Wisest of the crowds

More news from the Commerce Department (pdf) yesterday - the number of homes sitting empty has increased fairly dramatically. Homeowner vacancy increased to 2.8% from 2.1% and rental vacancy increased to 10.1% from 9.5% versus the first quarter of 2006. That means that there are now almost 4 million units for rent, 2.2 million houses for sale and 7.3 millions units vacant for no apparent reason (dead cities?). When looking at homeowner data by area, cities increased 60% to 4% occupancy, Metropolitan Statistical Areas increased 45% to 2.9%, and suburbs increased 33% to 2.4%. Regionally, the South has both the highest rental and homeowner vacancy. The data below:

The Commerce Department released more data and analysis confirming what we know - that housing is dragging the economy. The economy grew just 1.3% (preliminarily) for the first quarter of 2007. From the press release:

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending.

Here is a chart of GDP going back a few years:

As you can see, things haven’t been this bad since Q1 2003. The markets largely shrugged this off but home builders took it on the chin:

Most of the big names down around 3% but the index as a whole finished down just 1.52%

People Magazine names Drew Barrymore as its most beautiful woman. What the bleeping $%^%$*!!! Unless People Magazine is looking beyond skin deep (which it should), this is absolutely off! (Drew, we love ya but come-on…)

Okay so this is a perfect example of why Wisdom of the Crowds is SOOOOOO much better than the “expert” paradigm that we are just starting to shake off. People Magazine probably has some complicated relationship with the various parts of the Hollywood ecosystems resulting in this warped beauty contest outcome.

Do I really care that what People Magazine thinks?? NO! This is just an example of why social media will persist - it is inherently democratic and therefore structurally superior in reflecting the current zeitgeist. We the People will decide for ourselves thank you very much.
People Magazine should either re-tune its pop culture antennae or consider changing its name. How does Studio Boss Magazine sound?

Looking for a great buy-rent analysis tool? Go no further the the New York Times. My friend Kevin Boer blogged about it here, and I have to further endorse this product. Very cool Ajax interface and has all the things you need to understand the issues. Warning! Do not accept their base assumptions, some of which are in “Advanced Settings”, “General”. The main value to a tool like this is playing with different assumptions so that you can understand the real drivers. I have inputted some assumptions below based on a friends analysis of spending $6,850 to rent a house that might ordinarily cost him $2 million in San Francisco (yes, these are real numbers…it is that expensive here!).

Three Key Assumptions:

- Housing Value increase 4% per annum

- Rent increases 2% per annum (San Francisco is largely rent controlled)

- Investment returns of 6.5%

You can see there is no scenario that allows one to buy versus rent. So what does it take to get the buy-rent math to justify buying? Well if you increase housing prices to 5% increases per year then you get a break-even point of 7 years and if you increase it to 6% then you get a break-even point of 3 years. Although I held investment returns constant at 6.5%, prices increases for housing coincide with general returns in assets so realistically I should probably be increasing investment returns with any increase in house price appreciation . Why is this relationship so important? Because when you have money tied up in your house, that money is no longer available to invest. If you are a crappy investor no problem. If you know your way around, this makes the math even more difficult. So if I increase investment returns to match my original assumptions of 4% appreciation and 6.5% investment returns (2.5% spread), then the following buy-rent trade-off emerges:

So buying is better after 5 years but the gets worse at year 15. Why? Compounding. It seems the real issue is what is the relationship between housing returns and investment returns…something I will blog about in the future.

What was my recommendation to my friend? Rent and look for a distressed seller.

Local Resources:

San Francisco Assessor-Recorder

City of San Francisco Rent Board

My post yesterday entitled “Dead Cat Bounce Revealed” was further confirmed today when the Commerce Department released their March 2007 data (PDF) for New Home Sales that showed a slight increase nationally over last month but terrible data versus a year earlier. Inman covered it here. Here are the facts:

- Nationally, the new home sales increase 2.7% versus February but down 23.5% versus same month last year
- The Northeast is the only bright spot, showing an astounding 50% increase versus February and 18.0% versus March 2006. Note: the Northeast accounts for only 8.4% of the national sales transaction as of the latest data.
- The West is the worst performing region and was down 0.9% versus February 2007 and down 29.6% versus March 2006 . The West accounts for 25.2% of National activity.

- Months of supply decreased to 7.8 months from 8.1 months

- There was no discernable shift in price point composition.

By the way, the dead cat bounce reference is one used by pro’s in the financial markets to describe how a bear market rally bounces similarly to how a dead cat bounces off of the pavement (hint: modestly). Tasteless, but there it is!

Kenneth Harney pens another interesting piece entitled How ’systematic inattention’ led to subprime fiasco. My favorite line:

Ninety percent of the appraisers in a 2006 national survey by October Research Corp. said they had experienced threats, nonpayment of fees and other forms of coercion. Many said they had lost business by refusing to play the game.

Harney also details a few scams worth a read but perhaps the key point is that the commercial incentives of banks and other intermediaries are wrecking havoc on the reputations of appraisers. Is it time to re-examine incentives and better structure the industry? Should buyers hire appraisers rather than bankers and agents? I discussed this earlier here.

The National Association of Realtors reported existing homes sales today (the press release). The data was scary and probably indicated the first quarter activity was a knee-jerk reaction by consumers who were sidelined the previous quarter. Of course this didn’t stop the NAR from spinning it as Matt Carter at InmanBlog noted in his excellent post, “Again with the weather”.

Here are the facts:

- Nationally, sales declined 8.4% versus last month and is down 11.3% versus last year.
- The West was hit hardest, being down 9.1% versus last month and down a whopping 16.7% versus last year.

- Median prices were up 1.6% nationally but down 1.8% in the west versus last month

- Inventory declined 60k units (1.5%) to 3.75 million units but because of faster declining sales, the number of months of supply actually increased to 7.3 from 6.8 a month earlier.
- This monthly decline was the largest since 1989 according to the Associated Press via MSNBC and the NYT

What does this all mean? Probably just that there was a “dead cat bounce” in interest in the first quarter of 2007 after the unbelievably slow fourth quarter of 2006. This happens all the time in financial markets where people attempt to bottom pick a falling market resulting in a series of rapid, but ultimately unsustainable, bounces. If this is in fact a dead cat bounce, look for prices to go substantially lower. From my experience as a trader, it will only be when people loose hope that a bottoms in prices gets set. Did you know that more people lost money in the 1929 crash buying stocks 50% below their peak?
Having said all this, markets are hyper-local and what’s true generally can be completely untrue for your neighborhood or street. If you live where new supply is negligible and high-paying jobs abundant and secure, don’t sweat it. If you live in a place where new construction in plentiful and excessive credit rampant, look out (sorry Florida)!

Side note: My-Currency markets are predicting lower prices in many san francisco zip codes over the next 3-6 months. An example for 94117 (Haight, Alamo, Ashbury Heights, Cole Valley)

Since returning to SF from London a little over a year ago, my wife and I have delayed looking for a house until we have decided where we want to live. Our eldest child just went through the interview process in the private schools (San Francisco public schools are poor with only a few exceptions) and lucky found a spot so we are only now truly testing our will to raise our kids in the City.

I spent all day looking at single family houses across the city’s open houses. Here’s how my search went:

-Started with Google base via My-Currency (developement site) for listings

-Re-Checked listings at SF MLS (this site sucks!)

-Re-re checked listings at Trulia and Redfin

-Re-re checked listings at various local firms

-got annoyed at the fragmentation of listings

-Found a few properties

-Checked for tax & prior purchase records at Zillow (some there, some not)

-Checked analytics at My-Currency

-Checked analytics at Trulia

-Read Robert Shiller’s assessment of housing and got scared (recommended reading:”Long-term perspectives on the current boom in home prices”, March 2006)

-Tried to find a good open homes site and failed so grabbed the SF Chronicle Sunday pull-out (yes paper…I still read paper).

-Got annoyed that I had to type in the addresses of a bunch of properties to decipher agent language about location (hint to one exuberant agent: Lyon at Geary is NOT Lower Pacific Heights jackass - not even close!)

-Reviewed some of the price predictions for square feet in various zips in our alpha site.

-Got annoyed again that this is taking so long

-went to open houses

-got frustrated with descriptions that are BS (hint to another exuberant agent: a large closet off of the kitchen is NOT a bedroom unless your dog or cat need bedrooms in your house)

-got pitched by 10 agents (unsuccessfully).

-Learned that one property sold for a whopping $600k over to $3.5 (this may be a lie since the agent was using it to justify her pricing)

-Came home after a full day of research and tours exhausted and feeling no smarter

We real-estate entrepreneurs have a lot of work to do to get this right because this is taking too long, there is still substantial holes in the listings aggregation of all sites including the MLS, and is is still difficult to get things down to numbers. Here’s my review: For listings go to Redfin (only a few cities) or Trulia. For tax and property records Zillow or Redfin. For statistics Trulia. For open house, go fish. For area price predictions and agent reputation, My-Currency (coming soon!)

Today, Easter Sunday, the New York Times takes advantage of its prominence in the psyche of the educated and well read by putting Real Estate front and center. The first article sits in the right hand column of the front cover and discusses the impact of the housing contraction on State tax revenues.

Entitled “Housing Slump Pinches States in the Pocketbook”, Abby Goodnough’s article was thorough, some highlights follow:

Florida is projected to have tax revenues drop for the first time since the energy crisis of the 1970’s.

-NJ could have a budget shortfall of $2.5 billion by mid-2008

-California could have a $2 billion shortfall this year and next

-16% of Floridians and 30% of californians use home equity loans to buy cars

The second article, from a NYT regular (and a personal favorite), Gretchen Morgenson, is on the cover of the business section. Entitled “Home loans: A nightmare grows darker”(premium), the article discusses the sub-prime mess and suggests that well intended social engineering led by the Clinton administration is the cause of the mess. Highlights:

• Sub-prime accounts for one-eight’s of mortgages and 60% of foreclosures

• -President Clinton and HUD Secretary Cisneros encouraged the private & non-profit sectors to find solutions to increase homeownership. Outcome: ownership rose to 69.2% from typical range of 60-65% but was built on mis-leading “innovations” such as teaser interest rates that are resetting substantially higher, extending maturities out to as much as 50 years, interest only loans , and discontinued use of escrow accounts to collect real estate tax and insurance expenses.
• -Best quote: “We’ve created a society that loves the term homeownership, yet we can’t allow people to understand that they are being taken advantage of by the term” - Josh Rosner, MD at Graham Fisher.

On a local front, the Real Estate pull-out of the SF Chronicle Examiner’s lead story entitled Boom and Gloom by Marni Leff Kottle

• -Places like San Francisco, Palo Alto, Marin County are doing well while cities further out are doing poor

• -2.2 million Americans could wind up losing their homes to foreclosure over the next several years.

• -Quote: “People are paying a lot for schools and for shorter commutes on the west side of Silicon Valley and up the Peninsula toward San Francisco,” said Mark Burns, president of the Silicon Valley Association of Realtors

Real estate markets are hyper-local and now that the bloom has come off, this will become more and more apparent. Sub-prime versus Super-prime. City center versus suburb. SOMA neighborhood versus SoBe neighborhood. Bush Street versus Jackson Street. The house at148 Jackson versus the house at 156 Jackson. Talk of a “market” needs to be cleaned up and better described because it doesn’t really exist as a market.
Having said all that, there are common touch points that make real estate a market from a macro-economic perspective: Cost of money, local employment and income, demographics, and population changes. Of course one of the biggest is buyer and seller psychology of the future prices.

Today, as I spend the day with my kids and prepare them for a holiday with their grandparents, in the background I ignore my blackberry buzzing and my phone ringing knowing all along knowing what is at work - one of the largest players in my vertical has moved the ball further and in my general direction. I admit I was expecting it but what surprises me is how indifferent I have been to their impressive announcement. Perhaps I was expecting them to up the anti even more or perhaps I am just happy to be in the intellectual company of some really smart entrepreneurs. They see what I see but are just going about it differently.  Plus, I got a free ride on their press thanks to Matt Marshal at VentureBeat and Rafe Needleman at WebWare. Congratulations Rich and Lloyd! You guys are making this fun!