Early January Listed Sales Results For San Francisco: Down 34%February 12, 2009
Based on an early count of 142 sales of listed single-family homes, condos and TICs in January, sales volume in San Francisco has dropped 34% on a year-over-year basis (versus a 13% drop from 2007 to 2008), and is down around 60% from four years before.
At the same time, inventory of listed and available single-family homes, condos and TICs is up 20% on a year-over-year basis (versus a 32% increase from 2007 to 2008) and is up 58% over the past two.
In terms of months of listed supply on the market at the end of January, in 2007 the count was 3.4 while in 2009 it was 9.4. Keep in mind, however, that January typically marks the seasonal low point for sales activity and sales counts should climb over the next five months (and at a faster pace than inventory).
CORRECTION: As a plugged-in reader correctly notes, we originally miskeyed the current January 2009 sales count as 162 (corrected above and throughout as 142). We’re triple checking everything else.
∙ SocketSite’s San Francisco Listed Housing Update: 2/02/09 [SocketSite]
∙ San Francisco Recorded Sales Activity In December: Down 17.8% YOY [SocketSite]
Comments from Plugged-In Readers
Does this include pocket listings?
This is a telling picture. But I think an even more interesting picture would be painted by putting together a similar chart for various price ranges — e.g. 1.5M. My sense is that the sales activity has shifted to the low end (that is all people can afford now that the free money, no-down, jumbo days are over) but the listings at the low may actually be tailing off as the subprime phase of the crisis is ending. I’m guessing that the numbers will show that the crash has now moved upmarket, with sales plummeting at higher price ranges (no willing or able buyers) and listings continuing to increase (re-casts, overextended desperate sellers, etc.). Again, these are just largely-speculative thoughts from checking out the action via Redfin. Some market-wide hard numbers would be interesting to see.
FSBO posted numbers for the various districts a couple days ago that seem to support this (e.g. over 20 months inventory in D7) — but those were by district rather than by price range.
That chart is what we call in the trading world a “divergence”, lol. The chart says that price drops will continue, with 99.9% confidence 🙂
agree with satchel. you need climax selling which the govt is trying to prevent. id also venture to say that not only will there be even more price declines–they will be much larger than the past.
the trading world…aka the delusional world.
Technical analysis means nothing, there are no doubt trends are there but they are NOT predictive in nature.
SocketSite – I’m only getting 142 MLS sales for January (SFH + condo for San Francisco). Is your count of 162 from SFARMLS only? I’m also getting some higher sales numbers for the previous Januarys.
[Editor’s Note: You are correct (and we are correcting) with respect to the current January 2009 sales count. We’re triple checking our past year counts.]
“… there but they are NOT predictive in nature.”
When more people want to sell than want to buy prices go down as sellers have to undercut each other to attract one of the available buyers. This is true regardless of how much house a buyer could theoretically afford. Which is why the restriction of the buyer pool from higher underwriting standards and job losses is going to outweigh any benefit from lower interest rates.
“climax selling which the govt is trying to prevent”
There are a lot of bad assets swirling the bowl. Many have ideas about how to flush them, and the Fed and others have been coming up with ways to facilitate that.
It isn’t so much that prices are declining as it is that they are correcting. Trace back to before gains went haywire, add inflation, and there is where things are headed. Inflation is important because at around three percent or more a year we will soon reach the point where prices that have stagnated since 2006 represent 10% cuts in real prices. The scale of the correction is a multiple of gross domestic product, so the government isn’t going have much influence.
This does data does not include new construction inventory not listed on the MLS, which will have a significant effect on the graph.
Better to get your data from county recorder and not MLS in this case.
So you mean it’s even worse Paul?
Technical analysis means nothing, there are no doubt trends are there but they are NOT predictive in nature.
not to split hairs, but this is important: the above analysis is fundamental analysis, not technical analysis.
the data above is presented in chart form, but the interpretation is fundamental, not technical.
Technical analysis is forecasting purely based on the shape of charts. fundamental anaylsis involves making sense of the data behind the chart in order to forecast.
it is a basic fundamental concept (based on the supply demand curve) that price tends to fall as inventory rises and sales volumes fall
I would say this trend (higher inventory with lower sales yielding lower future prices) is EXTREMELY predictive. but it is not infallible.
you yourself use this kind of analysis every day without thinking about it. This is why clearance prices are cheaper than original prices. as a product loses its luster there is less demand for said product. thus its price must drop.
In the same way: the chart above is telling us that at current prices there are more people willing to sell their houses than there are willing/able to purchase.
thus each year you have higher inventory, yet lower sales.
(In Jan 2007 there were 839 sellers COMPETING for 247 sales. so about 3.4 sellers competing for each buyer.
This year there are 1,327 sellers COMPETING for  sales. That’s [9.4] sellers competing for each buyer. )
this usually results in price drops…although those price drops may take months/years due to the “stickiness” of housing prices. (the “I’m not going to give my house away” syndrome).
another way to resolve the battle would be for sellers to take their properties off the market, reducing buyer options. but you can see easily from the chart in aggregate sellers are not doing this (inventory going up).
As to Paul’s point, will we ever see another CII? I suspect that missionite is right and the complete picture is actually even more stark than this partial (MLS-only) picture, with far more available units than sales of new unlisted inventory. And if you could figure out a way to quantify shadow inventory (i.e. pocket listings) that are also disciplining the market, it would be starker yet.
tough to say for sure though, as some of these developments are starting to drop their prices…
we may see a bifurcation of the market with professional developers selling and private sellers (homeowners) holding out…
I agree, that the numbers probably look more stark than the above, but just so hard to know until we know what the sales rate is on these developments.
also: I really try not to make too much about January, even when seasonally adjusted… I think we’ll have a far better picture in June-July (when May numbers are released) and we’re in the heat of the selling seasaon.
I do of course expect this spring to be dismal but will wait until data backs it up…
SF still appears to be following the San Diego trend with a 2 year lag. (although not exactly… pretty close)
2586 Clay just went into Escrow; listed at $2M for about 1750 SqFt SFH. This is pretty surprising to me actually. I went to look at the home and it is very small, has a bad floorplan, outdated kitchen and baths, and small bedrooms (BOTH of them.)
There was a lot of buzz at the open house so I’m not entirely surprised, but I still think this is a bad investment as you’re paying over $1k psf; and you have to invest at least another $200k IMO. I guess that we’re finding a basic $2M floor for SFH in PH. For the same money or less — you could buy 2203 Broderick, or 1612 Vallejo; and I’m predicting that 2646 Chestnut sells for closer to $2M and that is a nice home.
I’m constantly surprised — but there are clearly folks out there who think ‘now is a good time to buy’.
Any discussion of “trends” or divergence is technical analysis, it rests on making predictions about future behavior regarding past behavior.
That is not a supply/demand discussion, that alone is fundamental analysis.
LOL, I’m getting a good laugh at reading these comments on technical analysis.
True technical analysis is just an imperfect tool for trying to approximate deeper fundamental factors. One aspect of those fundamental factors that has been traditionally overlooked by the “rational expectations” models upon which most finance and pricing theory is built are behavioral biases. Behavioral finance concepts like “price memory”, loss aversion, nonlinear loss/gain preferences, etc. might possibly be captured better by certain technical indicators than traditional fundamental metrics.
No one sensible trades just based on technicals (or, I should say, he won’t survive long if he’s just trading off patterns). But technical analysis – which is really better termed analysis of price/volume trends, patterns, etc. – definitely has a place when it is informed by a fundamental analysis of the market that is based on a theoretical model of market fundamentals. All academic studies seeking to “debunk” the value of technical analysis that I have seen are flawed because they assume that only technicals determine portfolio selection and therefore ignore that the technicals only help refine fundamental analyses. As one of the acknowledged “master of the universe” types told me more than a decade ago, “fundamentals pick the market and technicals tell you when to pull the trigger”.
In the case of the SF listing/sales trends, the technicals are perfectly reinforcing the fundamental picture. It’s too bad one can’t short (Case Shiller futures are imperfect for a number of reasons, not the least of which is that there should be positive carry associated with a short position in SF real estate because it is more expensive to carry the asset than to rent it). This would truly be a market where one could short “at will” at thee prices with almost zero risk.
Let’s just hope human beings don’t change their behavior and make your trends meaningless.
When the technicals don’t reinforce the fundamentals, does technical analysis work? How do you know when it will or won’t work?
Insane. Just insane.
If human beings were that predictable or aware of other people’s behavior, folly, and greed you wouldn’t be a blogger on some SF real estate site.
IMO there are many more buyers than the “8 sellers for every buyer”. You can’t see it like listings, but they are out there, and they’re ranks are growing (pent up demand) because so few are pulling the trigger. Open house traffic is a measurement you should consider, but here is a better one:
1206 32nd Ave just sold via auction. Listed at $349k, 300 people showed up 3 days later, 135 with pre-approval letters, and word has it that the winning bid was $775k
Obviously the other 134 buyers aren’t willing to pay $775k, but that’s a huge number of buyers when you consider only 162 January sales in ALL of SF and yet these 134 were on the spot with only 3 days notice in one little section of town.
Those 134 “losing” bidders all have their opinion of value, some clearly hoped for $349k winning bid, but the bottom line is they are actively shopping and not reflected in the above chart.
I love how technicians try to rationalize the virtues of trends, charts, and other nonsense when it is clear that technical analysis is the biggest fraud the financial industry has ever invented.
They will not let it go down in flames, they will perform every form of mental gymnastics to accomodate it.
jessep, as I’m just an ignorant lawyer, can you explain your point? Are you saying that despite the trend that is illustrated by this chart it is impossible to predict with any reliability at all where SF housing listings, sales, or prices are headed? If that’s not it, then what are you saying? Thanks.
What I am saying is that it is not possible to:
Use trends to predict future behavior.
That doesn’t mean we aren’t in a trend, a trend won’t continue, or that you may not look like a genius in five months.
Trends are predicated on behavior not changing and continuing as it is. That never is the case, plenty of people, the government, and everything else are working to change this trend.
You cannot know what is unknowable. I cannot know where I will die and I cannot know the real estate market a year from now.
But, on a supply/demand side the numbers do look bad. Lesson: Buy something you love and never leave it. Try to get completely financed, then you wouldn’t be at the mercy of markets like this.
LOL, jessep, if you think I am a technician. You haven’t been reading my posts for the last year or so – I’m sure cooper and ex SF-er would set you straight if you think I’m a big believer in technicals to the detriment of fundamental analysis.
About behavioral biases and such, I really recommend a short book of articles – Thaler’s “The Winner’s Curse: Paradoxes and Anomalies of Economic Life”. It’s a little dry, but it’s well worth reading (there’s probably more modern collections around, but I haven’t been reading in the literature too much these past 8 years – recommendations from others would be welcomed by me!).
jessep, your beef with the words “trend” and “divergence” doesn’t make any sense (I think “divergence” was used in jest, anyway). Of course people base future predictions on what happened in the past – what else are they supposed to go on? Any time anyone looks at a chart or graph they are analyzing trends. Just because someone says the word “trend” doesn’t mean they’re practicing TA (as it is understood with respect to trading). If 100 people look at a graph showing an ever increasing supply of houses and are asked their opinion on what will happen next month, almost no one will predict that the curve will make a 180 degree about-face and supply will suddenly be much, much lower. Maybe it’ll rise at a less steep rate or maybe it’ll level off, but you can’t reverse that kind of momentum instantaneously. That’s not just TA, that’s being realistic about the underlying process.
If you’re going to use the stock market as a counter-example: I admit, the stock market CAN reverse instantaneously. But that’s because it’s got much less momentum behind it in the sense that the market’s sentiment can change on a whim.
“Those 134 “losing” bidders all have their opinion of value, some clearly hoped for $349k winning bid, but the bottom line is they are actively shopping and not reflected in the above chart.”
Funny thing, SFrob, I went out on the street and offered 1000 dollars for 500 dollars. My open house traffic was AMAZING!!! And then I took bids, and the winning bid was for $999 but I received 135 bids, most of them around $500.
I therefore conclude that 135 people are actively shopping for dollars!!! Who knew people were just standing around shopping for dollars? There must be WAY more people going shopping for dollars than you would think, right?
What you might be able to conclude is that if you offer something at 50 cents on the dollar, you will always have lots of buyers looking for a seriously low price. If you offer it at 100 cents on the dollar, you are lucky to get one these days.
And a couple more auctions like that and people will realize that they will not get a “deal” and they’ll stop going.
Valentino, how does this momentum manifest itself? Is this the same “momentum” that led the appreciation?
Do you think our government is not trying to create similar “momentum” to stem this crisis? Of course not.
All that matters is your perception of where things are going and that those perceptions are fulfilled.
At some point, if you print enough money prices will rise.
People in cash feel comfortable (as warren buffett says). They shouldn’t. That rests upon them feeling like they will be able to find the bottom, time it, and get into another asset class before significant inflationary forces are put in effect.
[Editor’s Note: And now back to debating the merits of the numbers at hand, or at the very least debating the merits of any analysis in the context of the numbers at hand…]
The fundamentalists are assuming that real estate is going to behave like eggs and bread, following supply and demand in light of some perceived utility to consumers. In this view, the observed price and volume trends would only make sense if sellers and buyers reached entirely different conclusions despite access to more or less the same information. Falling volumes in concert with falling prices would only happen because the stubborn sellers refused to give in to the “reality” that the demand curve was racing left faster than they realized. Conversely, volume would only fall if sellers raised aking prices and buyers refused to go along. So much for efficient markets, CAPM (fair value–meh) and etc.
On the other hand, if RE behaves more like a financial investment, then it’s not surprising that volumes and prices rise and fall in concert. Particularly if the buyer of a property is already the owner of another property on the market and the seller of the property is trying to buy something else. In that case, the utilitarian notion of supply falls apart as the transactions are occuring amongst owners with little influence from any truly new supply. Volume is then only an indicator of expectation and very low volumes would be harbingers of price increases while high volumes would presage market tops.
If per CAPM, there is a cost difference between renting and buying (in favor of renting) then the “oddity” of buyers and sellers doing deals at high prices would only show that these buyers and sellers are thinking more like investors than mere consumers of bread and eggs. That wouldn’t make them “wrong” and neither would it necessarily predict a price move (at any particular time) back to rent/own cost parity (plus some fuzzy freedom to paint-the-walls puce premium).
Since the above fundamentalist “analysis” is pretty useless (and contradicted by the observed facts), the less wooly framework would be to accept that prices bob around randomly and people tend to want to buy more/ sell less when prices are up and sell more/buy less when prices are going down. Reversals then happen at moments of the high consensus expectations of future trend.
Q.E.D. the lower volumes go, the more likely it is that prices would go up.
Socketsite, sorry, I’m just responding to other bloggers. I don’t mean to be off topic.
I think this whole “technical analysis” thing has been taken waaaaay out of context. We are talking about 8 data points (6 really, just looking at ’07-’09 where there are both Inventory & Sales #s). No one is doing serious “technical analysis” on 6 data points, they are just pointing out that inventory (supply) is going up and sales (realized demand) is going down, hence it is probably not unrealistic to infer that prices are likely to continue to come down while these trends are in place. It’s not like anyone is doing 50-day Moving Average/Bollinger Bands/Fibonacci Retracements etc. analysis here…
“Q.E.D. the lower volumes go, the more likely it is that prices would go up.”
vox, not sure if you’re pontificating on random walk vs. mean regression here, or actually making this specific statement. So as sales volume approaches zero, prices approach infinity?
Let’s not get bogged down in academic minutia here, gang. It’s pretty obvious at this point that prices are falling citywide. If anyone out there has a plausible theory as to why prices might go up anytime soon, I’m all ears. But I expect more declines in the days ahead, barring an immediate, massive inflationary binge (which would coincidentally send rates through the roof and wreak havoc on what’s left of our real economy).
I think vox was being sarcastic. At least I hope so 🙂
Inflationary binge just isn’t going to happen, Dude, so I agree with you that price declines in SF are not going to reverse anytime soon (also agree with your implicit point that the size of the binge that would be necessary would essentially have to displace private credit systems and would send all rates shooting skyward, collapsing the leveraged economy).
A little OT, but after looking at the final contours of the stimulus package (the details that are available), I am getting the sense that the USG is starting to jettison the housing market as a key concern. There are much larger fish to fry now. Removal of the proposed $15K homebuyer credit, and disallowance of the provision that would have allowed the homebuilders to carryback current losses five years, seem to reinforce this view.
And then there’s this:
“Housing policymakers weighed but have for now shelved one plan that would have seen the government stand behind low-cost mortgages of between 4 and 4.5 percent, sources said.”
China is starting to really make some noises about the money printing going on, and in the end the USG has done about all it can for housing. The goal all along (I’m convinced) was just to slow the declines enough to trap people in the assets, and we can expect more of that (subsidizing troubled mortgage holders, but letting people with large equity absorb the full amount of loss coming). The game now is purely political IMO: as the US slides towards unavoidable depression, how to keep the focus on the “Bush” years, how to create new dependent classes, how to add to union rolls, etc., all to ensure reelection. Typical 1930s political dynamics.
I don’t see anything on the horizon that would change the trend in SF, and I’d be honest if I did. For a change in trend, I’d like to see a sustained period (maybe 6 mos?) of volume increases combined with steady or only slightly declining price metrics (median, mean $psf, etc.). We’re not seeing that combination anywhere in the Bay Area from what I can tell, although you have to believe that the lower end is much closer to a “bottom” than the upper end (including most of The Real SF).
The economy is a slow moving train wreck. We saw the first car get whacked…and the second car…and the third…is San Francisco’s real estate immune? I donno…those numbers of having more housing on the market and less buyers…welp, we will see.
Maybe the stimulus package will give the jolt we desperately need…then, all these recent home buyers will be haled as the brilliant ones for taking advantage of an opportunity…
But, I am hearing that this stimulus package will barely make up for companies recent slides…so…hum…
I don’t know how to bet…
Today’s home buyer brilliant
Downright stupid because prices will drop more…
Only time will tell.
I look at that volume graph and feel sorry for the Realtors. It has GOT to be tough on them right now.
Buyers have no money or no access to money or both. Most of those who do see what economic conditions are like (startups shutting down, VCs turning off the spigots, few companies hiring, almost all laying off) and keep their wallets shut tightly. Sellers can’t or don’t want to sell at a lower price.
You can talk about technical analysis all you want, but the reality is this market is essentially just waiting for the foreclosures to start later this year and begin the price drops in earnest before times get good for the Realtors again.
@ sfrob Very interesting, and telling, anecdote. I am not surprised about hundreds showing up to bid on a middling SF property because I like you think there is way more pent-up demand in SF that the socketsite crowd usually takes into account.
Any way to confirm the $775 k purchase price?
Well, I think the lower line on the chart may be a more reliable indicator of the amount of pent-up demand than an anecdote about a single property . . .
Wishing for ridiculous bargains and “demand” are two different things.
Any discussion of “trends” or divergence is technical analysis, it rests on making predictions about future behavior regarding past behavior.
forgive me jessep, I haven’t read all the posts yet, I’ll get to them later.
but a caveat: technical analysis has a SPECIFIC meaning and you are using it incorrectly. Fundamental analysis has a different meaning.
we all use trends in order to make predictions. That does not make us technicians. a technician cares ONLY about the shape of a chart. It doesn’t even necessarily matter what the chart says. I have seen nobody use any technical analysis on this thread.
I think technical analysis is one of the stupidest things on the plant.
Trends on the other hand are very valuable, even though not perfect.
It is a common trend that prices drop if you have increased supply and decreased demand. Inventory is but one marker of supply. Sales are but one marker of demand. So the chart above tells you about supply and demand.
if you smoke, you have a higher likelihood of cancer. it is an observable trend. This does not mean that 100% of people who smoke will get cancer. it means that a historical trend is established that has possible import on future occurences.
likewise, if one sees increased inventory and decreased sales, it is recurrently observed that future prices fall UNLESS either sales increase substantially or inventory is withdrawn from the market.
there is no technical analysis in this. period.
now you may argue that you don’t believe in fundamental analysis. but if you do that then I will strongly disagree with your rationale.
(only those who DIDN’T do fundamental analysis are “surprised” at the predicament we see ourselves in today. anybody who did saw that RE in the country had unsustainable trends for quite some time).
a “technical analysis” type statement we used to see was when one poster said “the declines in SF Real Estate will happen when the three lines cross” (if you remember back a year or so). That is technical analysis.
Or if you said “there is a head and shoulders pattern developing in the inventory curve”. that is technical analysis. in other words: ONLY analyzing a chart.
understanding what a chart is saying is FUNDAMENTAL analysis.
“there is clearly a change in SF Real Estate compared to 2005 as evinced by the continually higher inventory and the continually lower sales numbers. I analyze this to mean that there is increased need to sell and decreased need to buy. therefore given supply demand curve we will likely see price drops”.
corporations and stockholders use this type of graph (inventory vs sales) EVERY SINGLE DAY to forecast their corporate profits etc.
Great posts as always.
I totally agree that the housing market is a side matter in the “stimulus” and for reasons I am sure you have stated many times–this is a credit bubble bursting and the housing was one key aspect, but not the only facet, of the pyramid.
As far as the on topic discussion, I have never seen so much complicated discussion over something so simple as the fact that SF house prices will continue to drop esp on the high end (relatively speaking): jessep let me just tell you that were it not for “fundamental factors” (ie, what I view as common sense ones), I would not have my moniker here because I would not have sold a financial services company at top tick in July 2007 (now bankrupt).
Likewise I went liquid on the markets in Nov 2007.
You can try to be clever and make counter arguments all day, but at the end of that day people like LMRiM and I will be the ones “laughing”–meanwhile, for your part I seem to recall that you paid more for your condo than it is now worth.
I am not trying to make fun of you or make you regret your decision and wouldn’t dare 2nd guess your motives, but at least maybe concede that people like LMRiM may be right more often than not when it comes to common sense commercial decisions.
Do you really believe $400k for a modest place on 32nd Ave. (let alone $775k) is such a “ridiculous bargain” that anyone interested at that price level should not even be counted as “demand”? I’d be surprised if you truly mean that.
And, no, the bottom number on the graph (142) indicates precisely the amount by which demand decreased in January (i.e. 142 folks no longer looking to buy), and it is not a reliable indicator of overall pent-up demand at all.
What will you be laughing at?
I didn’t use leverage, no one can take away my home. I want prices to go down not up. I’m not praying for a turn around. I’m not overextended and I couldn’t care less if Pacific Heights
I’m just not eternally and unrealistically bearish. If I think something is wrong, I’ll say it is wrong.
I just know that human beings have a tendency in ANY trend to think that it is “different this time” when it isn’t, and will continue and continue when it won’t.
Socketsite, why don’t you make comments regarding the other posters who are trying to get me to respond to them?
I’d like to try to steer this conversation to something else.
sanfrantim, please explain how a large amount of pent up demand (defined as buyers willing and able to buy) can result in record low closings when there is 10X as much inventory as sales? If you don’t like that definition, supply another.
All the sfrob anecdote (yes, a hearsay anecdote supported by nothing) indicates, even if you accept it, is that a large number of people were willing to bid on a 1200 sf place listed at $349k (not 400k). What did they “bid”? One dollar? We have no idea.
All that is indicated by the actual evidence is that there is large number of people who want to sell out there and not very many willing to buy at prevailing asking prices. You have to really twist the meaning of “demand” to find that there is any that is “pent up.”
If your understanding of “pent-up demand” — which of course eludes easy definition or measurement — excludes 135 pre-approved buyers who show up to bid on a property that was listed at $349k and purchased for more than twice that amount, … then, well, no, I don’t buy your definition, nor your glib dismissal — “what did they bid? one dollar.”
showed up expecting to bid a buck. Pent-up demand is by nature elusive and difficult to measure. I cannot; you cannot
Agreed — and a truce on this one. Any statements about the level of pent-up demand (whether high or low) are utter guesswork.
However, my complete guess is that there is not nearly enough pent-up demand, or any demand, to buy up enough of the excess inventory to keep prices from falling significantly more.
sanfrantim: The 1206 32nd Ave example proves there is pent-up demand for $350K single family homes in San Francisco and one other buyer at $750K but not much else.
There is increasing pent up demand but that is being neutralized by pent up anxiety.
I agree with Anna.
there is clearly demand for homes in SF for at $350k. there was evidently no demand for that house at $751k.
so all we know is that the pent up demand is somewhere between $350k and $750k.
we need more sellers to do this to establish more clearing prices. which is getting more and more difficult since sales volumes keep dropping.
this is why I’m more interested in the transactions that happen in May. there will likely be more numerous transacattions then compared to January given seasonal variation.
“”Q.E.D. the lower volumes go, the more likely it is that prices would go up.”
“vox, not sure if you’re pontificating on random walk vs. mean regression here, or actually making this specific statement. So as sales volume approaches zero, prices approach infinity?”
Almost pontificating. I’ll leave that to others. If RE equity investors behave like investors in equity securities (thinking their purchase an investment in RE rather than a consumption of RE) then volumes would positively correlate with price changes in either direction: as volumes approached zero, prices would also approach zero. Or, as prices approached infinity, volumes would approach infinity.
Similarly, as prices approach zero, inventory would climb, not only because of falling volumes but because some owners by choice or need try to switch sides and become non-owners.
In the investing context, prices change as a result of uncertainty. Uncertainty gives investors anxiety and a perception of risk that they shed for the comfort of joining a growing herd (that expects more of the same trend to continue). The growth of the herd is dependent upon an increase in the rate of change of prices in the direction of the perceived price trend.
This “irrational” behavior is justified by the return fix provided by accelerating momentum. If I’m making big returns after buying an overpriced house, I must be right after all; as my returns accelerate the more I overpay, then clearly “this time is different” and any naysayers “don’t get it.” And vice versa.
Yet, as the consensus approaches an overwhelming majority, it runs out of counterparties and can’t sustain even further increases in the rate of change. Put another way, the certainty of the consensus (that uncertainty is going to grow even more) damps the required further acceleration of momentum.
Lacking a further increase in the “fix” provided by the volatility (and reward)of an accelerating rate of change, the weak hands get washed out (even if they’re directionally accurate because their cost of borrowed funds is higher than what they’re making on their “correct” speculation). For example, recent bubble buyers couldn’t service the loans on their holdings because they couldn’t rent/sell for enough cash flow to offset holding costs, even as prices still rose a little.
This sets up a reversal.
Randomness happens over short terms but as a general theory is contradicted by the unrandomly frequent occurrence of valuation extremes. On the other hand, randomness as a guessing strategy pretty consistently outperforms communities of “experts” using “advanced, rational analytical techniques. However, one short term flip breaking a long chain of flips in the other direction throws a wrench into the acceleration of momentum.
Mean reversion is total nonsense. I think I put in about 50 posts about why that’s so some months ago. Perhaps I’ll revisit this to kick off another 170 post lollercoaster with the true believers in the power of an arbitrary and time bounded statistical abstraction.
The kinda sorta short version of why mean reversion is a crock of crap… It’s a trumped up fallacy that relies upon inductive reasoning that’s bounded by historical experience. It shouldn’t even be accepted in its weak form: the argument that mean reversion is probable. Why?
1. The existence of a mean is a function of a time bounded series. If we test the usefulness of an historical mean by predicting that in the next unit of time the series will revert– and it doesn’t– then mean reversion is falsified.
2. There is no particular reason to prefer one mean (in terms of time) over another. Since price patterns are scale invariant, those adopting a longer mean just have longer to wait (until they’re perhaps right by chance, and then we know that only in hindsight). Meanwhile they’re certainly wrong, possibly for decades. Given the opportunity to speculate on mean reversion they could be so wrong for so long, that any future reversion to the chosen mean fails to deliver a meaningful return. They could well be wiped out along the way, given the chance to leverage their bet.
3. The mean itself could change. If the road rises to meet ya, because prices persist in staying high and away from the old mean, then who cares? The investor who banked on reversion to the old mean enjoys the privilege of seeing that happen. Still he loses or loses out.
4. The theory is underspecified. If any observed outcome can be fitted into mean reversion theory (by playing with choice of mean and etc.) then it’s useless for practical purposes.
5. Market dynamics for many investments show spectacular variances relative to any chosen mean, not uncommonly 10X or a lot more from peak to trough as measured by price to some valuation variable, such as yield, rents, earnings, book value, etc. If markets mean revert, they don’t seem to care a whole lot just when they do so and they will stray very far from the mean.
6. Mean reversionists employ several silly arguments to prop up the fact that the empirical phenomena haven’t read their thesis. These include:
a) “Market participants may become temporarily irrational.” Sounds like a Get out of Jail Free Card: mean reversion works, except when it doesn’t. When it doesn’t, the people must be crazy. Since the “rational” mean reversionist refuses to be crazy, he excuses himself from the fact that his own cherished prediction had/has nothing to do with reality– a condition typically associated with ACTUALLY BEING CRAZY! This argument fails because nearly all the time, the market isn’t at its mean (whatever they mean by that). It also provides no explanation for how the mean reversionist is to protect himself from a temporary outbreak of The Crazy, except by doubling down if he has any cheese left to throw against the Mobbe. It screws with their assumption that actors are rational, or at least boundedly so, and yet these actors don’t bet on mean reversion. Instead, they bet on the opposite and overwhelmingly so the MORE the market is away from its mean. Consequently, they can only point to temporary insanity in hindsight if and when there is a reversion.
b) “Markets are characterized by multiple equilibria.” This argument just screws over the whole standard proposition of equilibrium seeking by positing multiple equilibria. It’s another way of saying that the market has no clue as to which mean it’s supposed to revert, or, that it does but doesn’t care to follow the mandate of plain vanilla mean reversion. Rent vs. Buy parity calculation anyone? Per mean reversion and equilibrium and rational actors this shouldn’t be violated. Yet if there’s one equilbrium for buyers, another for renters, and another for the homeless, then Rent vs. Buy is a useless argument. Whereas if Rent vs. Buy is useful, then how come mean reversion tolerates persistent disequilibrium? Like plain vanilla equilbrium and mean reversion, the new and improved quantum superposition of equilibria that exists until collapsed by a rational consciousness isn’t doing a better job making predictions; it’s just papering over why the standard theory doesn’t work.
c)”Heterogeneous market participants”. This is multiple equilibria in human clothing (rich man, poor man, beggar man, thief). It too collapses or self-contradicts for all the reasons noted in (b).
d) “ceteris paribus”. The ultimate cop out. Faced with the fact that the theory is falsified by real experience, the theorist takes refuge in the notion that if reality were to be redefined within the limits required by the theory, then the theory would be true. This may be theoretically true but it’s useless because the necessity of a ceteris paribus clause doesn’t exist anywhere but on some economist’s blackboard. Even then, it only exists to save the falsified thesis and it still doesn’t make anyone using mean reversion any money.
I’m not a mean reversionist (if that’s a word) and have hardly looked at the theory.
It sounds like you’ve researched this: so a question:
have you looked at reversals of trends when those trends have far exceeded the mean? put another way, let’s say there is a fairly constant trend line over time (decades?) and then you get a significant diversion from that line… when/if it does correct does it typically revert back to the mean? or does it sometimes revert to the mean, sometimes further than the mean, and sometimes nearer the mean?
overall I agree that reversion to the mean is relatively meaningless. I prefer using other fundamentals for analysis. (specifically things like debt to income ratios and so on)
but your post piqued my interest.
by the way: ALL economic analysis suffers from 6a. This is the reason why economics will never and can never be a science. because it relies too much on mass psychology, while the theories all require rational parties making the transaction. (perhaps if we get to the times of Foundation under Hari Seldon then economics will become science).
“while the theories all require rational parties making the transaction.”
*Current* theories require rationality. They also require linearity since modern economics departments don’t require their students to know partial differential equations or non-linear systems modeling.
This does not mean that a workable theory cannot be created. As long as you can create a general model of human response and incorporate it into non-linear network model a workable theory should be possible.
Who cares? Theories based on human behavior are in general, unquantifiable and don’t fit any sort of mathematical mold.
Hasn’t this crisis taught us anything about that?
On the contrary, in general this crisis has played out as I foresaw back in 2004 based on some simple models of human behavior and non-linear dynamics in the financial system.
Since an understanding of the functioning of the economy is the difference between prosperity and happiness and poverty and misery I think it’s very important to get it right.
That was one of the things that drove people crazy about the Great Depression. One minute prosperity was everywhere, flappers were dancing the Charleston and drinking champagne out of shoes. The next, soup lines, oakies and misery. And yet, nothing had changed in the real resources available to us.
Really? Did your “models” predict the run-up several years ago or the boom of the 90s?
Choose your time-frame appropriately and any conclusion can be rationalized.
I’m sorry, that doesn’t make you a genius.
Soup lines and misery are entirely within your own doing. You should never over-extend yourself.
I wouldn’t say that a trend line is the same as a mean unless the trend is flat. A mean must always have no slope while a trend line (best fit curve for the entire data set) often does. We could add a third category for a moving average which is a mean with a time period that’s a subset of the time series.
If we’re talking about a mean, then with hidsight, by definition half the data in the time bounded series are at or above mean and the other half are below.
In the case of a trend line, there’s an appearance of less nonsense since the curve is drawn by design to minimize the deviation in the y-axis. It looks even more like the data are getting sucked in towards this curve. Really it’s the curve that’s getting fit to the data.
It still can’t escape the induction fallacy since the nature of the distribution is inferred from the data and the expectation of future data is inferred from the distribution.
It’s a correlation not a causal relationship. We can’t relaibly assume that a future datum will obey the boundaries of the past. If causation is mistaken assumed, it leads to statements like “the passage of time makes prices go up”. It would be just as wrong to say “rising prices make time pass”.
Using a fundamental makes more sense in markets where the participants are more concerned with consumption than investment. These markets have higher certainty and less volatility. It’s not easy for a seller to switch over and become a buyer (the egg farmer doesn’t usually respond to falling egg prices by opening a Denny’s). It’s not scale free. This gets wierder when a good experiences a paradigm shift whereby an historical consumption good is suddenly deemed to be an investment asset (i.e. tulips) or when an investment class suddenly gets treated as a consumable (tulips again). RE seems to switch back and forth, sometimes trending and dynamical (like an investment) and other times just wobbling a little around a flat line, even declining in real price terms (like a basket of eggs).
Regarding the science or psychology of economics, I think the trend in some schools is to introduce a little more of the human condition than the faculty of reason (see Tversky et. al.). Economics would become more scientific were it to make theories that are testable and falsifiable and accept that its theories are at best, just provisionally true.
Instead, I see a lot of economics written as a complexifying apology for its failures to make accurate predictions. At worst, these apologies set up conditions that can’t be tested or conditions where the falsified theory is salvaged after the fact by rearranging the goal posts.
In sum, markets don’t mean revert; means get recalculated to fit the expanded data series. In this process they become even more useless since they accrete more and more survivorship bias as they recalculate.
Since I only became interested in economics around 2001 after having watched the dot com foolishness I’m afraid I don’t have much of a track record.
In 2004 it was possible to show that the system was in an unsustainable state and to predict the chain of events that would ripple through the system. It was not possible to predict how far or how long it would go before that chain was set into motion.
“I’m sorry, that doesn’t make you a genius.”
Yeah, I usually fall back on my PhD in sub-atomic particle physics for that. 😉
“You should never over-extend yourself.”
Words I live by everyday.
“Soup lines and misery are entirely within your own doing.”
Not to denigrate the benefits of hard work but the economy provides the ocean in which we swim and the currents can be stronger than any one individual can swim.
Cross your finger for me! I’m submitting a research proposal for next year, “Modeling of non-linear dynamics and network effects in distributed resource allocation systems.” Maybe I can get some time to actually code up and run some of my models. Particle physics has gotten dull.
If we’re humble enough to recognize the limitations of inductive reasoning and avoid the temptation to make a theory into a metaphysical proposition then of course a better model could be induced. It wouldn’t become a “general model” because Godel’s Incompleteness Theorem forbids it. Any general model must be arbitrary and irrational.
All of the above is just a cautionary statement that it’s risky to infer some higher principle of induction to restore confidence in a more primitve prior form of inductive reasoning. Such an a priori justification of induction leads to an infinite regress. Economically, it’s unwise (eventually) to use a lot of leverage backing its expectations.
There are plenty of people with Ph.D’s who were proved to be miserable failures in this crisis, that doesn’t make you a genius. Talk to everyone at the federal reserve about how their academic qualifications made a difference with this crisis. All you hear is excuses.
Getting right once is not being a genius, put your ego down.
“Not to denigrate the benefits of hard work but the economy provides the ocean in which we swim and the currents can be stronger than any one individual can swim.”
I own my home in cash and I have enough saving to live 25 years. I do not want to sell. Where are my currents? Where am I swimming?
That’s funny that you did your work in particle physics. When I was at a hedge fund, there were basically three distinct backgrounds for the people who worked on the desk.
1) Degenerate gambler type, started out on a dealer desk in FX out of college (one didn’t go to college), moved to proprietary FX trading at Goldman, left to join our fund when they were forced to become “managers” or blew up, whichever came first.
2) Moved up the ranks at a buy side institutional investment manager (usually on the equity or credit analysis side) and got to know credit and equity portfolio managers at the fund.
3) Solid-state and particle physics Ph.D’s, brought on to help price derivatives and write scripts for mechanical pattern-trading systems! Some of these went on to manage money with discretion. One of them worked for me for two years (Cambridge Ph.D in solid state physics – Salim M. if you’re out there reading this, hi!). I still remember some conversations on slow trading days about quantum fluctuations of vacuum fields as a source of the big bang, and why it was (or maybe wasn’t?) a violation of the principle of the conservation of matter/energy. You missed your calling…..
(ex SF-er – we also had an MD/anesthesiologist who somehow got the ok to let the head portfolio manager observe at an open heart surgery and he joined doing investments in medical devices in the mid-90s, so you missed your calling too!)
“Where are my currents? Where am I swimming?”
You are on the beach with a margarita. Congrats.
But I’m sure the rest of humanity would like someone to get the economy right.
“Where are my currents? Where am I swimming?”
If you are a particle, then per standard theory you are capable of wavelike behavior in a certain context and will pass through both slits at once (unless you are observed and then you’ll have to choose).
If on the other hand the wave is coming at you from the detector and you are really just a particle…
so sales of homes are down 17% yoy, sales of cars are down 40%. Are we going to see price corrections on cars way deeper than what we are seeing in homes?
What assumptions on rate of return and inflation do you make in that calculation?
Satchel correctly points out the difference between *money* and *wealth*. Depending on what form your savings are stored in (usually some form of money), a period of sustained inflation (even short of hyper-inflation) would require that you either make some choice of investments (which then become dependent on the economy) or suffer a serious drop in standard of living.
So in that sense even though you are on the beach with a margarita as diemos says, there is always the danger of a tsunami.
I have a low cost of living (for SF standards) and quite a bit of money in safe assets.
That’s the best I could do, sorry.
At some point, inflationary expectations don’t make a difference if you manage 1) your cost of living appropriately 2) have enough money.
I fulfill both those qualifications.
Jessep, did you say in another thread that you are 23? If not, ignore this question. If so–– can I ask how you came by all your $$? Family, work, lottery, or ?
Just curious (and a bit envious), not sniping.
“Where are my currents? Where am I swimming?”
you are swimming in the US economy. all of us who live/work in the US are impacted by this.
there were many people who were of rock solid financial status who were decimated by the Argentinian crisis a while back as an example
I would postulate that you are an anomaly if you are young, to have 25 years of savings in the bank.
I am very high income and very low spender, but due to my age I still have far far less than that. (maybe 10 years, total guess).
but if our currency was suddenly devalued, or if we saw hyperinflation, our money would suddenly go less far. other things that could affect us: if govt were to pass a “wealth tax” at very high rates. there are countless more examples.
in the end we are all hostage to the US economy and Govt (unless again you aren’t here… then you’d be hostage to your particular country).
This is my last post on this thread.
I am 24 now and I own investment firm in the city. My parents come from very humble beginnings.
I own penthouse 2 at 845 montgomery street.
fu bu guo san dai
You spent a lot of this thread arguing against the folly of predictions/assumptions about the future. Yet you do not see the HUGE assumptions about the future in statements like “I have enough money for 20 years, inflation doesn’t matter?”
viewlover: “so sales of homes are down 17% yoy, sales of cars are down 40%. Are we going to see price corrections on cars way deeper than what we are seeing in homes?”
The difference between cars and homes is that the supply of cars is highly elastic. As demand for cars drops, automakers shut down plants. Eventually, some of them go out of business. You may have noticed this in the news.
With RE, as all the agents around here loved to point out during the boom, “there’s only 49 square miles of land in SF.” That inelastic supply implies that you should get strong upward price movements when demand is growing. But it equally implies that you should get strong downward price movements when demands falters. They just didn’t mention the latter implication.
It’s worse. As prices correct downward, more people give up second homes. When they sell that place, they don’t buy another. No one buys a second home in Pleasanton, but lots of people bought them in SF. Particularly when it was nearly riskless and free to do so.
So not only does the supply not drop off in a downturn, it actually increases, without an increase in demand.
I never imaged that I would ever hear Gödel’s Incompleteness Theorem applied to real estate economics.
I think vox has defensible (if straightforward) points, but he cloaks them in absurd academic flourishes (Q.E.D/Godel/bullying use of the word “nonsense”) which undermines and obfuscates them. I’ll lick my shoe if vox isn’t a he, BTW.
I knew a handful of physicists and mathematicians when I was in grad school, and my anecdotal evidence was the best PhD’s remained in academia, the “second rate” ones went into finance/startups, and the “second/third rate” ones went into startups/consulting (watch out for those).
I’m not sure where the ones that post anonymously on blogs fit, because we didn’t have blogs back then 🙂
Yup, no one goes to grad school in physics because they want to go to wall street. Wall street was always the exit strategy for grads who couldn’t get an academic job.
Back during the dot com what was going on made no sense to me but the people on TV said it was a new paradigm. Like Ester I shrugged my shoulders and told myself that people who had penthouses, mercedes, nice suits and expensive shoes must know what they were talking about but I still couldn’t bring myself to put any money into it.
After it was revealed that the people with nice suits on TV were at best idiots and at worst shills and grifters I decided I would have to understand this economics stuff for myself.
And this stuff is just … so … frickin … fascinating.
I know I should be getting all excited that the Large Hadron Collider is about to turn on and we are going to discover the Higgs boson and understand the origin of mass and discover supersymmetric particles and understand spontaneous symmetry breaking in the electro-weak sector but it’s just not as engrossing as economics.
And I can’t imagine a field that is more in need of a good physicist to come in and straighten them out. You listen to mainstream economists and you get this eerie feeling that you’re listening to medieval monks arguing about how many angels can dance on the head of a pin. So much of mainstream economics is just unmoored from any connection to physical reality. Ah, well. Perhaps I’ll just have to found the diemosian school of economics. 😉
“listen to mainstream economists and you get this eerie feeling that you’re listening to medieval monks arguing about how many angels can dance on the head of a pin”
diemos: you are clearly not a string theorist 😉
jessep is apparently a 24 year old multi millionaire business owner who must have paid about $1400 per SqFt for a penthouse unit as a primary residence, probably so he could walk to his downtown offices.
he also paid all cash.
i like how he was dismissed/ignored after that comment since he doesn’t fit in with your beliefs that no one paid all cash when so much free money was floating around.
and while i have no cute chart to prove my point… i guarantee you there are many more jesseps in SF than you realize. and they have not been decimated by this economy, they are just on pause waiting for things to shake out. SF will still be the place they want to live FULL TIME and eventually the $1 million plus market will be moving here quite nicely
your charts and theories are flawed until you realize that there are actually some smart, well off, people who buy homes because they want them and don’t give a crap if they can save 10% 6 months from now because they want it now.
sure, their ranks have thinned a bit… but since SS commenters largely believe only idiots bought real estate in the last 3 to 5 years… i figured i’d force you to stare jessep in the eye a moment longer
Could we stop the personal attacks?
You asked and I answered. I think that should be end of it. Also, I did not pay anywhere close to 1400 psf.
I did not “respond” to that post because I want to stop discussion of me. Thanks! =)
thanks for your answer, makes sense. I guess now the main question would be the inelsaticity of the sellers. Everyone makes the assumption that property owners are desperate, some may be across the nation but we really don’t know the assets of the local property owners and how elastic their wallets are.
Regardless, if real estate devalues, then the same leverage that caused markets worldwide to rise, mortgage-backed securities, will cause them to drop, as you point out, ie the part “they” don’t mention. What remains constant is property, or real-estate, and that is the most solid investment in the long run, it rides the wave as a particle, or whatever.
@sfrob: So is your assertion then that there are enough jessep’s out there to support the whole SF real estate asset class at current asking prices? If they are all blithely unaffected by the financial carnage, why are they not snapping it up “because they want it now?” Inventory is up, sales are down – you need to stare at that chart a moment longer.
“What remains constant is property, or real-estate, and that is the most solid investment in the long run, it rides the wave as a particle, or whatever.”
Do your research viewlover, over the long run the stock market is a much better INVESTMENT than real estate. Convincing people that real estate is a great investment is exactly the kind of crap that got our country into this mess in the first place. For most people homes are a decent hedge against inflation and a good place to live but far from their best investment.
Chart Lover, the failure of charts to predict anything substantive does not mean you can’t make long term predictions.
I am looking more now, but that doesn’t mean I will buy anything. I have what I want and I don’t want to get overextended. Isn’t that enough kiddo?
not for everyone. what research do you do? looking at the long terms gains of stocks without looking at their turnover rates you cannot know how it turned out for all of those investors along the line of trades. If you hold the same stock for the long haul, from day one to maturity, will it yield higher results? Say 10,000 shares of GM sold in 1960 for $50,000. Today cashing in on my retirement from GM I would get maybe $30,000. Would I have been better off buying a house for $50,000?
No problem jessep. I’ve always been skeptical of technical analysis. But arguing that we can see higher supply, lower demand, but not have solid footing for some predictions is just silly.
The Milkshake of Despair
“I never imaged that I would ever hear Gödel’s Incompleteness Theorem applied to real estate economics.”
I guess it was going to be Godel or a reference to Turing machines and compression programs. Since my mind couldn’t know what it was going to choose, it flipped a coin which was fated to come up Godel, I think.
geez…nice posts guys on all the quant analyses, personal success stories, etc. (i was indulging in a somewhat less intellectually rigerous ritual that nite, the real housewifes of the OC.)
my comments on the discussions:
1- this chart tracks only jan #’s; let’s see what the trendline is for the next few months YoY. although i suspect this trend will continue, i advise bears not to get too giddy w/jan stats only.
2- sanfrantim makes a valid point wrt to that 749k sale, and i think we all agree that quantifying ‘pent up demand’ may not be possible w/hard #’s. but i also read some wrong inferences, namely, yes 1 guy was willing to pay 749k, and probably 149 (whatever the exact # was) were willing to pay 349k (which we all agree is artifically low.) but that DOES NOT mean that 149 were only willing to pay 349! we ultimately don’tknow what the attrition rate was as the price escelated. but safe to say that numerous bids went well beyond 349. this, along with the preponderance of all cash people in SF, indicates that a pent up demand does exist, where it does not exist/exists less in most other mkts.
3- vox convinced me that the whole revert to the means buzz-phrase is largely BS, a paper tiger. prima facie, i never gave it much credence, but i guess it sure sounded good to B-rate entrepreneurs/investors who are informed primarily via cnbc, etc. (LOL and by inference, i suppose C-rate investors take their cue from trump, kiosaki, suz orman:)
Yes, I agree that revert to the mean is a concept for idiots.
However, “revert to fundamentals” is usually a concept ignored by idiots. In a bubble, everyone is convinced that the fundamentals don’t matter. After the bubble, fundamentals usually matter a whole lot. Because the fundamentals are what usually drive the mean, mean reversion, by coincidence, usually rules the day, but there is nothing that requires reversion to a mean if other factors driving that mean have changed.
In housing, prices are usually a function of these fundamentals: rents, J-O-B-S, incomes, credit, and expectations of appreciation.
All of those things are falling right now, and the bubble is over so they matter again. Therefore, prices will fall.
Jobs and credit are the most meaningful fundamental. Because the bay area has had high incomes, one can sustain the other: if you had a job, it has, until very recently, been easy to get credit.
And that likely explains why SF and the peninsula have seen a much later downturn. The people who live in these areas mostly have jobs that are based more on the promise of things to come than actual economic realities. By contrast, if you live in Tracy, what is happening in the broader economy hits you just as hard as anywhere else. When the economy slows, the homebuilders, after a while, stopped building houses at the same rate, reducing jobs. That helped slow the local economy, and retail jobs were lost.
Meanwhile, in SF and the Peninsula, all those startups and tech companies kept going full bore. The startups had no real metric by which they would lay people off as the economy soured, and tech companies sold a lot of stuff internationally, and the theory was that many international economies had become self sustaining, and would take over when the U.S. economy faltered. Therefore, there was really no reason to lay people off in this area, even though Tracy, much more dependent on the broader economy and housing for its economic success, started to falter.
In the last month or two, tech has started laying off, and many startups are barely hanging on, after going through layoffs themselves. As the months go on, this trend will likely continue: the stimulus will help a bit in 2010 and then hurt a lot afterwards, but even in the short term, it can’t replace demand from the entire world, and startups need funding and that is in very short supply right now because the traditional sources of funding have seen their own assets get cut in half.
Will it go on forever until the economy collapses? Of course not, but there’s probably more to go before it gets better, at least a year or two.
Will it ever get back to bubble levels? Probably not for a very long time. But I agree that mean reversion has nothing to do with the price of anything, except indirectly!
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