IJ Anti-spin

The Marin IJ (Marin's main local paper) has published their response to DataQuick's May, 2006 report on Bay Area real estate. Naturally, the IJ, beholden to their RE masters, has of course put the most positive spin they could on it:

The median price for single-family homes, not including condominiums, dropped about 8 percent from $979,000 in April.

Kathy Schlegel, president of the Marin Association of Realtors, said several factors drove the median price down last month.

"Inventory has increased and more homes are staying on the market longer, so it has become more competitive," Schlegel said. "Buyers and sellers are negotiating prices down. When we have all that working together, it will tug the prices down."

Schlegel, an associate broker with LVP Marin, said the figures reflect a return to a normal market.

"It goes up and down throughout the year, so if you look at the year it balances out the increases and decreases in price," Schlegel said. "We are back to seeing more negotiating between buyers and sellers, which is healthy for a more balanced market."

Valerie Castellana, an agent with Pacific Union and association president-elect, said it was still too early to know whether a trend is taking shape.

"The changes from April to May in 2006 are a snapshot in time. It is too soon to see whether this is a trend that will continue for the year," Castellana said. "Reality may be setting into the market. We have been on a roller coaster ride and now it is more of a teeter-totter with buyers on one side, sellers on the other and statistics moving around month to month."

"It is too soon to see whether this is a trend that will continue for the year." True enough as a trend can never be positively identified until after the fact (when no one, except historians, really cares anymore). But I don't believe a word of it and I don't think you should either. I cannot foresee the future any better than you of course, but I do have records of past market behavior at my disposal to inform my decision-making process. Below you will find some charts I made and put up on this blog quite some time ago.

The following chart can be found here; it shows the ratio of mean Marin SFR price to per capita income. If you project the trend line into the future and assume that income increases only a few percent a year (as it has been), then we are looking at about a 25-30% drop in SFR price relative to income over the next few years:

The following charts can be found here; the first one shows the same sort of data as the previous graph and makes a similar prediction:


The next two charts show that Marin's SFR prices are greater than two standard deviations away from the mean. The reason why this is significant is that researchers have found that for every single financial bubble that they investigated where prices have increased by two or more standard deviations away from the mean, prices have reverted back to the mean. Please re-visit the original post to get more detailed information:



Unless you believe that incomes will increase at a fantastic rate over the next few years, history is telling us that we can expect Marin SFR prices to revert to the mean which implies at least a 25-40% drop in prices.

Lastly, there is this chart which shows Marin SFR prices expressed in terms of ounces of gold (thus nicely taking inflation into account):

Now add in the facts that mortgage rates are going higher which is far more likely to continue than not, foreclosures are rising at an alarming rate, adjustable rate mortgages are starting to reset and will only get worse, faudulent appraisals and lending is starting to be closely examined, and loose lending standards in general are being tightened.

I don't know about you but I am not terribly optimistic.