Part II - Explaining Home Price Decreases - Charting the Information

Hello,

Last week we started to explore average home prices for Los Angeles County in 2006 and 2007.

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This week we will look a little harder at the information we do have and what conclusions can be drawn. Then we will explore what other information is available and if it can be used to help explain what is happening to home prices in LA County.

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The chart above shows 2007 home prices on the vertical axis and 2006 home prices on the horizontal axis. It is the same information as what we started with last week, except that it is displayed here graphically instead of in a table.

Scatter plots are great when first looking at the information. Bar charts or line graphs assume a certain level of order in the data and are more for telling a story convincingly than finding a story in the data. A scatter plot is messy and allows for much more interpretation, which is why you shouldn't ever use them at sales meetings, they tend to scare and confuse the managers.

The red line in the chart above has a slope of 1. This is important because all the data points (average home prices) above this red line appreciated while those below this red line depreciated. The farther away from the line, the more appreciation / depreciation occurred.

I picked out a couple of choice cities. Santa Monica stands out as the clear winner as far as home appreciation goes, with Pasadena (my current place of residence) doing better than most. The shortest distance from the Pasadena dot to the red line (an imaginary perpendicular line) represents a $40,000 increase in home values over the previous year. I point this out so that you, the reader, can gauge what a $40,000 increase looks like on this chart and to allow you to estimate what the home price appreciation must have been in Santa Monica. (It was $250,000).

On the other side of the coin, home price depreciation in West Hollywood was simply amazing, a $270,000 drop in a single year, and Marina Del Ray had a $131,000 drop. Probably the saddest story this chart tells is of Pacoima, where home prices fell $173,000. Pacoima is fairly close to the origin (where the axis meet), meaning that a $173,000 drop for this city is worth a larger percentage of total house value than those cities that are further away.

There is more charting to be done and more relationships to be found.

Coming up next: Power Laws?

Ouch! Explaining Home Price Decreases

To the left (in the small print, I apologize) is a table showing median home values for cities in Los Angeles County.

For the most part, what we see here is a decrease in price from 2006 to 2007. This shouldn’t be a surprise to anybody following the news lately. What is of interest is why the drop in price was not consistent. Why did home prices plummet 34% in Pacoima while rising 29% in Santa Monica? Is there something about these regions that explain these price differences, or could it be human error or some other mundane flaw in the data?

Part of the problem we have in breaking these numbers down has to do with the nature of the data, it is aggregate data. (What is listed here in the table is all I have to work with.) This means that instead of the actual data points, instead I have to work with averages. Thus, it would be difficult to do any sort of hedonic model attributing the change in price to characteristics of the house such as gross square footage, number of bathrooms or school quality for instance. While it is possible to back these factors out of the data using some elaborate process (such as an ecological inference solution), I don't recommend it. We will use the data at hand, limitations and all, and see what kinds of valid conclusions can be obtained.

Coming Up Next ...

Chart of the Information and What It Tells Us
Map of the Information and What It Tells Us
Regression and
Forecasting?

Stay Tuned.

Home prices in IE fall from the previous year, will commercial space follow?

From Inman News,

DataQuick reported that sales fell from 23,005 in November 2006 to 13,173 in November 2007 for the six-county Southern California region, while the median price dropped from $485,000 to $435,000.Riverside and San Bernardino counties suffered the steepest price drops among Southern California counties. The median price in Riverside County fell 16.5 percent from November 2006 to November 2007, while the median price tumbled 13.2 percent in San Bernardino. San Bernardino led Southern California counties with a 48.1 percent year-over-year sales drop in November, followed by Los Angeles County with a 46 percent drop. The other four counties in the Southern California region also experienced year-over-year price drops.

While the sub prime mess has yet to be resolved, the effects on the commercial real estate market has started to rear its ugly head.

On the short term supply side of the equation is an increase in lending standards, the so called credit-crunch that you no doubt have been hearing much about lately. Lenders face a crisis of confidence as they try to balance sub-prime "write-downs" with their existing cash flow. Since these risky assets are difficult to price, lenders are scrambling for liquidity to meet their obligations. This is the closest thing I have seen to a traditional "bank run" and a lot of respectable large banks stand to lose a lot of money. This is an eerily similar scenario akin to the S&L crisis in the 1980's although I suspect the resolution of this crisis will be different; there will be no FDIC bailout of these large banks. I do suspect that government(s) will step in to ultimately resolve the issue, but how and when is still a mystery.

Unfortunately, what this means is that funds that normally would have been allocated to real estate investments will be put into other places, since anything associated with "real estate" now inspires panic and also because commercial real estate is a very illiquid asset. Even REITS (whose primary benefit is to make commercial real estate investing much more liquid) have seen a large downturn this year; the FTSE NAREIT Index is down -8% in November and returns are a dismal -20% so far for 2007.

The long term demand side of the equation is a recession. This downturn hits homeowners in the wallet, and a decrease in consumer spending lessens the demand for imports (industrial especially) and consumer goods in general (retail especially) and could ultimately lead to job losses (all property types).

But not to worry, the FED has been cutting interest rates to stall a recession and the US government is looking at ways to step in to freeze interest rates on mortgages using voluntary measures. The department of wishful thinking has been very busy locking the gates after the horses have run off and as the curtains close on 2007, we should all move to the concession stand for that pound of cure promised to us. 2008 looks to be a very interesting year and a good opportunity to purchase long term assets, the short term shake out looks like it has some steam in it yet.