Tuesday, May 20, 2008

A Look at San Diego Average Home Prices 5/20/2008

Housing prices, pre-, in-, and post-bubble continue to be a hot topic. Rather than debate what prices “should” be, let’s observe what they are, how that relates to prior years, and if there are any reasonable expectations we might have for the near future. All price data comes from Sandicor’s monthly reports.

Figure 1a. San Diego County Average Priced Home

The timeline view in Figure 1a shows that average home price based on sales that closed in the given month. Figure 1b shows the same data in a year-over-year format. The price run-up really jumps out.

Figure 1b. San Diego County Average Priced Home – Year over Year

While that gives us status, where do today’s prices fit in with reasonable expectations of an increase in home prices over time? In the following figures, the average home price in January of each year is extrapolated at given growth rate. Figure 2a uses 8%. Figure 2b uses 5%.

Figure 2a. Housing Price Extrapolation at 8%

Depending on whom you listen to, home prices increase by 4-7% per year. In Figure 2a, we see that an 8% growth rate (compounded monthly), lines up fairly well for 2000, 2001, 2002, and 2008. If an 8% rate is appropriate for a major city, with perhaps the best weather in the country, that is limited by the ocean to the west, Camp Pendleton to the north, Mexico to the south, and the desert to the east, then today’s prices are about right where they should be.

Figure 2b. Housing Price Extrapolation at 5%

If however, you want to use a 5% growth rate, then today’s prices line up with the beginning of 2003, clearly in bubble territory. Coincidentally, 2007 prices line up with 2004 prices. In both figures 1b and 2b, we can see the jump in prices that occurred in 2002. If this view were correct, then the average San Diego home price is still too high by about $90K.

Admittedly none of this discussion considers the economics of supply and demand as imposed by lower interest rates and a credit crunch, by growth in bio-tech and tourism or a decline in construction and all related industries. Nor do we consider the many other variables that affect our markets.

Where will or should our prices be tomorrow? An 8% growth rate does not offend me, for which I would argue that prices should be up. However, the real estate cycle will naturally drive prices below where they should be until the masses recognize the great deals and take us back to the era of multiple-offers and rapidly escalating prices (thus repeating the cycle). Given that, I expect prices to slide a bit further, but there are already some great buys out there. We are seeing some prices less than 45-50% of their highs.

Sunday, April 27, 2008

Foreclosures and Short Sales in San Diego as of 4/27/08

We gave a homebuyer seminar this last Saturday, the 26th, and received several very good questions with respect to what we are experiencing in the short sale / foreclosure market. I thought everyone would like to know that although the market has been tough, you can’t just low-ball the bank and expect to walk away with a deal.

In summary, if you are serious about owning a home or investing, then…

When a property is 30% or more below where it was at the top of the market, it is probably a good deal, move quickly. When it is a short sale, your target is the current low list price or about 20% below its old list price, but be prepared to wait months before hearing back from the lender and don’t be surprised if you lose out on several opportunities. When you see a normal sale, aim for 10% below its list price and expect the properly priced properties to disappear in about a month’s time. Details and rationale below.

There are 18,673 homes or condos on the market.
There are 6,281 (33.6%) listed as short sales.
There are 942 (5%) listed as foreclosures.
Nearly 39% of our market is composed of distressed homes.

In 2007, there were 1,839 short sales that closed. This year, there are already 1,372 that have completed the process. That puts us on track to more than double last year. Everyone wants a deal; labeling a property as a short-sale brings out the bargain hunters. For two different buyers, we have attempted to put purchase offers on several properties only to find that every one we asked after already had multiple offers. The agents are merely waiting on the lenders to respond, which is taking 2 ½ to 4 months. We surmise off our few data points, that most short sales probably have multiple offers and only the bank delays are keeping them on the books. One can only surmise that our market would look much stronger if all these pending offers were completed sales.

Of the short sales that have been sold this year, the most interesting fact is that the median sales price is 99.8% of the low asking price (stdev=6.4%). That is to say that, on average, you should expect to pay the low asking price, as can be seen in the following histogram, broken down in 5% increments, labelled with the low end of each increment,

Having said that, the asking price tends to be reduced over time. The chart below shows the sales price divided by the old list price with respect to days on the market.

The median sales price comes in at 87.4% of the old list price (stdev=11.1%). The following histogram shows how sales prices compare to the old list price.

The absolute best sales price to old list price ratio was 50.9%, the median was 87.4%and the worst was 117.1%. The moral of the story... don’t put in a half price offer and plan to get anywhere.

Short Sales and Normal Sales

The major differences between short sales and normal sales can be seen in the following table.

Median ValuesShort SaleNormal
Avg Mkt Time9929
Sales / List Price99.8%98.6%
Sales / Old List Price87.4%92.9%

The most significant observation is that normal sales now tend to be pretty well-priced out the gate and are being purchased in less than 1/3 the time of a short sale. Of course, the time difference could merely be the delay in waiting on the lenders. Not surprisingly then, the sales price in a normal sale ends up being much closer to the asking price.

In conclusion... there are good buys out there and they are going quick. However, there are a ton of new listings that are still over-priced. So, look at the time on the market and check to see whether or not the price has already been reduced. Keep the above statistics in mind when making your offer.

Monday, March 10, 2008

What the New Jumbo-Conforming Loan Guidelines Mean to San Diego

A 9-page document describes the new lending guidelines (in response to the Economic Stimulus Act of 2008). So, let's cut to the chase(with minor over-simplifications for brevity).

$697,500 is the FHA limit for "jumbo-conforming" loans for San Diego. It should be the same for FNMA & FDMC.

Loan-to-value (LTV) requirements:
- 90% LTV for fixed-rate
- 80% LTV for adjustable-rate
- 75% LTV on a refinance; NO consolidation of 1st and 2nd; NO cash out*
No 30-day lates in past 12-months (on any housing debt)
ARMs must qualify at their reset rate
Full documentation is required
Borrowers must personally have 5% skin in the game

My view is that the lending guidelines are sound and I wish they had been in place four-years ago.

Wednesday, March 5, 2008

Anne-marie Boyer interviewed on KUSI News

Real Estate Economic Stimulus

KUSI News, Inside San Diego, February 19, 2008

Click for Video

Lena Lewis and Bridget Naso interview Anne-marie about the effects of the Economic Stimulus Package on the San Diego Real Estate Market. More detail on this topic is provided at San Diego's Finest Real Estate blog - Real Estate Economic Aid.

Anne-marie says, "With interest rates at their lowest in four years, it is a great time for homeowners to refinance to convert a jumbo loan to a cheaper conforming loan, combine a first and second into a cheaper conforming loan, trade in a variable rate mortgage for a long-term fixed rate mortgage, reduce interest rates, or to just consolidate debt to reduce payments. "

Update: Due to recent dither within HUD, lenders have temporarily increased interest rates. We expect rates to come down again as soon as things firm up. (It is uncertainty, such as nearing an election, that cause worry and concern which in turn cause a temporary increase in rates.)

Transparency and New Conforming Loan Limits

HUD had 30 days from the date the law was passed, February 13th, to designate the median home prices and otherwise resolve all the ambiguity. However, the rumor mill indicates they may not get their act together until this summer. Additionally, there is currently discussion about not actually changing the conforming loan limit (per se), but rather "adding" a new loan classification - maybe they will call it conforming-jumbo.

All in all, that might be along the right lines, just not enough. The huge ripple effect through the financial community was partially driven by a lack of transparency - the claims that no one really knew what kinds of loans were in a portfolio. The argument is that if more were truly known about the loans, they could have been better rated for risk and priced accordingly. But, what can create the required transparency?

I have two recommendations. Context & Labelling.

Context (weighed heavily in my PhD research).  Consider that a number without units (context) is worthless.  What is my speed?  5.  5 what?  Feet / second?  Miles / hour?  Although equity in a home is considered when the loan is first given, it seems to be an unknown when a loan is sold (re-sold) into the secondary market.  After all, if people are getting 100% financing via a 1st-mortgage for 80% and a 2nd-mortgage for 20% (to avoid paying mortgage insurance) then there is no equity in the property.  That is a very different 1st-mortgage than the one where someone has put down 20%.

Labelling. Label the loans by the key attributes. (This is really just a derivative of context when you look closely). Start with Loan Amount by Credit Score, in units of, say, $50,000 and 50 pts respectively. (E.g., Loan $250-300K & 500-550 FICO vs $550-600K & 750-800 FICO.) Such classification would provide the much needed transparency. Then, it is fairly easy for the market to "buy" a bucket of loans and to know exactly what they are getting. And the invisible hand of the market can efficiently price such loans. Better yet, loans that the market doesn't like will dissappear entirely for lenders who resell their loans or else will be priced higher (e.g., hard-money loans).

We must realize there already is (an N-dimensional 'grid') classification for loans based on #years, interest rate, payment schedule, interest only, etc. So all I'm really offering is that we add more attributes (context). In fact, as a programmer, I believe everything but the equity in the home is already available.

Of course, the more attributes to be measured and the increase in the number of divisions in each attribute result in a rapidly growing quantity of unique labels. E.g., 12 (credit score buckets) x 20 (price divisions) x 10 (equity divisions - say, by 10% percent) x 10 (loan term options) x NNNN = 24,000 x NNNN. Seems like a lot, but we seem to be able to have 'zillions' of different mutual funds. And besides, it is just a database and the numbers identified are quite small for our computers.

Now for the fun... (Another part of my research and work history is about information in real time.) What we will then need is to dynamically re-classify loans based on changes in equity. E.g., a $100,000 home equity loan removes that much equity out of the house, reducing the equity, say from a 25% down-payment to 5% remaining equity. This just made that first loan quite a bit more risky. This would take effort to implement and track, but it would stabilize the overall system by creating (and managing) the much needed transparency.

Monday, February 25, 2008

Real Estate Economic Aid

$5,694 / year – every year, is to be given to homeowners nationwide by the economic stimulus package.*

$1B+ / year – every year, could be put back into the San Diego economy.**

* Homeowners who refinance loans in high-cost areas may save $5,694 per year due to the economic stimulus package. With the conforming loan limit being increased to as much as $729,750 in high-cost areas like San Diego, a number of homeowners may be able to trade in a jumbo loan or a first & second combination loan for a conforming loan. Because the interest rate on a jumbo loan is typically 1% higher than we find on a conforming loan, less mortgage interest will be paid. For example, on a $729,750 loan, reducing an interest rate of 6.75% down to 5.75% means a savings of $5,694 / year – every year!

** The National Association of Realtors indicates that 44% of transactions in San Diego fall below the current conforming loan limit of $417,000 and that 32% fall between the current limit and the new $729,750 limit. The US Census Bureau says that San Diego has 1,125,000+ housing units, of which 35% are multi-family. Hence, there are 731,250+ homes * 32% = 234,000 homes. At $5,000 apiece, we are well over $1B. You might be tempted to argue that a $5,000 average savings is high. It is. But, I believe the 32% might be low.

Why? Two reasons. First, we have first-hand evidence of a client refinancing their mortgage that is currently above the $729,750 loan limit. Now, that means a first and a second, but there is a significant savings to be had regardless. Second, 100% - 44% = 56%. So, we aren’t necessarily limited to 32%. If all 56% could save equally, then we’d be looking at $2B+ / year. Of course, not everyone can; some have no equity; others have loans that are just too large; banks are freezing some rates; and still others have awesome rates that they should just leave alone. And not everyone who can, will. Hence, “could” and “$1B”.

But the interesting thing about this is the comparison to the much-hyped “give something to everyone – except the rich” provision. The $600 / adult and $300 / child provision amounts to about $1.5B for San Diego. But is a one-time-only deal. The mortgage interest savings is every year until the loan gets replaced.

However, this provision expires at the end of 2008. My wife, Anne-marie, the mortgage broker, says, “It is important for people to act quickly … with hundreds of thousands of people looking to refinance, the system will become overloaded, there are only so many appraisers” She cites the last refinance boom where lenders artificially inflated interest rates to limit the flow of loans. She says people from anywhere in California with good credit may refinance with her at San Diego's Finest Real Estate for Loans aka www.SanDiegosFinestRealEstate.com. The phones are usually busy, but she can be reached 24/7 at aboyer@SDFRealEstate.com.

If we can put $1B+ back into the local economy, recurring annually, wouldn’t it be “un-American” not to refinance?! :)

Tuesday, February 19, 2008

San Diego Real Estate - Sales Volume Trends

Welcome to the first of a six part series analyzing the San Diego Real Estate market and predicting its 2008 behaviors. The parts of this series will be:

  • Sales Volume Trends
  • Price Trends
  • Interest Rate Trends
  • Our Economy
  • Putting the Pieces Together
  • Market Timing for San Diego

Sales Volume Trends

People often think real estate sales are seasonal; families prefer to move during the summer, between school years. This is only a half-truth, as the charts below will show. The following charts show year-over-year results on a month-by-month basis. We will first look at listings and sales.

The most significant behavior observable in the "Listings by Month" chart above is the fact that listings completely fall off at the end of the calendar year. With Thanksgiving, Christmas, and all the holiday parties in between, it just seems to be too much trouble. This in turn creates the huge surge in the January listings from everyone who held-off during the holidays (with an apparent decline in February).

We see that the January 2008 new listings come in at under 7,000, showing a contraction back toward to normalcy. Unfortunately, we are probably 1,000 - 2,000 listings higher than we would like to be.

The "Sales by Month" chart above confirms the seasonal behaviors seen in the Listings chart. Naturally we see that January and February are the slow months for closing escrow. Remember, a typical 60-day escrow means that the purchases were back in November and December. So, the actual slow period is the end of the prior year. The true activity picks up in January, resulting in the boom in sales closings in March.

Looking at the statistics for 2000, we see that sales (closed escrows), gradually increase from January through June and, with the exception of July, it shows a similar and reasonably steady decline through the end of the year. Absent other data, and knowing what our market did during the last eight years, I posit that this is perhaps the best definition of a normal year.

Right now, the initial sales of 1335 homes for January 2008 are down to less than 80% of last year at this time. February information (to date) indicates it will be substantially worse. Looking at the end of 2007, we see the sales numbers are down to about 65% of 2006.

Taken in isolation, it looks grim indeed. And for anyone who had needed to sell, it has been painfully slow.

But, looking at the bigger picture we see a depression (or even an inverse bubble) in the rate of sales. In the years 2000 – 2005, every January and February were 2297 sales and up. Today, sales are less than 60% of six other years. We have a pendulum swing or rubber band effect. There is always a pull toward normal. As with either a pendulum or rubber band, the further away from center, the more difficult it is to keep moving away. Right now, we are way below normal.

I hate to introduce this next part, because the numbers just don’t work, but here it is anyway. According to work by Rohe, Van Zandt, and McCarthy in 2001, homeowners remain in their home an average of 8.2 years while renters move every 2.1 years. (Anecdotally I hear 5-7 years for Californians.) In San Diego, with over 1,000,000 housing units (half of which are rentals), an average stay of 8.2 years would mean we would need to sell 61,000 units annually.

Not even at the height of the real estate mania did we reach this number. So, at least one of our numbers above is wrong. Be that as it may, we see the annual sales data showing us the same thing we are seeing in the monthly data – sales are far below any “normal” rate of sales. All else being equal, the quantity of sales must swing back. It is my belief that the pendulum is stopping already and the swing back must begin soon.

Wednesday, January 30, 2008

Why it is OK to Buy Now

Just as the stock market is volatile and subject to emotional whims, so too is our real estate market. By getting beyond the fear, to the basic economics of supply and demand, we will see that it is OK to buy now.

Our supply of homes for resale stands at 18,117. Using 2007 resales volume of 24,013 homes, we have a 9-month supply. But, new construction, condominium conversions, and building permits are down to 1/3 of where they were in 2004. With this reduction, part of 2007’s 6,368 new sales will likely be replaced by resales, chewing down supply.

Although foreclosures increased 3 ½ times since last year, they have only gone from 0.19% to 0.67%, still less than one percent. Without the emotional and media components they would have much less overall effect.

In 2000, average home ownership in the US was 67.5%. Current San Diego home ownership is 49.5%. Demand exists, we need affordability – our other housing crisis.

The median home price dropped to $430,000, just below April 2004 prices. Interest rates just reported by Freddie Mac are the lowest since March 2004. Simultaneously, family household income is estimated to have increased by over 5%. The net result is that housing affordability has come off its 9% and is estimated to be where it was in late 2003, early 2004 – somewhere north of 24% (according to the California Association of Realtors as of the third quarter 2007).

Finally, it comes down to relative cost. Buyers priced out of the market were forced to rent. Vacancy rates are down nearly half, to the 2.5% range. Rents are increasing 3-5% / year.

With prices and interest rates coming down and income and rents increasing, a tipping point is reached where for more and more people, it makes more sense to own. And, buyers have negotiation room now.

Despite fears of recession, our basic economy appears relatively stable. Unemployment rates have dropped for the fourth consecutive week. If the Federal Reserve Board drops interest rates another ½ point as expected, mortgage interest rates are likely to drop further. These things are helping to stabilize our real estate market. A $150 billion national economic stimulus package can’t hurt either.

The average homeowner in California lives in their home for seven years. This time horizon is long enough that small price declines will be wiped out. These people have the green light to buy now.

Monday, January 28, 2008

Guest on KUSI's News - Inside San Diego

Dave Davis and Bridget Naso interview on KUSI News - Inside San Diego segment.

Click for Video

Thursday, January 24, 2008

Interest Rates at four-year lows (per Freddie Mac)

It's "official". Mortgage rates have hit four-year lows (since March 2004).

"The national average interest rate on the benchmark 30-year, fixed-rate loan averaged 5.48% in the week ending Thursday," wrote Michelle Donley of MarketWatch on January 24, 2008, citing Freddie Mac's survey released Thursday.

In CA, today we would be able to get our clients a 5.125%, 30 year fixed, no point conforming loan. Last week we found a just over 6%, 7/1 ARM, no point jumbo loan. [Rates change daily.]

Mortgage rates have been trending down of late. With a January 29th FED meeting and a market expectation of another 1/2% drop, I expect we will see interest rates drop a bit more in the next few weeks.

If you have a variable rate loan that is set to reset in the next, say year, then I would seriously consider grabbing this fixed rate NOW. Annecdotally, I'm told, election years always create temporary fear of the unknown and interest rates (not necessarily the FED rate) typically go up prior to an election.

If you are in CA and think now would be a good time for you to refinance, feel free to write us at aboyer@SDFRealEstate.com

Tuesday, January 22, 2008


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Friday, January 18, 2008

What are the Expectations for the San Diego Housing Market in 2008?

Watch the live interview

Robert T. Boyer, Ph.D.
interviewed by
Chrissy Russo
Fox 6
San Diego Living

The "script" below contains the essential talking points prepared for the live interview, held January 15, 2008, on Fox 6's San Diego Living show with Chrissy Russo and Joe Bauer.

      We are all aware the dour headlines and news reports tell us that the real estate market is going to continue to tank for another year or two – that 2008 will be another miserable year for the real estate market.

      As a real estate financial planner for San Diego’s Finest Real Estate, I have to disagree. As a Ph.D., I’ve learned to do lots of research and synthesize lots of data and look at things just a little differently; here’s my read...
      First, you can’t compare any local real estate market to the national real estate market directly. They’re not the same – there are very different dynamics. In fact, San Diego was at the leading edge of the price run-up, the downturn, and again now that we’re looking at recovery.

2008 isn’t going be an easy year, but it’s going to be a much better home buying year than anticipated.

      When you put aside all the emotional baggage, you ultimately get to supply & demand. There are a lot more factors than we have time for, so I’ll just touch on the highlights.

On the supply side:
     The builders have cut back drastically - new home construction, condo conversions, and building permits are all down to less than ½ of where they were in 2005
     Just 3-months ago, we had the 2007 fires which claimed nearly 1400 homes
All this takes a bite out of supply.

We have plenty of demand – people who were previously priced out of the market. The key on the demand side then is housing affordability which breaks down to
     Pricing
     Interest Rates
     Relative Cost

     Home prices have come down substantially
        o By way of example - Homes in one condo complex in Carmel Valley, were over $500K; now the exact same unit is in the low $400s.
        o We’ve seen this correction behavior all over the county.
        o We’re at pre-bubble prices in most areas
     Interest rates are still amazingly low. At San Diego’s Finest Real Estate, we can get people a jumbo loan, 7/1 ARM for just over 6% with no points – which is truly an awesome rate!
     The kicker is rent. Because so many people have stayed out of the housing market, rents have increased by nearly 6% just last year.
With prices coming down and rents going up, there is a tipping point where it makes more sense for some people to own. We see this in the affordability index which has increased by 20% of what it was last year.

      Our market has made its major correction. We are already starting to see positive activity. We think it is an ok time to buy. By way of contrast, in 2005, at San Diego’s Finest Real Estate we started advising clients to not buy in San Diego if they could avoid it. We believe now is the time to buy.

      And of course some of the best deals are going to be the foreclosures – which are historically available at 20% below market because the banks want these properties off their books.
     The challenge with foreclosures is finding them, most are not listed like regular resales.
     So, what we are doing is offering bus tours of these foreclosures in January and February, called our American Dream Tours, which people can sign-up for on our website at SanDiegosFinestRealEstate.com (Promotion Code: blog)

To summarize my expectations for 2008
     It is not going to be an easy year. We still have to get beyond the fear mongering. We’re going to see:
        o more foreclosures
        o more aggressive prices from sellers
        o but there are going to be some great deals
     I think overall sales will be up. And if that is the case, it will demonstrate that the market has stabilized.
     For our clients planning to stay awhile, we are now giving you the green light to buy.

The live interview may be found at Where is the Housing Market in 2008? Robert T. Boyer, Ph.D. interviewed by Chrissy Russo of Fox 6 for San Diego Live

Saturday, January 5, 2008

How Everyone Benefits From Mortgage Rescue

On December 19, 2007, the San Diego Union Tribune (daily paper) published my opinion piece titled "How Everyone Benefits From Mortgage Rescue" which addresses the issue of lenders freezing the teaser rates. The full article can be viewed at (pdf) and of course you can find out more about us at San Diego's Finest Real Estate