Major Indicators

1 – Existing Home Sales

The market slept during 2007, relatively, and jumped back to normal levels in the Spring of 2008. The momentum has been positive but is heading toward negative territory. The seasonal market force will start having some affect on the sales volume for the next 3 to 5 months. Some other forces have indeed corrupted this market result. Deductibility of interest has always had a positive impact on demand for real estate while tax credits have affected the sale of homes just over the last 12 months. However, like most government-sponsored-errors (GSEs), the tax credits have had unintended consequences (not to mention the possibility and probability of fraud). Rather than increasing home-ownership for new owners, most of the supply has been going to the all-cash buyers. That is, the sellers (banks) don’t care if the buyer is a deserving first-time buyer and they will get a tax credit. Cash is king. And the market was not aware of the intent behind the tax credits. When the government adds a corrupting force, there needs to be a balancing force or the intentions can go haywire. This is especially true when the system is not closed and controlled.

2 – REO Sales

The market is currently ruled by banks. Whether the sale is “short” or “REO”, there is at least 1 bank involved. But there is good news. First, we are starting to see a slow release of REO inventory but the expiration of the tax credit, the shortage of sunlight, and the tendency for humans to hibernate means this new supply could be sitting a little longer than in the last 6 months. Short Sales, too, have increased in supply and success (although I can tell you some horror stories). There were 309 closed short sales in September. Second piece of good news is that the banks are working out the kinks in their processes. As a trained business process designer, it can be a frustrating engagement.

3a – Median Price (Sacramento County)

September’s median for Sacramento decreased a little but the negative momentum is slowing and again approaching zero. It still has a way to go to come into positive momentum but what goes down, must come up. Supply . That causes prices to increase. Even recent appraisers are attesting to the relative stability in prices over the last 4 months versus the first half of the year.

3b – Median Price (El Dorado County)

The choppiness in El Dorado is probably explained by the wide variety of homes and prices. However, the recent choppiness, like any commodity market, is caused by colliding forces that will not allow smooth reactions. This is a sign of corruption.

We probably shouldn’t ask but, how much is left? In areas where the median price is $40,000, that question is easier to answer. In the higher demand and nicer areas like many parts of El Dorado County where Serrano and other McMansions are keeping prices higher, one would think that those same desirable attributes will render a similar answer — “there’s not much left to go”. Famous last words.

3c – Median Price (Placer County)

Placer has seen a lot of new development in the last 10 years which has kept the median price a bit higher. This includes areas now flooded with foreclosures and short sales (e.g., Lincoln). We now know that three most important words in real estate are “timing, location, and location”. There are few if any areas that were spared in this downcycle. Timing, albeit sometimes luck, is as critical as location.

3 – Median Price (3 counties)

This combined graph shows all three counties. There is a consistent pattern except for the recent choppiness of El Dorado County.

4 – Notices of Default (NODs)

A Notice of Default is the first public sign of a homeowner in mortgage distress. Arguably upwards of 95% of these homeowners will end up in foreclosure. Mortgage modifications are not helping people and when you can’t pay your mortgage, it’s hard to cure the total amount in arrears (thereby removing the default). It follows that this metric tells us the possible number of foreclosures (REOs) in the future pipeline.

If the math is taken a step further on NODs and REOs, there are almost 15,000 homes with NODs (preforeclosure) not yet reflected in active listings or REO sales. This supports the rumor that banks are holding on to inventory. Whether for accounting purposes or some regionalized collusion among lenders, the pipeline “should” not be so empty.

5 – New Home Permits

This is not a seller’s market and developers are sellers. Many developers are gone, not just quiet. The builders who have standing inventory are very motivated. If you are a buyer and want a new home, let me negotiate a great deal for you.

Funny thing about future consequences of this market: A home built in 2008 or 2009 will be a unique property.

6 – Mortgage Rate

An increase of 1% in interest rates can have a major calming effect on the market. Many buyers are very sensitive to the monthly payment. Interest rates, HOA dues, Mello Roos, and other recurring expenses can quickly deteriorate purchasing power. And if it takes a buyer beyond their spiritual limit, then they may exit the market completely depressed.

When the money supply is increased, the existing money is devalued (diluted). Lenders have to charge more money to make their same profits. They increase interest on loans to get more money. Fewer people can use leverage. That means fewer loans. That means even higher rates. P.S., Thanks Congress. Now shut up and keep your hands off the checkbook.

7 – Inventory

This is supply. When it collides with the other major force, demand, a market is created. The price is set by a willing buyer and a willing seller. In a normal market, there are different strategies for selling and buying. In this market, unless you MUST sell, don’t. Inventory may be decreasing but we have an unexplained logjam in the foreclosure pipeline and your current competition is much more cut-throat than a human.

NOTE: The data collection for this metric had to be restarted due to errors in how MLS was calculating inventory. It’s a long and technical story but I’m proud to say that I was the one who brought the error to their attention. They corrected it moving forward but it is impossible to fix the past reporting. So, like me, they are starting anew with better math.

8 – Months Inventory

This is a computed indicator using average Days On Market together with Inventory to show how long it would take to sell all active inventory. It is a farily low number lately which points to a low supply and a market with high activity.

9 – Momentum Swings

The current reading is 39-9-6. That means 39 of the 54 zip codes had a momentum increase in the current month; 9 of them were unchanged (the median may have changed); and 7 of them had decreases.

The chart shows the oscillating heartbeat of the market as well as many other facts that can be seen (e.g., Mar 2004, Mar 2005). It also shows how a corrupted system (since March 2004) behaves wildly.

Community Indicators

There are 50+ zip codes tracked in my system. To review them individually, go to my Communities web page (http://JayEmerson.com/Communities.asp). This page shows a summary of areas, prices, and then individual links to the specific community where you can see more information including Rental Surveys.

Keep in mind that all of the momentum changes are reflected in the Momentum Swings indicator.