Altos Research Real Estate Insights

Today's post is from guest contributor, Kevin Boer. Kevin is a good friend and client of Altos Research. He's a "numbers guy" through and through. This post is also his inaugural post at his own blog. I like the way Kevin thinks and thought you might too. I'm traveling this week and back at it next week. Welcome to the blogosphere, Kevin!

Sensationalizing the news probably makes good business sense, since it attracts more readers. Media coverage of real estate news is no exception. "The sky's the limit" theme of many real estate
articles of a year ago has largely morphed into "the sky's falling!"

Search hard enough, and you can find the numbers to support pretty much
whatever case you want. An extreme example: as this graph clearly shows, prices in Atherton increased by 70% from April to May, 2006. Imagine the headline on that one! But for those of you who are disappointed that you now can't afford a home in
Atherton, there's hope...the headline in July 2006 is that prices have decreased by 50%!

Rollercoaster prices in Atherton makes for two juicy headlines

So what's the message? Three things:

First, keep in mind the source's bias. Media? Probably trying to sell more newspapers. Real estate professional (like yours truly)? Hmm....maybe
trying to sell more real estate.

Secondly, ask if the amount of data being analyzed is enough to warrant a trend. Atherton is a small, fairly exclusive city, and in a typical month there are only eight or so transactions; in a slow month there may only be two or three. You
can draw far more accurate conclusions from larger data sets; for cities like Atherton, you probably want to compare consecutive quarters, or even half-years.

Thirdly, look at the metric being used. "Average" is often not a good one since a handful of particularly high numbers can skew your perspective. In the Atherton example above,
much of the April to May rise came from four particularly high sales ranging from $8 million to $13 million.

This week the San Jose median home price sits at $749,000 down a tiny fraction from last week. For our Inkling Markets

futures trading market, that means we're still up about 3% year to date.

Here's a chart of the prices in the four quartiles of the San Jose real estate market. You can use these as a proxy for the Silicon Valley housing market as a whole, or dive into the local market reports for more detail.

Note that in all the housing bubble talk, where median prices for the city are basically flat for the year, prices at the low-end of the San Jose housing market are up about 20% year-over-year. These homes are about 1200 square feet, 45 years old, 3 bedroom, 2 bath. There are over 500 on the market in each quartile of San Jose.

This week our articles are featured in two Blog Carnivals:

TheLandlordBlog (passive income, baby!) hosts the ever-growing Carnival of Real Estate and cites our Housing Boom Fundamentals post.

David Daniels at Business and Technology Reinvention host the Carnival of the Capitalists (which sounds to me like a Michael Lewis tale of 1980's Wall Street). Our Bubble Headlines post is included there.

Blog Carnivals are a great way to get a roundup of high quality posts by active bloggers in niche markets. I recommend you check them out.

Check out this chart from David Rosenberg of Merrill Lynch. It illustrates how home-builder sentiment has correlated to future stock market performance. Each month the National Association of Home Builders

surveys it's members and asks whether they have positive or negative expectations for the next six months. In the past 10 years, the NAHB index has been 79% correlated with the S&P 500 a year later. Prior to 1996, the two indices show very little correlation.

Link: John Mauldin

The current edition of the Chicago Fed's Economic Perspectives publication carries a marvelous article about the fundamental drivers about this massive housing boom we're in. In short: Don't blame the housing bubble on a couple years of cheap interest rates. Rather demographics, technology, and financial market innovation have converged to give us a long boom.

I agree wholeheartedly with the basic thesis of the work - that is, Americans (western economies generally) are wealthier and the costs of acquiring homes has gone down, therefore home ownership and home demand has increased. This uber-capitalist orientation strikes close to my heart and echoes the work of David Malpass at Bear Stearns and the folks at GaveKal Research. Both of whom I've referenced before.

Here's a particularly insightful point, one that runs counter to most real estate bubble headlines these days.

The dramatic rise in residential investment and homeownership has coincided with equally dramatic developments in the mortgage market. Over the past ten years to 15 years, the mortgage market has developed substantially in four areas. First, technological progress has reduced the cost of approving a mortgage under a standardized set of lending guidelines, in part by allowing more precise measurement of a borrower’s credit risk. Second, mirroring developments in financial markets more generally, many new kinds of mortgages have become available. Third, the secondary mortgage market has grown and matured so that many kinds of mortgages can now be packaged and sold as mortgage-backed securities. Fourth, the mortgage market has become more specialized, as firms concentrate on different pieces of the market, including origination, servicing, and securitization.

Of these developments, the second is most important for our argument. We think that the main impact of the other three developments is to increase competition and lower transactions costs. Also, the development of the secondary mortgage market probably improved the risk–return tradeoff between mortgage-backed securities and other financial instruments.

A refreshing counter point to be sure. New Fangled mortgages don't deserve the bad rap they're getting lately. Financial product innovation gives more people more of what they want; it increases competition and reduces costs. Attempts to "protect" consumers from these products will result in less efficiency and higher costs for everyone involved. Proceed with caution.

One beef I have with the article. The authors shrug off recent lax interest rates as a "cause" of current housing market. Rather, they say, a booming economy is a factor. But a booming economy leads to feelings of job security, which is indeed a big driver of housing demand. That's why I fear a coming recession as a pin prick in our lil' housing bubble.

Thanks to Inman News for the link

Update August 28: I notice Jonathan Miller at Matrix has his comments on the report as well. Summary: Duh, of course low rates fueled the boom.

Big news day for the Housing Bubblistas. Let's try to sort out the headlines. In the Wall Street Journal alone today we see (RR):

Housing Data Seen As Sign Market Heading For Hard Landing

Housing Slump Proves Painful For Some Owners and Builders

Housing Prices May Become More Volatile, Fed Report Says referencing this opaque report from April.

Toll Cuts Outlook as Profit Drops, Seeing No Sign of Market Bottom

Headline: Existing Homes Sales Fell again in July to their lowest level since 2004

Behind the news: This is the NAR's monthly report. The number came in below "expectations" and June was revised downward also.

Behind the news: Sales are down, prices are up fractionally. Of interesting note, condos, usually the canary-in-the-excessive-inventory-coal mine, actually rose vs. a year ago. Single homes sales fell 5%.

The real estate bubble crowd sees today's sign the bubpacalypse is upon us. David Lereah of the NAR sees the 'soft landing' he's been talking about for a year. From the NAR release

David Lereah, NAR’s chief economist, said
higher interest rates dampened sales but that price softening is good
news for the housing market because it is drawing buyers. “Many potential home buyers have been on the sidelines, some ‘kicking the tires,’ but mostly waiting for sellers to compromise on prices and terms,” he said. “Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.”

Headline: Months of inventory hits "record"

Nationally, the months-of-inventory stands at 7.3 months. The highest level in 13 years, since emerging from the ugly recession of the early 90's.

Behind the news: The "record" mentioned is in how quickly we've hit these levels. Up from 4 months at the end of last year.

Headline: Toll Brothers cuts its earnings forecast

McMansion Builder Toll Brothers cut its full-year forecast for the third time this year.

Behind the news: In our opinion Toll missed a golden opportunity earlier in the year to get all the bad news out at once - anyone with a pulse could see this coming. We're not stock analysts but our guess is that Toll misses again in the fourth quarter. There just aren't many scenarios that imply robust new home purchases in the next few years. Toll should be forecasting as though they're facing a deep recession. (Even if no recession materializes, this market has lost its momentum for a few years.)

How to tally it all together? Well nationally, rising inventory is moving into the red zone. Our Bay Area, So Cal, and Seattle numbers point higher, but not into critical zone. Score 1 point for national bubble. The "painful slump"... is really a non-story. Some guy was moving up from the house he paid $225,000 for to one he wants to pay $900,000 for. He's having trouble selling the first one for $500,000. Toll Brothers, likewise, will face a few years of weak demand until a new economic catalyst emerges. But that's not related to home prices collapsing in a bubble burst.

Here's one silver lining that the eternal optimist in me picks out. The weak housing data may help keep a lid on Fed interest rate hikes. Already mortgage rates have unexpectedly dropped since these June and July deals happened. Mortgage applications are up this month. Low mortgage rates help avoid the perfect storm (recession + high rates) that will burst the bubble. So we got that goin' for us...

Today Curbed SF

has an article about The Beacon, that giant condo development on the San Francisco waterfront by the Giants. Apparently failing to note that much high-end condo demand on the south side of the city was driven by circa 2005 Google wealth, real estate investors (aka condo flippers) bought up much of the new supply. Those would-be flipped properties are now proving difficult to sell as the Googlers have settled down and the rest of the stock market takes it's extended breather. Lawsuits ensue.

So let's look at the condo market in that part of the city. The following snapshot covers zip 94107 which includes the Central Waterfront neighborhood of The Beacon, AT&T Park, and extends over Potrero Hill. I love this view to see what you get for your money:

Quartile	Median Price	Med. Sqft	Beds	Baths	Med. Age	Inven.	Newly Listed	Sold	DoM Approx
1	$1,312,000	1,322	2	2.0	4	34	4	2	69
2	$925,000	1,164	2	2.0	2	34	3	5	69
3	$739,000	1,111	1	1.5	7	34	3	4	44
4	$618,500	786	1	1	4	34	5	4	41

So there are 136 condos for sale in the area. What's amazing to me is not how long it's taking to sell these properties - the Days on Market is aiming for critical zone, but it's not there yet - But the Age column. With a few exceptions these properties are brand new! This is San Francisco we're talking about folks. The median age for the bottom quartile of the city as a whole, is 64 years.

As of August 18, 2006 median home price in San Jose appreciated by 3.1% year to date. Up just slightly in the fall of last year, the year-over-year appriciation rate for San Jose real estate is about 4.1%.

The median single family home in San Jose is priced at $749,888 this week. Down exactly $2 from last week. And basically flat all summer.

Notably, the inventory of homes for sale is 45% higher this year than last year at this time.

Here's the details for the Inkling Markets San Jose housing futures market that we're running.

So what does this say about the San Jose hosuing bubble? Popping? In my opinion, the only real conclusion we can draw is, Not Yet. Popping the Silicon Valley real estate bubble may well be a multi-year correction process. Or it may never pop, per se. Stay tuned.

Every week the Carnival of Real Estate runs a collection of interesting blog articles from the previous week. The Carnival is hosted this week by PineNeedleLawn

blog (who usually post about lake properties in Minnesota, Wisconsin, and Michigan - Ya hey der! Dat's God's Country, eh?)

Our Friday article on re-listing properties is among those cited in the collection this week. Lots of good real estate market reading and thoughts. Check it out: Pine Needle CoRE.

If you've shopped for a home lately, I'm sure you've noticed this deja vu phenomenon. A property gets emailed to you flagged as "new on the market." Breathlessly you open the email and ask yourself, "could this be The One?" But your heart sinks when you realize you went to the open home for this place a month ago. What happened? The property, still on the market, has been re-listed.

Why re-list? A few reasons:

1. Reset the Days-on-market: When a property sits on the market too long, people start whispering... "what's wrong with that place?" A "new" listing resets that DoM to zero. Makes it seem fresh. In many local California real estate markets, more than just 30 days on market is a red flag for buyer.
2. Lowering the price: You can, of course, lower the price on an existing listing. But when you take it off the market and re-list it, the price history isn't as readily available. The casual home buyer won't see that the seller is getting more motivated.
3. Free Marketing: Anyone can sign up for those email services that alert you when a new place comes on the market. So re-list and get pushed back in front of all the subscribers.
4. Test-the-waters: Watch your neighborhood closely and you will see what I call serial re-listers. People who test the market and then pull the house off, only to test again in a few months. In our experience, this is actually a small percentage of re-listing activity. But it should be filtered out nonetheless.
   

But how pervasive is re-listing? A conversation with a new customer prompted us to do the following analysis. For a handful of Washington and California housing markets, we looked at all properties currently on the market and identified what percentage of them had been re-listed at least once since the beginning of the year. Some of these relistings were done purely for reasons 1. and 3. because they kept the price the same. Here's what we found:

Real Estate Market	Current Inventory	Re-list %	Reset DoM %
Los Gatos	230	40%	9%
Mill Valley	138	6%	1%
Palo Alto	90	18%	4%
Pleasanton	255	44%	7%
San Jose	2181	30%	6%
Kirkland	384	21%	11%
Redmond	271	24%	14%
Seattle	2238	19%	8%

So in Los Gatos, fully 40% of the homes currently on the market have been re-listed. Mostly this was done to drop the price. But one-in-ten were re-listed just to game the MLS's DoM count. That's why when we calculate Days-on-Market in a report for, say, the Los Gatos Real Estate Market, we actually comb through the data and remove this anomaly.

To be sure, any agent will be able to get the listing history for a given property. Make sure you get it before you make an offer. Also make sure you pay attention to the true Days on Market when trying to measure your local real estate market conditions. Want to get some insightful housing demand indicators? The local re-list percentage is a good place to start.

Here's a snapshot from our latest report on Walnut Creek real estate conditions:

Median single family home price as of August 15 is $899,000, that's up a little over 3% from the beginning of the year. Current available inventory of homes is 134, which is up consistently through the year. Demand has kept pace enough to keep us in a seller's market. The market cooling is measurable in a declining Market Action Index, and increasing Days on Market (though at around 40 days, the average time it takes to sell a home is not worrisome.)

Here's an interesting tidbit from our research. Changes in Walnut Creek home prices this year are being driven by a shift in the properties available. In this chart, we look at the four price quartiles for Walnut Creek 94597 (which includes neighborhoods Larkey Park and Beacon Ridge.) Notice that we have a convergence in the properties available. Fewer properties being sold at very high-end of the market keeps a lid on the median price. But the low end of the market (around $700,000) has had relative price stability.

If you want to keep track of Walnut Creek in real time, you can bookmark our free Executive Summary page for Walnut Creek real estate market.

Here is our weekly update on the San Jose Housing Market for our Inkling Markets futures market.

The median single family home price in San Jose this week is $749,990.

Where last week I noted inventory levels, this week I want to point out price per square foot for homes in San Jose. At $475 per square foot, the market has hit a plateau this summer after a solid year long climb. If you look at this week's price per square foot chart, you can see how the cooling effect is impacting the value placed on homes. I find this chart very telling. It appears we have passed a peak recently.

Link:

San Jose real estate market intelligence report

I've been meaning to post a roundup of some of my favorite blog reading. Here are some folks worth paying attention to:

Sellsius: The guys at Sellsius know a lot about real estate marketing. Here they give up the goods on writing for real estate marketing. I'll add my own pet peeve to the list: If, as a real estate agent, the first words on your web site are still "Welcome to my website!" it's time to step up and write some targeted copy!

Realty Thoughts: Digs on real estate conferences. See my thoughts on last month's Inman conference here:

Curbed SF: I'm particularly fond of mid-century modern architecture. The Eichler homes from the 50's and 60's are the working-man's Neutra and embody that great California indoor/outdoor thing that I so envied growing up in Chicago. Curbed always has great coverage.

Boulder Realty: great market analytics coverage in Colorado. I love the guys who leverage the stats! Here's Osman picking apart the Boulder real estate market for signs (or not) of housing bubble conditions there.

Ubertor: I've been consulting this post for leads on the real estate blog world all week.

Blue Roof: Just launched a very pretty online real estate site, based in Salt Lake. Greg posts a nice look at real estate price appreciation rates across the country. Even if it is, ahem, not real-time market information.

Marin Bubble: I always consult the Marin Real Estate Bubble for a laugh, a bit of schedenfreud, and frankly, good market perspective before I spout off about Marin County real estate conditions.

Good news and bad news, folks. The good news is that long-term mortgage rates are still really low. The interest rate on the 30-year bond, on which mortgage rates are roughly based, is down from its highs this year. At about 5% today, we're still at very low rates.

But the bad news is piling up: The yield curve is inverted which means two things: any short-term and ARM debt actually has higher rates than your long-term mortgage. It also means that the likelihood of recession is increasing. Some perma-bears are calling recession chances as high as 70%. My economic sources were generally positive in the first half of the year, but even they are pointing to slowdown signs. Paul Kedrosky points out the Google Trends on the topic today.

The 30-year fixed mortgage is one of the great financial deals of all time. Don't miss out on what may be the last great time to lock in.

Update August 10: It looks like Greg at Bloodhound has been thinking about Zillow too. He reinforces my comments about Realtor perception and has some great details.

Update August 15: Lots of talk in the blogosphere about Zillow. Sellsius is polling Zillow users about their experience.

We founded Altos Research because quality real estate market information is really difficult to find. Any analysis on the housing market tends to be old, based on last month's, or year's, sales data. In Silicon Valley from 2001 - 2003 was nuclear winter. Lot's of people out of work, huge piles of stock option wealth evaporated. During that time, we wondered what was happening to the value of our little, old, over-mortgaged, Silicon Valley homes. Because real estate market data was so lousy, we had to invent the system to get us the data that would really help us understand the market in real-time.

Apparently that's roughly the same impetus for Rich Barton and Lloyd Frink and Zillow. Zillow's initial success has been stellar and it warrants attention, especially if you have $55 million in venture capital.

This is a remarkable study because the fundamental proposition, "how much is my home worth?" is an entirely pedestrian offering. Literally HUNDREDS
of sites will give you the same number (realestateabc, HouseValues, Home Gain, Domania, not to mention any local agents). The feature is so common frankly because it's
compelling and because it's easy to calculate. (input public records data and do a multivariate regression. Tweak it a little better with some natural language processing techniques. That's it. You can do it for your local market in Excel, if you like.) In fact, Rich Barton said at the Inman conference, "We seriously thought about not launching the company until we had something more..." I'm pretty sure I would have been one of those arguing to hold back.

So they had to do things well to get noticed. Well, they've done a lot of things well and here are those that, in my mind, really made the difference:

1. Sexy UI - this is web 2.0 after all. And Zillow is a clean, pretty interface. People like to use their site. I'm surprised that folks like Zip Realty haven't fixed their stuff up yet.
2. No Hassle - This is the most obvious one for anyone who's surfed around the online real estate market. Of all those sites above, Zillow was the first to open it wide up for consumption without giving your contact information hungry real estate agents. Thank you!, says the market. Good for them.
3. Ballsy confidence - where the first two items are clear business choices, #3 is really the secret catalyst. This decision illustrates a victory of great marketing over engineering. Zillow decided to publish the one number. The Zestimate they call it. By showing one number they demonstrate confidence and confidence equals authority. But let's face it: the number is, ahem, unreliable. Anyone familiar with the math can tell you why. Anyone in the real estate market will tell you that property variables are so myriad that you can't know until you've spent time in the home. Bad carpet could pull percentages from the price. All of the online price my home sites deal with this reality by giving you a range. (which what good statistical methodology says, too.) "Your home is probably worth between $500,000 and $680,000. Have a professional narrow it down for you." Zillow said, Screw it. "Your home is worth $647,415."

The result is that the average surfer says, "Wow! that's useful!" and Zillow gets millions of visitors. In general though, the serious researchers or home buyers tend to be a bit frustrated. And real estate professionals tend to be incensed. The noise introduced can be difficult to navigate around with clients. But everyone else seems happy. And everyone else is a big group of folks.

Zillow can succeed with this strategy because, where HouseValues and HomeGain are real estate firms, Zillow is a media company. Business Week sells a lot of ads and with this headline - an exact, though meaningless, number. The secret is that people react to specifics. They crave the exact number. Zillow is in the advertising business and they prudently chose the fastest course to readers. Rock on.

Altos Research, on the other hand, exists to serve the serious researcher types and the real estate professionals. Maybe we're dinosaurs in not chasing a million eyeballs. Time will tell, I suppose.