Case Shiller impacts

I consider my real estate emotions article my signature article. Its the previous article to this one. However... you have to look at this Graph. It is the rate at which home prices are declining in a select number of large markets.

Notice something? The west coast markets are all burning down at 3.0% to 3.5% lost equity per month. For some reason Miami is burning down slower; I wonder if its due to fewer resales due to all the fresh construction being sold cheap. Washington DC is joining the crowd too.

What's that mean? Simple. The national credit crunch is causing all 'bubble markets' to converge on the same loss rate. Since all areas covered by Case-Shiller are declining, we can state with certainty that the entire US residential real estate market is now in decline.

The loss rate is fractionally higher than what I predicted. I was predicting that the bubble markets would converge on a loss rate of 2.5% to 3.0%. So the question is, why is it worse?

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Neil

Real Estate Emotions February Update

What a difference a month makes! The change in emotions is huge, we're in desperation or so close no one will ever be able to say this couldn't have been the transition date. While I did indeed note less anger in January, its the exact opposite in February. Oh boy and the Ponzi victims upset that we're dissing their hero!

Ponzi's supporters were outraged at the officers who arrested him. 17,000 people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.

The above quote is important. The faithful cannot understand their greed has ruined them. Instead they will point blame anywhere else. Let's help point it at the REIC where it belongs.
quote from:
http://en.wikipedia.org/wiki/Ponzi


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



Stability: 40% (Old homeowners and bubble bloggers)
Immobilization: 20% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 12% (This one must be discussed)
Bargaining: 5% (Ok, we can cut the price and lead the market)
Depression: 5% (We're going to lose our home. Just let them take it...)
Testing: 5%
Acceptance: 5% (Stop payming, we're toast. Move back in with mom.)

If you compare to my previous months (eventually I'll do graphs), you'll notice I pulled from Stability and Immobilization and populated the later emotions. Some of the people in Denial only need one discussion to flip into anger (and back); be careful what you say at work! I'm serious... there were nasty arguments this week.

Onto the investment emotions. We're transitioning into desperation. This is the same graph I updated in January; I put enough work into that timeline that it should hold for a while. Option-Arms are hitting their limits and helping drive the correction and emotion changes.

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. Lasted ~10 months)
6. Denial (Reached in October of 2006 until mid-May of 2007, ~8 months)
7. Fear (Reached in mid-May of 2007 to mid/late February 2008, ~9 months).
8. ****Desperation: Current state ***** edited from last month
9. Panic: Fall 2008 looks to be the start.
10 Capitulation: Spring 2009 through the winter of 2009. Yes, basically 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 or when J6P realizes their overpriced McMansion isn't the road to riches they imagined. Recall, over 90% of Option-ARM borrowers only pay the minimum, so that negative amortization is going to flatten them when the payments reset.

Do read my article on inventory and sales. Ouch!

Basically, the 2008 selling season isn't getting traction. Why? Homes are not affordable. Look at the Wells Fargo Afford ability index. Most people are still priced out by historical measures. Its getting better, mostly by price drops but a little by income increases. Guess what, when the recession hits incomes, afford ability will continue to improve quickly. You get one guess how that's done. Interest rates? Going up will only drive down prices faster.

We'll finally start seeing price declines in the nicest areas. But wait. The bargains won't exist outside of the rust belt until 2010. Some areas like Bakersfield and Riverside have seen amazing drops in January prices; its like a cancer. It will spread. Credit will tighten. Get your down payment in order and wait.

Later update/Edit:
Home Prices Drop 8.9 Percent in 3 Months

Nothing the bears didn't already know, but if that doesn't give both the bankers and buyers pucker butt... Let's just say I'm not expecting anything but a slowing in the velocity of money.

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Neil

Video Fun

I sometimes feel like we deserve Morbo. Even a week ago I was interested in 'debating the bulls' on housing blogs. Now? We know what's happening, and its not pretty.



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Neil

Sales and Inventory just suck

Let's not mince words. January sales and February inventory just suck. Globally. I'm going to focus on a few US areas, but I could talk about anywhere. Why? The credit crisis. Or more precisely, the easy credit that allowed flipping is gone. Without flipping, homes must return to fundamental values. For some areas that is *only* a 25% price drop. For the most bubbly communities (DC, FL, CA, Phoenix, Las Vegas, Sacramento, Reno and debatable the San Francisco bay area) its going to require a 40% to 60% price drop to get prices down to where incomes justify risking loaning money.

Do I really need to talk about down payments and how requiring full documentation loans and some meat in the game will change the markets?

For the Graphs I'm going to Go by region. Feel free to skip ahead to where you're interested. I'm going to end discussing banking and hattip Calculated risk. If you are not already a reader of one of the best economic blogs out there, become one.



I'm starting with the 'protected core' of DC. For nine months sales have been one or more standard deviations below the decade median. Is there a year one or more deviations above? Yes. Some of 2004. The year of panic buying. This tells us the sales process is broken and must be fixed. The only fix is to reduce the prices in a tightening credit market.



To keep things in perspective, we also have to talk inventory. Look at how the DC inventory trend is broken. Now some areas don't have high inventory... yet. But they'll have to price to compete against the substitution effect.



My... we have a pattern here. Sales absolutely suck.








On to Phoenix!



Here Inventory and sales suck. Multiyear collapse in home prices. No avoiding it. As long as prices are held artificially high... builders will build making the collapse worse.


Another disaster areas is Lost Wages:



My coworkers like to laugh at how harshly Las Vegas is crashing and burning. I'm quiet about this at work. Why? About five of my guys own in Vegas and are realizing their entire life savings are toast. Cest la vie. That's what happens when you get greedy.



Now its time to talk about the 'lead dog' San Diego. Everyone else is trailing this sunny city with perfect weather. We'll see San Diego recover long before most other areas hit bottom. Its leading the cycle and thus is studied by *many* blogs.


The rest of California is following the same pattern. I'm not going to discuss much. The chart on sales speaks for itself.






No Victor/Victoria, the bay area isn't different. Yes there are high wages there. But that doesn't mean anyone has to buy. This bubble is so huge there are rentals available everywhere.







LA sales are falling apart. Look at those turn times.


Here are the sales... horrid.



National inventory, on ziprealty, tells a story of a national housing decline. The first one in a long time. But its happened before. So quite a few people are going to learn it can happen again. Want to really see how the elite areas fare in such a downturn? Read a book called the Hungry Years.















What is driving this? Lenders cannot pass on mortgage debt to bond buyers suckers anymore. I'm just going to borrow a few charts from Calculated risk. Go there to read the indepth analysis.














If you think the layoffs have even started... they haven't. Biff and Buffy will not be able to HELOC out enough for the $100k BMW. High end shopping is toast for three years. All REIC related businesses are cutting back. My wife was riding the train on Friday and the numbers of people who were laid off from commercial real estate companies on board were staggering. The residential side isn't done yet either. Of course these aren't showing up in the layoff statistics, all of these people were independent contractors.

I don't bother to blog Florida with its areas of 10 to 15 years of inventory. Its toast. Read about the Florida real estate speculation and crash of 1925 and 1926. Yes, I said crash. Prices dropped 90%+ over a year, bankrupted all of the state's banks, and left it with a construction surplus that wasn't fully consumed until 25 years later. So the idiots who say we've never had a major real estate crash need to start reading!

Anyone who buys in 2008 is an idiot. Wages will decline and that means rents are going to drop. So the price to rent ratios will get even further out of balance. Exceptions? Actually yes. I'm advising a cousin to buy in Cleveland during his medical residency (recall, where doctors go for residency isn't usually their call) because buying there is far cheaper than renting. If you have a secure job in Detroit ("Hi!" to all the police and fire workers), there are great deals with little downside risk.

Got popcorn?
Neil

Ok, what is your interpretation of this

This is a government source of economic data:

http://www.economicindicators.gov/

Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.

What?!? Oh wait... bad economic year right before an election...


Now read their mission statement:

Economic Indicators.gov is brought to you by the Economics and Statistics Administration at the U.S. Department of Commerce. Our mission is to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau.

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Neil

WSJ: Things Not To Say When Your Bear Stearns Hedge Fund Is Imploding

When I saw the title of This article in the WSJ, I busted a gut laughing!

During the April 25 call, Mr. Cioffi told investors that the two funds, called the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, were down just slightly for the month. But figures he released to investors about a month later revealed that the Enhanced Leverage fund, which was the riskier of the two, was in fact down 23% through late April, and its sister fund down about 5%.

Nor were investors informed at the time of Mr. Cioffi’s early March move of $2 million of his own money out of the Enhanced Leverage fund and into a third fund he managed, Structured Risk Partners, that ultimately proved less risky. (Mr. Cioffi has told associates that the money transfer, which was approved by compliance officers at Bear Stearns Asset Management, was intended to show confidence in the third fund.)

It looks like the bait and switch will be prosecuted.

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Neil

Weird data trend

I'm a big believer in taking a step back and looking at the details. Today I look at inventory. How is the inventory growth looking like across the nation. What I talk about below is the growth in home invenotry since 1/11/08 per day per data from ziprealty. (I skip the first 10 days of the year due to reset noise.)

Nationally: 1005 properties added to ziprealty per day (versus 1300 in 2007 from a lower start point). We have 40% more inventory today in 2008 than on the same day in 2007. The implication is that nationally inventory will make the problem worse.


Areas falling apart
Palm Beach country: 99.3 properties added to ziprealty per day to a decade+ inventory.
What do you say about an area that might not need to have a single new home built for 25 or more years?!?

Seattle: 96.7 properties per day (brave new world!) The immune city seems to need antibiotics…

San Francisco: 84.5 properties added to ziprealty per day. Wow! We just read about how sales there are falling apart!
http://www.dqnews.com/RRBay0208.shtm

Phoenix: Adding 80 properties per day. (~1/3 faster than 2007) This is the poster child of the housing bubble. With its current multi-year inventory, be ready for a long show.

DC: 43.4 properties added per day (normally no inventory growth until march due to the cold winter weather) And inventory is already 133% of a bad 2007. Now DC is lagging other areas in this downturn; but this inventory buildup will cause the wheels to fall off by July.

Orlando: 36.6 properties added to ziprealty per day. That's onto an incredible existing inventory too! Like the rest of Florida its falling apart.

Areas bleeding equity, but not collapsing
LA: 23.8 (slower growth than 2007 but starting from a high January start)
LA is interesting. The numbers should be higher, but I'm seeing two properties a day being pulled from the market in the following cities: Lancaster, Palmdale, and to a lesser extent from other 'less desirable areas.' In blunt, people there have given up and are just waiting to have the cops come and take the house away. With just over a year’s worth of inventory, LA could bring down the Jumbo loan market alone. Add in Florida… and we have a sweet credit crunch.

Denver: 19.2 properties added to ziprealty per day. Since Denver is doing quite a bit to attract jobs and has remained affordable, I wonder if it might be sustained by California economic refugees? Probably not. A recession combined with high inventory isn't a sustainable market.

Houston: 15.9 properties added to ziprealty per day. This city has a pretty constant inventory year round. So will really only see conditions worsen due to the credit crunch and job losses (or gains...).

We are not seeing normal inventory growth. We're seeing the abandonment of the housing market by buyers. That means that soon home prices will become affordable again. Soon being ~30 months. This is just one more data point for a historic ‘Real Estate Emotions’ change that is occurring.

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Neil

January SoCal sales slowest on record

Oh... somehow they 'reset' how they take data prior to 1988. But its bad per Dataquick.

Particularly noticeable is a drop-off in sales of more expensive homes financed with "jumbo" mortgages.

The great squish down has begun. We're going to watch high end homes push prices down. There are some very nice homes going for $2.5 to $3.0 million I'd love to buy. Maybe they'll drop enough that I'll be able to afford one... or maybe they force down the price of a more modest home.

There is a 50% YOY drop in sales in LA county! 3,398 sales in a month doesn't even begin to touch the inventory. LA is now up at Florida levels of inventory (in terms of months).

Personally, its become so obviously that there will be a large drop in home prices in 2008 that anyone who buys this year is an idiot. We have years of price drops ahead.

Got popcorn?
Neil

January sales look really bad

The NAR is going to do everything they can to delay reporting January sales. They are looking horrible. I thank the blogs out there that report the data promptly. For example, NOVA bubble fallout presented this data as part of Harriet's "Decade of sales" series. I plotted the data and did an ANOVA analysis. Oh... broken process. The wheels are falling off.















Yes, the data is 3.1 standard deviations below the decade mean. Oh... the decade median is the same number... how interesting. Overall, the 94 sales in Arlington country is a very poor showing; about half the sales needed to sustain prices. Cest la vie.

Anyone else curious to see how bad January's Case-Shiller index will look? Ouch. Evidence is building we're transitioning to desperation. But I have a few weeks until I update my real estate emotions series.

Got popcorn?
Neil

Its not different here.

To understand this article, you need to first understand a little about the Case-Shiller data. Basically, it tracks the trend of regional real estate values based on the sales of homes that have sold before. The weighting is heaviest towards homes that sold more than six months after their last sale but recently.


When I sat down to write this article, my intent was to show how a bunch of different markets were progressing on their own. Instead I took the derivative of the Case-Shiller home vales and saw how the western markets are marching to their doom together. Similar percentage drops in value per month! Note that I've inverted the y-axis. A higher value means that the market is losing value faster. Notice a trend? We're no longer bleeding 'value' out west, its a regional flood!



Note: this data is averaged over three months with a two month lag in data reporting.

How can one explain how these five large metropolitan areas are moving in concert? Only Las Vegas seems to have done a little early jump in equity evaporation. Now they are falling together as if jointly pushed off a cliff.

These regions are now losing 3.0 to 3.5% of equity per month! All of them! Now I have to note a mistake on my part: I thought the peak equity loss for these cities would be 2.5% of the homes 'value' per month. So the question is, will the rate of home value lost, expressed as a percentage of the current home value, turn over toward the 2.5% I have been predicting for a long time? Or will we see a break away? I'm very curious to find out.

What about other regions?



DC is an interesting market. It, like the conjoined western markets, is a large metropolitan area. Its been slowly bleeding equity for a bit. But notice the uptick. Has it decided to join its western friends?

Why is this happening? Supply and demand. Here is the latest national inventory chart:



We now have an acceleration in the loss of home values across all of the metropolitan areas tracked by Case-Shiller. It appears that this equity evaporation is starting to go in phase but is not yet nationally falling at the same rate. Obviously, this is due to the tightening of the credit market. Now what's going to happen when the employment market weakens?

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Neil

Bad Economic Indicators

Yahoo has some interesting articles this morning

Bad January retail
The sales figures made it clear that consumers wrestling with high gas and food prices, a slumping housing market, an escalating credit crisis and a weakening job market retrenched further, buying mostly necessities even when redeeming their holiday gift cards. The disappointments cut across all sectors .

Wow! Written by a blogger? ;)

Jobless claims show labor market straining

The Labor Department reported Thursday that 356,000 claims for jobless benefits were filed last week, a decline of 22,000 from the previous week. The decline only erased a part of the huge jump of 72,000 in claims of the previous week.

Ouch. Not good numbers.

Do you remember I was blogging that my company would probably announce a relocation in March? Stop holding your breath. They won't announce anything.
Why?
1. We've already quitely relocated about a thousand to Texas in the last few months and into the next month or two. A relatively slow tricle. Why slow? Notice the lack of new coverage?
2. The company quietly opened a new campus in Colorado (surprised me!) and the first I heard about it is when employees of mine told me they were cashing out and moving to Colorado. Since this is a pure voluntary move, there won't have to issue any press releases. Again, a very quiet bleed off of jobs.

Mostly we're pulling from LA and DC. A few other areas, but not by intention. Since these are applied for relocations, the company cannot geographically limit the applicant pool without raising alarm bells.

Quite bluntly, we're copying Raytheon; they have become the master of quiet relocations from state to state. No forced relocations... No layoffs. But a steady bleed out of bubble markets. I didn't think we'd go the silent route. J6P thinks the Aerospace downturn was the only reason for the 1990's recession; the aerospace companies do not want to be the poster child for a housing downturn anywhere.

My company needs to get a cadre of experience into the new campuses to mentor new engineers we're hiring. Our rate of hiring will explode just due to the baby boomers retiring. So the company copied a competitor to enable future hiring without raising alarm bells. I'm surprised now, but I shouldn't have been. Cest la vie.

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Neil

Dam Break?

Edit: Another Blogger has determined that ziprealty is double counting properties that have been relisted with another broker; thanks Bearmaster! There is new inventory on the market, but how many are truly new? I'm going to check ziprealty daily until it settles out. However... homes should not be relisted under a new MLS number unless they have been off the market the required time to become a fresh listing. Why is this happening this year?!? It didn't happen in 2007... I think its due to desperate sellers.

The old article as originally written (note: data is still what comes up on ziprealty):




I had to rescale my graphs for the South Bay portion of LA.

Why? Inventory is exploding! I'm in Shock.

Torrance, Redondo, RPV, and El Segundo (not graphed) have had inventory spikes that floor me. Is it the writers stike?

City-----Inventory on 2/3/08-----Inventory on 2/5/08----Status
Hermosa Beach-----------101----------192----------------New Record!
lawndale----------------155----------260----------------New Record!
lomita-------------------69----------128----------------New Record!
Manhattan Beach---------154----------302----------------New Record!
Palos Verdes Estates-----54-----------54----------------Peak 2007 was 67
Rancho Palos Verdes-----163----------309----------------New Record!
Redondo Beach-----------366----------686----------------New Record!
Rolling Hills------------20-----------20----------------Peak 2007 was 24
Rolling Hilles Estates---43-----------43----------------Peak 2007 was 50
Torrance-----------------599-------1,043----------------New Record!

We're in uncharted territory folks. Peak inventory was 10/29/2007.
Most of the south Bay just blew through 2007. Yes, Torrance alone almost has the normal south Bay inventory for this time of year. Those jumps in inventoryare amazing. Can I believe the data? This is the housing equivalent of a stock market crash. Seriously.

Is Ziprealty malfunctioning? Or is the LA economy broken?

Got popcorn?
Neil

Break away: Where is the super bowl notch down?

On the west coast I'm seeing a bizare increase in inventory. Normally, we have a notch down everywhere around the super bowl weekend. Instead I'm seeing a huge leap up in the LA beach cities. I'm waiting for east coast data (they tend to have a *major* update at ~6pm east coast time that will really sway the inventory). Overall nationally, it was a normal pattern. But look at this chart! Please see my previous article for more inventory graphs.



Yes, that's a vertical line in the beach areas of the south bay of LA! Last year there was a similar uptick of much smaller scale in mid-March, but otherwise we have nothing to compare to.

Note: We shouldn't care about week to week inventory changes. Normally its too minor to matter. In some areas, its quite different this year. Its the highest spike I've seen. Note: West coast data tends to be real time and east coast tends to batch daily. So it will be 24 hours until I can comment on many parts of the nation. But nationally, we aren't seeing a 'healthy sales start' to the spring selling season.

Edit: I should note that there were three patterns to when minimum inventory was seen last year.
1. Minimum inventory the Thursday after Superbowl (2/8/2007)
2. Minimum inventory Start of March (3/7/2007)
3. Break away (yes, some areas did in 2007)


Got popcorn?
Neil