On the Economic Front, A Rare Voice of Optimism

Posted on February 13, 2009 by Misha

It’s hard to find much cause for hope these days.  The headlines tell us every day about tectonic shifts in our economic landscape.  We read about layoffs spiraling into the millions, major institutions crumbling, government bail-outs of unprecedented proportion.  Just one example of the doom and gloom:  David Brooks on today’s NY Times Op Ed page, describes the situation as a psychological crisis rather than an economic one, a crisis potentially so bad that no amount of money thrown at the problem will fix.
In this media-driven echo chamber, it’s hard to hear many sober, let alone optimistic, voices.  Dr. Jim Smith may be one such.  He was the keynote speaker at a major builders’ trade show in mid-2007 and accurately predicted both the looming recession – though not its depth – and a Democratic win as a result.
His current prognostications are less dire than most.  According to an article in today’s Wall Street Journal, he sees GDP of 4% by year’s end. There’s no more than a one line quote in the WSJ, but I was able to find more details in an economic forecast he wrote at the end of 2008 in his capacity as Chief Economist for the wealth-management (the latest oxymoron?) firm, Parsec Financial. (Smith is also a professor at Western Carolina University’s Institute for the Economy and the Future) and a former co-chair of the European Council of Economists.)
Here are a few highlights.  You can download his full forecast here.
•    The unemployment news is bad and is likely to get worse, but oft-quoted comparisons to earlier periods like after World War II are misguided because the national economy is so different.  The unemployment picture should start turning around in a few months.
•    Like Brooks, he sees a huge crisis of confidence underpinning this melt-down, just as it has underpinned other financial crises.  Here’s the takeway:  Historically, when huge resources are thrown at financial panics, three things have always happened:  The panic stops; stock markets boom; and the real economy soars.
•    Things to look for to signal a turnaround:  an upturn in housing starts, especially single family units.  Next, an increase in new vehicle sales.
•    The consensus view is that there won’t be a turnaround in the economy until the summer or fall 2009.  He thinks that view is too pessimistic.
I sure hope he’s right.

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DOM Roll Please

Posted on February 6, 2009 by Misha

A couple of posts ago, we dispensed with Absorption Rate as a good barometer of the market since there appeared to be no correlation between how much inventory was available in relation to sales rates and where median prices were going.  I asked whether there might be a different metric that would correlate better, like the oft-quoted Days on Market or “DOM.”

In essence, DOM tracks the average number of days that properties have been on the market from the time they became active on the MLS (Multiple Listing Service used by realtors) to the time they actually sell.

Great minds must think alike because it turns out that my friends over at Inside SF Real Estate have been exploring the same thing.  Head over to their recent post for a look at DOM trends over 14 years.  What they haven’t done, however, is track DOM against median prices.  Ha!  I have, and here are the results for the last three years tracked by month (my numbers are pulled directly from the MLS database  — click to make the chart larger).

dom-chart

Now that’s what I call correlation! Note that the right-hand Y axis tracks DOM inversely, with longer periods at the bottom and shorter periods at the top.  So, this chart is basically showing that during periods, even relatively short periods, when the average DOM falls, prices rise, and when properties stay “on the market” for longer, prices fall.  This is just what you’d expect.

Why?  My guess is that DOM captures many of the factors in play in the real estate market at any given time.  For example, if credit is tight and appraisals are rigorous, you’d expect that transactions would take longer to get approved.  Likewise, if lots of people are bidding on the same house, you’d expect that the winning bidder would promise a quick “no contingency” close and that there would be no haggling on the sale price.  When the market slows, you’d expect more cautious buyers, more haggling on price, longer closing periods — all reflected ultimately in the DOM.

As my friends over at InsideSFRealestate pointed out in their post on DOM, realtors can play games with DOM.  For example, if a property doesn’t sell, they’ll take it off the market, and then put it back on as a “new listing” at a lower price and voila, the DOM resets to zero.  Still, that would just tend to increase the “down” side of the line — the correlation would still hold.

The only other point I’d add is to note the seasonal trend in the chart.  It seems that every December/January, DOM increases and prices dip.  Perhaps that’s the best time to buy.

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…And what $850,000 buys in Noe Valley

Posted on February 4, 2009 by Misha

4317 24th Street @ Douglass originally listed back in October for a cool $995,000.  It’s advertised as a  4 BR/2.5 BA.  (Ahem.  This is a fixer folks.)

4317-24th-street

4317-24th-street

Interesting to note that 4209 24th Street, just a block away and very much a fixer along the same lines,  sold in December 08 for $896,000.  That was $11,000 above the asking price.

4209-24th-street

4209-24th-street

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What $2.1 million buys in Noe Valley

Posted on February 4, 2009 by Misha

Out on brokers’ tour yesterday, I looked in on two homes  available in my Noe Valley neighborhood, priced within $2,000 of each other.  731 Douglass (at 24th Street) sold in March 2005 for $1.944 million and a mere $29o,000 in March 1997, when it was a sad-looking 1200 ft marina-style house, with a 6-car garage.  Back then:

731-douglass-old

and now:

731-douglass-now

In 1999, the owners completely redid the building, right around the same time that my wife and I were remodeling our house just around the corner and converting it from a two-unit building into a single family home.  At the time, there weren’t too many larger homes in Noe Valley.  Now, everybody seems to be adding floors or building out the basement.

For $2,150,000 you’ll get 4 bedrooms, 3.5 baths, plus an office with panoramic views of the city on the top level, plus a good- sized family room downstairs.  Around 3,000 square feet, based on the 2005 listing information.  It’s a nice livable layout, has lots of light and the high quality finishes you’d expect.

What’s missing?  No backyard, just a postage-stamp sized courtyard.  Another possible negative:  it’s across the street from Noe Courts and the bus stop for the 48 Quintara which might make it a little noisier than average.

Just up the hill and around the corner, on one of the nicest streets in Noe Valley,  is 110 Hoffman Street @ 23rd, selling for $2,148,000 after two price drops.  Originally listed for $2.395 back in November.

110-hoffman

This one sold a year ago for $1.2 million as a 1600 sf “fixer”.  Well, they sure fixed it.  It’s now just under 2900 sf, 4BR/3.5 BA family room/media room, and a built-out attic with panoramic views of the city, accessible by a spiral staircase.  The flow of the space is not quite as good as  731 Douglass and there’s less of it.  But it’s an impressive home nonetheless.

What 110 Hoffman has that Douglass doesn’t is a beautiful back yard and a location on one of Noe Valley’s best streets.  Now that Hoffman’s price is returning to earth, it’ll be interesting seeing how these two thoroughbreds compete.


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Absorption R.I.P.

Posted on February 2, 2009 by Misha

After talking to people about my last post on Absorption Rates and the lack of a correlation between slower absorption and lower median prices (or faster absorption and higher prices), I got the impression that there was some curiosity — skepticism?  — about the underlying numbers.  So I thought a post mortem of sorts was in order.  Here’s a chart that simply tracks total listings and total sales over a little more than the two years covered by the Absorption Rate chart.
on-market-vs-sold

Total listings is defined as new listings plus anything that’s under contract but still  “contingent” in the parlance of realtors.  Total sales is exactly that.  The chart reflects the raw monthly numbers with no averaging.  This really highlights the seasonal fluctations:  ie. the very evident drop-off in activity at the end/beginning of each year.

Other than the seasonal dips, maybe you can conclude that both listings and sales are trending downward, but I sure don’t see any evidence of a major change of direction in either.

A couple of closing thoughts.  My absorption rate conclusions were based on an analysis of single family homes only.  It’s possible that the conclusion would be different if I’d included condos and TIC’s as well.  ie.  Looking at the broader market might change the results.

On the other hand, it’s possible that correlations between absorption and price would appear if we looked at finer segments of the market.  For example, we might find that absorption rates are longer at the high end of the market and that in fact prices have come down as we’d expect for that portion of the market.

Alas, the MLS database that’s the repository for sales information for brokers/realtors simply doesn’t allow you to do this sort of data-mining easily, so we’ll never know.

I stand by my previous conclusions:  First, San Francisco just isn’t that overbuilt a market. Second, if you take out the seasonal fluctuations, the absorption rate doesn’t seem to have moved that much anyway.  Finally, and perhaps most importantly, absorption rate doesn’t tell you how much activity (offers)  each available listing is generating — in the end, just one property gets sold.

The question is whether there are other metrics that do a better job of tracking whether the market’s “hot.”  Stay tuned.

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Revised Absorption Chart, but the results are the same, only worse

Posted on January 30, 2009 by Misha

Thanks, Jean-Claude for making me take a second look at my methodology on my Absorption Chart.  I had anticipated your point about the lag between listing dates and sales but had unfortunately gotten the formula backwards in my chart — basically dividing inventory by lagging sales, rather than forward sales:  moral of the story:  don’t do this stuff at 1 in the morning.)  So I redid the chart with the correct formula inserted.  (Excel groupies its =4*(AVERAGE(listings month 1, 2, 3)/AVERAGE(sales months 2, 3, and 4)). The data points at the end of the chart are averaged over shorter periods due to the lack of forward data.

One can quibble about whether a 30 day lag on listings to sales is sufficient, but the average days on market for 2006, 2007, and 2008 were 29, 41, and 51 respectively.

Here’s the revised chart.  The median price line and the Absorption Rates line up beautifully, don’t they?  Until you remember that there’s supposed to be an inverse correlation between them.  True, there appears to be an inverse correlation over the last few months of 2008, but that could simply be due to the lack of forward data.  It certainly doesn’t negate the lack of correlation over the previous nearly 3-year period.

absorption-chart-revised

Stay tuned for a chart showing median price plotted against Days on Market

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Supply/Demand: Does it predict price? Maybe not.

Posted on January 25, 2009 by Misha

Now hold on there, matie!  Basic economic theory  says more supply than demand, prices will fall, right?  Well take a look at this graph. It shows the absorption rate of single family home listings from January 2006 through December 2008 plotted against median prices (click to make it bigger):

absorption-price-chart1

“Absorption” is basically the number of weeks it would take to sell all the homes available on the market based on the number of homes that are selling at that time.  (I’ve tweaked the formula to diminish the spikes caused by the huge seasonal dropoff in new listings each December/January.)   There are many ways to calculate absorption, but the basic idea is simply to capture how quickly demand is eating supply.  Less time to absorb the supply should reflect a “hotter” market where sellers can demand top dollar. A higher absorption rate, on the other hand, means that there’s relatively more listings on the market than demand for them.  That would tend to suggest a buyer’s market and softer prices.

In the chart above, we’d expect to see  median prices rising when the Absorption Rate line falls and median prices falling as the Absorption Rate line rises.  ie. an inverse correlation.

Well, I’ve looked at this chart long and hard and I just don’t see those lines moving that way at all.  In fact I’ve looked at similar data as far back as 2002 and the only thing that’s clear is that people forget about buying or selling a home at the end of the year. Look at 2006:  the market got tighter but prices stayed pretty flat. In 2007, stuff was being absorbed more slowly (the red line goes up), but prices went up anyway.  In 2008, you’d think that with only two weeks of supply available, home prices would be skyrocketing.  Obviously that aint happenin’.

I’m not an economist or a statistician, but I did get my dear wife, who eats statistics for breakfast, to check my methodology.  I think these results are quite counter-intuitive.  Here are the explanations I can think of.  Please chime in with your own:

  • If you cut off the peaks and troughs, the Absorption Rate  mostly stays within a band of around 4 to 7 weeks.   That suggests that supply/demand in San Francisco is actually pretty stable.  And that in turn suggests that something else must be driving prices.  Note, for example, that my chart  doesn’t reflect the number of offers that are made on any particular house.  There might be 10 offers on a house, but at the end of the day just one house gets sold.  Anyone who was playing during the frenzies of 2005 – 2007 doesn’t need to be told how multiple offers affect price, but that sort of demand isn’t reflected in an absoprtion rate.
  • Relatively speaking, San Francisco is not a stressed market.  Supply/demand is not hugely out of whack.  Foreclosures are not piling up (yet).  Under these circumstances, prices are “sticky.”  They don’t react quickly to changes in demand.  If people don’t get the price they want, what do they do?  They don’t sell unless they really have to.  And SF home-owners tend to be people who don’t have to sell.  More on this in another post.
  • The price increases of the last few years and their recent tumble may are probably most directly attributable to one thing, pure and simple:  easy money.  That aint gonna show up on this graph either.

Conclusion:  “Absorption”  isn’t a good measure of supply/demand.

So is there any other metric that correlates more closely with changes in price?  How about the famous “DOM” — Days on Market.  This is how long a property takes to go from being listed to being sold.  The theory goes that when properties sell quickly the market is “hot.”  Why do properties sell quickly?  Probably because … there’s more demand than supply.  ie.  More people making offers, more people getting the loans they need, more people willing to waive inspection contingencies and buy “as is” just to get the deal done.  So maybe DOM actually does capture those muliple offers where the Absorption Rate just doesn’t.

So will DOM tell us how “hot” the market is and where prices are headed?  Or is DOM dumb.  Stay tuned….

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Happy New Year! — The Official Blog Launch

Posted on January 13, 2009 by Misha

misha-bw

Happy New Year everyone!  I’d intended to illustrate this post with suitable icons for every winter tradition from Christmas to Kwanzaa but decided against it when I  couldn’t think of a suitable graphic for non-believers.  And why should they (we) feel left out?

The image is of a sculpture by Rodin.  I saw it in the Rodin Museum in Paris during the summer of 2008 and, like so many of his sculptures, it seemed to glow from the inside.  For me, these hands express the tenderness and grace that we humans are capable of.  My wish for the New Year is that there be more of both in this  world.

And now, drum roll please….

This is the “official” launch of my blog, which I began writing in earnest last September.

As someone who has reached “a certain age”, I find blogging itself an interesting phenomenon, so I think it’s worth explaining what I hope to do with this blog and why.  Herewith a candid interview with yours truly….

How will your blog be different from other real estate blogs? Good question Misha.  There are lots of real estate agents and brokers who have beautiful websites full of  useful links, gorgeous pictures, and information feeds from other sources.  Very few of them spend a lot of time researching and writing substantive posts on the real estate market (some exceptions are included in my blogroll).  There are other real estate blogs that have a particular take on a specific issue  — for example, East Bay Housing Bubble (on my blogroll) covers… you guessed it.  Still others, like my friends at TheFrontSteps,  blog on everything from the latest real estate news to the best or worst new property listing for the week, and still have time to run a contest on who is San Francisco’s cutest real estate agent.

My blog will be mostly about real estate data and trends, both from a macro and micro point of view.  For example, several recent posts were on a real estate conference about the California real estate market in the context of the global economy. Another post compared  sales price trends of  individual neighborhoods (MLS districts) within San Francisco.  Yet another discussed the often quoted Case-Shiller Index and why it presents a somewhat misleading picture of the San Francisco market.

I’ll also cover subjects that I think are of interest to people who own or are thinking about buying residential property in San Francisco — how much does it cost to put in a garage or adding a new floor, for example.

And  from time to time, I’ll blog about other stuff that interests me — including blogging itself.  It’s a strange phenomenon, this intersection of the personal and the professional, the private and the public.  It almost seems wrong to blog and not be self-conscious about it.

How often will you blog? I hope to post once or twice a week.  My posts tend to be longer because of the nature of the subjects I cover.  And they take more time to research.

Why do you blog? Ah yes, why indeed!  First of all, blogging allows me to combine two of my main interests:  real estate and ‘riting.  Secondly, I believe that people want to know who they’re dealing with.  My posts are my opinions, my research, my writing.  They say something about me, my judgment, my interests.  If you find them useful, then perhaps you’ll think of me when you or someone you know are thinking about buying or selling property.  There’s the sales pitch, and it’s the only one you’ll find on this blog.

So Happy New Year one and all!  Thanks for coming! Come back often. Subscribe to my RSS feed.  Tell me how I can improve this blog and what subjects you’d like to see covered.

And please comment vigorously and often on my posts, or email me.   Because without you, this blog is just me talking to myself.

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The Credit Crunch from the Other Side of the Desk

Posted on December 18, 2008 by Misha

I’ve written a piece as a guest-writer for The Front Steps, one of the better blogs on SF Real Estate.

After talking to loan officers and loan brokers for several weeks about the lending environment, here are the takeaways:

  • Have “perfect everything”:  high credit score, secure job, money in the bank and documentation to prove it all.
  • Figure you’ll be putting down a minimum of 20% as downpayment.
  • For the best long-term rates, to to a retail bank that you have a relationship with.

The complete article is here.

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Maybe it’s time to buy that first house….

Posted on December 8, 2008 by Misha

That’s what New York Times journalist Ron Lieber discusses in Saturday’s Business Section.  You can find a copy of the article here.  Of course, nobody really knows where the real estate market is headed but Lieber suggests that now could be a good time to buy.  Here are a few of the takeaways:

  • First-time home-buyers presumably have the down-payment sitting in the bank, so they can benefit from the drop in home values without having to worry about selling their own home in a depressed market to raise the downpayment.
  • Mortgage interest rates are currently pretty low by historical standards and could go lower if the federal government decides to try to drive them lower.  If you can lock in a low rate for 30 years, that seems pretty smart.
  • The best deals may be in “new” housing, where developers are desperate to get out from under bloated inventories.  Those inventories, however, are falling as construction of new projects has come to a halt.  With winter being a traditionally slow time to move houses, now may be a particularly good time to buy.

Along these lines, a loan officer recently told me that he’d heard of a downtown high-rise condo that was listed for $1.1 million and was sold by the developer for $770,000 — just enough to pay off the loan amount attributable to the unit.

Continue reading “Maybe it’s time to buy that first house….” »

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