Friday Lite

Normally, the real estate sales data for Southern California is released to the general public a few days after it is provided to the local papers (which just happened yesterday), so it is a bit surprising to be publishing updated charts on this topic in today's Friday edition. Nevertheless, duty calls.

This month's news is not good - the local papers are now full of headlines like these:

Home Sales, Prices Still Falling - Signs on San Diego
Home Prices Drop for First Time in Five Years - Ventura County Star
Home Prices Slide for Third Straight Month - Orange County Register

In an online poll from the Ventura County Star, they asked readers if they are worried about the drop in home prices. Almost 200 responses were tallied with the following results:

• 39.4% - I hope they keep dropping so I can afford a home.
• 24.4% - This is just a blip, a sign that prices are stabilizing. No need to panic.
• 18.3% - Not really, I bought a long time ago. I'll lose some equity, but I'll be just fine.
• 8.9% - Yes, it's sure to keep dropping and I'm going to lose all the equity I've built.
• 3.9% -The sky is falling! The sky is falling!
• 2.8% - Yes, I just bought a house, I won't be able to sell it for what I paid.
• 2.2% - I don't own a home and I hope this will bring rents down.
  

Optimism is still high - particularly for renters.

And Then There Were Two

Yesterday, DataQuick released the September real estate sales data for Southern California. San Diego now has company below the zero mark on the y-axis of the chart depicting the year-over-year change to the median home price.

To no one's surprise, it is the same county from which this blog originates - Ventura.

Sales volume in these parts is rather low compared to other areas in Southern California, hence the price volatility as shown in the chart below, so it wouldn't be surprising to see the violet line pop up over the zero level in the months ahead, but the overall trend seems to be clear.

Click to enlarge

San Diego County prices are now down 4.4 percent from year ago levels, along with Ventura County prices that have declined 3.3 percent. Overall in Southern California, prices are up 1.9 percent, led by Riverside County where a yearly increase of 8.0 percent was seen.

The bad news is that there is still plenty of room to go to the downside. With rising long term rates and new guidance to reign in the more toxic of the nontraditional mortgage products, this may be just the beginning. Will it be a flattening out or a downward correction? We'll see.

Click to enlarge

The folks at DataQuick aren't quite as cheery as they were last year, but they do seem to be adapting. Marshall "almost all, if not all, of those gains are here to stay" Prentice had this to say about the most recent data:

"Now is when things get interesting. The vast majority of home buyers have done very well for themselves the past few years. As things level off, though, we should be able to quantify how many buyers overpaid during the frenzy, and by how much. And more importantly, how they manage any financial challenges they encounter. Historically most homeowners in that situation tough it out and wait for the market to go up again."

Marshall seems to be about three-quarters of the way along in his transformation from 2005 cheerleader to 2007 realist. He appears to have just transitioned through denial and anger, showing his first signs of acceptance of the new reality in the California housing market.

Yes, now is when things get interesting.

Big House Bob Confirms: This trend is not your friend

Writing on the local housing market, San Diego realtor Bob Casagrande notes that it's really worse than it looks out there. Most sellers are either unrealistic by a wide margin, or they're just hoping to get lucky.

The average detached home in inventory is 2,282 sq ft with an asking price of $899,180 where the average home sold in September was 2,494 sq ft with an average asking price of $757,227.
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The typical detached home sold was 2,050 sq ft with an average selling price of $626,296, this is down about 9% versus last years average of $691,608 for the same home. We see the same trend with attached homes, with this year's average of $395,936 down about 6.5% from last year. One has to be very careful with prices since you will see a lot of variance in the price changes from neighborhood to neighborhood, house style to house style, etc. However, one can conclude that in general prices are declining. These price trends will continue until we see a major downward movement in the current inventory supply of over 300 days. Buyers need to continue to be price savvy and serious sellers need to understand the importance of pricing right from the beginning.

Since so many homes are purchased with no money down these days, and with sales volume in the thousands per month, there must now be tens of thousands of homeowners in San Diego who owe more than their home is worth. That may be a problem someday.

Some Very Simple Explanations

This picture has been sitting around, waiting for just the right opportunity to use it in an appropriate context. After details of last week's speech by Alan Greenspan became known, it is clear that the appropriate context is now at hand.

The great boom in US house prices that abruptly petered out in recent months was caused by increased global integration, not loose monetary policy, Alan Greenspan, the former chairman of the Federal Reserve, has claimed.

"I don’t think that the boom came from a 1 per cent Fed funds rate or from the Fed’s easing. It came from the collapse of the Berlin Wall," Mr. Greenspan told a private audience in Canada on Friday.

The former Fed chairman said the collapse of Communism in eastern Europe and the shift towards more market-based economies in China and other parts of the developing world brought “billions of cheap labourers onto the scene”.

This, he said, “brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums.”

In consequence, “the real market value of assets increased faster than GDP”.

Mr Greenspan said the system “ran out of steam as no one could afford houses any more.” But he said the worst of the housing correction may already be over.

The system "ran out of steam" and soaring asset prices were a result of "billions of cheap laborers" - now it all makes sense. Freakishly low interest rates with virtually no regulation of mortgage lending had little to do with the housing boom.

Ben, we need more steam!

Guess the Year-End Prices for Oil and Gold, Win Big

This is your last chance to guess the price of gold - both the yellow and black varieties - and win big. At midnight tonight all entries will be tabulated and placed into a locked vault to be opened on New Years day of 2007 . Whoever guesses closest to the year-end price for these two important commodities wins a free one-year subscription to Iacono Research.

Here are some charts to help you along with your prognostication.
The combined percentage differences between the guessed values and the closing prices on December 29th will be used to determine a winner. Entries may be made either by sending mail (see above right - Send Me Mail) or posting them in the comments section below.

Special recognition will be given for the best snarky comment, given recent price trends.

Picking up Nickels in Front of Steamrollers

The Economist must be commended for adding the Buttonwood column to the print edition a few weeks back. This story about carry trades and hedge funds both informs and entertains.

The carry trade is essentially a bet on lower volatility. To take an outright gamble that markets will barely move, an investor would write (sell) options; this approach would bring in premium income, but would lose money if prices changed enough for the options to be worth exercising.

In the foreign-exchange version of the carry trade, an investor receives an income by borrowing a low interest rate currency and owning a higher-yielding one. This produces a positive return most months, but the risk is that the high-rate currency will devalue, resulting in a heavy loss.

Cynics have described these bets as “picking up nickels in front of steamrollers”. A long series of small gains is punctuated by the occasional wipe-out. However, from the point of view of a hedge-fund manager, it is a perfectly rational approach.
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But the important point is that financial markets are a complex adaptive system, in which the actions of participants affect the fundamentals. The best analogy might be the “seat belt” attitude to risk. In theory, having seat belts in cars should save lives. But the presence of seat belts may cause motorists to drive faster, leading to no improvement in road safety. That has led some to theorise that people have a mental budget for risk; if it is reduced in one area, they will compensate by taking more risk in another.

Thus the low level of volatility may make investors overconfident, taking on more risk either by buying exotic investments or by using debt to finance their positions. When bad news does occur, those investors will be dangerously exposed. Low volatility and the carry trade sow the seeds of their own destruction.

That appears to be Brian Hunter of Amaranth Advisors flattened on the front roller.

She Would Struggle to Leap Over a Bucket

This is the story of Thumbelina, the world's smallest horse.

Standing just 17 inches tall, she is never going to be a champion show-jumper. In fact, the tiny mare is so small she would struggle to leap over a bucket.

But such things are of little concern for feisty Thumbelina who has just been officially recognised as the world's smallest horse.

The five-year-old received the title from the Guinness Book of Records after her astonished owners realised she was never going to grow any bigger.

She was born on a farm in America to a couple who specialise in breeding miniature horses.

These popular show horses usually weigh about 250lb and reach a height of 34 inches when they are fully grown.
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Thumbelina survives on a cup of grain and handful of hay, served twice-a-day.

For extra credit, locate the memorable quote from the original City Slickers that applies here. (Hint: the big horse is Curly, the little one is Mitch).