Downward Pressure Indicator
Jonness - 8/24/2008; Updated 9/6/2008:
Santa Barbara and San Diego, CA have seen dramatic declines in house prices compared to Seattle and Tacoma, WA. Many observers hypothesize WA is following CA in the downward price trend but lagging the rate of decline. They argue high appreciation rates in CA fueled by historically low interest rates and lax lending standards resulted in houses becoming severely overvalued. Thus, eventually the system cracked and houses began to depreciate back toward historic levels of affordability. Homowners with little or no equity in their homes aided the price correction when rates on their ARM mortgages began to reset causing widespread defaults. This caused more downward pressure, which caused more defaults, which triggered a downward feeding cycle. In an effort to stop the bleeding, banks began to increasingly tighten their lending standards, which led to the supply of homes outstripping demand and a further correction to prices.
Many people argue California has had much more exposure to subprime loans than Washington, so Seattle will not depreciate as far as Santa Barbara and San Diego. Out of curiosity, I looked at the data available at the WSJ interactive map to see if I could detect a pattern. I concluded exposure to high-interest loans (subprime) influences price declines, and excessive price appreciation plays an equally important role.
Since many high-rate loans reset 18 months after origination, loans that originated in 2004 through 2006 correlate to foreclosures that are presently occuring (see the following chart).
2004 |
2005 |
2006 |
|
FL |
18.30% |
30.70% |
36.90% |
NV |
16.20% |
28.80% |
34.00% |
CA |
11.80% |
25.80% |
29.40% |
WA |
12.30% |
22.70% |
24.30% |
In the above chart, WA is well behind NV and FL for all years, but actually fairly close to CA numbers. Thus, I thought it would be worthwhile to further compare CA to WA by focusing on key metro areas (see following chart).
2004 |
2005 |
2006 |
|
Riverside-San Bernadino-Ontario CA |
17.10% |
34.50% |
38.70% |
Tacoma WA |
16.30% |
29.90% |
31.00% |
Olympia WA |
11.70% |
22.00% |
24.10% |
Seattle-Bellevue-Everett WA |
10.00% |
19.90% |
21.50% |
Santa Barbara-Santa Maria-Goletta CA |
8.00% |
18.60% |
19.50% |
San Diego-Carlsbad-San Marcus CA |
8.10% |
19.10% |
19.20% |
Tacoma has slightly less exposure than Riverside-San Bernadino-Ontario. Seattle and Olympia have slightly more exposure than Santa Barbara and San Diego.The folllowing chart compares WA mortgage delinquencies to U.S. states hit the hardest by the housing meltdown.
Q4 2005 |
Q1 2006 |
Q2 2006 |
Q3 2006 |
Q4 2006 |
Q1 2007 |
Q2 2007 |
Q3 2007 |
Q4 2007 |
Q1 2008 |
|
FL |
1.80% |
1.90% |
2.00% |
2.20% |
2.60% |
3.50% |
4.00% |
4.60% |
5.76% |
6.82% |
NV |
1.70% |
2.00% |
2.10% |
2.70% |
2.90% |
3.70% |
4.30% |
4.40% |
5.60% |
6.58% |
CA |
1.20% |
1.40% |
1.50% |
1.70% |
2.10% |
2.50% |
3.00% |
3.40% |
4.33% |
5.07% |
WA |
1.40% |
1.60% |
1.50% |
1.50% |
1.60% |
1.70% |
1.90% |
1.70% |
2.16% |
2.29% |
In Quarter1-2008, WA was about where CA was in Quarter4-2006 and Quarter1-2007. Delinquencies in both states are steadily increasing. It is difficult to tell if WA is following CA toward equivilant levels of price depreciation, or if WA simply has less pressure and is experiencing a less intensive price correction. To get an idea of how much trouble Washnington could be in, we should probably look at the percentage of apprecation from (peak - 7 years) to peak.
| Santa Barbara-Santa Maria-Goletta CA | 206% |
| San Diego CA | 196% |
| Riverside-San Bernadino CA | 188% |
| Tacoma WA | 96% |
| Olympia WA | 91% |
| Seattle WA | 87% |
Based on peak appreciation, WA doesn't look nearly as in danger of price declines as CA. To get an idea of how appreciation and in high-rate loans simultaneously affect price declines, I multiplied the percentage of high-interest loans in 2006 by the (percentage appreciation (Peak - 7 years) to Peak)/100. Although an indepth data mining study would yield much better results, this calculation resulted in an interesting predictor of foreclosure pressure in CA and WA cities.
July 2008 Forclosure Filings |
Downward Pressure Indicator |
1 in 92 housing units Riverside-San Bernadino Counties |
72.8 |
1 in 187 housing units San Diego County |
37.6 |
1 in 229 housing units Santa Barbara County |
40.2 |
1 in 527 housing units Pierce County |
29.8 |
1 in 1125 housing units King County |
18.7 |
1 in 1133 housing units Thurston County |
21.9 |
IMO, the indicator is a measure of relative downward pressure in each area when factoring in subprime exposure and price appreciation. It is not a measure of how far each area WILL drop; it's an indicator of the pressure TO drop based on the theory that foreclosures drive price declines, which in turn drive foreclosures. Let's look at actual drops compared to the prediction indicator:
Downward Pressure |
Actual Drop Peak toQ1 2008 |
|
Riverside-San Bernadino CA |
72.8 |
25.60% |
Santa Barbara-Santa Maria-Goletta CA |
40.2 |
31.50% |
San Diego CA |
37.6 |
25.60% |
Tacoma WA |
29.8 |
3.70% |
Olympia WA |
21.9 |
3.10% |
Seattle WA |
18.7 |
3.90% |
Of interest, Santa Barbara had less exposure to high-interest loans than Seattle, but it has a much higher downward pressure indicator reading. According to the methodology, this is due to the much higher price appreciation it experienced. It appears that high numbers of foreclosures don't automatically trigger major price declines. High levels of appreciation are a necessary ingredient in rapid downward price corrections.
Judging from the downward pressure indicator, WA home prices are in danger of future decline--especially if factors not included in the indicator further pressure house prices. It will be interesting to see if the continued tightening of credit, bank failures, and impact of recession will push WA toward price declines more in line with its pressure indicator readings.
Update 9/6/2008:
Downward Pressure |
Actual Drop Peak toQ1 2008 |
Actual Drop Peak toQ2 2008 |
|
Riverside-San Bernadino CA |
72.8 |
25.60% |
33.30% |
Santa Barbara-Santa Maria-Goletta CA |
40.2 |
31.50% |
36.02% |
San Diego CA |
37.6 |
25.60% |
30.96% |
Tacoma WA |
29.8 |
3.70% |
3.96% |
Olympia WA |
21.9 |
3.10% |
3.50% |
Seattle WA |
18.7 |
3.90% |
3.44% |
CA continued to drop like a rock while WA continued to defy the high amount of pressure on its cities' house prices. Having looked at actual houses for sale in WA, it appears prices have dropped much more than the data shows. I suspect this is because people are paying a similar amount for homes but getting a lot more for their money than in the recent past. Currently, mortgage rates are very low, which could continue to help to support this trend due to increased affordability. However, next quarter should prove interesting as the influence of the peak selling season loses its effect on supply. Of particular interest, CA had a similar pattern of holdout just after its peak. In fact, the decline from peak in CA looks identical to the decline from peak in WA three quarters into the correction.
