A DAILY LOOK AT THE STORIES YOU SHOULD BE READING

Real Estate

- If you want a huge house in SF, it seems you have a lot to choose from.  And they’re getting cheaper by the day.

- Manhattan is the riskiest real estate market in the country.

- Bankruptcy doesn’t solve all your problems.  It always pays to evaluate all your options.

- Some people just don’t see the benefit of affordability.  Will somebody please help these people acquire more debt!!

Finance

- Nationalization here we come

- Obama decides to cut his losses with student loans.

- Freaky Friday in the markets and Minyanville is here for you

- People are not in the mood to buy stuff when they don’t have jobs.

Ciriosly Funny

- Lefties of the world unite!  Our plans for world domination are quickly becoming clear, sign up here for the monthly newsletter.

By RYAN TAYLOR

New homes sales reached record lows in January as transactions fell 10.2% from a month ago to seasonally adjusted annual rate of 309,000. This annual rate is the lowest in the history of the reading which the government started in 1963. The median sales price for new homes also fell by 9.9% to $201,000.

The sobering reality is that jobless claims are now the biggest driver of the falling homes sales. When this downturn in housing began in 2005, creative financing had allowed people with jobs to buy houses they could not afford. But even if incomes and employment were still at those 2005 levels, that same buyer pool would not be around to buy up houses at today’s “cheap” levels. Buyers at those prices no longer exist for  three basic reasons:

1) They are still trying to stay in their current home by acquiring a modification for their loan.
2) They have been foreclosed on and their credit score is below 700.
3) They no longer have a job so they cannot afford to buy a home even if they wanted to.

These facts are especially bad for new homes sales as most new developments are located far away from job centers. Since foreclosures are now prevalent throughout the country, most people are deciding to buy homes closer to their places of employment so they can avoid the long commute. Furthermore, most of the areas that are in close proximity to job centers are more established and are generally viewed as a better investment.

Those buyers looking to purchase homes in areas with new homes for sale have quite a few properties on the market to choose from. REO properties are becoming more popular purchases because they are frequently cheaper. As modifications become more prevalent, buying an REO in a neighborhood with few “For Sale” signs will be seen as less of a gamble because most struggling homeowners will find it easier to receive some mortgage relief from their servicer. Additionally, these buyers are avoiding new developments because there are not enough other buyers to suggest that the development will acquire the prosperous feel that is often advertised by the homebuilders.

Those who do have jobs can afford to be selective and, as a result, will most likely choose a home in an established neighborhood that is close to job centers. This home will rarely be a new home.

Until a publicly traded homebuilder is forced to liquidate their portfolio of homes, new home sales will remain at historically low levels.

A DAILY LOOK AT THE STORIES YOU SHOULD BE READING

Real Estate

- People are not buying existing homes and they are not buying new homes.

- In breaking news, real estate agents are not paid to get you a good deal.

- Oversupply + 100 degrees in the summer = more value declines for Arizona

- Hanging out at the Mall may be a thing of the past.

Finance

- Ken Lewis might be a leeeeeetle too optimistic.

- JP Morgan’s Jamie Dimon lays off 12,000 people as a “precautionary move to ensure that the company has financial flexibility should economic conditions worsen”.  Ironic

- Job losses at a 27 year high and the stock market is up as of this posting.  Makes sense to me.

- If our wagon is hitched to GM, we are all in big trouble.

Ciriosly Funny

- Finally, an effective crocodile repellent.  Phew, just in time for the flocks of summer swamp-goers.

By AUSTIN NELSON

Nationwide home values continue to decline into the New Year.

The National Association of Realtors (NAR) released existing home sales data today for January, indicating an overall 3.1% decline in the median sales price of US homes from the previous month. This drop follows the same national trend we have been seeing since July of last year: Prices have been declining steadily since that time at a rate of 2-5% per month.

The most interesting aspect of today’s numbers is a 5.3% drop in seasonally adjusted, nationwide sales rate. This reverses last month’s numbers, when sales had actually ticked up by 4.4%. Interestingly, the sales rate has seesawed over the past year, showing increases in Feb, May, Jul, Sep and Dec but declining in the other months. Overall, the trend has been down, with an 8.6% decrease since this time last year. The volatility of these numbers could simply be an artifact of an imperfect seasonal adjustment or cycling demand, but the long term trend is clear.

The West region showed no change in its sales rate, continuing its trend as the strongest region in terms of sales activity. In fact, the West has seen a 29% increase in sales since last year, largely due to the fact that the rate was extremely depressed in early 2008. As we have mentioned before, we expect the West to be a leader in buying trends as price declines have been most severe in that area and homes are finally becoming affordable to residents. Continued price declines (median price in the region declined 4.2% last month) will only make homes more affordable as time goes on.

The Northeast region has been the hardest hit of late, posting a 14% decline in rate combined with an 11.2% drop in median prices from December to January. That is a monster drop in a single month. Recent data indicating that New York City’s real estate market is cracking is adding to these drops. But Cirios readers knew about this trend months ago …

This month’s dismal sales numbers are likely closely related to extremely low consumer confidence, as prospective home buyers are holding off on big ticket purchases in the face of the continued and worsening economic decline. Considering that the sales included in these newest numbers were originated in November and December of last year and consumer confidence has dropped significantly since that time, we may be in for further declines in sales rate.

Even if national figures continue to decline, we would encourage readers to look beneath the data. Certain markets are still showing strong increases in activity, even as prices fall. Real estate, still, is local.

For this week’s House of the Week, Cirios takes you down the coast from San Francisco about 500 miles to one of California’s hidden gems: Ocean Beach in San Diego. Ocean Beach (or “OB” as the locals call it) is a modest, middle class town free of the pretentiousness of many other beach towns in Southern California. As a result, home prices didn’t experience the huge run-up that has plagued other areas. To be sure, it’s not cheap down there, but it’s tough to beat the location. (click on images to enlarge)

Home prices have slipped in OB along with the rest of the state, but it’s relative affordability along the coast has led to a less severe drop. It’s edgy, grungy vibe keeps the yuppies away — which is just the way the OBecians like it.

Address: 4844 Coronado Ave, San Diego, CA 92107
Status: ACTIVE
Bedrooms: 2; Bathrooms: 1
Living Space: 942 square feet
Lot Size: 1,591 square feet
List Date: 11/10/2008
Original List Price: $675,000
Current List Price: $625,000
Elementary School API: 894
Zip Code Sales Last 3 Months (year-over-year): -35.0%
% Homes in Foreclosure in Zip: 0.1% (Very Low)
% Housing Inventory For Sale in Zip: 0.3% (Very Low)

Real Estate Agent Comment: Brand new Vintage Beach Cottage with 550 SF of outside living area, private yards & large roof deck with ocean views. Great location on a wide concrete street, 1 1/2 blocks to ocean. Quiet area where palm trees and greenery fills the view. The cottage is an eclectic mix of vintage beach cottage and Spanish villa style. Beautiful, elegant finishes, classic materials and beach cottage colors all add up to a beautiful cottage your buyers will love.

WHAT WOULD YOU PAY FOR THIS HOME?
Post a comment below to guess!

Need more information? Please post a comment and we will get back to you.

A DAILY LOOK AT THE STORIES YOU SHOULD BE READING

Real Estate

- Yahoo! Finance thinks you should be looking at taking out a HELOC. The number of Americans eligible for such a loan shrunk while you were reading the article.

- US existing home sales fall again, analysis to follow later today.

- Job losses and reality are starting to put pressure on mortgage applications.

- After years of winning, renters may actually be losing their edge in some markets.  This losing streak is probably not accurate in your area

Finance

- Should we be less concerned about Steve Jobs health than with how we heard about it?  One Apple shareholder thinks so.

- The Chronicle is in big trouble. I think we are all going to miss their biased sports reporting.

- The Unpaid Furlough = the “in” way to get laid off.

- Fed chief Ben Bernanke agrees with us that unchecked foreclosures will pull the economy down further than necessary.

Ciriosly Funny

- Schwarzenegger and Stallone are finally teaming up to battle evil….or maybe just to make the worst movie of all time.

By ANDREW JEFFERY

The broken record rambles on: Home prices keep falling.

The latest reading from the S&P/Case Shiller Home Price Index showed another record decline, as prices tumbled 18.5% from a year ago. And again, the worst performing metro regions were out west, with Phoenix, Las Vegas and San Francisco leading the way to the downside. The 20-city index has now slid 27% from its 2006 peak.

The ongoing home price declines, which many attribute to steadily rising foreclosures helped spur the latest government-backed efforts to rescue the housing market. And while most commentators heavily criticized the Obama Administration’s $275 billion housing relief plan, take a read of Cirios’ Austin Nelson’s excellent take — a little optimism never hurt anyone, especially with the resounding and ubiquitous negativity we read in the daily headlines.

There isn’t much new to glean from the latest Case-Shiller Home Price Index, it’s still just bad out there. However dire the data continue to be, keep in mind home sales transactions typically bottom prior to prices. In the markets first to see precipitous declines, Cirios data analysis indicates ongoing increases in sales. And while the most distressed areas certainly show the strongest rises in transactions, mid-range areas are seeing more activity as well. Not so for the high end, where buying activity has all but evaporated.

But you, our Cirios readers, already knew that.

Far from being a bottom call, this is trend an example of the housing correction at work. While we would argue prices will continue to decline for foreseeable future, the reality is that homes are more affordable today than they were yesterday. And will be more so tomorrow. And tomorrow. And so on.

At some point in every market, prices begin to make sense again and buyers gingerly step into the water. The sharks are still circling, to be sure, but most are full and lazy, the new arrivals having more and more trouble finding a tasty snack.

By AUSTIN NELSON

There is considerable controversy as to the wisdom of the new measures introduced by the Obama Administration to stabilize the housing market: Will they work? What does it even mean for something like this to work?

While there are strong arguments on both sides, let’s look specifically at who Obama’s plan will definitely help and how that could in turn help the economy.

According to the White House’s official release on the Homeowner Affordability and Stability Plan (HASP), upwards of 9 million homeowners will be helped in their struggle to stay afloat. Even assuming that the administration is inflating these numbers a little, that’s still a lot of families. Each of these families could potentially be given a lifeline, a way to stave off the foreclosure of their homes.

In a plan estimated to cost $275 billion, HASP aims to achieve the lofty goal of slowing foreclosures by:

1.Reducing and subsidizing monthly payments for troubled borrowers
2.Incentivizing servicers and banks to modify loans
3.Instituting clear and consistent guidelines for loan modifications

The argument has been made that the plan rewards those who made poor financial decisions at the expense of those who did not. In some ways, this is true, but there could be effects of these measures beyond the families who are directly helped.

Most importantly, slowing foreclosures can prevent the downward spiral of home values that results when a number of homes get foreclosed within a single neighborhood. In fact, the White House claims that “the average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 dollars.” While the exact modeling used to figure out such a specific number is unclear, the fact remains that preventing foreclosures will stabilize prices, particularly in neighborhoods with high rates of foreclosure.

Notice that I said that staving off foreclosures will STABILIZE prices, not that it would put an end to price declines. The underlying forces involved in the current home price correction go well beyond foreclosure activity. Prices will correct—indeed they must correct before the economy improves–and no foreclosure prevention plan can stop those fundamentals. The key is to make sure that the market doesn’t over-correct and cause unnecessary damage to the economy as a whole.

In a pattern we here at Cirios have seen many times over, a flood of foreclosures can cripple a neighborhood in a matter of weeks. The greatly increased supply caused by newly foreclosed properties coming onto the market results in price declines in the entire neighborhood. Additionally, foreclosed homes often sit on the market for months, largely because they are improperly priced and the bureaucracy involved in their sale is staggering. While on the market, these homes gradually fall into disrepair, decreasing the value of every home on the block simply by their ugly presence. The resulting decrease in home values leads to more homeowners going underwater and in turn even more foreclosures. And the spiral continues, feeding back on itself. By slowing the flow of foreclosures, it is theoretically possible to stabilize this cycle and remove the feedback mechanism.

The bubble that formed from 2001-2006 in the residential real estate market was unprecedented in its scope and magnitude. At the national level, median home prices climbed to more than 30% beyond historical trends. In many areas that number was twice that much.

As you can see in the graph below, a previous bubble (blue arrow) in the late 1980s (a time period where prices climbed above historic trends) was followed by a prolonged trough (red arrow) where prices fell below the trend. The same could be said for the late 1970s, but the bubble was much less severe.

In fact, the size of these “bubbles” and the length of following “troughs” have increased substantially. If the same pattern were to follow the currently deflating bubble, we should expect to see a trough that lasts on the order of fifteen years. With the current plummeting trajectory of home prices, that trough could be even deeper than the historical pattern would predict.

Source: Economagic, analysis by Cirios Real Estate

On the right side of the graph, I’ve placed a few projections of trajectories for housing prices. One represents a deep trough, which would result from a large “overshoot” in housing price declines. The other represents a “soft landing” for home prices which could result from breaking the foreclosure spiral. Note that the difference between the two projections is two-fold: depth and duration.

In other words, how bad will it get and for how long.

The variance between the trajectories is a 12% difference in low price and a five year lag in home prices’ return to historical trends. In the interest of scientific rigor, I have to say that there is no factual basis for either one of these scenarios. I have not run any models or even evaluated any data in a quantifiable way. But what I am trying to show is that the difference between a scenario where the foreclosure fueled home price spiral continues and one where it is attenuated could have drastic consequences for real estate markets and the economy as a whole.

Our fictional 12% difference in home price means well over $1 Trillion dollars in lost home equity. A five year lag in housing recovery means five more years of expensive and destructive foreclosures. The drag that both of these factors would place on the economy would certainly slow any eventual economic recovery we could hope for.

Only time will tell if HASP will have the desired effect on the housing market. As I’ve said, it certainly won’t be a magic bullet to “solve” the economic problems that currently face us. At best it only addresses a symptom and not the disease. But spiraling home prices are a symptom that we cannot afford to ignore. That HASP simultaneously provides a positive solution to a lingering problem while directly helping millions of families most strongly affected by the economic downturn is reason for praise.

That it helps a select few more directly than others is unarguable, but the overall effect on the housing market and the economy should be positive. Whether it is the best possible plan or merely the result of political expedience is a matter for debate, as are the moral implications that such a socialistic policy represents. But now is the time for action, and this plan strikes a powerful blow.

A DAILY LOOK AT THE STORIES YOU SHOULD BE READING

Real Estate

- In many areas of the country, housing is finally dropping to an affordable range.  This trend is likely to continue for some time, but prospective buyers should be wary of further price declines.

- The Case-Shiller 20 city index has fallen yet again.  Declines for December were pretty steady across the board, but Phoenix, Las Vegas and San Francisco top the list for largest slide in 2008.

- Even in the epicenter of the capitalist universe, real estate is really starting to feel the pain.

Finance

- Fed Chairman Ben Bernanke sees a possible economic recovery in 2010 if banks can be stabilized

- At least one automaker is looking forward to a rosier future

- Consumer confidence is at an all time low due to continued economic woes.

- American Express is offering some clients a payoff to close their credit accounts.

Ciriosly Funny

- Sounds like the start of a new Bond film, but its true.

Brentwood, as we mentioned, was a poster child for California’s real estate boom and bust. A rural community turned boom town when homebuilders and speculators descended on its quiet shores. Ok, not shores so much as fields, but you get the idea.

552 Sassafrass is a gargantuan home, almost 5,000 square feet on a single story. A year ago, when it first went on the market at over $1 million, it was staged, well-maintained and in good condition. No buyers showed up and the house has since gone into disrepair and seen its asking price chopped in half. Now, with garbage in the back yard and empty halls, it will take an imaginative buyer to step up and buy this home.

Comparables were tough to find since this is a unique home, but some large new homes both on the market and recently sold can be found on the Cirios CLEAR report — click here (or on the image below).

Address: 552 Sassafrass, Brentwood, CA 94513

List Date: 12/26/07
List Price: $519,900
Cirios Value: $485,000
List Price vs. Cirios Value: 6.7% over-listed

The challenge for the seller is to find a buyer who would choose this home over the numerous other large, new, well-maintained and cheaper homes on the market. It’s uniqueness, however, does have value and for the buyer wanting a different home from his or her neighbors with a huge yard could pick up a modern-day Hacienda on the “cheap.”

Comments? Would you pay half a million dollars for this home?