Further weakening in home prices according to the S&P Case-Shiller Home price Indices

Now recall. We're only up to August data. That's when the 'mortgage crisis' started. September and October were far weaker markets based on the seasonally adjusted annual rate (SAAR) of home sales. Basically, most markets are dropping at near 1% per month! That's huge. But its accelerating.

If you want to know your city's future, look at Tampa, Miami, or San Diego. Recall that August is traditionally a STRONG sales month! What about the traditionally weak sales months (October through February)? Well... we won't find out about October for sixty days. So be patient. This is a multi-year downturn.

Click on:

SandP-source-Warning PDF!


More info:
www.homeprice.standardandpoors.com

Got popcorn?
Neil

Real Estate Emotions October Update

I *really* wanted to see a transition to desperation. We seem so close to that emotional switch. However, all I've seen is an increase in fear. Fear to a fever pitch, but we aren't yet in desperation. This series will also continue with the Kubler-Ross grief cycle. From what I can see, we're getting a pile up in the anger category. There is quite a bit of venom out there against anyone who isn't REIC or a FB.


To the Kübler-Ross grief cycle and what fraction of the population seems to be in each emotion.



Stability: 50% (Old homeowners and bubble bloggers)
Immobilization: 25% (Prices dropping? Can't be.)
Denial: 5% (No! Real estate only goes up!)
Anger: 8% (This one must be discussed)
Bargaining: 3% (Ok, we can cut the price and lead the market)
Depression: 3% (We're going to lose our home. Just let them take it...)
Testing: 4%
Acceptance: 2% (Walk away, we're toast)

We're progressing up the stages, but mostly a bottleneck at Anger.




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 until mid-May of 2007)
****7. Fear (Reached in mid-May of 2007). *****Current state****
8. Desperation Predicted to start in November/December 2007
9. Panic: Early mid 2008 looks to be the start. Exactly when? Depends on the credit markets.
10 Capitulation: Looking like the winter of 2008/2009
11 Despondency (start of market price bottom) Not before superbowl 2009. Possibly as late as 2010. Much more uncertainty here.
12 Depression (end of market price bottom) Not over before summer 2011, probably later.
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)

So for this month we have more anger and a stronger presence in fear. But desperation isn't far away. But if there is one thing I've learned while doing this series, real estate emotions move slower than you would think; all of my corrections have been to the right. Oh well. We're progressing.

As this winter progresses, I'll get a much better understanding of how will slide into capitulation next winter. Whatever you do, do not buy until we've been in capitulation for a while. This is a world wide event.

update 9:45pm:
This other blog puts us at somewhere between denial and fear:
http://drhousingbubble.blogspot.com/

I think the "anger in the air" puts us at a later state. However, when it doubt, delay purchase decisions during the downturn. There is a reason we have a market. Some think its time to sell, others think it is time to buy. There is no one correct answer. In fact, socioeconomic and geographical differences shift what state each region is in. For example, Seattle and Oregon are back in denial while Florida is up front in desperation. But there is no doubt that we're on the downswing globally. This isn't your father's housing downturn.

As to myself, I believe the risk of depression is constantly growing. (Man did I hate typing that.) Delaying the pain is only causing the seed corn to be expended prior to the planting. I cannot wait for the next rate cut and dive in the dollar.

Got popcorn?
Neil

Existing home sales down to 5.04 million

Inventory at 10.5 months!

I'm being lazy as I watch bloomberg news.

How much will this impact the market?

Tomorrow is new home sales data.

Prediction for existing home sales was 5.3 Million (taken from WSJ in a previous post of mine):
http://recomments.blogspot.com/2007/10/what-to-expect-in-coming-week.html

Got popcorn?
Neil

Merrill Loss May Be

From this WSJ aritcle:

Merrill Lynch & Co. is expected to announce its third-quarter losses are more than $2 billion more than first projected, ratcheting up the pressure on Chief Executive Stan O'Neal to demonstrate he has a grip on the firm's risk level.

Merrill announced on Oct. 5 that it expected to write down $5 billion for the quarter that ended in September, the biggest such loss of any Wall Street firm, based mainly on an over-exposure to risky mortgage-related securities.

But the actual write-down is expected to come in far above that initial estimate, with outsiders putting the level at $7 billion or higher.


Ouch!

So the question is, how long until I-bank layoffs?

Update:
Merrill Lynch & Co. swung to an unexpectedly deep loss in the third quarter on the back of a $7.9 billion writedown in its fixed-income trading business, a hit that exceeded the Wall Street giant's net earnings for all of 2006.


Merrill posted a net loss of $2.24 billion
Updated WSJ article:
hat tip Calculated Risk

Got popcorn?
Neil

What to expect in coming week

This coming week could be interesting. We're in earning reporting season, a financial crunch, and the NAR reporting on existing home sales. The graph comes from the following link:

WSJ article


Notice one thing from the graph? The plunge in seasonally adjusted home sales only "paused" during the normally really slow January/February months. In other words, the worst months of the year didn't behave horridly, but every other month has been performing far worse than seasonal norms.

Countrywide reporting on Friday should be exciting. Any predictions?

Don't forget to look at foreign stock markets:
http://finance.yahoo.com/intlindices?e=asia
All I'm seeing (today 10/21/2007) is red.

I send out my best wishes to those impacted by the fires. The Laguna fires from my days down in the OC left quite a memory (we were the next section scheduled for evacuation prior to containment of the fires). I'm not at my place right now, but one of the fires supposedly stopped 1.5 miles away. Oh joy, lots of ash in my stuff. :( But that is nothing compared to anyone who lost their home. Or might that be good luck for some FB's? ;)

Got popcorn?
Neil

Party photos

Ok, I know I'm late. But they're here! We had a lot of fun. Two dozen attendees. What amazed me is that the whole group was upbeat and the type of people everyone would enjoy hanging out with. None met the stereotype of a "perma-bear."

Edit 3:00pm 10/15/07:

I was asked to go over the conversations and discussions of the event. Quite a bit of the discussion was focused on where to put one's money during the period of inflation that is coming. To say the least, the metals crowd got their word in. ;) We also discussed low cost investments in "sin." E.g., cigarettes, alcohol, and other businesses that do well in downturns.

A side conversation I had during this meeting was about why I still believe recession versus depression. To say the least, I was in the minority. Many thought the banking system and real estate would result in too sharp of a contraction to avoid depression. I debated back why deposit insurance (FDIC), technology growth, and a few other industries would keep us only in recession.

We also talked about how we arrived at this point. How could we have gone away from down payments on homes. I think we talked 45 minutes about the banking system. Probably every aspect of what should be regulated and what shouldn't.

Another side discussion was how long had people been waiting to buy a home. What did people do for a living and why were they safe/not safe from layoff.

I know there were a dozen conversations going on that I couldn't participate in, so I invite the attendees to put their memories in the comments section.



So to the photos! Yes, the eye bars are silly, but I think as this downturn gets momentum... people will be angry. Many thanks to Mike for these photos! If you have photos, send them to wannabuy3@gmail.com. I'll happily send photos to participants sans the eye bars.

Good food and good fun:





























Hope to see everyone at round 2 in a few months.

Got popcorn?
Neil

Random conversations and layoffs

Today was one of those days where you realize "the knowledge" is spreading out to the J6P population. Purely anecdotes, but I believe they represent changes in the economy. The first overheard conversation was during training at work. Technicians were chatting on how their parents had moved to nicer retirement homes, after selling their "work homes," but were 'just renting.' The second was a REIC layoff conversation my lovely wife participated in.

The technicians didn't just note that their parents were renting a home in retirement; they stated point blank that it was smart to wait until they could buy nicer "at the same price as rent." (Ok, these people think in monthly payments...) To have a room all agree that was wise... floored me. Ok, a third of the room was already "in the know," but to hear a whole room agree ("oh yea," "my parents are doing that too," "wait to buy")... just surprised me.

The other was a conversation my wife had with a "REIC layoff survivor." A small escrow company started the day with twelve (12) employes: 3 escrow agents, 4 escrow assistants, 4 title agents, and the receptionist. They now have 3 escrow agents and two assistants. Yes, more than a 50% layoff. This was a COMMERCIAL escrow shop. Note, this shop is tied to a residential company that has been doing rolling layoffs. Note: I think rolling layoffs only destroy morale. If you have to layoff, get 'er done and move on.

My conclusions: Sales are continuing to slow. The market is going from euphoria to depression. I'm not saying we're anywhere close to depression, but rather on the path. The second conclusion is that the REIC is having a bunch of layoffs that we'll never hear about. Layoffs from small shops that will never be reported in the MSM until long after they've happened. Not to mention the MSM will only notice if it impacts the economy. But these stealth job losses will add up. I'm not even sure they'll make the employment report (for many will be fired instead of layoffs).

Got popcorn?
Neil

Restaurants

I like to look at restaurants to see far out trends. Are people buying fancy alcohol (good times are here for a bit), are price increases being accepted by customers?

At Ruth Cris,


The company said average check increased 3.4 percent, driven by higher bar traffic and higher prices. That was offset by a decrease in entrees.

Ok, a little contradictory, higher alcohol sales is good... less food. Fewer customers... are the few customers going in needing to get drunk? ;)

Ruby Tuesdays

Still in the black but declining profits.

Down analysis on restaurants
Basically, fast food restaurants are offering salads, so family sit down places are suffering as people have neither time and are trying to save a buck.

Perhaps other retailers are suffering because everyone's shopping at Costco.

Not a great article (the title was wasted on it), but a good point. The discount stores prosper at the expense of other retail. Why? People NEED to save a buck.

What about other industries?
Chevron
Tighter refining margins. Is that less demand? ;)

Food inflation
This morning, your bowl of cereal and milk probably cost you 49 cents. Last year, it was 44 cents. By next year, it could be 56 cents. It's enough to make you cry in your cornflakes.
later in the article:
The big picture, at least in the U.S., is that higher food prices don't hurt like they used to. Today, about 8.5 percent of the American household budget goes to food at home, down from an average of 19 percent of the total budget in 1960, Wyss said. While food inflation is high, it's not hyperinflation, he said.

No its not "hyperinflation," but the grain going into J6P's beer is getting pricier!


I'm bearish on the restaurants. Will one or two chains do well? Sure. Most won't. I'll be curious to see how the better ones adapt.


We'll have to keep doing meals to keep our favorite places in business. ;)

Got popcorn?
Neil

How to have this Crash get HUGE: 401k

Hattip to Sandman for this link.



http://tinyurl.com/35h2x6

http://online.wsj.com/article/SB119162722016150793.html?mod=hpp_us_whats_news

From Sandman's link:
Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.

Not all plans have seen jumps, and more-comprehensive statistics won't be available until next year.

In other words, J6P won't know about this until its blown up another part of the credit economy. Sigh...

Later in the article:
Most plans allow borrowers to take money out of their 401(k) accounts to pay tuition, purchase a residence, pay medical or funeral expenses, or to avoid eviction or foreclosure. Borrowers must repay the loan plus interest, which is typically set at one or two percentage points above the prime rate.

20% of Fidelity 401k customers have taken advantage of this... so basically we're going to see 10% to 30% of the 401k funds go "poof" due to this RE bubble.


This is going to be a really ugly recession.

Got popcorn?
Neil

Consumer borrowing up sharply

Consumers have boosted their borrowing at the fastest pace in three months, turning increasingly to their credit cards to replace home equity loans as a source of ready cash.

Whew, good thing they aren't trying to actually save money for retirement. I'm so glad our demographics suggest a negative savings rate is ok. Why, its so 1950's to save up right before retiring. ;)

USA Today article

During the housing boom, when home sales were hitting records for five consecutive years and prices were soaring, many homeowners tapped the rising value of their homes to finance increased spending by taking out home equity lines of credit.

Sadly, J6P will need to hear this again and again before he/she believes it.


Exurban Nation noted that Hawaii hotel vacancies are up YOY. Hmmm...

To think, all that construction is past the point of no return. When we honeymooned in Hawaii, it was non-stop construction everywhere. What the heck will happen to that state's economy when we go into recession?

Good thing all real estate is local! Yea right...

Got popcorn?
Neil

Article in works

Ok,

I know its lame to put in a placeholder, but I've noticed an abnormal trend this year in the inventory. Normally, there is a National inventory peak on September 21st with a 2.5 day sigma (standard deviation). With inventory climbing again, it looks like we could have a six sigma event pretty soon!

The fact that inventory peaked at the end of september (about 3.5 signma) is too easily explained away by the "hickup" in the mortgage market. However, if we get to the point where a market inventory peaks during October, we have a six Sigma event. There is a reason "Six Sigma" was selected as the name of corporate quality campaigns; a six Sigma event is so out of the norm it only happens if the process is broken.

By broken process, it implies that none of the normal fixes will save the real estate market. We're beyond another Fed 50 point drop. We're beyond freezing option ARMs at the teaser rates. Let's face it, if home construction suddenly stops, we go into recession just from those job losses.

Sadly, about the only thing that can be done now is an emergency infrastructure program. Now I'm biased, I truly believe that "Transportation is the cornerstone upon which a city builds wealth." Its past time to expand the interstate system. Its past time for certain cities to get a proper commuter rail network. Why do none of our major airports have a good bus terminal like the ones at Haneda (Tokyo) or Frankfurt? I'm all for building dedicated bus lanes to said bus terminal (elevated?). And of course, build more runways. ;) (I'm an aviation nut.)

Something should be done to absorb all of the unemployed construction workers. Hopefully with efficient production. No point in wasting money just employing people. I'm most concerned the maximizing the infrastructure.

Edit circa 6:40pm: I'm noticing the "Bulls" are starting to get really nasty. Could it be that the pigs are squeeling due to be spanked by the "Invisible hand" of the free market? Kudos to Adam Smith for writing such an awesome book. (I have a 3rd edition from a used book store.)

Nasty "bulls" are invading most of the bubble blogs. Their #1 concern seems to be our dissemination of accurate information counter to their agenda. The last time I saw this was around when New Century failed. Thus, I speculate that the current "counter-information" campaign is due to economic stress in the REIC. In other words, we are but a short time away from some economic event. But what is it? REIC layoffs? A Realtor branch closure? Countrywide selling out to BoA? When? I'll go on the record and say within October.

But then again, I'm already on the record predicting a stock market correction in October. Note: I have no shorts or puts, but I'm dang bearish.

Got popcorn?
Neil

Home Price Estimates

Basically, the CME futures contracts are point to moderate price drops ahead in LA, DC, and quite a few other markets.

WSJ ON HOME PRICES


I think we'll see bigger price drips due to the impacts of the credit crunch and overbuilding. If LA drops less than 45%, quite a few industries are "priced out forever." Let's see how they adapt.


Got popcorn?
Neil

Dinner

The dinner at the Cheesecake factory was a success. Later I'll do a proper post (with photos). The crowd was an incredibly upbeat and friendly group. As you would expect, from quite a large varieties of walks of life.

A credit card from our group was left on a table. It is in the Cheesecake factory's safe.

A favor, if you took photos, please send them to wannabuy3.com Thanks to M. He sent me a review of photos including the "Cash car" that was parked right in front of the place. (We all laughed)

It started early at 5:15pm and didn't end until 10pm when the last of us left the Cheesecake factory. We chatted on a whole variety of topics. Everything from "why will/won't this be another depression" to growth patterns around the world. Quite a bit of discussion centered around the dollar and others on buying a home before the perceived bottom as an inflation hedge.

Thanks everyone! The final count was 23 attendees.

It amused me to be given popcorn at the event. ;)

Got popcorn?
Neil