Secondary Mortgage market tanking

First, a hat-tip (again!) to CR:
http://calculatedrisk.blogspot.com/

She pointed out how Fleck's newsletter is predicting an immenant meltdown in the mortgage market. Why? Lack of buyer interest in the MBS sector.

We'll look here from the below link, we see that BBB rated mortgage securities are plumetting in value. Instead of getting par (or even a little better) of their value, this debt is trading at 92 cents on the dollar.



http://www.eurobondonline.com/abx-HE-BBB-06-2.Htm

This is so called "scratched and dented" mortgage debt is now continually declining in value towards lower value debt's traditional range (pease read CR's article on this, I felt that I learned quite a bit). See the drop off? Looks like a bad Nasdaq stock, eh? On a $400,000 mortage, that's a loss of 8 cents on the dollar since September. In other words that $400,000 mortgage now trades for ~$368,000. Sucks to be the bagholder.

Consequences? This is possibly the start of a 2 to 3 year deflationary cycle. Think about it, if Joe and Jane six-pack cannot HELOC their way to prosperity, they'll bargain shop more. That's going to force retailers to put the screws on their vendors. Due to the drop in value of the dollar I predict will happen, its going to pressure certain wages...

Ouch.

But I still only predict a bad recession.

Got popcorn?
Neil

Demographia.com

I've posted this before, but you really should read this pdf:

http://www.demographia.com/dhi-ix2005q3.pdf

Its from the non-US perspective.
LA is the most overpriced housing market IN THE WORLD!


Do you still think we're still going to have a soft landing?

I think we might be a little off flight plan...
(claiming fair journalistic use of the photo)

Got popcorn?
Neil

Seperation of Church and Real estate

Boy did I notice it when the pastor noted that "for six months, we've been seeing declining attendence." Don't worry, my blog isn't about to be about religion. But sometimes you overhear something at an event that has repercusions on real estate.

Today was the anual "state of the church" service. Less religion, more the facts of how the church is doing.

So the question is, are we truely seeing an exodus from the south bay? This audience would have been primarily drawn from four south bay cities. Are they losing population that quickly? I look onto zipreality and find 97,313 homes in the "greater Los Angeles region" for sale. A little high... That's about 8 months of sales. Enough to effect attendence at something like a church? I doubt it.

So no answer here... just a question. What would have effected people for the last 6 months? This is a new definative trend. I think its economic related (but I could be wrong). It could just be the annoying remodeling that's going on. ;)

We'll see. But I don't think young families with kids can afford to migrate into the south bay... and that would be cutting off institutions of all types from growing their membership... Hmmm... Just something to ponder.

Got popcorn?
Neil

Home affordability

You've probably seen the "Map of Misery before." It details where the sub-prime "Option ARM" mortgages were issued. Why does it matter? It shows which regions had home prices shoot so far beyound incomes that people did really stupid loans to get into a house.

Ok, it also shows where rampant home speculation has occured. Don't think its happened in your neighborhood? Drive around, see how many homes are empty. Is it a flip? Well... is the flooring under the washer and drier new? If so, in my opinion, its a flip. Let's face it, who actually lives in a place and doesn't use the washer and drier? If they never spilled anything there, they are a much more dexterious person than I'll ever be.

There is a new blog on real-estate affordability. Unfortunately, the data is quarterly and thus there is a time delay between when the data is received and then published. Cest la vie:
http://www.housingtracker.net/affordability/

Let us take a look into Los Angeles. In 3Q 2006 the price to rent was 332X. Ok, Los Angeles never gets down to a price to rent of 120 to 150 (normal market) or the 110 that is the supposid traditional end of a RE drop. So it comes down to, who can afford to live in LA?

I know my employer is having to consider moving departments out of state. Our competition relocated a thousand already and a similar number is scheduled. Thus, it implies my industry is priced out.

But we pay above the local median wage! Thus, this implies that a large fraction of the LA workforce is "priced out forever." Ok, its normal in LA for the bottom 40% to 60% to have no hope of owning. Bummer... but that's the fact. But when its the bottom 80%? Watch the middle class leave.

So what will happen to our tax base in 2007 and 2008? Yep... shrink. And do pay a visit to CR's blog and note how quickly construction jobs are going to go "poof." Jobs that do not show up in unemployment statistics due to the fact that they are "independent contractors." Notice he forcasts a drop in March, April, and May. A pretty steep drop.

So who is going to stick around? Who's going to leave? And who is going to hold onto a home where they owe 110% of the purchase price AND the market has dropped 10%+? The "Map of misery" is about to become the map of foreclosures.

Anyone who bought in 2006 is well underwater. Unless they put 20%+ down, there is no reason to protect their credit (its just far too expensive to do so). If they option ARM'd their equity away (or HELOC'd, Refied, etc.), they'll bail too. We can safely predict that 20%+ of 2006 sales will be back on the market, soon. 2005? They'll be underwater not too far behind. 2004 sales? They'll be underwater by fall. 2003? By spring 2008. 2002? By summer 2008. What's your prediction? When will it stop?

Due to the amount of stock margined to invest in RE, its going to hit Wall Street too. I'm trying to find the stats on that. Please post links if you have them!

One tidbit, Fortune 500 moves are slow to plan and execute. Nissan showed a lot of foresight. By the time anyone else moves, we'll be in a steep decline. But my employer needs to see a large drop in prices to justify keeping some divisions in state. Once the decision to move has been made, its too late to stop the wheels (buildings would have been bought and sold, moving contracts signed, etc.). Thus, we'll have jobs exiting state right just as the proverbial stuff hits the fan.


Most of my life I've been far more optimistic on everything. Economically, I can't believe how much of a bear I am. But the facts... don't show a sudden influx of young entering California; the opposite is happening. It takes those young to foster the next generation of high wage industries. Sigh... They'll be in Pheonix, Vegas, Austin, etc.

This is going to be a very long downturn for Califonia. Worse... if property values drop in Florida or Hawaii, that's where forign money will go. (Better weather or at least closer proximity.)

Got popcorn?
Neil

Unemployment

Photo by Doretha Lange, 1933, "White Angel Bread line."

Unemployment should be a periodic discussion when talking housing. What' s important forthe US is the 33,000 housing construction related jobs we lost each month in 4Q 2006. However, while searching google news for unemployment I found a bit on world unemployment:

VOA is reporting that global unemployment is near record levels.
http://www.voanews.com/english/2007-01-24-voa81.cfm

From the article:
The report says the Middle East and North Africa remained the region with the highest unemployment rate in the world at 12.2 percent, followed by sub-Saharan Africa at nearly 10 percent. East Asia's unemployment rate of 3.6 percent remained the lowest in the world.
Ok... interesting, but has absolutely nothing do do with south bay real estate. ;) It just shows globalization is far from complete.

What does is the increase in the construction unemployment. This doesn't include cuts by Dupont, Georgia Pacific, GE, and other due to declining orders for building materials. But its significant.

http://www.marketwatch.com/tvradio/playerFull.asp?media=1&band=0&remPref=1&guid=%7BFB0C3402-6FB9-4E19-893C-267977E8312A%7D&siteid=yhoo

Anyone who thinks RE won't shake the whole economy? Wait.

I've been having fun looking at real estate in the "non-bubble" markets my employer is looking to move me to. Do you know in some areas of the country really nice new construction is less than $130/ft^2 and nice used is selling for less than $110/ft^2? On large lots?!? It has forced me to change my thinking a bit. ;) I'm talking about areas with better schools than most south bay cities too!

Neil

One correction and local observations

Today at breakfast I chatted with a realtor. Then me and my fiancee looked at one house. This forces me to change my opinion on where we are in the market. We're deep into Denial. I thought we were going towards fear as I posted yesterday. Heck, the realtor was genuinely happy (even estatic) on his January sales. Good for him... Statistics from show sales are still happening and about at January 2006 rates. (About...) Bummer for me. Good for the Realtors (tm), bad for the GF's...

But that's not the case. Might this delay my time-line? Definitely. But what are the highest income people thinking when they buy a 1,000 ft^2 shack?!? for $1.1 million (per the realtor this morning, I don't doubt its true... stupid. But probably true.)

Ok, I'm trying images for the first time. I'm here take a fair use photo from another blog (where I forgot where I grabbed it... Mea Culpa.) Statistics such as this make me certain we're in for a correction and a real estate triggered recession. Cest la vie.

Worse (for me), this continued RE boom might make my employer determine that the economics justify moving thousands of employees out of state? Possibly. Unfortunately, this increases the probability (in my eyes). We have one set of buildings near some golfing. If this market keeps up, I'd bet the company would love to cash out there. Its not like they haven't sold a bunch of buildings anyway.

And what is it having a home for auction with a minimum bit of $4.7 million?!? We had to stop by the house in Palos Verdes Estates (90275) and look. Did it have antique fireplaces? An elevator? Anything I've come to expect in a home over $2.5 million? Nope. Good luck selling that home. Oh, great view. But I've been in two homes recently that would be $4.5 million dollar homes in this market. The difference in construction and "fittings" is staggering. Let's face it, for $4.5 million the buyer expect phenomenal stonework (maybe woodwork... but you've crossed into the price range where stone can be expected).

Denial. Nothing but denial.

BTW, take a look every Friday night or Saturday at the implode-o-meter. Its amazing how many mortgage firms fail at close of business Friday. We are now at the point where one or two fail *every Friday*. I think its going to speed up.

Unfortunately, we have our first candidate for a bank failure. Sadly, this time is going to make us wish it was only an S&L crisis... sigh. Coast is destined to be toast due to the failure of CCI. It is buried in the following article on Ben's blog:
http://thehousingbubbleblog.com/?p=2206

We're getting ready to sign a 1 year lease on a bigger place. You? Sadly, we're getting to the point we accept that my job will probably travel out of state. Cest la vie. It will make it possible for anyone who stays behind to buy. When? I have no clue.

Remember, only a few hundred of the re-locations have occurred. As best as I can tell, only ~1,700 jobs from Lockheed and Boeing and the about 1000 jobs Nissan have moved out of the area. We see commitments for 1,700 (Lockheed), 1,000 (Boeing), and the 1,000 from Nissan. Thus, of 3,700 jobs announced to be moved, we have 54% of the announced relocations still left to go! Yes, I know only 42% of the Nissan jobs actually moved people. But the jobs are gone and the region is about to discover that real estate prices are a function of income. (Notice I didn't say salary... passive income is important too.)

Got popcorn?
Neil

Pattern is locked

I have an old expression (for me) that I use when its obvious when the future can be predicted: "the pattern is locked." Its finally happened for the economy and thus real estate.

If you haven't kept track of home inventory, take a look over at OCrenter's blog. No matter what happens in 2007, there will be more homes on the market than sales. There is talk that 1/3rd of the homes listed in Southern California 2007 (Q1 through Q3) won't be able to sell. NO MATTER THE PRICE. I can't vouch for that... but it has the "feeling" of being the truth.
http://bubbletracking.blogspot.com/

CR also has an excellent blog. Currently he is forcasting a huge drop in Construction employment in the March through May time frame (my interpretation of his graphs). In an already precarious climate, having such a large industry lay off rapidly will due untold damage to retail sales, banking (via loan default), and eventually real estate values.
http://bubbletracking.blogspot.com/

Now we have Bernake warning that government spending must be cut due to the hit the economy will take when the baby boomers retire... oops!
I'm thinking that the negative ~3% savings rate is about to go flat to positive for the US consumer. Quickly too.
http://biz.yahoo.com/ap/070118/bernanke.html?.v=17

So I follow real estate. I'm very thankfull for bearmaster's local blog (to me) detailing the differnces between asking prices and sales prices. This has be added to her normal monthly charts. I'm all for numbers. Eventually they'll show that its time to buy. But don't worry, there will be a long time before there is risk of monthly payment increases; the typical buyer is overstretched as is. Companies are gettng ready to move.
http://sbbeachbubble.blogspot.com/

I keep coming back to my personal favorite blog post. Why? It helps me understand how this market must slowly progress through stages to get back to sanity. Besides, we'll overshoot on the negative... A good thing to understand.
http://recomments.blogspot.com/2006/10/market-cycles-time-to-buy-2008-or-2009.html#links

I like this post so much I want to repost the emotions of an equity market like real estate:
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)

I declared in October were in Denial.

We're starting to approach Fear. (Not there yet... but close). I think that in July or August is still the time frame for Desperation.

About right... the "spring bounce" (or lack thereof) is going to send us into Fear.

Don't for get half way between steps 11 and 12 are the lowest prices. We're at about 6.5 on the 15 step program. If you buy before 10, you're leaving a lot of money on the table. While its hard to know when its in 11 or 12... You can at least know when Capitualation has started.

Got popcorn?
Neil

Had more important stuff to do

There is a great thing about being a renter, I'm not worried about my home's value. Thus, for a bit I didn't think much about the housing maket. I didn't have any inclination to blog.

Instead my time has been with friends. I want to congradulate my best friend Nick and his new bride Jen. Their wedding last weekend was incredible! Please join me in wishing them the best possible start to their new life together.

For life isn't always about the price of homes, inventory, stock markets, imploding loans, etc. Then again, the bears argument that if you put everything into your home, you just couldn't have a wedding like theirs: large, fun, and well done.


Do take time to go over to OCrenter's inventory blog. Its growing:
http://bubbletracking.blogspot.com/

Want some information from an honest realtor? Jim's blog has become a nearly daily look for me:
http://www.bubbleinfo.com/journal/

Don't miss taking an occasional look at the implode-o-meter. Who knows, maybe your lender is gone next?
http://ml-implode.com/

Oh, I'll get back into blogging. And the rumors at work are getting very interesting. They're starting to be very specific about which group is going to be moved out of state. (Thankfully, not mine, yet.)

One real estate thought I've had is what if the market stays flat? Then I do get moved out of state and thus I cannot lose.

If you're waiting for relocations to effect home prices, you have another 5 to 7 months of waiting. It won't be until then that the big moves (that I know about) start shuffling people. Yes, Lockheed and Boeing moved people to Colorado over the Christmas break... but that wasn't enough to make a difference. With more moves scheduled after school ends... we'll begin to see the impact then.

But it won't be much of an impact during 2007. What will happen is companies will simply get tired of waiting and thus plan the moves during 2007; they'll happen in 2008. Thus another reason I do not believe its wise to buy before fall of 2008. :)

I hope you've been enjoying yourself. My current job situation makes me feel lucky; its stable and pay is fair. Hopefully you're doing well too.

Neil

Geographic lock

An interesting discussion happened last night over rediculously priced steaks and wine; several very well paid individuals feel that they cannot afford to throw away the money its costs to sell/buy an upgraded home.

This had me yawning... until the guy, a non-bear on realestate BTW, pointed out that its far better for him economically (transaction costs, prop 13, location) to upgrade his current house than to buy a new home. So he starts going into the details of the cost to move just a few blocks and a light bulb went on...

Anyone who bought more than 5 years ago in California is probably dreding upgrading.

This gentleman owns a 2 bed/1 bath home (remember those?) in the westside. Luckily, they have enough land and rights to expand. He's talking about building a 2nd floor to make the place a nearly double size 3 bedroom 2.75 bath: all bedrooms upstairs, current bath becomes the downstairs bath, one existing bedroom becomes either a family room or a dining room (they haven't decided), the other is sacrificed to make a nicer entry, staircase, and expand the kitchen.


He laid out the costs and it just struck me that the cost of nearly doubling a home's size is only about double the cost of a move.


To me, this implies further stagnation of the upgrade market in 2007.

Plus side, more jobs for contractors. Hey, anyone who really works has my sympathy. I see nothing wrong with them getting paid. Besides, this slowdown is going to be so fast this will be but a drop in the market.

Other local housing observations: Wow, the south bay has a huge flood of townhomes hitting the market!

At PV blvd and Hawthorne (I believe that's Torrance), Along Catalina in Redondo, not to mention all of the condos going up near the various aerospace corporations.

Whatever you do, don't be stupid enough to catch a falling knife in 2007. There is absolutely no reason not to rent. If you want to upgrade your current home... its probably the best short and mid-term solution. Good luck with the project.

Neil