Joys of Owning... Follow-up

March 31, 2008

The Joys of Owning... Follow-up

In response to our last missive, a long-time reader and friend wrote in with a question. The poor guy has learned over the last couple years that even when he asks what should be a simple question, he sometimes gets several paragraphs in return. I guess he's not irritated too badly, yet, since he wrote again this past week:

* * * * * *

Hello "VFVS":*

Is this hyped "enzyme-free donkey fazoo,"* or what?

http://latimesblogs.latimes.com/laland/2008/03/california-free.html

http://www.car.org/index.php?id=MzgzNzc=

Regards,

XXXX

* = euphimisms we couldn't resist for terms we choose not to print...

* * * * *

Hello XXXX:

This may trigger another missive, so here you go:

We routinely use DataQuick (DQ) results for our missives. DQ's monthly press release touts "all homes" while CAR is referring here to "Resale Homes" (which is "All Homes" minus "Condos" & "New Homes"). With far fewer sales, it's easier to deflect the "Resale Homes" median with a comparatively few low-ball sales prices.

Both articles used the same exact quote.

http://latimesblogs.latimes.com/laland/2008/03/california-free.html

"The median sales price of an existing, single-family detached home in California during February 2008 was $409,240, a 26.2 percent decrease from the revised $554,280 median for February 2007."

http://www.car.org/index.php?id=MzgzNzc=

"The median price of an existing, single-family detached home in California during February 2008 was $409,240, a 26.2 percent decrease from the revised $554,280 median for February 2007, C.A.R. reported."

It seems likely this has to be some kind of a statistical anomaly. Obviously, year-over-year Santa Clara (-3.2%), San Mateo (-6.8%) & Santa Cruz (-7.5%) resale homes are reported weekly on our site and are down much less. Santa Clara County resales peaked at $816.5K on August 27, 2007, putting last month's median resale at -12.3% vs. the peak.

Don't forget, we also publish peak-to-current prices on a monthly basis in, "The Last 30 Days (XX'0X Data)." The most recent edition noted:(http://www.viewfromsiliconvalley.com/id401.html)

Peak Since

Resale Homes Current Peak Date Peak y-o-y

Santa Clara Co $716.5K $817K Aug27'07 -12.3% -3.2%

San Mateo Co. $745K $925K Jun26'07 -19.5% -6.8%

Santa Cruz Co $680K $810K Aug20'07 -16.0% -7.5%

Also note, a heavy involvement of foreclosures in total sales, as reported many times over the last couple months, should actually preclude a sharp drop. After all, banks are "buying" back a foreclosed house by "paying" with the price of their (1st) mortgage. With so many 100% financing or low-down-payment sales closing in 2005 -06 -07, it seems banks are still be "paying" 2005 -06 -07 prices here in 2008.

Actual reported open-market sale prices wouldn't go "down" (and kill the comps) until the bank re-sells the house in an arm's-length transaction. We all keep hearing how bank sales are slow and tedious. If so, this suggests there are NOT a lot of bank sales taking place --at least not yet.

Or maybe CAR is excluding foreclosures and only counting non-foreclosure sales? You can't really tell from the articles, since niether included sales volume details.

If foreclosures are excluded, this suggests the downward price trend might soon accelerate sharply. After all, we understand foreclosure re-sales by banks tend to be at-- or usually below!-- prevailing market prices. If the market price is already down -26% y-o-y without foreclosure data, imagine what happens when bank foreclosure sales start to hit the market!

Make no mistake, I personally wish -26% was true here and now. Medians are up 50 -60% in four years. (Not to mention, we felt prices were unsustainable before the run-up started in late-2003/early-2004. Of course, this was also before the advent of Google employees gaining $400 -$500 -$600+ per share on their options or Apple stock running from $11 to $200.)

If house prices today are 160% of (un)reasonable, we need a -37.5% drop just to get back where we "started" in early-2004. FWIW, we thought in mid-2003/2004 that a 20 -25% drop was very do-able. If this is somehow still "correct," it suggests we're due a 50 -55% total drop from the peak. Even adding back a few points for inflation during the "extra" years it took to reach the peak, early-2004 prices ($520K Santa Clara Co. median resale) are very do-able. There could easily be windows of opportunity at even lower prices.

The relevant question is if we can survive that long in the valley. Or if "survival" is too low a standard and we move out anyway. Life is too short...

BTW, there is an empty lakefront foreclosure in our old Florida neighborhood. I heard this week from an old friend that he is giving up his gig in Europe at a PE-acquired semi company to move back to "our" old neighborhood. He says he couldn't stand working for the new management any more.

I recall we used to play a lot of golf together.