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.

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

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

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

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

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

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

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.

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

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