Housing Market and Valuation Study
The media paints a pessimistic picture of the housing markets based on:
1) Risk of potentially higher interest rates and stricter lending terms
2) Slumping housing starts, foreclosures and other bad news
3) Housing values dropping and continued perceived housing overvaluation in states like California and Florida (marked red in maps below)
Big Picture alerted me to a series of quarterly national housing reports distributed by Global Insight and National City Corporation. The report focuses on housing appreciation trends and housing over/under valuation in 2007/Q1 by county.
The media overstates the continuing deterioration of housing prices to the
extent it has sidelined buyers across the country, but it's really
quite localized. Here's a common sense explanation why the high rate of
foreclosures in Sacramento is not a bellwether for the rest of the
nation.
The housing booms happened in California, Arizona, Florida and the Northeast Corridor due to demand - the economies are good and everybody wants to live there. In California, demand is highest in the San Francisco Bay Area and Los Angeles, where the land supply is very limited. Builders focused on developing "affordable Californias" in the Central Valley, LA exurbs, and to a lesser extent, Las Vegas and Phoenix - all expansive desert climate regions. The "bust" is localized in these regions, not in the urban centers.
Overlaying the two maps reveals housing demand
The variable not shown, but implied, within the maps is housing demand. Note the cities with continued housing appreciation that are also considered overvalued - Seattle, Portland, Salt Lake City, Virginia. Housing demand will continue to drive these markets, as it will in California once the housing surplus corrects itself as builders slow down the pace of building.
The Global Insight report highlights a graph showing the correction happening rapidly - the % share of overvalued properties has dropped from 45% to 25% in just the past year based on 2004/Q1 as the 0% benchmark. What the graph doesn't reflect is housing demand trends... the Bay Area, Manhattan, Seattle and LA may be "overvalued", but haven't they always been? Isn't it quite possible that the 2004/Q1 valuation benchmark might be too low relative to today?
The housing booms happened in California, Arizona, Florida and the Northeast Corridor due to demand - the economies are good and everybody wants to live there. In California, demand is highest in the San Francisco Bay Area and Los Angeles, where the land supply is very limited. Builders focused on developing "affordable Californias" in the Central Valley, LA exurbs, and to a lesser extent, Las Vegas and Phoenix - all expansive desert climate regions. The "bust" is localized in these regions, not in the urban centers.
Overlaying the two maps reveals housing demand
The variable not shown, but implied, within the maps is housing demand. Note the cities with continued housing appreciation that are also considered overvalued - Seattle, Portland, Salt Lake City, Virginia. Housing demand will continue to drive these markets, as it will in California once the housing surplus corrects itself as builders slow down the pace of building.
The Global Insight report highlights a graph showing the correction happening rapidly - the % share of overvalued properties has dropped from 45% to 25% in just the past year based on 2004/Q1 as the 0% benchmark. What the graph doesn't reflect is housing demand trends... the Bay Area, Manhattan, Seattle and LA may be "overvalued", but haven't they always been? Isn't it quite possible that the 2004/Q1 valuation benchmark might be too low relative to today?
Pardons, the comments for this article were inadvertently deleted by this Quickblog application when the comment spam were deleted. I added them back manually.
I appreciate your comments... the gist of the post is to explain why the media's focus on bad news of the housing market is so overwhelming that it keeps buyers away...
Today's Bloomberg has a typical hard core article headline - Rate Rise Pushes Housing, Economy to `Blood Bath'
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Thanks. It's great to see some real and serious numbers regarding what is happening to prices.
You mention the media. I have no investment in the media, or reason to protect them but something jumped out at me as i read...
Media is not saying that all markets are going down, which you imply in your post. I think a fair reading of the legit media is they report on local trends.
When they do report on the monthly trends it's from the PR output of the NAR, NAHB and MBA.
They do report on Nat'l trends, which as we know are basically useless in informing us and our clients about the price trend of housing in any single market. They are nat'l (diluted) numbers. (and extremely, shall we say, slippery). The NAHB publishes 'contracts' but doesn't mention 'fall-thru' rates, the NAR does similar wizardry. NAR only last month got real in their price trend projections, adjusting to the LOW single digits. (I don't know what is going on but there is gotta be a story on the ouster of D Lereah. I'd love to read a post on that.)
For instance. Me, my clients and all my colleagues know central NJ real estate lost about 7% in '06. But NJAR says we lost about 1%. hmmm? I guess they thinking they are helping us salespeople? or maybe they just stink at crunching numbers?
I think the Case/Shiller studies are trying valiantly to develop and establish a more realistic measure of price trends. Add to that the affect 21century RE creates: blogs, a business philosophy and practice of transparency, more dialog and participation - thru distributed media - from agents (not just brokers PR peeps) will change our understanding and tools for establishing and analyzing price.
(thx for the spell check. makes me look smarterer than i am)
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Fine comment Ron... correct media is not saying that the housing market is uniformly disintegrating, but the aggregation of bad news - slumping housing starts, foreclosures, subprime debacle, and the latest prediction at Anderson Forecast that says the market has a 10% further drop to go - is pretty depressing. The total message is what is holding back buyers nationwide... consumers don't understand real estate well enough to see the positive side of the market when the news is 10:1 slanted in the pessimistic direction.
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Great post. The over-generalization by the media is what got a lot of the "bust" markets into their current situations. It's sad that people will buy or sell because their TV or newspaper told them to.
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Pat - Yes buyers are holding back b/c of news - as well as a belief that the market can't just keep going up. Their assumptions becoming a self fulfilling prophesy.
The very interesting facet of this larger debate is the fact that affordability is not mentioned. RE prices are out of line with historical and fundamental household incomes. Basically (in my market) we overshot the high mark. Perhaps by 20%. There are many reasons for this, but abnormallylow rates and investor/speculators contributed a large part.
I personally, and professionally agree that certain markets in central NJ will correct another 10% over the next 18months. We;ve already seen a 10%+/- loss in the last 18mos
Only time will tell.
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