GDP Falls, Stock Rallies

Why am I saying that the median home prices in the stronger markets (i.e. the South Bay region of Los Angeles) is near a bottom? It is because the stock market is telling me so. The stock market charts allow you to see the investor sentiment. Investors speculate about the future and go "long"--which means buying shares of stock--if they think the share price is going up. They will go "short"--which means selling shares of stock--if they think the share price is going down. The investor sentiment can be seeing by looking at the trend in stock market price to see if investors are long (or "bullish") or short (or "bearish"). It is generally said that the stock market will bottom out and start improving six to nine months before the general economy, so this is a way to fortell the future--but this is not an exact science.

Before looking at the stock market, let's look at the overall picture of the economy. A general measure of the economy is the GDP--Gross Domestic Product--which is "the output of goods and services produced by labor and property located in the United States." The GDP is reported quarterly and is in comparison to the previous quarter. If the GDP number is positive, it means that economy expanded compared to the previous quarter. If the GDP number is negative, it means that economy contracted compared to the previous quarter. The chart below plots the GDP report from 1947 when they started to track it.



It's just a squiggly line! Well, the key to reading the chart is to see when the GDP is above zero (expanding) or below zero (contracting). You can see that the magnitude of the squiggles since around 1985 is much more orderly compared to the previous time period indicating that the government is paying attention and controlling it so it won't get too far out of control--preventing sky rocketing growth and bone crushing contractions. You will notice that the GDP stays above zero for most of the time--when times are prosperous. It is only occasionally that the GDP falls below zero which signals a contracting market and possibly a recession like we are in now. The GDP for Q4-2008 was -6.3% and for Q1-2009 was -6.1%. The current contraction is near equal to that in 1982 and only beat by the contraction in 1980 and 1958. In other words, the current recession is a pretty bad one considering all the history we had.

The chart above just shows the GDP for the last six years. You can see that Q4-2008 and Q1-2009 was a significant drop. In Q4-2008, the GDP contracted -6.3% compared to Q3-2008, and then again -6.1% contraction between Q4-2008 and Q1-2009. So, the economy bottomed out in Q1-2009 right? Not exactly.... If you compare Q3-2008 versus Q1-2009, you can say that the economy contracted a total of -12.4% (this is not exact as there is a compounding affect). In order for the economy to have bottomed out, the GDP number will have to reach above zero and go into positive territory. The US recession started in December 2007 and that was announced a year later in December 2008--it took the economist a year to figure out that things were already bad!

The GDP for Q1-2009 was released yesterday, April 29, 2009. The concensus was -5.0%--which means everybody expected the GDP report to come in at -5.0%. But, the GDP number came in at -6.1% which is significantly worse (22% worse!) than people expected. This is considered very bad news and usually causes the stock market to fall dramatically. But, the stock market rallied instead...


The chart above is a chart of the S&P 500 which is generally considered as the representation of the overall stock market. The green arrow in the chart above points to April 29, 2009 when the Q1-2009 GDP number was reported. Since it was a very bad news, I expected the stock market to fall but the market all but ignored the bad news and rose and even broke a significant resistance level at 874 that it has been trying to break for nine days. You can see that the stock market hit a near-term bottom on March 6 and has been rising since. The S&P index is over 30% higher than the March 6 bottom, so you can say we are already in a "bull market" which has a technical definition of 20% rise from a near-term bottom. Note the number the S&P 500 hit at the bottom--"666." From the calling card, you all can tell who was causing all this problem! But, there are still many investors who expect the stock market to fall even further than the March 6 bottom before really going up.... But when the stock market shrugs off such news as a very bad GDP and keeps rising, you gotta know that the stock market sentiment is "looking up" and that the end to the current recession is near.

James

http://jamesmakishima.com/

http://twitter.com/JamesMakishima

South Bay Home Price Change Trend

As promised in the previous blog, I'll be blogging about price changes in the Los Angeles County South Bay area. But before going there, let's look at the entire US market to understand what's happening. According to the California Association of Realtors, US Median price fell -9.8% from 2007=>2008. I found this to be quite incredible that the US Median price only fell -10% with all the talk on the news about collapsing home price. In the forty years they have been keeping record, it was only the second year where price fell--the first time was 2006=>2007 where price fell -1.8%.

Looking at California, the median price dropped -38.2% from 2007=>2008!! The previous largest year-to-year drop was only -4.5% experienced in 1992=>1993. The biggest price move was +28.1% increase between 1976=>1977. So, this -38.2% change in price is a truly unprecedented event for California.

Focusing onto Los Angeles County, the median home price for February 2009 was $298,000 which is roughly the same as the price in April 2003 which was $299,000. Of course when you figure in inflation, today's price would be much lower than April 2003 but let's keep inflation out of the equation to keep things simple. If you were to chart Los County median price which is around $300,000 to Redondo Beach which is $630,000 or to Lancaster at $116,000 it becomes quite difficult to chart and make sense. So, I've taken April 2003 as the "0" price point and plotted the price change as a percent from that point. The data used to plot these charts come from the California Association of Realtors.



In the chart above, Los Angeles County median price is plotted with the heavy red line. I'll use that as the reference point. So, In April 2003, the price change starts at 0% and it reaches a price peak of $550,000 (+85%) achieved between May-August 2007. Next, I've taken select Southern California areas for comparision. First take a look at the plots with the dashed lines. These are areas that experienced significant boom-bust cycles. I'm using Lancaster, Desert Hot Springs, and San Bernadino for this example. Lancaster went from $152,500 in 2003 to $338,000 (+123%) at the peak and collapsed down to $116,000 in Feb 2009. I pity those people who bought at the peak and have homes that are less than 1/2 of what they paid for... Desert Hot Springs went from $123,000=>$320,250 (+160%)=>$84,000 (ouch!) and San Bernadino that went from $120,500=>$328,250 (+172%)=>$83,000. Looking at the price range of these areas and the signifcant boom-bust cycle, you can tell that subprime problems had a major impact in these areas.

Compare that to the solid line areas like Cerritos, West LA, and Beach Cities. These areas did not have the boom-bust cycle of the areas mentioned before and the price is still quite a bit higher than it was back in 2003. Cerritos was $377,500=>$749,000 (+98%)=>$525,000. West LA was $492,250=>$799,000 (+62%)=>$646,500. Beach Cities (Manhattan/Hermosa/Redondo Beach) was $630,000=>$1,180,500 (+87%)=>$850,000. Don't get too hung up on the numbers--just understand that just because the "News" says prices in Los Angeles County has fallen -45% from the peak, it doesn't mean prices in all markets fell by that amount. These "stronger" markets have higher home prices and have very limited open land for new home construction. As a result, they did not get the full price boom caused by the subprime boom, but it also did not suffer the major bust caused by the subprime bust. So, don't expect to see similar price changes in Redondo Beach and Lancaster.



Finally, let's talk about the South Bay area where I am a Realtor®. There are only few cities that are large enough to have sufficient home sales to make meaning of the data. All the zig-zag you see in the plot above is because the data size is small and you can't get a smooth plot like with Los Angeles County median price where there is significant amount of data. So, for the South Bay price trend, first look at the heavy red dashed arrow. This is the general trend of Los Angeles County price. Next look at the channel bounded by the two green lines. This is the general price move for South Bay homes. In the first leg of price increase, you can see LA County and South Bay rise at around the same rate. In the second leg of LA County price increase (the shallower rising slope), South Bay prices top out and is pretty much going sideways. In the third leg which is the decline, you can see that the price of South Bay homes are declining much slower than LA County. Compared to the price trend above for Lancaster/Desert Hot Springs/San Bernadino which looks like it'll keep falling for quite a bit more, the South Bay areas look like they are seeing some kind of price bottom. Prices are still expected to fall until the end of 2009 to the beginning of 2010, but it doesn't look like South Bay areas have too much more to fall.

Before wrapping up, let's talk about reasons why median price fall. First, there is a general price decline. This is an across-the-board price decline that happens in recessive market. Second, there is a median price fall caused by a high number of low-priced distressed properties flooding the market. Even if the non-distressed properties stay at the same price, the large number of distressed homes will bring the median price down. Third, there is the mix change of type of homes being sold. Today, it's difficult to get a Jumbo Loan for homes above $700,000. This means the number of higher-priced homes (single family residential) being sold declines and lower-priced homes (condos) rise and will cause the median price to fall. The lower home prices are also driven by the higher number of first time buyers buying homes now. Today, all of these phenomenas are happening in every market to an extent. The different extent is what causes the difference in price change. Also, don't forget that the zig-zag on the plots are caused by small sample size--look at the larger trend.

James

http://JamesMakishima.com

http://twitter.com/JamesMakishima

Existing-Home Sales Slip but First-Time Buyers Rise

Nation-wide existing home sales slipped 3.0% in March 2009 compared to February 2009. So, why is this blogger (James Makishima—me!) keep saying “Buy! Buy! Buy!”?

Well, home price rose 4.2% nation-wide between February 2009 and March 2009. This is despite the First-Time Home Buyer percentage increasing to 53% in March. Typical First-Time Home Buyer percentage is around 40% so we are talking about a 32% increase in First-Time Home Buyer in March 2009 compared to a typical month. Also, First-Time Home Buyers typically buy lower-than-average priced home, so increase in First-Time Home Buyers should lower the median price—not increase like it did between February and March. Finally, the National Association of Realtors—according to CNBC’s Diana Olick—said 50% of the homes being sold are foreclosed homes or short sale. With the distressed home—which sells at a 20% discount on the national average--percentage increasing as well as the number of First-Time Home Buyers, prices should decline. So, why isn’t the price going down?

“Lawrence Yun, NAR chief economist, said the market appears to be stabilizing with modest monthly ups and downs, and that first-time buyers are driving the market. “The share of lower priced home sales has trended up, indicating a return of many first-time buyers, which we also see in a parallel member survey,” he said. “Sales in the upper price ranges remain stalled because of higher interest rates on jumbo loans.”

Why are there more First-Time Home Buyers buying houses now? The First-Time Home Buyer Affordability index is at a near-term high, interest rate is at a historical low, house prices are back down around 2003 level and they may qualify for an $8,000 tax credit. Even if today is not the bottom of the market in terms of price, home purchase is a very good value right now. If you do the math, a renter may find that it is actually more economical to buy than to rent a home. Another reason the First-Time Buyer percentage is increasing is because current home owners just aren’t selling their homes and buying another unless a job change requires relocation. If you bought a house anytime after 2006, the odds are you have lost equity with the house price drop. Yes, it is difficult to get a loan if you don’t have 20% down payment. But if you can qualify for a loan, it is a great time to buy a home now.

In my next blog, I’ll talk about the home price change in the South Bay area to give you a better picture of local real estate market.

James

http://JamesMakishima.com

http://twitter.com/JamesMakishima

Interest Rate Stays Low

Based on Primary Mortgage Market Survey released by Freddie Mac last week, the average interest rate for a 30-year fixed rate mortgage remained below 5.0% for the fifth week in a row. The average interest rate for the week of April 16, 2009 was 4.82% with 0.6 points for "fees and points" and is the second lowest weekly rate ever; following 4.78% during the week of April 2, 2009.

California Association of Realtors® "Housing Affordability Index - First Time Buyer" reached a recent high of 46 for the Los Angeles region for the 4th quarter (Oct-Nov-Dec) of 2008. That means 46% of house holds can afford to buy an entry level home in the Los Angeles region. This is at an affordability level last seen in 2nd quarter (Apr-May-June) of 2003. Affordability index largely takes in median housing price and prevailing interest rate to arrive at the index number. The high affordability index shows that it is as good time to buy right now as it was back in 2003.

People tend to be focused on house price, but interest rate is just as, if not more, important. Let's take an example of a $400,000 house you buy with 20% down payment ($80,000) and a 5% 30-year fixed rate loan (loan amount is $320,000), your monthly mortgage payment will be $1,717. If the mortage rate increases just 1 percentage point to 6%, the payment will increase by about $200 to $1,918. So, think $200 change for every 1 percentage point change in interest rate.

On the other hand let's say you put $80,000 down payment on a house and get a 5% 30-year fixed rate loan. For a house priced at $400,000, your monthly payment will again be $1,717. If the house price falls to $380,000 (still with $80,000 down payment) your monthly payment will go down around $100 to $1,610. If the house price falls to $360,000 (still with $80,000 down payment) your monthly payment will go down around another $100 to $1,503. So, think roughly $100 for every $20,000 change in price. You can do your own calculation from the Mortgage Calculator here to check my math.

So, in this example, if the house price falls another 10% to $360,000, you will save around $200 monthly. But, if the interest rate increases 1 percentage point to 6%, your monthly payment will increase around $200. In a strong housing market like in the Los Angeles County South Bay area where there are already signs of housing price bottoming out in this price range, which do you think is more likely to happen? Prices falling another 10% or interest rate increasing by 1 percentage point before December 1, 2009 (end of $8,000 Federal Tax Credit Benefit)? I'm not a gambling man, but I'd say the safe bet is to bet on the interest rate rising.

Price direction has a psychological impact on sellers. If the general trend is falling price, sellers are generally willing to negotiate a discount--since if they don't sell today, they may have to sell at an even lower price at a later date. If the general trend is increasing price, the seller will wait for the buyer to come up to their price. Given that the current price direction is still falling, the circumstances are better for negotiating a discount right now.

Price direction also has a psychological impact on buyers. Buyers tend to make low-ball offer that is significantly discounted from the asking price with an attitude of "if I can get it at a real low price, that's great. If I can't, I'll just move on to the next opportunity." Sellers, unless they are desperate for one reason or another, won't be willing to accept an offer that is significantly lower than the market value. This creates a big gap between the seller and the buyer and typically results in a failed transaction....

Considering the already good opportunity to buy a house now with the declining price trend, there is an opportunity to buy a house at an unprecedented value today.

James

http://jamesmakishima.com/

http://twitter.com/JamesMakishima

Is now a good time to buy?

Hello and welcome to James' blog site. I'll try to keep this on-topic--although I digress frequently--and just talk about Real Estate in a timely matter.

"Is now a good time buy? How close are we to the market bottom?"

This is a question I get frequently. I cannot predict the future--other wise I'd be at the horse tracks or a casino to make my living. However, I do know that things are aligned pretty good to call now a "GOOD TIME TO BUY."

National Association of Realtor's First Time Home Buyer Index for Los Angeles County in Q4-2008 was at 46% which is a recent-high as well as the index being similar to 2003 levels. This means 46% of families in Los Angeles County can own an entry-level home compared to 27% in Q4-2007 which is a 74% increase. Housing prices peaked in LA County in the summer of 2007 but compared to that, median home prices has come down -45% by January 2009. Interest rates are hovering around "historical lows" at below 5.0%. Also, if you haven't owned a home in the last three years, you may qualify for the Federal First Time Buyer's Credit and receive an $8,000 tax credit if you buy your home by December 1, 2009.

Also, with all of President Obama's Stimulus Packaging going into action, the general forecast is that the US will exit the recession in the second half of 2009 to early 2010. There is some expectation that house prices will bottom out and start increasing around the same time. Interest rates can't go much lower, so the expectation would be that it will start rising in the near future when the Federal Reserve Bank becomes concered with inflation.

Can you buy a house at the bottom of the market? Yes, if you are lucky. But you need to know that you can only know a bottom was made after the price has risen quite a bit. I think it's easier to negotiate a good price on a house when the median price is still falling rather than when the price is already rising.

Monthly payments associated with owning your own home may look much higher than the rent you are paying now, but when you take tax consequences and equity build-up, the two payment tend to look really competitive. Of course, if you own a home and pay it off after thirty years, you will no longer have to pay rent and may be sitting on a pile of cash called equity which appreciated over the 30 years. If you continue to rent, you'd still be paying rent after 30 years and won't have the equity or the appreciation possibilities.

All of the content of this blog is convered in my "First Time Home Buyer Seminar" so please register on-line to attend one of my presentation. This is a FREE seminar with NO OBLIGATION--but hopefully, you'll like me and select me as you Real Estate Agent.

James

http://JamesMakishima.com

http://twitter.com/JamesMakishima