Altos Research Real Estate Insights

A paper in the Journal of Emergency Management came across my desk today. Measuring the Efficacy of a Wildfire Education Program in Colorado Springs

Timely, considering the state of Southern California right now and of Tahoe earlier this summer.

The program sounds like a fascinating way to increase awareness of the fire risk (awareness being the key factor in reducing the controllable variables). Preparation for disasters like this is of course subject to the Black Swan effect:

...most people are uncomfortable making risk estimates of uncertain events such as wild fires... They may think, "There has never been a wildfire where I live, so it is very unlikely that there will be one in the future."

So what can public policy do to motivate people to better manage their exposure? In Colorado Springs, they evaluated every parcel, 35,000 of them, and gave each a rating. Now the city can tell me I have a very-high-risk property and get me thinking about trimming the pine boughs back from my cedar-shingle roof. Then they publish that information. When I go to buy a home in the area, I can factor that into my purchase. That's positive.

But is it effective? And how do we measure changes in risk perceptions? The authors of the paper took a novel approach.

Rather than simply measuring changes in risk perceptions, we examine the effect of the program on the housing market. This provides a more complete picture of how the CSFD approach to education affects homeowner attitudes toward wildfire risk.

A market-based approach. Nice. Incent homeowners to fix the easy stuff that makes up most of the wildfire risk. Very cool.

And the results?

Perhaps the most striking result is that pre-assessment home prices and wildfire risk were positively correlated. In other words, houses with higher wildfire risk also had higher sales prices. The reason for this is [otherwise desirable features also increase fire risk]...building on a ridge may increase the wildfire risk, it also provides better views.

In contrast, post-assessment there is no such correlation. Post-assessment wood roofs and wood siding now have a negative impact on price. As a result, people are migrating to safer building materials.

Good stuff. Too bad it's a lesson a bit too late for the disasters this week. We'll keep an eye on the data to see if we can discern any immediate impact on home prices in San Diego from the fires. Will report back soon.

No Dilberts on the walls here at Altos Research world headquarters, but there's nothing like a good cartoon to really capture the zeitgeist. Randall at xkcd.com gives us:

click for full size

(Oh yes, I have indeed uttered the phrase, "I did some analysis with the Census Bureau numbers last weekend...")

The Journal today shows off its peerless graphic design team with a fantastic illustration of the past three years of subprime mortgage lending.

Wall Street Journal charts the sub-prime tidal wave

The accompanying article reveals little that the bubblistas haven't been crowing about for years, but a few bits bear repeating here. The first reiterates my view that the housing market correction has many years before recovery.

The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years.

[As an aside, am I the only one who noticed how many of this year's Inc. Magazine 500 fastest growing companies were mortgage lenders?]

The second gets to a less commonly asked question about the whole subprime blowup--who really is the "victim" here? Does anyone really deserved to be bailed out by the feds?

Last September, Darla Ball, a printer and copier saleswoman, purchased a $460,000 home in Las Vegas using an adjustable-rate subprime loan with an initial rate of 8.2%. At the time, she says, she expected to refinance before her interest rate resets to 14% next year, which will raise her monthly payments to $8,000 from $3,700. But in the past year, she says, prices of comparable homes in her subdivision have fallen to $310,000, which means she would not qualify for a new $460,000 mortgage, unless home values go back up to that level, an unlikely scenario. She says she has stopped paying her mortgage and is trying to negotiate with her lender. "I'm going to lose my home anyway," she says, "so why pay?"

Let me get this straight, Darla. You knowingly took a deal from a lender willing to front you the cash, despite your already bad credit, with super low payments to get yourself into your dream home. Now you're living there and NOT EVEN PAYING? Bad luck, sure. A risky investment that didn't pay off, that happens. I'm sure you didn't at the time have a deep appreciation for the highly leveraged scenario you put yourself in. God knows we've all made risky investment decisions that in retrospect were crazy-stupid. (As they say, experience is not something we get until just after we need it.)

What riles me is that this is a perfectly legal deal with two parties taking risk in exchange for an enticing return. Is this really a situation that deserves to be bailed out? So-called predatory lending gets a lot of headlines. No doubt fraud has been comitted in many cases. It's just a bit hard to must a ton of sympathy for any of the participants. [Another aside: Make sure you read Michael Lewis' hilarious satire of this position on Bloomberg.]

Here's a couple of Altos Research mentions in the Seattle Post Intelligencer last week.

Altos client and blogger Sandy Kaduce is a contributor to the paper's blog site, wrote last week about the changing nature of the market.

On Friday, writer Aubrey Cohen called to get our take on the Seattle housing market numbers. The numbers that come out of the Northwest MLS are just starting to show year over year declines. (If you're an Altos watcher, you've seen this coming for a long time now of course.) Aubrey notes that the mix of property types being sold have an impact on the over all "median price" of a market. He uses one of my favorite qutoes to describe the 2007 (where the pain is starting low).

And the recent problems in the subprime mortgage market, which serves people with poor credit, have a disproportionate effect on cheaper homes, meaning those that do sell are more likely to be at the higher end of the market, buoying the median price, said Michael Simonsen, chief executive of Altos Research in Mountain View, Calif.

"You don't buy a $1 million waterfront property on a subprime mortgage," he said.