Saturday, February 16, 2008

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?

No comments: