With the dramatic changes we have been witnessing in the lending arena, it was suggested in the forums that I link to an old analysis post which discussed the implications of what we are seeing in great detail. If you are new to this site, or if you need a refresher on what this change in loan terms is going to do to the housing market, I suggest you follow the links below.

2007-05-07 — Your Buyer’s Loan Terms – The precursor to The Anatomy of a Credit Bubble. It discusses house prices from the perspective of the future buyer of your home. It demonstrates the impact changes in loan terms will have on future buyers and how this will impact the amount your future buyer can bid for your home.

The information presented in this post are provided by the Orange County Register and Dataquick.

Previous commenters have noted the “noise” from week to week makes it difficult to determine where the market is really going. Here is the data from the first half of 2007 smoothing out the noise from individual weeks.

Above is different look at the market. Instead of breaking it down by zip code, this data looks for trends in various housing types, and it is for all of Orange County not just Irvine. Notice the dramatic decline in sales volume, and notice the huge drop in the median sales prices of new homes.

It is difficult to put a bullish interpretation on this data. New home prices are down, and we know the prices of new product is not reflective of the true price because the incentives being offered to buyers. So one could argue the new home sales price numbers are far worse than what is shown. It is true that many of the new home sales have been condos on Jamboree, so perhaps there is smaller product dragging down the median, but then again, this also means new higher-end homes are not selling at all (Portola Springs).

The numbers appear to be holding up for resales, but ask yourself how is this possible. If new homes are selling for 20% or more under last years prices, how could resale prices not be lower? Wouldn’t a reasonable buyer go buy a new house for a significant discount over an old one? Of course they would.

The reason resale prices are not showing the decline in the median is twofold:

1. There are few if any sales at the low end of the market. The sales that would be occurring in a healthy market that would cause the median to record a lower value are not occurring now.
2. The people who bought new homes in 2005 and 2006 are going underwater and unwilling and unable to sell. They are being killed by the pricing of the homebuilders, but there is nothing they can do about it, so they all sit in their overpriced homes waiting for their exotic mortgages to explode.

The resale buying which is occurring right now is the last of the move-up buyers who are taking advantage of what they perceive to be a bargain in the market. The loose lending standards are still being offered to prime borrowers (for now.) These buyers are few in number because they are having difficulty finding someone to purchase their home. There are many properties falling out of escrow for this reason. It is the “plankton theory” on display.

Perhaps some of the bulls can offer another interpretation in the comments. I would like to read them.

I have been kindly asked by the OC Register to stop posting the scanned image of the DataQuick information from their newspaper. So from now on, you will get the data in a non-scanned format.

It looks like we have a continuation of our rally in Oak Creek (92618) from last week, and it appears we have the continuation of the complete market implosion everywhere else.

Just a reminder of why we have had the dramatic decline in sales volume…

Credit Suisse saw this coming months ago. Credit tightening has eliminated many prospective buyers from the market. Plus, the unusually high sales volumes of the rally years has seriously depleted the buyer pool.

The reason the median has not declined much to date is because those people who still qualify, are able to obtain financing just like the bubble years. That too is about to change. Below is a chart of the AAA rated ABX index. AAA is the highest rating. It is composed of the highest level of prime borrowers.

This is the cost of insuring a loan against default. As you can see, the meme of “subprime containment” is no longer believed by the insurers of debt. This will cause a further tightening of credit.

• Look for the volume to decline even further in the coming months as this makes its way through the system.
• Also, look for a dramatic drop in prices this fall and winter as the banks liquidate their REO inventory at a time when there are no buyers.

Let’s see: prices are up where volume is way down, prices are down where volume is way up, and 92618 is having a massive price rally. Wait a minute. Didn’t we just profile 92618 last week and show many examples of lower prices? Why is the median up 41%?

Do you see how a few sales can skew the median and make it look high when prices are dropping?