Investment conditions

Two very cool announcements today from Friends of Altos - both are great examples of real estate data helping people make better decisions in this crazy housing market. I just love this kind of innovation.

Krunching.com

First up is Krunching.com: These guys built an investor-focused site with tons of data about properties for sale, investor metrics, property analysis. You can tell it was built by real estate investors answering their own property analysis questions. The site is super-fast and really pretty (in a web 2.0 sense.)

If you're an investor, Krunching is going to be a powerful tool for you. They're taking a freemium business model - they give away a bunch of great data for free and their power users sign up for paid services. They've built Altos local real estate data and analysis into their premium services, so if you don't buy from us, you can get our data in your Krunching subscriptions. My only complaint is that they've used an OFHEO regional chart on their investment summary page. The feds are telling us what happened to home prices in September. Thanks guys. (Hey Brian - you need an AltosChart on that page! Get with the program!) Krunching is only available in California right now, but it's a great start for a national product. Great job guys.

Homethinking Mortgage

Also launched today is a really cool mortgage market analysis product from longtime Altos partner Homethinking.com. I get questions every day from people trying to understand the scope of the mortgage crisis. The Homethinking guys have taken a huge pile of mortgage data and presented it in a super-clean, very powerful visual interface. Want to know how much exposure your town has to sub-prime loans? Homethinking will tell you. Want to know what percent of mortgage applicants are rejected? Check it out. Huge amounts of information in here. Again, thanks to the feds, this data is a year old. Still, it's better information than the world had access to yesterday. So kudos to Niki and team at Homethinking. Looks fantastic. And it comes in cool embeddable widgets!

I did a bunch of press calls last week and they all had one question in common: Everyone wants to know if it's a good time to buy.

Our BusinessWeek article from Friday carries the theme:

Where some see despair, others see hope. Sellers, who were once clinging to boom-time expectations, are trimming asking prices. But the news isn't all bad for buyers. In fact, for some the timing couldn't be better. The lower prices—at least in some markets—are making homes affordable for first-time home buyers and more attractive for investors on the lookout for fire-sale discounts.

Prices are down so much, there must be bargains, right?

Well, yes. But don't kid yourself. Getting a steal on a great property is NOT a slam dunk.

Glenn Kelman at Redfin has an excellent post on the challenges involved with mining for bargains in short sales, foreclosures, and other distressed properties. (aside: Glenn's Redfin corporate blog is consistently cogent and entertaining. If you're at all interested in real estate or startups, you should read it.)

Some of our Wall Street clients are well-financed funds that buy distressed mortgages from the banks. In many cases they're actually taking ownership of hundreds of properties every month. Guess what. As a buyer looking for a bargain, these guys are your competition.

So what's the recipe for investing in this market?

1. Be well-financed. In fact, be over-financed. Even good-credit first-timers are having trouble getting loans this spring. But if you're a well capitalized investor with a solid loan-to-value portfolio and a good relationship with your lender, you have a strategic advantage right now.
2. Build insider channels. Chances are if you're only driving around on weekends, you're going to miss the deals. You'll need to augment your search with other avenues, like foreclosure auctions or even direct lender relationships, to truly capitalize on the opportunities. Kelman points out that Redfin's buyers making offers on short sale properties are only succeeding at a 15% rate. Remember that you're competing against professional investors and specialized Wall Street firms for these deals. Also know that these specialized firms don't really want to be long-term owners, so the opportunity occurs when you work directly with them.
   
3. Do your homework. Know your market and your strategy. How are you finding the property? Where are you going to find them? Has your realtor handled many? Is she already selling some? You already know Altos for market analysis, but there are lots of excellent investment analysis websites (some marvelous Altos partners include Deedquest.com and InvestmentRiches.com, check them out.)
4. Be persistent. There's no question the bargains are out there. But your bid on a short sale or foreclosure will be subject to lender approval. (Kris Berg did a great illustration of the trend San Diego.) That means if you're aiming for a bargain, some of your offers will be getting rejected. That means you'll have to keep shopping.
5. Hope against large-scale bailouts. Every government deal aimed at helping owners ironically hurts buyers. You can argue right or wrong, but if you're a buyer, bailouts shrink your opportunity.

In short, bargain shopping for homes is like any bargain hunting. It takes insight and perseverance. It takes relationships. And above all it takes the financial wherewithal to capitalize when the opportunity strikes. Good luck.

We've had some really nice attention in the press and blogosphere the past week or so. Here's a quick summary so you can see what people are saying about Altos.

O'Reilly Radar: Tim O'Reilly highlights our real-time data products for Wall Street and the housing derivatives markets. I'll be presenting on this topic at the O'Reilly-sponsored Money:Tech conference in New York February 6-8.

In SFGate.com / San Francisco Chronicle Carol Llyod finds her friends in the market for a home in San Francisco - everyone is surprised how hot the market is. I love this kind of analysis. The data reveal so much more than the headlines can capture. Carol - have your friends email me and I'll set them up with the neighborhood level and insights that we do in our detail reporting.

Dustin thinks we're going to get acquired. And Robbie gives us a nice plug on Rain City Guide.

The bloggers at Redfin have been especially prolific lately. I like the approach Redfin uses for their blogging work. They've got a team of bloggers, each with an intelligent voice, tackling the local real estate markets they're in. None of it is too controversial, but it's solid content, targeted well for their customers.

Altos Links:

National Data for the Housing Derivatives and Case Shiller markets

San Francisco 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 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 fascinating development for anyone interested in the housing futures markets. Radar Logic has acquired Miller Samuel-- the eponymous home of Jonathan Miller, blogger of Matrix fame and all around good guy.

Radar Logic, in case you haven't been paying attention, has developed the second tradable index for futures and options in residential real estate. Their product, the RPX, differs from the incumbent Case Shiller Index in a few key ways. The CSI updates monthly, where the RPX is a daily update. Case Shiller tracks median price, RPX tracks price-per-square-foot. This difference is ostensibly to better align with the relative value of a property and to avoid entanglement with the changing nature of the properties themselves.

More important in this story however, is not the difference in the trading indexes (each has its own advantages) but the differences in the companies that support these indexes.

With this move, Radar Logic buys itself all kinds of benefits: revenue, diversification, and talent. Miller is arguably the most influential voice in residential property valuation markets today. He's certainly got more readers than Shiller, plus the regular CNBC gig. Radar Logic is building itself into a significant Wall Street player.

Shiller's firm MacroMarkets, on the other hand, remains a couple of introvert finance professors in Cambridge with a reputation as enormously difficult to do business with.

So place your bets. Expect the RPX to over take the CSI in trading volume very quickly. (Both are still thinly traded to date.) Radar Logic may just be making itself into the firm that can fulfill the promise of a real, liquid market in housing futures.

[Disclosures: At Altos Research, we sell data that leads the Case Shiller Index by 3 months. We have trader clients on Wall Street. We have no relationship with MacroMarkets, but wish they'd turn up the heat a bit. RPX stuff coming soon.]

I have huge respect for Jonathan. Great move by Radar Logic. Congrats to both. This is what the market needs.

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

The topic is the emerging predictive power of internet information. Triggered by the recent murders by a pro-wrestler, and its seemingly prescient reporting in Wikipedia, Noam draws the comparison to the oracles on the Ides of March.

My friend Bill Tancer of Hitwise is also cited. Bill and I gave a talk on this very topic at FOO Camp a couple weeks ago. Bill likes to predict American Idol winners based on search data they capture at Hitwise (and he's good at it, though not infallible.) He's also demonstrated some potentially actionable leading data on housing, unemployment, and the spread of pandemic fears. Bill calls it searchonomics. Here's the point I like to make:

This information serves a Wall Street function as “closer to real time” data for investors, said Michael Simonsen, Altos’s president and chief executive.

“We are really early in the predictive power of the Internet; financial markets are getting a hang of it,” he says. “We have miles to go in all the nuances in capturing information.”

And that's the key, really. Predictive power is a trade-off between advance time and uncertainty. So the more the information is reported in real time, the more it is measured in real time and the more efficient markets get. Funny how in this view, the Bloomberg terminal looks like steam power.

Altos Research happens to be in the business of measuring really, really quickly. In markets where it takes a long time to get the data to people, the internet blows the roof off previously held conventions. Robin Hanson nails it:

Robin Hanson of George Mason University, an expert on using future markets to track public sentiment, said an e-mail exchange that these examples are hardly evidence of predicting the future. Rather, he suggested, it was “a bit newspaper-centric to say that news has not broke ‘publicly’ if it is being discussed online in rumors but has not appeared in a newspaper.” He added that “with more and more kinds of media, there are more and more intermediate levels of info availability.”

This is the crucial dividing line: between reporting on events in as close to real time as possible — which can prove jarring to society, and journalists in particular, but hardly supernatural — and predicting things around the bend.

Cool stuff. Nicely captured by Cohen.

In case you missed it, long term interest rates are rising. In some respects this is actually good news. The yield curve, charting interest rates along their maturity duration, is no longer inverted. Recall that an inverted yield curve means short-term rates are higher than long-term rates, an awkward financial state that commonly signals a coming recession. So a positively sloped curve reflects general economic strength. That's the good news.

The yield curve first inverted nearly a year ago. It was a time of pick-your-poison for the housing market. To get "right", either we were going to see recession, where the resulting joblessness would pummel housing demand. Or we'd be faced with rising long term interest rates, making mortgages more expensive and pummeling housing demand.

As of June 2007 the yield curve is no longer inverted. The Market sees significantly less recession risk. Chart courtesy Bloomberg

Well, the economy has spoken. The bears are capitulating one by one, recognizing that the housing market downturn is not sufficient to drive the economy into a tailspin.

Instead we're faced with something much more mundane in the housing market cycle. Higher mortgage rates. Higher rates, coupled with tighter lending from the subprime cleanup. We've had such low rates for such a long time that returning to normal levels will seem like a foreign country. Every upward move in rates makes homes less affordable.

Macro shifts, a declining dollar, protectionism all seem to be lurching us out of the mortgage rate utopia and back to the real world. Time to lock in that 30-year before we get to gasp 7%, methinks.

We'll be attending the Real Estate Derivatives seminar put on by Fritz Siebel and Clare Yang from Tradition Financial Services on May 29 in Manhattan.

TFS is the leading broker of the S&P Case Shiller options and futures products on the Chicago Mercantile Exchange. This seminar is where they discuss the market mechanics, trading strategies, and will probably get into the development of the OTC products forthcoming.

We get lots of questions from readers and clients about the ins and outs of this market, and this seminar is a great place to start for answers. They cover the commercial real estate derivatives as well as residential housing futures markets.

If you're interested in attending the invite is here (PDF file). They have another seminar coming June 19, 2007.

Fritz has been a tireless advocate of this market. His blog is really the go-to source for housing derivatives news and data. Read it here.

Also - We'll have information on our S&P/Case-Shiller leading-data products too. We now have some of the big Wall Street boys building our feed into their trading models. So if you're in that market, give me a buzz. I can share more details at the seminar.

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.

Home Prices as measured by ECRI

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.

A couple of months ago we pointed out a firm called REX & Co who are offering a unique approach for refinancing your home.

For anyone considering this kind of equity investment financing, here's a marvelous analysis posted in the comments to that post.

The bottom line is that the fees and deal terms are significantly high enough to make the option profitable as a hedge against declining home values. Akin to selling a call option on your home, you get the cash immediately and if the property value declines, you get to keep the cash (minus fees.) Of course, if just want access to cash but aren't hedging against a downturn, take a HELOC. The interest payments will be significantly lower than the fees and cut that you give to Rex.

After reading about REX here, I was curious about the terms so I contacted them and asked for more details. REX has two similar products: one is for purchasing a new home, and the other is for taking equity out of a home you already own. The home must be your primary residence. I mostly asked about the second product. Here's an abbreviated version of what I learned:

REX will pay you up to 13% of your property's current appraised value in exchange for you signing a contract that gives them their money back when you sell the property plus a 3.5% interest in the change in value (up or down) for every 1% that they paid you. There is also a fee of 18% (!!!) of REX's money due when you sell the property. The up-front costs include you paying for an appraisal, and I think some other small fees, probably comparable to a normal refi, but I didn't get specific numbers. Apparently you have to use third-party appraiser selected by REX.

Here's an example: say your home is worth $1 million today and you want to use REX to take out 10% ($100,000) of the equity. At some later date you sell the house for $1.5 million. The appreciation since the REX transaction is $500,000. At closing, REX will receive 35% (10% x 3.5) of the appreciation, $175,000 plus their original $100,000, plus the 18% fee (18% x $100,000 = $18,000) for a total of $293,000.

If the property went down in value, and you were only able to sell for $900,000, I believe REX would receive their original $100,000 minus 35% of the depreciation ($1 million - $900,00 = $100,000 depreciation, 35% of which is $35,000), plus the 18% fee, for a total of $83,000.

If you improve your property after the REX transaction, you can ask for an appraisal when you sell the property to determine the value of the improvements, and REX will not receive a percentage of the appraised value added by those improvements. You can buy out the contract by getting a current appraisal and paying REX the same amount as they would receive if you were to sell the property for the appraised price.
The 18% fee is going to be much worse for you than just paying interest on a home equity loan unless you hold the property for at least several years after the transaction, and that is without even considering the large percentage of any increase in value that you are signing over to REX.

In the example transaction above, you end up paying REX $193,000 in addition to paying back them back the money they paid you. If you took out an interest-only home equity loan of $100,000 at 8% it would take over 24 years for the interest payments to add up to $193,000. Of course, you would have to be making those interest payments every year. And if the loan had an adjustable rate, you'd be subject to interest rate risk. If you are retired and don't have sufficient cash flow to make the interest payments, perhaps REX is an interesting alternative to a reverse mortgage. Also, if you think your home will stay flat or decrease in value, and you are going to own it for many more years, maybe this is an interesting product.

This week's real estate blog carnival is up at RealEstateZebra. We don't have any articles in this week, but there's a couple of things we'd like to highlight: first is a good data-geeking post by the guys at Zillow. The shrinking American family vs. the growing American home. Dig it. Also RealEstateZebra uses the fabulous Wordpress Template called Cutline. Remarkable how readable that style is.

We did get picked up at the Real Estate Investment carnival, which we believe emerged because there is just so much good real estate blog content out there. Hosted this week at unabashedly-named theMillionairesblog.com, our post on Flipping Homes in a Down Market made got a highlight. As we mentioned in the post, we're big fans of buying-fixing-selling. There are some great articles at theMillionairesblog on his fix and flip exploits.