January 14, 2012

Holy home sales, Batman, this column was written by an agent!

Today we have a guest post from Burbed reader Greg Fielding.  Greg has a real estate blog, Bay Area Real Estate Trends, and even though he’s a real estate agent, he is not a Realtard.  If you check out his site, you’ll find it rather free of Now Is The Time To Buy.  For someone who makes a living helping people buy or sell houses, he sure spends a lot of time over on patrick.net.

Greg is based in Contra Costa County, which we haven’t covered enough on this site.  Be sure to let him know if you think his analysis is relevant to the Real Bay Area (if anyone can figure out where it is in 2012).

Anyway, please give Greg a big, warm, RBA welcome to the front page today. 


Tale of Two Markets: Breaking Down Case-Shiller Tiered Indices

Following up on the latest Case-Shiller Home Price Index report for the Bay Area, let’s break down index into top, middle, and lower tiers. The result shows two distinctly different markets since the price lows in the Spring of 2009.

Just as Wall Street has diverged from Main Street, high-end neighborhoods are enjoying a different reality than the rest of us.

Tiered Case Shiller Home Prices San Francisco Bay Area

The lower and middle-tiers are generally following the same pattern. When the supply of foreclosures was turned off, interest rates dropped, and buyer incentives kicked in, both market segments rallied. Then, when that temporary stimulus was exhausted, they resumed their declines at a paces of roughly 10 percent per year.

However, the top-tier – homes priced above $579,803 – are only declining at a pace of roughly 3-4 percent per year.

Why?

There are lots of possible reasons. Among them, that higher home prices are more directly tied to the stock market, which has performed remarkably well. In April of 2009, the S&P 500 Index was in the 800′s. Today it is at 1,277 – an increase of roughly 50 percent. Also, higher-paying jobs have survived the recession better than lower paying retail-type jobs that are more directly tied to consumer spending and sentiment. Or, that wealthier homeowners with higher-paying jobs were more likely to be able to refinance their homes to avoid foreclosure. And there are probably a dozen other reasons that all contribute to the divergence.

One other note: high-end home prices are holding relatively stable in spite of the reduction in conforming loan limits. Buyers literally need 100K+ more of cash to buy the same high-end home, and they are still doing it. So far, anyway. Honestly, I am shocked by this.

One thing is clear: this circle will square itself at some point. Either the mid and lower-tiers will rally (or stabilize) and the gap will narrow over time. Or, the pillars holding up the high-end will eventually give way and prices will begin to fall at a pace that matches the other tiers.

Written by Greg Fielding. This article originally appeared on Bay Area Real Estate Trends on January 4th.  Republished with permission, nay, encouragement of the author.

Comments (28) -- Posted by: madhaus @ 5:14 am

28 Responses to “Holy home sales, Batman, this column was written by an agent!”

  1. SEA Says:

    Anonymous wrote, “Higher end homes hold up nicer because there arent that many out there in comparison to the many lower end homes which exist in the SV Bay Area. And affluent folks or highly skilled workers still prefer a nice neighborhood with good schools. So, that is certainly another angle to take. In the end good quality wins over bad quantity.”

    Fielding replied, “Except that because this is divided in equal thirds, there are exactly the same number of homes in the top tier as the others. And, it’s all relative. Nicer areas are nicer in comparison to other segments. No homes exist in a vacuum.”

    Anonymous and Fielding both neglected the bigger issue: C-S is a repeat sales index, and there was the tax incentives that disproportionately incentivized the lower end sales. While it is true that each of the tiers contain a third of the sales, when the data are suddenly loaded with lower end properties, the top tier becomes low end sales, as compared to periods before the incentive. The incentive maxed out at 10% for sales $80k and under. At $400k the incentive was 2%, and for a $800k sale the incentive was 1%.

    My guess is that there was a sudden and temporary change in the mix of sales.

    Beyond that, there were agents who suggested that a lower end purchased would simply cost $8,000 more after the deadline. My guess is that after the deadline buyers demanded a better deal–instead of receiving $8,000 from the IRS, buyers wanted more from the sellers, like a $12,000 price reduction, to make up for the fact that the IRS was providing cash today, but the $12,000 would be result in lower payments over time. Basically the Yun line of buyers willing to pay more has yet to materialized.

  2. madhaus Says:

    The top tier is homes priced over $579,803? I see a fun feature called “What can you get for $579K?” Bear in mind that in many places in SV, the answer is “nothing.” This could be fun!

  3. SEA Says:

    $579,803–it’s not a lot of money more than not a lot of money.

  4. madhaus Says:

    Greg has some fighting words for us over on his site. In comments he said:

    January 5, 2012 at 10:36 am Absolute bunk. Silicon valley has unemployment well above the state average. The only places I would accept are fundamentally different are a few pockets like Menlo Park, where economic rules no longer seem to apply.

    Do not fall into the trap of thinking wherever you live is different. It’s not.

    He said we aren’t Special!

  5. SEA Says:

    Also the price points on the tiers change every month, so the $579,803 is only for one month.

  6. SEA Says:

    #4- “SV is special because it has a higher unemployment rate, but please don’t fall into the trap of thinking SV is different.”

    lol

  7. nomadic Says:

    Greg’s quote in #4 isn’t accurate either. Both Santa Clara and San Mateo County have unemployment rates much lower than the state average of 11.3%.

  8. Tom Stone Says:

    I haven’t spent any time at Burbed for several years. I have mostly followed Naked Capitalism and Calculated Risk Blogs, both of which I found though patrick.net and the early days of HBB. The comments here seem to be both intelligent and thoughtful for the most part, which is nice to see. Madhaus has been posting at Bay Area Real Estate Trends from time to time and I have as well, it’s what brought me over for a look.

  9. SEA Says:

    #7- Likely some Simpson’s Paradox in here somewhere.

  10. madhaus Says:

    Tom, nice to see you here. I have a reply to this column appearing tomorrow.

  11. Fun with Case and Shiller | Burbed.com Says:

    [...] we had a guest post from Greg Fielding on Bay Area Case-Shiller tiered data.  In case you haven’t been reading any real estate [...]

  12. Living Large on Case-Shiller’s Top Tier | Bay Area Real Estate Trends Says:

    [...] Burbed had a guest post from Greg Fielding on Bay Area Case-Shiller tiered data (it’s a reprint of his article from this site).  This [...]

  13. Living Large on Case-Shiller’s Top Tier « Editorials « Real Estate Sacramento Says:

    [...] Burbed had a guest post from Greg Fielding on Bay Area Case-Shiller tiered data (it’s a reprint of his article from this site).  This [...]

  14. bmwman91 Says:

    Interesting stuff. My fiancee & I have been looking on & off for the last couple of years, and this little analysis sort of quantifies what we have been seeing. Many of the places that we aren’t as antsy to live in have seen some tempting price reductions, while the nicer areas with (most importantly) shorter commutes have remained stubbornly high. I want to call those places “overpriced” but they clearly aren’t since enough people are willing to borrow / buy there to maintain the prices.

    So, what would it take to get the upper-tier houses to start dropping at 10%/yr with the others? It seems like the only way that would happen is if 3.5%-down FHA loans has their conforming limit drop back to reality / $460k (super duper unlikely), or if the jobs near these areas dried up (not sure how likely, probably not a good thing). Is it more probably that the lower- & mid-tier houses will stop dropping and / or increasing as specu-vestors soak them all up since they seem to be driving the market at the moment?

  15. SEA Says:

    “So, what would it take to get the upper-tier houses to start dropping at 10%/yr with the others?”

    Go back and read #1. It is possible, and very likely given the tax incentives, that the change in mix of sales results in the upper tier holding up. In other words, remove a few of sales in the bottom 2/3 and the top third starts to look better, even if it’s going down at the same rate.

  16. bmwman91 Says:

    Sorry, I am being dense & having a hard time understanding your explanation (no sarcasm). Maybe we can figure out where I am getting lost.

    - Tax incentives in 2010 drive up the low- & mid-tiers, and to some extent the high-tier.
    - With the expiration of the incentives, prices in the low- & mid-tier resumed their decline. Similarly, upper-tier houses also resumed a decline, but not as much so since the incentives had less of a draw there to begin with.

    Here’s where I seem to be a little confused.

    It sounds like you are saying that a languishing low- & mid-tier market can help to stabilize the upper-tier. Is the rationale behind this that people who would have done some amount of calculation & seen the tax incentives as being more advantageous for cheap properties are going to say, “well with the incentives gone we may as well look at nicer houses”? I guess I am not seeing the logical connection between the lower 2/3′s tanking and the upper 1/3 staying up.

    Thanks.

  17. SEA Says:

    “I guess I am not seeing the logical connection between the lower 2/3′s tanking and the upper 1/3 staying up.”

    First assume home values do not change, but the mix changes:

    For simplicity, let’s start with 12 sales, numbered 1 to 12. The value of each sale is $100k times its number. Thus sales below $450k are bottom tier, and the sales above $850k are top tier.

    Suddenly there is an incentive for buyers to buy at the lower end, so the number of sales on the bottom end go up.

    5 at $100k
    5 at $200k
    4 at $300k
    4 at $400k
    3 at $500k
    2 at $600k
    2 at $700k
    1 at $800k
    1 at $900k
    1 at $1,000k
    1 at $1,100k
    1 at $1,200k

    The division between bottom and mid tier is now all at $250k.
    The division between mid and top is now $500k.

    As we return toward the former mix of sales, the break point for the top end will be pushed back up toward $850k, even if prices are going down.

    I still would have to add ‘paired-sales’ in the mix, but I hope it is clear that what was once in the middle sale level is now in the top tier, and what was once a low tier sale is now in the middle tier.

    Clear?

  18. bmwman91 Says:

    Thanks, I think I have it. Now it makes sense why Fielding mentioned that the tiers were determined by sales volumes, and how top-tier indices could “appear” to stay flat or go up. For some reason I went right past that & was thinking that the tiers were delimited by price. Thanks!

  19. Greg Fielding Says:

    Glad you guys are having fun with this. I did make a mistake saying that SV unemployment was higher than CA – it’s not. It is higher than the national average. I confused my stats. Forgive me.

    bmwman91,
    It’s by volume and the $579 is just where the top third breaks off. I would love to see it broken down in more detail.

    All,
    In terms of areas being “different,” nowhere really is. We are all connected. Sure, Pleasanton is worth more than Livermore. It was in 1980, 1990, 2000, and 2010. If economic forces cause one to rise or fall, the other will follow. This applies to SV as well. As Pleasanton falls, more people will move there from SV, reducing demand in SV, etc.

    Obviously all of this takes time to play out, but it will play out. I’ve heard so many people defend how their town/neighborhood/street is somehow “different” than everywhere else, and sooner or later they are always proven wrong.

  20. nomadic Says:

    Greg, a central belief here on burbed is that nowhere is “special” or “different” – except the RBA. And those who can’t afford to live in the RBA hope to live in close proximity to it to bask in their glow.

    It is different here. It’s the sushi.

  21. SEA Says:

    “In terms of areas being “different,” nowhere really is.” … “If economic forces cause one to rise or fall, the other will follow.”

    It’s official now: The BA, RBA, and Detroit produce exactly the same returns on investment. And those homes built on former Superfund sites? Not a different area.

  22. Greg Fielding Says:

    “It’s official now: The BA, RBA, and Detroit produce exactly the same returns on investment. And those homes built on former Superfund sites? Not a different area.”

    Homes built in bad spots were worth less when they were built, less today, and less tomorrow than homes in better spots. By saying nowhere is “different” I’m not saying that all areas are equivalent. I am saying that nowhere is immune to the popping bubble and struggling economy.

    And, for what it’s worth, a $20,000 home in Detroit is probably more likely to double in the next decade than a $400,000 home in the Bay Area.

  23. SEA Says:

    “By saying nowhere is “different” I’m not saying that all areas are equivalent. I am saying that nowhere is immune to the popping bubble and struggling economy.”

    Are you saying that all areas are not equivalently subject to the popping bubble and struggling economy?

  24. madhaus Says:

    Greg, there is indeed a relationship between home prices in Palo Alto and home prices in Pleasonton, but the ratio between these prices is not unity. Not only does the ratio vary, it varies for many reasons. One of the biggest reasons, of course, is that Palo Alto is Special and Pleasonton is Much Less Special. Livermore is more Not Special than So, and Tracy is near as UnSpecial as Stockton.

    What makes Palo Alto more Special than each of those cities to its east? Better weather. Higher paying jobs nearby, and many more of them. More sushi of higher quality. The Tesla dealership. Grocery stores selling cheeses you can’t pronounce properly unless you’ve been to whatever little village in Southern France first came up with the recipe. And a complete lack of empty space to build more houses.

    I know you think all places are subject to economic forces. That’s true. But those forces play differently in different industries, and last time I checked, high tech here is still hiring.

    Do you need me to follow up this feature with what you can buy for $579K in Silicon Valley? It would make the five homes shown in Sunday’s feature look downright luxe.

  25. SEA Says:

    Changes in consumer behavior are often difficult to predict.

  26. If You Can Read This, It Should Be Old | Burbed.com Says:

    [...] Saturday, we heard from Greg Fielding on Case-Shiller tiers.  On Sunday, we saw some examples of just how much house qualified for the “upper” tier (the [...]

  27. cardinal2007 Says:

    In terms of areas being “different,” nowhere really is. We are all connected. Sure, Pleasanton is worth more than Livermore. It was in 1980, 1990, 2000, and 2010. If economic forces cause one to rise or fall, the other will follow. This applies to SV as well. As Pleasanton falls, more people will move there from SV, reducing demand in SV, etc.

    While I think this is true, there are two nationwide trends that will lead to the percentages to change.
    1. Gasoline has gotten significatly more expensive in the 2000s. I believe this has really taken out steam from exurban projects that were popular in the late 90s through the boom. (Gas prices were already kind of high in 2006, but the boom was hiding other trends)

    2. Walkable business/shopping areas like downtown MV, downtown SM, and so on have become a lot more popular since the 80s, I’ve talked to people who where in the Bay Area in the mid 90s who would’ve said the hills were a lot more valuable than a nice house near downtown X, whereas nowadays that trend is the opposite, people value being close to a downtown, hence one of the reasons I liked the Peninsula.

    I think we also got a lot more growth in the low end in percentage terms during the bubble (even though incomes grew faster in the high end) so the correction would have to be harder on them.

    SEA Says: Changes in consumer behavior are often difficult to predict.

    That is true, maybe 20 years from now places like Santana Row will be seen as undesirable, while malls make a comeback, and people will once again move to the exurbs, but who knows. Maybe waterfront properties will be all the rave, while hillside views become less valuable. I don’t think anyone really predicted 25 years ago the small downtowns would become relatively more valuable, while the hillsides less so. Or maybe they did and didn’t tell anyone, just quietly buying and selling property based on these trends.

  28. SEA Says:

    “I don’t think anyone really predicted 25 years ago the small downtowns would become relatively more valuable, while the hillsides less so.”

    25 years ago? There are plenty of REALTORS who seem to lack the ability to price a property today.


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