USB bank is predicting a 10% drop in US home prices in 2007. Head on over to the bubble news network for more details. More than one video discusses the downturn.
http://www.paperdinero.com/BNN.aspx
What interested me was the regions they picked out for the most declines:
1. Florida
2. California (Southern California)
3. Nevada
4. DC
(I might have missed Pheonix...)
Getting information about DC is tough. But I think we all know about the others.
What does a 10% decline mean? For most buyers, wait. In southern California, a 10% drop in prices means about a 100k price drop in the nice neighborhoods. While those prices are dropping, it also means that the would be buyer is able to save cash.
What also interested me is the statement by the USB rep that a decline in home prices entails a drop in consumer spending which will trigger a drop in prices. Ok, makes sense... That will likely force a drop in the Fed rates (short term rates).
This finally ends the inverted yeild curve. I quite frankly expect long term yields to slowly keep climbing. Since the typical mortgage payee's ability to sustain a higher payment isn't there, this doesn't translate into a penny of higher monthly carrying costs. In fact, it implies a dramatic cut in the sales prices.
My prediction is that a 10% drop in 2007 is about right. I'm entertaining estimates of 7% to 15% drops nationally. In southern California? Much higher in San Deigo and OC. But what about the south bay? Due to the extreme prevelence of risky loans, probably a little worse than the national norm, but not much. Home prices are sticky. REOs take a long time to get to market. People are greedy and loath to "realize a loss."
And job losses will force it. First in the mortgage markets, than realtora, lumber, furniture, airlines (and other high end services).
It will be an interesting year,
Neil
Saturday, December 30, 2006
Saturday, December 23, 2006
Merry Christmas
I'm taking a short break from blogging just to enjoy the holidays with family. In fact, it almost Christmas eve and my gifts to others are waiting to be wrapped. That should be my #1 worry.
I'm not concerned about paying my mortgage (I rent).
My finances are in good shape. (I rent)
Last year I was able to focus on my job and it looks like a promotion will go through.
Did I mention I'm getting married in the summer? :) (Great woman)
I've bought a bunch for Christmas, but I'm being sensible.
Whatever holiday you celibrate (or avoid), I hope you are able to relax and enjoy this time of year. (Or, at a minimum, get double time pay for your efforts to keep this counry running.)
For one week, I'm just going to forget the bubble and spend time with family.
Neil
ps
I lied, I can't stay off the bubble blogs... but that's sneaking a read here and there. I really am going to spend a week with family. :)
I'm not concerned about paying my mortgage (I rent).
My finances are in good shape. (I rent)
Last year I was able to focus on my job and it looks like a promotion will go through.
Did I mention I'm getting married in the summer? :) (Great woman)
I've bought a bunch for Christmas, but I'm being sensible.
Whatever holiday you celibrate (or avoid), I hope you are able to relax and enjoy this time of year. (Or, at a minimum, get double time pay for your efforts to keep this counry running.)
For one week, I'm just going to forget the bubble and spend time with family.
Neil
ps
I lied, I can't stay off the bubble blogs... but that's sneaking a read here and there. I really am going to spend a week with family. :)
Monday, December 18, 2006
U-haul index revisited
It shocks me to be reading on how the U-haul index is getting worse right now. Back in August I blogged about it and there were sites where I cost 4 times as much to rent a U-haul one way as the other. For those who don't recall, the U-haul index is an indicator of the directionality of job flow in or out of a region. So I decided to revisit it.
My previous article:
http://recomments.blogspot.com/2006/08/uhaul-index-job-flow-directionality.html#links
A quick review of the U-haul intex:
1. Pick a city and see how much it costs both ways to rent a U-haul in/out of the area to multiple destinations.
2. The more expensive direction is the direction that has an unbalanced surplus of jobs going in that direction.
3. If all destinations from a city are more expensive, it means a net-outflow of jobs.
4. The further the travel, the more likely prices also reflect interactions of mid-point job flows. But it should give a trend.
I’m going to redo the same cities to/from
Prices from city listed to 90277/Prices from 90277 to city listed:
What can we conclude?
First, lets look at the old results from August:
90277 to
90277 to
90277 to
90277 to Austin Texas: $6,439 Return: $575 Yes, over 10X more expensive!
90277 to
It appears I was only a little “optimistic” predicting that by Mid-October Joe Sixpack would know that home prices are declining. But I wasn’t too far off. He and Jane Sixpack know home prices are weak to declining. They just believe the NAR propaganda that prices will recover.
I’m still floored by the demand to
The longer people dig their heads in the sand the more population will capitulate and leave the state. On one hand, that’s good for those that want to stay in state. On the other, there is a point to where workers deserting will break the economy.
2007 will be interesting for SoCal real estate. For the most part the California U-haul index is staying the same: bad. Really bad.
Neil
Friday, December 15, 2006
Without a "bubble," buyers are going to wait anyway
There has been much talk about how the press is slowing real estate sales. I’m going to present an argument as to why if buyers do not anticipate incredible equity gains they will wait with no regard to what the press is saying. In other words, common sense, without any knowledge of a bubble, is enough to force down home sales rates.
The first bit point is obvious. Home prices are at incredible heights compared to incomes. Thus buyers are going to be financially tight for a long time if they purchase. Buyers know this and this thought scaring them away from buying or at least making them hesitate. Also, everyone in bubble areas below age 40 knows someone in financial trouble due to the suicide loans, HELOCs, or normal financial distress. I
The second bit is most of the remaining buyers recognize that owning a home in bubble markets is stratospherically more expensive than renting. Thus many, like my fiancée and myself, are adjusting first to the lifestyle home ownership would entail: less dining out, cutting costs, etc. Thus a delay of home purchase.
The third and I believe most important reason is that it is now impossible to save money for the first 5 to 7 years after buying. Most people know a financial cushion is invaluable. Thus, sensible buyers (about all who are left…) won’t be afraid of 2% appreciation. As long as home prices are at such multiples of incomes and appreciation is weak… they will put money away until their down payment and their financial cushion are sufficient.
Since the market cannot sustain current prices without continued fevered sales rates… we have a guaranteed drop in real estate prices. Everyone should have asked what happens when enough people are “priced out forever.” It has happened and thus this is the real estate market we’re stuck with. Press reports might slow the market a little further, but they are not the cause nor the cure.
Neil
Tuesday, December 12, 2006
"substantial cooling of the housing market."
The fed kept rates constant
On growth, the Fed said that the economy has slowed this year reflecting a "substantial cooling of the housing market." It added the word "substantial" to describe the housing slowdown in this statement.
preceeded by:
In its statement, the Fed continued to signal concerns about inflation, stating, "The Fed judges that some inflation risks remain." That is the phrase the Fed has been using to signal that further rate hikes are still possible unless inflation slows more.
http://biz.yahoo.com/ap/061212/fed_interest_rates.html?.v=10
Its starting... and the fed is between a rock and a hard place. I wouldn't want to be BB... he has a tough job ahead.
A coworker and I just had a discussion and what he wanted to know is "when will they lower interest rates again?" It took a while, but when I explained that if rates don't go up his pension would be reduced... He wasn't as adament about a return to low rates.
Interesting times ahead. Any bets on when the first hedge fund is taken under by credit default swaps?
Neil
On growth, the Fed said that the economy has slowed this year reflecting a "substantial cooling of the housing market." It added the word "substantial" to describe the housing slowdown in this statement.
preceeded by:
In its statement, the Fed continued to signal concerns about inflation, stating, "The Fed judges that some inflation risks remain." That is the phrase the Fed has been using to signal that further rate hikes are still possible unless inflation slows more.
http://biz.yahoo.com/ap/061212/fed_interest_rates.html?.v=10
Its starting... and the fed is between a rock and a hard place. I wouldn't want to be BB... he has a tough job ahead.
A coworker and I just had a discussion and what he wanted to know is "when will they lower interest rates again?" It took a while, but when I explained that if rates don't go up his pension would be reduced... He wasn't as adament about a return to low rates.
Interesting times ahead. Any bets on when the first hedge fund is taken under by credit default swaps?
Neil
Friday, December 08, 2006
Death of the subprime and easy credit
This has been a very interesting week. Multiple subprime lenders bit the dust. Ownit made the news and simply closed the doors at 5:05pm to 300 workers in Agoura Hills (Ventura County, CA) and another 500 elsewhere. Sebring Capitol also shut down as did Merritt. Option One is on the block by H&R block and in my opinion could eventually take H&R block down (or at least into BK court). Netbank closed their subprime unit a month ago. I'm also concerned about Ameriquest. They seem to be flailing.
Opednews noted something that I hadn't considered:
"Many people in the industry cannot claim unemployment because they were on commission only jobs. Many of them were treated as self employed or independent contractors thus they are not reflected in the real unemployment numbers. "
This is interesting... We're going to have unemployment without official unemployment! In other words, the statistics are already off, but by how much?
Its almost like the secondary market has lost its appetite for sub-prime mortgages. This bubble was fueled by easy liquidity; is it over? Most likely this is just a step down in the long road to rational credit markets. However, I am of the opinion that this won't be a smooth tightening of the "home ATM" spiket, but rather a time of sharp reductions.
This leaves me with a question, can banks reduce or cut off unused HELOCs to minimize their exposure? How long until too many people do not have enough credit to be credit worthy?
I still predict 2Q 2007 is the schwerpunkt of the housing crisis. As I posted in the comment's of Ben's blog, I am willing to entertain an earlier start. ;) These sub-prime loans removed affordability from many markets. I say good ridance to them.
For southern California, that will suddenly remove 1/3rd of the buyers. Do not expect the upgrade market to maintain prices when the 1st and 2nd time home buyers cannot upgrade. When you factor in the ever increasing foreclosure inventory, it tells me we're in for quite a price correction.
I'm keeping with my prediction of a 30% to 60% price drop for Southern California. For 2007 it seems almost impossible for us to have less than a 25% price drop in one year. Yikes! Will it all happen in 2007? Unlikely due to the way the ARMs reset and people's willingness to go into denial for a year. But this isn't the 1990's where people have nice nest eggs to ride out a downturn for years. Today's typical consumer's sustainable downtime is a few months; yes, some can only get by for a few weeks.
Considering that the bulk of the sub-prime jobs are in Orange County, LA Country, and Ventura Country... I'm not very optimistic for Southern California what so ever. (Yea, I skipped San Diego county. If you don't know what's happening there... I can't help you.)
Its only a question of when credit gets tough. Its only a question of how long until home prices really drop. Forget a spring bounce... that cannot happen with 1/3rd of the mortgages taken off the plate.
Neil
article from bloomberg on Ownit (sorry about the ad...):
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKO4CvD700gI&refer=home
The oped news article:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm
article on mortgage catering due to fraud:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm
Opednews noted something that I hadn't considered:
"Many people in the industry cannot claim unemployment because they were on commission only jobs. Many of them were treated as self employed or independent contractors thus they are not reflected in the real unemployment numbers. "
This is interesting... We're going to have unemployment without official unemployment! In other words, the statistics are already off, but by how much?
Its almost like the secondary market has lost its appetite for sub-prime mortgages. This bubble was fueled by easy liquidity; is it over? Most likely this is just a step down in the long road to rational credit markets. However, I am of the opinion that this won't be a smooth tightening of the "home ATM" spiket, but rather a time of sharp reductions.
This leaves me with a question, can banks reduce or cut off unused HELOCs to minimize their exposure? How long until too many people do not have enough credit to be credit worthy?
I still predict 2Q 2007 is the schwerpunkt of the housing crisis. As I posted in the comment's of Ben's blog, I am willing to entertain an earlier start. ;) These sub-prime loans removed affordability from many markets. I say good ridance to them.
For southern California, that will suddenly remove 1/3rd of the buyers. Do not expect the upgrade market to maintain prices when the 1st and 2nd time home buyers cannot upgrade. When you factor in the ever increasing foreclosure inventory, it tells me we're in for quite a price correction.
I'm keeping with my prediction of a 30% to 60% price drop for Southern California. For 2007 it seems almost impossible for us to have less than a 25% price drop in one year. Yikes! Will it all happen in 2007? Unlikely due to the way the ARMs reset and people's willingness to go into denial for a year. But this isn't the 1990's where people have nice nest eggs to ride out a downturn for years. Today's typical consumer's sustainable downtime is a few months; yes, some can only get by for a few weeks.
Considering that the bulk of the sub-prime jobs are in Orange County, LA Country, and Ventura Country... I'm not very optimistic for Southern California what so ever. (Yea, I skipped San Diego county. If you don't know what's happening there... I can't help you.)
Its only a question of when credit gets tough. Its only a question of how long until home prices really drop. Forget a spring bounce... that cannot happen with 1/3rd of the mortgages taken off the plate.
Neil
article from bloomberg on Ownit (sorry about the ad...):
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKO4CvD700gI&refer=home
The oped news article:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm
article on mortgage catering due to fraud:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm
Tuesday, December 05, 2006
WSJ article on mortgage defaults
If you don't already have an online subscription to the WSJ, I recommend it. Pricey? Yes. A little behind some of the bubble blog news? True. Worth it? Definately.
http://online.wsj.com/article/SB116528735773440781.html?mod=home_whats_news_us
Who is going to be buying all these sub prime lenders?
Who is going to buy the lower tranches of MBS?
But some recent deals are already coming under review. Standard & Poor's Corp. put one deal backed by loans issued by Fremont General Corp.'s mortgage unit on credit watch for possible downgrade last month and says it could take similar action on deals from several other issuers within the next few months. Fremont declined to comment.
This is the most important part of the article. I wish the WSJ had gone into how a bond downgrade results in an increased risk premium resulting in a credit tightening.
We have all discussed what happens when credit tightens.
Wait to buy a home until its difficult to get a loan. Have your down payment secured. That's when you get the best deal.
Neil
http://online.wsj.com/article/SB116528735773440781.html?mod=home_whats_news_us
On Friday, KeyCorp said it reached a deal to sell its subprime Champion Mortgage business. Analysts at Friedman, Billings, Ramsey & Co. put the price for the company's subprime mortgage operation at $130 million, "far below" the $200 million to $250 million they expected. A spokeswoman for KeyCorp declined to comment, except to say that KeyCorp feels it "definitely generated a fair price" for both the unit and its loan portfolio, which was sold separately. She added that KeyCorp was leaving the subprime market because "it no longer fits with our long-term strategic priorities."
Soaring delinquencies are making some lenders more cautious, which is likely to put further pressure on the weak housing market. Yesterday, the National Association of Realtors said that its index for pending home sales for October fell a seasonally adjusted rate of 1.7% from September and was down 13.2% from a year earlier.
Delinquency rates have been rising steadily since the middle of 2005. But the trend has accelerated sharply in the past two to three months, according to an analysis by UBS. The figures don't include loans that lenders were forced to repurchase because the borrower went into default in the first few months; such repurchases also have increased sharply this year.
In October, borrowers were 60 days or more behind in payments on 3.9% of the subprime home loans packaged into mortgage securities this year, UBS says. That's nearly twice the delinquency rate on new subprime loans recorded a year earlier.
Who is going to be buying all these sub prime lenders?
Who is going to buy the lower tranches of MBS?
But some recent deals are already coming under review. Standard & Poor's Corp. put one deal backed by loans issued by Fremont General Corp.'s mortgage unit on credit watch for possible downgrade last month and says it could take similar action on deals from several other issuers within the next few months. Fremont declined to comment.
This is the most important part of the article. I wish the WSJ had gone into how a bond downgrade results in an increased risk premium resulting in a credit tightening.
We have all discussed what happens when credit tightens.
Wait to buy a home until its difficult to get a loan. Have your down payment secured. That's when you get the best deal.
Neil
Saturday, December 02, 2006
Resort style living
There are currently 4 properties for available at 1800 PCH in Redondo Beach. This "is a gated wal-street community located just blocks to the sand & water and the Riviera village." Not to mention a community with a $292 HOA. These homes are truly "fallback" homes for individuals who have to live somewhat near the beach. All seem to be 3 bedroom and 2.5 or 3 bath residences.
We have one "A" model, one "B" model, and one "C" model for sale. Come pick your model! Also, for a limited time only, we have a "C" model for rent for a mere $3,400/month. Ummm... I've seen bigger places for $700 or $900 less per month. Convieniently, three of the properties are on one flier. Since that flier has 3 and 2.5 bath townhomes on it... I'm going to assume the bathroom discription is accurate. (Yea... I know, "assume"...)
The properties:
#11, a 3bd/3bath 1622 ft^2 for $3,400/month. "C" model
#17 a 3bd/3bath (or is that 2.5 bath? B model of 1672 ft^2) offered at $719,900
#64 a 3bd/3bath 1622 ft^2 "C model" for $729,500
#89 a 3 bdr, 2.5 bath 1500 ft^2 at $740,000
I haven't compared the amnenities. But that HOA makes these $750k properties after negotiation... Is it worth it? But with 4 properties on the market... during the slow season... I'm seeing a dutch auction.
Neil
We have one "A" model, one "B" model, and one "C" model for sale. Come pick your model! Also, for a limited time only, we have a "C" model for rent for a mere $3,400/month. Ummm... I've seen bigger places for $700 or $900 less per month. Convieniently, three of the properties are on one flier. Since that flier has 3 and 2.5 bath townhomes on it... I'm going to assume the bathroom discription is accurate. (Yea... I know, "assume"...)
The properties:
#11, a 3bd/3bath 1622 ft^2 for $3,400/month. "C" model
#17 a 3bd/3bath (or is that 2.5 bath? B model of 1672 ft^2) offered at $719,900
#64 a 3bd/3bath 1622 ft^2 "C model" for $729,500
#89 a 3 bdr, 2.5 bath 1500 ft^2 at $740,000
I haven't compared the amnenities. But that HOA makes these $750k properties after negotiation... Is it worth it? But with 4 properties on the market... during the slow season... I'm seeing a dutch auction.
Neil
Friday, December 01, 2006
Depression versus recession
Why I predict a bad recession and not a depression.
There is quite a bit of dicussion in the blog sphere that we could be in danger of a depression. This entry is to explain why I don't think this will turn into one.
First, let me define a depression.
1. 25% unemployment
2. A broken economy, specifically the banking sector
3. Stagnation: technologically, economically, philosophically
In other words, a depression is a lot more than a long recession.
What created the last depression? Among other factors
1. Cessation of trade.
2. Collapse of the banking sector
3. Incredible surplus inventory (years supply in many sectors)
Let me discuss what is different this time.
Despite all of the furor over "globalization", trade is here to stay. We can no longer function without it.
The banking sector is at risk and this worries me. We're going to need intervention after defaults. The financial sector is the "lubricant of the economy." Without loans, businesses have trouble expanding, individuals cease buying homes, etc.
Basically, children of the middle class cannot themselves be middle class without a banking system. Sans it, none of us would have homes, be able to better ourselves via education (unless our parents could pay for it, e.g., no student loans). Ok, some aspects of loans are currently way out of hand. That shall pass... I've gotten over that bit. My concern is to rebuild a healthy system post the coming crisis.
The last tidbit that sent us into depression was teh amazing surplus inventory of 1929/1930. Many industries had years of inventory. Ok, the housing industry (a large sector of the economy), does have a tremendous overhang of inventory. That will drag us down. But what about the other major sectors? I'll address the ones that drove us down to depression before.
1. Steel. With the current worldwide shortage... not an issue.
2. Cars... Ok, there is surplus and it will hurt, but nothing like 1929.
3. Consumer goods... Not much surplus thanks to "just in time" inventory. e.g., no piles of RCA radios this time. Computers? Na... they're worthless in 2 or 3 years anyway.
4. Agriculture. In the later 20's, Europe had rebuilt itself post WW1 and was able to feed itself. This cut off a large source of funds into the US. Ok, cutting off bond sales might be the same... we'll see. Our current Agriculture system isn't great, but I'm not seeing "grapes of wrath" part II.
5. Rail (and other transit). If anything, we must invest into this infrastructure. Everything from the Chicago cross over, the sunset line, more interstates, freeways, subways, airport (runways and terminals)... we're hurting for more transpertation infrastructure.
I do admit there are meany weaknesses to the current economy. In the great depression the hardest hit industry was the service industry. Or more specifically servants. Yes, servants. Once upon a time one definition of middle class was being able to afford a servant. Ok, I know many people who hire maid services, etc., but not a servant.
But today we hire people by the score in service industries. Restaraunts, spa,
and one interesting coorelation, Golf. In the 1920's, golf was incredibly popular, like today. ;)
So what's different?
1. When we lay off tremendous numbers of construction workers, we'll send them back south of the border. Cruel? Very. Reality? Yep.
2. Banking. The total cut off of credit to the middle class had major consequences. We'll have a government "bail out" this time instead of a president who didn't want to interfere.
3. Job creation. Infrastructure, or some industry I haven't thought of.
4. Inventory. "Just in time" will actually save our butts. Not in every industry, but enough.
5. demographics. The boomers are going to have to hire people to help them. Those that have savings will be forced to stimulate the economy.
6. Unemployment. It will get high... very high. But not 25% nationally. Its probably going to break 12%... ouch.
7. Trade. China will trade with India, Europe, etc. It won't be cut off like last time with smoot-Hawley and everyone reciprocating. Like it or not, the WTO is here. There is no simple unraveling of world trade. It won't shut off again.
http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act
Oh, this is going to be an ugly recession. Very ugly. But not a depression. I would hate to be a country selling luxury foods to the USA... that business is about to be cut down. We're going to be forced to drop back to a low (or zero) trade deficit. Cest la vie.
We'll be ok, but it'll be ugly.
Neil
There is quite a bit of dicussion in the blog sphere that we could be in danger of a depression. This entry is to explain why I don't think this will turn into one.
First, let me define a depression.
1. 25% unemployment
2. A broken economy, specifically the banking sector
3. Stagnation: technologically, economically, philosophically
In other words, a depression is a lot more than a long recession.
What created the last depression? Among other factors
1. Cessation of trade.
2. Collapse of the banking sector
3. Incredible surplus inventory (years supply in many sectors)
Let me discuss what is different this time.
Despite all of the furor over "globalization", trade is here to stay. We can no longer function without it.
The banking sector is at risk and this worries me. We're going to need intervention after defaults. The financial sector is the "lubricant of the economy." Without loans, businesses have trouble expanding, individuals cease buying homes, etc.
Basically, children of the middle class cannot themselves be middle class without a banking system. Sans it, none of us would have homes, be able to better ourselves via education (unless our parents could pay for it, e.g., no student loans). Ok, some aspects of loans are currently way out of hand. That shall pass... I've gotten over that bit. My concern is to rebuild a healthy system post the coming crisis.
The last tidbit that sent us into depression was teh amazing surplus inventory of 1929/1930. Many industries had years of inventory. Ok, the housing industry (a large sector of the economy), does have a tremendous overhang of inventory. That will drag us down. But what about the other major sectors? I'll address the ones that drove us down to depression before.
1. Steel. With the current worldwide shortage... not an issue.
2. Cars... Ok, there is surplus and it will hurt, but nothing like 1929.
3. Consumer goods... Not much surplus thanks to "just in time" inventory. e.g., no piles of RCA radios this time. Computers? Na... they're worthless in 2 or 3 years anyway.
4. Agriculture. In the later 20's, Europe had rebuilt itself post WW1 and was able to feed itself. This cut off a large source of funds into the US. Ok, cutting off bond sales might be the same... we'll see. Our current Agriculture system isn't great, but I'm not seeing "grapes of wrath" part II.
5. Rail (and other transit). If anything, we must invest into this infrastructure. Everything from the Chicago cross over, the sunset line, more interstates, freeways, subways, airport (runways and terminals)... we're hurting for more transpertation infrastructure.
I do admit there are meany weaknesses to the current economy. In the great depression the hardest hit industry was the service industry. Or more specifically servants. Yes, servants. Once upon a time one definition of middle class was being able to afford a servant. Ok, I know many people who hire maid services, etc., but not a servant.
But today we hire people by the score in service industries. Restaraunts, spa,
and one interesting coorelation, Golf. In the 1920's, golf was incredibly popular, like today. ;)
So what's different?
1. When we lay off tremendous numbers of construction workers, we'll send them back south of the border. Cruel? Very. Reality? Yep.
2. Banking. The total cut off of credit to the middle class had major consequences. We'll have a government "bail out" this time instead of a president who didn't want to interfere.
3. Job creation. Infrastructure, or some industry I haven't thought of.
4. Inventory. "Just in time" will actually save our butts. Not in every industry, but enough.
5. demographics. The boomers are going to have to hire people to help them. Those that have savings will be forced to stimulate the economy.
6. Unemployment. It will get high... very high. But not 25% nationally. Its probably going to break 12%... ouch.
7. Trade. China will trade with India, Europe, etc. It won't be cut off like last time with smoot-Hawley and everyone reciprocating. Like it or not, the WTO is here. There is no simple unraveling of world trade. It won't shut off again.
http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act
Oh, this is going to be an ugly recession. Very ugly. But not a depression. I would hate to be a country selling luxury foods to the USA... that business is about to be cut down. We're going to be forced to drop back to a low (or zero) trade deficit. Cest la vie.
We'll be ok, but it'll be ugly.
Neil
Friday, November 24, 2006
News lags reality
Some erroneously blame the media for slower sales. In fact, the media has been lagging the reality of the housing market. For a long time they've parroted the NAR's insistance of a rebound in the spring or the "soft landing" propoganda.
But now... they're losing subscribers. Who's going to buy something that is only an obious mouthpiece for their advertisers?
So the daily breeze has an artilce on soft housing markets:
http://www.dailybreeze.com/business/articles/4705351.html
The feeble U.S. housing market showed more frailty when third-quarter home sales plummeted in 38 states, hitting Nevada, Arizona, Florida and California particularly hard, government data showed on Monday.
They also have in the from of the business section an artile tiled "What they'll do to close on a home." Gee... now why can't I find that on the web site? Its talking about how buyers don't want to buy in a "buyers market." Also how selling $1 million dollar homes is getting tougher. Ok, they don't say it... but its pretty obvious the author did want to say it but the editor cut that out of the story.
USA today had bearish home articles too.
Money magazine also had recomendations on downsizing real estate investments. It even went into how it could be wise to downsize the house to reduce exposure. Good advice. Nov 27th edition (IIRC). Sorry no link, I was browsing post turkey day through someone else's copy.
And yet they wonder why buyers aren't buying?
Simple, a $1.0M home takes about a $300k salary. That's a very rare salary in Los Angles, but not a rare home price. Last I looked, only 1.8% of LA's population could afford the median home. Someone up in that income bracket isn't going to want the median home.
Its going to take a while. I still don't expect the market to "break" until 2Q 2007. I also still do not expect it to be a true "buyers market" until Fall 2008. Do note, I place a higher utilization value on having a home than some of my fellow bubbleheads. Many of them note, I believe correctly, that we cannot expect home appreciation in LA/OC until 2011. So there won't be a rush to buy for a long time.
And I believe home prices have been too high for too long. Combined with taxes and workers comp, this means jobs that pay 75k to 150k (Nominally 1.5X median wage to 2.5X median wage) are going to leave LA/OC. Wait a second... Isn't that the best jobs a city can hope to attract?!? Uh oh... this is going to get ugly.
I hope to buy into the south bay... but I now think there is a 50/50 chance I'll be leaving the state in 2 years, not buying in. :( Not by choice, but rather to follow a good job. Hopefully I'm wrong.
Enjoy shopping on Black Friday.
Now to come up for a catchy name for the comming downturn...
Neil
But now... they're losing subscribers. Who's going to buy something that is only an obious mouthpiece for their advertisers?
So the daily breeze has an artilce on soft housing markets:
http://www.dailybreeze.com/business/articles/4705351.html
The feeble U.S. housing market showed more frailty when third-quarter home sales plummeted in 38 states, hitting Nevada, Arizona, Florida and California particularly hard, government data showed on Monday.
The real estate market's persistent weakness during the past year has reined in expectations for economic growth but hasn't been severe enough to offset a rising stock market, lower gas prices and improved consumer expectations.
They also have in the from of the business section an artile tiled "What they'll do to close on a home." Gee... now why can't I find that on the web site? Its talking about how buyers don't want to buy in a "buyers market." Also how selling $1 million dollar homes is getting tougher. Ok, they don't say it... but its pretty obvious the author did want to say it but the editor cut that out of the story.
USA today had bearish home articles too.
Money magazine also had recomendations on downsizing real estate investments. It even went into how it could be wise to downsize the house to reduce exposure. Good advice. Nov 27th edition (IIRC). Sorry no link, I was browsing post turkey day through someone else's copy.
And yet they wonder why buyers aren't buying?
Simple, a $1.0M home takes about a $300k salary. That's a very rare salary in Los Angles, but not a rare home price. Last I looked, only 1.8% of LA's population could afford the median home. Someone up in that income bracket isn't going to want the median home.
Its going to take a while. I still don't expect the market to "break" until 2Q 2007. I also still do not expect it to be a true "buyers market" until Fall 2008. Do note, I place a higher utilization value on having a home than some of my fellow bubbleheads. Many of them note, I believe correctly, that we cannot expect home appreciation in LA/OC until 2011. So there won't be a rush to buy for a long time.
And I believe home prices have been too high for too long. Combined with taxes and workers comp, this means jobs that pay 75k to 150k (Nominally 1.5X median wage to 2.5X median wage) are going to leave LA/OC. Wait a second... Isn't that the best jobs a city can hope to attract?!? Uh oh... this is going to get ugly.
I hope to buy into the south bay... but I now think there is a 50/50 chance I'll be leaving the state in 2 years, not buying in. :( Not by choice, but rather to follow a good job. Hopefully I'm wrong.
Enjoy shopping on Black Friday.
Now to come up for a catchy name for the comming downturn...
Neil
Thursday, November 23, 2006
Happy Thanksgiving
I hope you're enjoying a meal with those you love today. Its the one day of the year you are supposed to eat to much!
We're now officially in the slow season. Few markets have strong sales this time of year. As a future home buyer, I'm in shock at the number of homes for sale out there.
Now, admit it, like myself, you are curious to know if there will be a bunch of open houses on "Black Friday." If that isn't an indicator...
But I have more important things to do... My job is the pies today, so I'm off to the market for one spice that we've run out of. :) Whatever your families traditions are I hope you get to experience them.
Neil
We're now officially in the slow season. Few markets have strong sales this time of year. As a future home buyer, I'm in shock at the number of homes for sale out there.
Now, admit it, like myself, you are curious to know if there will be a bunch of open houses on "Black Friday." If that isn't an indicator...
But I have more important things to do... My job is the pies today, so I'm off to the market for one spice that we've run out of. :) Whatever your families traditions are I hope you get to experience them.
Neil
Saturday, November 18, 2006
Convergence at end 2Q 2007
Its time for me to put into writting why I think its going to get interesting at the end of the second quarter 2007 (June). There are several factors converging at once.
1. Sufficient quantities of ARMs have reset by then to make a difference. About 1/3rd of the ones that will reset with the majority of those in 2007.
2. Enough population leaving California to finally start to matter (a little).
3. Construction employment finally will start down around late April or May.
4. Enough perception of slowing real estate appreciation to slow sales.
5. Foreclosure rate in Florida, San Diego, and Sacramento gets high enough that the defaults stall the MBS market.
6. Enough forclosures and short sales "return to the market" to correct the shortage of housing created by flippers withdrawing properties from the market.
Each topic:
Option ARMs are the toxic waste of this housing bubble. But they only matter
by the monthly payment pain they induce. As bad as building up a negative equity sounds... for too many, who falsely believe their home is appreciating, only the monthly payment matters. When that ends... ouch.
Supposidly California is losing population. Boy will I be all ears for United Van lines summary that will come out in January of 2007. Have no doubt I'll grab a copy of that pdf and post links. I expect California to get a special mention on the extent of the outflow of population. I simply know too many people who have fled the state. Not to mention I see too many empty homes for sale; the previous sellers long ago cashed out and set up residence in another state.
Calculated risk did a great little analysis of what's going to happen to construction employment. There is a direct correlation between housing completions and housing employment. Since housing completions lag starts by six months... In an article on Nov 17th, Calculated risk notes that by April we will see 300,000 to 400,000 lost jobs in California in construction. The domino effect will be pretty rapid... Some lag is always there... But we'll be feeling it by June (but won't fully get the impact probably until Christmas 2007!).
http://calculatedrisk.blogspot.com/2006/11/housing-starts-and-completions.html
I'm read a book on real estate cycles recently. Not really anything that great, but it spent a whole page going over why home sales slow when the *perceived* appreciation slows. People just lose the urge to buy. Buyers also get spooked by declining prices. So by 2Q 2007... buyers won't be a little spooked, they'll really be on the sidelines. (Smart ones are on the sidelines today... buy June 2007, even some of the dumbest will be on the sidelines.)
The next bit is that enough enough loses in the MBS holders that they'll tighten the credit a bit. Just the requirement for income verification will slow the market enough to drop prices. If people are also required to put some meat into the game... that will cut out most (not all) of the speculators. I've seen coworkers just recently jump into the speculation game, so I know they're still out there. But after a credit tightening... we'll get rid of most of them.
One odd artifact of this bubble is the amount of housing that was artificially pulled off the market for condo conversions, teardown and rebuild, or just greedy speculation (cheap remodels). Once this inventory is made available... the shortage of housing won't be as accute.
So this is why 2Q 2007 is the start of the "interesting times" in my book. Its not the bottom... oh no. Its not even going to be the quarter with the fastest price drops. (That's later.) Oh, I've posted before I thought it would be the period of fastest price drops... but I realize people can hold on for a little longer. It won't be until 2008 that we have the mixture of enough foreclosures and "owners" underwater to create the great stampede out the door.
Will my Fall 2008 be ok for buying? I'm begining to suspect that's too far to the left... But I posted the information. Let's see how accurate it is. Items #1, 2, 3, 4, 5, and 6 will all be getting worse as 2007 progresses.
But its 2Q 2007 when enough either change direction or get "bad enough" to pass the pain threshold. And note I point towards the end of the quarter. Could it happen earlier? Maybe. But we've all be amazed at the "stickyness" of this housing market. That end at the end of the second quarter. It still won't be time to buy. But we'll start seeing *good* progress towards affordability.
Neil
1. Sufficient quantities of ARMs have reset by then to make a difference. About 1/3rd of the ones that will reset with the majority of those in 2007.
2. Enough population leaving California to finally start to matter (a little).
3. Construction employment finally will start down around late April or May.
4. Enough perception of slowing real estate appreciation to slow sales.
5. Foreclosure rate in Florida, San Diego, and Sacramento gets high enough that the defaults stall the MBS market.
6. Enough forclosures and short sales "return to the market" to correct the shortage of housing created by flippers withdrawing properties from the market.
Each topic:
Option ARMs are the toxic waste of this housing bubble. But they only matter
by the monthly payment pain they induce. As bad as building up a negative equity sounds... for too many, who falsely believe their home is appreciating, only the monthly payment matters. When that ends... ouch.
Supposidly California is losing population. Boy will I be all ears for United Van lines summary that will come out in January of 2007. Have no doubt I'll grab a copy of that pdf and post links. I expect California to get a special mention on the extent of the outflow of population. I simply know too many people who have fled the state. Not to mention I see too many empty homes for sale; the previous sellers long ago cashed out and set up residence in another state.
Calculated risk did a great little analysis of what's going to happen to construction employment. There is a direct correlation between housing completions and housing employment. Since housing completions lag starts by six months... In an article on Nov 17th, Calculated risk notes that by April we will see 300,000 to 400,000 lost jobs in California in construction. The domino effect will be pretty rapid... Some lag is always there... But we'll be feeling it by June (but won't fully get the impact probably until Christmas 2007!).
http://calculatedrisk.blogspot.com/2006/11/housing-starts-and-completions.html
I'm read a book on real estate cycles recently. Not really anything that great, but it spent a whole page going over why home sales slow when the *perceived* appreciation slows. People just lose the urge to buy. Buyers also get spooked by declining prices. So by 2Q 2007... buyers won't be a little spooked, they'll really be on the sidelines. (Smart ones are on the sidelines today... buy June 2007, even some of the dumbest will be on the sidelines.)
The next bit is that enough enough loses in the MBS holders that they'll tighten the credit a bit. Just the requirement for income verification will slow the market enough to drop prices. If people are also required to put some meat into the game... that will cut out most (not all) of the speculators. I've seen coworkers just recently jump into the speculation game, so I know they're still out there. But after a credit tightening... we'll get rid of most of them.
One odd artifact of this bubble is the amount of housing that was artificially pulled off the market for condo conversions, teardown and rebuild, or just greedy speculation (cheap remodels). Once this inventory is made available... the shortage of housing won't be as accute.
So this is why 2Q 2007 is the start of the "interesting times" in my book. Its not the bottom... oh no. Its not even going to be the quarter with the fastest price drops. (That's later.) Oh, I've posted before I thought it would be the period of fastest price drops... but I realize people can hold on for a little longer. It won't be until 2008 that we have the mixture of enough foreclosures and "owners" underwater to create the great stampede out the door.
Will my Fall 2008 be ok for buying? I'm begining to suspect that's too far to the left... But I posted the information. Let's see how accurate it is. Items #1, 2, 3, 4, 5, and 6 will all be getting worse as 2007 progresses.
But its 2Q 2007 when enough either change direction or get "bad enough" to pass the pain threshold. And note I point towards the end of the quarter. Could it happen earlier? Maybe. But we've all be amazed at the "stickyness" of this housing market. That end at the end of the second quarter. It still won't be time to buy. But we'll start seeing *good* progress towards affordability.
Neil
Thursday, November 16, 2006
Again, not much
I believe that this blog needs one post a week to capture the snapshot... but the holidays are coming up and I have other thoughts on my mind.
I will mention my fiance' and I wend house shopping again last weekend (not seriously, look at the rumor post). What we noted:
1. Almost empty homes
2. Realtors flat out telling us its a buyers market and that we can bid $50k under asking price.
3. The one other home we met other buyers, we stopped to chat how that was weird.
4. Prices are down $250k from when we started looking! That's $250k in 270 days... or $1,000/day! (In rough numbers.)
5. Prices under $800k are becoming common.
6. Where did all of these new $2 million+ homes come from?
7. Far too many "Zero down" signs in the beach cities. Whisky Tango Foxtrot? I'm sorry, if you don't have a down payment, what are you doing looking in premium markets?
Gee... and people wonder why I'm waiting...
I did have fun mentioning to one realtor how we weren't going to buy until my company decided if we should relocate out of state or not. She asked "why would you move." I noted we hire quite a significant number from out of state, but that it was getting impossible to bring people in due to home prices.
Oh, that look was priceless! ;)
I stand by my prediction that prices will drop 30% to 60% in nominal dollars from the peak. Sigh... how long will that take? I do know that 2Q2007 is continuing to look like the Schwerpunk for the housing market. (Schwerpunk=Point of main decision.)
Neil
I will mention my fiance' and I wend house shopping again last weekend (not seriously, look at the rumor post). What we noted:
1. Almost empty homes
2. Realtors flat out telling us its a buyers market and that we can bid $50k under asking price.
3. The one other home we met other buyers, we stopped to chat how that was weird.
4. Prices are down $250k from when we started looking! That's $250k in 270 days... or $1,000/day! (In rough numbers.)
5. Prices under $800k are becoming common.
6. Where did all of these new $2 million+ homes come from?
7. Far too many "Zero down" signs in the beach cities. Whisky Tango Foxtrot? I'm sorry, if you don't have a down payment, what are you doing looking in premium markets?
Gee... and people wonder why I'm waiting...
I did have fun mentioning to one realtor how we weren't going to buy until my company decided if we should relocate out of state or not. She asked "why would you move." I noted we hire quite a significant number from out of state, but that it was getting impossible to bring people in due to home prices.
Oh, that look was priceless! ;)
I stand by my prediction that prices will drop 30% to 60% in nominal dollars from the peak. Sigh... how long will that take? I do know that 2Q2007 is continuing to look like the Schwerpunk for the housing market. (Schwerpunk=Point of main decision.)
Neil
Wednesday, November 08, 2006
Rumor: Only a rumor
Market conditions are creating interesting rumors at work
A rumor is going around work that should have been expected. Its a rumor in two parts. The first part is pretty factual. For our site, in the south bay area of LA, we need to double salaries within 5 years to keep attracting talent (not likely...) due to the unaffordability of housing.
The second part of the rumor raised the hairs on my neck. It is how my company plans to see off our main campus and relocate out of California. Unfortunately, this makes sense. Why?
1. The company is selling off buildings not attached to our main campuses.
2. The company is having trouble recruiting into LA; home prices are at fault.
3. The business case to expand in LA... isn't there. We're expanding pretty much every where else and contracting around greater LA.
4 . The company has sold warehouses.
5. One state in particular, Arkansas, has been trying really hard to recruit our company.
6. In southern California, we're spread out to about a half dozen major campuses. For over a decade they have wanted to consolodate but haven't been able to.
Could housing prices actually make it happen?
A coworker and I identified a dozen locations where the business case to relocate would make it happen.
What the company needs:
1. Land. Lots of it. We cannot expand in LA, need to expand, yet we're selling building. That says the ROI case doesn't justify expanding... in LA.
2. Consolodation. Two of the campuses constantly have traffic back and forth... its costing too much having them seperated. We might as well merge a few more together.
3. Lower housing costs for employees. Not a little. Nothing less than a 50% drop justifies the move. It probably needs to be more to "excite" the current work force to cash out and move. The 50% drop is required to attract new hires.
4. Reduced comute times for employees. Comute times are discouraging employees as much as home costs.
5. Airport access. There are different thoughts. We're talking about moving enough people that the company could justify buying a small business jet fleet to ferry people, but they wouldn't want to. We do international business, so we need to be at most one hop from a variety of hubs.
6. Industrial and office supplies. We actually make stuff, so we need a pre-estabilished vendor for tooling and all the normal stuff.
7. Pre-estabilished community services that could grow to meet the influx. In other words, an existing city that's big enough to handle the influx easy and has schools, police, fire, hospitals, and other community services. Not to mention hotels and workers to build the new campus, housing, etc.
8. No extended freezes. We have equipment we leave outside that if it truly freezes... its toast. It can take frost, just not well below freezing.
9. Dryness. Or more precisely, it cannot be too excessively humid. I'm talking no swamps; parts of Florida could work, but not right off the Mississippi, and ignore any area with more than morning fog. I'm not going to say why, except that it effects our product.
10. Road and rail access. But that's a given (along with water and electricity and other stuff I've forgotten about).
11. Something attractive about the area that would draw equity rich Californians there. Nearby skiing? Water sports? Something!
Anyway, this rumor is a little buzz around work. Does it mean anything? I don't know. The last time such a rumor went around work (at a different company) we moved 1,000 miles. But we were the satalite campus relocated back to the main campus. My father was threatened with a move to New Mexico, but the company couldn't sell the property in 1994... Will the decision be made too late?
Neil
A rumor is going around work that should have been expected. Its a rumor in two parts. The first part is pretty factual. For our site, in the south bay area of LA, we need to double salaries within 5 years to keep attracting talent (not likely...) due to the unaffordability of housing.
The second part of the rumor raised the hairs on my neck. It is how my company plans to see off our main campus and relocate out of California. Unfortunately, this makes sense. Why?
1. The company is selling off buildings not attached to our main campuses.
2. The company is having trouble recruiting into LA; home prices are at fault.
3. The business case to expand in LA... isn't there. We're expanding pretty much every where else and contracting around greater LA.
4 . The company has sold warehouses.
5. One state in particular, Arkansas, has been trying really hard to recruit our company.
6. In southern California, we're spread out to about a half dozen major campuses. For over a decade they have wanted to consolodate but haven't been able to.
Could housing prices actually make it happen?
A coworker and I identified a dozen locations where the business case to relocate would make it happen.
What the company needs:
1. Land. Lots of it. We cannot expand in LA, need to expand, yet we're selling building. That says the ROI case doesn't justify expanding... in LA.
2. Consolodation. Two of the campuses constantly have traffic back and forth... its costing too much having them seperated. We might as well merge a few more together.
3. Lower housing costs for employees. Not a little. Nothing less than a 50% drop justifies the move. It probably needs to be more to "excite" the current work force to cash out and move. The 50% drop is required to attract new hires.
4. Reduced comute times for employees. Comute times are discouraging employees as much as home costs.
5. Airport access. There are different thoughts. We're talking about moving enough people that the company could justify buying a small business jet fleet to ferry people, but they wouldn't want to. We do international business, so we need to be at most one hop from a variety of hubs.
6. Industrial and office supplies. We actually make stuff, so we need a pre-estabilished vendor for tooling and all the normal stuff.
7. Pre-estabilished community services that could grow to meet the influx. In other words, an existing city that's big enough to handle the influx easy and has schools, police, fire, hospitals, and other community services. Not to mention hotels and workers to build the new campus, housing, etc.
8. No extended freezes. We have equipment we leave outside that if it truly freezes... its toast. It can take frost, just not well below freezing.
9. Dryness. Or more precisely, it cannot be too excessively humid. I'm talking no swamps; parts of Florida could work, but not right off the Mississippi, and ignore any area with more than morning fog. I'm not going to say why, except that it effects our product.
10. Road and rail access. But that's a given (along with water and electricity and other stuff I've forgotten about).
11. Something attractive about the area that would draw equity rich Californians there. Nearby skiing? Water sports? Something!
Anyway, this rumor is a little buzz around work. Does it mean anything? I don't know. The last time such a rumor went around work (at a different company) we moved 1,000 miles. But we were the satalite campus relocated back to the main campus. My father was threatened with a move to New Mexico, but the company couldn't sell the property in 1994... Will the decision be made too late?
Neil
Monday, November 06, 2006
Home Builders report very poor results, media ignores
I'm overwritting my post on how TOL and BZH were going to report this morning and switch to saying they did. Their results were horrible! Toll brothers is reporting a 55% drop in home orders but only a 10% drop in revenue. BZH was just as bad, new orders off 58%.
http://biz.yahoo.com/ap/061107/toll_brothers_sales.html?.v=4
http://biz.yahoo.com/ap/061107/earns_beazer_homes.html?.v=3
"We continue to look for signs that a recovery is imminent but can't yet say that one is in sight," Chairman and Chief Executive Robert I. Toll said in a statement.
Ouch!
WCI is in trouble.
Another blogger has written about them:
http://www.immobilienblasen.blogspot.com/
Basically they are dying in Florida and need to sell units in their towers. Oh boy...
Oh, KB homes is in a dispute with bond holders. It will take 60 days for this to really matter, but its interesting:
http://biz.yahoo.com/ap/061106/kb_home_debt.html?.v=2
Neil
http://biz.yahoo.com/ap/061107/toll_brothers_sales.html?.v=4
http://biz.yahoo.com/ap/061107/earns_beazer_homes.html?.v=3
"We continue to look for signs that a recovery is imminent but can't yet say that one is in sight," Chairman and Chief Executive Robert I. Toll said in a statement.
Ouch!
WCI is in trouble.
Another blogger has written about them:
http://www.immobilienblasen.blogspot.com/
Basically they are dying in Florida and need to sell units in their towers. Oh boy...
Oh, KB homes is in a dispute with bond holders. It will take 60 days for this to really matter, but its interesting:
http://biz.yahoo.com/ap/061106/kb_home_debt.html?.v=2
Neil
Stopping Mortgage fraud
When credit tightens:
Once again I find myself blogging on a topic brought up (inpired?) on Ben Jones' excellent real estate blog. This one is the problems of mortgage fraud. If its not reigned in... credit will tighten so quickly that we'll see an economic train wreck. Ok, we will anyway. But I accept a recession. Please, lets not be stupid and start a depression part two. Ok?
The initial article that brought this up:
http://thehousingbubbleblog.com/?p=1770
I bring your attention to the middle of that article.
How to stop the scam?
1. Income identification.
2. ID identification (doesn't help the real estate "apprentice," but you can't stop stupid greed.)
3. Down payment
#3 is very important. Right now so few real estate buyers have enough "meat in the game." Can you imagine what this will do to prices if 20% down payments become required again? Perhaps allow 90/10 for conforming loans (but require PMI!). Yes, keep the starter home 3% loans, but those have low enough purchase prices that there isn't much money to be made from these scams.
I'm talking about the $500k+ homes where you can kickback a bunch!
Personally, I would also require as part of the loan origination process a "clear photograph of all persons involved in the transaction." I'm talking about legally requiring a photo of every person face on and from the side (mug shots) plus a body shot (standing or sitting, but enough to start gauging height. Maybe require a yardstick be in the shot?). With digital cameras as cheap as they are... This additional cost to the process is well worth it.
Fraud is plaguing home lending
A local paper:
http://www.dailybreeze.com/business/articles/4566126.html
What do they report? A 35 percent increase in suspected mortgage fraud!
"Mortgage fraud poses a growing risk to banks and other lenders, it says. Federal banking regulators have said that mortgage fraud is growing because it can be very lucrative and fairly easy to perpetrate, especially in areas where home prices have been rising rapidly."
"The regulators also found schemes in which borrowers signed multiple mortgages on the same property from multiple lenders and fraudulent bankruptcy filings to stall or prevent foreclosure."
Now that is clever. Solution? 72 hours before closing a national clearing database. If two or more mortgages show up for the same property... both are cancelled until resolved. But you say this prevents a 2nd for the down payment... Why yes it does. Welcome back to the requirement to put some of one's own "meat in the game."
The problem is mortgage fraud won't be stopped in time to prevent a further drop in prices due to the credit clamp down. Its part of the reason I do not believe home prices will revert to the mean but rather undershoot it. Let's not do a florida 1926 where homes started to sell for 50% of material costs. We also don't want Japan protracted deflation.
Please read my previous article on how Los Angles/OC is now the most overpriced real estate in the world. Why does this matter? Because that is where I want to buy. Those areas that overshot the most will undershoot the most. We'll be exporting population to "fly over country" until at least mid-2008. Possibly longer.
Do not buy until 2008 (at the earliest). Let this crap filter out of the system. But do have a large down payment ready. If you don't like my advice that's ok. Just promise me you'll create a spreadsheet and compare the cost of renting for your timeframe (assume 5 years if you don't know better, that's the average time between jobs). My calculations say buying costs me $400k more out of pocket for 5 years compared to renting the same place. Yours? Oh, and I assumed 7% per year rent increses (high inflation).
Real estate mortgage fraud is going to hurt us all. Sadly, the government is going to have to clean this up and I really don't want them involved (any more). Oh well.
Neil
Once again I find myself blogging on a topic brought up (inpired?) on Ben Jones' excellent real estate blog. This one is the problems of mortgage fraud. If its not reigned in... credit will tighten so quickly that we'll see an economic train wreck. Ok, we will anyway. But I accept a recession. Please, lets not be stupid and start a depression part two. Ok?
The initial article that brought this up:
http://thehousingbubbleblog.com/?p=1770
I bring your attention to the middle of that article.
The Grand Rapids Press from Michigan. “With ‘For Sale’ signs seemingly on every street, it may be surprising to hear bidding wars have broken out in the West Michigan real estate market. The bidding wars come most often with homes taken back by a bank, a result of the mounting number of foreclosures in the area.”
“Realtors say they see more of them, and the listing price is often below market value. ‘When I first started, foreclosures were one out of 10,’ said agent Ethan Dozeman, who has been in the business for five years. ‘Now they’re probably one out of four.’”
“Susan Kazma-Hilton, a (broker) in Grandville, said some homes are over priced for the market. ‘The homes are priced to get rid of debt, not priced to sell the house,’ she said. ‘I’ll bet you in 40 percent of the homes, the sellers owe more on the homes than they’re worth.’”
Yikes! Let's play out this scenario. Homes are "bought" with a refund. Almost certainly via identity theft. Maybe willing nieve identity theft ("Become a real estate investor apprentice!") . But not with the perpetrators real ID.
Maybe they use the house to make/grow/sell drugs for a few months (actually make payments) and then skip. Maybe they just skip out with the cash day 1. Either way, by mid 2007 mortgage brokers and more importantly MBS buyers will be onto this scam.
How to stop the scam?
1. Income identification.
2. ID identification (doesn't help the real estate "apprentice," but you can't stop stupid greed.)
3. Down payment
#3 is very important. Right now so few real estate buyers have enough "meat in the game." Can you imagine what this will do to prices if 20% down payments become required again? Perhaps allow 90/10 for conforming loans (but require PMI!). Yes, keep the starter home 3% loans, but those have low enough purchase prices that there isn't much money to be made from these scams.
I'm talking about the $500k+ homes where you can kickback a bunch!
Personally, I would also require as part of the loan origination process a "clear photograph of all persons involved in the transaction." I'm talking about legally requiring a photo of every person face on and from the side (mug shots) plus a body shot (standing or sitting, but enough to start gauging height. Maybe require a yardstick be in the shot?). With digital cameras as cheap as they are... This additional cost to the process is well worth it.
Fraud is plaguing home lending
A local paper:
http://www.dailybreeze.com/business/articles/4566126.html
What do they report? A 35 percent increase in suspected mortgage fraud!
"Mortgage fraud poses a growing risk to banks and other lenders, it says. Federal banking regulators have said that mortgage fraud is growing because it can be very lucrative and fairly easy to perpetrate, especially in areas where home prices have been rising rapidly."
"The regulators also found schemes in which borrowers signed multiple mortgages on the same property from multiple lenders and fraudulent bankruptcy filings to stall or prevent foreclosure."
Now that is clever. Solution? 72 hours before closing a national clearing database. If two or more mortgages show up for the same property... both are cancelled until resolved. But you say this prevents a 2nd for the down payment... Why yes it does. Welcome back to the requirement to put some of one's own "meat in the game."
The problem is mortgage fraud won't be stopped in time to prevent a further drop in prices due to the credit clamp down. Its part of the reason I do not believe home prices will revert to the mean but rather undershoot it. Let's not do a florida 1926 where homes started to sell for 50% of material costs. We also don't want Japan protracted deflation.
Please read my previous article on how Los Angles/OC is now the most overpriced real estate in the world. Why does this matter? Because that is where I want to buy. Those areas that overshot the most will undershoot the most. We'll be exporting population to "fly over country" until at least mid-2008. Possibly longer.
Do not buy until 2008 (at the earliest). Let this crap filter out of the system. But do have a large down payment ready. If you don't like my advice that's ok. Just promise me you'll create a spreadsheet and compare the cost of renting for your timeframe (assume 5 years if you don't know better, that's the average time between jobs). My calculations say buying costs me $400k more out of pocket for 5 years compared to renting the same place. Yours? Oh, and I assumed 7% per year rent increses (high inflation).
Real estate mortgage fraud is going to hurt us all. Sadly, the government is going to have to clean this up and I really don't want them involved (any more). Oh well.
Neil
Friday, November 03, 2006
What would it take for a spring bounce?
If you don't read Ben Jones' housing bubble blog, you should. In particular:
http://thehousingbubbleblog.com/?p=1754
Ok, let's look at that article. Home prices are dropping in Australia, China, Canada, Hawaii, New York, Alabama, and Georgia; all in one article! Its already well know that California home prices are dropping and Florida's are crashing. DC is so overbuilt its not even funny.
First we need to consider the tendency of American's to move about. With 70% of families home owners, that means most people must sell a property before buying. That's getting tough... not improssible for the sensible (read, willing to drop the price to the market price), but most people aren't willing to do that... Thus the difficulty selling homes has to be slowing sales.
Second, read my previous post on housing affordability. I think sales are slowing due to a shortage of GF's.
Third, there seem to be far too many people who must sell.
My prediction? In the spring here in LA we'll be talking more about jobs leaving the state than a real estate 2nd boom. In fact, people will finally start to wake up and wonder what jobs are going to pay for the current homes. Ok, maybe only a few of the sheeple, but enough.
This is going to be a long ride down (read my previous post on RE emotions for my predictions on the length).
Neil
http://thehousingbubbleblog.com/?p=1754
Ok, let's look at that article. Home prices are dropping in Australia, China, Canada, Hawaii, New York, Alabama, and Georgia; all in one article! Its already well know that California home prices are dropping and Florida's are crashing. DC is so overbuilt its not even funny.
First we need to consider the tendency of American's to move about. With 70% of families home owners, that means most people must sell a property before buying. That's getting tough... not improssible for the sensible (read, willing to drop the price to the market price), but most people aren't willing to do that... Thus the difficulty selling homes has to be slowing sales.
Second, read my previous post on housing affordability. I think sales are slowing due to a shortage of GF's.
Third, there seem to be far too many people who must sell.
My prediction? In the spring here in LA we'll be talking more about jobs leaving the state than a real estate 2nd boom. In fact, people will finally start to wake up and wonder what jobs are going to pay for the current homes. Ok, maybe only a few of the sheeple, but enough.
This is going to be a long ride down (read my previous post on RE emotions for my predictions on the length).
Neil
Sunday, October 29, 2006
Housing affordability
I found this (old) link while perusing the net. Whatever you do, make sure you look at the figure on slide 14 (Figure 7).
www.demographia.com/dhi-ix2005q3.pdf
Ok, its a pdf (you've been warned). What it does is rack and stack local home affordability to the median income. I *strongly* believe that long term home prices are driven by the median income. What this pdf notes is that Los Angeles has the highest multiple in the world for a large city!
Homes in Los Angles are selling for 11.2 times the median income. This puts it as the poster child of unaffordable locations. Forget having businesses locate here... you won't be able to afford the salaries.
Is Los Angeles becoming a 2nd home destination market. Ok, I would ask why? Its not Florida with Northeastern folk swarming down to avoid the winter. We're not Hawaii with year round perfect surfing. Heck, half of my SCUBA friends have stopped diving California waters as its too cold; they only dive on vacation. I cannot imagine the baby boomers excited about our cold waters... Hmmm...
Now what does slide 14, Figure 7 say? Simple, this market isn't sustainable. If that isn't scary, I don't know what is. No amount of cheerleading is going to sustain... that! Severly unaffordable is a 5.1 multiple or greater, seriously unaffordable is 4.1 to 5.0. Moderately unaffordable is 3.1 to 4.0. Affordable is 3.0 times median wage or less. So we currently have 2/3rds of the markets that are unaffordable about to become affordable. (It was ~55 of 65 markets in 1995 versus 20 of 65 today.)
I've noted before that whenever LA broke through 8.0 times median salary it drops to 6.0. What will be the bottom this time? I'm betting LA will drop down to seriously unaffordable before returning to its normal premium. But how long? How much of that will be wage inflation? How much dropping home prices? We won't know until 2008. Whatever you do, don't buy a home in California, Hawaii, or Florida today!
Neil
www.demographia.com/dhi-ix2005q3.pdf
Ok, its a pdf (you've been warned). What it does is rack and stack local home affordability to the median income. I *strongly* believe that long term home prices are driven by the median income. What this pdf notes is that Los Angeles has the highest multiple in the world for a large city!
Homes in Los Angles are selling for 11.2 times the median income. This puts it as the poster child of unaffordable locations. Forget having businesses locate here... you won't be able to afford the salaries.
Is Los Angeles becoming a 2nd home destination market. Ok, I would ask why? Its not Florida with Northeastern folk swarming down to avoid the winter. We're not Hawaii with year round perfect surfing. Heck, half of my SCUBA friends have stopped diving California waters as its too cold; they only dive on vacation. I cannot imagine the baby boomers excited about our cold waters... Hmmm...
Now what does slide 14, Figure 7 say? Simple, this market isn't sustainable. If that isn't scary, I don't know what is. No amount of cheerleading is going to sustain... that! Severly unaffordable is a 5.1 multiple or greater, seriously unaffordable is 4.1 to 5.0. Moderately unaffordable is 3.1 to 4.0. Affordable is 3.0 times median wage or less. So we currently have 2/3rds of the markets that are unaffordable about to become affordable. (It was ~55 of 65 markets in 1995 versus 20 of 65 today.)
I've noted before that whenever LA broke through 8.0 times median salary it drops to 6.0. What will be the bottom this time? I'm betting LA will drop down to seriously unaffordable before returning to its normal premium. But how long? How much of that will be wage inflation? How much dropping home prices? We won't know until 2008. Whatever you do, don't buy a home in California, Hawaii, or Florida today!
Neil
Friday, October 20, 2006
No news
Its all been the same information for a bit. All that is happening is the "buyers standoff" is becoming iconified. Sellers won't sell... buyers won't buy. Here is California, we're losing population (if you haven't read the United Van lines 2005 survey, please do).
I'm not betting on much change in 2006. If I'm wrong, that's ok. 2Q 2007 looks to still be when everything converges and prices start to drop significantly.
From what I'm reading/seeing, prices are dropping about 2% to 3% a month here in the south bay. Exciting? No. Its like watching paint dry.
Please read my post on real estate emotions... We're so stuck in denial... until people realize that its not a river in Egypt, yawn.
The only interesting tidbit is that a coworkers wife is selling a home that priorly sold for $940k for $770k. But that's down in oceanside and I intend for this to stay a southbay centric blog.
Neil
I'm not betting on much change in 2006. If I'm wrong, that's ok. 2Q 2007 looks to still be when everything converges and prices start to drop significantly.
From what I'm reading/seeing, prices are dropping about 2% to 3% a month here in the south bay. Exciting? No. Its like watching paint dry.
Please read my post on real estate emotions... We're so stuck in denial... until people realize that its not a river in Egypt, yawn.
The only interesting tidbit is that a coworkers wife is selling a home that priorly sold for $940k for $770k. But that's down in oceanside and I intend for this to stay a southbay centric blog.
Neil
Monday, October 09, 2006
Local market observations
My fiance' and I did a little tour of homes on Sunday 10/8/2006. We really only planned on looking at 2 houses (we didn't start until 3:30pm), but instead we checked out a large number.
Observations:
1. Homes are falling out of escrow. Out of about 20 homes we looked at, 3 were back on the market due to homes not closing.
2. N. Juanita is out barometer (Redondo Beach, CA). There is one block with 5 nice townhomes for sale. While not our first choice, they're an ok backup. The last sale on this block was in January. All townhomes have been on the Market since Febuary. No movement in 7 months. Two of the townhomes proudly sported "sold" or "In escrow" sub-signs for about a month. Both are back on the market. Two more townhomes are under construction on this street (in framing).
3. Man are realtors desperate to be buyers agents. One realtor even anounced she wasn't the listing agent but rather the buyer's agent. I had a few words for her.
4. We're seeing 3 townhomes that are identical for sale near the beach in redondo. Each is trying to be $10k less than the others. The rear unit people seem to be the most willing to cut... and cut... and cut... But $1.24M isn't there yet.
5. Lots of construction still progressing. Some gorgeous new homes just completed.
6. Prices are all over the map. 30% differences in equivalent properties. The price point de jour seems to be $1.2 to $1.3 million.
My comment? Price drops will continue to be slow. But if sales drop much more or inventory builds at all... free fall.
Neil
Observations:
1. Homes are falling out of escrow. Out of about 20 homes we looked at, 3 were back on the market due to homes not closing.
2. N. Juanita is out barometer (Redondo Beach, CA). There is one block with 5 nice townhomes for sale. While not our first choice, they're an ok backup. The last sale on this block was in January. All townhomes have been on the Market since Febuary. No movement in 7 months. Two of the townhomes proudly sported "sold" or "In escrow" sub-signs for about a month. Both are back on the market. Two more townhomes are under construction on this street (in framing).
3. Man are realtors desperate to be buyers agents. One realtor even anounced she wasn't the listing agent but rather the buyer's agent. I had a few words for her.
4. We're seeing 3 townhomes that are identical for sale near the beach in redondo. Each is trying to be $10k less than the others. The rear unit people seem to be the most willing to cut... and cut... and cut... But $1.24M isn't there yet.
5. Lots of construction still progressing. Some gorgeous new homes just completed.
6. Prices are all over the map. 30% differences in equivalent properties. The price point de jour seems to be $1.2 to $1.3 million.
My comment? Price drops will continue to be slow. But if sales drop much more or inventory builds at all... free fall.
Neil
Monday, October 02, 2006
Market Cycles: Time to buy 2008 or 2009?
There is an emotional cycle to a market:
1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak)
5. Anxiety (I'm a long term investor, not a speculator.)
6. Denial
7. Fear
8. Desperation
9. Panic
10 Capitulation
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom)
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...)
15 Optimism (cycle starts again)
Judging from the press, home prices, and advertisements out there. I'm going to declare us in Denial. It took 10 months to go from Euphoria to Denial. Does this mean that in July or August of 2007 we'll be in Desperation? Probably, assuming the time scale stays constant. That means Capitulation won't happen until May of 2008 and Despondency through Depression might be summer and fall of 2008; that would be the best time to buy.
Warning: It could be a much slower cycle. But we seem to be progressing much faster than the Japanese recession. Why?
1. The Japanese had an amazing savings rate. They could ride out almost anything. We have zero to negative savings.
2. The internet is spreading information much faster than in the past. Economic cycles are very accelerated.
3. The Japanese economy falling wouldn't impact anyone else's economy. Any guess what American luxury buying habits do if we go into a recession? ;) Look at the Japanese economy, for the first few years luxury sales were down. We import most luxuaries.
4. The US market is far more overbuilt than the Japanese market
Now this speed of the downturn is slower than previous predictions of mine. Cest la vie. However, its pretty obvious that we have to write off 2007 as having no chance of a home market recovery. The only question is when do we hit bottom?
1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak)
5. Anxiety (I'm a long term investor, not a speculator.)
6. Denial
7. Fear
8. Desperation
9. Panic
10 Capitulation
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom)
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...)
15 Optimism (cycle starts again)
Judging from the press, home prices, and advertisements out there. I'm going to declare us in Denial. It took 10 months to go from Euphoria to Denial. Does this mean that in July or August of 2007 we'll be in Desperation? Probably, assuming the time scale stays constant. That means Capitulation won't happen until May of 2008 and Despondency through Depression might be summer and fall of 2008; that would be the best time to buy.
Warning: It could be a much slower cycle. But we seem to be progressing much faster than the Japanese recession. Why?
1. The Japanese had an amazing savings rate. They could ride out almost anything. We have zero to negative savings.
2. The internet is spreading information much faster than in the past. Economic cycles are very accelerated.
3. The Japanese economy falling wouldn't impact anyone else's economy. Any guess what American luxury buying habits do if we go into a recession? ;) Look at the Japanese economy, for the first few years luxury sales were down. We import most luxuaries.
4. The US market is far more overbuilt than the Japanese market
Now this speed of the downturn is slower than previous predictions of mine. Cest la vie. However, its pretty obvious that we have to write off 2007 as having no chance of a home market recovery. The only question is when do we hit bottom?
Friday, September 29, 2006
Automating 4506-T Form application
Head over to http://calculatedrisk.blogspot.com/ and I saw a story on a new automated process for income verification. Anyone want to guess how long until MBS buyers *require* this. The best comment I saw is that brokerages *need* people to buy their Mortgage backed securities. MBS buyers don't need mortgage brokers; there are other places to invest.
While this will take a few months to change the rules (maybe as much as a year...), this will end the practice of no-doc "liar loans" pretty quickly.
Original link:
http://www.courant.com/business/hc-harney1001.artoct01,0,5083108.story
Neil
While this will take a few months to change the rules (maybe as much as a year...), this will end the practice of no-doc "liar loans" pretty quickly.
Original link:
http://www.courant.com/business/hc-harney1001.artoct01,0,5083108.story
Neil
Wednesday, September 27, 2006
What happens when credit tightens
The end of suicide loans
There has been speculation on the web as to what happens when bond holders lose their appetite for the high risk loans. In reality there are only a few scenarios:
An end to “no-document” loans (better income, savings, and employment verification).
Tighter qualification requirements for exotic loans (e.g., qualify for the maximum payment not the minimum).
Higher interest rates
Fewer mortgages being offered
Higher down payments (risk reduction)
I've been reading at some blogs I respect how they expect interest rates to spike as the 1st choice response. This I disagree with. Why? There is to much money looking for a “safe return.” Thus, I would expect that instead investors would want to minimize risk. Thus, ensure the FICO scores are high enough to qualify, triple verify income and savings via 24 months of documents (or even more time?).
The easiest risk management would be to increase the required down payment back up to 20% or 10% + PMI. I can even envision a return to the old standard where, except for a starter home, the bank expected a 20% down payment and a payment of the home's last year's appreciation. So if homes went up 6% in a year, a minimum 26% down payment was due. That would be true risk reduction.
The likelihood that bond buyers will have an appetite for mortgage backed securities (MBS) backed by exotic loans is pretty low. In fact, I expect bond buyers to be shy of these loans for 5 to 7 years.
Thus, do I expect interest rates to go up on mortgages? A little. But mostly for risk aversion processes to creep back into the mortgage system.
Neil
Monday, September 18, 2006
Pushing on a rope
Fed expected to hold interest rates
At what point does it not matter what the Federal reserve does with interest rates? While they can choke an economy easily by raising rates, when do they have trouble stimulating the economy? What I'm referring to is the US economy's need for capitol inflows to sustain our economy. What happens if the fed pauses on interest rates again?:
We can expect the dollar to weaken versus foreign currencies.
Foreign capital inflows to the USA will slow
Inflation risk edges up
At this moment I believe the risk of deflation is greater than inflation, so I'm going to make only a few comments on inflation. Due to the eventual devaluing of the US dollar that is going to occur, imported goods will get more expensive and thus we are going to have consumer retail inflation due to that. But I still think deflation is a greater risk due to the abruptness with which credit can be cut off.
This brings us to point #2, the reduction of foreign capital that feeds our insatiable need for cheap imports. Inflation in the low interest/fast growth world was avoided by the integration of the world economy. Each country has found its niche to fulfill in the global supply chain. The problem is the US has done a much better job putting off paying the bills than is healthy. Like an alcoholic college kid, eventually its time to sober up and pay the bar tab.
We currently borrow 2 billion dollars a day to feed our import habit. We've gone beyond being a casual user to credit junkies. And now we find out in July the Capital inflows were short (google capital inflow July and you'll find your favorite news service has the article).
So let's say the Fed drops rates yet foreign interests still cut back the capital inflows. That would lead to the USA printing money to keep the economy going. But as foreign buyers purchase most of the mortgage backed securities right now (MBS), its going to seize up the home buying market.
Thus, another reason why I wait. Oh, this scenario probably will happen by degrees. But someone explain to me why there are 984, 773 properties for sale on ziprealty.com (nationally) when during the summer selling season there were 2/3rds that number?
Anyone who thinks homes will land softly hasn't looked at the fundamental numbers. Shiller just noted that we now have more home inventory for sale than anytime since 1955. And this is with the economy still “going strong.”
During the Japanese recession, real interests rates were zero percent and they were stuck in a decade long deflationary recession. They were pulled out by the global economy. The US? We'll pull everyone else down. Is Asia and Europe ready to support the US? Their citizens will stop throwing money at us to borrow. So how will be pay for their exports?
I think the Fed's rate hold and soon to be future decreases will not do much to stimulate the economy. It will be like that sailor trying to move the boat by pushing on the rope.
Neil
Thursday, September 07, 2006
State of the market
Stagnant or declining home prices?
We live in interesting times.
There are two theories to how homes will hold up for the next few years. Some suggest homes will hold their value or possibly inflate along more traditional lines, others like myself believe prices will not only decline to fundamentals but over-shoot to the low side.
Let’s look at the drivers of home prices:
1. Wages. One has to pay for that home
2. Inventory How many homes are for sale?
3. Job/population growth If homes are selling fast, sellers will try for “a little more.”
4. Optimism/Pessimism
5. Inflation If money is going to be worth less… seek stability!
Wages: With homes going for 10X to 11X median salary, there is a total disconnect with affordability. We’re seeing job losses from the south bay (e.g., Boeing is talking about closing Long Beach, No one I know can afford to hire, etc.) This indicator points to homes not appreciating. Declining? One indicator won’t answer that question. But it certainly points down.
Inventory: Its huge! We will be at record levels soon. Ok, it might decline in the Fall and winter… but when we see the traditional spring run up in inventory… The market is going to collapse under its own weight. This driver points to declining prices. This is also the driver that resulted in prices getting out of sync with fundamentals.
Job/population growth: We’re seeing good job growth in
Optimism/Pessimism: This is herd mentality. We’ve been *very* optimistic on housing for years. So this can only cool. I’m calling this one a minor driver to declining prices. Beware, this driver could cause a rout in home prices if it goes too negative.
Inflation: We run a strong risk of inflation right now. But… If people cannot afford homes, it doesn’t matter what inflation does, people will not buy. I’m calling this driver neutral.
Overall? In order Inventory, Wages, Jop/Population growth, and Pessimism (or declining Optimism) all point to declining home prices. Inflation will get run over. I expect that with declining home prices the speculators will run for the doors thus making the inventory and Pessimism drivers all that much stronger.
In fact, I’m going to make a prediction. Declining home prices will drive down rents. This will pull down the core inflation in 2007 and 2008! Thus, I expect that by 3Q2007 the Fed will drop rates. Will we see inflation? Yes, I expect imported goods to ramp up in price pretty quickly by 10% to 20%. But the core’s largest component is rent. A declining economy also has a good chance of driving down oil prices… Personally, I believe deflation is of greater risk than inflation, but I lack the data to prove such a statement.
My vote is for a strongly declining market, and soon. Some have predicted a Post Labor day massacre in home prices. Judging by the huge number of new signs along PCH… I believe it. Remember, we’ve exited the summer selling season. Inventory should be tight this time of year. Some have noted with all of the homes on the market that the summer rentals will have a hard time getting school year rents… Thus the inventory driver will only grow.
We live in interesting times.
Sunday, August 27, 2006
Simple math
The most talked about presentation on the web (for housing)
You've probably already heard about Lereah's new powerpoint at the Leadership summit in chicago. If not, please read it as the cheerleader of realestate is now a bear. In particular, a polar bear.
Now for the simple math. From the presentation 28% of home sales were to investors in 2005. *Assuming* investors stop buying (they will), and sales don't slow further (they will):
(investor sales * 12 months) divided by (100%-investor sales)
is equal to the number of months it will take to sell the flipper inventory if only flipper inventory sells.
Or (28% * 12 months)/(100%-28%)=4.7 months.
I cannot imaging flippers can command more than 30% of total sales. So that gives us a minimum "time of falling home prices" of 15 months if everything goes well for the flippers.
It won't.
Neil
ps
A shorter version was first published on David's excellent bubblemeter blog.
Tinyurl:
http://tinyurl.com/esg89
Full link
http://www.realtor.org/Research.nsf/pages/presentations_use?OpenDocument
You've probably already heard about Lereah's new powerpoint at the Leadership summit in chicago. If not, please read it as the cheerleader of realestate is now a bear. In particular, a polar bear.
Now for the simple math. From the presentation 28% of home sales were to investors in 2005. *Assuming* investors stop buying (they will), and sales don't slow further (they will):
(investor sales * 12 months) divided by (100%-investor sales)
is equal to the number of months it will take to sell the flipper inventory if only flipper inventory sells.
Or (28% * 12 months)/(100%-28%)=4.7 months.
I cannot imaging flippers can command more than 30% of total sales. So that gives us a minimum "time of falling home prices" of 15 months if everything goes well for the flippers.
It won't.
Neil
ps
A shorter version was first published on David's excellent bubblemeter blog.
Tinyurl:
http://tinyurl.com/esg89
Full link
http://www.realtor.org/Research.nsf/pages/presentations_use?OpenDocument
Tuesday, August 15, 2006
Uhaul index-Job flow directionality
The iron is frostbitten
The “U-haul index” is supposedly an accurate indicator of job flow. What does this mean? Quite simply this, if you can rend a U-haul from city X to city Y and vice versa, which way is cheaper? The jobs are flowing in the *expensive* direction.
Now, one has to be careful in the interpretation of the results. For example, if I pick
But if we look at a costal start, we minimize the impact of this. However, the longer the drive we experience a greater chance of price interactions. Thus, we must look at multiple destinations and forget trips to
So what are the U-haul costs from
90277 to
90277 to
90277 to
90277 to Austin Texas: $6,439 Return: $575 Yes, over 10X more expensive!
90277 to
What can we conclude?
1) In every instance, its cheaper to go to
2) U-hauls are pilling up in Austin Texas. Wow! Its not that far from
3)
4)
5) This says nothing about population growth! Nothing! Why? If someone is not affluent enough to be middle class, they don’t hire a U-haul, they just fill up their one car and go (e.g., students, illegal’s, etc.)
6) This index says nothing about the upper middle class or big corporate moves. However, I’ve participated in enough corporate moves to know that with every campus shutdown, there are those who treck out on their own. So while the U-haul index will miss the magnitude of a large corporate relocation, it won’t miss the entire effect.
Basically, Los Angles from a middle class housing and employment perspective… is going to get hammered. We’re not looking at a subtle downturn what so ever. Expect
This is but one more indicator to show that the market is heading downhill for
So what does this have to do with a blog about buying a house? Simple. One strikes when the iron is hot, not when its at a temperature that would make an eskimo proud. Wait before buying in Southern California. Your wait will probably extend into 2008 or even 2009, but don’t buy in 2006 and beware the falling knife 2007. For home buyers, the iron is frostbitten right now.
Its all about alligators
Investments that bite back
How many people do you know whom own investment property? If you take a little time to ask, its amazing! You cannot turn around at any event without bumping into a real estate “investor.” Ok, I’ve always known quite a few prosperous families who had their vacation home; but in the past it was people whom could afford vacation homes. Now I’m going to tell you why the housing market will crash and crash hard.
You see, its all about the Alligators. Many have heard that an investment property is often called an “Alligator.” Why? As soon as you cannot afford to make the payments, it eats you. ;) How many people own “Alligators” that will soon be chomping away?
Drive around North Redondo Beach in the
Then take a bit of time to tour homes in South Redondo Beach (say “
I’ve been through too many open houses with my fiancé where the realtors were afraid we wouldn’t be interested in the house (we weren’t).
Other real estate blogs have noted that if there is appreciation greater than nominal interest rates, home “owners” can extract equity every year. In fact, in a fast appreciating market at absurdly low interest rates they can do so “pain free.” At some point they just sell their
Well the musical chairs have stopped. The economist Thornberg has finally put out a shingle so that he can speak about housing as the bear he currently is.
“A hard landing could come if housing prices begin to fall, Thornberg said, in large part because that would scare consumers accustomed to watching their net worth rise on paper. Their spending pullback and a corresponding drop in construction could push the economy into recession.”
From:
Folks, real estate investment is the most margined investment of our lifetimes. Gee… Almost like
Those Alligators are hungry and they’ll drive the market for the next few years. I once read (sorry, I forgot where) that a real estate investor is a real estate speculator who has lost money. How long can flippers feed the alligators?
Neil
Tuesday, July 25, 2006
Market waking up (but still sleepy)
Market waking up
Its been another month and not much has happened. Oh, inventory is building up in the south bay of loss angeles. The shear numbers of homes and townhomes on the market is staggering.
What I have for my non-existant readership base is a question: Whom has been buying homes here for the last few years?
This isn't a rehtorical question. Quite simply, far too many of the homes for sale are empty. Where are the owners living? Why is so much housing stock in the beach cities of Los Angles sitting empty (or with micro furniture in it taken from a model home)?
My theory: The residents of Los Angeles are cashing out and moving elsewhere. I wonder if even during the 1950's the USA built homes as quickly as we've seen the last few years. So has Los Angeles exported its homeowners and we're left with a bunch of flippers about to find out its midnight and the ball is over?
Personally, I think jobs are quietly being exported to other states (or even other countries, but mostly other states). Yes, a huge immigrant population is providing cheap labor; but unless something has really changed, Manhattan beach isn't about to be taken over by families earning at or below the median salary for the region.
Now for my prognosis.
July might or might not be negative YOY (Year over year) for the median sales price. Might?!? Yes, sales are dropping, price reductions have become the norm, and soon sellers will have no choice but to chase down the market.
A comment for those who think most sellers will "withdraw" from the market and decline to sell for reduced prices:
1. Anyone who bought before 2001 will still make a *huge* fortune cashing out. Don't you think once prices begin to slowly fade that some people will opt for an early retirement rather than wonder if their "next egg" will drop in value?
2. We're starting to see rates reset. Ok, the "tidal wave" isn't for 10 months, but more and more people are unable to keep up with their suicide loan.
3. Soon the smart speculators (flippers) will realize that the current market price represents the highest potential profit and they'll stop dreaming and start selling. Most flippers will try to hold on and will be forced to "feed the alligator" once their rates reset.
4. Soon (ok, maybe 3Q2005) many people with neg-ams will hit their borrowing limit. While that sound innoculous... it isn't. Once the maximum neg-am limit is reached on an option-arm... the loan minimum payment schedule automatically resets to an amortized loan with high payments that *include* principal. If someone is struggling to pay 75% of the interest... when their payment suddenly is 160% to 180% of what it was... they're toast.
5. In a declining market, no one rushes to buy.
6. I keep hear about people transfering to areas that are more affordable; it also seems that the great hordes who were once willing to move into this State from afar... just aren't coming in anymore (at the incomes that could buy a home before 2009).
And to think... we're almost done with the summer selling season...
By the "Ides of October," the market will hurt.
This is not what I want to happen. I just want to be able to afford a home in the region I love.
But wages cannot support these home prices. Don't be silly and think companies can afford to raise wages right now... The profits aren't there. If anything, layoffs are coming.
Oh, in my quest to evaluate the market... Its just too obvious *most* of the homes that were for sale before the summer are still on the market. Maybe its just the neighborhoods I'm interested in...
Neil
Its been another month and not much has happened. Oh, inventory is building up in the south bay of loss angeles. The shear numbers of homes and townhomes on the market is staggering.
What I have for my non-existant readership base is a question: Whom has been buying homes here for the last few years?
This isn't a rehtorical question. Quite simply, far too many of the homes for sale are empty. Where are the owners living? Why is so much housing stock in the beach cities of Los Angles sitting empty (or with micro furniture in it taken from a model home)?
My theory: The residents of Los Angeles are cashing out and moving elsewhere. I wonder if even during the 1950's the USA built homes as quickly as we've seen the last few years. So has Los Angeles exported its homeowners and we're left with a bunch of flippers about to find out its midnight and the ball is over?
Personally, I think jobs are quietly being exported to other states (or even other countries, but mostly other states). Yes, a huge immigrant population is providing cheap labor; but unless something has really changed, Manhattan beach isn't about to be taken over by families earning at or below the median salary for the region.
Now for my prognosis.
July might or might not be negative YOY (Year over year) for the median sales price. Might?!? Yes, sales are dropping, price reductions have become the norm, and soon sellers will have no choice but to chase down the market.
A comment for those who think most sellers will "withdraw" from the market and decline to sell for reduced prices:
1. Anyone who bought before 2001 will still make a *huge* fortune cashing out. Don't you think once prices begin to slowly fade that some people will opt for an early retirement rather than wonder if their "next egg" will drop in value?
2. We're starting to see rates reset. Ok, the "tidal wave" isn't for 10 months, but more and more people are unable to keep up with their suicide loan.
3. Soon the smart speculators (flippers) will realize that the current market price represents the highest potential profit and they'll stop dreaming and start selling. Most flippers will try to hold on and will be forced to "feed the alligator" once their rates reset.
4. Soon (ok, maybe 3Q2005) many people with neg-ams will hit their borrowing limit. While that sound innoculous... it isn't. Once the maximum neg-am limit is reached on an option-arm... the loan minimum payment schedule automatically resets to an amortized loan with high payments that *include* principal. If someone is struggling to pay 75% of the interest... when their payment suddenly is 160% to 180% of what it was... they're toast.
5. In a declining market, no one rushes to buy.
6. I keep hear about people transfering to areas that are more affordable; it also seems that the great hordes who were once willing to move into this State from afar... just aren't coming in anymore (at the incomes that could buy a home before 2009).
And to think... we're almost done with the summer selling season...
By the "Ides of October," the market will hurt.
This is not what I want to happen. I just want to be able to afford a home in the region I love.
But wages cannot support these home prices. Don't be silly and think companies can afford to raise wages right now... The profits aren't there. If anything, layoffs are coming.
Oh, in my quest to evaluate the market... Its just too obvious *most* of the homes that were for sale before the summer are still on the market. Maybe its just the neighborhoods I'm interested in...
Neil
Friday, May 19, 2006
Real Estate comments
Real Estate comments
Alright, here is my second posting. Basically, I have started reading up on the other online real estate blogs out there. I cannot over-recommend a few if you're starting to look into buying a home:
http://thehousingbubbleblog.com/
http://sacramentolanding.blogspot.com/
http://bubbletracking.blogspot.com/
Basically, I have become of the opinion that we're in a flat market until about mid-September. Then... expect your world to be rocked as the market falls out.
Let's take the example of where I want to buy, the "south bay" region of Los Angeles county. About 29% of the buyers in 2005 were "flippers" (aka, speculators) looking for that "greater fool." Many of them realize they're sunk. So basic math says the "for sale units"/"buyers" is going to go up by:
(1+29%)/(1-29%)=182%!!!
Note, I assume that flippers jump out of the market as a whole at the same rate they bought in. I also just assume the rest of the market stays the same. But let me tell you why the buying and selling will get further out of ballance (in my opinion):
1. Buyers "panic bought" last year (2005) in bidding wars with speculators. No need for that in 2006!
2. Nice housing inventory coming online. :) I can't believe all of the new construction in the South bay.
3. It seems like everyone I know who is retiring is getting the *ell out of LA. It doesn't matter where they go, their retirement is being padded by the sale of their house. (Maybe they cashed out, maybe they had no choice. That doesn't matter, what does is high income people seem to be leaving LA.)
We're almost at the inventory point where enough sellers will discount to drive down the median price. Please read the other blogs as to why the median price doesn't matter when most of the sales are rebuilt or new housing. Yes, new in the south bay! Drive around North Redondo and look at the McMansions being completed/sold. Those $700k box homes are now each a pair (or more) or $1.05 mill McMansions. Since the contracts for many of those were written in the "buy at any price" 2004/2005 season... of course what's selling is pricey.
But look at the sales rates plummet. Others have noted that 8.7 months of supply seems to be the market breaking point. With inventory growning and sales weak, when will be hit that point?
Do note I predict that before the market crashes we'll see a final "end run" on housing. It wouldn't shock me at all to see one last 10% boost in median sales prices. But by September, the floor will fall out.
Will it start in San Diego? Pheonix? Sacramento? DC? Miami? Somewhere else in Florida? Las Vegas? Denver?
Have no doubt, by Christmas 2006 even the major media will be clued in to the housing bubble burst. Yes, even realtor subsidized rags like the LA times will have to face up to the facts. Its going to be too brutal to ignore.
Knowing the market will fall is easy. Now when do I buy in?
Supposidly 40% of all new California white collar jobs since 2000 have been real estate transaction related. Why? Shouldn't the internet have cut the number of required jobs per transaction?!? My next loan will be internet based. My "buyers realtor" will almost certainly be a discount realtor that I find on the net. No way am I paying $12k+ to have someone help me buy a home when I'll do 80% of the work ahead of time. :)
Interesting times ahead.
Neil
Alright, here is my second posting. Basically, I have started reading up on the other online real estate blogs out there. I cannot over-recommend a few if you're starting to look into buying a home:
http://thehousingbubbleblog.com/
http://sacramentolanding.blogspot.com/
http://bubbletracking.blogspot.com/
Basically, I have become of the opinion that we're in a flat market until about mid-September. Then... expect your world to be rocked as the market falls out.
Let's take the example of where I want to buy, the "south bay" region of Los Angeles county. About 29% of the buyers in 2005 were "flippers" (aka, speculators) looking for that "greater fool." Many of them realize they're sunk. So basic math says the "for sale units"/"buyers" is going to go up by:
(1+29%)/(1-29%)=182%!!!
Note, I assume that flippers jump out of the market as a whole at the same rate they bought in. I also just assume the rest of the market stays the same. But let me tell you why the buying and selling will get further out of ballance (in my opinion):
1. Buyers "panic bought" last year (2005) in bidding wars with speculators. No need for that in 2006!
2. Nice housing inventory coming online. :) I can't believe all of the new construction in the South bay.
3. It seems like everyone I know who is retiring is getting the *ell out of LA. It doesn't matter where they go, their retirement is being padded by the sale of their house. (Maybe they cashed out, maybe they had no choice. That doesn't matter, what does is high income people seem to be leaving LA.)
We're almost at the inventory point where enough sellers will discount to drive down the median price. Please read the other blogs as to why the median price doesn't matter when most of the sales are rebuilt or new housing. Yes, new in the south bay! Drive around North Redondo and look at the McMansions being completed/sold. Those $700k box homes are now each a pair (or more) or $1.05 mill McMansions. Since the contracts for many of those were written in the "buy at any price" 2004/2005 season... of course what's selling is pricey.
But look at the sales rates plummet. Others have noted that 8.7 months of supply seems to be the market breaking point. With inventory growning and sales weak, when will be hit that point?
Do note I predict that before the market crashes we'll see a final "end run" on housing. It wouldn't shock me at all to see one last 10% boost in median sales prices. But by September, the floor will fall out.
Will it start in San Diego? Pheonix? Sacramento? DC? Miami? Somewhere else in Florida? Las Vegas? Denver?
Have no doubt, by Christmas 2006 even the major media will be clued in to the housing bubble burst. Yes, even realtor subsidized rags like the LA times will have to face up to the facts. Its going to be too brutal to ignore.
Knowing the market will fall is easy. Now when do I buy in?
Supposidly 40% of all new California white collar jobs since 2000 have been real estate transaction related. Why? Shouldn't the internet have cut the number of required jobs per transaction?!? My next loan will be internet based. My "buyers realtor" will almost certainly be a discount realtor that I find on the net. No way am I paying $12k+ to have someone help me buy a home when I'll do 80% of the work ahead of time. :)
Interesting times ahead.
Neil
Wednesday, May 10, 2006
Start of the Blog
Ok, this blog isn't going to be too detailed nor really that intersting. What it comes down to is that I am looking into buying a house in the South Bay area of Los Angeles county. Currently, the market is insane.
I'll be referring back a lot to this other blog as I admit that's where I'm getting over half of my information: http://sbbeachbubble.blogspot.com/
1st impressions: Last weekend (5/6/2006 and 5/7/2006) we went house hunting. What struck me is the following:
1. The prices were all over the map.
2. My girlfriend was kind enough to look up the houses on the LA county assesors web site and boy were a lot of the places on 2 year "flips" asking for, on average, 50% more than they bought it.
3. Real estate agents were hungry for buyers. A year ago, none cared if they "locked in" a buyer. This time, they all were hungry to have us sign up with them.
4. Some of the homes were listed at "hail Mary" prices. For example, one house went for $1.2 million while in better areas similar homes were going for $1.05 million.
We looked at about 20 homes over two days (just for the fun of it).
I'll let you know more as we move along in the buying process.
Neil (aka Wannabuy)
I'll be referring back a lot to this other blog as I admit that's where I'm getting over half of my information: http://sbbeachbubble.blogspot.com/
1st impressions: Last weekend (5/6/2006 and 5/7/2006) we went house hunting. What struck me is the following:
1. The prices were all over the map.
2. My girlfriend was kind enough to look up the houses on the LA county assesors web site and boy were a lot of the places on 2 year "flips" asking for, on average, 50% more than they bought it.
3. Real estate agents were hungry for buyers. A year ago, none cared if they "locked in" a buyer. This time, they all were hungry to have us sign up with them.
4. Some of the homes were listed at "hail Mary" prices. For example, one house went for $1.2 million while in better areas similar homes were going for $1.05 million.
We looked at about 20 homes over two days (just for the fun of it).
I'll let you know more as we move along in the buying process.
Neil (aka Wannabuy)
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