In response to a thread on Bernalwood regarding Bernal Heights real estate, Cirios put together some simple data for single family home sales over the past three years. Monthly data is inherently choppy and seasonal, so we prefer to look at rolling 3-month averages. The table and graphs below help paint part of the picture of the Bernal Heights real estate market.

But what the data don’t show, and can only be known by actually being close to the market, is that sales mix,  more than true value drops are pushing average sale prices lower in Bernal. 2011 has been a wildly volatile year, and consumer sentiment and confidence has tumbled thanks for geopolitical uncertainty (Europe, Arab Spring, etc) and domestic problems, both political and economic. As a result, fewer traditional (ie, non-distressed) sellers have put their home on the market in Bernal Heights, an area with all sorts of fundamentals going for it.

It makes sense — why would they? If you don’t have to sell, it doesn’t make a lot of sense to do so in an area like Bernal. Far better to rent and hold if you need to move. Distressed sales, be they probate, short sale or bank owned are often smaller, cheaper homes, and the sales drag down averages. To wit, the few high quality, larger homes that do come on the market in Bernal typically sell above list with multiple offers.

Data makes for nice blog posts and flippant analysis, but it rarely tells the entire story.

This post first appeared in the September edition of: Cirios Trends: In Search of Real Estate Opportunities

In a financial landscape marred with uncertainty, there is one constant, one thing that “everyone” knows: Housing is in trouble. And while the bears certainly have ammunition to support their pessimistic case, history tells us that when everyone is looking one way, smart investors should be looking the other.

The federal government’s determination to prop up housing at all costs is creating pockets of opportunity, even as data point to an increasingly bleak picture. We’ve heard the story for months: Tax credit expiration, weak employment outlook, looming shadow inventory, tight lending environment, etc. And it’s all true.

Meanwhile, billions of dollars continue to be thrown at the housing market, in the desperate hope that home prices can be kept from falling (again).

This flood of money is keeping mortgage rates low, which benefits not just hard hit markets, but all markets, including those poised for fundamental growth. Buyers in markets that don’t need government support, those that are strengthening because they are becoming more popular with wealthier buyers, are benefiting from stimulus pouring in to help distressed markets.

Recently, on the same day the financial media was obsessed with existing home sales data that painted a stark picture for the future of housing, we checked on a house in Bernal Heights, a neighborhood on the outskirts of San Francisco, that had gone under contract in just a few days. The transaction had closed, well above list, with a note that there had been 13 offers.

Apparently, Bernal Heights didn’t get the memo that housing is dead.

Bernal Heights isn’t unique, despite being one of the strongest real estate markets in the Bay Area. It is one of the last affordable neighborhoods in San Francisco (on a relative basis of course), it has a growing main drag and is well-poised to benefit from large scale redevelopment plans already underway (see last month’s Cirios Trends that discussed the Hunters Point redevelopment project).

All over the country, there are similar pockets of fundamental growth. Neighborhoods are changing, jobs are being created, people are moving who need places to live. Meanwhile, the vast majority of
housing markets remain weak, plagued by oversupply, anemic job markets and a limited pool of prospective buyers.

These struggling communities are the focus of the trillions of dollars in housing stimulus that have driven interest rates to historic lows and kept distressed inventory off the market. These unsustainable policies have, unwittingly, doomed most distressed markets to stagnation for years, if not decades, by preventing the legitimate price discovery required to find a sustainable bottom. On the flip side, this massive injection of cheap funding is accelerating demographic shifts already underway.

So while housing bears look at national data and proudly remind us how right they have been about the double dip in housing, they risk throwing the baby out with the proverbial bathwater. There continue to be opportunities out there, as long as you know where to look.

This post first appeared in the April edition of: Cirios Trends: In Search of Real Estate Opportunities.

As long time readers of this newsletter know, we at Cirios rail against the concept that “it’s a great time to buy,” irrespective of market condition. There is just too much that goes into the homebuying decision to make this sort of blanket statement. We urge clients and non-clients alike to be wary of Realtors bearing such oversimplifications, as if with some fancy chart or graphic they can assess the whole of the real estate market and the collective whims of all buyers therein. So, without further ado here are some charts and fancy graphics from which we will attempt to extrapolate the condition of the whole of the housing market.

In this month’s Zip Code Spotlight, we examined two areas of San Jose and tried to explain why neighborhoods with similar price points could have witnessed such divergent price trends. It all comes down to fundamentals, understanding why buyers are buying and why sellers are selling. The following two graphs attempt to break out one of those fundamental demand factors: The stock market. The stock market is most certainly not a rising tide that lifts all boats. First consider 94301, the well-to-do enclave of Palo Alto where Silicon Valley’s wealthy move to raise their children. Top notch schools and neighbors like Steve Jobs and Steve Young draw executives from around the Bay Area to settle in and settle down. It’s safe to say that the so-called “wealth effect” of rising (or falling) stock prices is strong in Palo Alto. The data above concur, as a home price spike in 2000-2001 matched the peak of the dotcom mania. Further, as stocks made all-time highs in 2007 even as the broader housing market had begun to roll over, 94301 home prices rose seemingly without worry.

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So now that we know rising stock prices are a reasonable determinant of rising home prices, let’s apply the analysis to a very different part of the Bay Area. Antioch, a small suburban community an hour east of San Francisco, is hanging onto the Bay Area at the fringe, just beyond the reaches of BART. Formerly an agricultural and industrial community, Antioch is known to be frequented by gangs and homebuilders alike. A quick glance at the chart above, tracking the same time period and movement in equity prices shows how important fundamentals are to understanding home price trends. To have bought a home in Antioch in 1996 with the expectation of price gains due to stock market gains would have shown a lack of understanding of what moved home prices in the area. As can be seen, all it took to move prices up was a bubble of a different kind.

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As the housing market began to roll over in 2006, the most frothy, speculative markets were the first to be hit: Phoenix, Vegas, Florida and the California Central Valley were the first to fall. Then last year, as government-backed foreclosure prevention initiatives began to squeeze inventories, some of those same distressed markets began to stabilize. But true stabilization and any eventual rebound will depend not on government programs, but underlying economic factors that support strong buying demand. By both looking at the data and examining actual transactions, it is becoming clear that cities further away from job centers are starting to falter. In fringe markets like Livermore, where economies were hit harder with layoffs, buying demand is starting to wane. Looking above, while prices stopped falling last year, gains are yet to materialize. In Fairfield, Livermore, Petaluma, Gilroy, and other far out suburbs we are starting to see cracks in the recovery. And as foreclosures are kicked down the road and more short sellers enter the market, expect more local market trends to start to mirror the one above — a long march sideways, at best.

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Hillsborough is one of the Bay Area’s most exclusive communities. With grand estates nestled in the hills, the wealthy and reclusive flock to this unique town. Here, despite the allure of hobnobbing with the elite, buying demand remains weak. In particular, the area’s largest homes appear to be in least demand. Even as affordable neighbors such as South San Francisco and Daly City see tight markets and strong demand, there is a dearth of buying activity in Hillsborough’s high end. In looking at the top 50% of sales as measured by home size, prices are still slipping. In particular, look at how many sales are happening below the trend line – a precursor of lower prices to come.

This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux

The books are officially closed on a decade which will be remembered for an historic real estate boom in the United States that busted in spectacular fashion, nearly taking the entire world financial system down with it.

Of course, the real story is a touch more complicated: Our housing bust was merely the most glaring crack in a global economy that grew far too dependent on cheap debt, where flows of money around the world magnetized to the hot asset, blowing bubbles first in stocks, then real estate, then commodities.

During each subsequent bust, governments rushed to the aide of markets, stitching them up with a patchwork of looser regulations, low interest rates and promises it would never happen again.

Late in 2008, the collapse of the credit markets culminated in the failure of some of this country’s most storied financial institutions. When the dust settled, Bear Stearns, Lehman Brothers, Merrill Lynch,
Washington Mutual, Wachovia, Fannie Mae, Freddie Mac, AIG, Countrywide and a host of smaller, lesser known entities had either gone bust or been bought for a song by stronger, better capitalized firms.

Some simply melted into this or that government agency, while many members of our financial complex survived only with historic government aide. Citigroup, Bank of America, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, GM and Chrysler are alive today thanks to massive taxpayer-funded bailouts.

But enough looking behind us; historians and journalists will be employed for decades slicing and dicing this most turbulent of decades.

Surveying the horizon, the primary fear among economists, investors and ordinary Americans is that the inflationary effects of pumping trillions of dollars into an economy must eventually come home to roost.

To be sure, there are those who remain firmly in the camp that believes the more pressing concern is inflation’s less-well understood counterpart, deflation. But even the most ardent deflationists believe theirs is a debate that is more accurately painted as one of time horizons, rather than absolutes.

The US dollar is in the crosshairs of this philosophic, as well as very practical debate. The greenback’s standing as the global reserve currency has been thrown into question as investors around the world scratch their collective heads and try to figure out how we’ll ever repay our staggering, ever-growing debt.

And now, as our economy appears to be slowly healing, the Federal Reserve faces the unenviable task of withdrawing its generous stimulus. In March, the Fed plans to scale back its purchases of mortgage backed securities, spooking more than a few market participants.

The fear, particularly for the housing market, is that any Fed pullback will push up interest rates.

Higher interest rates translate into lower purchasing power for buyers, curtailing the steady stream of homebuying demand that, coupled with ongoing foreclosure moratoria, has propped up prices in recent months.

We kick off 2010 with mortgage rates approaching the all-time lows set last spring. Sure, they could always go lower, but the smart money is betting it’s just a matter of time before rising prices force regulators to ease their foot off the monetary accelerator. Higher mortgage rates are likely on the horizon.

So as we begin the first true test of our nascent economic recovery, Cirios would like to take you through a bit of history. We’ll look first at the macroeconomic picture as it relates to home prices, inflation and interest rates. Next we’ll examine a few California real estate markets illustrative of the localized trends masked by most broad economic measures.

But first, a word of caution: As Mark Twain’s oft-cited saying goes, “History doesn’t repeat itself, but it often rhymes.”

It goes without saying that the financial upheaval of the past 24 months has been, in a word, unique. There is no historical analogue, no matter how neatly we try to jam this experience into some mold cast in the 1930s, 1970s or 1980s. By extension, any conclusions drawn from this historic perspective should be taken with a very large grain of salt.

Nevertheless, understanding where we stand and how we got here is essential to understanding where we’re headed. And understanding where we’re headed is essential to finding and taking advantage of the plentiful investment opportunities the previous decade’s turmoil has created.

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This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux

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Life is always so much clearer in hindsight.

The graph below shows the US Median Home Price (blue line, as measured by the 6-month moving average of the Median Price, admittedly as arbitrary a metric as any other) graphed against the year-over-year change in prices (red line). While it doesn’t take a degree in econometrics to identify the ongoing correction as the most significant in recent memory, here are a few additional items to glean from this broad view of history.

(click to enlarge image)

First, on a year-over-year basis, even at the height of the real estate boom in 2004, at no point did prices rise as quickly as they did in both of the booms in the early 1970s or mid-late 1980s. Instead, prices grinded upward without a meaningful correction: Prior to late 2007, the last annual decline occurred back in 1992.

Second, although prices are now roughly back in line with the historical trend of appreciation, understanding what drives this particular dataset paints a somewhat cloudier picture. Of the myriad ways to measure home prices, Median Price, despite being the most ubiquitous, can be misleading. Foreclosures and other distressed sales have driven the most active housing markets in recent years, so a larger-than-normal portion of sales have occurred in lower priced markets. This, in addition to nominal price declines, has skewed median price data to the downside. Now, as lower-priced markets stabilize and luxury markets continue to tumble, the dataset should return to a more historic mix of cheap as well as expensive homes. This means median price data could show appreciation where, in reality, no such rise in prices exists.

Finally, it is crucial to understand home prices in relation to inflation and the value of the dollar. Continue reading for some interesting comparisons between home prices and inflation while considering this: Simply adjusting for inflation and ignoring all other factors, a house bought in 1965 for the median price of $17,200 would cost $118,123 in today’s dollars. With the current median price just over $200,000, that means more than half of all home price appreciation in the past 45 years can be attributed to inflation. Nothing more, nothing less.

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This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux

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The aforementioned warning about historical analogues notwithstanding, let’s take a look at how the housing market recovered the last time there was a persistent decline in home prices.

As an aside, one of the most challenging aspects of analyzing the current housing recession is how infrequently home prices have fallen for an extended period of time. Since 1965, this is only the third time the US housing market has experienced two or more consecutive months of year-over-year price declines.

The most recent such decline occurred in 1991 as the housing market reeled from the Savings and Loan debacle. For those unfamiliar with the S&L crisis, banks and thrifts found themselves overleveraged to residential mortgages as home prices fell. Clearly, we learned our lesson.

(click to enlarge image)

The peak of the 1980s real estate boom, as measured in year-over-year appreciation, registered 28 months earlier than the top in prices, not a dissimilar tally as our the most recent boom. On the way back up, from the bleakest moments in 1991, it was 18 months until we saw a meaningful pickup in home prices.

Of important consideration in examining this historical example, however, is the way in which government action affected the cleanup of each respective housing bust. The Resolution Trust Company, or RTC, was created in 1989 to liquidate distressed real estate assets gumming up the country’s banking system. And while many argue this strategy ushered in a de-facto policy of moral hazard that culminated in our recent financial crisis, others widely hail the strategy as cordoning off the damaged segments of the banking system so the rest of the industry could heal on its own.

We have no RTC2 to clean up this mess, but we are certainly flush with government schemes to prop up the housing market. The relative effectiveness of these programs will go a long way to determining when the good old days of steady home price appreciation will be back again.

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