The idea of a housing bottom is intriguing.  First, we need to put the entire housing rise to fame in perspective.  Housing has never declined on a year over year basis since the Great Depression (that is until this current housing market).  That is an astonishing accomplishment in itself and it is easy to understand why many wrestle with the idea that housing simply cannot go down for a long duration of time.  It is also the case that this mental archetype which is so ingrained in the psyche of the American public is creating a desire for finality or a bottom to the current housing problems.

It is understandable that a generation that has never seen home prices on a nationwide scale fall on a year over year basis feels that what is going on is simply an anomaly.  A Black Swan event in a orderly and efficient market world.  The Case-Shiller Index has been tracking a composite of 10 large metropolitan areas since 1987.  This has come to serve as the de facto rubric of measuring housing price declines since it looks at same home sales over time as opposed to looking at sales of many different homes in one given month.

There are futures traded that are derived from the Case-Shiller data.  This makes it useful to look at what people are speculating future prices will be.  Like the stock market, even though it isn’t always accurate at least at any given time you can determine the “market” price of a company.  The futures are sold and have contracts up until November of 2012.  I went ahead and compiled the data into a chart to give you a picture of whether futures traders see a housing bottom:

There are 4 points on the chart that I want to draw your attention to.  I’ll try to summarize as best as I can what occurred during these periods.
Period #1 - 1987 - 1997:  The boring years

During this time housing on a national level simply kept pace with inflation.  In fact, prices over this decade long period were woefully underperforming.  Now you may be saying to yourself that during the decade, there was no home speculation and people were simply more restrained in their risk taking.  All we need to look at is the massive speculation that occurred in the technology bubble which engulfed the nation during the 1990s.  People were making 30, 40, and even 50 percent year over year gains so the desire to speculate in housing wasn’t even an idea born in the minds of many.  Sure, you had your real estate moguls out there but this was by far a small subset of the population.  Exotic mortgages made a tiny nearly insignificant portion of the market and housing was truly viewed as simply a place to live.
Period #2 - 1998 - 2006:  The speculative boom fever

After the technology bubble burst in the early part of the decade, the economy entered into a recession.  Normally housing during recessionary times contracts because people pullback in their demand for housing if they feel the economic situation isn’t positive.  This time it did not occur.  Now there are a variety of reasons why housing took off during this decade:

(a):  Negative rates:  The Federal Reserve dropping rates to historic lows thus fueling easy credit.

(b):  New exotic mortgages:  Provided maximum leverage to new home buyers.  Subprime, interest only, and option ARM mortgages made there way into the market.

(c):  Chasing higher yields:  Hungry for higher yields, foreign investors ate up these bonds and thus provided further liquidity to the market

(d):  The housing history novel:  Housing never had fallen before so why would it fall now?

These and other forces combined to create one of the biggest speculative bubbles in the history of the United States.  At the peak it was estimated that residential housing wealth hit $24 trillion.  This indeed was a good time.  New products fueled a new wealth renaissance with people having the ability to tap into their mortgage equity and it would appear that consumers had found El Dorado.  This in turn fueled the consumer economy since people feeling wealthier and having access to credit spent in droves.

Period #3 - 2006 - 2007 (The Peak):  Doubt creeps into the market

The peak hit in 2006.  When the peak hit leading indicators such as home sales started to decline and prices started to slow down in growth.  The reason housing has reverted so quickly is the magnitude of the increase was predicated on continually having high rates of growth.  This was unfeasible.  The slightest decline and that was it for the housing market.  This setoff a chain reaction that we are now enduring.

During the peak years which I would say were 2006 and 2007, there was a riff growing in the economy.  Things were apparently getting worse yet there was still a desire to keep the existing paradigm going.  Easy lending was still prominent yet cracks in the foundation were forming.

Things radically changed in August of 2007.
Period #4 - 2007 - present/future:  The bubble is pricked

The credit crisis for a large part of society came as an utter shock.  The idea that credit would become restrictive was something many did not anticipate.  People grew accustomed to the idea that their homes were going up in value each year.  Homes do fall in price however.  This lesson was painfully learned and many realized that prices can and will go down.  In fact, from the $24 trillion peak current estimates put residential housing values at $19 to $20 trillion.  That is, $4 to $5 trillion in home equity has evaporated in the last two years.  This is a painful realization for many.  Given that the futures market is predicting a bottom in May of 2010 with an additional decrease of 17.3% from current levels we are looking at another $3.287 to $3.46 trillion in housing equity to disappear.  This isn’t to account for the already $500 billion in credit related write-downs.

For those looking for a bottom the good news is that there is one on the map.  The only problem however is that it is two years away and will include additional pain.  We are only half way through this housing correction if the futures market is correct.

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I’ve been seeing many articles asserting that currently the housing numbers for states like California are not reflecting the actual housing inventory on the market. Many of the articles argue that lenders through the process of taking back properties via auction are holding off on putting properties onto the Multiple Listing Service (MLS). As I discussed in an article highlighting the tools on the market, trying to get a general ballpark figure for the California market is rather simple and I think relying simply on one data source for all your information can be problematic.

In this article I’m going to attempt, albeit in a very rough estimate to give an overall total count of California inventory and foreclosures on the market.The first step is to get an accurate figure of how many homes are on the market. We can look at data provided by the California Association of Realtors.

The data for June of 2008 reveals the following:

Seasonally Adjust Annual Home Sales: 420,550

Unsold Inventory Index (months: 7.7

With this information at hand, we can figure out the monthly average sales rate:

420,550 SAAR / 12 months = 35,045 homes per month

Yet we encounter already some issues in this number. First, let us total up the first six months of actual sold home data from DataQuick:

2008 Monthly California Home Sales

January: 19,145

February: 20,513

March: 24,565

April: 31,150

May: 33,024

June: 35,202

1^st Half California Home Sales: 163,599

The SAAR figure from the C.A.R. looks to take the current month of data June and multiplies it out by 12. Of course, you can see that overall this skews the numbers. The data for July and August will most likely be high as well but the fall and winter are always slower selling seasons and given the current economic climate, this should prove to be the case as well.

I took a look at the September through December 2007 sales numbers and they average out about 25,000. So let us assume that for July and August we keep 35,000 sales and for September through December we’ll have 25,000 per month sales. We can best approximate that for the year of 2008 given that we already have the first half complete, we can see the following total sales:

1^st half California total: 163,599

July and August: 35,000 average per month

September through December: 25,000 average per month

Total sales for 2008 estimate: 333,599

This isn’t such a far fetched number since last year 357,890 homes sold in the state. Now with that number established, let us look at current inventory.

I went ahead through some of the online MLS sources gathered data for the largest metropolitan areas in California, which cover the entire Southern California market, Bay Area, Sacramento, and the Northern and Central Valley. Unfortunately, this isn’t an exhaustive list leaving out certain areas like Redding and Eureka but overall it’ll gives us a solid snapshot:

Let us first go over the chart above. Total inventory for these areas which covers the entire Southern California market including LA, OC, Ventura, the Inland Empire, San Diego, and also covers Fresno, Bay Area, the Central Valley and Sacramento areas gives us a total MLS inventory of 219,482. From this number, we see that across all these areas 28,233 homes are foreclosure sales meaning these are homes taken back by lenders and are now re-listed on the MLS and tagged as foreclosure resales. We also see that there are 49,818 short-sales meaning current owners have negotiated with current lenders to sell homes at a pre-agreed price to buyers assuming there is a buyer. These homes should they not sell will turn into foreclosures.

The problem arises however when we incorporate the foreclosure data released this month from Realtytrac:

July 2008 California foreclosure filings:

Notice of Defaults: 36,373

Notice of Trustee Sale: 12,506

REO: 23,406

So for our own purposes, for the month of July there should have been a jump in the foreclosure data by 35,912. What may be occurring is that REO numbers are not making it onto the MLS at the pace that lenders are taking these places back. As you can see from the above chart again, currently we have 28,233 foreclosed resale homes on the MLS for California as of this week yet last month alone, we had 35,912 homes being foreclosed on in California.

This causes even a bigger issue when we look at the June data:

June 2008 California foreclosure filings:

Notice of Default: 37,989

Notice of Trustee Sale: 10,053

REO: 20,624

We do not count Notice of Defaults because these properties are technically still owned by the current borrower although data for California is showing that less and less of these properties are being brought current. The vast majority are being foreclosed upon which only cements future inventory hitting the market. But given the 35,000 sale per month average, that means that 100 percent of the sale amount is being brought onto the market as foreclosed properties. This doesn’t even take into account the properties that are on the market that aren’t distressed. This of course is the bulk of the market.

Either way, you can clearly see that something is missing here. If we look at the C.A.R. data once again and the 7.7 months of inventory, we can derive that there are approximately 269,847 homes on the California market: 35,045 x 7.7 months according to their data. Yet that inventory number is assuming that the highest month of sales data, that of June - August will remain throughout the year which it will not. You can see with the chart that we constructed that over 80 percent of the market inventory is covered so we get a clear snapshot of what is occurring.

The purpose of this article is to simply highlight where the gap in data is coming from. The leak in they system seems to be the REO numbers. That is where the numbers are not making it into the MLS system. These are being kept in the lender’s own balance sheet yet make it very hard to predict what the actual inventory number is out on the market. What is certain is that the REOs are out there. Trying to figure out how this factors in with months of inventory is going to be a new challenge in the next few months.

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