Housing Market - Has It Bottomed?

The problem with attempting to gauge the bottom of any market is that you can*t know for certain if it has hit bottom "until it's past" and prices and rates have risen. Because I had slated this topic for the March newsletter over six months ago, the results of the latest S&P/Case-Shiller Home Price Index of the 20 Metro Markets struck me as particularly fortuitous. Home prices had fallen in all but one of metro markets surveyed, only the San Diego market had managed to eke out a gain from October to November. Admittedly, the gain was a scant 0.1%, but a gain nonetheless. That one market locale can be up while nineteen others are down is further proof of the adage "that all real estate is local".

The primary variables that are generally regarded as affecting a market turn around are: existing home sales; new home building permits; mortgage defaults; foreclosure sales; interest rates; and the Case-Shiller Index. Analyzing these factors enables buyers and sellers to identify whether the current market is trending up or down and whether it is in their best interests to be a buyer or a seller. It should be noted here that inflation, flow of funds into real estate, job growth, in- or out-migration, and the path of progress are also relevant, but to a lesser extent and for that reason they will not be addressed here.



Existing home sales is the pre-eminent indicator of real estate price trends. But, as such, the number of homes sold in a given month is just a number. What one wants to focus on is the moving 12 month average, because this removes the seasonality from consideration. By averaging the past 12 months' sales (locally), one gets a fairly accurate indication as to whether sales are slowing or increasing. When existing home sales are trending up, there are more and more buyers entering the marketplace which increases the demand for housing thereby driving up the price. When existing home sales are declining the demand is abating and prices are apt to weaken.

Nationally, the Existing Home Sales report for January 2011 from the National Association of Realtors (NAR) showed that:

* First-time buyers accounted for 29% of purchases, down from 33% in January
* Repeat homebuyers accounted for 48% of purchases, up from 47% in January
* Investors accounted for 23% of purchases, up from 20% in January
  In addition, distressed sales "foreclosures and short sales" made up 37 percent
  of the market.

Locally, existing home sales have been in neutral territory during the last two quarters of 2010. More recently, though January sales showed a 1.1% decline, prices increased by 0.9%


Another excellent marker is new home building permits. New home building permits are highly regarded in market analysis because 1) real estate construction is the largest single industry in the United States, and 2) homebuilders are highly sophisticated in analyzing the demand for housing. As with existing home sales, when builders pull more permits in consecutive months than they did previous ones, it is indicative that they think the market is improving and they want to be ready to break ground should other signs confirm as much.

The actual amount of new construction is largely irrelevant, just as long as it's not greater than the demand. The more new construction falls short of demand, the stronger the ensuing market. Fluctuations in supply will cause prices to ratchet up or down accordingly, as demand waxes or wanes. The number of new home building permits peaked last June. Since then, it has fallen into negative territory.


Residential mortgage loan defaults are also helpful in forecasting real estate market trends. Loan defaults are indicative of the strength of the local economy and its employment because job loss is the most common reason that borrowers become delinquent and lose their homes. If defaults are rising, it suggests that the employment market is weakening. As a result, lenders are apt to have an excess of REOs or foreclosure inventory that has yet to hit the market because job losses trigger delinquencies, which in turn become foreclosures. And, when supply exceeds
demand, sale prices fall until a new equilibrium point is established where the demand rises to equal the supply. Falling prices may also indicate that fewer loans are being modified and more and more loan payments are ratcheting upward, such that borrowers cannot keep up with the increasing payments.

When foreclosure filings are on the wane, it signals that prices are stabilizing and the employment market is strengthening. Recent data demonstrates that the monthly number of residential mortgage loan defaults in San Diego have continued to decline from 3,409 in June 2009 to 2,207 in September 2010. The 12-month trend shows that notices of default have been tapering since November 2009. So, the current data suggests that although homes sales are down, the local real estate market is stabilizing.


Foreclosures are the actual number of delinquency filings less the number of owners who have been able to bring their loans current. Lenders tend to dump foreclosures on the market 20% to 30% below the rest of the market, so they can clear their REO inventory quickly. The foreclosure sale becomes the new de facto value until sale prices change.

Foreclosure sales are a lagging indicator because they usually take place after the requisite 3 months have elapsed for the property owner to bring the arrearages current and an additional 15-day period for the Notice of Sale to be arranged. A rising foreclosure rate is usually indicative of two things: 1) the homeowner lacks any equity in his home, and/or 2) the demand for purchasing the home is more or less non-existent. In a normal housing market, a defaulting homeowner will be able to short-sell his home before the occurrence of a foreclosure sale. For this reason alone, diminishing foreclosure sales are more predictive of market bottoms than of market tops.

Market research shows that residential foreclosure sales have been trending down in San Diego since October 2009. While downward sloping, the rate of descent has also decelerated since March 2010. It should also be noted that the decline may, in part, be accounted for by lender paperwork problems and robo-signing scandals.

Also, since October 2009, the drop in the 12-month moving average has coincided with a decrease in the average amount of time required to sell a home in San Diego. This suggests that homes are currently under-priced vis-a-vis the demand. In any event, these factors are further evidence that the residential real estate market is recovering, albeit slowly.

The rate of deceleration in the 12-month foreclosure sales and the 12-month moving average may be attributed to banks being more amenable to short sales in lieu of foreclosing or the temporary moratorium on foreclosures that occurred last year. The time to receive lender approval on short sales has dropped markedly from 2009.

Short sales have always been in the best interest of both sellers and lenders, but it has taken a surprisingly long time for lenders to realize the obvious by hiring more staff and providing better training for their Loss Mitigation teams.


Mortgage rates aren't as much of a portent as they are an "exaggerator". Falling interest rates are a stimulant, while rising rates act as a brake on the housing market. Home prices are very much a function of a borrower*s monthly payment. When factors one through four above, signal that the real estate market is trending upward, then rising interest rates will retard the uptrend and decreasing rates will accelerate it. Conversely, when these factors suggest a downward trend, then rising interest rates will accelerate the down trend and decreasing rates will slow the decline. Even so, interest rates are not the key issue for buyers. Interest rate increases don*t act as a huge deterrent, per se, because home prices tend to decline in response to higher rates which offsets some of the increase.

Interest rates have decreased from April of 2010 until they hit 50 year lows in October. Then, thirty-year fixed rate loans were @ 3.875% and 5/1 ARMs bottomed out 2.75%. Interest rates have been steadily creeping up since the first week in November 2010. Their rise, if they continue, will act like a brake on the market. Higher rates will necessitate an accommodation in prices.

6. Case-Shiller Index

The San Diego Index (SDXR-SA) climbed in the first and second quarter of 2010 from 156.95 in January to 165.02 in July. And, as I mentioned at the outset of this article, San Diego was the only metropolitan area surveyed in the 20 city survey that showed a gain from October to November "modest though it was" at 0.1%. From November to December it retreated to 158.97, a decline of -0.7%. Nevertheless, the recent 12-month data shows a strong upward trend.

Just this past week (ending 2/24/2011) San Diego was shown to be one of two major metro areas in the S&P/Case-Shiller Home Price Index that closed 2010 with an annual gain, further confirmation that the region and other parts of the state are rebounding better than other U.S. areas from historic lows. Home prices in the San Diego area increased 1.7 percent in December from a year ago, according to the 20-area index, a leading economic indicator calculated monthly. The only other area to post a gain was Washington, D.C., with a 4.1 percent increase year-over-year. (The index has a two-month lag.) More recently, the NAR's Existing Home Sales report for January 2011 showed a price increase of 0.9% for homes in the San Diego market.


As we have seen new home building permits are down, mortgage financing is restrictive and while interest rates have risen, they still remain relatively low by historic standards. Consumer confidence is in positive territory, though it is lower than it was last summer. Home prices throughout San Diego County are starting to increase, according to the Case-Schiller Index, and residential foreclosures are slowing. With the exception of existing home sales, the factors discussed signify that the San Diego County residential real estate market is stabilizing. In fact, San Diego is now the 2nd highest ranking city out of 20 national metropolitan areas in the highest percent in quarterly home price changes.

Hence, the current data suggests that the real estate market in San Diego County is at a bottom. This is not true for all communities as real estate always has been and will continue to be a local phenomenon. Now is an ideal time for buyers to purchase a home for long term with the express purpose of living in it. It is, however, not the time to purchase a property for the purpose of "flipping it" since foreclosures still constitute over 26% of real estate sales in the state. Short sales and foreclosures will continue to exert a downward pressure on prices and preclude significant price appreciation in the near term. Price appreciation is heavily dependent on what is known as the *move-up* buyer and they will likely be in absentia until employment improves.

Copyright 2022 Rod Haase.  All rights reserved.