January Housing Data

There is no question that the San Diego housing market is showing a bit of strength. The real question is: what does it mean? Let’s have a look at the stats and discuss…

Prices

The size-adjusted median price, aka the price per square foot, increased from the prior month for both detached homes and condos:

Of course, that increase was fairly meager compared to the declines we’ve seen both year-over-year and since last September’s peak:

As Econo-Almanac regulars know, I de-emphasize the "plain vanilla" median price because it tells us only what buyers were paying, not what they got in return. The median price per square foot, while still far from perfect, at least takes a step in the right direction by telling us how large a property the typical buyer got in return for his or her money.

Nonetheless, the mainstream media and virtually all other housing analysts remain laser focused on the vanilla median price, rendering it an important factor in determining market sentiment. So it’s important for us to monitor the median even though it provides a less accurate read on prices.

And with that said, it looks like the median is set to provide a boost in optimism. The detached home median has now risen for two months, after being flat for one. Even the downtrodden condo median managed an uptick:

Here is a chart of the median price change since the (aggregate for condos and detached homes) peak last November.

Supply and Demand

Sales volume was actually pretty good… it is always low in January, but it was roughly on par with the volume we saw last January. During mid-2006, we were typically experiencing year-over-year volume declines of 25%. So even though the raw numbers weren’t terribly high, they represent a big improvement from a trend perspective.

Inventory likewise declined. It’s true that inventory is always lower in the winter months, but as with sales, year-over-year comparisons show that the situation has improved a lot. Many months in 2006 saw year-over-year increases of 80% or more, whereas the current inventory is only 9% higher than what we saw last January.

This has resulted in another month of relatively low months of inventory, comparable to early 2006:

Conclusion

Between the bout of strength in the median price and the improvement in the supply vs. demand picture, bottom-calling is likely to abound once this month’s DataQuick data hits the streets.

As I stated at the outset, it is clear that the local market has shown some relative strength of late. Volume is up, inventory is down, and even the size-adjusted median price showed a small improvement.

But to interpret this bout of strength as a signal that the bottom is behind us — as much as this is likely to happen in the coming weeks — is to ignore the big picture view of what’s happening in this market.

We are experiencing the deflation of a multi-year housing bubble during which prices reached levels that would have been unattainable without the presence of excessive optimism and risk taking. These two artificial props are only beginning to be removed, and valuations have only begun to correct down to levels that are justified by true economic fundamentals. The correction will not be over until San Diego rents and incomes have risen a lot, home prices have fallen a lot, or some combination thereof.

That’s how bubbles end. San Diego homes are still vastly unafforable, yet without the speculative stimulants that made them so. That prices have further to fall unless
fundamentals vastly improve is self-evident.

But if you need a catalyst, I propose the increase in must-sell inventory that we are likely to see in 2007. It may be the case that "want to sell" inventory is declining, but the increase in notices of default and residential vacancy rates suggest that many owners are being forced to sell. The looming wave of resets and the tightening up in the subprime lending market indicate that even more will be forced to sell in the future. And as I’ve argued before, must sell inventory (and not job loss, at least not directly) is what drives down home prices.

So what caused the market’s recent improvement? Perhaps rates dropped low enough to lure some buyers back in. (If so, the rate rebound since December may put this trend to rest.) Perhaps some buyers believed the bottom truly was behind us and decided to snap up some "bargains." I’m not sure.

What I do know is that the brief spurt upward in sales and volume doesn’t change any of the fundamental facts: as the bill for all the years of reckless lending and borrowing starts to come due, homes remain vastly overpriced.

I will leave you with a plot of single-family home prices during the the protracted 1990s downturn. The market experienced several multi-month price rebounds, only to follow up with declines to new lows. I imagine that each bounce spawned a flurry of bottom-calling, but the correction continued until prices fell to (and eventually, below) a level that was justified by the fundamentals. I see no reason why this downturn should be any different.