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Tim Myers: Good news, bad news, or just news?

Myers’ Musings

Posted: August 1, 2009 5:50 p.m.
Updated: August 2, 2009 4:55 a.m.
Dutifully, the Southland Association of Realtors publishes the monthly real estate statistics for the Santa Clarita Valley.

I literally dreaded the publication of these statistics in 2005 and 2006, when they reported the seemingly inexorable climb of median prices that we now know relied on an unprecedented liquidity bubble, so this seemingly "good" news predicated the eventual catastrophe.

But in examining the June 2009 statistics against the June 2008 statistics recently reported, I now feel good in saying the reports contain neither good news nor bad news, but only news.

First some caveats. Analyzing the results of one particular month in real estate contains about the same meaning as predicting Major League Baseball's World Series Champions from the result of one game in a 162-game season.

The data sets for one particular month contain so few data points that one could actually come to mistaken conclusions. More sophisticated models analyze trends over several months or even several years.

It helps to compare the results to the month in the previous year, since pure point estimates can often mislead. That is why I assert the monthly reports contain only "news" that one can take or leave.

But with these caveats let us examine some key metrics associated with the June 2009 numbers against June 2008:

Median price: The median price fell year on year from $450K to $410K or 9 percent.

When compared with peak median prices, the SCV now stands between 30-percent to 35-percent below the peak, or about where professors Case and Shiller predicted home prices would fall from their national peak in their now-ubiquitous S&P Case-Shiller Home Price Index.

The $410K price makes some economic sense, since the tax-adjusted cash cost of owning a median-priced home would now stand about even with the market rent on a similar property.

This would mean a credit-worthy renter could actually save cash flow on home ownership and own a home also. This could indicate a potential floor in prices, though those poor souls who purchased homes in 2006 suffered grievous financial injury on that precipitous fall.

Sales velocity: The association publishes the number of sales, but this provides little information of note, since low sales can mean a low inventory of homes available for sale ("good" news) while high sales can mean an incredible number of distressed properties hitting the market at once and depressing prices ("bad" news).

One can derive a more meaningful metric from sales velocity, the amount of total inventory divided by monthly sales. This calculates the number of months it would take to clear all the existing inventory at the current velocity of sales.

In June 2009, the sales velocity stood at 4.41, down a whopping 44 percent from the nearly eight months it would take one year ago to clear the inventory.

Much better for sellers, since they can actually turn their property in a reasonable time if need be; much more difficult for buyers, since they literally possess only half the time to ponder a purchase.

But the news never seems good for our local real estate agent community. At the peak, over 2 percent of the population of California held real estate agent or broker licenses, or one out of 50 people.

The membership of the Southland Association-Santa Clarita chapter stands at just over 1,800. That works out to about .73 percent of the total population, or about one-third the state average.

Thus the general population of the SCV did not go outhouse-rat crazy over the real estate profession during the bubble.

However, assuming the sales in June 2009 generated a 4-percent commission at the median price, the amount of commission earned totaled up to only $1,820 per license holder, or about $22K per year. (Remember, this amounts to gross income before deductions for expenses like advertising, support staff and facilities.)

Naturally, this means that most license holders only dabble in real estate or do not even practice currently but continue to maintain their license.

If one takes the general rule that 20 percent of the practitioners will gobble up about 80 percent of the business, these most active generated gross income of $7,000 per month, so they might make a respectable living.

However, this amounts to a 20-percent decrease from gross income one year ago at a still-relatively modest $9,000 per month.

So while those of us who owned our homes for some period of time can feel confident concerning further declines in the value of our homes, keep a good thought for real estate professionals, who must work very hard for their clients to make a reasonable living.

Tim Myers is a Valencia resident and CPA who thinks numbers hold the key to everything. His column represents his own views and not necessarily those of The Signal.


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