January Housing Data

Submitted by Rich Toscano on February 8, 2007 - 10:27am

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...


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:


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.

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Submitted by jg on February 8, 2007 - 2:01pm.

Aw, heck, I was ready to go out and buy based on the series of improving numbers, until you showed that last chart with all of the 'false starts.'

Nah, the end has just begun,
and has a long, long way to run.

Keep up the good work, sir!

Submitted by an on February 8, 2007 - 3:07pm.

That last graph explains a lot. That's why I think every down turn have dead cat bounces all the way to the bottom. Only fundamental can be used to call a true bottom.

Submitted by zk on February 8, 2007 - 4:35pm.


I see that the last graph uses the Case-Shiller HPI. That's nominal prices and not inflation-adjusted, right?

Submitted by Bugs on February 8, 2007 - 6:30pm.

D-E-J-A V-U.

The only aspect about this surge that would surprise me is if it triggered a 300% increase in sales activity that would burn off all the excess inventory and reverse the current supply/demand dynamic. That would be a surprise. A 3 or 4-month rally that "recovers" 2% of the 12% loss from last year is basically part of the pattern of a declining market, as is the inevitable overcorrection once it goes negative again.

As I've said before, from an economic standpoint we really wouldn't like what happened if 100% of all buyers came to the same recognition of a declining market at the same time. As selfish as it is to say this, the regional economy really is better off if some buyers are a little dumber than others.

Submitted by recordsclerk on February 9, 2007 - 4:00pm.

I don't think these new purchases were based on any type of news related to housing. I think it was just the right time in their lives, so they made the move. I don't think there was enough news out there to support purchasing a home, so the people on the fence are still on the fence. I personally could not afford to purchase a home right now, so waiting for the bubble burst is my only choice. So some times regardless of the housing situation, you just buy because it's the right time in your life. I think it's a bad time to buy house right now. I still think they are going to tank. People do the stangest things, they buy at the stangest times. People get laid off, so they go shopping to make themselves feel better. People get a $.50 an hour raise and go out a buy a new car. So why can't some people just go out and buy a house because they just fell like it. It may be the biggest purchase of your life, but what the heck it's just money and it's not even yours.

Submitted by guy1 on February 13, 2007 - 7:47pm.

Hate to be the one to say I told you so, but, I told you so. There will be no great correction. Eventually you guys are gonna get it, we do not live in a free market economy. We have not had a true recession since Ronald Reagan was in office. The Fed has manipulated and controlled the economy to avoid these unsavory episodes successfully for over 20 years. You can bitch and complain all you want but you are never going to beat the Fed. Fact is you got your couple of percent decrease and an extra bathroom, better grab it. The Fed is not letting this baby go to the crapper. And for all the hanger ons, a word to the wise, if you cant buy now, then you wont be able to buy next year or the year after that. Renting is not cheaper, it is throwing money away. Worse than leasing a car, you have nothing. So keep paying the rent and deluding yourself, in the meantime, Rents will continue to rise and your getting squeezed. Find a way to make more money or get out. Your low rent ride is coming to an end, courtesy of Ben Bernanke.

Good Luck.

Submitted by sdcellar on February 14, 2007 - 10:47am.

Actually, you love to be the one who says I told you so, but there isn't anything to tell yet. Real estate (and the world in general) is cyclical and you've done nothing to demonstrate otherwise. You drop by once a month or so and ramble on about nothing substantive.

You go ahead and buy something today, I'll keep renting, then come back by in a couple years and let me know how well you're doing. Right now, house values are still dramatically down.

Oh, and you can keep your so called good luck. You're gonna need it.

Submitted by rockclimber on February 14, 2007 - 2:10pm.

I appreciate guy1 coming around. It's great for my lunch-time laugh.

Let me tell you what is delusional... buying a 4S Ranch McMansion for $800k when the same house rents for $2500/mo. The property tax alone is almost half the rent (1.7% for the next 40 years). Add in insurance, debt service, upkeep... it is really a no-brainer for anyone who gives it a little thought or is not being motivated by something irrational.

That's my guess with guy1. He's probably a flipper who's holding the bag big time on a couple suicide loans. Facing reality is hard and any glimmer of hope (like this month’s data) become an emotional rally point.

I think there are also a lot of folks on this board equally irrational to the other extreme. Somewhere in the middle is probably reality.

Submitted by sdcellar on February 14, 2007 - 5:17pm.

I enjoy alternative viewpoints as well, I just don't find guy1's very meaty. I will agree he is funny every once in a while. I would also agree that we've got both ends of the spectrum here. You and I are probably the most realistic ;)

Submitted by Bugs on February 20, 2007 - 6:50pm.

According to Sandicor, in January 2006 we had a total of 2,041 detached/attached sales. In January of 2007 we had a total of 1,816 detached/attached sales. Current listings top 17,000; Last year it was about 6,000 right around this time.

I can't input a search for comps on a single family residence in San Diego County and not run across at least one or 2 listings per search that involve a short sale or foreclosure.

Tell me again how stable this market is? 'Cause on the face of it we seem to be looking at a 2007 that might be just as bad as 2006.

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