IS THE HOME MARKET WEAK? STRONG? SIDEWAYS?
It’s confusing to go by the headlines and even much of the coverage, that’s for sure.
So for a moment, disregard what you’ve been reading about home prices lately, step back and take in the big picture in OC, as officially tabulated:
Home prices, after doubling from the year 2000, have fallen 7% since last June. The volume of year-over-year sales has declined for 15 straight months, suggesting further pressure for lower prices.
Simple enough. But why do the news reports suggest prices all over the board?
Believe it or not, when the Business Journal had its interview with Donald Bren a few weeks back, the Mr. Big of OC, California and arguably all of U.S. real estate, lamented the very same thing. If Bren is perplexed by the numbers, the rest of us are permitted to be, too.
Here is a helpful guide (offered by a longtime business journalist who has never made a good real estate deal, so consider the source):
When you see a headline about housing prices being up, down or flat, check to see if the change being referenced is year to year, or month to month, i.e., if it’s February, is the change from January, or from a year ago February?
Year-to-year is good for tracking sales volume, which is subject to seasonal fluctuations.
For prices, follow the month-to-month.
But that’s not always easy to do, because newspapers love to highlight the year-to-year price change,which doesn’t make much sense.
Sure, you might decide December’s a lousy time to hunt for a house, what with all of the office parties and gift shopping. That thinking affects sales volume. But if you’re listing your house, you base your asking price on what other homes have been going for recently in the neighborhood. You don’t look at the calendar and say, “Omigosh, November has slipped into December, so I have to knock $20,000 off my asking price. But if I can hold out until January, I’ll be able to add it back in.”
(A caveat,you might indeed say that in December if you’re a big homebuilder, which I cover in the parenthetical below.)
Reported OC home prices are flat year-to-year only because we have an inverted “V”,prices rose from January to June of 2006 and have fallen since.
Whither from here? Month-to-month will reveal more than year-to-year.
Now, a year-to-year price is better than month-to-month for gauging appreciation, and I suspect some of my colleagues at the dailies will argue that’s why they’re partial to that number.
But a one-year snapshot is mainly useful to speculators, not the Average Joe. If newspapers want to track appreciation, they ought to report not only year-to-year price changes, but three, five and 10-year numbers.
There’s much more to take in. Sometimes the reported numbers are just new homes, or just resales, sometimes both,all with different price points. Has a big new subdivision or rash of condos come onto the market, altering the sales mix and thus affecting prices? Are we looking at escrows or closings?
(December presented an intriguing aberration,a 5% month-to-month upward spike as builders dumped new, higher-priced homes on the market for end-of-year purposes, followed by an offsetting 5% drop in January as the market returned to “normal.” In this December instance only, I concede focusing on the monthly number is misleading.)
Keep in mind, too, that in a soft market, builders and other sellers make concessions that help to buoy the sticker price,upgrading the carpeting, adding more landscaping, leaving the nice chandelier,and mask the price weakness.
There’s another factor to consider: The numbers are probably wrong.
Researcher DataQuick, using what it says is new and improved methodology, just revised 19 years of numbers. The trends didn’t change, but it turns out the old data understated sales considerably and somewhat overstated the price run-up of early 2006.
I presume statisticians do their best, but theirs is an inexact science.
Consider as another example of fallibility the state’s habitually adjusted job figures, which fail to adequately gauge the impact of small and startup businesses and of part-time employees.
The official numbers are most reliable for being unreliable, understating both downturns and upturns.
Just last year revised numbers showed the state had understated job creation in OC in 2005 by 50%.
I wouldn’t be surprised if we were now experiencing a similar disconnect between numbers and reality in the housing market.
The anecdotal evidence suggests to me that even accounting for the inverted V, that housing prices are already lower than they were a year ago.
But that’s just a hunch.
Who knows for sure? Not even Bren.
,Rick Reiff
