Tuesday, July 31, 2007

Still thinking about Case Shiller.

I've been getting some emails about when I think Los Angeles prices will drop and how far (as if I know!). All I can tell you is that I've been basing my gut feelings on the Case Shiller index and so I kind of graphed it out above (click graph to enlarge). The blue line is the actual CS index for Los Angeles. The redline is my half-hazard attempt at graphing out what the normal growth would've looked like if there were no booms. (I fully admit that my methods are less than scientific, but I still think they have at least cocktail-party-chat value). I'm sure there are people who would've drawn that redline more steeply and others who would've drawn it less steeply. I was attempting to graph from valley to valley in the cycle.

You can see that in the last boom it took approximately 3 years to peak and 6 years to bottom out. At the low point, homes didn't roll all the way back all the way back to pre-boom pricing; they rolled back about 50%.

Depending on how you look at the current boom (what I like to call the "Great Boom"), you might say it will take six years to drop 50%. That would assume that you believe real estate follows certain fixed cycles that are not dependent on the individual boom. Or you might think it will take twice as long to bottom out as it took to peak, assuming you think real estate follows a trend that is dictated by the boom itself.

To me, the interesting aspect of this graph is that the current boom peak didn't lie flat as long as the last boom. It also climbed at a much faster clip. This could indicate that our current boom is more volatile and will fall more quickly than the last. I think I subscribe to this faster-collapse theory because of all the fraud that went on in lending. I believe the fraud is more widespread than say the volume of aerospace employees who were laid off in the 90's.

The point on which virtually nobody disagrees, is that the current pricing is unsustainable. There's just no reason to pay three-quarters of a million dollars for 1,700 sq. ft. tract house in the Valley. Don't do it, People. That house will easily be sold for $400k in the next year or two.

As for E & I, we might jump in before the market totally bottoms out. But we've definitely decided that we won't buy before summer ends. And it seems unlikely that we will buy before the holidays are over. I am still looking everyday because I think it's important to have a strong knowledge of the market and value -- but I am still not seeing the kind of value that I believe is sustainable.


Dr. JwB said...

Kate- Love the blog and Pete Viles for directing me here. Two questions for you:

First, have you seen the Case Schiller numbers as actual weighted home value as opposed to normalized index? I did a web search, and I struck out (flooded by too many results to find what i wanted and also keep my job).

Second, if you and yours believe that the market will drop, why get in early? Perhaps you have answered this in an old post, but I am curious. I ask because my wife and I are moving to LA in December, and while we could buy now, we've decided to risk waiting just to see if we can get more for less later. I'd like to get your take.


Kate said...

Dr. J:

No, I have not seen the weighted home values -- but I'm digging around now.

As to getting in on the market early, I am not planning to dive in today. If Angelo Mozilo didn't scare the living daylights out of you, I don't know what will. But, I don't feel like I the market has to hit rock bottom before I buy. Because we are looking for a long-term home, I don't think a 5% or 10% drop will be something to be overly concerned about. We are more interested in finding the right house and we are ever so tired of renting as we have been waiting a couple of years already.

Kate said...

Oh! Dr J:

Do you mean the weighted system of the OFHEO? Andrew Leventis?

There's a PDF on that here.

Dr. JwB said...

Kate- I'd just like to have that graph with the real median home prices instead of the index (weighted or not). I understand why they do it, but for me . . . I'd just like the "real" numbers.

And I couldnt get that link to work, but thats ok, I'm sure if you find it, you'll post it.

And thanks for the feedback.

Anonymous said...

I have been reviewing this Case-Shiller index, and have also shared the 1890+ graph with my husband. All the indicators, including the recent stock market uncertainty, seem to be pointing towards a healthy & needed correction. When I mentioned this to my sister, she said that in the SF area (where she lives) there are local ads running in support of some type of bailout. I haven't seen the ads myself, but supposedly they state that major investment houses, including Merrill Lynch, support a bailout. This makes my husband and I furious! Particularly in light of the apparent questionable-to-fraudulent activity that has driven (some of) the market. However, my concern is that the only people that benefit from a correction are everyday people such as you and I, who have tried to be patient and (relatively) cautious with our finances. However, a lot of money stands to be made/saved by investment firms, hedge funds, banks, etc., (in addition to the homeowners who took out the loans). Some of those folks have a lot more political clout than I. Do you have any thoughts on the probability of some sort of bailout-- in my head, I'm not sure I see how it works?? Have you seen any coverage on this? And how could such bailout affect the local markets? So far I haven't seen anything about this in the news, the ads my sister apparently saw up in the Bay Area are really all I've heard of it. So I don't want to start any rumors.

2d-- we're really interested in the Pasadena area-- do you know of any blogs that specifically target that region, such as you are targeting the Valley? --Anon 2

Kate said...

The last article on lender bailout that I read was at Market Watch and you can find it here.

I am not aware of anyone blogging in Pasadena on the bubble -- but it will probably happen soon. Pasadena, however, is a very established neighborhood and will probably continue to be highly sought after by downtown-commuters (read: new law associates with new salaries burning holes in their pockets). I'd be surprised if Pasadena was as hard hit as the Valley when the prices come down.

Patient Renter said...

Hey Kate - I'm really glad to see you looking at this kind of information. I really wish everyone could see this. Oh, and your red line looks good to me.

"Because we are looking for a long-term home, I don't think a 5% or 10% drop will be something to be overly concerned about."

The impending drops indicated by the Shiller graph you brought up are much greater than this...

Kate said...

Patient Renter:

Yes indeed! It does look the drops will be much greater than 5-10%. But I'm not buying today...

I meant that we will buy when prices come down but I am not overly concerned with buying at rock bottom. If I miss it by 10% or so, that's okay with me. So long as I'm happy with the house and the payments.

Thanks for reading!