PMI Market Risk Index: Spring 2008
According to the latest PMI Market Risk Index, The San Francisco-San Mateo-Redwood City MSAD ended the fourth quarter of 2007 with a 30.2% likelihood of house price declines over the next two years. And while that’s up from 24.6% in the third quarter of 2007, that’s also down from 39.5% at the beginning of 2005.
The likelihood of decline for a few other nearby areas: Sacramento-Arden-Arcade-Roseville (77.7%), Oakland-Fremont-Hayward (63.8%), San Jose-Sunnyvale-Santa Clara (51.1%).
And for perspective, the Miami-Miami Beach-Kendall MSAD weighs in with a 61% likelihood of decline (roughly twice that of San Francisco, but less than Oakland), while the New York-White Plains-Wayne MSAD weighs in at 7%.
UPDATE: As a number of plugged-in readers have noted, the PMI Market Risk Index is tied to the OFHEO house price index which “excludes jumbo loans and the large portion of subprime and Alt-A loans that Fannie Mae and Freddie Mac don’t participate in.”
· Economic And Real Estate Trends: Spring 2008 (pdf) [PMI]
· Economic And Real Estate Trends: Spring 2005 [SocketSite]

27 thoughts on “PMI’s Market Risk Index And Real Estate Trends Report: Spring 2008”
  1. So does this mean there is an app 70% chance that NO price declines will occur here?
    (Probably not, but I’m betting it is better than 50/50 that no nominal price deprication will occur here). I tend to agree with ex-SFers take on this that most loss (in SF) will be due to inflation, etc. Not sure if he/she still holds that view or not.

  2. This is a slow-motion train wreck.
    We’re all cosy at the back wagon bar sipping our Martinis looking at the front being crushed (Central Valley, Florida, Las Vegas) and saying “look at those guys! The crash is definitely losing momentum!”
    We might not be crushed ourselves, but we’ll eventually run out of Martini.

  3. Yes, that’s exactly what it means.
    PMI only cares about nominal declines because the debts are in nominal dollars…

  4. This number is:
    “a percentage that predicts the probability that house prices will be lower in two years. For example, a Risk Index score of 100 means there is a 100 percent chance that the OFHEO All Transactions House Price Index for that MSA will be lower two years from the date of the data.”
    So it is limited to OFHEO (i.e. conforming) transactions, and it is a prediction of things 2 years out and nothing between now and then. I cannot tell for sure, but I believe that this does not take inflation into account.
    Note that the SF MSA number jumped from 24.6 in Q3 ’07 to 30.2 in Q4 ’07. That’s not the biggest leap in the entire country, but just about (and SF is not in the highest risk groups but higher than about 2/3 of MSAs in this report).

  5. Isn’t everything that’s based on OFHEO numbers looking at places purchased for $417K or less, at least historically? If so, then the relevancy of this for the local market is limited. The only things in San Francisco that are being purchased for $417K or less are studios and foreclosures in Bayview, the latter already having lost 20% of their bubble value.
    From the report, contrasting OFHEO vs. S&P Case Shiller: “The narrower OFHEO index could
    decline by a lesser 5-10 percent, because it excludes jumbo loans and the large portion of subprime and Alt-A loans that Fannie Mae and Freddie Mac don’t participate in. The difference between these measures is a rough estimate of how much worse the price decline is likely to be for houses using subprime, Alt-A, or jumbo mortgage financing.”

  6. Whoo, boy. This brings back memories of the days when I used to write marketing reports! First, I’d come up with my analysis. Then everyone up the line to the president would review it and change it based on the needs of the perception of the business. By the time I was done, I think there was a semicolon left from my original draft. Everything else got changed. If I said “the sun will rise tomorrow”, and that was inconsistent with some executive’s compensation plan goals, I would have to change it to read “we expect that trout will be caught in the future, though not necessarily in the same amounts as the past.” That was just a funny example, but you get my drift, night and day difference between what I wrote and what got printed in our colorful reports.”
    I can tell you these guys have to walk a fine line. On one hand, they need to state that housing is going to be a disaster, because they sell insurance.
    BUT, their investors won’t push the price of their shares up if the homes they have insured are going to drop like a rock. So they walk a very fine line in releasing a report like this.
    You’d think the name of the game would be on accuracy, because their investors will be holding them to this report, but actually, the name of the game is on RESULTS. If the report is completely wrong, but they beat their numbers, they can wink and say that their competitors were thrown off the trail by the report and they did well.
    As a result, that report has been massaged and changed by the time you and I read it. The executives got the benefit of someone’s research from the original report, and their policies may differ as a result. But the report you read bears little relationship to the original one: this one has been released as a sales and marketing tool.
    So one should take these things with a very large grain of salt. Could the report be WORSE than they really predict in order to sell more insurance? Yup. Could the report be better than they predict to get more investors? Yup. Watch what they DO, not what they say.
    Looking at statistical trends from a colorful “report” is as likely to lead you astray as it is likely to lead you to the correct conclusion.

  7. Tipster is mostly right — as there are very few reports that are (a) really strong on research and (b) done by folks with no agenda whatsoever.
    So it really doesnt make sense to analyze this on a granular level.
    What is beyond dispute is following
    1) the resl RE market globally is in a major decline we dont understand the size of it yet-
    2) it has to hit san francisco itself at sone level — even if muted
    3) NO ONE knows when the end is.

  8. @ Dave – agreed. Anyone that thinks SF rents are or will be headed down needs to stop thinking so hard. At last report, they are up and still headed up.

  9. prediction: rents will be down in 08.
    the vacancy rate is already up, more housing is going up and population is declining according to recent census #s.

  10. Youre mixing things up.
    Rents go opposite of sales prices now. No longer qualifying buyers now rent.
    Investment market underwriting 6% rent growth in SF 2008.
    Will need large unemployment drop to change rents to negative. In which case sales still tank worse.

  11. W”ill need large unemployment drop to change rents to negative. In which case sales still tank worse.”
    agree. i see rents down 3-4% and housing down 8% from Dec 07 to Dec 08

  12. There are so many elements that come into play in the rental market that it’s tricky to see where it’s going.
    In the end, it comes down to how much people are making. If the average salary is 90K, and the rental population makes 70K, you can charge up to 2200 for one-bedrooms, 3000 for two-bedrooms (usually couples).
    But other factors are at work that work for-and-against a price increase:
    1 – Condo-conversions and sales as TIC – This is one huge factor for the high rent in SF in the past 10 years. People want to cash out, go out of a business that has become unprofitable. Say you bought 400K a building with 4 1-BR in 1995. You had 4 tenants at 700 a pop. They are still there due to rent control. You’re still stuck with your bills and still getting a meager 3K/month of which ALL goes into maintenance. But the building is worth 2M. Do the math. You kick out the tenants and sell to live-in-owners! Those 2M on CDs will give you 3 times more than the best rent you can get after all the expenses and taxes.
    2 – Condos and TICs going back into the rental market. People move a lot, and in this market sometimes you can’t sell a place at the price you expect. You’ll rent out your place and buy or rent another one in your new town. Plus, you got all the wannabe flippers still stuck in 2005 who just can’t sell because they owe too much. Yes, that’s for you lucky ORH owners. Most will try to rent at or close to mortgage cost. And then realize they have to adapt to the market.
    3 – Economic slowdown. It hasn’t really come to SF, but other parts of the BA are suffering, starting with the fringes. Theses hardships are bound to propagate someday, just like our current crisis will touch Europe and Asia in less time it takes to spell “decoupling”. We have a lot of banks here. And the tech sector is going through a slight correction. We’re doing fine. But less fine than 2 years ago.
    4 – People moving in. I am shocked to see the newcomers to my street (Noe Valley). Mostly well educated 50-60 years old. They have assets, liquidity, no sense of any kind of crisis going on, and they just buy like nothing is going on.
    The same thing goes for young-ish professionals. They keep flowing into this vibrant economic magnet. And more than ever before as the economy is going south in many regions of the country.
    And they mostly rent.

  13. (Probably not, but I’m betting it is better than 50/50 that no nominal price deprication will occur here). I tend to agree with ex-SFers take on this that most loss (in SF) will be due to inflation, etc. Not sure if he/she still holds that view or not.
    Yes, I still believe that the majority of SF-proper real estate losses will be due to inflation.
    however, I also believe strongly that
    -we will see some nominal price declines as well.
    -we will see somewhat significant REAL price declines
    -it will be a long time before RE gets back to it’s peak levels in real terms (10 years plus)
    -I’m not really willing nor able to quantify losses (real or nominal). my gut often tells me about 20-30% real losses… but this really depends on my mood (real scientific, huh?)… and is too dependent on what government is going to do.
    -macroeconomic issues are far too complex for me to translate that into nominal losses… I’m simply not smart enough. If pressed I’d say 5-10%… but that’s a HUGE guess and not worth the electrons that were used to type that.
    -I don’t exclude (what I believe to be) an outside chance that RE in SF could see massive nominal price declines (the 40% nominal losses that some bears talk about). it depends on if/how long we have recession. but I feel that we will have hyperinflation before govts allow us to have 40% nominal home price drops
    lastly, I’ve brought up a point that many overlook as well… even a small nominal price decline can be very hard on homeowners, given the large absolute mortgage values. (example: a small 5% loss on a $1M property is $50,000… no small change). this is even worse when one figures that on average the holding costs and the duration until we go back positive when compared to renting holding costs (for anybody buying since 2005 or so)…
    I’m telling you… it would SUCK to be stuck in a 1BR starter condo paying monthly payments of $4500/month if the place was worth the same amount 10 years from now, especially if similar rental were $2500/mo.
    sorry for the rambling…

  14. It never makes a good headline when the actual ratio of numbers is quoted with the higher number first, does it? As someone who is in the real estate trenches daily, we are seeing prices moving upwards in the Burlingame area, not down. We don’t see conforming loans. But, prices have dropped in parts of San Mateo, where conforming loans do appear. That won’t make headlines.
    70% of all houses sold in San Mateo County will not drop in price but will either stay the same or rise. That’s a headline, but no one wants to read that one. Pity.

  15. Hmmm. Lenore, the graph in the upper-right corner of your web page (just click on Lenore’s name) sure looks like it shows a very steep downward price trend for Burlingame. Maybe someone who is in the real estate trenches daily does not always see the forest for the trees (to mix a couple of metaphors).

  16. I haven’t focused much on San Mateo – but San Francisco seems to be defying gravity this month. It’s early in the month and volume is down of course – but median prices are way up. For the 101 listed sales from Apr 1 – Apr 9, overall median price is $849K. This will surpass the May 07 highwater mark of $840K. Single family is up from recent months at a median of $925K ($65K above asking price) – although this is still well below the $965K median from May 07. Condos this month have a median of $827K which may be a new high if it holds.
    I haven’t looked that closely at district mix. Square footage is up – so the $/sf aren’t up that much. Analytically, I am still very much in the bear camp – but, as I indicated over at the 2311 Scott thread, I’m really amazed that a couple hundred buyers each month are stepping up and paying these prices. $1,100 psf (and $175K over asking) for the Scott Street condo; $3M for the kinda ordinary place on not-so-great California Street; how about $5.6M for 100 Palo Alto – $1.625M over asking and $1,200 psf! Is this 2005? (Well, actually if it were 2005, you could have bought 2311 Scott for exactly 1/2 the price it just sold for.
    We’re at $1,000 psf (well, for some properties) while most of the rest of country is dropping back to $100 (including some areas fairly close to SF).

  17. @ Trip – perhaps you should not rely so much on graphs and news stories to gather so much of your information.

  18. LENORE:
    Burlingame is not an ivory tower. Look at the recent short sale of the 3BD/2BA home on Palm. Look at the large number of bungalows hitting the market in recent weeks in the $800s (while comparable crapboxes like the ones on Rhinette and Larkspur sit idle with DOM >100 days).
    We will see a fundamental shift in the low-end floor of SFH in Burlingame by this summer. Now you might say, so what……how does this impact the rest of Burlingame (or even the broader peninsula)……….once this price floor breaks on the low-end homes, you will see a ripple effect on the tiers above, as everything will gap down. It happens in the equity markets all the time, it will happen for the housing sector.
    Also, people overlook the fact that most families in the US do not operate on a dual-income basis for perpetuity. Eventually one day the wife will quit her day job to have kids or the husband will get downsized and will be out of work for a sustainable period. People soon realize that they can’t service $6000+ mortgage/PTax loads each month.

  19. FSBO:
    your input is often some of my favorite. thank you.
    out of curiosity, does your compilation of listed sales mainly consist of sales that were put in contract in the last few months (i.e. homes recently put up for sale), or years ago (i.e. ORH/infinity effect) or evenly spread?
    and also: are you seeing consistent sales across all brackets, or are the sales skewed at all to a certain bracket?

  20. FSBO brings up another interesting subject, which is what the top 5% of this country are experiencing versus everyone else. I design homes where construction and land costs usually exceed 5 million for clients, and things have never been this crazy. We have more work than we can handle and are turning away jobs, while other architects that specialize in traditional housing are starving. Penthouses in Chicago are going over asking while 1bd units on lower floors in the same buildings are in foreclosure. I am working on a project in the Palm Desert area in a club where properties still are selling over asking while outside the gates, smaller vacation homes are sitting in foreclosure. I think the Bay Area is no different than Southern California, Chicago or even resort areas.
    The rich have definitly gotten richer during the last 7 years, so homes north of California are still hot, while Soma lofts are sitting empty and unsold. Even during the depression, better golf courses and restaurants were full, yachts were being built, and money was being spent. This is part of the great inequality of this country which helps us to give an illusion of comfort and success, when in reality our standard of living for the majority cotinues to decline year after year. Now that junk loans are gone, how many will still feel they are “middle class”? How many mortgage brokers went out and bought BMW convertibles instead of putting their gains into future retirement savings?
    As someone who was raised in northern Europe, I still am in shock at the extremes of wealth and poverty in this country, and feel shame when showing friends and relatives San Francisco, which although beautiful, has many corners with trash and homeless that are unknown back in Norway. In Norway, savings is still encouraged, homes are paid off instead of flipped, and debt is frowned upon, so expensive toys are laughed at as people focus more on the entire community instead of sales of mansions or expensive cars.

  21. @ Trip – perhaps you should not rely so much on graphs and news stories to gather so much of your information.
    PART I:
    Movingback: on what should we rely?
    First of all, before you flame me, I almost never say anything negative against realtors (I’m not tipster). and the following is not meant to be negative, simply factual.
    Ms Wilkas’ post said that they’re seeing prices move upwards. Her graph is almost straight down.
    For me, it’s always important to understand what something is telling you (graph, chart, RE agent, etc) and also understand from where that data is derived, and also the limitations of the data.
    nothing is perfect. but using all the data points the answer is often a little more clear.
    in this case, the data presented about Burlingame is unclear. RE agent states “it’s up” and her chart states “it’s down”
    this is fine… when markets change you often get conflicting data. such as in our economy where a weak jobs and retail number is followed by a good unemployment number…
    My problem is that she follows with
    “70% of all houses sold in San Mateo County will not drop in price but will either stay the same or rise. That’s a headline, but no one wants to read that one. Pity.”
    It took me a while to even figure out why she said that… I initially thought she made the 70% number up until I realized that she doesn’t understand what the original headline said in the first place.
    The headline didn’t say that “SF will see a 30% drop” or “30% of homes in SF will drop”, it says “there is a 30% chance that RE will fall in SF in the next 2 years”
    but she misunderstood it to be “30% of homes in SF area will drop” which she changed to “70% of homes won’t drop”.
    This shows a clear misunderstanding of basic mathematic/statistical principles (or perhaps simply she didn’t read the article that she maligned so much-even worse).
    Given her lack of understanding of what the “30%” number means, then I must discount her assesment of that data.

  22. PART II
    And this, in the end is the problem. RE agents try to act as experts. However IMO most are sales people (this is not a bad thing…) In many ways no different than a car salesman or a stock broker or the Manager at Walmart or a traveling salesman for a multinational semiconductor company. (again, being a salesperson is not a bad thing)
    Salespeople in general can give me great information about what is selling and how it is selling. because they sell it.
    they are the best “leading indicators” because they know about a sale often BEFORE it goes into contract or gets published into data.
    Because of this, many famous investors (Lynch, Buffet, Schwab, Wilbur Ross to name a few) were known to go to retail stores and ask the clerks what was ringing up, and then pick stocks based on that.
    Like buying Chipotle stock because I saw lines out the door… and I asked the manager how often the store was like that… he said “every day, all day”. Or selling Crocs when a relative told me other shoemakers were making knockoffs.
    More specifically, RE salespeople (not the NAR) are even better leading indicators than the “New Home Sales” numbers, especially for local and micro-markets, since that is where they sell their product. but leading indicator does not mean more accurate indicator.
    and also having this sales experience DOES NOT necessarily mean that the RE agent has the ability to translate that data into a form that I need.
    So it is up to me to take what the RE salesperson says, and then hear their analysis of that data, and then compare that data with other sources of data, and then make a decision for myself if I agree with their assessment.
    In other words, so long as RE salespeople understand that their expertise in general is SALES and not markets, then all is well.
    and FWIW:
    -yes, I discount the uber-bears just as much.
    -I don’t dislike realtors. I personally have an amazing realtor (who is one of the smartest and most honest people I know, and really has his finger on the pulse of the market), and I will buy another investment property the second he states “it’s time”
    -IMO the problem is simply that RE agent has low barrier of entry. almost anybody can be one in just a few days. thus, you get a few very good ones, and then a lot of bad ones that ruin it for the rest. this was compounded by the bubble where everybody flocked to RE.

  23. “the vacancy rate is already up, more housing is going up and population is declining according to recent census #s.”
    The vacancy rate was down substantially for 2007 versus 2006, according to the BusinessWeek link I provided in response to this statement of yours the other day.
    The population estimates of SF vary. The US Census hasn’t counted the population of SF since the 2000 Census. The US Census Bureau makes annual rough estimates (the most bearish around), which showed that the SF population declined in the early part of this decade, but is now increasing. The State of California’s estimates have shown more robust growth– that SF’s population is at a record high.

  24. ex SF-er, I agree with much of what you see. There are a few good retail stock brokers out there like there are a few good RE agents. But with the retail stock brokers, at least there is some nominal regulation about what they can do and say. There is no regulation on the nar and what RE agents can do and say. Thus, many of us have had experiences which make us lose faith in any RE agent, sometimes intentional on their part and sometimes not.
    I don’t know what the residential market in sf will do, but I still believe strongly that the way that houses are bought and sold and the commission structure will change dramatically over the next few years.

  25. Second the comment that FSBO’s input is most welcome. It actually won’t surprise me at all to see median sales prices climb — they always do in the spring. But remember this only counts what has sold and ignores everything else on the MLS. From what I can glean, listing volume is way up and median listing prices continue to trend lower. Price/sf continues to trend downward even faster. I.e., as FSBO surmises, it appears that bigger, nicer homes are now being put on the market, and the bigger and nicer of this improved mix are the ones that are selling — the story is in the mix. I do not believe that median selling price is completely irrelevant, but it is only one data point, and a skewed and incomplete one (as noted, it completely ignores the vast majority of homes that were listed but have not sold at all in the period at issue).
    I don’t apologize for focusing on objective data to the extent we can find it rather than anecdotes from realtors.

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