Southern California Real Estate

Last week we published the February editition of our National Housing Market report [PDF download]. I was traveling and forgot to add it to the blog, so here it is. We've expanded the coverage this month and added a few more cities ebyond the initial 20 covered by the Case Shiller Index. We'll add a few more important cities in the upcoming versions of the reports too.

Here are the highlights from this month's report.

• Listing prices declined in 19 of 22 markets during January. Prices only increased in the New York metro area during January and were flat in Dallas and Phoenix.

• The largest monthly decline of 3.6% occurred in San Francisco. Over the three month period, listing prices in San Francisco have fallen by 6.1% from $708,551 to $665,100. The other California markets of Los Angeles and San Diego logged declines of more than 2% for the month of January.

• Property inventories declined in most markets except in the Northwestern markets of Seattle and Portland. Inventories tightened sharply in the Midwestern markets of Cleveland and Detroit with decreases of 10.4% and 5.4% respectively during January. Seasonal declines in listing inventories are typical during the winter months.

• Markets with the longest time-on-market are Miami and Minneapolis at an average of 144 days-on-market. Miami’s days-on-market only increased slightly from the previous month’s 143 days while Minneapolis jumped over 5% from 136 to 144 days. Sixteen of 22 markets had an average days-on-market of over 100.

• Denver led all markets with the fastest rate of inventory turnover at 61 days, followed closely by Dallas and San Diego at 80 days. The sharp decrease in Denver’s days-on-market indicator – almost 39% during the past three months – coupled with an inventory reduction of over 11% during the same period, should be a positive for listing prices in the coming spring selling season.

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.

Jessica at Inman this morning reports that, in a fit of fear of a bursting bubble, the SoCal MLS has stopped publishing it's Days on Market stats.

Even if you give them the benefit of the doubt that a Days On Market stat can be misleading as a standalone indicator of housing market conditions, the move is just plain silly. Bite the bullet guys, sweeping bad news under the rug doesn't make the bad news go away. It just makes it harder to manage intelligently for home buyers and sellers.

So since you can no longer get a view from the SoCal MLS, you'll have to get it from us. And we, of course, don't present DoM as a standalone indicator.

Among lots of other market data, when we survey a market, we calculate an mean Days on Market vs. a median Days on Market. (The mean, remember, is the average. It'll skew higher if just a few porperties are on the market for super long times. The median is the measure of half the market. So half the homes are on less than X days.) It's fascinating to watch in a changing market, for example, the median drop while the average stays high. That illustrates the freshest properties--and the ones priced right--are turning over quickly while the stale, overpriced, unappealing properties are lingering.

Because I know you're interested, here's a chart illustrating the median Days on Market for some key Southern California real state markets. You can see we're past the seasonal Spring Fling of new properties coming on and the Dog Days are approaching. Though higher than it's been for years, 2+ months is actually not that crazy painful (easy for me to say). This is the median, remember so there are lots of properties hanging around for several (many) months.

Southern California Homes Days on Market as of July 15 2007

[update] Here's average DoM too, note the effect of stale properties staying on the market and skewing the average higher than the median:

Average Days on Market for Los Angeles, Irvine, Pasadena, Thousand Oaks, California July 15 2007

Further Research Details available here:

Los Angeles Real Estate Market

Irvine Real Estate Market

Pasadena Real Estate Market

Thousand Oaks Real Estate Market

Some readers have asked lately about a recent jump in our Days on Market statistic. I thought it makes sense to explain it here. We recently did a methodology change where we increased the look-back window for watching properties.

By making this change, we more accurately reflect the actual total time on market, even for properties that have come on and off the market, especially including those that have been off the market for 30 days before being relisted.

In January 2007 we increased our look-back window. We'll now identify more properties as they've come on and off the market. Thus the big jump in our Days on Market statistic.

What we found was that in some markets, we can find a significant chunk of properties that have really been on the market for long periods and these properties were previously under-reported in our stats. We've seen a notable decline in the number of properties relisted (with the sole intention of "refreshing" a listing) in Silicon Valley since last fall when the local MLS changed its rules. In San Jose California we've observed a drop from nearly 25% of homes on the market having been relisted down to 9%. That's real progress.

Those rules however do not impact a property that for example was on the market all last summer, was pulled off over the holidays and put back on the market in January. A soon-to-be-announced Altos partner calls these properties "stale fish." We've adjusted our nets to catch more stale fish. We're still dolphin-safe though.

This change effected our the trend charts in most communities a little bit. In some areas, though, you might notice a big jump in the DoM stat that week in January 2007. This change is the reason for the jump. Inset is a snapshot of the current Days on Market trend for San Jose Homes.

When I cite stuff from Bear Stearns, I usually go for chief economist David Malpass. This week though, Fracois Trahan, Bear's chief strategist, weighs in on the housing market and the global implications of the Bubble. Trahan, whose job it is to plot optimal investment strategies is much less sanguine than Malpass, whose charge is simply to prognosticate on economic direction, I suppose.

Trahan's thesis is that the US real estate bubble burst will hit global stock markets hard through a chain reaction of consumer retractment, dropping the earnings of foreign firms send us our goods, leading to decreased global liquidity and lower stock markets.

A slowdown in the housing market would most likely have repercussions for the U.S. consumer, since housing wealth has been an important driver of this economic recovery... when the growth of homeowners' equity has slowed, so too has the rate of real consumer spending. Looking ahead... if housing slows, the consumer will likely slow as well... sooner or later, a slowdown in world trade weighs on global financial liquidity.

Contrast this with Malpass, who consistently downplays the gloom and doomers on the Bubble. Malpass' point is that the American consumer is marvelously wealthy and well positioned with locked in mortgage debt, but variable rates on savings to actually benefit from rising interest rates.

So why the seemingly contrasting Bubble takes coming from top guys at Bear? Well the answer lies in your preferred scope and scale. Trahan the Strategist is fundamentally addressing the question, Are stocks a good place to invest in the next 18 months? While Malpass the Economist tries to answer, What is the likely state of the US and global economy from here on out?

So I'm going to chalk up the union of analyses as my favorite scenario for how the Bubble plays itself out. Clearly we're at a housing demand crest. Any significant deflation of the Bubble has global equity market repercussions for what could be several years. But underlying economic health suggests long term strength, not some kind of Road Warrior apocalypse.