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Silent Spring

E-MAIL POST

The typical spring home price rally was a no-show for 2008, if the size-adjusted median price of resale San Diego homes is to be believed. By that measure, single family home prices fell by 2.1 percent and condo prices by 5.8 percent between May and June. A volume-weighted aggregate of the two fell by 3.3 percent for the month.

Since the series peak in September 2005, the size-adjusted median price -- which is a slightly shorter way of describing the median price per square foot -- has fallen 29.5 percent for resale single family homes, 36.4 percent for resale condos, and 31.9 percent in aggregate.

The recent shift in buyer preference towards lower-priced properties may be causing some distortion in the size-adjusted median because it doesn't account for quality of the properties sold, except inasmuch as quality can be measured by square footage. So the price of a given home may or may not have fallen to the same degree as the size-adjusted median (and that's without even considering the vast price change disparities seen from one locality to the next).

However, this data suggests that as a whole, springtime has come and gone for San Diego without a price rally to show for it.

-- RICH TOSCANO

Friday, July 4 -- 1:35 pm

Mortgage Rate Update

E-MAIL POST

We haven't paid much attention to mortgage rates of late, a fact that is understandable given that the real action in the mortgage market has involved defaults on high-risk loans rather than incremental rate changes. But let's check back in on the topic.

The accompanying chart displays rates for 30-year fixed and 1-year adjustable mortgages along with the effective Federal Funds Rate. It's clear to see that just as the multi-year increase in the Fed Funds Rate didn't do much to increase fixed mortgage rates (which are more dependent on long-term rates than the Fed-controlled overnight rate), its current decline hasn't exerted much downward pressure on fixed rate mortgages either.

As a matter of fact, fixed rates are not a whole lot lower than they were when the Fed began cutting rates back in mid-2007.

Adjustable rate mortgage (ARM) rates have fallen a bit, but they are notably higher than they were when the Fed Funds Rate was hovering around 2 percent back in 2005.

In short, the Fed's dramatic rate-slashing extravaganza hasn't put much downward pressure on mortgage rates at all.

-- RICH TOSCANO

Tuesday, July 1 -- 4:37 pm

Alt-A Pain Still Ahead

E-MAIL POST

I'll just say up front that this is one of those lame blog posts that links to another person's blog post and then appends a little extra commentary at the end, which is exactly the type of blog post that one might expect on a Friday afternoon in late June.

The linked-to blog post in question comes from local real estate luminary Jim "The Realtor" Klinge, and it offers up a host of data comparing subprime and Alt-A mortgages in California. The difference, to put it simply, is that while "subprime" describes mortgages given to borrowers with low credit scores, "Alt-A" describes high-risk mortgages granted to people with better credit scores.

I've long argued that subprime loans weren't the only ones at risk of default, and Jim's data (sourced from the New York Fed) shows that this is true. (For instance, 23.5 percent of Alt-A loans have late payments over the past two years.) But what interests me most about Jim's post is that it suggests that much of the Alt-A pain may still be pretty far in the future.

Specifically, while 43.4 percent of California subprime mortgages are due to reset in the next 12 months, only 3.6 percent of Alt-A mortgages are in the same boat. However, 43.3 percent of Alt-A's have resets 24 or more months in the future, versus just 6.2 percent for subprime loans.

Now, there's more to this all than resets. As I've noted on the blog before, the evidence suggests that a lot of underwater loans are going into default well before the reset date.

This makes sense. At the peak, homes were so expensive that it cost more to make the monthly loan payments than it would to rent an equivalent home. So once borrowers who bought near the peak are underwater, they have an incentive to bail immediately and start saving money every month by renting.

Unless, that is, the borrower has a negative amortization loan. In this case, the borrower is actually paying less each month than is actually owed, and the excess is getting tacked onto the mortgage principal. For these folks, their artificially low mortgage payments might be lower than the rent on an equivalent house. In this case it would make sense to stay with the mortgage until the loan reset, but not afterward, both because neg-am loans typically reset sharply upward and because the all the extra debt that had been piled onto the principal would likely lead to a highly-underwater loan.

So the little theory I am advancing is that when it comes to predicting default, reset dates matter a lot more for negative-amortization loans than for fully amortizing loans.

I have no data to support this theory, but it makes sense.

Some related data, though, can be found in Jim's table: 30.8 percent of Alt-A loans were neg-am, versus 0.1 percent for subprime loans.

So considering that a lot of Alt-A loans are negative amortization, and that a lot of them are a long while from resetting, we may be seeing high default rates among more creditworthy (to use a loose interpretation of the term) borrowers for years to come.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Home Prices Drop Again in April

E-MAIL POST

San Diego single family home prices as measured by the accurate-but-lagging Case-Shiller index took another hit in April. The overall index declined 2.6 percent from the prior month, 22.4 percent from the prior year, and 27.9 percent from the November 2005 peak.

As usual, those aggregate numbers hide some huge disparities between homes at different price levels. The high-tier index (accounting for the upper one-third of sale prices) fell 1.5 percent for the month compared to 2.7 percent for the mid-priced tier and 3.5 percent for the low-priced tier. The accompanying graph shows that this pattern has been in place since the beginning of the decline. The vastly different performance on the way down is pretty much the flip side of the differences we saw on the way up, when lower-priced properties rose a lot further due to the explosion in subprime mortgage issuance.

April's decline in the aggregate index brought overall home prices back to a level last seen in November 2003. Adjusting for the effects of inflation as measured by the Consumer Price Index, home prices were just below where they had been in November 2002.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Employment Goes Negative Again

E-MAIL POST

San Diego employment declined on a year-over-year basis in May, according to the latest estimates from the California Employment Development Department. This is only the second time in 15 years that annual employment has shrunk, the first time being in March of this year.

The loss of jobs continues to be centered in the industries that became unsustainably bloated as a result of the housing bubble. From May of 2007, construction employment fell by 8,900 jobs or 10.0 percent, finance and real estate employment by 5,400 jobs or 6.6 percent, and retail employment by 1,900 jobs or 1.3 percent.

Things looked a lot brighter outside of the three housing boom industries. Employment in other sectors grew by 13,000 jobs or 1.3 percent, and the green line on the accompanying graph shows that the growth trend in the non-housing economy has remained pretty steady.

However, the increasing burden supplied by the housing-related sectors was heavy enough to drag overall employment down by 3,200 jobs or .2 percent. The orange line on the graph shows total San Diego job growth in a fairly steady downtrend.

There continues to be some controversy about the birth-death model, which posited a increase in construction, finance, and retail employment from hypothetical new business formation even as the known, existing businesses continued to shed jobs. For more information on this topic see the Bureau of Labor Statistics' monthly birth-death figures or my previous articles (first here, then some vindication here) questioning the accuracy of the birth-death model at job growth inflection points.

-- RICH TOSCANO

Friday, June 20 -- 12:14 pm

Prices Way Down, Sales Way Up

E-MAIL POST

Last week I noted that May had been another good month, as these things go, for home sales. But there is more to the story, as you might expect. Just as there has been a huge disparity in price declines between different areas of San Diego, the recent surge in sales activity has been every bit as uneven.

Using the zip code-level sales data kindly offered up by our pals at the Union-Tribune, I collected information on all zip codes that had more than 20 sales either in May 2007 or May 2008. I put the resulting list in order based on the year-over-year change in sales activity, with the biggest sales increase at the top. Then I took some averages for the top 20 zip codes (those with the biggest increases) and the bottom 20 (those with the biggest decreases). The two lists are here for anyone who wants more detail.

The results, summarized by the table to the right, were pretty clear. To begin with, the sales disparity among different zip codes is huge. The top 20 zips averaged a year-over-year sales increase of 38 percent while the bottom 20 averaged a decrease of 42 percent.

There was a big difference in pricing between the two categories, as well. The average median price (that sounds funny, but it's the average of the 20 zip codes' individual median prices) in the top 20 was $352,228, which was down 25 percent from last May. And the average median in the bottom 20 zips was $640,463, which was down only 8 percent from a year back.

In short, the lower-cost areas that have taken huge price hits are seeing a big resurgence in activity. More expensive areas whose prices have been resilient, on the other hand, have experienced a severe drop in activity.

A few implications leap to mind. First, because the composition of sales has shifted towards lower-priced homes, the plain-vanilla median price is almost certainly overstating shorter-term price declines at this point. There is no shortage of analysts pointing this out, by the way. (Oddly enough, not so many of them were pointing out the compositional changes that caused the median to overstate price increases in early 2007).

Second, this is not a good sign for the high end of the market. All the talk of desirability is meaningless if there aren't actual desirous people buying actual houses. The challenges faced by the high end, covered here before, may be taking their toll.

Finally, the increase in sales volume is obviously a sign of improvement in the lower priced markets. At the same time, this is where foreclosure incidence is highest, and for now, foreclosures are still winning. But at least something good is finally happening at the long-suffering low end of the housing market.

-- RICH TOSCANO

Tuesday, June 17 -- 10:18 pm

Housing Supply and Demand Improves Again

E-MAIL POST

While there wasn't much good news in the home price department last month, sales volume and inventory made for another story.

Sales activity quickened in May, resulting in a 5.2 percent decline in volume from a year prior. This number doesn't seem all that impressive on the surface, but compared to the 30 percent annual declines on display earlier in the year it is actually a big improvement.

Inventory also flattened again so that it was just 1.4 percent over last year's figure.

The number of months' worth of inventory declined to 7.6 months -- still in or near bear market territory, but a vast improvement over the 12 months of inventory we saw earlier in the year.

That's the good news. The bad news is that as much as sales have been increasing they still aren't keeping pace with foreclosure activity.

Homes going into foreclosure tend to eventually end up as must-sell inventory, which is the type of inventory that puts the most downward pressure on home prices. So while volume has increased and current inventory has moderated, San Diego's housing market will probably not be out of the woods until that pipeline of future must-sell inventory clears out a bit -- or at least until it stops filling up so fast.

-- RICH TOSCANO

Friday, June 13 -- 3:38 pm

Still No Spring Rally for Median Home Prices

E-MAIL POST

The size-adjusted median price for San Diego resale homes fell again in May, dropping 2.0 percent from April's median.

However, that number hid some widely disparate behavior between property types: the size-adjusted median was actually flat for single family homes while it fell a whopping 5.9 percent for condos.

From the peak of the series in September 2005, the size-adjusted median has fallen 28.0 percent for single family homes, 32.5 percent for condos, and 29.6 percent in aggregate. The bulk of that decline has taken place within the past year.

-- RICH TOSCANO

Tuesday, June 10 -- 6:01 pm

Foreclosure Frenzy Continues in May

E-MAIL POST

May was another month for record-breaking foreclosure activity. This time, the new all-time high was set by trustee sale notices (NOTs), which happen late in the foreclosure process and serve as notice of an imminent home repossession. 1,762 NOTs were delivered in May.

Notices of Default (NODs), which serve as an earlier warning that the multi-month foreclosure process has been initiated, were down 5 percent from the prior month. However, the 3,422 NODs delivered in May is the second-highest number on record.

NODs and NOTs were respectively up 114 percent and 187 percent from May of last year.

The accompanying graph, which adjusts NODs and NOTs by San Diego's labor force size to provide a long-term comparison of foreclosure prevalence, shows that the recent level of foreclosure activity continuest to be worlds apart from what took place during the region's protracted 1990s housing bust.

-- RICH TOSCANO

Saturday, June 7 -- 12:00 pm

Return to 2003, Again, or Possibly 2002

E-MAIL POST

As promised, here is a followup chart to Friday's article on how long it's been since home prices were at current levels.

This chart once again uses the Case-Shiller index to track San Diego home prices but adjusts those prices for the effects of inflation as measured by the Consumer Price Index. By taking account of inflation, we can observe how expensive housing is (and was) not just in dollar terms, but compared to everything else.

The high end fared best once again, of course. Adjusted for inflation, the high tier of the March Case-Shiller index was back to levels last seen in August 2003. The middle and low tiers, in contrast, had fallen all the way back to valuations last seen in October and September of 2002, respectively.

As of March, the aggregate index of all single-family resale home prices was at an inflation-adjusted level last seen over five years ago in April 2003.

-- RICH TOSCANO

Monday, June 2 -- 8:53 pm

Return to 2003

E-MAIL POST

Earlier this week we examined how much home prices have fallen in percentage terms. Let's now look at things a different way: how far have prices fallen in terms of time? In other words, how long ago was it that prices were last at their current levels?

The accompanying chart attempts to answer this question using the three tiers of the Case-Shiller home price index in addition to the overall index for San Diego. To find the appropriate months, I just took the March value of each index (the most recent available, unfortunately) and noted what prior month was closest to the March figure.

The low tier has regressed the furthest, you will be unsurprised to learn. As of March, the Case-Shiller low tier index had fallen to a level last seen in August 2003 -- over four and a half years prior. The middle tier index had fallen to its October 2003 level. The resilient high tier was still firmly in 2004 territory, at least, back to its April 2004 value.

The aggregate index was closest to the level last seen in January 2004. It was actually slightly lower than the January 2004 value, so in a manner of speaking you can say that San Diego is back to 2003 pricing overall.


In reality, the results are in all likelihood worse than what you see above due to the time lag involved in the Case-Shiller index (used here nonetheless because it is by far the most accurate home price index). To begin with, the index lags by two months -- the March figures were just released earlier this week. On top of that, the index is calculated based on the prior three months' worth of home sales. For example, the March index was based on sales that closed in January and February as well as March. Assuming a consistent trend, then, March's value is more indicative of February pricing than of March pricing.

These facts lead the above chart to be overly conservative on both sides of the calculation. First, a match to the October 2003 Case-Shiller index value, for example, actually implies a match to September 2003 price levels. Second, the March 2008 index value represents February prices, and here we are nearly in June. (The evidence suggests that home prices have continued to decline since February.)

Sorry, I had to throw those last two paragraphs in for the nerds. The point is that as far back as prices appear to have reverted in the above chart, they've very likely reverted even a little farther than that.

When inflation is taken into consideration, "real" home values have regressed farther back still. But that is the subject for a followup chart -- check back on Monday (or maybe Tuesday) for that.

-- RICH TOSCANO

Friday, May 30 -- 12:40 pm

Another Month of Home Price Declines

E-MAIL POST

The S&P/Case-Shiller home price index for San Diego, which is the most accurate measure of aggregate single family home prices, declined 2.6 percent between February and March.

The high-priced index tier, which is composed of the most expensive one-third of homes that were sold during the period in question, was down but once again demonstrated relative strength. High-tier homes declined 1.2 percent for the month to end up down 18.0 percent from their June 2006 peak. The accompanying graph shows that the high tier has experienced a spring rally of sorts as the pace of price declines let up from previous months.

The middle tier of the index was down 2.3 percent for the month and 27.7 percent from its November 2005 peak. The low-priced tier continues to take the brunt of it, down 3.4 percent for the month and 33.8 percent from its June 2006 peak.

The continued underperformance of the low tier is primarily due to the explosion in subprime credit availability, which first helped low-end prices rise in great excess to prices in the higher tiers and then led to a preponderance of foreclosures among those same formerly high-flying properties.

The Case-Shiller index indicates that as of March, San Diego single family home prices in aggregate had declined 25.9 percent from their collective November 2005 peak.

-- RICH TOSCANO

Tuesday, May 27 -- 10:32 am

Foreclosures Creeping Up the Economic Ladder

E-MAIL POST

I recently wrote that San Diego's more upscale housing sub-markets aren't out of the woods just yet. One of my arguments concerned the behavior of the region's more creditworthy borrowers: it's not that they stayed away from risky loans during the boom, just that the types of loans they tended to get took longer to reset than the subprime loans that are currently blowing up all over the county's less expensive neighborhoods.

For a visual I point you to the mortgage reset chart hosted on the always-informative Calculated Risk economics blog. While I suspect that San Diego was a little ahead of the nationwide figures represented on the chart, the fact remains that the types of risky loans often taken out by the well-heeled have barely begun to reset. (This March article offers a more in-depth treatment of the afore-linked chart and the topic of Option ARMs, mortgages that can cause particular trouble upon recast given their negative-amortization payment schemes).

Now a bit of evidence for higher-end mortgage distress is starting to trickle in. The blog Housing Wire features two recent examples. One involves a study performed by an asset disposition company showing that its California foreclosure sale rate for properties over $417,000 has increased almost eight-fold from a year ago. (No San Diego-specific info, unfortunately). The article suggests that non-subprime foreclosures are just beginning their climb at this point.

Another Housing Wire report from back in March shows that even by then, delinquency rates on Alt-A mortgages (riskier loans made to borrowers with good credit) had risen to a hefty 17.4 percent.

Interestingly, the March report contends that for Alt-A loans -- most of which took the form of stated income mortgages, aka "liar loans" -- resets aren't the problem at all:

...[N]ote that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.

While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.

Interesting. We'll have to keep an eye on those non-subprime delinquencies.

-- RICH TOSCANO

Friday, May 23 -- 6:07 pm

Must-Sell Housing Supply Overwhelms Demand

E-MAIL POST

Last week, we saw that the housing supply and demand situation improved notably in April as the number of months' worth of resale inventory retreated to early-2007 levels. Today we will have a look at how well the improved housing demand stacks up against "must-sell" inventory, that crucial subset of inventory that can't be taken off the market to await better times.

For a while now I've been using Notices of Default (NODs) as a proxy for must-sell inventory. The idea is that homes in foreclosure represent the vast majority of must-sell inventory, and that homes whose owners who have defaulted on their mortgages are likely to become must-sell inventory in the near future. On the demand side, I've used historical single family home sales (nothing against condos -- I just couldn't find any historical data). By dividing the number of home sales by the number of NODs in a given month, we can see how demand stacks up against likely must-sell supply.

The accompanying graph shows that it pretty much doesn't stack up at all. April's 1,707 single family home sales, while a huge improvement from the prior month, were dwarfed by that month's 3,601 NODs for a sales-per-default ratio of .47. This compares quite poorly to the early-1990s bust, in which the sales-per-default ratio bounced between 1.25 and 2.25 for the bulk of the time.

Including condos, the total number of April existing sales was 2,475 homes -- only 69 percent of April NODs. (I do not include new home sales in this calculation as new homes are their own type of must-sell inventory not measured by the NOD proxy).

April's activity surge brought out a whole crew of bottom-callers. And the fact that demand is starting to compare more favorably with want-to-sell supply is indeed a notable bright spot. But I just don't see how much of a recovery can take place until demand starts to stack up far better against must-sell supply.

-- RICH TOSCANO

Wednesday, May 21 -- 12:55 pm

Employment Goes Positive

E-MAIL POST

In March, San Diego employment fell on a year-over-year basis -- the first annualized decline for fifteen years.

In April, job growth went positive once again.

The housing boom beneficiary sectors provided their requisite drag, but according to the estimates released today by California's Employment Development Department, job growth outside those sectors was strong enough to drag the region as a whole into positive territory.

The accompanying graph displays the number of jobs added or lost by the three housing boom sectors in addition to jobs gained outside those sectors and overall. Construction was hardest hit with a loss of 7,900 jobs or 9.0 percent, followed by finance and real estate with a loss of 5,300 jobs or 6.5 percent and then by retail with a loss of 1,600 jobs or 1.1 percent.

Things were much brighter in the region's other economic sectors, which grew by a total of 17,500 jobs or 1.8 percent. Overall employment growth was 2,700 jobs or .2 percent -- not great, but at least lacking a minus sign.

Please note that the graph displays the data a bit differently than in the past. Now, each data point represents that month's change from a year prior. This method provides a better picture of the trends at work by automatically accounting for seasonal effects. I have also switched from graphing percent declines to showing the actual number of jobs gained or lost in order to represent each sector's relative influence on the overall employment picture. (Thanks to reader JP for the suggestions on how to better visualize this data.)

The graph shows that while everything but retail bounced last month, job growth in the construction, finance, and retail sectors appear to be in somewhat of a longer-term downtrend. The same could be said for overall job growth. However, employment outside the housing boom sectors appears to have been quite steady, oscillating around the 15,000 jobs-per-year mark as far back as the graph goes. We aren't seeing much in the way of second-order effects from the housing bust.

As I wrote in February and revisited in March, these preliminary estimates involve some pretty heavy guesswork and are subject to substantial revision. Assuming that they are correct, however, it looks like San Diego's comparatively robust non-housing economy prevailed in April.

-- RICH TOSCANO

Friday, May 16 -- 4:34 pm

Another Record Month for Foreclosures

E-MAIL POST

The month of April saw 3,601 default notices and 1,512 trustee sale notices. The former indicate homeowners who've been put on notice for mortgage delinquency; the latter are sent to owners about to have their homes repossessed. Both are at all-time records.

The graph to the right presents a long-term look at such filings. To account for San Diego's growth over the years, default notices and trustee sales notices (NODs and NOTs) are calculated as a percentage of San Diego's labor force. Even after this adjustment, the graph makes clear that the current pace of foreclosure activity is leaving that of the 1990s housing downturn in the dust.

This record-breaking foreclosure activity is precisely what I was talking about last week when I noted that there is an important distinction between "want-to-sell" and "must-sell" inventory.

-- RICH TOSCANO

Monday, May 12 -- 11:37 pm

April Housing Supply and Demand

E-MAIL POST

Resale housing activity surged last month, with the number of home sales increasing by 25.0 percent between March and April. Volume was still lower than it had been a year prior, but less so than in previous months: the average year-over-year decline for January, February, and March of this year was 30.7 percent versus a year-over-year decline of 13.4 percent in April.

At the same time, resale inventory grew at a modest 1.7 percent pace for the month, ending up 10.9 percent higher than it was a year prior. Once again, while higher than last year this represents an improvement from the year-over-year comparisons in prior months.

The increased demand met with modest supply growth to substantially bring down the months-of-inventory figure. As pictured in the accompanying graph, the number of months of resale inventory has declined to levels not seen since the before the credit crisis abruptly deepened in mid-2007.

The big decline in the number of months' worth of inventory waiting to be sold is certainly a positive development for the market. But there are a couple of footnotes. First, according to local broker Adam Rappoport of G&R Realty, it appears that the volume of closed sales has picked up much more in the areas that have suffered steep price declines than in those that haven't. Adam believes that the prices in the hard-hit areas may finally have gotten low enough to start bringing buyers back into those particular markets even as activity has been flat or even decreased in some of the more price-resilient areas.

Second, the resale inventory numbers detailed here represent the totality both "want-to-sell" and "must-sell" inventory. I have long maintained that the latter category -- which consists mostly of foreclosures but also includes vacant and builder-owned properties -- is the more important one. And if the number of in-process foreclosures is any indication, the must-sell component of inventory is set to keep growing fast. It remains to be seen whether the increased demand will overpower all that must-sell supply that appears to be headed for the market.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

No Spring Rally Just Yet

E-MAIL POST

Despite the seasonal tendency for home prices to rise in the spring, San Diego resale prices fell again last month. At least, that is, according to the size-adjusted median price, which is the more timely but less accurate price indicator that we cover here at the Nerd's Eye View.

Between March and April, the size-adjusted median resale price fell 3.3 percent for single family homes, .3 percent for condos, and 2.3 percent for a volume-weighted aggregate of the two.

From the peak of the series in September 2005, the size-adjusted median price has fallen 27.6 percent for single family homes, 28.5 percent for condos, and 28.0 percent overall.

Keep in mind that these countywide figures lump together multiple areas that are actually holding up quite differently. Some markets are doing a lot better than the graph to the right would indicate -- and some a lot worse.

The most recent release of the three-tiered Case-Shiller index helps to show this disparity, but there is a lot of variation even within the three price tiers. I discussed the nature of the regional differences in more detail last month.

-- RICH TOSCANO

Date: 5/6/08

Employment Sector Winners and Losers

E-MAIL POST

Earlier this month, we saw that San Diego employment declined on a year-over-year basis in March -- something that hadn't happened during the last recession (nor for 15 years, according to the U-T).

The accompanying graph shows how many jobs were added year-over-year by the top four sectors for employment growth how many were lost by the bottom four sectors. Over each bar, I have noted the average hourly wage within that sector (for some reason, the BLS site does not report government sector wages -- perhaps they consider that a little too personal).

There shouldn't be any surprises here for folks who've seen prior iterations of this graph. The leisure and hospitality sector has been in first place for a while, with government and education/health jockeying for second and professional services bringing up fourth place. Similarly, construction has been the big loser for quite a while, followed by financial activities, retail, and manufacturing -- usualy in about that same order.

What's different now is that the number of jobs being added by the strong sectors has declined, while losses in the weak sectors have for the most part gotten worse. It doesn't help matters that the sector losing the most jobs pays on average twice as much as the sector gaining the most.

-- RICH TOSCANO

Date: 5/1/08

Another Bad Month for Home Prices

E-MAIL POST

February was another bad month for the Case-Shiller index, the best measure of aggregate home prices. The overall San Diego index dropped a hefty 3.6 percent from January, for a total decline of 24.0 percent since the November 2005 peak.

As has become the custom, lower-priced homes were hit a lot worse than higher-priced homes. But as has become a more recent custom, high-priced homes have started to feel some substantial pain as well.

According to the Case-Shiller tiered price indexes, low-priced San Diego homes fell 4.1 percent for the month, mid-priced homes fell 3.9 percent, and high-priced homes fell 2.7 percent. The declines since the three tiers' respective peaks can be seen in the accompanying graph.

The Case-Shiller index, while comparatively accurate, lags a lot. Each month's index figure is based on sales activity from the prior three months. The February index, for example, is based on sales from December, January, and February. So assuming a somewhat constant price trend, the index is more representative of January prices than anything else.

Next week, we will have a look at the size-adjusted median price for homes sold in April. This less accurate but more timely indicator will at least give us an idea as to what's been happening since the early months of 2008.

-- RICH TOSCANO

Tuesday, April 29 -- 4:15 pm

BailoutWatch: I Can't Even Keep Up

E-MAIL POST

When I wrote the first installment of BailoutWatch this January, I intended to post occasional updates to keep readers apprised of the ongoing housing bailout efforts. Well, the truth is that I haven't even been able to keep up.

That column wasn't even the first on the subject -- it had followed hot on the heels of this one. Since the January post, the bailout attempts have been coming fast and furious. They've also been getting progressively more irresponsible and transparent in their attempts to reward the very institutions that enabled the housing bubble in the first place.

Let's go through a selection of recent bailout-related developments.

Of course, everyone heard about the Federal Reserve's offer to guarantee $29 billion of investment bank Bear Stearns' debt. "Debt," here, includes the questionable and probably worthless mortgage-backed securities of exactly the type that brought Bear Stearns to the very edge of bankruptcy. This was nothing less than a public bailout of the reckless and overleveraged Wall Street firms that for years had pulled in huge profits by feeding the real estate mania.

This action was deemed necessary by our fearless leaders to prevent a financial market panic that might have occurred if Bear couldn't pay off its creditors or counterparties, the latter being the term for the folks on the other side of a derivatives trade. Now, more established Nerd's Eye Viewers may recall that I wrote a piece back in 2006 describing the risks that buyers of credit default swaps, which are derivatives that insure their buyers against loan defaults, might not get paid back in the event of default because of the flawed models employed by default swap issuers. Many others were warning of this risk as well, but we were pretty much collectively ignored.

Well, the Bear Stearns bankruptcy was it -- a huge derivative counterparty failure. Instead of allowing it to happen, however, the Fed (one of the main parties doing the ignoring back in 2006) bailed out Wall Street by taking on the risk for itself.

"Itself," here, means the taxpayers, who are of course the ultimate source of funding for the Federal Reserve. Enjoy Bear's worthless mortgage-backed securities, because you are now effectively their proud owner.

The Fed also invoked an emergency provision in order to start lending directly to investment banks, many of which are now suffering due to their heavy involvement in the mortgage-backed securitization boom about which I wrote in detail a while back. Go ahead and read that article and then ask yourself whether these companies really deserve to be lent public funds to make things easier for them after they took such huge and obvious risks (and made a killing doing so, at least for a while).

This is all serious stuff. None other than former Federal Reserve chairman Paul Volcker recently expressed concern that the Fed's actions "extended to the very edge of its lawful and implied power, transcending certain long-embedded central banking principles and practices."

Volcker was presumably referring to the Bear deal and the lending to investment banks. His statement didn't even address the fact that the Fed's target rate has been forced down well below the rate of inflation, so that savers across the nation can watch the real purchasing power of their savings disappear for the benefit of the housing bubble participants.

The Fed is certainly breaking out the big artillery, but other members of our government are hard at work on the bailout as well. In addition to raising the limit on conforming mortgages underwritten by Fannie Mae and Freddie Mac, regulators gave those two enormously leveraged operations the green light to go further into debt. (As I explained in the January installment, U.S. taxpayers are the implicit guarantors of this now-increased debt).

Also, the Federal Home Loan Bank system, a somewhat obscure quasi-government agency that was created during the Depression, has been lending billions (and has been cleared to lend a lot more) into the mortgage market. The FHLB, like Fannie and Freddie, isn't explicitly guaranteed by the government. But if said government won't even allow a private enterprise like Bear Stearns to fail, do you really think they will let a huge government-sponsored entity fail? The point being that the taxpayers are almost certainly on the hook for this money as well.

Finally, we have the "Foreclosure Prevention Act," or as I like to call it, the "Keep Homes Unaffordable Act," or possibly the "Give Taxpayer Money Directly to the Exact People That Caused The Problem Act." This legislation was already passed in the Senate. It includes, among others, the following fantastic ideas:

• Over $25 billion in tax breaks for home building companies.



• $4 billion for communities to buy up foreclosed homes.



• A $7,000 tax credit for anyone who buys a foreclosed home.

I hope it's clear that most of these bailouts benefit not struggling homeowners, but the housing and financial industry companies that were big and hugely profitable players in the boom.

In general, trying to keep far-underwater homeowners in their homes is often of little help to them. People who owe significantly more than their homes are worth would in many cases be better off walking away and freeing themselves from a potential lifetime of overindebtedness. Keeping them locked into their unreasonably huge mortgages benefits the lenders more than the homeowners.

But much of the Foreclosure Prevention Act is even more blatant in that it targets taxpayer money directly at the homebuilders and lenders. The first item noted above, the tax break for homebuilders, is pretty self-explanatory. And the second two, the subsidies for buying foreclosures, increase the demand for foreclosed homes and thus help the lending institutions that own those homes get a better price. As an added bonus, this artificial demand also keeps foreclosed homes from returning to price levels that people would be able to afford without government subsidies.

I try to stay off the soapbox but this is getting a bit out of hand. I am astonished at the level of complacency on display as responsible people's earnings and savings are plundered with the express purpose of keeping homes unaffordable and rewarding the institutions that both contributed to and profited enormously from the housing bubble.

If you think this is all as ridiculous as I do, write your Congresscritters and let them know you don't want any part of it. I promise it will be off the soapbox and back to the charts after this.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Employment Goes Negative

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San Diego employment has just decreased on a year-over-year basis, falling by 1,700 jobs between March 2007 and March 2008.

That is a very small drop in the grand scheme of things, representing a decline of just .1 percent. But it's the first time in a long time that employment has turned negative at all. The data I pulled from the Employment Development Department website goes back to the year 2000, and it shows that even during the recession and slowdown that took place at the beginning of this decade, the weakest month showed a year-over-year increase of 2,300 jobs.

So even though we are not in an officially recognized recession, San Diego's employment situation is worse than it ever got in the aftermath of the 2001 recession.

The culprits, as you might imagine, are the housing boom beneficiary sectors -- the ones that grew like weeds in the midst of the housing frenzy and are now suffering in the bust.

Construction was hit the worst, declining for the year by 9,100 jobs or 10.3 percent. The finance sector, which includes real estate, lost 5,700 jobs or 7.0 percent. The retail sector, which was a more indirect beneficiary of the boom, was down by 1,400 jobs or 1.0 percent.

Outside these industries, employment was quite positive. Excluding the three housing boom sectors, local employment increased by 14,500 jobs or 1.5 percent. But the drag from the formerly high-flying housing boom industries was enough to drag the region into negative territory on the whole.

San Diego's March unemployment rate was 5.3 percent, up from 5.0 percent in February and 4.2 percent a year prior.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

A Mixed Month for Foreclosures

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Let's start with a review of foreclosure lingo. Notices of default (NODs) are the nastygrams sent to people who have repeatedly failed to make their mortgage payments. Notices of trustee sale (NOTs) are sent to owners who have failed to make things right with the lender after having received an NOD. The NOT informs the owner that the bank will repossess the house in the near future. The official minimum timeline between the NOD and NOT is 90 days, although it often takes longer than that given that the system is so flooded with foreclosures. The minimum time between NOT and actual repossession of the home is 21 days.

In shorthand I sometimes refer to NODs as defaults and NOTs as foreclosures. This isn't entirely correct, as the term "foreclosure" really describes the entire process outlined above. But "trustee sale notice" is a bit too obscure a term for the uninitiated, so I hope I can be forgiven for thinking that "foreclosure" is close enough in certain cases.

Alright, now that I've dragged you through the above explanation, let's have a look at last month's foreclosure data.

3,284 NODs were delivered in March. This is 2 percent higher than in February but ever so slightly lower than in January. Considering the number of business days in March, this is an all-time record on a per-day basis.

NOTs, in contrast, fell rather substantially. The 1,161 NOTs racked up in March represented a 17 percent drop from February.

We've had such one-month divergences between the growth of NODs and NOTs in the recent past. If it continues we will have to speculate as to a cause, but for now the most likely culprit is randomness.

Regardless of the month-to-month gyrations, the accompanying graph shows that the monthly pace of NOD and NOT accrual, even when adjusted for San Diego's population growth, remains near levels that dwarf anything we've seen in the past.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Employment's Been Weak for a While

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The latest Quarterly County Employment and Wages (QCEW) report came out this week. You may recall from a prior article on the topic that this employment survey is quite a bit more accurate than the monthly employment estimates, but that it is typically ignored because it lags by six months.

You may also recall that I advanced the theory earlier this year that the statistical adjustments employed by the agencies that put out these numbers were causing job growth to be overstated. Shortly after I wrote that article, this thesis was vindicated with the arrival of revised estimates showing that San Diego employment growth had indeed been much weaker than initially reported.

The latest QCEW report provides more evidence still. According to the report, year-over-year employment growth in San Diego had come to a standstill as of September 2007. Private sector employment, which excludes government jobs, had actually shrunk slightly. This is a huge difference from the monthly estimates released at the time, which showed that San Diego had added about 12,000 jobs in the year leading to September 2007.

The question now is whether the agencies are still overestimating job creation for the monthly figures, and whether the current growth is merely stagnant or worse than that. Only the passage of time will tell.

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Fence Sitters Will Be Sorry

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Our favorite housing cheerleader, Chuck Smiar, is back in the news again today with another attempt to scare real estate fence sitters into action. After issuing a warning to hesitating homebuyers that they were "in for a surprise" back in December, Chuck had this to say in a North County Times piece earlier today:

"There's a lot of buyers sitting on the fence waiting for the bottom. And I think if they don't jump in soon, they're going to be sorry."

Well, he did add the phrase "I think" in there. Perhaps he's getting more circumspect as time goes on. Nonetheless, this latest assertion fits right in with his increasingly well-established track record of making statements that, in addition to having little basis in reality, seem pretty clearly intended to frighten people into buying homes.

The accompanying graph displays Chuck's prior suggestions overlaid with San Diego home prices (as measured by the Case-Shiller home price index through January and then approximated using single family size-adjusted median prices for February and March). The timeline pretty much says it all -- I'll just add that I look forward to future installments.

For the record, I'm not purposely singling out Chuck here. He may be a real nice guy, for all I know. He just happens to provide the funniest examples of the brazen and often delusional boosterism that emanates from so many (though definitely not everyone) in the real estate industry. To his credit, at least he sticks to telling people why they should be buying homes instead of concocting implausible conspiracy theories to explain why they aren't.

-- RICH TOSCANO

Wednesday, April 9 -- 4:49 pm

March Resale Housing Supply and Demand

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A lot more resale homes were sold in March than in February, but that's how it happens every year. As a matter of fact, this year's February-to-March rise of 23 percent looks pretty weak compared to last year's 40 percent increase. Between March 2007 and March 2008, sales volume declined by almost 34 percent.

Things looked brighter on the inventory front. Despite a seasonal tendency to rise, resale inventory was pretty much unchanged from February. This compares to an increase of almost 5 percent between February and March of 2007. However, inventory was still 17 percent higher than it had been a year prior.

The steep rise in sales made for an equally steep drop in the number of months' worth of inventory sitting on the market. However, if past seasonal patterns hold, that figure will start creeping up in the months ahead. Even if it doesn't, 10 months' worth of inventory represents a level that is understood to put serious pressure on home prices. The unusually high proportion of "must-sell" inventory -- typically properties that are bank-owned or vacant -- will likely apply more pressure still.

-- RICH TOSCANO

Tuesday, April 8 -- 5:59 pm

Median Prices Hang Tough in March

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After their worst month ever, San Diego resale home prices were offered a respite in March, at least according to the median-based price indicators.

For the month, the size-adjusted median price was flat for detached homes and down a mere .4 percent for condos. I guess that's what passes for a spring bounce these days.

Since March 2007, the size-adjusted medians were down 19.6 percent for detached homes and 20.6 percent for condos. However, recall that early 2007 saw artificial strength in the median-based indicators as the "subprime mortgage crisis" (eventually to become "the mortgage crisis") skewed median prices upwards. Because the March 2008 number is compared against an artificially strong March 2007 number, the net effect is that year-over-year median price changes are now overstating the annual rate of decline. This will continue to be the case until later this year.

From the peak of the data series in September 2005, the size-adjusted median is down 25.1 percent for detached homes and 28.3 percent for condos. A volume-weighted aggregate of both property types is down 26.3 percent.

The less informative "plain vanilla" median was down 2.3 percent for detached homes and up 4.9 percent for condos. From the combined peak in September 2005, the vanilla median is down 25.9 percent for detached homes, 22.7 percent for condos, and 24.9 percent in aggregate.

As usual, these countywide figures mask some pretty serious disparity among San Diego's different regions. For those interested, a recent column explored why some parts of San Diego haven't declined very much and whether this will always be so.

-- RICH TOSCANO

Thursday, April 3 -- 9:40 pm

Desirable Yes, Immune No

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For years, people claimed that because San Diego was such a desirable place to live, local real estate was immune to price declines. We know how that turned out. Yet these days that same argument is often applied to San Diego's more upscale areas.

It seems, at first blush, to hold up. High-end San Diego homes have certainly weathered the housing bust far better than their lower-priced counterparts. This can be seen in last week's Case-Shiller home price graphs, which show that the high end of the housing market has fallen in price less than half as much as the low end. And the Case-Shiller high tier -- which aggregates price movements of the most expensive one-third of San Diego homes -- understates some notable resilience in swankier sub-markets such as Point Loma, Mission Hills, La Jolla, and much of the North County Coastal region.

The relative strength in these areas has led to the widespread conclusion that the high-end markets are desirable enough to be more or less invulnerable to the housing bust.

I am skeptical of this interpretation. There are better explanations for why the high end has held up so well. And there are some looming threats -- overvaluation, high-end foreclosures, job loss, and pressure from lower-end price declines -- that put San Diego's more desirable areas at serious risk of losing their "invulnerable" status.

Let's start with the idea that there are better explanations for the high end's resilience. As noted at the beginning of this article, saying "prices in Area X will remain high because Area X is so desirable" sounds a lot like a repackaging of the "everyone wants to live here" mantra that pervaded the market during the boom. In this new version, Area X has been narrowed down to include only certain parts of San Diego rather than San Diego as a whole, but the thrust of the argument remains the same.

As such, it suffers from the same flaws. It offers no explanation for why prices increased so vastly within a period of just a few years, nor does it offer any compelling reason why those huge price increases should stick now that the props of speculative enthusiasm and easy lending have been removed. (A more thorough treatment of the "everyone wants to live here" fallacy and other assorted home price rationalizations can be found in a housing bubble overview I wrote last year).

A big part of that resilience has to do with the fact that prices in that part of the market never got so out of whack in the first place. The heavy influence of the subprime mortgage securitization boom led to much larger proportional increases in low-tier home prices than in the high-end markets. This is illustrated in last week's price update, but to put some quick numbers on it: in the five years leading up to the price peak in November 2005, the Case-Shiller low-tier index increased by 144 percent versus a much smaller -- though still enormous in absolute terms -- increase of 88 percent in the high tier. (The middle tier split the difference at 116 percent).

The subprime boom also led to a preponderance of risky mortgages in the low-cost areas. Many of these risky loans have since gone into foreclosure, forcing a glut of must-sell inventory onto those markets and accelerating the price declines. The areas that typically host the higher-priced homes are not subject to nearly as many foreclosures as the lower-cost areas.

In short, the high end's relative resilience throughout the downturn is pretty adequately explained by the disparate boom-era price increases between different property tiers and by the lower incidence of must-sell foreclosure inventory. There is no inherent invulnerability at work.

I can say that last part pretty confidently because the the high end was anything but invulnerable during the last housing downturn. The accompanying chart, which measures the ratio of the Case-Shiller high-tier index to per capita San Diego income, shows that the ratio of high-priced San Diego homes to incomes fell by 33 percent during the last housing bust. Once again, this index is lumping together a lot of different sub-markets and that some nuance is surely being lost. But the graph does clearly illustrate the point that as a whole, the most expensive one-third of San Diego houses can still be subject to price declines despite their obvious desirability.

As for the housing bust now underway, I believe that high-tier homes -- and here I am including even the areas that have been relatively unscathed so far -- are very much vulnerable to further price declines.

To begin with, have another look at that last graph. Even after the decline that's already taken place, the price-to-income ratio for the high tier is still above what it was at the tippy-top of the region's prior real estate bubble. (More detailed thoughts on home valuations are available for those interested).

I realize that this graph only provides a broad-brush approach. As mentioned above, it lumps together multiple sub-markets, and on top of that it is comparing prices of high-end homes with the per capita income across all of San Diego. Still, the level of the price-to-income ratio is so historically high that I have a hard time believing that it could be accounted for by changes in income distributions or by valuation differences between sub-markets. High-end homes in general look very overpriced, and now that the bubble is over, it seems reasonable to believe that they will return to being somewhat closer to fairly priced based on their historical relationship with incomes.

There are some more immediate risks, as well. I've often written here about the fact that reckless lending and borrowing wasn't just a subprime phenomenon. The bulk of foreclosures so far have certainly occurred in the lower priced areas that were more dependent on subprime financing, but that doesn't mean that the high end is out of the woods. Many analysts believe that the payment shock is still to come among the more creditworthy borrowers who took on risky loans.

Foreclosures are the primary source of must-sell inventory these days, but unemployment can play that role as well. Part of the reason that the high end fared worse than the lower tiers in the 1990s was that job loss was a big factor during that downturn. This time around, the bust so far has been driven more by financing getting abruptly tighter, so it makes sense that the lower-end areas that are more dependent on financing would suffer more. However, if job growth continues to stagnate or starts to shrink -- and especially if job losses continue to be concentrated within some of the higher paying sectors -- there could be more forced selling in the expensive markets.

Finally, the serious price downturn taking place in the lower tiers could itself negatively affect the high end. If prices get beaten down enough outside the high-priced areas without an adequate decline within those areas, there could be a substitution effect wherein buyers decide that the more expensive sub-markets aren't worth the price premium. There is so far no evidence that the price relationships that historically prevailed between different areas of San Diego should be thrown out the window.

Price declines in the current market, whatever their cause, tend to be self-reinforcing -- just as price increases were self-reinforcing during the boom. The premium that people pay to live in the high end areas has, ironically, increased because of the widely held belief that those areas will not be subject to price declines. As goes that belief, so goes that increased premium. And falling prices would put more owners underwater, leading to increased likelihood of foreclosure and thus yet more downard price pressure. Any of the risks mentioned in this article could cause San Diego's finest sub-markets to enter the kind of downward spiral that is taking place throughout the county.

San Diego as a whole is a very desirable place to live, but there are nonetheless upper limits to how much people are willing or able to pay to live here. The same reasoning applies to the extra-desirable areas. Every part of San Diego participated in the bubble, to a lesser or greater degree. There's little reason to believe that they won't all participate in the bust.

-- RICH TOSCANO

Tuesday, April 8 -- 6:00 pm

Mortgage Fun with the Federal Reserve

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The Federal Reserve does more than just slash interest rates below the rate of inflation. In the case of the New York branch of the Fed, they also provide the nation's nerds with really cool interactive maps showcasing various tidbits of mortgage data. The server is pretty bogged down right now but you should consider visiting the afore-linked page sometime soon, as it offers loads data on the state of both subprime and Alt-A mortgages (the latter basically being high-risk loans made to borrowers with good credit). The site stopped working before I could verify this, but it looks like you can drill down for data specific to San Diego County and even to each ZIP code within the county. (Thanks to the blog Calculated Risk for the link).

-- RICH TOSCANO

Friday, May 9 -- 10:25 am

Case-Shiller Declines Again in January

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The Case-Shiller home price index for San Diego was down 2.5 percent in January. This is not as poor a showing as we saw in December, but it's still pretty bad for a single month. From its November 2005 peak, the Case-Shiller index -- the most accurate indicator of aggregate home price movements -- has declined by 21.1 percent.

Kelly Bennett has provided a fairly detailed writeup on the movements of the index's three price tiers, so I won't rehash that here. Once you've read through Kelly's piece, come on back and have a look at the following charts.

The first chart shows the three tiers' declines from their respective peaks. The high tier has clearly held up best, although it has started to decline a lot more steeply in recent months.

The second chart shows price changes in the three tiers back through 1989. This puts the high tier's strength into context, as it becomes clear that high-end home prices didn't rise nearly as much as those of their as their lower-cost brethren during the bull market (this disparity is largely an artifact of the explosion in subprime mortgage credit).

While the low tier has taken the brunt of it, all three price tiers are now declining pretty reliably. This is no surpise considering that in spite of the steep price declines so far, San Diego homes remain substantially overvalued.

-- RICH TOSCANO

Tuesday, March 25 -- 7:35 pm