in Sept 2002, then as predicted, entered into relatively steady growth phase based on actual, market based valuation of the companies (i.e. market fundamentals).

Hmmm, sound familiar? That is exactly what I've been saying about the housing market in San Ramon. In fact, you can replace "dot com" with "house" and "venture capitalists" with "Government" in my above comments and everything is pretty much a reflection of what is happening in the current housing market.

Oh, what a hot topic it is. In 6 months, we already had 100+ answers. Is Gdn Bear who originated this thread still there?

Hawkeye

I read your posts but I did not respond because your analysis is based on a wrong model. Your customized analysis of San Ramon which did NOT represent Windemere.

I consider your analysis to some analyst in 2002 basing Apple's market value to Apple's share of PC market share rather than the Ipod and Iphone potentials.

Bottomline from your analysis, Windemere is still overpriced and it will go through a correction. You have been promoting that since early this year. I agreed with you when SP500 was around 700 but when the government decided against the nationalization bank and decided to reinflate the housing market and that put a major dent into your hypothesis. With SP500 @ 1000+, the world has averted a major depression and we are just in a deep recession. When the entire housing market mood changed (extremely negative to moderately negative) and Windemere market changed direction in Jun, I changed my mind. The average Windemere DOM went to less than 14 days from 6 months in matters of months. If that did not change your opinion, you are hopeless. So what, people are selling at loss or real estate agents are selling their own houses at loss. Most of people who bought home in 2005 lost money or leverage extremely high lot money but the underlining demand for Windemere home is still there. People waited the hurricane to pass and now they are taking action.

As far as the racism remark, there was none intended. My behavior/motive 15 years ago was no different from the people I described in my previous post. I was trying to make a point. Any way, good luck. This will be my last post on this subject.

George, did you even bother to read my responses before you replied? My analysis is custom tailored specifically for the San Ramon market; it reflects the actual behavior of folks buying into that market from 1995 to now.

And if you want to ask and answer your own questions and then launch into a strange (and borderline racist) diatribe, maybe you should find a park bench somewhere, where you can have a seat, enjoy your bottle, and talk to yourself...

Hawkeye

Rather than trying to argue from a macro-economics view(which is 10,000 ft view), put your boot and go to one of Windemere open houses and observe a true situation in Windemere.

Q. Are the people who are attending Windemere homes same type of people that are living in Belmont, San Mateo?
A. Probably not. Most potential buyers in Windemere are Indian or Chinese(but I think mostly Indian) that probably been US for maximum 15 years. Many Asian living in Peninsula are probably born in the USA and they probably cannot relate to the new comers (too aggressive?).

Q. Do you think the buyers are a typical average American family that you are constantly referring to in your statistics.
A. No, these people are from a country that average annual income is less than $1,000 and any decent houses (similar to Windemere homes) will cost over 100X of annual average income in India.

Q. Why don't they consider some place cheaper such as Dublin?
A. Most likely, the people moving into these area want to have a chance to send their kids to Ivy league school. The minimum is UCLA/UCSD. Only thing they had when they came to the US is their education and they probably saved their downpayment by being extremely frugal and now they are willing to spend over 50-60% of their income into a house to send their kids in a good school district. 4.5 X income ratio ratio you mentioned is irrelevant. Would most average American family willing to put 50-60% of their income to live in a good school district. No but these people will. With that in the perceptive, you need to calibrate your brain.

In 1995, there were NOT that many Asian living in San Ramon. Many Asians did not move into San Ramon area due to a perceived discrimination. In Windemere area, the ratio is now 65/30/5 (Asian/White/others). This is attracting more Asian (primary Indians most through the their friend) to the area and this is the group that is pushing up the price. Nothing is more important than education for their kids for this group. You should not consider Windemere area with one broad stroke with a rest of the country or Peninsula. Windemere house price will continue to go up until it reaches a parity with Fremont Mission Area. I think this will have some negative consequence such as white fleeing the area but overall, it will increase the property value as DVHS becomes a top ranking HS in California. For this group, Dublin is NOT on their radar. School system is NOT good enough. Same goes for Belmont and San Mateo. Not under consideration from this group. Any way, you love to argue. Use that energy to make money. By ignoring a real fact, you probably lost $100K while you are trying to make your point. Well, financial hurricane came through and the worst is over. $100 AIG bond with 5.5% coupon that was $72 in Jun is now $94. B of A was $3 stock in March is now $15. It is not $60 stock but it is better than $3. Try to adjust the reality and make the decision accordingly. Just arguing sake of arguing does not make a sense.
FYI. I bought a home at Mission SJ in 1996 that was 8X of my salary. I had some money from stock option and It was cheaper than sending two of my boys to a private school. Still the mortgage payment was over 50% of my net income. After they graduated HS, I sold it for 2.8X of the original price. I see same thing happening with Windemere. Unless the world economy collapses, the home price of Windemere will go up until it is in par with Cupertino/Mission San Jose. Open your mind; otherwise, you will never own a home in California City especially one with a great school district.

Hi Bob, thanks for the response.

I agree that lax lending standards and loose credit policy have allowed San Ramon home prices to outpace wage growth and inflation. However, keep in mind that my analysis is specific to the mid high market in San Ramon, not the broader Contra Costa County market.

As I said in my post below, I am using a 4.5X price to income ratio (very high) which already accounts for the regional premium; this means that the ratio is inflated to correct for the imbalance of supply and demand associated with the appeal of the local market (location, weather, schools, etc.). In other areas, where there is excess supply (or tornados, bad schools, crime, etc.), the price to income ratio would be much lower because people are not willing to stretch themselves to buy in less desirable areas. So, yes, I have compensated for the factors you have described with regard to supply and demand, by using a higher price to income ratio.

At the peak of the bubble, homes in the mid high segment were selling for more than twice their “non bubble” fundamentals would justify (with location premium factored in). So in 2006, homes in that segment were selling for $1.2M when their inflation adjusted value should have been in the high $500Ks. Four years later (now), those same homes are selling for $900K when they should be selling for $600K. So yes, the market has corrected, but it is still highly overpriced and has by no means fallen back to being in line with fundamental market forces, even accounting for the regional premium.

And more importantly, factoring in the high price to income ratio, this market segment was tracking against wage growth and inflation before the bubble. The divergence in price to value was not a natural phenomenon driven by regional forces; it was a direct result of the government’s housing and monetary policies. Now that those policies have changed, the G-folks are trying to keep prices propped up by other means. However, those artificial forces can be maintained for only so long. Once they wane, the market will return to its regional, premium adjusted baseline and then go back to tracking against wage growth and inflation (as it did before the bubble).

The reason for the outpacing of values in San Ramon compared to incomes is not as it is being represented right here. Here is why.

1) Values were out of whach mostly ahving to do with loose credit and all else that was wrong with the credit market (regardless of cause). Easy money, speculation and lack of availability created an environment where prices skyrocketed.

Now that values have fallen we are going back to where the values based on economics that are more closely gounded in reality.

2) Hawkeye and I heve gone around on this in other posts but in my opinon his analysis doesn't take into consideration demographics. The 2003 Greebelt Alliance report (hardly a pro development report) cites ABAG numbers that BACK THEN showed the supply demand differential in the "affordable" end of the market to be out of whack 30k orso housing units. A 2009 UNC report for Contra Costa County shows GROWTH to be a consistent 1.4% per year going back a decade. IN real numbers that ewuated to a little over 100k in new residents. So the supply demand differential is 130k.

Rest assured that in the whole of the Bay Area there have not been this many homes constructed. In the Dougherty Valley there are a mere 11,000 total homes proposed. Since Diablo, Alamo and Danville are built out that leaves San Ramon (and East County, Dublin and Livermore) to absorb the affordable and new resident market. As Diable (Which is now the top 1% of the top 1% of income earners) Alamo, and Danville become more exclusive in time that shift will trickle into San Ramon keeping values ahead of income. (When rational economics apply.)

3) A bulk of the Dougherty Valley is now built out leaving Dublin as the next center for population Growth. It too is currently growing at just under 1%. Since their population is 50% greater than Contra Costa at 1.5 million that is in real numbers thats another 100k in population. That is annually. They won't be building anything close to that number of homes in Dublin, Livermore and Pleasanton combined.

In short, values anywhere in Contra Costa (once we hit bottom) will outpace and have outpaced income growth.

Aside: What is really scary is with all this population growth considered agains the income numbers Hawkeye has been throwing around should really scare people. This population growth is the reason the median income has not grown inplying that people moving into the area are bringing in much money with them and are not high earners. It furhter underscores my arguement that Hawykeye's analysis is flawed.

Stephen, I’ll try to keep the economics simple, to help you understand the numbers.

We’ve already established (below) that a San Ramon home selling in 1995 for $350K should have an inflation adjusted value today of about $600K. You raise a very good point about wages; because, if wage growth has outpaced inflation, then the relative increase in money supply could justify prices that are higher than expected with just inflationary growth. Let’s see if that’s true for San Ramon.

In 1995, you needed a family income of $78K per year to buy a $350K home in San Ramon. Note the high price to income ratio (4.5x), which indicates that folks were spending a much larger percentage of their income to buy in the Bay Area (i.e. the location premium); elsewhere in the country, the average multiple was much lower (as low as 2.3x). So, the 4.5X multiple already has San Ramon’s “location premium” included within it.

So what about today? The current median family income in San Ramon is around $130K, indicating that over the past 14 years, family incomes in San Ramon have grown at roughly 4%; that is consistent with expectations, since wage growth generally matches (or slightly exceeds) the rate of inflation. So clearly, in San Ramon, wage growth has not significantly outpaced inflation and the buying power is roughly the same as it was in 1995. Using the 4.5X multiple (which includes the location premium), a $130K family income in San Ramon will buy you a $585K home. Wow, that’s really close to the $600K prediction we arrived below, by just using the inflation adjusted home values.

So now we have two independent points of analysis (wage growth and inflation adjusted home values) corroborating the conclusion that a San Ramon home that sold for $350K in 1995 should be selling for around $600K in 2009, if there were no abnormal market forces interfering with pricing.
Let’s take it one step further. How much would wages have to grow from 1995 to 2009 to justify the current prices?

If wages were responsible for the difference between a $600K price and a $1M price, then median family incomes would have to be $222K ($1M / 4.5x = $222K). So, if wages were to account for the high prices, they would have needed to grow from $78K in 1995 to $222K today. That growth rate is nearly DOUBLE the rate of inflation, meaning the majority of families would have had to get an 8% salary increase every year since 1995 (in order to justify the current prices). That clearly has not happened.

Prices are clearly being supported not by market fundamentals, but by artificial and unsustainable policies, such as low interest rates, foreclosure moratoriums, loan modifications, and tax credits. These policies cannot continue indefinitely and when the cease, the market will continue its correction back toward values that are in line with historical inflation and wage growth.

The C&S graph with title nominal is not adjusted by inflation. For inflation adjusted graph, it shall have a work `real'.

You are wrong again. Property price does not exactly track inflation. It tracks income growth. Income normally growth faster than inflation. Otherwise we will never have improvement of our living standard. In long term, property price must be tracking income growth. Otherwise eventually a house will be either either dirty cheap or completely out of reach. You can confirm this on C&S's graph. In long term, event after inflation adjustment, it is still a upward trend.

Many of those samples you are showing are weird. Some of them are excluded by ziilow for estimation. My neighboring community is built around 1992-1994. The largest plan is about 2,400 sqft. Most houses are sold between $300k to $340k. Right now, they are sold for $600k to $700k. I don't know back then , with same amount of money, why people not purchasing those much larger and apparently better houses.

Anyway, still you did not show any sample to backup your claim that a $900k house was sold for $250k 10 years ago.

Stephen,

I think you are a bit confused about how to correctly read the data. The graphs are inflation adjusted indices, meaning they have been normalized for the effects of inflation. That allows you to factor out inflation and consider only the influence of other market forces, such as wars, recessions, and booms.

If none of these types of events ever occurred and inflation was the only driver in price appreciation, the Shiller index would be a flat line. So yes, in periods where inflation was the only major driver of price appreciation, the graph will appear flat; however, that doesn't mean home appreciation was zero, it just means that home appreciation was equal to inflation (as it should be).

Your are wrong about the booms. Since 1960 there have only been two other real estate booms. One occurred from 1976 to 1980 and the other occurred from 1984 to 1989. The market corrected back to baseline in 1993 and thereafter, home appreciation roughly matched inflation until the start of the most recent boom in 1997. So there was a relatively "flat" period from 1993 to 1997 (where homes appreciated at the rate of inflation).

This is all clearly shown in the graph:

http://i86.photobucket.com/albums/k104/mathoda/homevalues1.gif

And you are wrong about the housing values. The example I used below was actually over priced when it sold (which is why I picked it as the example ; - )

Try doing a search on Redfin for San Ramon, but in the "more options" area of the search engine, select "Sale Records - All". Then set the home search options to 3 + bed and 2 + bath, square footage to "2750+". Adjust the price range to cap out at $400K.

As the results will clearly show, from 1988 through 1998, the period between bubbles, comparable homes in that neighborhood were consistently selling in the mid to high $300K range:

5 bed 4.5 bath, 3200 sq. ft. sold for $350K in Nov 1988
http://www.redfin.com/CA/San-Ramon/16-Cobblestone-Ct-94583/h…

4 Bed, 3 Bath, 3300 sq. ft. sold for $370K in March 1996
http://www.redfin.com/CA/San-Ramon/56-Sioux-Ln-94583/home/978024

3 Bed, 3 Bath, 3200 sq. ft. sold for $375K in March 1989
http://www.redfin.com/CA/San-Ramon/28-Dogie-Ct-94583/home/1413516

4 Bed, 4 Bath, 3300 sq. ft. sold for $342K in May 1994
http://www.redfin.com/CA/San-Ramon/2460-Palmira-Pl-94583/hom…

4 Bed, 3.5 Bath, 3200 sq. ft. sold for $375K in Oct 1998
http://www.redfin.com/CA/San-Ramon/2431-Ascension-Dr-94583/h…

4 Bed, 3 Bath, 3400 sq. ft. sold for $334K in Dec 1993
http://www.redfin.com/CA/San-Ramon/2431-Ascension-Dr-94583/h…

So with inflation, these homes should now be selling around $600K, but instead are listing from $900 to $1M. So you have $300k - $400K of unjustified price inflation in this market and anyone who buys at those prices will be overpaying by some amount in that range. As long as the government keeps injecting "stimulus" into the market with low rates, foreclosure moratoriums, tax credits, loan modifications, etc., the house of cards will stand. But that can't last forever and once those abnormal forces are removed, the market will not be able to sustain price gains that are still 40% above the CSI baseline.

Using the C&S graph you provided, there is almost no appreciation between 1989 to 1997. Can you conclude that in a normal non-bubble period, price shall appreciation 0 in 8 years?