Thursday, August 21, 2008

The Elusive Bottom – are we there yet?

Once again I find myself pulling information from John Mauldin's "Outside the Box" e-letter. (and once again I recommend you sign up for this free service!) This week John printed an essay written by David A. Rosenberg entitled "The Elusive Bottom." Rosenberg is the North American Economist for Merrill Lynch.

Rosenberg's essay is lengthy and detailed, and I found it very interesting. He compares our current environment to different periods in history, and makes a case for when our recovery will begin and what things will trigger a recovery. Of course, I focused in most closely on his points related to real estate – a couple of which I wanted to share.

A. He writes: "Home prices in this country on average rose 20% per year for six years. That has never happened before. When you take a look at home prices in real terms, they're still more than 30% higher today than they were when this mania morphed into a bubble back in 2001. ... Make no mistake there is going to be more deflation in home prices ahead..."

B: "I doubt that anything is really going to bottom, including the financials, until we're convinced that house prices have hit bottom. ... When I take a look at (total units for sale), it's more like a 17-month supply. I have to see that number cut in half. I have to see it down below eight months supply before I'll be convinced that home prices don't bottom."

These points are interesting to me because they deal with the housing market at the national level. And while I don't want to sound harsh, I don't really care about the national level – I'm more concerned about the local level. So let's take a look at his points from a local perspective:

A. Home prices in Phoenix did not rise 20% per year for 6 years. They rose their historical average in 2001 and 2002, a little faster in 2003 (10-15%), and then they basically doubled between 2003 and 2006. I'm looking at homes listed for sale today, and homes that sold in 2002 for $175,000 are on the market for $275,000. If the home had appreciated 5% per year, it's current value would be $235,000. It's very possible, then, that Rosenberg is right on this point.

B. Today there are 52,515 Active Listings in the MLS. (43,019 Single Family Residences). The MLS shows 6,228 as having sold in the last 30 days (5,577 SFRs). This puts our inventory level at 8.4 months (7.7 for Single Family Residences.)

Does this mean that we're at the bottom? Or because we're better off than the national averages, does this mean Rosenberg would want to see our numbers at 4 months inventory, rather than 8? And what about the differences I pointed about last month regarding various price ranges?

It's interesting to think about, even though we don't really have any answers.

Your wishing his magic 8-ball really predicted the future Realtor,

Chris Butterworth