Something More Ominous

Yesterday, DataQuick released the Southern California real estate sales data for the month of July. Attached herewith are a few updated charts showing the dismal state of affairs in most of the Southland.

While price changes in Ventura County are once again the low-volume outlier this month, all other counties are plotting a clear path downward in year-over-year price changes. From last year at this time, prices fell two percent for housing in San Diego, continuing its trek below the zero level on the y-axis, not likely to re-emerge in positive territory for some time, since comparisons versus the price peaks of last fall will be particularly difficult.

Though San Diego real estate prices have surprised observers before, it's a good bet that the next few months are not going to be one of those times.

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While two percent doesn't sound like much, the decline from last November is a much more significant 6 percent and anecdotal accounts of falling prices far exceed single digits. San Bernardino County appears to be quickly catching up to the other counties in decelerating price increases, falling from almost 30 percent to just over 10 percent in only five months.

As shown in the chart below, for those comparing the recent performance of San Diego real estate versus other investment options, you can now go back almost two years and see the same median price at just under $500,000.

Other counties are flattening out, however prices in Ventura County have jumped up the last two months in a row, now once again challenging Orange County for highest median price just under $650,000. As noted yesterday, this is about ten times the median household income for this area.

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Marshall "almost all, if not all, of those gains are here to stay" Prentice is growing less and less sanguine with each passing month. His once reassuring remarks have turned to hesitation and fear mongering amid the rapidly declining sales volume. Being the real estate market expert that he is, Marshall knows what rapidly declining sales volume usually means for future sales prices.

"The relatively large drop in sales last month may be nothing more than a statistical blip, but it could also be a sign of fast-petering demand for homes at today's prices," said Marshall Prentice, DataQuick president.

"Our sense has been that many who bought homes in recent years purchased them sooner than they otherwise would have because of very low interest rates and a great sense of urgency, given the fear of being priced out forever or missing out on a great investment. That phenomenon helps explain why there's not more demand today. Whether July's data also signal something more ominous at work in the market – something that would cause a severe correction in home values – is unclear to us. We'll know a lot more in a few months."

Coincidentally perhaps, Marshall's price guarantee referenced above occurred in November of last year - right around the time that prices in San Diego peaked. The DataQuick reports originate from La Jolla, adjacent to San Diego.

Good to know.

Maybe what's got the DataQuick Prez spooked are the dreadful sales volume parallels with the 1990s. Last month's year-over-year decline in sales volume was the sharpest since August 1992, which, as anyone living in Southern California at the time will recall, was about a year past the price peak that occurred in 1990-1991.

After that it was five years to the bottom which was forty percent lower than the top in some areas. The change in sales volume is the antecedent to much lower sales volume, and much lower sales volume is a prerequisite for lower prices.

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Last month's Southern California sales volume of 22,712 was the lowest since 1997, but still significantly higher than the low of 15,077 in July 1995, which locals will recall as being about the bottom last time around.

This is a marathon, not a sprint - it is far too late for last year's buyers to benefit from Marshall Prentice's newfound caution. All part of the business it seems - stocks, housing - a mania is a mania.

Soft landing or hard landing, a landing is certain.

One last note - please don't say that the real estate market will do fine because without a broader decline in the economy housing will not be affected in a big way. We are living in a time when, as never before, the housing market is the economy.