Wednesday, January 30, 2008

Horsemen of the Apocalypse

Inventory is the horse pulling a mean army into multiple real estate markets. There are numerous local inventory blogs around the web that I've put into my links, so we can get far superior data to what the used house salespeople want you to read. This January's inventory is breaking previously known trends and only by looking at the graphs can you really understand how broken the system is. What you will understand by the end of this post is that there will be no soft landing in real estate. Its not different here no matter where here is. Some areas won't be as hard hit, but the most bubbly will see prices drop a lot between now and 2014. Don't want to wait that long? You'll see the biggest price drops in 2009.


This is the national picture. Notice something? Large gains year over year. Now, this is from ziprealty; they do not cover all areas. In fact, only about a third of all homes for sale in the US. But it covers enough to give a great national trendline. See the large gains in inventory in January? You might want to rethink the chances of a 'spring bounce.'

Sales peaked at 7,072,000 in 2005 nationally. What about last year? 5,652,000. Right now, we're at ~10 months of national inventory. That's huge! It should be 5 or 6 months of inventory. So let's look more into 'problem areas.'

Greater Los Angeles: Horseman #1

Bubbletracking (better known as BMIT) is probably the grand daddy of all the inventory tracking blogs. OCrenter runs it and has provided good data for a long time and thus has been in my links forever. I've chosen to pull his data for LA inventory and sales. Same trend as the national inventory: Constantly increasing inventory.

Inventory in LA is now at a full year! Sales have stalled at a new low. Yes, the fed is trying to boost them, but as soon as more Jumbo loans are available, LA will soak everyone of them up that it can. Expect LA alone to weaken the national market.

Washington DC: Horseman #2

DC is climbing like it never did last year. Something has "broken away." For fun, I plotted Houston on the same graph: Houston is almost back up to peak inventory already (but everywhere is following that trend...).

People say Arlington is different. Nope. Read the following blogs "decade of sales." That is where this data is from:
I tried putting into my sidebar links, but blogger hasn't updated... I'll figure it out later. ;) I picked 2000 as a normal year, 2005 was the peak year, 2007 is when it started to fall apart. Just in case you want to see everything and see how 2007 has undercut everything:

Yep. 2007 wasn't a great year. 2008 will make used home salespeople pine for 2007. I've watched people from 'high end areas' crying on couches because their homes lost 40% of their 'value' in nominal dollars before. Is not something I want to see again, but its coming.

Its different by the beach, NOT!

Look at this area where everyone wants to live south of LAX in LA. Notice something? A sharp spike up. Now this could be due to the writer's strike shutting down TV, ad, and some movie production in greater LA. But look at the slope up! My data has no comparable increase in inventory in 2007. That wasn't a great time to sell a home; 2008 is going to be far worse. Did I mention LA will soak up any jumbo loan bail out package?

Phoenix: Horseman #3

Phoenix is definitely one of the four horesemen of the Apocalypse: California, Florida, and "DC" round out the bad boys. This chart's data is from BMIT again. That's at least 18 months of inventory (sales at 3,290 in December)! Yes, plotting months of inventory and inventory on the same chart is a bit crowded. But look at the trend. From low inventory in 2005, break away inventory in 2006, even worse in 2007, and now its out of control in 2008! (Note: I assumed January sales matched Dec 2007 for graphing purposes just to show how much worse this year is starting off!)

Comment on Florida

I didn't have the heart to publish charts on Florida. West Palm Beach has 10 years of inventory and things are getting worse every month. :( Orlando and Tampa could stop building homes and still have a surplus in 2011. Miami is expected to sell ~10,000 homes this year yet will build 16,000+ condos alone!

Peak inventory is usually late in the year (August or September Nationally). We're on track to exceed last year's peak inventory by end of May. That implies we'll see 20% more inventory in 2008. Combine that with an expected drop in sales to ~4.5 Million homes/year, it wouldn't be unreasonable to expect 10% to 20% national home price declines per Case-Shiller.

As long as the government insists on keeping home prices elevated, builders will continue to flood the inventory. Cities are losing jobs as 'house poor' owners have no choice but to cut back on anything but debt service. Let's also not forget that it is once again socially acceptable to walk away from mortgage debt. Why not, there isn't any way 20 million of the homeowners will every pay it off... Nothing to surprise the housing bears. Meryl Lynch is getting out of the CDO market, without that huge liquidity source, the 'gold rush' to buy homes is over!

Edit 2/3/08: Updated graphs, cleaned up some spelling. We should now be close to the bottom of the inventory for the year, but most areas are high this year. Yes, around the superbowl is when listings should drop off in such numbers in order to 'refresh' for the 'spring selling season.' I even saw a superbowl Sunday open house today... Hmmm...

Edit #2: See Calculated risk The article is interesting. Real estate commissions have fallen to normal boom levels. If the normal pattern repeats, RE commissions will drop from the current ~0.5% of GNP to 0.25% of GNP. Don't even think sales are bad now; its taken 30 months to drop to a boom level of real estate sales. The historical pattern is that it will take another 24 to 36 months to hit minimum sales. Since we're in uncharted territory... it will be interesting. Could RE commissions drop to unprecedented levels? I don't know, but I wouldn't be surprised.


Tuesday, January 29, 2008

Countrywide takes impairment

You've probably already read about Countrywide's large loss: $422 Million or 79 cents a share (more than double the predicted loss). But what struck me as I was reading this article is the HUGE impairment they're taking for holding unsellable Jumbo loans into their investment pool: edit/correction $394 Million on $7billion in loans.
Countrywide's loan fundings in the quarter totaled $69 billion, down from $124 billion in the prior-year period.

I wish the article had gone more into the impairment. That will have a large impact in all of the jumbo markets. I still believe during the darkest days of this downturn 25% down payments will be required. Believe it or not, BofA still has a zero down full doc "Doctor's loan" to $1M for professionals that have recently seen a large jump in their income.

That alone says it all. Mortgages are down 50% YOY and declining. You cannot have that large of an 'impairment' on Jumbo loans and expect banks to keep funding Jumbo loans on the old terms.

Countrywide has cut about 11,000 employees from its payrolls since July, the company said.
Ouch. And they're not done. There will be more job losses in the REIC this year than last. Yet somehow home prices are supposed to rebound?

2008 will be interesting

Think about all the 'profit' they took in 'unrealized gains' during 2006/2007 on neg-Am loans. That 'profit' is about to disapear.

Got popcorn?

Monday, January 28, 2008

Redlining laws and their dark side

For years redlining has been illegal. But could those laws now have an unintended side effect? For now we cannot quarantine a small area where homes are being defaulted up. Legally, the smallest area that can be quaranteened is a county, but in some states you must make it the entire metropolitan region to avoid redlining laws if that is what is required to cut loan losses.

It was after some further reading that I realized something about the Countrywide categories; They are structured by large regions to comply with redlining laws! In some states, they can have one county a Category 1 or 2 and another a 4. But in many areas, if they do not declare an entire metropolitan area to be of risk category, than none of the region can be a risk category.

I think these well intended laws will instead help constrict credit very quickly. Instead of slowing the trade up chain, it will cut it off. The 5% extra down-payment requirements will grow to 10% extra... Until the 25% down payments I've been predicting become reality. Remember, during the darkest times of US history, 50% down payments were required.

DC and LA are probably the best two examples of this I could find. Both are labeled as "4's." But should the multi-country region of DC all be a 4? Probably not today. But how can Countrywide differentiate legally? Since they cannot, even the cities with low defaults are all now lumped in with the high risk cities. Since this increases the down payment required, this will drop the prices of all homes in the region until you get up to price points were mortgages aren't typical.

Countrywide's categories:

Conclusion: "We're all subprime now." ;)

Got popcorn?

Friday, January 25, 2008

Real Estate Emotions January Update

Honestly, I expected more of a transition in emotions through this month. We're still in fear. Somehow, despite all the stock market oscillations, the emotions are staying pretty stagnant. The one change is less anger. Is that just what I'm seeing? Or is it the cold weather?

To the K├╝bler-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)

Still lots of anger out there... But less. Its as if we took a step back during the winter break?

The timeline stalled. No progress this month. I've slid the dates a bit, so I need to update the graph. Graph updated . But if you've been reading the blogs... Option-Arms are hitting their limits and thus the resets are really happening much earlier.

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 February/March 2008 edited from last month
9. Panic: Fall 2008 looks to be the start. I slid this a few months
10 Capitulation: Spring 2009 through the winter of 2009. Shifted... But still most of 2009
11 Despondency (start of market price bottom) Not before winter 2009. Possibly as late as 2010. Much more uncertainty here.
12 Depression (end of market price bottom) Not over before summer 2011, probably later. It could be as late as 2014.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...) about 2017
15 Optimism (cycle starts again)

Sellers bet the farm (house) on appreciating real estate and those days are gone. This year will only begin to shake out the more feeble 'homeowners.' 2009 is still when I predict the greatest price drops (both nominal and real prices). The bottom is a long way off...

The option-ARM resets will be the motivator in 2008/2009. Not the planned resets, but the loans hitting their limits. Recall, over 90% of Option-ARM borrowers only pay the minimum, so that negative amortization is going to flatten them when the payments reset.

Upcoming article: I'm creating graphs of housing inventory data from my own data and a few of the inventory blogs. It will cover national, LA, and DC inventory.

edit (Warning PDF):
Countrywide ranks markets
The above countrywide document is a must read. (Hattip Crispy&Cole on HBB) Is your area a Category 5 or 4? Miami and Phoenix are 5's. LA and DC are 4's. I think the color coding in the document tells it all...

2nd edit: For Countrywide Purchase Loans:

Soft Market Category 4-5 loans: Maximum financing will be reduced by 5%
Soft Market Category 1-3 loans: Maximum financing will be reduced by 5% if the appraisal or appraisal review indicates any of the following: Declining Market, Oversupply, Marketing time over 6 months.

For Countrywide Home Equity Loans:

Soft Market Category 5 loans: Maximum financing will be reduced by10%
Soft Market Category 4 loans: Maximum financing will be reduced by 5%
Soft Market Category 1-3 loans: Maximum financing will be reduced by 5% if
the appraisal or appraisal review indicates any of the following: Declining Market, Oversupply, Marketing time over 6 months.

Hattip: Crispy again at

edit #3:
New homes sales at worst on record:

Got popcorn?

Thursday, January 17, 2008

One year of "Got Popcorn?"

The earliest post I can find where I used "Got Popcorn?" is January 6th, 2007.


Tuesday, January 15, 2008

Bargains everywhere

How is this for an economic indicator: I've been buying wine as it goes for low prices (usually at supermarkets that added premium wine selections during the bubble). The types of wine I'll only drink with friends. Usually a Wine Spectator rating above 91 (not every bottle) but always wine I've already tried and loved. Never do I pay more than 40 cents on the dollar (versus the old price).

Well... I have to stop that. My wine fridge is now 3/4's full of bottles that I shouldn't 'waste' on just me. A few years ago, I'd have one bottle over five years old. Last week I uncorked a merlot after just quickly verifying it wasn't one of the 'snooty lables' and was pleasantly surprised at the richness and smoothness of that 11 year old vintage...

There are bargains out there for *everything.* Cars, wine, toys. Production on most goods cannot stop overnight; but demand can. 'Just in time' cuts the quantity of goods in warehouses; it doesn't eliminate momentum in the supply chain.

We all know Citibank will layoff. Indymac is laying off 24% of their workforce. Gee... why not a full quarter of their people?

Nokia is laying off while sprint is expected to follow

Google "layoff" and click news. As you scan through the pages, there are lots of tiny little municipal layoffs in the news. Anyone who thinks this is local is deluding themselves.

The 'great squish down' has started. Nothing to do but kick back and watch it happen. I now have some great wine to enjoy watching the ride.

The Yen is at 106.34 to the dollar. Remember the Yen carry trade? How will it unwind? Suddenly a bunch of loans that were made at 115 to 120 yen/dollar cost at least an 8% more, in dollars, than they did when issued. oops We're testing the late November/early december low. If it breaks through (and should with the Fed rate drop), it will bite more than a few Hedge funds.

Got popcorn?

Friday, January 11, 2008


What interest me is THIS ARTICLE'S GRAPH .

What struck me is that recessions correlate with the use of the word "Recession" in newspaper articles. Hmmm.... But the newspaper articles seem to be a lagging indicator...

Got popcorn?

Wednesday, January 09, 2008

Goldman Sachs predicts recession during RE selling season

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters.

They're predicting a minor and short recession. Ok... you can stop laughing now. But take a step back and notice that they're predicting the economy will hit the skids right when most people try to sell their homes. Do you think this will have a further impact on sales? Might GS have neglected to take into account the impact of the tightening mortgage market?

The old advice is always buy real estate when its tough to get a loan. We're not there yet. This is but one more bit of proof that its best to wait. Get off the fence and join us in the bleachers. We have at least two years before its worth risking entry into the house market.

Got popcorn?

Sunday, January 06, 2008

More Workers Cut to Part-Time Hours

This WSJ journal article gave me a little scare.

Why? I recommend reading the book the hungry years. In it, during the start of the Great depression, companies wouldn't lay off people. Now don't think I'm mean... but layoffs cut the surplus in one industry and allows for cheap fast growth in another industry that isn't over-invested. What we're seeing is companies are holding onto people long past its obvious that a staff reduction would be better. This is good if the economy turns quickly. Its really bad if a large number of companies 'wake up' at the same time and go from underworking people to laying them off.

What makes me blog this from the article?

n another sign of a weakening job market, employers are cutting hours for more workers to below the 35-hour-per-week threshold for full-time work because of slowing demand, or "slack work," according to government data.

Hyundai Motor Manufacturing Alabama LLC, a unit of Hyundai Motor Co., idled 3,300 production workers for 10 Fridays over the past three months, effectively dropping their weekly hours to 32 during the affected weeks. Pella Corp., a window and door manufacturer in Iowa, has trimmed hours for several hundred of its 10,000 employees over the past few months, many to part-time hours.

The moves indicate how cautious employers have become as they grapple with the slowing economy. Reducing hours is enabling many companies hurt by slowdowns in housing and autos, in particular, to stave off layoffs and retain skilled workers, but the cuts are squeezing earnings for many workers and putting some workers' benefits at risk.

Now, I understand not wanting to lose skilled workers. But this article notes that part time work (under 35 hours per week) is an accelerating trend.

Combine this with my previous article with decreasing tourism to Mexico...

The increasing unemployment...

Yep... we're in recession.

And look at those house inventory numbers...

And somehow this market is supposed to turn around quickly? lol That won't happen. We'll continue progressing through the investment emotions. However, I think we're towards the end of 'quick stepping' through the emotions.

scary edit:
Horses being abandoned

Basically, the used horse market has become... very picky. Owners who can no longer afford their horses are abandoning them to charities. Or worse:

Some owners aren't bothering to look for new homes. Laurie Waggoner, executive director of the South Florida Society for the Prevention of Cruelty to Animals, says the group recently rescued five horses that had been abandoned on the eastern edge of the Everglades swamps. The state of Georgia last February seized 99 starving horses from a farm and sentenced the owner, who pleaded guilty to animal cruelty, to five years in prison.

The numbers suggest further evidence of economic hardship. Just one more set of indicators. Hold on. We're in for a wild ride.

Got popcorn?

Is it crime or the economy: Mexico Tourism

Surfers and kayakers are frightened to hit the waters of the northern stretch of Mexico's Baja California peninsula, long popular as a weekend destination for U.S. tourists. Weddings have been canceled. Lobster joints a few steps from the Pacific were almost empty on the usually busy New Year's weekend.

Later in the article:

The Baja California peninsula is known worldwide for clean and sparsely populated beaches, lobster and margaritas and blue waters visited by whales and dolphins. Surfers love the waves; fishermen catch tuna, yellowtail and marlin. Food and hotels are cheap.

News of harrowing assaults on American tourists has begun to overshadow that appeal in the northern part of the peninsula, home to drug gangs and the seedy border city of Tijuana. The comparatively isolated southern tip, with its tony Los Cabos resort, remains safer and is still popular with Hollywood celebrities, anglers and other foreign tourists.

The article is worth reading in its entirety. However, what isn't said is that I think this is due to economic contraction. This makes it so people will latch onto any excuse to cut spending.

What we've seen before is American's are cutting back on 'affordable luxury.' This is going to hit Mexico's vacation resorts hard. Let's face it... if you really have money you're heading to the Bahamas, Hawaii, or the Mediterranean. For the HELOC extracting Keep up with the Jones type... its time to get on that new show "Please buy my house."

Got popcorn?

Saturday, January 05, 2008

Subprime word of the year 2007

Sometimes you just can't make things up:

This year is starting very different than previous years. It has me wonder could we transition from fear to desperation in January or will it take just a little longer?

Either way, buyers should sit out 2008. I personally believe in sitting out 2009... but some have pointed out the market could break.

Where are we going?
I've seen many predictions, but the Irvine Housing blog seems to have one of the more rational predictions. Could it be faster? Yes. Slower? Unlikely. Less deep? Ha!

And if you go over to, you'll see they found the subprime article too (I typed this too slow.).

Got popcorn?