Supply and Demand

Yesterday I wrote about Chicago's dubious distinction as the most socially regulated city in the US. I argue that trend does not bode well for the creative class, the city's future prosperity and ultimately its real estate values over the long haul. However today I came across a glowing article on Chicago in Fast Company, calling it "City of the Year". Indeed it's a city I love, so let's look at the positives.

Fast Company lauds some of the city's social restrictions as forward thinking "Greening" efforts. (Ironically they also posit that the city's position as anchor of 20th century architecture happened here because there was "no one to tell [the developers] to do it differently.")

Construction Booms
Most of what FC is happy about though derives from, Chicago's marvelous growth spurt. The city is the fastest-growing non-Sun Belt city in the US. The economy is growing faster than New York or LA. Immigration remains strong from all over the world.

While highrise condo development has slowed from it's frenzied pace a few years ago, I'm still excited about the Chicago's recent construction boom. The famed skyline is remains one of the most moving in the world. And its development continues. (I highly recommend the Chicago Architecture Foundation's boat tour if you have 90 minutes to spare while you're in town.) Between the 150-story Chicago Spire and the new Trump tower (who let him in there?) the city will remain on the forefront of skyscraper architecture.

With all this development, it's worth a look to see how the downtown Chicago condo market is holding up. Here's a handful of zip codes:


Let's look at demand rates also.


Like much of the country, the most desirable parts of town have (those with the higher prices already) show reasonably consistent demand and stable prices. This is not the case as you leave the hot neighborhoods.

So what's in store for the City? Construction, investment, and immigration warm my heart. Laws to dictate my diet chill me to the bone. The good news is that buildings last a long time. Bad laws can be as ephemeral as the foie gras they're restricting. Let's call this one a net positive.

Rock on Chicago.

Link: Chicago Real Estate Data

We're have an internal game here at Altos - Guess the San Jose Market Bottom. It's quite clear that you can't predict the market bottom by looking at the price chart alone, but what else should you look at? Inventory provides a clue. Check this out:

The seasonal cycles are pretty clear, no? Usually there's a summer plateau in the number of homes for sale, then properties drop off through the winter.

The question is, Is that the first inkling of a summer plateau this year?

If inventory levels flatten out this sumer then maybe, just maybe, the worst of the carnage would be over. That inventory could work its way out over the next couple years. What do you think? Is the recession going to make this chart jump even higher this fall?

Here's where you can keep an eye on the live San Jose real estate data.

NAR is out this morning with data from March (and updates to February). Thanks guys.

Summary: March prices ticked up from February ($195k to $200k), but sales volume resumed its decline.

The money quote from NAR's release:

[NAR economist Lawrence Yun] "Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets," Mr. Yun said.

Some borrowers?!

If you're looking for the inflection point at the bottom of this market, watch the trends in lending to people with good credit. Right now, even good buyers are blocked.

More at WSJ

If you've ever needed an illustration of the supply/demand curve, here is one for you, via the real estate market. I grabbed the inventory levels of four cities, each about 30,000 people big, all reasonably prosperous, nice places in their respective regions. Frisco, Texas; Sammamish, Washington; Los Altos, California; and Winnetka, Illinois.

My overblogging tendencies want me to expound on the reasons for these inventory differences: building regulation, NASDAQ exposure, etc. But I won't. I'm just going to give you the price chart that illustrates the inversion, and let you conjecture for yourself.

Altos Links:

Sammamish real estate data

Los Altos real estate data

Winnetka real estate data

Frisco real estate data

Some posts just write themselves.

Can't. Help. It. Must. Write. More.

Ugly? You betcha. Do these tell the whole story? Not a chance. In Silicon Valley, San Jose is the dominant market, of course. San Jose is a diverse community, with lots of sub-prime and other crazy loans in the past few years. But also some really great neighborhoods with prosperous, fully employed folks. Lots of big, but not-risky loans too. Here's how the market in a desirable part of town, Willow Glen, is holding up. I've done the price chart in Quartiles so you can see the trends at each price point in the market.

Link: San Jose Housing Market.

When we started this company, one of the things we envisioned was creating a National Housing Market Report -- one that would be a right-now alternative to the laggard OFHEO reports and even the Case Shiller releases. Well today is the day, folks. The Altos Research Real IQ National Housing Market Report is here!

In it we look at 20 major metro markets, publish some key stats about pricing and supply and demand trends and we draw some conclusions about what's happening out there. The U.S. metropolitan statistical areas (MSAs) covered in the report include: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa, and Washington, DC.

We're working in conjunction with Stephen Bedekian from Real IQ. Stephen is an industry leader, writer, and consultant and he helped bring this project together. This being the first issue, it took us a few extra days of editing. In future months, we'll be aiming to publish the report just a few days after month's end.

The latest version of the report is available for download on our financial institutions page. Or you can download the PDF here.

The Press Release headline this month isn't any shocking news - Surprise! Prices are still under pressure! But we're laying the foundation here to be the first to identify the eventual bottom of the market. From the press release:

REPORT: HOUSING PRICES
CONTINUE DECLINE IN NOVEMBER

Time-on-Market
Increased as Housing Market Demand Falls Faster than Supply

MOUNTAIN VIEW, CA
- December 13, 2007 – The listing prices on properties in 18 of 20 major markets across the U.S. fell during the month of November. San Diego experienced the steepest decline with listing prices falling 5.8 percent as the recent wildfires exacted a toll on demand. This information was presented in the newly-launched Real-Time National Housing Market Report*, published by Altos Research, the premier source for real-time, real-estate market research and Real IQ™, a market analysis consultancy.

The Real-Time National Housing Market Report is based on an analysis of data from over one million properties currently listed for sale in 20 metropolitan markets across the country and represents the most timely source of housing market data on current market activity.

“Real estate information tends to be highly latent and subject to a lot of revisions,” said Michael Simonsen CEO and co-founder of Altos Research. “It takes several months before the S&P/Case Shiller Index or the
OFHEO data is released for a given month. When you're making investment decisions or trading derivatives these lag times are simply killers.”

Another key trend noted in the new report was an increase in the time-on-market duration for homes on sale in virtually all markets. Miami experienced the longest time-on-market span with an average days-on-market of 137 in November. Minneapolis had the second highest average days-on-market at 125.

Listed property inventory levels displayed seasonal declines in many markets with the exception of Las Vegas where for-sale property listings increased 6.6% over the past three month. “While inventory levels declined in most major markets, the decline in supply could not keep pace with the rapid fall in demand,” said Stephen Bedikian, partner and research director for Real IQ. “We expect time-on-market will continue to lengthen and apply pressure on homeowner pricing decisions until buyers regain confidence and demand levels off. So far that point is not in sight.”

*The first report was published December 7, 2007 and will be released every month. Report downloads are available from Altos Research.

The bubble is bursting all around us and the National Association of Realtors comes out with a report that San Francisco Bay Area median home prices increased by 13% in the second quarter. Nooooo, can it be? If you can't trust NAR, who can you trust?

Stephen Bedikian of RealIQ has a nice piece today over at Inman News sorting through the confusion. He cites some Altos numbers to help make sense of the turmoil. Stephen concludes:

So what actually happened? Sales transactions increased with a greater proportion on the high end versus the previous quarter. There appears to have been little actual appreciation as evidenced by the Case Shiller and OFHEO numbers, while inventory increased and prices of many listed properties were reduced. So next time you read that median house prices have increased in your area, don't celebrate prematurely. Conduct more research before you reach a conclusion about market conditions in your area.

In addition to Stephen's suggestion of diversifying your stats, I'll add that if you're not looking local, you're not looking anywhere. The Bay Area market? Are you kidding? This spring, you could indeed watch a few key markets, like Palo Alto and up the Peninsula stay strong. But look even a few miles inland, say Antioch, and the carnage was everywhere.

To be fair to NAR, we reported the same trends for some of those parts of the Bay Area in February, March, and April. We also noted that by May, the Spring price growth had already begun to recede. (Notably correlated, by the way, with the widening spreads on jumbo mortgages that started at that time. Surprise! The high-end starts to fade when fat mortgages get more expensive.) So here we are five months later and NAR is telling you that San Francisco had a strong spring. Thanks guys.

[ps. sorry about the long hiatus from the blogosphere. Hope you've been enjoying Scott's posts on real estate e-marketing tactics. Our plan is to intersperse both topics together. Thanks to Stephen for getting me off my ass and posting. I like his work, we'll have to do more together in the future.]

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.

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

Further Research Details available here:

Los Angeles Real Estate Market

Irvine Real Estate Market

Pasadena Real Estate Market

Thousand Oaks Real Estate Market

We've been talking for a while about how the market strength in the Bay Area's housing market has been focused on the economic centers, San Francisco and down the Peninsula, with the market notably cooling the farther you reach into the exurbs.

Thanks to the folks at FortiusOne, who launched GeoCommons at O'Reilly's Where2.0 conference last week, we finally got around to illustrating the heat map of this phenomenon.

In the following snapshot we've created a heatmap of price reductions. Specifically this is our percent-price-reduction stat--for a given zip code, the percent of properties that have had their asking prices reduced. We have some color tweaking to do still, but you can see the picture pretty clearly. The brighter red, the higher the percentage (and the weaker the market).

If we zoom into the San Francisco, San Mateo County Peninsula and the north end of Santa Clara County, you can see the strength in Mountain View, up through Palo Alto, and in the San Mateo/Burlingame areas. Also, demand levels in the City have stayed strong.

You can get details of the markets in Burlingame, San Mateo, Palo Alto, Mountain View etc. on our free research page. From that page, you can go to our map view and look at price trends for each zip code. (Heatmap not yet included.)

Money Management firm and Bond King PIMCO has staked out one of the most bearish positions on the Housing Market of any of the serious Wall Street players. Theirs is also one of the most well quantified. The thoughtfulness bears paying attention to. Pun intended.

PIMCO founder and CIO Bill Gross does a monthly economic outlook podcast which I look forward to the first week of each month. Intricate, playful, and self-referential, Gross constructs his essays in a mini version of the Hofstadter style. To grossly oversimplify, Gross has been generally bearish on the economy, primarily driven by his view of housing market recession for over a year. [aside: the article and podcasts are here. But I'm I the only one who finds Apple's iTunes UI absolutely horrible? It takes me hours to navigate through that morass.]

Today, I'd like to call attention to an article by PIMCO portfolio manager Mark Kiesel. He writes this month that he's "still renting." Citing the litany of housing bubble factors (affordability, excess money, rampant speculation, easy lending, inventories, vacancies, delinquencies, etc.) Mark assumed we'd hit a housing market peak and sold his home in 2006 (in Los Angeles presumably). He has been renting ever since. Mark considers that he'll be renting for another year or two. We'll posit here that Mark is wrong: he's looking at 5 or more years.

It turns out that Mark is one of the few who has the cojones to put his money where his bed is. We've had the discussion at the Casa Simonsen breakfast table. Here's how the scenario plays out:

Me: There's a reasonable chance that we'll lose maybe half a million dollars in home equity over the next few years.

The Wife: You think it's that much? Really?

M: Well, there are plenty of scenarios where the housing bubble pops in a catastrophic way. Or it could be flat for 10 years. Remember we never thought the NASDAQ could lose 80% of it's value.

TW: Well then, Mr. Smarty Pants, that business of yours better pick up the slack. 'Cause we're not going to go live in an apartment.

M: Righto. [goes to get coffee]

TW: No coffee for you. Coffee is for closers.

...And life goes on. (That Wife is a funny one.) Despite the fact that we're acutely aware of the capital at risk, we ain't taking any action.

Our situation underscores the trouble with Mark's plan. Even assuming that PIMCO's fundamental analysis is spot-on and the worst case bubble scenario happens, Kiesel faces the speculative problem of market-timing. What if Kiesel is right, but off by say, four years? In fact, Kiesel addresses the condition, but misses the implication:

Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the US housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ˝ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

The relative illiquidity of the housing market means that we could be in a five to ten year cycle. The highly liquid stock market took 2.5 years to reach is trough. Housing could be 2x - 4x that time frame. Here's an illustration by the fabulous forecasting firm ECRI. Note the average market correction time over the last 30 years has by over 3 years (green shaded areas). And these are corrections following significantly shorter booms. The implication is that we could have many years of mean-reversion ahead of us. Note that "mean-reversion" could simply be stagnation, with no strong growth (but no drastic crash) while new construction slowly withers, affordability creeps up with wealth, and broad cyclical economic changes kick in. Either way could create a multi year (5? 10?) cycle before related factors catch up to home prices. Bore 'em to death.

So now it's 2011 and your kids are half-grown, you're not in the school district you wanted, but you're a few hundred grand richer. Or maybe not, because a stable home environment has given you the opportunity to focus on building wealth in other areas (see The Wife's comments above).

Much Ado

So much of the housing bubble crowd is fueled by vitriol and schedenfreud, that PIMCO's fundamental analysis is refreshingly pure and compelling. But it doesn't address the problem of what to do about it.

That's why we're so bullish on the housing futures markets emerging. We've discussed some new fangled hedging strategies, but the fee structure makes them cost prohibitive. I'm just hoping some decent consumer-retail products develop before catastrophe strikes. It could be that in a few years, home value insurance products are part of every transaction. Like PMI, but for the buyer, not the lender.

In the end, maybe the housing bubble like Mark Twain with the weather: so many people complaining, but no one doing anything about it.

This may come as a surprise to many of our readers, but this spring is shaping up to be a pretty hot market in the Bay Area (especially the Peninsula, with the more desirable spots in the East Bay and South Bay trailing, not far behind). We have plenty of anecdotal evidence coming in from our Realtor clients and friends: multiple offers, three-day sales cycles, etc.

So the question is, where in the stats can one turn to measure this transition? Obviously we see the price charts start to march upward with greater demand. But that's not enough, because prices are influenced by lots of exogenous factors and may lag the actual demand a bit. So we decided to explore a different measurement: Days on Market. In a cool market, many properties sit around for a long time. We watched Days on Market climb upward all last year. Now however, if lot of homes are selling quickly with multiple offers, we should see that fact immediately in the Days on Market indicator.

Specifically, when watching a transition from cool to hot, we should see median DoM drop first while the mean DoM stays high. (Remember that median implies half the homes on the market are on for less that this number. And mean is the average of all properties, so a handful of homes that have been for sale for, say, 12 months keeps the average high.)

For example, our client Bart Marchioni recently sold a place in Willow Glen San Jose in 7 days when the average home has been on the market for over 100 days! Good, fresh properties come available and get sold right away, but the stale ones are still sitting around. That's your transition.

So we dove into the Bay Area housing market data to see where the hottest markets are emerging. We looked for zip codes with greater than 15 single family homes for sale, then we looked for those with the greatest percentage difference between the median days on market and the average DoM. What we found confirms what we're hearing from clients are the hottest markets. Here are the 10 hottest Bay Area housing markets ranked by percent difference in median and mean days on market:

City (click any city name for the free research page)	Zip	Median Price	Median Time on Market (approx)*	Mean Time on Market (approx)*
San Jose	95130	$810,000	newly listed	8 weeks
San Carlos	94070	$1,098,000	less than 1 month	12 weeks
San Leandro	94579	$598,888	less than 3 weeks	8 weeks
Los Altos	94024	$1,649,000	less than 1 month	11 weeks
San Francisco	94110	$849,000	less than 3 weeks	7 weeks
Palo Alto	94301	$2,599,000	less than 5 weeks	13 weeks
San Mateo	94402	$1,388,000	less than 6 weeks	15 weeks
Oakland	94618	$1,124,000	less than 1 month	9 weeks
Sunnyvale	94086	$758,900	less than 3 weeks	7 weeks
San Ramon	94582	$1,098,000	less than 5 weeks	11 weeks

* Days on Market rounded to nearest week. See also this post on recent DoM methodology changes we did.

So in West San Jose (Cupertino and Saratoga schools!) half the properties on the market are newly listed. But the average property has been on the market for two months. Sales rates have stayed high so this is not driven by a buildup of new inventory.

Note the theme we've been talking about for a while here: ALL of these markets are close in. These top ten zip codes are from a sample of several hundred in 12 Bay Area counties. Four of these are Peninsula towns, two in the South Bay and three in the East Bay. If the trend holds, and the number of buyers continues to grow, expect the market strength to bleed further out from the Bay Area's geographic heart. If it does, you'll be the first to know.