Wednesday, May 21, 2008

House price mosaic

(Calculated Risk) Last night I posted a video from Jim the Realtor showing an area of Oceanside, CA with numerous REOs. Jim has an REO listing in the area and he sent me the details.

260 Securidad, Oceanside, California
2 Bedroom 1 Bath, 820 sq ft
The house sold for $318,000 in July 2004, and the owner refinanced a year later for a total of $375,000 in loans.

The house is now listed (REO) at $127,900, and there are several bidders (investors and owner-occupant buyers) and Jim believes the property will sell for between $140,000 and $150,000. Note: the house is in good condition (for what it is) and appears to be move-in ready.

This is about 55% off the previous sales price and even more off the apparent appraised value when the homeowner refinanced.

This brings up a key point: house price changes vary widely by area, not just by state, but even within cities.

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San Diego Case-Shiller Index Click on graph for larger image.

This graph shows the Case-Shiller Home Price Index for San Diego. Prices are off by about 24% from the peak in 2005 according to the Case-Shiller index, but the Oceanside REO is off by about 55%.

Obviously areas with numerous foreclosures have seen larger price declines than areas with fewer foreclosures.

The following map of Denver, from an article by Luke Mullins at U.S. News and World Report, illustrates this point. Some areas of Denver are being devastated by foreclosures, others are mostly untouched.

Denver House Prices by Area From the USA Today: Mortgage defaults force Denver exodus
Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live.
...
On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.
But prices in the areas untouched by foreclosures are actually flat, or in some cases have even increased slightly.

What does this mean for future prices? First, some areas are probably close to a price bottom. Looking back at the REO in Oceanside, we can see that this property is now attractive to investors. According to Jim, this property will rent for between $1000 to $1200 per month. Here is a simple cap rate calculation:

Cost: $140,000
Rent: $12,000 to $14,400 per year
Expenses:
Taxes (1% in California): $1,400 (note: no Mello Roos or HOA fees)
Vacancy: 5% or $600 to $720 depending on rent.
Maintenance and Insurance: $1,400 per year.

This yields a cap rate of between 6.1% and 7.8% depending on the rent. Investors provide a floor for house prices, and these are attractive cap rates for some small investors.

But what about prices for areas with fewer foreclosures? These prices are still sticky, but will continue to decline. From Peter Hong at the LA Times yesterday: At the luxury end, home prices are falling
You can't have one market hugely cheaper than another forever," said UC Berkeley professor Thomas Davidoff, who specializes in real estate.

Davidoff and others say the time lag stems from the fact that affluent homeowners generally don't have to sell under duress, unlike struggling borrowers facing escalating mortgage payments. But wealthy homeowners are increasingly finding out that if they want to sell their homes, they will need to discount the prices.
Housing Chain Reaction In the end, the housing market is linked as shown by this graphic.

Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of first time buyers will eventually impact the entire chain.

Over time the equilibrium between different price ranges will return, but the price dynamics will be different. Areas with a large number of REOs have seen much faster price declines - and are probably closer to the price bottom. Areas with fewer REOs will exhibit "sticky prices" and the prices will probably decline for some time.

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