The Blog Is Back

The blog is back. It's been more than two months since my last posting but I expect to be posting regularly once again.

Since this is my first posting of 2010, let's start with prices. Take a look at the chart, below, which shows home price indices for San Francisco as well as the nine-county Bay Area.

The San Francisco index comes from Dataquick and includes single family homes as well as condos. The Bay Area index comes from Case Shiller and includes single family homes only.

San Francisco prices plateaued in the summer of 2005 and remained fairly stable until the summer of 2008. Then, during the six-month period ending in January of 2009, prices fell by more than 25%. They bounced back strongly in February and have remained fairly stable since then, at a level that's only about 15% below the peak.

Prices in the greater Bay Area also plateaued in the summer of 2005, but remained at peak levels for only two years instead of three. The subsequent price decline was both longer and more dramatic than in the case of San Francisco. Over the 18-month period ending in March of 2009, Bay Area home prices fell by a whopping 45%. Home prices (along with stock prices) bounced back strongly when it became clear that the economy wasn't sliding into depression. Even so, Bay Area home prices are still about 35% lower than they were at the peak.

Perhaps there's an economic justification for the strong relative performance of the San Francisco market, as compared to the greater Bay Area . I suspect, however, that the main reason why San Francisco has held up better than the greater Bay Area is that San Francisco homeowners generally have more financial staying power than their counterparts in the greater Bay Area.

35% of California Homes with Mortgages Are Underwater

According to a recent report from First American CoreLogic, 35% of California homes with mortgages were underwater as of September, 2009. Results were generally better in the Bay Area, although not in the East Bay.


There's no mystery about why so many homes in the East Bay are underwater. Prices there have fallen further than in the other regions.


Note: I don't have aggregate price indexes for the regions shown in the First American report, so I just showed the component counties.

The number of underwater homeowners continues to grow. (See this map for numbers from November, 2008.) As I mentioned in an earlier posting, the number of foreclosures is likely to continue growing as well.

Nation's Housing Prices Were Flat in September

The Case Shiller home price indexes for September were released today. The 20-city composite index was essentially unchanged from the prior month. Ten of the twenty cities actually fell during September. That represents an unpleasant reversal from the August result, when 17 of the cities rose. There are plenty of reasons to question the recent gains in housing prices. We may already be seeing signs that those gains are not in fact sustainable.

The Bay Area seems to be faring better than the nation as a whole, with September prices rising by 1.3% compared to August. Bay Area home prices are now about 14% higher than they were at their March lows, although they are still almost 40% lower than they were at the peak of the bubble.

National Housing Market Update

Here's an overview of recent stories about the nation's housing market.

Housing starts fell more than 10% in October, hitting a six-month low. Pundits are attributing the unexpected decline to uncertainty about the fate of the first-time homebuyer credit. The decline is troubling because housing starts historically have been a good leading indicator of overall economic activity.

The delinquency rate on residential mortgages hit a record high of almost 10% in the third quarter. That doesn't include the 4.5% of mortgages that are in foreclosure. The combined total of over 14% is also a record, going back to 1972 when the Mortgage Bankers Association initiated its delinquency survey.

The vacancy rate for apartments hit a 23-year high of 7.8% in the third quarter. The vacancy rate is expected to climb further during the fall and winter quarters, when rental demand is seasonally weak.

The unemployment rate rose to 10.2% in October, reaching double digits for the first time in 26 years. The highest rate recorded during the six decades since the government began compiling data was 10.8%, which occurred in 1982.

Despite all the bad news, existing home sales rose 9.4% in September, to a two-year high of 5.6 million units on an annualized basis. The recent strength of demand is at least partially attributable to the first-time homebuyer credit, which is scheduled to expire in the middle of 2010.

Don't Count on Silicon Valley to Revive Housing Market

Silicon Valley is the economic engine of the Bay Area, but it is not as dominant as many people seem to believe. Take a look at the chart, below, which shows technology sector employment in the Bay Area over the last twenty years.

The numbers in the chart were obtained from California's Employment Development Department. I've defined the technology sector to include computer design and manufacturing, research and development, internet, and software development.

The first thing to notice is that the tech sector is not all that large. There were 250,000 tech jobs in September of 2009. That represents only 15% of the 1.7 million jobs in the San Francisco and San Jose metro areas. And keep in mind that many tech jobs are in supporting roles such as secretarial, accounting, and sales.

The relative size of the tech sector surprised me. What surprised me even more, however, was that the number of tech jobs has never re-approached its dotcom peak. The number of tech jobs in September of 2009 was 33% lower than it was at the peak, and only 10% higher than it was 20 years ago.

The tech sector exerts a significant influence on the Bay Area housing market. Technology employees usually earn high salaries, so they can afford to pay top dollar for homes. But at only 15% of all jobs, the tech sector doesn't dominate the housing market. And judging from the record of the last twenty years, it isn't becoming significantly more important.

Note: Thanks to one of my readers, who pointed out that I had mistakenly compared the number of tech jobs in the San Francisco and San Jose metro areas to the total number of jobs in California. That was an embarrassing mistake. The correct comparison is not as striking as my original, erroneous comparison, but the original conclusion remains valid: The tech sector does not dominate the Bay Area housing market, and does not appear to be headed that way.

Banks Are Still Tightening Mortgage Standards

Mortgage delinquencies have been rising rapidly for the last two years. Not surprisingly, banks have been tightening their standards for new mortgages. Take a look at the chart, below, which shows the net percentage of banks that tightened credit standards for residential mortgages in each quarter.

The chart was derived from the Federal Reserve's quarterly survey of senior loan officers. The survey asks, among other things, if banks tightened or loosened credit standards during the current quarter. The numbers in the chart were calculated by subtracting the percentage of banks that loosened standards from the percentage of banks that tightened standards.

Banks have gone through cycles of loosening and tightening in the past, but the current cycle is unprecedented. Beginning in the fourth quarter of 2006, banks began tightening credit, reaching a peak level of activity in the third quarter of 2008. At that point, roughly 75% of banks were tightening credit standards for mortgages.

In some senses, the panic has receded. In the most recent survey, only 24% of banks said that they were tightening standards. It's important to interpret the chart correctly, however. It does not indicate that credit standards are actually loosening, only that fewer banks are still tightening. (Only 2% of banks actually relaxed their lending standards during the current quarter. That's the first time in a year that any survey respondent has relaxed its standards.)

The continuing clamp-down on mortgage standards probably explains why record-low mortgage interest rates have not had a larger impact on housing prices. It may also provide a clue about when the housing market will recover. The last time that the housing market went from boom to bust, prices didn't bottom out until the mid-1990's, long after banks had begun loosening credit standards.

Mortgage Delinquencies Are Still Rising

The housing market is showing tentative signs of stabilization, but you wouldn't know it from looking at mortgage delinquency data. Nationally, the delinquency rate on residential mortgages is at record levels, and still appears to be rising. Take a look at the chart, below, which shows the percentage of Fannie Mae's single-family home loans that are at least 90 days past due.

The delinquency rate for August of 2009 (i.e., the latest available) was 4.45%. That's almost three times higher than the 1.57% delinquency rate that was recorded in August of 2008, when the financial crisis was already well underway. While it's certainly not scientific, I think it's reasonable to look at the chart and conclude that delinquencies are likely to continue rising for some time.

Note: The Mortgage Bankers Association (MBA) publishes its own National Delinquency Survey. The headline number from the second quarter survey was 9.24%. The MBA figure is heavily skewed by the inclusion of subprime mortgages, which are largely absent from Fannie Mae's portfolio. More importantly, the MBA uses a lower threshold for 'delinquent', requiring only that the borrower has missed a payment.

At first blush, the situation appears to be somewhat better here in the Bay Area. Take a look at the chart, below, which shows the number of default notices recorded in San Francisco as well as the greater Bay Area.

Recorded default notices appear to be stabilizing. There's an important distinction, however, between a default notice and a delinquency. A borrower is said to be delinquent when he falls behind on his loan payments. When he falls far enough behind, the lender may record a Notice of Default, which is the first step in the foreclosure process. Recent changes in California law make the foreclosure process more difficult, so the number of recorded default notices probably understates current delinquency rates.

In other words, it seems likely that delinquency rates here in the Bay Area are still rising, just as they are at the national level.