Timely Topics

*** Copyright © David Rathgeber - All rights reserved. ***

Your personal gain from inflation? - January 2012

The segment below ended with the question: What should we be doing now to prepare? Conventional wisdom holds that in times of deflation it is best to hold cash while in times of inflation it is best to hold things. Things? Yes, hard assets like gold and real estate. Even if conditions worsen, a double-dip recession that some still fear, significant inflation seems to be a sure thing sooner or later. What do you think?

Let’s investigate real estate. Local average home prices are around $450,000, well above their December 2008 low of $359,660 but still well below their April 2006 high of $568,074, and continued gains are expected. Let’s say you buy an average home for $450,000. At an assumed 5% annual appreciation rate (our 20 year average rate is over 6% and the average has been 8% for the last 3 years) the home will be worth $574,000 in only 5 years. This represents a tax-advantaged gain of $124,000! Further, there are financing options that could provide a great advantage when you sell the home. So what are we waiting for?
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Where are we and where are we going? - September 2011

The US economy has been in the dumps for years, and massive government spending programs, supported by unprecedented borrowing, have had too little effect. Much of the borrowing has been from China, whose continued appetite for our bonds is not guaranteed. Those who lend expect interest payments until maturity, and find the recent discussions of default rather worrisome. Our creditors also expect eventual repayment. At some point, China and other investors will seek better returns elsewhere or worry about default, and curtail their purchases of our Treasury Bonds. Eventually, we will either go bankrupt (translation: default and be unable to borrow from anyone) or our interest rates will increase to attract lenders.

Meanwhile, trillions of dollars worth of Treasury Bonds have been bought by the Federal Reserve (AKA the Fed). Why is the Fed doing this? To keep interest rates (short and long term) artificially low and therefore increase the money supply in an attempt to spur economic growth. But the Fed buying Treasury Bonds seems like smoke and mirrors. Is this not why Bernie Madoff is in jail and why Charles Ponzi got deported?

What will happen? The scenario above has historically led to inflation. The Fed's action, China's continued purchases, and our stalled economy are likely to postpone the inevitable for some time. But significant inflation seems a sure thing at some point. In the meantime, and likely for months to come, we are enjoying record low mortgage rates. Where do you think we'll be in a year or two with interest rates, inflation, or depression, and what should we (individually) be doing now to prepare? Share your thoughts!
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A Look Back at 2010 and a Look Ahead into 2011 - March 2011

2010 was the third year of recovery for our local real estate market as the Market Index maintained a healthy 2.4 months supply of homes. The recovery was led by Northern Virginia with townhomes in the forefront. To see how 2010 ranked, click here for the Market Index from 1991 to date. 2010 was the second year of home price recovery as average prices again made sustainable gains.

For 2011 we see a strong local market with sellers having the advantage early in the year. The upward trend in prices is expected to continue indefinitely. Our market is expected to remain one of the strongest in the country.
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Market Perturberances and more - August 2010

There’s still more bad news coming for housing as the media catches up with what we reported three and a half months ago. The Federal Tax Credit Program’s major effect seems to have been packing sales into March and April, most of which would have happened in May June and July. Consequently, recent months’ sales have been somewhat lower than expected and it is strikingly clear that the Program is not having any lasting effect. After the bad news passes, the news will be of increasing sales, albeit merely from current artificially depressed levels. So remember where you heard it first.

This year will turn out to be slightly slower year than last. But at year’s end we will look back at a generally healthy, normal year overall, which was skewed up (a statistical term) by a well-meaning Federal Program. Our local supply and demand remain in reasonable balance with the months supply of homes on the market in the range of 3.0 to 4.0. Year-to-date sales are running about 7% lower than 2009.

Meanwhile, the average home price has seen a significant increase this year which is expected to hold, but further increases are not expected until 2011. Great news: The long-heralded rise in interest rates has not yet materialized, due to artificial influences as well as the weak economy. The 10-year Treasury note (widely viewed as an indicator of mortgage rates) has hit record lows recently as have mortgage rates. The current situation is expected to last at least until the spring of 2011. But, higher rates are surely coming at some point. Keep your eye on macro economic data, especially the employment numbers.

And the bubble? When bubbles burst, there is nothing left. This analogy does certainly not describe even the worst housing market in the country. No one thought that the elevated level of sales could continue forever. What was striking and unforeseen: The number of foreclosures and their effect on our home values. In the end, the problem was not 100% loans, interest only loans, adjustable rate loans, or any other kind of loan. Mainstream media did not have a clue! The problem was: Ignoring existing guidelines, throwing caution to the wind, and making loans to folks who clearly could never repay them. It was a case of the money lenders not doing their job. It was a repeat of the “savings and loan” crisis of the early 1990’s. Do you remember?
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What about prices? - April 2010

2009 was a year of recovery for our local real estate market as both the months supply of homes and average prices made sustainable gains. To put things into perspective one must revisit the unusually slow market of the early 1990's during which home appreciation was nil for 6 or 7 years. When the market heated up dramatically in the early 2000's the average price peaked at $568,074 in April 2006 and then started to decline. For a look at average home prices from 1991 through 2009, click here.

Although our recovery started almost 2 and a half years ago, the average home price was not on exactly the same schedule. The decline in prices continued even as the health of the market (as best measured by Months Supply of Homes) continued to improve. How can this happen? A reasonable explanation is that the price declines were the result of the large number of foreclosures. To see the bumpy road, and find how recently prices turned up click here.
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A Look Back at 2009 and a Look Ahead into 2010 - March 2010

2009 has been another year of recovery for our local real estate market. The recovery was led by Northern Virginia townhomes. To see how 2009 ranked, click here for the Market Index from 1991 to date.

As you know, our recovery started over 2 years ago. For a month-by-month graph of the Market Index for the last 3 years that clearly shows when the market turned, click here.

2010 has started off remarkably well in spite of our record bad weather. We see a strong market for the first half year, spurred on by the Federal Tax Credit and historically low interest rates. The second half of the year should be a bit slower.
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Foreclosure and Short Sale Data - August 2009

Tracking foreclosures and short sales has recently become possible as a result of some timely changes in our MLS data collection process. You might recall that we identified these distressed homes as an important part of our market, but could only approximate the data by tracking vacant homes. Vacant homes data included foreclosures, some short sales, and other homes where the sellers had moved.

Our reporting can now be much more precise. But what does all this mean? Foreclosures represent homes that can readily be purchased. The process is indeed more cumbersome than dealing with individual sellers, but it can work. The net result of each sale is (obviously) to decrease inventory, and as a rule, to affect average prices negatively. It is believed that a large proportion of foreclosure sales during the last half of 2008 is what produced the unprecedented 19% drop in average home prices in our area. As long as foreclosures remain below 10% of the homes available for sale, negative effects on average prices will be slight.

Short sales represent homes that are so difficult to bring to closing that the great majority of buyers are unwilling or unable to deal with them. In other words, in the eyes of most buyers, short sale properties are not an option. When the proportion of short sale homes exceeds 5% the market is measurably stronger (better for sellers) than the Market Index (months supply of homes) indicates, because these not-really-on-the-market homes are included in the current inventory data.

Currently the proportion of foreclosures is relatively low and consequently precipitous drops in average prices are very unlikely. Further, the proportion of short sales is relatively high, making the market easier for sellers and harder for buyers than the numerical data suggest. Both the number of foreclosures and the number of short sales on the market are expected to decrease in the future and eventually minimize the associated aberrations.
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What are they talking about? - October 2008

Putting real estate news into perspective…

Here are some very important questions you should ask yourself about the news:
What decreased 3%? The number of sales or home prices?
For what time period? Compared to when? Last month? Last year?
Did they consider seasonality?
Is the data recent, or several months old?
From what perspective? We get different views if we start tracking in 1990 versus 1998!
What is included? Resale homes? New homes? Both?
Our area? We do have a regional market, but there is no national real estate market. Although national averages can be calculated they are merely useless bits of information for individual homeowners.
Do they support their conclusion with meaningful data or do they start with a conclusion and support it with anecdotal evidence? An example or two can illustrate a view, but not prove it.
Do they understand that the value of a home is defined by a buyer-seller, arms-length transaction or do they seek to project their personal opinion on home values? The real price of a home (or all homes) is never defined by some third-party’s opinion, even if they represent themselves as experts.
Are they confusing the homes we live in with shares of stock?

When you examine the underlying data, you might ask:
Do they comprehend the concept of statistical significance? This answers the question: Does the number I just calculated actually mean something? This is of great importance when considering average or median home prices. When sample size (number of data points) gets too small, the results bounce and individual reports are useless unless you are the producer of a TV news program trying to fill time. Further, for buyers and sellers, there are much more important data than median home prices.
Does the algorithm being used make sense? What does it include and exclude? No one actually adds up all the home prices and divides by the number of homes on a national scale. Delve into the method.
Are they careful to make the distinction between correlation and causal effect?
Have they been tracking their data over several decades? While there are some Johnny-come-latelys, the National Association of Realtors, Freddie Mac, and the government’s OFHEO (just Google it) seem respectable.
In the questionable category is the widely reported Standard & Poors - Case-Schiller Report. For you statistical buffs who wish a reasonable discussion of various home price reports click here.

Why are the “pundits” telling us all this baloney? What do they think we should do? Sell our homes and live with mommy and daddy? The kids? In a tent? Stop buying homes? I’d be happy if the Wall Street folks could give me an accurate prediction of the stock market, where they should be the experts! I’ll be a bit worried when the Realtors start telling me what stocks to buy!!!

In their defense, radio and TV news spots and newspapers have time and space constraints that make answering all the above questions impossible. So, it’s up to us to decipher the truth. Unfortunately, this is well beyond the scope of most listeners and readers, the savvy folks like us being a small minority. Isn’t listening to the news just a recreational activity anyway?

Remember that "what everybody knows" is not always right, even when it sounds right. Get your real estate advice from real estate folks, not ignorant Wall Street lemmings. Monitor the local economic conditions including employment, and most importantly, housing supply and demand (yes, the Market Index). And when you are making those really important decisions about your personal housing, good luck!
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Data vs. Information - February 2008

Fourth quarter 2007 (preliminary) data now available from the National Association of Realtors (NAR) shows median home prices in our area (Washington DC MSA) flat for 2007, but down 5.1% in the 4th quarter compared to 4th quarter 2006. The latest NAR tables are available here
The 4th quarter data show home prices in Lansing, MI and Sacramento, CA down about 19% and prices in Cumberland, MD and Yakima, WA rising by about 19% with the rest of the country in between these extremes. Of course there are parts of our area where home prices are rising and parts where they are not, so even the data for our MSA should be viewed very generally.

Roughly similar results were also recently published by the Governments OFHEO (just Google it). While our current market is not as soft as in the mid-1990's, home values seem to have been less resilient. Although the current state of affairs is now vastly different from the years 2000 to 2005, it still does not qualify us for a "bubble-burst" award.

Important lessons to be gleaned from the data?
1-There is no national real estate market (in case we have never mentioned that before).
2-Interest rates are not the main key to home price appreciation: Rates are nearly uniform nationally while price changes vary appreciably.

Actionable information?
1-Keep your job, if only for the income it generates.
2-Keep paying your mortgage on time.
3-Do not sell your home in panic: It’s way to cold to be pitching a tent in the county park.

More Information: This paragraph originally contained a link to an article by Dr. L. Yun of NAR about home price data and was an expose’ of the S&P Case-Shiller Index. Unfortunately, this sensational "shock index" makes bigger news than the NAR and OFHEO reports which are based on sound research principles. But Dr. Yun's article no longer (Feb 2011) seems to be available.

For you statistical buffs who wish a reasonable discussion of various home price reports click here.
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Looking Back at 2007 - February 2008

2007 consisted of 2 very different half-years. There was the first half: While it felt a bit slow after so many boom years, it actually posted sales slightly higher than normal as was also the case in 2006. Then there was the second half of 2007 with the number of sales down about 20% compared to normal*. We know from our experience in 1989 and 1990, that such a drop is significant. Lower sales partly due to tighter mortgage guidelines, along with an unusually high number of foreclosures, led to inflated inventories of unsold homes and the concomitant rise in the Market Index** (months supply of homes).

It bears repeating over and over that there is no national real estate market. Further, there is no national labor market. So when you hear that unemployment is 4.9% nationally and that the foreclosure rate in California is 3 million percent, listen for the local data! 2008 is expected to be a normal year in our market and by year end, inventory levels (homes on the market) should be much lower. Assuming our local economy maintains its buoyancy, and the media does not scare the wits out of us, 2009 should be an even better year for local real estate.

* What is a normal year? Click here The average of 1997 and 1998 represent one normal year as does all of 2006.
** Market Index (Months Supply of Resale Homes): Below 1.5 is a hot sellers’ market; 1.5 to 4.0 is a (normal) sellers’ market; 4.0 to 6.0 is a neutral market; above 6.0 is a buyers’ market.
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Real Estate News in Perspective - November 2007

The hectic pace of our local real estate market over the past several years has slowed. Even I have noticed! But no one thought it would last forever. The “boom” was mainly the result of demand for housing driven by a healthy economy.

Our current slowness is the result of two factors which are related to indiscretions in home mortgage lending. First, there is a larger than normal foreclosure rate as some folks are unable to make the increased payments resulting from their adjustable rate mortgages. The second factor was a temporary shortage of mortgage money resulting from lenders’ reactions to the sub-prime mortgage mess. Both of these problems attained critical mass mainly as a result of the Federal Reserve Board's (FOMC) interest rate increases over the past year or so. The Board's recent decreases in short-term interest rates will certainly help those folks with adjustable rate mortgages, and are calming money markets so that mortgage loans are more available. A recent release from the Mortgage Bankers Association points out that the national news on foreclosures is being driven by data from a few large states, none closer to us than Ohio or Florida.

Important: You never hear that there is no national real estate market and the constant implication that such a market exists is unfortunate. There are hundreds of separate markets and a meaningful connection of national averages to any specific location is impossible! History proves that what happens in Las Vegas or Houston has no effect on us. The obvious reality is ignored because it does not support the story. National news is not directly relevant, but alarmist reporting can indeed have a chilling effect locally. News is 80% entertainment, 20% fact on a good day.

Undaunted by the facts, one Standard & Poors (S&P) “expert” recently predicted a 50% drop in home values. You would think that after years of pointless bubble talk, the Wall Street folks would just try to tell us what will happen to the stock market next week. The most recent (Nov 2007) home values report from the National Association of Realtors (NAR) shows areas of the US where home prices are rising as much as 20% and others where prices are falling as much as 20%. Our area (Washington DC SMSA) is in the middle with slight gains (less than 1%). The NAR has been publishing their study for a long time and have inside information through MLS systems around the country. My discussions with NAR indicate that they are aware of “statistical significance” an important concept unknown to mainstream media. S&P can not claim expertise in residential real estate.

Our local real estate market should appear much more healthy by spring. But there will be more bad news in coming months, as predicted in my October Market Report, as weak September data becomes apparent to the general public through the media. Therefore, home sellers who need to sell soon need to take significant corrective action so that they do not get caught in an ugly year-end real estate market resulting from media amplification of stale unfavorable data. On the other hand, homebuyers should take advantage of the current situation which might last only a few months. Mortgage rates are still low and should be lower in the next month or two. This slow market, unlike some in the past, is not the result of a recession and therefore will not be prolonged. The current inventory surge will not last long. Meanwhile, you, I, and our neighbors have jobs, need shelter, and are not selling our homes in panic.
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Market Alert - March 1999

The buying momentum from 1998 continues. The big news is that number of resale homes on the market is now as low as it was in the late 1980's. Real estate appreciation is returning to our local market, but not at the 20% to 30% rate from the late 1980's.

February sales were 14% ahead of last year, thanks to interest rates and the weather. But a continuing decrease in the number of homes for sale (at a time when the supply is customarily increasing) pushed the market index deeply into sellers' market territory: 2.3 months supply. Detached homes in Virginia are leading the way with only a 1.6 month supply. Average time on the market is plummeting. Over half the homes sell in less than a month. This market is BIG news. This is a HOT market. This is a first for the 1990's, and March and April will be hotter!
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Market Alert - February 1998

With the cooperation of the weather and interest rates, the momentum continues. February sales were almost 50% higher than last February. But inventory (homes for sale) was about 15% lower than last February. This has sent the market index to an all time low (better for sellers) for the 1990's. The positive trend is still accelerating.

Buyers should act as soon as possible and not get bogged down in protracted negotiations. If the current trend continues undisturbed, which seems likely for the near future, buyers will see a lot of competition for the home of their choice as lucky sellers enjoy multiple offers. This is where you get the news before it's news.
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Market Alert - February 1994

In 1994 you will see the long awaited economic recovery take a firm hold. While economic improvements will be slow, they will be steady. The resulting improvement in consumer confidence will bring strength to the housing market. Economic worries which had a controlling and significant negative influence on our local real estate market in the first quarter of 1993 are not expected to re-appear. Selling your home might not be "a piece of cake," but it will be possible.

Keep an eye on interest rate changes which can have an important effect on the market. A trend toward higher rates could dampen market activity as happened last in 1992. Don't expect any significant appreciation in home prices until at least 1995: The resale home inventory is still too large, although it is being trimmed steadily by about 10% each year.

The foundation for future real estate appreciation is in place, assuming that mortgage interest rates stay below 9% as expected. As interest rates have moved down sharply in recent months, personal income has remained much more constant. This means improved affordability for real estate. So the upward pressure on home values remains, held in check only by economic worries and the large resale home inventory. Both of these factors are moving in a direction that eventually will benefit real estate values. Look for continuing support from first-time buyers to help strengthen the market. In time, home values will experience measurable appreciation again, but you might have to wait a long time to see a repeat of the late 1980's.

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