Convince me to buy: Job security

I cannot help but notice the number of posts by "anons" saying something along the lines of "it hasn't crashed, ignore the high inventory, BUY!" Not just my blog, but all over the housing blog spectrum.

But I look at it this way:

I'm an engineering manager
My job security is dependent on keeping those whom work for me happy and productive.
All but a few of those who work for me earn less than I do (some exceptions, but they're worth it).
50% of engineers retire as a senior engineer... so they have to be able to afford homes.
Engineers are worthless without technicians (whom also want homes)
Basically, if someone cannot afford to earn 1/3rd less than I do and buy...My job is a lost cause as our business model is broken. :(

So don't bother to taunt me about buying, show me how those who work for me can afford to buy in such a way that I'll know they'll be around in five years. That's what concerns me. I really pull myself out of the picture, as most good managers do.

I know of several senior engineers and a few other managers who are ready to throw in the towel. (This has already been blogged.) A good subset have already moved out of the south bay. I've only once seen a similar number with their foot in the door once before; that was the only engineering "revolt" I've ever seen in aerospace. (A big one is supposed to happen ever 3 to 5 years nationally... but its really hard to get the technical guys that pissed off...) For the record, people like to work for my employer... so its not that.

We're already transferring technicians to Phoenix and paying them hotel, airfare (southwest advance purchase), and rental car for the work week. Not many... but the number is growing. Update: Had technicians in Phoenix. They found jobs out there sans the inter-city commute hassle. (Notice given 5/1/2007).

So now, like David's excellent DC blog (bubblemeter), you've found my blog. Convince me that those I'm responsible for will stick around. Then... I'll buy a home.Until then, me and my fiancee (soon to be wife) will save our money. We just re-affirmed our savings goal (again, previously blogged).

Let's put it this way, I'm pretty relaxed financially. Heck, my biggest worry today was "should I spend $120 for a fancy knife to compliment my kilt at the wedding?" Yea... I'm part Scottish. So I'll say vows in slacks but when my wife puts on the traditional Chinese wedding dress... I'm marching around in my kilt! :) (Can't wear a kilt without knives... yea, I bought the knife.)

So give me reason that those I mentor will stick around the south bay... and I'll buy. But right now... *everyone* seems to be working on getting to either senior engineer or the 1st rung of manager... and then moving out of state.

Don't worry, I have confidence aerospace will stay in Southern California. I just have a finger on the pulse... and the rumor mill keeps talking about a few thousand here and there moving out of state. I know of 2,000 condos/townhomes being built (soon to be built) on land that my employer has sold within the last 30 months. Not one of those units is complete... And co-workers were shocked when I showed them the links in our quarterly report on land options in other states...

Let's just say engineers are good with numbers and patterns... and while there are always land options out there, the quantity (acres) was not within the norm. Since the group of departments I work for will stay in state, may I wish my coworkers Bon Voyage? (And if my employer moves to Austin or another fun city I like, don't get in my way to the door!).

And let's say a certain employee of a competitor spilled their attrition rate... and I knew they were building in another state... yea... Convince me to buy now or be price out forever. (Need we mention buy vs. rent?) Put they guys who work for me in homes... and I'll know all is well. (Townhomes are fine... but engineers and condos... you won't convince me.)

So to the anon's who say "buy now!" I say... why? Give me numbers... not emotion. Numbers. To those who say the market isn't bad... so what? I'm a saver. I can only hope credit tightening temporarily excludes me from the market. Eventually I'll be let back in at a reasonable price level. But until those that work for me are let back in.... being out of the market is a no lose option for me.

Got popcorn?
Neil

One is a tragedy, a million is a statistic

With a coworkers permission, I'm going to blog about his mother-in-law. No, it has nothing to do with my wedding (soon), but instead real estate.

Let's head down to Oceanside to a near ocean condo.
The statistics:

Year of purchase: 1995
Purchase price $64,000
Current mortgage: $350,000 (after 7 cash our refi's)

It was purchased to fix future housing expenses at 1995 rent levels at her son-in-laws request. It also had the benifit of moving the mother-in-law closer to retail, nicer location than her previous apartment, and get her into a slightly larger place of her own back when price/rent screamed BUY!

The other details really don't matter. What does is this woman called her daughter to see about getting some help with a new cash our mortgage. Since the daughter is a Realtor (tm), she helped mom by arranging to have a good appraiser sent over to the place to do a really quick look at the properties values. Daughter even got in touch with a mortgage broker who could set up the mom with a good and fair cash our refi. They check the mother's income (mother-in-law of co-worker) and its fine for this level of loan (not my standards, the mortgage company's).

The appraisal came back: $284,000.
In other words, LTV is currently at: 123%

Even a subprime Heloc will max out at 125%

Once refinancing fees are considered, there is no-equity to extract in any form from this property. None.

The daughter freaks out. Not at the appraisal (she knows it is fair), but at her mom's debt. She daughter also knows the place appraised for much more a year ago. (I'm unsure of the past appraisal, so we'll leave it at "more" for now.)

My coworker is resigned to having the mother in law move in.

The mother in law? She's livid! "My place will be worth $1million one day and they have to give me my money!" "How am I supposed to pay for X, Y, and Z without my money?"

I loved the mother-in-laws exit strategy. "Oh, I'll just sell the place and rent again."

I'm serious folks... this isn't made up.

Its sad... someone will lose their home due to "buy it now" greed. Not a bad person... Just someone who didn't watch their spending and was caught up in this mania.

Got popcorn?
Neil

Implode-o-meter count at 62

If you're reading this blog you probably know about the implode-o-meter.
http://mortgageimplode.com/

Since so many regions have home prices far disconnected from fundamentals, I honestly expect this list to break 100. Easily. Heck, its peak will probably be around 250. Yikes!

Florida and Michigan will take the worst hit. But California, Phoenix, and Las Vegas will certainly "enjoy the same hangover."

Got popcorn?
Neil

Coworker to Jacksonville Florida

A coworker has announced his and his wife's transition to Jacksonville Florida. Why? Just no hope of buying in California. Not to mention there are engineering jobs there (for the Navy, working destroyer retrofits).

What interested me is that when he mentioned the relocation, toward some family, for the purpose of affording a home... everyone took that as the most natural thing to do. No one expects a young engineer to stick around California and buy...

Oh, my company is buying down points and doing whatever they can to retain young talent... but since a 70% wage increase isn't about to happen... people leave.

I did chat with the coworker and believe that our conversations are a small part of why he is going to lease for a year instead of buying right away. I do expect him to buy within that year; but any delay over six months should save him a bundle.

Now to find the link from the NYT that hints that illegal labor is leaving the state in droves (due to the construction slowdown). Question: how long until the yuppies at the cocktail parties notice? I still think by June everyone will know that real estate is dropping. But when will they know its recession and people do leave California en mass? I think that realization won't happen until August to October. (Sorry for the wide window, but predicting when people recognize something isn't always easy.)

A quick comment on real estate emotions: we're still not in fear. Not in the crowds I rotate in. That includes the flippers I know, the blue collar machinists, the engineers, the doctors (family friends), etc. Soon enough.

Oh, expect fewer posts from yours truly. Today is T-minus one month to my wedding!

Got popcorn?
Neil

WSJ on retail

The latest article on retail points to strong overall sales, but weakness in boats and:

"If a company sells something that a significant portion of its customers can't buy without borrowing money, watch out."

http://online.wsj.com/article/SB117668148589570733.html?mod=todays_us_money_and_investing

or

http://tinyurl.com/3xmm9k

Do you think they see what we see? Ok, this was buried in the journal, but points to people waking up to the spread of the contagion.

Got popcorn?
Neil

Weaker dampening force

Bubble markets inventory has a great article on San Deigo foreclosures. (fair use of image)
http://bubbletracking.blogspot.com/2007/04/wow-look-at-me-go.html

Compare the rise of foreclosures in the 90's recession and current event shown in the graph.

Notice two things:
1. Steep slow in 2006/2007 (18 months rise time versus 48 months).
2. Jagged increase in the 1990's recession.

These to quantities imply two things:
1. Stronger driving force propelling foreclosures
2. Weaker dampening force (ability of people to avoid foreclosures)

Driving forces?
We've barely had ARM resets
Jobs are strong
Credit is still easy, just not supper easy.

So Driving forces haven't played much of a role yet.

Dampening forces?
The savings rate is gone. IIRC 3 years of savings versus 3 months.
"Equity extration," Too late, already done. LTV's are far too high.
"Investment in the home." What down payment? What equity to defend?

I believe the spiking foreclosure rate is due to weak dampening forces. We have not yet seen strong driving forces. Sadly, between now and the fall the driving forces build in intensity.

What can we expect?
1. Massive layoffs: Construction, mortgage brokerages (recall, the Warren act has kept *most* from going without a paycheck... yet), realtors (business is still churning), retail, etc. I expect 1 million jobs lost by September. Boy do I hope I'm too pessimistic. This month (April) is supposed to be the first month of strong layoffs... lets see. I credit this as one for stronger driving forces. But its also a weakening of dampening forces. So if layoffs become large, this is a double zinger.
2. ARM resets. If you haven't seen the graphs from the Credit Suisse report... google for it. Its scary. This just starts to build this summer and continues for years. This is the largest increase in driving forces.
3. Job relocations. Some this summer, I expect more next year. Why pay California salaries once its easy to pick up workers out of the worst of bubble land? I put this as a further weakening of damping forces. Probably a minor impact.
4. Oil (gasoline). I put this as a driving force. People are strapped.


I've been telling friends that they can consider me insane until June about my housing predictons. My thoughts? My sanity won't be questioned in June.

Alas, this is only making me more bearish. Still recession bearish... but I'm conceeding more and more of the nation will hit depression (Michigan, Florida, ???)

Got popcorn?
Neil

Video of Real estate roller coaster

I'm obsessed. Someone has created an incredible little video of the inflation adjusted price of real estate (from Shiller's book).

http://www.youtube.com/watch?v=kUldGc06S3U

I'm having issues with youtube allowing posting to this blog, so pardon the link.

Hat tip to http://sandiegomarketmonitor.blogspot.com/

I'm afraid pretty much everyone I know will be getting to see this video. My favorite part? The coaster is turning the final corner (2006) and you look back to see the previous trend of real estate... Way down below. It leaves the viewer to question where the market is going in a way that normal graphs just don't drive home as effectively.

One thing I would like to change is to put the ground level at the median income. (e.g., hills and valleys). But I only critique as I'm so excited about this format of showing just how overpriced homes are today. Showing how prices bounce above and below real median income would be a great little additional tidbit.


Got popcorn?
Neil

Real estate emotions update

I like to do about a monthly update on my take of real estate emotions. Since foreclosure sales have been reported to be climbing in California, now seems to be a good time to post.

This is my last post on the real estate emotions topic:
http://recomments.blogspot.com/2007/02/record-home-price-slump.html

Let's see how things have changed (or not changed):
A review of investment emotions.
1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak) Peaked in late 2005/early 2006
5. Anxiety (I'm a long term investor, not a speculator.)
****6. Denial Reached in October of 2006 Current state persisting****
7. Fear We're not there yet, but in we'll cross that line within 45 days.
8. Desperation Predicted for July/August 2007
9. Panic
10 Capitulation Could it be summer 2008?
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom) Not before summer 2010
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 am making one timeline changes since 2/15/07 post. After reading blogs on real estate time lines it now is obvious to me that the bottom will not hit before mid-2010. OK, I noted that the next step fear will be achieved by mid June. Otherwise, we seem to be right on track.

If you want a pretty bearish analysis of Irvine home prices:
http://www.irvinehousingblog.com/2007/04/02/how-bad-could-bad-get/

However, at those prices my grandmother would be buying three or four homes for her grand kids in OC. So I'm not thinking we'll dive that far or that long. Don't get me wrong, I really like the analysis IrvineRenter performed. I agree with the numbers up to October of 2008. There I disagree. I think late 2008 will be a little worse than IrvineRenter's prediction. But I think the bottom in 2010 will be up at about $330k.

Neat thing... We have 16+ months to discuss and change our minds. There is absolutely no rush. Its just a debate on when the optimal buying window will be.

I still think anyone who buys before Fall of 2008 is throwing away money. Only at that point will there be enough selection for it to be worth picking up a property; only one that is so special its worth leaving $100k+ on the table. (There are those properties.)

Also, because of tax advantages, I'm not going to fret about the last $50k of the drop. :) Remember, I place a higher utilization value on a home than most housing bears, so when the optimal buying window is for you might be different than for me.

That said, every investment bank seems be be predicting a moderate national price drop in 2007 and a bigger one in 2008. Since I have a down payment saved up and do not believe rates will go up much more... I'll wait until enough serial refinancers have handed back the keys to the bank to drive prices down. The tidbit that 75% of foreclosures are older "seasoned" purchases that had 3 to 5 equity withdrawls is.... interesting. Its going to open up a lot more inventory for us that are patient.

Step 10 will have the steepest price drop. Wait for that step to at least be well along.

Got popcorn?
Neil

New Trend?

I'm seeing a new trend amoung those that retire from my company and I thought it was interesting. The trend is to send their kids out of state to where they can afford to buy (ok, not a new trend). But what is new is that families are coordinating their moves in such a way that multigenerational moves are being planned as a package!

Multiple of my coworkers were discussing this today. Its not something I had heard much about. Ok, I've heard of a son or daughter moving out of state and then parents following to see the grandkids a few years later. But this time, its part of a planned muti-household move all within 2007!

The pattern is all the same. The adult kids pick a city where they have good employment prospects; the soon to be grandparents anounce their retirement and buy a large property on the outskirts of that affordable city. In all cases the oldest generation is buying a nice size lot (say 5 acres) near a lake and so far invariably in horse country. Due to the huge California home sale windfalls, the grandparents make out like a bandit (offen $1M+) and are retiring 5 to 10 years earlier than plan. Ponnies are being bought (for grandkids) as well as boats, RV's, and other "toys" for the grandparents to spoil the grandkids with.

As best I can tell, this one of two reasons my company is being hit with a rash of early retirements. (Cashing out). Reason #2 is a pension change that is relatively minor but has freaked out some old timers.

Before, people were retiring where they felt like it and flying the grandkids to them. Again, its the multifamily coordinated moves that I find interesting and new. (Usually both sets of grandparents and siblings too!)

One move is 5 families together. (Two sets of grandparents and three sets of adult children all pursuing a higher standard of living. Its resulting in three homes for sale in California (one sold, one pending, one on the market) and five being purchased in the new location. One additional set of grandparents is on the fence, but will probably move in a year or two (if they can afford to then).

Another move is just two families with a sibling promising to move in the Fall.

Another case has the grandparent finally winning a battle to pressure the adult kids to move out of state (so they can stop subsidizing their adult kids). Both sets of grandparents are preparing their homes for sale to follow. Another sibling might or might not follow.

Are you seeing anything similar? Did I miss this last year? (It is the right season to begin hearing about this for school break moves.)

Got popcorn?
Neil

U.S. Apartment Rents Increase 1% in quarter

The WSJ has a blurb that in the 1st quarter apartment rents went up 1%.

What caught my eye:
The numbers show apartment owners continue to benefit from weakness in the for-sale housing market, as would-be homebuyers wait out possible further declines in house prices. Sam Chandan, Reis's chief economist, says apartment owners will benefit even more as the tightening of subprime lending closes the door to many first-time homeowners who are currently renters.

Umm... yea. I'll be competing with people with poor credit. You sure people won't wait it out in new areas? Spare bedrooms in Mom and Dad's McMansion?

Also, let's see... that is about 5% inflation YOY assuming wages do well. What assumption do you make on wages? I'm not expecting much of a rent increase in 2008.
The article (requires subscription):
http://online.wsj.com/article/SB117565112287059207.html?mod=todays_us_marketplace

Got popcorn?
Neil

Subprime effective shutdown?

"For all practical purposes, the subprime market is in the process of shutting down."

From:
http://biz.yahoo.com/ap/070402/economic_forecast.html?.v=2


About time! However, I know that like some sad B-flick monster, it will be back some day. :( Hopefully with some sane regulation.

Also from the same article:

Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.

"For a housing market that has already witnessed housing starts decline by 36 percent, this is not good news," he wrote.

However, the article is less bearish than I am. I'm expecting starts to hit a wall this summer. Not stop... But drop to the 1.0 to 1.2 million range.

As to mortgages, sub-prime always leads higher grades in defaults; we haven't seen the big wave of resets... yet. I'm not expecting much to happen with prices until June. But by then... everyone will know RE is correcting.

Got popcorn?
Neil