(c) copyright
View from Silicon Valley, 2005. All rights reserved.
At the risk of telling something you can already
read elsewhere, news reports on both sides of the housing debate are followed closely. (Duh!)
On one side
we have the NAR, real estate and lending agencies large and small, lately accompanied by government entities, insisting
there is no housing bubble. They dismiss statistics showing 52% of net jobs created over the last three months being
in the construction and finance industries as merely further evidence of the strength of the ever-flexible US economy.
Any slowing in sales is just seasonal. Or a statistical fluke. Recently-reduced sales volume is still strong by
historical standards, while prices remain high.
We even got a John Mauldin blurb from a week or two ago reporting
on "researchers" (read: people who want you to invest your money with them) arguing it really is different this time.
In short, their rationale was it's completely rational in today's global economy for housing to be continually over-valued
in a societies with innovation, property rights and the "rule of law."
On the other side, we have a chorus of economists
telling us it's NOT different this time. They insist this surge of global liquidity will eventually recede, or seek
better returns in a different asset class, leaving debt-heavy real estate owners in financial difficulty.
(Just to
round out the Mauldin anecdote, he himself has been living in a rented house for the last few years, waiting for better
values.)
We read (too much of) this and must admit both sides make interesting and seemingly-valid points. A
lot of people have made a lot of money buying houses. (A few even have their riches in-hand, rather than leveraged up
into still more housing "investment.")
OK, OK, so what is the point? We're getting there...
As some of you already know, View from Silicon Valley maintains a "stats" pagewhere we track various tech-related and Silicon Valley-related numbers. This week's updates include some "interesting"
numbers. Time will soon tell if these are "anomalies" or a "test of the high" in real estate sales volume.
RE Loans Total
YTD05 Y-o-y Past 52Wks Oct 08: $2.820T 14.5% $363B
14.5% Oct 15: $2.832T 14.9% $357B 14.4% Oct 21: $2.839T
14.8% $353B 14.2% Oct 28: $2.838T 14.4% $349B
14.0% Nov 04: $2.847T 14.6% $354B 14.5% Nov 11: * * N O
T P U B L I S H E D * * Nov 18: $2.858T 14.4% $345B 13.7% Nov
25: $2.855T 13.9% $336B 13.3% Dec 02: $2.863T
14.0% $349B 13.9% --QTD-4Q05= +$43B(+1.5%) -3.9%
In
short, at the two-thirds point of 4Q05, YTD05 loan growth is roughly half of the prior two quarters. The $349B y-o-y
figure is -4% over the last eight weeks and is the lowest since July.
Hmmm... "Interesting," but far from conclusive.
What else ya' got?
We're glad you asked!
We also collate weekly real estate sales figures from DataQuick
as published in the local paper. Over the last few weeks, we have seen an interesting phenomenon.
As
I understand technical analysis, the relevant term is "test of the high." Y-o-y sales volume had been negative
for 34 straight weeks. The gap progressively narowed over the last few months until it momentarily hit a positive
number in the November 19 report. Over the subsequent two reports, the y-o-y figure plunged back into negative territory.
They "tested" the high and this test has now "failed." Such failure is often considered to "confirm"
the decline which was previously underway. In other words, theory suggests volume is now set to decline further.
But wait, it's only two weeks' worth of reports. How can you presume to infer such dire consequences based on so
little data?
We almost decided to wait another few
weeks before printing this report, but then we saw the San Mateo County "All homes" median sale figures:
Like
Santa Clara County, Santa Cruz County y-o-y volume got into positive territory, in this case in November 12's report. Three
short weeks later, y-o-y volume declined -26.5 percentage points!
Alert readers already noticed, in all three cases,
the median price and price per square foot are still up. Pricing is still strong. This may be comforting, but
we submit y-o-y volume is sending a message.
People who get their paycheck as a by-rpoduct of this housing bubble
will tell you declining volume doesn't matter. Honest investment professionals will tell you this is definitely something
to watch. Just like in stocks, higher home prices on lower sales volume is a divergence. It will be resolved.
There are two choice for this resolution --lower prices, or higher volumes. With volume now resuming its decline,
prices classically are expected follow.
Conclusion: We do not yet own
Tahiti, proving we still cannot predict the future. We readily admit it is possible for y-o-y volume to
reverse again and surge back to positive territory.
Even so, we submit the simultaneous decline in y-o-y volume in
all three counties at the heart of Silicon Valley is "news." If volume is declining, prices figure to
start following.
This "test of the high" constitutes an this week's investor's "edge."
*
* * * The above is strictly for entertainment purposes and should not be construed as advice to buy, hold or sell any security,
property or financial product.
