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.


A shorter version was first published on David's excellent bubblemeter blog.

Full link

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 Las Vegas to Dallas we must understand that Southern California to Texas job flow will effect the results. Example: If a bunch of jobs are fleeing Los Angeles, its cheaper to have a U-haul driven by a paying customer at least part of the way and thus we might see the Dallas to Las Vegas portion of the trip subsidized by U-haul charging Los Angeles to Dallas customer an extra fee that includes the cost to ferry the U-haul from Las Vegas to Los Angeles.

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 Florida or New England from California.

So what are the U-haul costs from Redondo Beach to a variety of destinations? All prices are for the 26 foot truck on September 22nd. I picked a Saturday travel date as it will emphasize the job flow directionality via the prices (peak demand times pay the full directional penalty). Searches were performed on 8/15/2006 at just before 9pm pacific time.

90277 to Las Vegas: $638 Return: $226

90277 to Phoenix, Az: $670 Return: $131

90277 to Dallas Texas: $3,389 Return: $827

90277 to Austin Texas: $6,439 Return: $575 Yes, over 10X more expensive!

90277 to Spokane, WA: $4,845 Return:$199

What can we conclude?

1) In every instance, its cheaper to go to Redondo Beach than to leave it. This tells me that jobs are fleeing Los Angeles, big time.

2) U-hauls are pilling up in Austin Texas. Wow! Its not that far from Dallas, so the added $3k+ in costs can only be due to local dealers crying uncle. If the housing bubble dies late anywhere, I’ll bet on Austin.

3) Spokane Washington also has an odd premium. Since I did Austin early and Spokane late in my search… it wasn’t search order. So is someone hiring in Spokane? Hiring big?

4) Phoenix and Vegas have premiums, but not like other areas. Is this due to a geographical effect? (But Austin and Dallas were $3k+ apart… so that cannot explain everything…)

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 Southern California housing prices to start sliding in a manner that isn’t going to be pretty. When? Who knows. I’ve been predicting by the ides of October (10/15/2006) that “Joe sixpack” will know that housing is declining in value.

This is but one more indicator to show that the market is heading downhill for Southern California and doing so fast.

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 South Bay area of Los Angeles. Look and see how many nice new town homes have been built. Notice how many are for sale and are empty “never lived in?”

Then take a bit of time to tour homes in South Redondo Beach (say “Hollywood Riviera”) on a Sunday during open house hours. Notice something? None of them are occupied!

I’ve been through too many open houses with my fiancĂ© 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 California (or other bubble market) home and move on to a lower cost area.

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.”


Folks, real estate investment is the most margined investment of our lifetimes. Gee… Almost like Florida 1926.

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?