Saturday, December 30, 2006

USB predicting interesting declines in 2007

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.

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,

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.

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:

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 Redondo beach that I did before. The format is to see how much it costs to go to 90277 (zip code) to the city mentioned and from. Again, I pick a Saturday departure to emphasize the cost penalty of directionality (depart, 26’ truck on 1/13/2007

Prices from city listed to 90277/Prices from 90277 to city listed:

Las Vegas, NV: $1,168 from Redondo, $276 to Redondo

Pheonix, AZ: $973 from Redondo, $181

Dallas, TX: $3,650 from Redondo, $730

Austin, TX: $3,650 from Redondo, $486

Spokane, WA: $5,544 from Redondo, $406

What can we conclude?

First, lets look at the old results from August:

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

In all cases it costs a hefty multiple to get out of Redondo to these out of state destinations. So we see that job flow out of California continues. Whatever crunch U-haul faced to Austin has mitigated a little. A very little… It is still crazy expensive to move to Texas yet a relative bargain to return. The $3k premium to Austin over Dallas has disappeared, that’s it… The difficulty in getting trucks back from Austin is reflected in the discounted return price (compared to Dallas).

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 Spokane Washington. I have no clue as to why… but the premium has persisted. Is there such a job flow to Spokane that getting there from anywhere is expensive? Pheonix to Spokane was $2,542 while the reverse was $1,117. So there is definitely a Spokane premium. I just cannot believe Redondo is having to pay a $5,000 premium.

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.


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.


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.

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?


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.


article from bloomberg on Ownit (sorry about the ad...):

The oped news article:
article on mortgage catering due to fraud:

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.

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.


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.


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.

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.