Altos Research Real Estate Insights

Here's an overview of the current Seattle housing market. Next week we'll illustrate a handful of key Seattle zip codes to explore a little. First, our real-time market profile for the city as a whole:

Median Price	$497,000
Average Price	$698,828
Asking price per square foot	$266
Average Days on Market	51
Total Inventory	2250
Absorbed this week*	205
Percent Price Decreased	43%
Percent Relisted**	10%
Percent Flip***	2%
Median Home size	2,009 sq. ft.
Median Lot size	approx 7000 sq. ft.
Average age	51

The number of properties lowering their price has grown to 43%, which is comparable to San Jose. Single family homes in San Francisco are holding up significantly better, with only (!) 27% having lowered their prices.

Some other interesting tidbits about the homes for sale in Seattle:

• Despite the signs of market cooling noted above. Prices are not generally falling through the floor. In fact the median prices have hovered around a plateau for a full six months. We may be seeing the weak cyclical trend ("the burst") interacting with a typically strong seasonal market ("summer buying season"). The net effect is prices haven't moved. Watch as the winter comes on to see if convergent seasonal and cyclical weakness impacts prices more noticeably.
• Our Trend Indicators for the broad Seattle real estate market see plateaus in other market measurements as well, for example Days on Market has held steady.
• The highest priced properties (the top quartile) went through a 20% correction earlier in the summer but appear to have stabilized in the last few months, price-wise. The following chart, while a little boring, illustrates the key part of the market that's moving.

Middling results to be sure. The housing market bears call look at these signs and call it "just the beginning of the housing market crash." The bulls (are there any real housing market bulls these days? Maybe what we have is "Bear" and "What, Me Worry?") read these signs as "less damage than expected."

Footnotes:

*sold and pulled off market

**properties currently on market that have been on earlier in the year under a different MLS ID. This stat is dropping precipitously since the Northwest MLS issued new rules about 6 weeks ago.

***properties on the market earlier in the year at a lower price.

Good friend Kevin Boer at 3 Oceans Real Estate has a great post up

using our AltosCharts service to dig into the Palo Alto real estate market that he serves.

Well done Kevin! (And, of course, thanks for the props!) We're glad you're having fun with our technology.

If you're a reader wondering about how Realtors leverage real-time market analytics, Kevin is a world-class example.

Last week at the Inman conference in Miami, Robert Shiller (author of 1999's Irrational Exuberance about the last bubble, and subsequent housing-bubbler-in-chief) gave a keynote on the new housing futures markets that he helped pioneer. (see my previous notes on the topic here.) I've said before that we're at the birth of a major new market here; one that brings significant long term benefits to the global economy. But it's early. And a bit esoteric. Here's how the Chicago Mercantile Exchange explains the new market.

The First Tools for Managing Housing Risk
While other industries, such as agriculture and the financial markets, have access to a wide range of financial risk management tools, such tools have not been available to the housing industry – until now. CME is continuing its tradition of innovation with the creation of the first comprehensive products to hedge risk in real estate – CME Housing futures and options.
These products provide opportunities for protection in down markets, and extend to the housing industry the same financial tools that previous CME innovations have brought to agriculture and finance. By providing a means of hedging exposure to home prices, they can diffuse the potential impact of sustained declines in housing prices. In addition, they:
» Create a new means of risk transfer to a broad range of investors
» Have the potential for fostering stability in the housing industry
» Provide an innovative way to participate in the real estate market without having to buy and sell properties

Immediately following the presentation, Brad Inman joined Shiller on stage in an attempt to use practical examples to help the crowd grok the concepts. Brad's first question was, "So let's say I'm going to buy a $2million property in Sausalito. I'm afraid the market is going to tank. How do I effectively protect my investment?"

Shiller replied in his, ahem, breezy-ivy-league-finance-prof style, a multi-threaded answer that can best be summed up this way: you can't...exactly (at least right now.)

Here's how it plays out:

The Case-Shiller index measures housing prices in a metro market, for example San Francisco Bay Area. The futures market tracks contracts on that index. But Brad is buying a specific property, which as we all know, is not a commodity. His home's price may not move in tandem with the market as a whole. Brad's waterfront digs in Sausalito are a very different market than, say that fixer in Dublin. We haven't yet done the calculations, but I'd venture that a market like high-end Sausalito, in fact, has almost no correlation with the Index. Brad could attempt a hedge and lose as the high-end of the market tanks while also losing while the broader market moves up. (or winning on both fronts).

But not to worry! The beauty of the market isn't its ability for Brad to call up his Morgan Stanley guy and hedge his house. The beauty is that they create a method for other intermediaries to offer the financial products that will help Brad.

Let's develop the scenario a little further.

Let's say Brad's real estate broker is seeing a slump in deals this year. Brad, like a lot of folks, is on the fence because of his market worries. What if the broker offers value-protection insurance for a year? Would that help get the deal done? Sure it would. The broker could offer downside protection of say, 10% of the property value. As a real estate broker with exposure to regionally diverse properties, they'd be in a much better position to match their risk against the broad index by offering this plan to a large group of buyers. They'd then hedge their risk by trading the futures. They'd trade a smallish expense today to get the deal done and make sure they wouldn't have to pay big to Brad next year. Expect to see the big national builders trying out these products if the bubble fears really take hold.

Unfortunately, it's still not that simple. Right now, the markets basically have an 8-month horizon. As derivatives broker Fritz Siebel points out in his new Housing Derivatives blog:

The CME lists 4 sequential quarters on housing futures. The [current] contract is [priced] in look-back in terms of pending sales. It has no predictive value for investors. The remaining 3 quarters, in terms of pending sales (pricing making), effectively then makes the available forwards only 8 months of term. So, the forward market is 8 months.

So we'll need to see some longer expiration terms on the contracts before we see wide spread acceptance. Shiller's firm, MacroMarkets, announced a commitment from Goldman Sachs to put up its own capital to help facilitate these markets. Presumably the longer term contracts will follow the increased visibility and liquidity that Goldman brings.

The analog is the development of the mortgage-backed securities market in the '80s. The individual homeowner doesn't think about it at all. But nearly every home buyer in the last 15 years has been helped by that market's creation. (Thank you, Mike Milken!) By securitizing mortgages, lenders have been able to transfer financial risk to a global market of people who hunger for the investment opportunity. In the process they lower costs and rates thus enabling the home-ownership boom. (And by many accounts, the Housing Bubble itself, but that's another post).

We're witnessing the birth of a powerful new tool. You can say you were there.

This is our semi-regular post tracking home prices in San Jose. This week we dive into the Cambrian neighborhood just a bit.

As of the week ending October 20, 2006, the median single family home price in San Jose, California was $735,000. Median price is up just over 2% for the year and has pulled back from 2Q 2006 highs of $758,000.

In spite of the mild mortgage-rate related uptick in demand that we've observed, prices continue their slow ease downward. A typical representation is the Cambrian neighborhood, wedged on the Western edge of San Jose next to Los Gatos. Median Price in Cambrian this week is $755,000 down from a peak of around $800,000 earlier in the year. Here's how the characteristics of the properties in Cambrian look right now.

You can see that while days on market is much higher than we're used to in this neck of the woods, that the lowest priced homes in this desirable neighborhood are still moving more quickly.

If you're researching a particular neighborhood in San Jose, let me know and I'll try to work it into a post sometime soon.

The Inflation numbers (Consumer Price Index) came out today. We're watching these closely, because they portend what might happen to mortgage rates. The summary is that energy prices have fallen dramatically and the core number (ignoring volatile food and energy) has moderated to an annualized 2.75%. This number is still higher than the Fed's target 2%, but at least it ain't roaring. Score one for the Real Estate Market.

There's a further subtlety in the numbers that might have some optimism for the anti-bubble crowd.

Asha Bangalore at Northern Trust points out in NT's daily economic commentary that the core inflation rate was skewed high by surging "shelter" costs. The feds measure inflation in shelter costs with a combo of rents and their guesstimate of what you could get for rent if you rented out your house. Increasing rents accounted for 80% of the upward pressure on todays CPI.

One of the fundamental Housing Bubble arguments is that home prices have run away from rents in the last few years. Therefore prices have to come down to bring it back to equilibrium. Wouldn't it be a pleasant surprise (for those of us riding this home price wave) if the actual inverse took place? The same argument could imply that rents really continue to adjust up relative to home prices.

Just a little food for thought.

So predicts the Housing Futures Market on the Chicago Mercantile Exchange.

I've written before on the housing futures markets and I'm a huge fan. Housing is a such a significant financial exposure that until now has been very difficult to hedge. (This post is about the real-money market on the Merc, rather than our for-fun San Jose market on InklingMarkets.com)

Here's a vast oversimplification - Futures markets work by simply paying off when a given event occurs by a certain time in the future. So if I have significant financial exposure to a rise in, for example, fuel costs for an airline, I buy a futures contract that pays off because I expect fuel prices rise next year. This payoff offsets my newly expensive fuel. I've now hedged my risk against fuel prices and can focus on providing my customers with $5 boxes of something known as a "Mini Meal". If prices are less than my contract's strike price at the expiry date, then my contract expires worthless and, well, that's the cost of insurance. I've traded a known, smallish cost for an unknown potentially large cost.

And because futures markets are essentially a collection of people betting big money on their best expectations, they have a predictive effect. The more people that expect an event, the higher the cost of the contract until its cost equals the risk. Efficient futures markets measure the collective wisdom as of right now. That's why they're so cool.

So back to the new real estate futures market. Current prices on the CME show an expected decline of 5.8% between November 2006 and August 2007.

To be clear, these contracts are based on the Case-Shiller Housing Market Index which is a function of median single-family home sales prices. So the contracts expect a decline in the index not necessarily a decline in the price of your home.

I got a chance to speak with Shiller this week at the Inman conference where he clarified a few things about his vision for the market and the application of the market into real world tools. More on those innovations and their implications in a later post.

I'll be at the Inman HighNet Conference in Miami early next week. Speaking on a panel about the latest technology in real estate market and valuation techniques.

If you're in attendance, make sure you say Hi.

The Revolution in Real Estate Asset Valuation

Precise and actionable data about the past, present and future value of real estate is transforming the way property is analyzed, invested in, bought and sold. If knowledge is power, this data revolution stands to have a nuclear impact never before seen in real estate—everywhere from home buyers to hedge funds. How can you and your clients profit from the disruption?

Moderator: Joe Casa, Founder & Publisher, October Research Corporation

Panelists:

Ben Clark, Director of Partner Relations, Zillow.com

Jack McCabe, CEO, McCabe Research & Consulting

Mike Simonsen, CEO, Altos Research

Dean Williams, CEO, Williams & Williams

Yahoo is getting crushed lately. The stock is off over 40% from its 52-week high. Analysts have been tripping over themselves to downgrade the stock as the company makes known the softness in financial and auto advertising sales. The latest culprit? The bursting real estate bubble.

RBC Capital Markets analyst Jordan Rohan (the guy most notable lately for declaring MySpace worth $15billion to News Corp) said recently, "As housing softens, fewer consumers are in the market for a mortgage, reducing valuable mortgage clicks." The implication is for online real estate ad spending in general.

Content and Inventory

Upon deeper review though, the bursting bubble isn't at fault here. Rather, Yahoo's real estate revenue risk is merely a function of declining search market share. Yahoo is losing real estate ad revenue to Google, which isn't even in the online real estate biz. (OK - Google Base is in the real estate business but that isn't monetized yet.)

Yahoo, as a portal, makes a decent chunk of it's advertising dollars on its own content. Compare this to Google which only sells ads on other people's content. In terms of ad-space-inventory, Yahoo will continue to lose market share as long as its content is growing slower than the internet as a whole. This seems likely to continue.

Google sells ads when you search for, say, "Miami Florida Real Estate". The paid ads are around five bucks a click from one of the big real estate brokers. Many of the results lead to content sites, like Trulia and Zillow, both of whom make their own money reselling Google ads.

Yahoo, of course, has the exact same paid search opportunity. But that business only grows if more people are searching with Yahoo.

Meanwhile, despite the housing bubble burst, online real estate ad spending is exploding. Says local-web-advertising firm Borrell Associates

... Internet real estate advertising [jumps] to a $2 billion level this year and [will pass] $3 billion by 2010, surpassing newspapers in terms of advertising market share. [of $11 billion total real estate advertising spending]
... There is huge room for growth. Sixty-one percent of agents do not advertise on the Internet. And 87 percent of agents are not buying keywords on Google or Yahoo.

Borrell is actually projecting overall (online and offline) real estate marketing spending to decrease between now and 2010 as the bubble deflates, so the online percentage gain is even greater.

Beyond paid search ads, the Trulias, Homethinkings, BuyerHunts, Craigslists are providing new channels to reach home buying consumers. Agent websites, blogging, market research and other online tools add to the total spend. These channels, because of their efficiency gains, actually grow the real estate marketing pie, rather than simply transfer from offline to online spend.

In spite of declining real estate activity (maybe because of it), online real estate spending will continue to go through the roof.

In all cases, interestingly, Google increases revenue leverage, where Yahoo loses share. Yahoo may be a great company and may continue to throw off huge amounts of cash. But the company's current woes shouldn't be blamed on the housing bubble any more than say, bad weather.

disclosure: Altos Research creates real estate market analysis tools for Realtors and consumers. We do not make any recommendations to buy or sell stocks, real estate or any other financial product.

Edmund Phelps, yesterday's Nobel Prize winner for economics, brings us a soulful, humanistic, and optimistic defense of global capitalism (by way of a history lesson in Western Civ) in an op-ed in today's Wall Street Journal

. A sample:

I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace--in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth. Note that an individual working alone cannot easily create the continual
arrival of new challenges. It "takes a village," preferably the whole society.

The concept that people need problem-solving and intellectual development originates in Europe: There is the classical Aristotle, who writes of the "development of talents"; later the Renaissance figure Cellini, who jubilates in achievement; and Cervantes, who evokes vitality and challenge. In the 20th century, Alfred Marshall observed that the job is in the worker's thoughts for most of the day. And Gunnar Myrdal wrote in 1933 that the time will soon come when more satisfaction derives from the job than from consuming. The American application of this Aristotelian perspective is the thesis that most, if not all, of
such self-realization in modern societies can come only from a career. Today we cannot go tilting at windmills, but we can take on the challenges of a career. If a challenging career is not the main hope for self-realization, what else could be? Even to be a good mother, it helps to have the experience of work outside the home.

I must mention a "derived" benefit from dynamism that flows from its effects on productivity and self-realization. A more innovative economy tends to devote more resources to investing of all kinds--in new employees and customers as well as new office and factory space. And
although this may come about through a shift of resources from the consumer-goods sector, it also comes through the recruitment of new participants to the labor force. Also, the resulting increase of employee-engagement serves to lower quit rates and, hence, to make possible a reduction of the "natural" unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and all the self-realization going on. True,
that may not be pronounced every month or year. Just as the creative artist does not create all the time, but rather in episodes and breaks, so the dynamic economy has heightened high-frequency volatility and may go through wide swings. Perhaps this volatility is not only normal but also productive from the point of view of creativity and, ultimately, achievement.

Ahhh. Capitalism makes me happy.

Why is this relevant to our housing discussion? (I'll stretch a bit to tie it back to the topic at hand). The work for which Phelps won The Prize yesterday centers on inflation and monetary policy, which he pioneered with Milton Friedman in the '60s.

Inflation, the cruelest tax. The disturbing fact is that the economy currently has more of it (~4%) than is comfortable (~2%). Unless inflation eases back down over the next three to six months, the Fed is going to be forced to respond with higher interest rates. This rate increase would coincide with a likely slowdown of the economy. Indeed the Fed may be forced to throw us into recession to stop inflation.

This worst-case scenario of higher rates and recession (read:job uncertainty) isn't a guarantee in our opinion. The best case scenario is that inflation fades, the economy bottoms at slow growth in 2Q 2007, and rates are allowed to ease down. In all though, it seems likely that Greenspan's call yesterday of the bottom of the housing market is premature.

So Phelps taught us how to manage inflation. Now in the face of that threat, our housing market may be forced to take the bitter medicine to fix it. Today he illustrates the glorious foundation for optimism - our enterprising society will carry us through in the long run even if the next few years are painful.

This week's collection of the best from the real estate blogosphere is up at the Bloodhound blog. Greg and Cathleen, not content to merely regurgitate a long list of entries, created a scoring system to separate the, er, red meat from the cream.

We were lucky to have had a confluence of a passionate subject and a double latte that helped us crank out an article that the Houndsters found to be among their favorites. Our highlighted post is on Affordability as a Red Herring on the Housing Market.

Other articles worth checking out:

1. Dan Green has an insightful, contrarian post about 30-year mortgages and the relative disadvantage compared to the much maligned ARM. His thoughts as a mortgage pro echo our position that the new-found flexibility in mortgage instruments is a significant positive factor for the housing market and the global economy in general.
2. Bryant Tutas describes using price-range-based properties as an alluring marketing/negotiation tool.

For a week of excellent real estate market insights, be sure to check them all out.

The National Association of Realtors today released it's pending home sales index for August. The Index, based on contracts signed
in August, rose 4.3% to a level of 110.1 from a reading of 105.6 in
July.

If you were paying attention, you'll remember we pointed out a couple weeks ago that we observed the housing demand curve in Silicon Valley actually turn up in late July. (Patrick at SaveOnClosingCosts.com and the blog transparentRE.com confirms that they observed an increase in financing activity during this same period.) We have seen the uptick in demand stay solid as mortgage rates have continued to stay stubbornly low. While we'll pat ourselves on the back for this prescient call, I'll note that since the activity is so tightly correlated with mortgage rates, the move is likely to be short lived.

The yield curve remains inverted, signaling either coming economic recession or dramatically higher rates at the long end of the curve (upon which mortgages are based).

So consider this a great example of the benefits of real-time real estate market intelligence. I'll try to make a note for you when the curve breaks down again.

Today Altos Research announces a fun new way to use our market research: Our very own Google map

mashup!

We've integrated our real-time housing price charts into a Google map so you can zoom around and see all the neighboring towns really simply. You can drill down into zip codes too. We've built a cool zip-code-outline feature so you can see where the boundaries are.

You'll also notice the free -research widget on the main Altos Research site now includes a Map It button. So while you're surfing around for our free market research on any town, you can access the maps with one click.

We're only releasing charts for the Bay Area and Seattle right now, but more markets are coming very soon! Stay Tuned!

This post is the first in our Silicon Valley Real Estate series where we plan to investigate the current housing market conditions and important related details for each town in Silicon Valley. Real Estate markets are best described locally, we always say, so this series will let us investigate price trends, supply and demand, and any other interesting tidbits we learn along the way. Today's focus: Cupertino, California.

Quick Intro to Cupertino:

Cupertino sprang up in the 1950's population boom in Santa Clara county. The city of

50,000 is nestled at the base of the Santa Cruz mountains just west of San Jose. It boarders Saratoga to the South, Los Altos and Los Altos Hills to the Northwest, and Sunnyvale to the North. Cupertino is home to a bunch of Silicon Valley greats, notably Apple Computer.

Cupertino Schools:

The Cupertino school district is known to be among the best in Silicon Valley. (Real estate prices reflect this fact. see below.) Heck, Cupertino schools are easily among the best in the country. The three high schools, Cupertino, Monta Vista, and Homestead, all score in the 90th percentile of performance on math and English tests. Monta Vista is actually the 100th percentile for math scores. Want to know what a school looks like when everyone's parents are successful engineers? Go check out Monta Vista.

Cupertino Demographics:

The city is, not surprisingly, wealthy. The median household income in the Cupertino elementary school district is $200k. The city is home to a large population of Asian descent. Cupertino, Monta Vista, and Homestead schools are 47%, 65%, and 30% Asian. Mostly Chinese, but in the last 10 years or so a growing Indian cohort too. I suppose if you lump India and China together under "Asian" then most of the world is of Asian decent. For whatever that's worth.

Cupertino Real Estate:

Silicon Valley real estate gets more pricey the closer you get to the mountains on the Valley's western side (but not too far up! Those mountain roads can be treacherous.) Cupertino home prices are no exception. In fact, because Cupertino has fewer properties in the hills than Saratoga to the south or Los Altos Hills to the northwest the median home price is significantly lower.

The median home price in Cupertino this week is a cool $1.28 mil. (Yes, that is significantly lower than Saratoga or the Los Altoses.) Down a bit from their peak earlier in the year.

In spite of a generally weakening Silicon Valley real estate market, housing demand (and thus prices) in Cupertino has remained relatively robust this year. We measure demand relative to the available supply with our Market Action Index. Housing demand in Cupertino has clearly fallen since last year at this time, but appears strong enough to keep the good properties moving quickly.

We attribute this resilient demand to the combination of factors that include high desirability (schools, proximity, employers noted above) plus the fact that Cupertino real estate prices weren't as stratospheric as its neighbors to begin with. Not too low or too high... just right. I have some friends who just stepped up to a cool Eichler in Cupertino. They had to choose between the Eichler in Cupertino or one for slightly less money in Sunnyvale. As two successful professionals, trading up from their starter San Jose townhome to a bitchin' Atomic Ranch, the Cupertino option was a no brainer. The data seems to indicate they are not alone, even in a rapidly cooling market.

Inventory of homes for sale in Cupertino is just about the same as last year. Around 100 single family homes are currently on the market. Silicon Valley real estate inventory in general is greater by about 20% over last year at this time.

Conclusion:

Cupertino seems to be weathering the early stages of the weakening housing market better than most of the Silicon Valley real estate market. Pent up demand for the great school district would appear to keep prices steady. As new buying opportunities arise, a line of young families appear ready to step in.

As always, complete Cupertino real estate market research available here.

The Census Bureau released some findings of its massive American Community Survey today. Among the headlines:

• San Diego has had the greatest price appreciation of any major US city since 2000 appreciation of 127%. Wow. The Feds are talking about 2005 prices so that number has crested in the subsequent year.
• San Jose is among the highest owner-occupied cities. 64% of the homes in San Jose (and roughly Silicon Valley, by extension) are occupied by their owners.
• Rents have decreased in San Jose by nearly 10% since the peak of the period-formerly-known-as-THE-bubble. (By the way, traffic decreased a lot since the peak of that bubble too.)

We are a nation (and even more so, a region) of home owners. But despite that fact, much of the attention from today's Census release focuses on "affordability." I submit that measuring the housing market by this so-called affordability number is like measuring the stock market by the Dow. Not entirely meaningless, but a red herring on the real data.

Typically "affordability" is measured by percent of people who could maintain the income/payment ratio on a mortgage of 80% of the median priced home (a "standard" mortgage arrangement). The California Association of Realtors has done some improvements on this formula lately to account for different mortgage products, but essentially that's it.

The biggest problem with this measure is that the definition of "income" is too narrow, essentially today's salary. The fact is that most properties in California are purchased (aided by) with some form of capital gains plus a vibrant growth economy that promises continued increase in wealth.

The vast majority of transactions are move ups. You don't buy a $1 million home with a chunk of savings and a fat mortgage. You do it with the equity from your first home, maybe a pile of options you're cashing out, and THEN a fat mortgage.

The second flaw in the affordability methodology is that it ignores home ownership rates. The affordability numbers would indicate that 80% of Californians can't afford a home. But the fact is that two-thirds of them ALREADY OWN ONE.

An anecdote:

We bought our home from the original owners who had been here for 50 years. (Picture the brown 1972 El Camino dripping oil in the driveway. Now THAT'S curb appeal.) He was a union laborer in the defense industry, she a homemaker. By any stretch of the above definition, they could not afford the home they'd lived in for fifty years. Nor could they afford the giant palace they built for retirement in the desert outside Tahoe. Nor could we afford the home that we purchased. Yet all completed smoothly, and profitably, I might add.

If affordability doesn't measure people's ability to own a home, what does? How about measuring home-ownership-rates? And Guess what? Home ownership is at record high levels. Joe Sixpack is telling us pretty loudly that homes are exactly as affordable as they should be. Rock On.

The Housing Bubblistas will argue that people have been suckered into buying and are overstretched. I'll accept that a bubble burst will shave a few percent from the ownership rates. But that change will merely mark a cyclical oscillation in the midst of a massive secular shift.

So rather than despairing about falling affordability rates, we should be cheering that home ownership is at record levels. Let's measure what counts.