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.

National




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:
http://novabubblefallout.blogspot.com/
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.

Neil

5 comments:

zgirl said...

Thank you for the interesting (if unpleasant) data and analysis. The Fed calls us "Construction Bubble and High Fraud States" (Nevada, California, Texas and Florida).

wannabuy said...

zgirl,

Thanks for the link. Well worth the read. I found it interesting that states with the most difficult foreclosure process also had the least dynamic economy. With the national foreclosure process going to get more difficult, will the lack of lending lead to a permanent change in economic growth?

How much of CA's growth is based of equity extraction? FL's?

I probably should have listed NV as one of the four horsemen... But I think long term the overdevelopment in DC will have a greater impact on the economy.

I am going to long term disagree on the fraud states. Why? I think many of the states 'lagging in the price declines' just haven't uprooted the extent of their fraud.

Got popcorn?
Neil

CRT said...

Neil - here is a good source for Las Vegas. Also, the other links are archives for Las Vegas real estate stories (and inventory & sales graphs) going all the way back to 2004.

http://www.lvrj.com/hottopics/housing.html

http://www.reviewjournal.com/news/housing/2006index.html

http://www.reviewjournal.com/news/housing/2005index.html

http://www.reviewjournal.com/news/housing/2004index.html


You might want to reconsider putting Vegas on your 4 horsemen list. Especially considering that they have over 25 months of inventory and that more than half of the houses for sale are vacant. (think about that for a second - I mean VACANT)! Imagine what that does to your values when you live on the far out fringe and are one of only a handful living in a large subdivision (minus the squatters of course)!

Their YOY inventory shows no sign of stopping (up 23% from Dec 06 and up 64% from Dec 05). Plus they are usually the clubhouse leaders in nationwide foreclosures, and case shiller already notes prices are down a ton already!

My personal belief is when everything is said & done, Vegas will lead the pack. As a former resident, I can attest to the fact that huge percentage of the LV residents are hucksters grifters & dreamers who are attracted to the city by the prospect of "easy money". In many ways Vegas attracts the the worst of other states worst. Incidentally when looking through these stories pay particular attention to the quotes from a guy named Steve Bottfeld. He is THE biggest chearleader I have ever seen (Makes NAR look like a bunch of bears). Enjoy

wannabuy said...

CRT,

I'll check your links. Thank you.

Las Vegas is in HUGE trouble. I really thought about making it one of the four horsemen and maybe I will in the future. But I chose DC instead for the impact it will have on national perception. Not to mention one of the counties broke 46 months of inventory.

This is global. For leading the pack... I'm going to pick Miami and Palm Beach. Although the job losses I'm seeing in Spain are quite the wake up call.

Got popcorn?
Neil

tj & the bear said...

I'm with CRT. Heck, LV may be in a class all by itself.

As Rob Dawg has noted, LV has never reached "critical mass". The only real industry there is tourism, and that's highly discretionary (i.e., economically sensitive) and has growing competition. Otherwise, it's economic growth engine *was* growth.

Now the place is so hugely overbuilt that there's no need for the second largest industry -- construction.

LV is very soon going to be one huge honkin' ghost town outside the strip.