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 The phones are usually busy, but she can be reached 24/7 at

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.