The chart shows that nominal (ie. not inflation-adjusted) prices hadn’t shown an actual decline in over 50 years prior to 2006/7.  Real (inflation-adjusted) prices have fallen in previous recessions, though with the exception of 1980-82, those declines were pretty small.  This time round, though, we’re down big-time.

An inflation-adjusted annual average price growth of 1.3% sure doesn’t sound like much to me.  And that number’s not going up a lot even if you discount the suislide of the last three years.  Proof that a home isn’t a “good investment?”  I’ve never suggested that it is.

Doesn’t look a whole lot better even after you factor in leverage.  If you’ve put 20% down, the rate of return on your equity increases five-fold.  Now we’re up to a whole 6.5% gross return.  But that’s before all the expenses of ownership not to mention the endless lists of things “to do.”

Of course, the real reason to buy a home is because it’s about “shelter” in the broadest sense of the word.  It’s as basic as finding a comfortable cave for yourself and your loved ones and painting beautiful drawings on the walls.

Back in the still-uncertain days of September 09, every market pundit had his or her own letter for what shape the recovery would take. I blogged about Ben Bernanke’s “U,” Liz Ann Sonders‘ “V,” and Nouriel Roubini’s “W” here. Though one could argue the jury is still out, I think it’s fair to say that Liz Ann won round one.  The recovery is looking and feeling like a “V”  — and in fact is falling pretty much within historical patterns. (Full disclosure — I had my money on Nouriel.)

I recently spent 20 minutes listening to her most recent webcast, and it all sounds pretty seensible.  What I like about Sonders in particular is that she’s basically a contrarian. So many people are betting against the stock market’s phenomenal rise right now — and in favor of bonds — that she thinks that the bears are refusing to accept the fact that a solid recovery is in place.  I like the way she puts it in a related article:

Skeptics are often the loudest folks in the room, and the bear case is often the more “intellectual” case, but the market has a tendency to reward the minority view, not the majority view.

What’s all this got to do with San Francisco residential real estate?  One of her points touches on a theme that I’ve sounded here recently. As everyone knows, interest rates are likely to rise as the economy starts to strengthen and the Fed starts turning off the easy credit spigot.   Sonders is not predicting the stratospheric rates that occurred in the early 1980’s.  Nevertheless, it doesn’t take much of an increase in rates to have a significant impact 0n the amount of house you can buy.

Say you’re thinking about borrowing $700,000 on a 30 year fixed rate loan at the current rate of 5.25%.  Your payment would be just under $3,900 a month.  Now say that interest rates increase by just half a percent to 5.75%.  Your monthly payment would increase to just under $4,100 a month.  Maybe a difference of $200 a month doesn’t sound like that much:  a couple of fancy restaurant dinners would would cost the same.

But look at it this way.  Say that the the maximum you’ve decided — or the bank’s decided — you can afford to pay each month on your mortgage is $3,900 a month.  Now that half percent increase in rates means that the maximum loan you can qualify for is around $662,000.  That’s a loss of $38,000 in the amount you can borrow and the amount of house you can buy.

It’s also a heck of a lot of fancy dinners.

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• Investors Should Give the Recovery Some Respect — but Watch for Rising Rates (dailyfinance.com)

Another glorious winter’s day in San Francisco.  My family and I biked over the GG Bridge to Sausalito and then took the ferry back to Fisherman’s Wharf. Thirty-five years in this town and I’ve only done that ride twice.   The previous time was a week ago, to celebrate my 10 year old son’s new birthday bike.

2009 was not a kind year.  I feel very grateful that my family has come through in reasonable shape.  It makes it easy to appreciate the fine views and the fine weather.

Exactly a year ago, I officially launched this blog. It’s been enormously gratifying writing it.  First, it’s made me feel plugged into the market in ways both large and small.  Secondly, because I’m a visual kinda guy, those charts that I’ve tried to make a central part of  this blog have helped me understand and retain what’s going on in ways that columns of numbers just don’t.   Plus, I’ve learned a heck of a lot more about Excel — and, alas, its limitations as a database –  than I ever knew before.)

And finally, it’s been great to feel appreciated!   Though I sometimes joke that I have a readership of 7½, it is a loyal, thoughtful and appreciative one.  Well, that’s three of you anyway.

Happy New Year everyone!  My best wishes to each of you, and thank you for your support.

Does anyone really know what’s going on?  Despite the gloom and doom of my recent posts (Waiting for the Other Sheep to Drop, Alphabet Soup:  What Shape will the Recovery Take?), the latest publication of the Conference Board’s Leading Economic Index (LEI) on Tuesday trumpets:  “Fifth Consecutive Increase!”  The LEI is supposed to predict economic activity approximately 6 months into the future, so you’d think that a five-month run would mean it’s time to celebrate, especially given what looks like the impressive bounce shown in this graph.

(The Coincident Economic Index — blue line — shows what’s happening to the economy currently, and — no surprise — it shows we’ve bottomed out.)

To be sure, The Conference Board hedges its bets and says that while a recovery is near, “the intensity and pattern of that recovery is more uncertain.” You can find the full report here.

Meanwhile, today’s WSJ headline reads“Rebound in Home Sales Hits a Bump” , with national sales declining last month after four straight months of increases. (Thank you, X-Man, for the heads-up on this article.)

What does all this mean?  I think it means two things.  1. The worst is over.  2.  You might just as well go consult your magic 8-ball (“signs point to yes,” “ask again later”…) as consult the experts on what the recovery will look like.

I looked at percentage change from all time highs for condos and single family homes (sfd’s) since January 2003 and here are the results for the city as a whole.

Until June 2008, condo and home prices were in lock-step in terms of price appreciation and decline.   Thereafter, homes fell first and further. (Do I hear a lithp?) In March 2009, the delta between condos and home prices was a whopping 13%.  Since then, however, home prices have recovered smartly:  as of June, homes are about 4.5% further off their all-time highs than condos.

What does this all mean?  First of all, I wouldn’t take too much consolation just yet in the upward spike in both condo and home prices since the beginning of the year.  If you take a look at the chart, this happens every Jan/Feb when people start buying out of the winter doldrums.  I wouldn’t predict a bottom until we see what happens this winter.

Secondly, given the woeful condition of the economy and the credit markets, together with the fact that San Francisco is not a badly overbuilt housing market, it sort of makes sense that condos are holding their value relatively well as people are finding themselves priced out of more expensive single family homes.

Still, the current delta of only $100,000 between median condo and median home prices seems rather small.  If people are just begging to know what the historical average is, let me know and I’ll find out.

“Absorption” is basically the number of weeks it would take to sell all the homes available on the market based on the number of homes that are selling at that time.  (I’ve tweaked the formula to diminish the spikes caused by the huge seasonal dropoff in new listings each December/January.)   There are many ways to calculate absorption, but the basic idea is simply to capture how quickly demand is eating supply.  Less time to absorb the supply should reflect a “hotter” market where sellers can demand top dollar. A higher absorption rate, on the other hand, means that there’s relatively more listings on the market than demand for them.  That would tend to suggest a buyer’s market and softer prices.

In the chart above, we’d expect to see  median prices rising when the Absorption Rate line falls and median prices falling as the Absorption Rate line rises.  ie. an inverse correlation.

Well, I’ve looked at this chart long and hard and I just don’t see those lines moving that way at all.  In fact I’ve looked at similar data as far back as 2002 and the only thing that’s clear is that people forget about buying or selling a home at the end of the year. Look at 2006:  the market got tighter but prices stayed pretty flat. In 2007, stuff was being absorbed more slowly (the red line goes up), but prices went up anyway.  In 2008, you’d think that with only two weeks of supply available, home prices would be skyrocketing.  Obviously that aint happenin’.

I’m not an economist or a statistician, but I did get my dear wife, who eats statistics for breakfast, to check my methodology.  I think these results are quite counter-intuitive.  Here are the explanations I can think of.  Please chime in with your own:

• If you cut off the peaks and troughs, the Absorption Rate  mostly stays within a band of around 4 to 7 weeks.   That suggests that supply/demand in San Francisco is actually pretty stable.  And that in turn suggests that something else must be driving prices.  Note, for example, that my chart  doesn’t reflect the number of offers that are made on any particular house.  There might be 10 offers on a house, but at the end of the day just one house gets sold.  Anyone who was playing during the frenzies of 2005 – 2007 doesn’t need to be told how multiple offers affect price, but that sort of demand isn’t reflected in an absoprtion rate.
• Relatively speaking, San Francisco is not a stressed market.  Supply/demand is not hugely out of whack.  Foreclosures are not piling up (yet).  Under these circumstances, prices are “sticky.”  They don’t react quickly to changes in demand.  If people don’t get the price they want, what do they do?  They don’t sell unless they really have to.  And SF home-owners tend to be people who don’t have to sell.  More on this in another post.
• The price increases of the last few years and their recent tumble may are probably most directly attributable to one thing, pure and simple:  easy money.  That aint gonna show up on this graph either.

Conclusion:  “Absorption”  isn’t a good measure of supply/demand.

So is there any other metric that correlates more closely with changes in price?  How about the famous “DOM” — Days on Market.  This is how long a property takes to go from being listed to being sold.  The theory goes that when properties sell quickly the market is “hot.”  Why do properties sell quickly?  Probably because … there’s more demand than supply.  ie.  More people making offers, more people getting the loans they need, more people willing to waive inspection contingencies and buy “as is” just to get the deal done.  So maybe DOM actually does capture those muliple offers where the Absorption Rate just doesn’t.

So will DOM tell us how “hot” the market is and where prices are headed?  Or is DOM dumb.  Stay tuned….