November 28, 2006

Uh-oh. Someone tell Greg Swann that Phoenix home prices are being reported as 46% overvalued at Smart Money / WSJ

At this point of the housing crash, arguing with a real estate pumping corrupt realtor in Phoenix is like arguing with a member of the flat earth society, so I won't even try.

Smart Money and the Wall Street Journal had this report out today on "What to do in a market that is headed for a falloff". Above all, I have one sane piece of advice that commission-hungry realtors like Greg Swann will disagree with:

DON'T GO OUT AND BUY A FRICKING HOUSE TODAY!

After hurtling along for years, the nationwide real-estate boom has come to a screeching halt. In 2005, home prices in the U.S. rose more than 12%; this year, the National Association of Realtors expects appreciation to reach just 1.9% -- the lowest gain since 1992.

Rising mortgage rates and selloffs by skittish real-estate investors have helped depress housing prices in many metropolitan areas. But there's another factor that many observers miss: the relationship between home prices and incomes.

When the cost of housing in a given area grows far faster than local wages and salaries, the pool of potential buyers shrinks, and prices are much more likely to sink.

According to Mr. Winzer, any market that's more than 30% overvalued is due for a correction. In the fall of 2003, only eight markets on the list of 152 fit that description; on this year's list, 37 did. Sure enough, price decreases are beginning to pop up in many of the markets that have shown up year after year as the most overvalued -- especially in Florida and California.

19 comments:

FlyingMonkeyWarrior said...

Dear Keith,
You tell him, he will listen to you.

Anonymous said...

This years appreciation is only 1.9%. Gimme a fricking break. The price peak was probably earlier this year in most markets. That is where the appreciation came from. we are 7% down from last october. but we are 15 down from the price peak (probably - no real numbers to back it up - yet).
BTW the 7% down from last year doesn't count the incentives to buyers (in sac they total to over 120,000 on a 400+ house) and dont cover the 15% co broke commission for buyers agent.
Cool.
Cow_tipping.

Tom DC/VA said...

If you go over to SmartMoney they have all the data in spreadsheet form. If you add another column you can see what they think the "fair value" is. For Phoenix they say 46% overvalued at $307K, so a fair value of $210K. The median hold income in Phoenix in 2000 was $41,207 according to Wikipedia. 5x (roughly ratio of national median household income to median home price) $41.K is $206K.

46% overvalued looks like a pretty good estimate.

Anonymous said...

Don't let Swann pump his blog. Pay him no mind. Seriously, he's a spooky guy. Talented writer, but as is the case with all talented writers, the prose is a direct view into the man's mind and character, and what you see there is not pretty.

honica jewinski said...

Wow, I can't believe they are still calling Dallas 18% undervalued. Dallas has seen HUGE gains in the past few years.

Mammoth said...

How do you know it’s a housing bubble? You know it’s a bubble when...

Great quote from an Anon on the November II thread:

“When working class houses in working class neighborhoods can no longer be bought by the working class, there is a serious problem.”

-Mammoth

LauraVella said...

Reno should be added to the list.

foxwoodlief said...

Tom dc/va, I wouldn't use Wiipedia for a guide, nor would I use 2000 income statistics to determine income ratio for a house in 2006 or 2007. I think Phoenix could support an average house price of more like $250,000, and maybe a little more if you take insurance and property taxes into consideration since many places are much higher on those two points.

Still most of my friends in Phoenix still don't believe their homes are overvalued, and definitely not by 46%. I've stopped trying to convince them. Just had friends out for TD and when tried to discuss the market there was told, not in my neighborhood. My friend's house is in Avondale north of I-10 and they paid $212,000 for 2500 sq ft on a large premium lot in 2001 and the last house that sold in their area in August went for $425,000 so they believe their house is worth at least $414,000 (the other had a pool and probably more upgrades). Zillow (which I don't believe) shows it at $365,000. I think the house is probably worth $250,000.

But then after the past year I've lost faith in my ability to determine value as I can't buy most homes for what I think they are worth and most sellers won't sell at those prices. So what do I know.

Anonymous said...

Hey it's easy to say the circus has clowns... Greg's got a big red honker, oversized shoes, candy-striped leggings, rainbow suspenders, a bright red wig, lots 'o face paint, a loud plaid jacket with daisy in pocket, a spinning bow tie, and a sign he spins on his website saying "Now's a great time to buy a home!!!"

Anonymous said...

Looks like the Phoenix market is ready for a Swan dive...

Tom DC/VA said...

"Tom dc/va, I wouldn't use Wiipedia for a guide, nor would I use 2000 income statistics"

Well, they cite the 2000 census for this data, and I've looked it up for other locations in the past and found it to be correct, so I think Wikipedia trustworthy for this data. But if you can cite data that is different for 2000, or any other year, knock yourself out.

foxwoodlief said...

Tom it isn't the data, though with wikipedia anyone can go in and edit or post data that isn't necessarily true (I'm afraid Honica will do that or maybe that is where he gets his info about jews).

It is that how relevant is using 2000 data for income to determine an affordable home price in 2006? For one, income may go up or down in an area depending on in and out migration of jobs and corporations. Here in Austin I think the income went down after 2000 with the loss of something like 67,000 high tech jobs and the loss of the value of stock options and is only now recovering.

In the case of Phoenix the median has gone up and in the next two years may go down so the point was you have to judge the market by current conditions and income and use past data as an average or baseline for where things are are where they are going.

I didn't mean to offend you and do agree mostly that the number one basis for any decision is "can you afford it" and not "can I endure the cost long enough to make a profit."

If you can't afford it, can't afford the loss, don't buy. I know that I'm considering a job offer in Monterey knowing that there is no way I'd pay $1,000 a sq ft to buy there so I'd rent, and rent well below what I'm use to living in to keep the rent payment affordable (I refuse to pay in rent what I can pay to own). And then I'm also weighing if earning less and staying here in my house in Austin makes more sense with California's high taxes and rent. The only reason I'm considering going to Monterey is my family is there and my parent's are elderly and I can't get them to sell their house nor can I convince them that loosing $4-500,000 when the market corrects is "real" money. They don't care since they have owned their house since 1962, paid $17,000 for it, and have very low taxes due to prop 13.

I feel obligated to live closer to them in the final years of their lives if I can't get them to sell and move here.

I'm sure there is data out there that is more current on incomes in Phoenix to use than the 2000 data.

Anonymous said...

For a little over 10 years I was a commercial real estate appraiser in the northern San Jaoquin Valley (CA). We did a lot of master planned community work and an offshoot of that was a study I did on trends in housing prices. I had access of detailed monthly data from about 1950 to 1994 (when I left the field).

Over that ~45 year period, the trend line of both average and median housing prices approximated that of the CPI. Of course, there were periods of over-performance (i.e. faster appreciation) as well as under-performance, but looked atlong term, or using a moving average, home prices generally tracked inflation.

There were two interesteting nuggets that emerged. One was that there was a decided step up in the prices line in the 1969-1972 era. Why? That was when a lot of women entered the workforce in high paying jobs and household incomes increased and stayed there.

The second nugget was an overlay of interest rates on home prices behavior. When interest rates were going up, home prices responded inversely or had no appreciation. When rates eased, prices went up. Why? Cost of ownership since nearly all homes are financed.

So, over long periods of time, home prices will generally track with inflation. Think about it: If inflation is, say 3.75%, and housing "always" averages 6% a year, at some point in time, no one can buy a house anymore. the example: "Middle class income of $75,000 a year; 30 years later when Junior gets his middle class job (at 3.75% inflation) he makes ~$230,600. Mom & Dad's middle class house starts at $300,000, 30 years later (at 6%) when Junior wants to buy on the street he grew up on, it's $1,806,700. -or- Mom & Dad's house cost 4x household income and Junior's house is ~8x.

If you go another 30 years, Mom & Dad's grandson has to pay 15x earnings for that house.

Long term, housing is a basic need, and income levels can only support a certain appreciation level.

Athol Kay said...

Love how you forgot to quote from the WSJ article;

"David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will bounce back in 2007. He adds that one-third of the country is primed for growth -- a claim that Mr. Winzer's research supports." (WSJ)

http://therealestateguide.blogspot.com/2006/11/housing-panic-watch-1-see-keith-spin.html

FlyingMonkeyWarrior said...

Athol Kay Realtor got hooked on HP!
hahahahahahah

Athol Kay said...

I believe the word you're looking for was "owned" rather than "hooked".

Anonymous said...


"David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will bounce back in 2007. He adds that one-third of the country is primed for growth -- a claim that Mr. Winzer's research supports." (WSJ)

How could you overlook an ironclad source like the big D ? After all, he researched it.

The other night I ran into an old acquaintance who is an appraiser. I asked him what he thinks about the current inventory levels and sales volumes and he mumbled something about the market normalizing as it cools off to a soft landing..blah blah blah. All I could say was "sounds like a good time to buy" and laugh my ass off.

Anonymous said...

To the above Anonymous: the key is the last phrase: " -- a claim that Mr. Winzer's research supports."

Also, I'll clear this up: Athol Kay powns HP.

Anonymous said...

Wow. Riverside / San Bernadino are number one, at something.