As we wrote in June when many seemed to get overly excited about a two point uptick in May’s previously owned home sales results:

And looking forward rather than back, “The Mortgage Bankers Association’s index of loan applications to purchase homes fell last week to the lowest level in more than five years.”

And from Bloomberg today:

Sales of previously owned U.S. homes fell in June to the lowest level in a decade as tumbling real- estate prices and consumer confidence signal no end in sight to a housing recession now in its third year.

Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June of last year.

And regardless, the rate remains down 16% on a year-over-year basis (and down 33% versus the record breaking 2005).
U.S. Economy: Sales of Existing Homes Decline to 10-Year Low [Bloomberg]
U.S. Home Resales Up But Remain Off (As Do Mortgage Applications) [SocketSite]

20 thoughts on “U.S. Home Resale Rate Falls To Ten Year Low (And 33% Below 2005)”
  1. Oh sure, but in the ‘good news’ department, NAR’s “Chief Economist” Lawrence Yun thinks we’re really, really, really close to the end of the downward cycle…
    Any way we can find out how much he’s paid? I’d love to know how much the soul of an economist costs in an open market.

  2. Actually I’m wondering if, outside of SF, it might start to be a good time to buy: places like Sacramento are looking increasingly attractive and I’m not sure the market in those areas will go down much further. In SF, I have no idea: it could go down a bit more and then stablize, or continue to slowly decline over an extended period. Thoughts anyone?

  3. NAR is a non-profit 501c6 organization. But just because you are a non-profit doesn’t mean you don’t have lots of $$$s. Their 990 filing for 2005 is available on Guidestar and shows annual revenue of $143M with assets of over $250M. The 990 is supposed to show the top 5 paid officers -but I could only find two paid officers shown. Both were listed as CEO & EVP with compensation of $706K and $1.1M for 2005. Not bad for “non-profit” work – and it also showed they worked only 37.5 hours per week.
    I didn’t see any mention of Yun’s moronic predecessor, David Lereah – but I bet he was very well compensated. The 2006 990 should be available somewhere.

  4. I am curious about Jake’s questions too. I know some people here think that SF will go down 30% from its peak, but what will go down exactly? Is it the median, or all homes? Will some neighborhoods be more vulnerable and have deeper drops? There are some areas of SF that are enticing to families (Noe Valley, Cole Valley, Inner Sunset) and it seems, at least anecdotally that there are more families looking to live here. Won’t that keep desirable neighborhoods from going down significantly? Or, will that depend on whether most people in those neighborhoods can hold on in a down swing?Personally, I like the city, but I like the Marin area too for the weather. Thanks.

  5. Much depends on what you want to buy. The cycle is still headed down, but if you have an eye on a specific location or circumstance then it might make sense to jump on an opportunity when it arises because homes that haven’t changed hands in ages are being shaken from the trees by this storm. Don’t be shy about starting with a mean low bid, just keep any bids high enough that they know you are serious. If you want to save as much money as possible then it safer to buy years from now when more of the lending craziness has worked itself out.

  6. majr,
    Marin is showing softness, and not just the disaster that is Novato. Southern Marin may become more accessible than it has been in a long time. That probably doesn’t include the $1.5m+ properties but I’m not a realtor. Just a homeowner who bought here for much less after selling a prime Cow Hollow duplex in 2006.
    Proximity to the water and 10 degrees warmer than the City make this a perenially desirable area. But it’s certainly not immune to price declines no matter what you may be told.

  7. One more time, answering the question of “how much will prices fall?”
    Assuming rents remain the same, it’s not hard to calculate a what a CAP rate of 8%-12% would look like. Depends on interest rates, what kind of CAP rate you need. Right now, they’re headed to 8.5% for jumbos, that implies a need for a 12% cap rate.
    But here’s a rule of thumb: In previous downturns, SFRs were going for 120x monthly rent (aka Gross Rent Multiplier). From what I’ve been able to determine, this was across all levels of housing. Anyone with contrary data (even from personal observations from 1991 or so), please chime in.
    I don’t have Sacramento information, but I’ve been told that inland areas of California bottomed at 100x rent, last crash.
    So if you can buy in Sacramento at 100x rent, go for it – it’s not terribly likely that you’ll lose your shirt. Just remember that in serious downturns, it’s not unlikely that rents could fall by 30% – so have a cash reserve if you’d like to be a landlord trying to catch a falling knife.
    Remember that recently in Dallas, prices bottomed at 70x rent in their housing downturn – so even 100x is not a safe bet – precisely because of the effect of falling rents.
    Houses aren’t stocks. When prices fall down, they STAY THERE. FOR YEARS.
    You’ll have plenty of time to buy at the bottom. No rush. Just look for areas where prices have stablized for at least 6 months.

  8. jake &majr,
    the last time sf re reeealy went down was from ’89 (the top) thru to ’94 (bottom) and for many neighborhoods the prices did not exceed their ’89 level until around ’96-97. i was actively searching for fixers in D5,6 and7 and i can vouch that the plums never really got that cheap and there was always competition.
    so prices most likely will go a bit lower and not substantially recover for a few years if this is anything like the last cycle.
    that being said i very much doubt that certain good neighborhoods (cole valley, inner sunset, pac hgts etc..)
    will see distressed selling. the good properties don’t change hands often and luck favors the quick…

  9. Two things about rents and SFH multiples from my perspctive.
    I think it is prudent to assume that rents in general will soften from here on out. Perhaps not in the most “prime” parts of SF (whatever that means – it seems that it generally refers to where the late 20s crowd wants to be), but in most of the rest of the parts of the Bay Area (and perhaps all of CA?). Rents for SFHs in Marin – except for really perfect remodelled properties indistinguishable from redone owner occupied properties – seem to have softened fairly dramatically over the last year or two. Friends who have been there for a long time tell me average rents for representative SFHs and condos are often below where they were in 2001 (admittedly a “boom” rate at the tail end of the tech bubble), and no higher than in 2002-04. I was looking in Marin – best school districts only (Kentfield, Tiburon, defnitely NOT Sausalito)- and can confirm that I was offered no fewer than 3 SFHs at greater than 20% discounts to their asking craigslist prices (and all under $4K per month). Based on comparable properties on the same streets, the prevailing price of the houses was between 300x and 450x.
    But as to multiples, prop 13 skews things in California, and especially in the Bay Area. I think purchase prices of 70-120x monthly rent is a sensible rule of thumb (but a very wide spread, admittedly) for most of the country. However, because prop 13 prevents increases in property tax for long time owners, they are at the margin more likely to hold onto properties at otherwise uneconomic rent/buy ratios. This restricts housing supply for purchase, while simultaneously providing a larger rental supply than would otherwise prevail. The net result IMO is that purchase prices are inflated and rents are deflated, again relative to what would prevail in the absence of the nonmarket tax distortion. So, on balance, in evaluating the Bay Area, I would look at ratios more like 120x – 200x when thinking about rent v. buy. I admit I sort of just pulled those ratios out of the air!

  10. In very depressed markets, these ratios can go way under 100. I’ve bought a few places at ratios of 40 to 80 in the mid-late-90s. Today, the same places are at 200-250. I’m sure this will swing back to earth eventually.
    Of course every situation is specific (location, demographics, economy).

  11. “But here’s a rule of thumb: In previous downturns, SFRs were going for 120x monthly rent (aka Gross Rent Multiplier). From what I’ve been able to determine, this was across all levels of housing. Anyone with contrary data (even from personal observations from 1991 or so), please chime in.”
    IF SFRs went to 120x monthly rent, that would mean a 50% drop in housing pricesfrom current levels (if rents stay the same) in SF proper.

  12. I LOVE all these rent/buy multiple discussions!
    This is OT to this thread, but for those interested in where rents are heading in the Bay Area, this might be interesting. To get a sense of just how weak rents are getting for nonrenovated homes in absolutely PRIME Marin county locations, take a look at this perfectly serviceable listing in Tiburon:
    The address for this one is 671 Hawthorne. BEAUTIFUL unobstructed bay views, from the Golden Gate to Mt. Tam, and there are no residential streets in between Hawthorne and the bay (Richardson Bay up there). Reed school district is one of the – if not THE – best school districts in Marin.
    Now, don’t get me wrong, $2650 (ASKING rent remember, although I would be surprised if this doesn’t get close to this level) is not chump change. But unrenovated 3/1s on this block would run more than $1MM to buy. In other words, just about 400x monthly rent. Renovated or new construction, the sky is the limit. In fact, the house RIGHT NEXT DOOR is for sale for $3.195M:
    (Take a look at the view photos – the $2650 house next door has the same EXACT views)
    And the renovated rancher (cosmetic renovation only) a few doors away is for sale at $1.9MM:
    Other, nicer houses on this street (it’s only two or three blocks long) have been advertised for rent on craigslist this summer for $3400 and $2900 (again, ASKING rents), so the $2650 is not an anomaly.
    Anyway, it seems that prop 13 is still working its magic for those people who like living in the Bay Area in a SFH but don’t feel like spending a ton on housing (if you check the records, you’ll find that these houses that are being rented out sub-$3K in a neighborhood where $1.5 million is pretty much the median selling price have tax bills less than $2K per year….).

  13. But as to multiples, prop 13 skews things in California, and especially in the Bay Area.
    You missed my point. There’s no reason why Prop 13 would skew things more now than in 1990. And prices were at 120x rent then.
    IF SFRs went to 120x monthly rent, that would mean a 50% drop in housing prices from current levels (if rents stay the same) in SF proper.
    And now you’re catching on. But rents have been increasing of late, so it’s likely not going to be quite that bad – but it will probably be close.

  14. Jim D,
    “There’s no reason why Prop 13 would skew things more now than in 1990. And prices were at 120x rent then.”
    I agree with almost everything you’ve written in this thread, but I’m not so sure here. Perhaps one can make a cogent rational economics argument that the skew should be the same now as in 1990.
    However, I don’t think that you can overlook the behavioral finance considerations. By 1990, prop 13 had only been around for about a decade. No doubt that prop 13 had already been working its distortions by then (namely, incenting individuals not to sell, but rather hold and rent them out, decreasing inventory for sale and increasing inventory for rent), but if you think about it, these effects are *cumulative* and compound over time. As sales inventory constricts (again, all this is relative to what would happen without the nonmarket tax distortion), prices rise. Since the increase in the tax is restricted to 2%, the value of the prop 13 “subsidy” enjoyed by the existing owners INCREASES as prices rise. This leads to a positive feedback loop, as you could imagine: prop 13 acts as an “insurance value” (insurance against rises in tax) => prices increase as the value of that “insurance” is capitalized in the sales price => further rise in price as the buying public (slowly) comes to understand what is going on => further increase in the perceived value of the insurance, resulting in a higher capitalized value in sales price => even further disincentive to sell properties, as the disparity between assessed value and prop 13 becomes *enormous* for long-term owners, AND increased desire on the part of potential purchasers to get on the “gravy train” so future purchasers can subsidize what they perceive to be their future of constantly rising asset prices but essentially fixed tax costs.
    I’m sure you’ll agree – 10 years of this feedback loop (1990) is likely to produce less distortions than 30 years (2008)! That’s why my gut feeling is that the multiples in older and desirable areas of the Bay Area (where the ditorions are cumulatively the greatest) will probably remain elevated. Until of course the whole prop 13/subsidy system comes crashing down (which it certainly will, although who knows how long it will take!).
    I’d be intersted in your reaction to these thoughts.

  15. Satchel –
    You know, I thought of that same point overnight, and I believe that you may be right. Maybe.
    But here’s the argument against that idea:
    The base price for homes, below which they will not significantly fall, is the amount that an investor can buy them for, and reasonably expect to rent them out at a profit. At a carry cost of about 6%, that’s what, an 8% or so CAP rate? At a carry cost of 8%, that’s closer to a 10% CAP.
    A 10% CAP rate is 10x annual rent, or 120x monthly.
    So while I think you’re possibly right, I’m not betting any money on it. It will depend on how many distressed sales in those properties there are. I suspect that there’ll be far more than you (or most people here) guess.
    And of course, 70x GRM is just a reflection of expected falling rents… So things can always get unhinged from a straight CAP analysis in a serious downturn.
    (A disclosure: I’m going to buy waaay beneath my means, at about 150x GRM, and just suck it up if the price drops further. Since prices have hit 200x in South Bay already (after being 400x two years ago), I’m pretty confident we’ll get there in reasonable time. I’m just here for the Realty Porn.)

  16. Why is everyone building in falling rents in very short order when this recent rent spike caught everyone wildly off-guard in the first place?

  17. Fuji –
    I’m not building in falling rents – you’ll note in an earlier comment on a previous thread to this that I noted rent increases in the area. In the South Bay, they’ve been going up 10%/year for the last three years.
    But not taking into account the possibility of falling rents in Sacramento (which was the original comment I was responding to) would be irresponsible when buying investment property.
    Also, remember what happened to rents in 2001? They do go down, and in severe downturns, they go down quite a bit.
    SF proper has shown resilience in the rental market, even during the mini-recession of 2002, so it’s probable that rents will go up for a while, pause, and then go up again, but you can’t be sure.
    By all means, make purchases based on current rental rates, but allow for some fall in your calculations. If a 20% fall in rents will bankrupt you, you’re not ready to be a landlord.

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