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Observations on California Housing, August 2006

The good news is that things have stabilized, or they are "less bad, " as a professional real estate person would surmise. In Santa Clara and Santa Cruz counties, the Listings declined for the first time in a very long time during the latest week (still quite a bit higher for the month of July). This could be because the sales tend to slow down after the Labor Day and so lot less people are putting homes for sale as the Labor Day nears. There were 934 single family Open Homes this weekend in Santa Clara County. I wonder if residents in some neighborhoods experienced the "sign pollution" problem.

Sales Pending have stabilized at a low level and no longer falling. The bad news is the incessant lowering of prices for listings that have been on the market. For example, in Santa Clara County the median Listing Price has steadily declined from $895K to $839K over a period of four months. And if this is happening during a period of peak demand, one would think, what lies ahead during the period of weak demand? The price drop is also reflected in $45-80K decline in Listing Price of Sales Pending during the past two months, though varying from week to week. It appears that buyers are using the recent price drop to buy slightly bigger homes as indicated in Table 1 (the period is too short to be conclusive, though).

Table 1: Weekly Data for New Sales Pending for Santa Clara County SFHs
(Median Price, June Escrows Closed = $819,950)
Data Type Week Ending 07/14/08 Week Ending 08/04/08
Median Listing Price of New Sales Pending $735,950 $778,800
Median Sq Ft. of New Sales Pending 1625 1695

A good indication of price pressure can be gauged from Table 2.

Table 2: History Of a Listing (4BR+2.5BA, 2006 sq. ft., 5-Year Old)
In Santa Cruz County
Date Listing Price Number of Listings In County Below the Listing Price
2/28/2006 $786,900 250-300
4/23/2006   312
5/7/2006 $762,000 342
5/23/2006 $750,000 334
6/7/2006 $735,000 349
6/29/2006   408
6/30/2006 $695,000 303
7/14/2006   345
7/29/2006   371
8/1/2006 $679,000 335

The current listing price of the home is 13.7% below the original listing price. Usually, people Fall-Behind-the-Curve in a falling market. Most of the homes listed for lower price are also below the price due to price reductions. Every week, the number of homes listed below the price goes up.

I think that one can characterize the bubble and the post-bubble periods as follows.

Buyers Panic (2004Q2-2005Q3) - Buyers afraid that if they don't buy now the prices will go up and they wouldn't be able to afford to buy later.

Period of Transition (2005Q4-2006Q1) - Few buyers left too panic and affordability becomes a serious problem. The idea that the bubble has burst start to take hold and fewer people are in denial of the fact that it was a bubble after all.

Buyers' Strike (2006Q2-Q3) - More and more buyers start to realize that it is stupid to pay such ridiculously high prices and that it is better to rent until homes become more affordable. It becomes a self-fulfilling prophecy as the weak demand leads to more and more price reductions.

Sellers Panic (2006Q4?- ) - After months of frustration in not being able to sell, enough sellers, many of whom were speculators to begin with, decide to, or are forced to, get out at the "market price" before thing get even worse. The problem is compounded by the talk of a recession to begin soon. The slow-down mantra starts to sound hollow as job losses accelerate. Scam Market leads the way by tanking. Fed panics and starts to lower rates.

How Booms Create Their Own Supply of Land for Housing

An argument that never seems to die, to justify high prices during booms, or bubbles, especially, in high-density areas, is the "limited supply of land" theory. It may well be true that more housing units get built in the same land area in the high-density areas in successive booms, but new housing units, including condos, keep getting built in large numbers to meet any demand. Here is a case study for one large high-priced area.

Case Study: City of San Jose (Santa Clara County)

"Housing Units Receiving Zoning Approval" increased by 3,500 in just one month, June of 2005 (average is 250-300 month). "Housing Units Receiving Building Permit Approval" increased by 2,500 in just one months, December of 2005 (again, average is 250-300 a month). It would seem that the two are connected. Both these data, 6245 and 5093, respectively, were the highest for the year 2005 in twenty years. I looked at an alternative data by the same source (City of San Jose) that shows permits lot lower for 2005 than the first source and the only concussion that can be drawn is that some big permitted projects were cancelled and the second data series made the adjustment. This is a clear signal that builders got the message in early 2006 that the bubble was bursting. Had the bubble continued we could be sure that the largest number of housing units would have been built in 2006 (initially zoning-approved and permitted in 2005). For the first six months of 2006, the permits are already at levels associated with bust years in residential real estate in San Jose area.

In 1999, I lived in a house in a partially completed brand new development in City of San Jose where more than 600 SFHs were being built. I looked at an old map that I had to see what was there before. What I found out was that a golf course and country club was reconfigured to 1/4th of its original size and the rest of the land was converted into the housing development.

The bottom line is that during boom years some 4,000-5,000 housing units per year get built in City of San Jose (the average is 3,300 a year). At all times there seems to be a large enough inventory of land to make that possible thru rezoning.

For those who fail to see the connection between the tech bubble and housing in Silly.con Valley might want to cogitate on the fact that the highest building permits in City of San Jose, for the past twenty years, were issued during 1996-2000 and 2003. The average during these six years was more than twice the number during 1989-95.

The building bust has already begun in San Jose area if permits during April and May are any sign (total of 150 during these two months). I predict that the building in Silly.con Valley would be at lower levels during the coming years than during 1989-95. For California as a whole, in 1993, the new homes sold were less than 30% of the new homes sold during 2005. In coming years, things would be lot worse than 1993 for builders in California.

What Lies Ahead for the California Economy?

1990 was a watershed year for the post WW II California economy - Interstate migration into California after 1990 dropped dramatically (it might have even gone negative in some years) and absolute number of additional household formation, including immigrants, legal and illegal, was significantly lower than in 1970s and 1980s (the percentage increases in households were even worse, below the national average, during 1990s). Could it be that California priced itself out during the housing price boom of late 1980s? If so, the housing price boom of mid-2000s could prove to be far more damaging than what California experienced during the early 1990s. The data show that the interstate migration was already negative for California in 2005. It is a safe bet that high housing prices were the main contributory factor. The negative effects of the high housing prices on the economy work with a lag; while during the housing price boom it is a boon to the economy. It is like a hangover after a drunken party; there could be lot of Californicators with headaches.

Next week - Pause That Depresses!


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