Here is the historical data clearly showing that this selling season was no better (and a little worse even) than last year:
Here is the key if you want to have some sense of what these Heat Index numbers mean; we are a very long ways into a so-called "buyer's market":
Some of the current lack of heat in Marin's housing market is due to the normal slowing down of the market this time of year. But much of its coolness cannot be so explained. The owner of the Marin Heat Index has always been pretty good at being forthright with his analyses so I will leave the discussion to him:Late summer is always a time of slow, then slower still, activity in our Marin real estate market. Year after year in early to mid-September this heats up, relative to the late summer levels, and the market gets a bit of jump back through early November.I honestly hope those "fearful" buyers have enough sense/savvy to wait long enough to break the sellers' wills. Then, find those sellers who really need to sell and who did not buy during the last few years and/or who did not HELOC out the majority of their "equity". Such sellers can make deals; the others cannot. After all, if you are the sort of house buyer who views their house as an investment and given that we are starting the slow and painful slide in prices which are not likely to recover for many, many years, the lower the purchase price, the less painful the wait will be.
This year the slow summer market has followed this pattern, with an overlay of anxiety and mistrust deepening the slow-down as buyers, sellers, and realtors have watched, startled and stunned, as the mortgage-credit crisis unfolded.
What is happening, other than that the market is recording its coolest activity Index numbers ever? Here is our take:
Sellers with discretion to choose the time to sell (in Marin, a larger segment of sellers than in almost any other market area in the country) are increasingly choosing to wait.
Closed escrows (closes over the prior 30 day period) dropped sharply in recent days and weeks. This decline is, in our estimation, largely because buyers in contract have pulled the plug on their deals at a much higher than normal rate. Buyers often suffer from doubts while in their contingency removal period (with the famous medical condition- "Buyers' Remorse"). During recent weeks, this has been spurred on by the relentless bad news on the mortgage and credit markets-resulting in buyers canceling contracts at higher rates.
Pending sales are down sharply as well. About half of the decline is attributable to end-of- summer seasonal patterns. The rest of the decline is due to the ripples from the scary world of finance, in which high-risk lending started a wave of credit paranoia that has breached the dikes of many seemingly safe sectors of the economy. Buyers clearly are asking themselves, "Is this a time to make major financial/life decisions?" The answer for a significant number of them is quite obviously, "No--not now."
Here are some of the market activity facts from the Marin Market HEAT Index that we used to draw our conclusions:
Today Compared to 30 Days Ago:
Marin Market HEAT Index Down 27%
Closed Sales (prior 30 day period) Down 30%
Pending Sales (all "in contract") Down 24%
Active Listings (unsold homes) (Virtually unchanged)
Today Compared to 7 Days Ago:
Marin Market HEATIndex Down 7%
Closed Sales (prior 30 day period) Down 12%
Pending Sales (all "in contract") Down 9.5%
Active Listings (unsold homes) Down 7%
Thanks go to reader "Lisa" and an anonymous emailer for kicking my lazy butt and alerting me to this record low.
13 comments:
Of course the flaw in that plan is what happens to those buyers that have been rooting for the day when tighter loan policies force lower prices can't get loans to buy the houses that they can now afford? Or worse see most of the depreciation of home prices that they have anticipated eaten up by higher borrowing costs long term - which if they can get the loan will still leave them in the same place from an overall cash outlay standpoint as before the price compression - just with more money going to the bank each month rather than the seller up front?
If you are cash buyer sitting on a couple million waiting for sellers to become distressed so that you can drive a bargain - then you might be in luck when the market locks up due to lack of capital access. However, I get the feeling that is not the profile of your average "fearful" buyer - because they aren't likely to become distressed sellers in the future - which of course is the source of the "fearful" in fearful buyer.
For everyone else, the impact of higher borrowing costs (a real cost) eroding the value of that price compression or increased difficulty in closing a deal due to capital access issues causing buyer's to lose bargains to better capitalized bargain hunters, who offer even lower prices than "fearful" buyer, because loan contingencies become a real negative for sellers would really have to be considered schadenfruede-driven karma.
Either way if price compression is driven by lack of capital access that impacts rational buyers as well as the irrational marginal buyer then everyone loses - buyers and sellers - unless, as a buyer, you, or someone willing to underwrite you, is liquid in a way most aren't...
So I looked at this and it really should be called the San Rafael/Novato heat index - because those two communities account for more than half of the index - because it appears that the index is a ratio of closed and pending sales to current listings and those communities account for more than half of the current listings.
Those are also Marin's marginal markets - which you can confirm by looking at the volatility in the index - in good years they have shown 3s and 4s and bad years less than .5
As such it has little relevance for owners in Tiburon or Belvedere where the index is much flatter from good to bad years with anomolies when the market has been truly hot - but even then hard to truly assess because data samples are too small to allow a fine level of analysis anyway - which is likely what you see in places like Kentfield or Ross where the data is all over the map.
Its a useful tool for some trend analysis - but not as absolute as the index creator would like you to belive (otherwise the market in Belevedere could almost never be considered "hot" - but is so small that "hot" is really a property by property consideration) - and its a blunt tool when looking at individual sub markets - which is what most people care about - particularly the smaller markets becuase of a lack of data sample size increasing the importance of one or two closings or new listings on the index for that sub market.
It does point out some interesting trends - location matters - prices in San Rafael and Novato are more volatile than other markets over consistent time periodds - meaning there is a measurable trend to those markets (something that is hard to guage in some of the other smaller markets like Kentfield or Greenbrae) and its volatile between good and bad times is palpable relative to other areas -this means stretching in Novato is more dangerous than in Mill Valley at the same price point - something to consider before you plunk your money down.
I suspect that this is driven in part by constrained inventory in the smaller more well heeled towns of Southern Marin which allows those markets to dampen volatility through inventory control in most soft markets but where median prices are high enough that the pool of potential buyers is still pretty small in real terms - which dampens the heat in hot markets on average - at least compared to what goes on in Novato or San Rafael.
Oh and one more while I sit around suffering from insomnia (not housing related)...
Why do you think that the decline in housing prices would be "slow and painful?" Opposed to say, rapid and painful.
Logically if the overpricing in the market is a result of marginal buyers inflating prices - then if you remove those buyer (which would likely happen en masse because the credit world will treat them in a uniform manner) then the attendent pricing collapse should be pretty sharp - and should end when the irrational buyer is eliminated - allowing credit to be restored to rational buyers.
I suppose you could argue that inventory control by sellers that are not distressed could drag that out - dripping excess inventory into the market when ever the market starts to heat up - but that wouldn't depress prices - just stagnate them when they wanted to rise by increasing supply to meet demand.
In the 80's fundemental changes to the labor market underpinned the housing bust - mostly around base and defense industry job losses - which was a long process as our labor market shifted - dragged out the price slide for 6 or 7 years... but that's not what is happening today...
mrlmv,
I'll take squeezing into a home that is priced properly with a higher term interest rate vs squeezing in a excessively priced home with a cheap interest rate any day of the week. You must be a mortgage broker, because you are too bloody focused on the monthly nut. The RE machine has done a marvelous job selling the "monthly nut" argument for the past 3-4 years… right along with buy now or be priced out forever BS. They (and you) were wrong then and they (and you) are wrong now... interest rates change, but home prices are forever and a 20% decline (or more) in a home’s value is real and stings, esp when we are talking about a $900,000 home (or priced home I should say)..
Why is it that a price of a home should be dictated by the capital markets… I agree that home prices have been grossly inflated over the past 6-7 years due to easily (and illegal) access to capital… You are arguing that mortgage terms should dictate home prices… I disagree… completely… I agree that they should, perhaps, influence them, but I believe home prices should be dictated by the value of the asset itself, not by the capital markets.. The capital markets merely facilitate more and more transactions and provide incredible opportunities for those involved to profit from each transaction.. No other asset that I can think of has it’s value based on loan terms in the capital markets, and neither should homes..
What the RE machine has done is pray on the ignorance of the average home buyer and consumer.. this buy now or be priced out forever BS.. It was an easy sell for many years as the average home buyer knew the Fed was raising rates, but was clueless what that really meant in terms of mortgage rates and home prices…. All they knew was the Fed was raising them from historic lows, so they better buy now as their Realtor suggested… well, guess what? That story was a hype that was laced with greed and ignorance and helped create the mess we have today..
I say let the foreclosures reign high and wide for year or so … Let the media swallow and report this story as it should be reported.. Let the bankers and hedge funds and holders of these MBS and CDOs wallow in misery as their balance sheets get whacked and marked to market.. let these mortgage companies that payed on ignorant buyers and consumers go belly up… let the millions and millions of newly minted Realtors get a real job and find a way to really contribute to society.... and, for god’s sake, let home prices return to where they should be and have been..
Matt
mrlmv
I agree with your explanation on what the heat index is telling us generally.. .39.. well now, my .40 predication was here before I would have guessed.. can you say .35 or .30 ? This heat index is really a measure of denial, which is one of the stages of a down housing cycle... seems like we're still in the denial stage then.. oh well, we've got a ways to go still..
I don't think we will see any rapid price decline in Marin, and I don't have the time list all my thoughts on this, but a slow withering away is how this will play out.. particularly in Marin where denial will reign supreme longer than almost anywhere and the price placed on one's home means much more than what the fair maket may think or the prospect of selling it... "what will the neighbors think?"..
Of course the flaw in that plan is what happens to those buyers that have been rooting for the day when tighter loan policies force lower prices can't get loans to buy the houses that they can now afford?
That's what the lower prices are for...to offset the higher rates. It's all about the monthly payment, right? The added benefits of buying at a lower price is you don't have to pay so much tax yaar after year. Etc.
Why do you think that the decline in housing prices would be "slow and painful?" Opposed to say, rapid and painful.
Because every housing bust before this one was such?
I wish the decline would be fast and deep as then we could all get on with things sooner.
Logically if the overpricing in the market is a result of marginal buyers inflating prices
But the over pricing is not just due to marginal buyers.
well now, my .40 predication was here before I would have guessed.. can you say .35
Matt,
Normally the Heat Index bottoms out around Thanksgiving time. So I would say it's a pretty good bet the Index as further to drop.
"...Sellers with discretion to choose the time to sell (in Marin, a larger segment of sellers than in almost any other market area in the country)"
My translation: real estate is a hobby for many Marin residents, where owning 1-4 "investment properties" seems commonplace. These languish in a market with high seller expectations, or alternatively as marginally maintained rentals. But, in a more normal community, homes on the market reflect more pride of ownership than merely a break-even analysis.
Ironically, as a prospective Marin home buyer, you're expected to value these homes inexplicably more than the seller, who often dismisses dry-rot and other signs of neglect because Marin RE is somehow "worth every penny". The preponderance of lousy properties only reinforces the buyer/seller standoff, and I suspect will depress the market further as the credit crunch ensues. The tragicomedy of expecting $1M for that 2BR/2BA bungalow will only grow more acute as time wears on.
Because every housing bust before this one was such? (slow and painful)
Sure, if past boom/bust cycles are any indication, it takes an easy 5-7 years from market peak to bottom, as data provided here and elsewhere has shown. Of course, this boom is without historic precedent…could it draw out even further if a credit crunch lingers over years?
"That's what the lower prices are for...to offset the higher rates. It's all about the monthly payment, right? The added benefits of buying at a lower price is you don't have to pay so much tax yaar after year. Etc."
And it's not just lower property taxes that come with a lower purchase price....how about the possibility of actually having a loan balance that you could manage to PAY OFF in 15 or 20 years. How many people who bought recently have any hope of that?? Nope, they are debt serfs for as long as they live in those homes.
I'll take squeezing into a home that is priced properly with a higher term interest rate vs squeezing in a excessively priced home with a cheap interest rate any day of the week.
This makes no logical sense. Cash outlay - whether paid to a bank in interest or paid to the seller in a higher price is a wash. Its a dollar you cannot invest, its a dollar you cannot buy food with... etc. That's in real terms... if you use that dollar to pay your debt whether it be lots of interest on a little principal or a little interest on a lot of principal - the impact on your wallet is exactly is the same. I sense that built into your sentiment is an assumption that rates will decline again sometime in the future for you to capitalize on your lower home price through a refi - but there's no evidence that this is any more likely to occur at all, or sooner, than your "overpriced" home recovering from a 20% drop in value.
In your defense, however, I did overlook one important point whicc was also noted below. That is that taxes are lower on a lower priced house - that's a real advantage that I overlooked. However, you can go and petition to have your taxes lowered to a more depressed value in the future if the value of your home decreases (yet another stupid... I mean great... provision of prop 13).
You must be a mortgage broker, because you are too bloody focused on the monthly nut.
No I am not a RE professional. In the interest of full disclosure I am a Marin homeowner. I don't know why you feel I am focused on the "monthly nut" as you say. I was merely pointing out that from a income and savings utilization standpoint high cost/low interest and lower cost/higher interest get you to the same place. There are a number of benefits buying better than buying poorly - my only point was that there would be a certain irony if bargain hunters waiting for price compression saw the benefit of their patience on the pricing side eroded or offset by higher borrowing costs. This would be particularly ironic if the access to capital issues that were the driver for price reduction also shut those bargain hunters out of the market by making loans impossible to get under any circumstance. Be careful for what you wish...
The RE machine has done a marvelous job selling the "monthly nut" argument for the past 3-4 years… right along with buy now or be priced out forever BS. They (and you) were wrong then and they (and you) are wrong now...
I am not certain why you think I am "selling" anything. Unlike you, I don't believe that I have made any prognostications of what the market is or should be in real terms. In fact I think I have been assiduous in my posts to point out that I don't know what the right number is. I would say that the majority of my posting has been to point out places where reasoning by others predicated on historical precedent might be wrong - and in which direction its wrong based on my understanding of the role of capital markets. Analysis based on bad facts isn't analysis - its SWAG (serious wild ass guessing).... Opinion that is presented as informed when its not for tangible reason should be discussed in an open forum.
interest rates change, but home prices are forever
True - Interest rates do change - but they go up as well as down. Prior to when interest rates were declining from the historical mean in the 1990's when was the last time they were 7%? Don't assume that they will go down and you can just refi in the future - you might be better off buying a more expensive home waiting out a price cycle but locking in a low interest rate. I am not saying that is going to happen, or that you should do that, I am saying you have to consider the possibility that interest rates don't go back down. There certainly is precedence to say tha the last 10 years have been mortgage rate anomoly... just like you want to tell me home prices are an anomoly... I don't know what is right - but since its a possibility people should evaluate that...
and a 20% decline (or more) in a home’s value is real and stings, esp when we are talking about a $900,000 home (or priced home I should say)..
Huh? A. How do you determine if you home has declined in value unless you sell it? You could guess but unlike a stock market there is no ongoing bid/ask spread for a ready buyer (not to mention your home is a unique asset which is different than a share of stock) B. If you aren't going to sell it then what it might sell for even if its 10% of what you originally paid is irrelevant because if you are buying the home to live in, and don't have to move then a potential decline in value doesn't sting at all... It only stings when you go to the market to sell...
Why is it that a price of a home should be dictated by the capital markets…
I didn't say they SHOULD, I said they ARE. A lot of discussion on this forum either misunderstands, underestimates or ignores the role that capital markets play in the housing market. Try buying a house without a mortgage... Fundemental change in the capital markets is about as big a thing to hit RE as anything in the last 100 years...
I agree that home prices have been grossly inflated over the past 6-7 years
If I gave you the impression that I said that I was sloppy in my writing (wouldn't be the first). What I meant to say is that your conclusion might be right - but the analysis you made to get there is wrong for the following reasons. This doesn't mean we don't end up where you predict - but in that case you would be right in spite of your analysis not because of it. I just think people should be diligent about the underlying market facts supporting their position - if you don't think that capital access has an impact on the market - meaning therefore any change in the structure of the market is moot - then lay out your argument - but don't ignore that change's existence by pointing to historical precidence without explaining why that history is relevant despite those changes.
due to easily (and illegal) access to capital…
Illegal? Not following you here? What is illegal access to capital?
You are arguing that mortgage terms should dictate home prices…
Again, no. I am saying they do. I am saying its not unreasonable to expect that they will given how important a mortgage is to being able to buy a home, I am arguing that analysis that factors this out is faulty. If you disagree I have yet to hear an argument why access to capital is irrelevant when determining what prices will be set for homes.
I disagree… completely… I agree that they should, perhaps, influence them, but I believe home prices should be dictated by the value of the asset itself, not by the capital markets..
Who is that arbiter of value? what is the true value of a home. If a buyer wants a home for X and a seller is willing to sell that home for X then that's the value.. Now lets say another buyer would pay X+ because they really really wanted the home and they valued the intrinsic aspects of the home more than the first buyer - but that buyer could only offer X- because they only had access to X- in capital? What is setting the value of the home in that case - the "true value" of that home? Since buyer 2 can't afford X+ that cannot be the true value of the home.
The capital markets merely facilitate more and more transactions and provide incredible opportunities for those involved to profit from each transaction..
No the capital markets make it possible for you to buy a home... How long would you have to save if you didn't have access to the capital markets? Home ownership would be less than 10% That someone makes money from the transactions that involve making those loans is capitalism - whichi is why those markets exist in the first place. We are not born with a right to access the capital markets and I shudder to think how we would be able to buy homes without them - barter would be particularly messy...
No other asset that I can think of has it’s value based on loan terms in the capital markets, and neither should homes..
Well, I can think of several kinds of asset where value is directly linked to loan terms - most debt for instance. If a high quality bond is par at 100 meaning you get $100 back in principal when its paid off and one pays you 10% a year over the 5 year term and one pays you 5% a year because in the time between when the first ond and the second bond being written interest rates decline - which is going to be more expensive?
In the equity markets access to capital plays a critical role all the time - e.g., what is the value of a company that has long term value and prospects but is running out of cash and doesn't appear to investors to be able to tap the debt capital markets to raise cash - pretty crummy as the two options facing equity holders are a.) dilution of their equity stake by new investors in order to raise cash, or b.) bankrupcy, reorg or some nasty cram down investment that would wipe them out - how would the value of that company change if it announced it had secured a bridge loan to get it to cash flow break even? Value is intimately tied to capital access in most markets... ignore that fact at your own peril.
What the RE machine has done is pray on the ignorance of the average home buyer and consumer.. this buy now or be priced out forever BS.. It was an easy sell for many years as the average home buyer knew the Fed was raising rates, but was clueless what that really meant in terms of mortgage rates and home prices….
I think that is true but that's an issue of sales practices not market pricing - look mortgage rates don't necessarily follow the fed - they rose when the fed loosened after 9/11 - Fed rates are flat right now but mortgage rates are spiking because there is no demand from investors for mortgage backed paper - that has nothing to do with the fed. An interesting aside - you know all those ARMs that everyone is worried about when they reset - most a pegged to something other than mortgage rates - i.e., Libor or some other bank lending rate. Those bank lending rates, unlike mortgage rates, tend to move more in line with one another because they have fewer and similar influences driving them than mortgages... With CMO paper a pox on the market - assets have driven down the t-bill rates - shaving at least 1/2 point off of an ARM reset in the last two weeks. I am not saying its a panacea to what ails the alt-A market - its just another example of why you have to be cognizant of capital markets when discussing home prices...
they knew was the Fed was raising them from historic lows, so they better buy now as their Realtor suggested… well, guess what? That story was a hype that was laced with greed and ignorance and helped create the mess we have today..
Still doesn't mean it didn't have a real effect on pricing... However be careful not to paint with too wide a brush as those types of loans disappear - not everything that happened was driven solely by greed and ignorance, not every Alt-A loan was a bad idea, CMO's are not the spawn of the devil but merely a different way for someone to buy and sell mortgage risk - so even if you take that out - those bad acts and products "got us into that mess" alone most likely does not account for all the change in housing prices... so wishing it away won't necessarily make it so...
I say let the foreclosures reign high and wide for year or so … Let the media swallow and report this story as it should be reported.. Let the bankers and hedge funds and holders of these MBS and CDOs wallow in misery as their balance sheets get whacked and marked to market.. let these mortgage companies that payed on ignorant buyers and consumers go belly up… let the millions and millions of newly minted Realtors get a real job and find a way to really contribute to society.... and, for god’s sake, let home prices return to where they should be and have been..
I have covered this at length in earlier posts... In my opinion this sentiment is uninformed and dangerous. Wrecking the credit markets for mortgages in order to extract some form of vengence on those that may have benefited from their growth - whether or not you think that growth was legitimate - is socially irresponsible. Mass forclosures as a mechanism for resetting prices would touch off a credit crisis of unparelelled scope - it would eat our economy alive - not because our economy is built like some house of cards on home prices - but because it would touch off a chain reaction that would hit businesses which would no longer be able to borrow money to grow, which would cause economic contraction as they stopped reinvesting in their businesses, which would cause unemployment to spike, which would cause more forclosures as well as bankruptcies, which would further depress the market for housing - causing more defaults, etc. This is what happened in the Great Depression - the difference was we were talking about equity back then - the mechanism was the same. Lack of liquidity resulted in a shift from pricing assets based on the intrinsic value of the operation less the capital risk from operating that business - to valuing assests solely on what you could get for them when there were no buyers - selling for liquidity at all costs... This isn't an argument for propping up home prices, its an argument for avoiding a forclosure-driven liquidity crunch that would artificially depress prices long into the future - mostly because no one - not even good credit risks would be able to get the loans that almost everyone needs to buy a home.
That's what the lower prices are for...to offset the higher rates. It's all about the monthly payment, right? The added benefits of buying at a lower price is you don't have to pay so much tax yaar after year. Etc.
I agree with all of this... though you can get your property tax value reset if there is a measurable decline in home values... so that's not a benefit restricted to buying cheaper.
If all things are equal - just the the same it begs the question why wait? I am not saying that's the right thing to do - I just don't understand the focus on pricing of homes to the exclusion all other factors. Waiting can have costs that are real as well as percieved (e.g., missing out on appreciation - which is a pretty dumb reason to buy a home), particularly if you are forgoing the tax benefits of a mortgage while waiting...
The second issue in my mind is a bigger one... if the price compression exists solely due to decreased demand based on capital access and not some other fundemental reason - then the interplay between access to loans and demand becomes a real issue - even for good buyers. Two weeks ago no one was getting loans - not even good buyers - were that to stretch on long enough to impact prices it would cause a serious problem for the bargain hunter that wasn't liquid. The paradox is that if there is capital enough for buyers to get it - and if the compression is only due to buyers being sidelined by capital constraints - then absent a change in fundemental demand for homes based on some other factor, when the bargain hunter can get a loan, other buyers will too, which will reverse the price cycle caused by lack of capital access - erasing the bargain...
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