Saturday, March 29, 2008

WSJ: Firms Should Resist Urge to Sue Critics

You would think that by now public companies that monkey with their numbers would get the hint: Suing critics almost always backfires.

This is a good article (subscription required).

Now the article is on short sellers but also pertains to flippers. If you sue bloggers because they publish the truth, it only persuades other bloggers to post the truth. In the online world, this is know as the Streisand Effect.

If you want your antics to be published on more than one blog. Sue that blog.

Welcome to a generation raised on the web.

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Neil

Thursday, March 27, 2008

Which Blogger works for Yahoo Finance now?


Economy Sputters With 0.6 Percent Growth- AP
The economy nearly sputtered out at the end of the year and is probably faring even worse now amid continuing housing, credit and financial crises.





The Bearish article

Oh... it looks like inflation is too much for J6P. The MSM is starting to report moroe realistic inflation numbers and ignoring the "core inflation." From the same link:
An inflation measure linked to the GDP report showed that overall prices increased at a rate of 3.9 percent in the fourth quarter. That was not as high as previously estimated but marked a big pickup from the third quarter's 1.8 percent pace.

Another gauge showed that "core" prices -- excluding food and energy -- grew at a rate of 2.5 percent at the end of last year. That was down from a previous estimate of a 2.7 percent pace but was up from the prior quarter's 2 percent growth rate.

The new core inflation figure is above the Fed's comfort zone -- the upper bound of which is a 2 percent inflation rate.


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Neil

Tuesday, March 25, 2008

Case Shiller January Results Out

I'll do graphs later. The entire nation is declining. Charlette only declined 0.2% in the last month; that is the city the NAR will claim is different (for its not yet down on a YOY basis). The worst is Las Vegas, down 5.1% in a month or dropping at ~80% per year!

Look at the graph! Las Vegas is falling apart! At the current rate, we're looking at a 60%+ price drop in 2008. I do not believe it can continue at this rate; then again, a year ago if you had told me

If Pheonix's linear increase in price drops continues, it will match Las Vegas' current price drops for March (note: Case-Shiller data lags by two months. January data was just released).

Some cities are holding into the "steady state burn" I predicted. But look how many have one month losses above 3%!












Scary graph...


Update/edit:
And for those who want to see a really scary trend. The price drop acceleration in Phoenix is like gravity: A constant acceleration:



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Neil

Saturday, March 22, 2008

Real Estate Emotions March Update

Take a minute to sit back and realize what only the bloggers knew about declining home prices a month ago is now common knowledge. If you look at my last two posts, you'll see how the information about the bubble is really gaining traction. The amount of anger in the system seems to be oscillating. I expect anger to peak either this summer or next summer; the Ponzi victims remain upset that the news about the emperor being naked is getting out.

I just love this quote. Its so appropriate to the housing bubble:
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.

http://en.wikipedia.org/wiki/Ponzi


To the K├╝bler-Ross grief cycle and what fraction of the population seems to be in each emotion.



Stability: 40% (Old homeowners and bubble bloggers)
Immobilization: 19% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 13% (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 see a shift from Immobilization to anger (1%). No, people aren't skipping emotions, that's just the overall trend.

Onto the investment emotions. We're firmly in desperation, with Florida possibly leading into Panic. Note that Florida, due to their multi-year inventories, high taxes and insurance, and low wages is pulling ahead of the pack in the worst ways. This is the same graph I updated in January; emotions are progressing on that timeline. Option-Arms are hitting their limits and helping drive the correction and emotion changes. For most of this year we'll stick in desperation. Anyone who thinks this will turn quickly is trying to sell you something.

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 *****
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. Don't let anyone BS you into buying soon.
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 when I predict the greatest price drops (both nominal and real prices). The bottom is a long way off... We'll be into 2010 before we have enough information to guess when the bottom *might* occur.

The option-ARM resets will be the motivator in 2008/2009. Not the planned resets, but the loans hitting their limits (due to negative amortization) or when J6P realizes their overpriced McMansion isn't the road to riches they imagined and putting 50%+ of income into a failed investment is just throwing good money after bad. Recall, over 90% of Option-ARM borrowers only pay the minimum; that negative amortization is going to drive the market in 2008 and 2009 as more and more home-debtors flee the pain.


I'm being a broken record. Why? Afford ability still isn't here. The baby boomers are going to consume less housing, starting in early 2008! Those are the reasons the 2008 selling season isn't getting traction. 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. When the recession hits incomes, afford ability will continue to improve quickly. You get one guess how that's done.

Interest rates? If they go up it will only drive down prices faster. Mortgage payments must drop back down to a historical fraction of income.

We'll finally start seeing price declines in the nicest areas. The bargains won't exist outside of the rust belt until 2010/2011. 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.

The time to start looking is when your local news goes from covering the foreclosure bargains to why its smart to rent. Until that happens, the wanna be Trumps will be liquidating their failed mini-empires. This will drive investment emotions. Emotions, income, and inventory will drive transaction rates and prices.

This will end. We will recover. Some new industry will offer a new product we all feel we all should buy. (e.g., a la Ipods, HDTV, air travel, etc.) I'm excited about living in a country that invents multiple new industries during every recession. But which cities? Look at this list of airport traffic (indicator of economic strength). Notice that most cities keep a constant relative rank, but some have shot up, and a few are dropping off the international conscience while others have jumped onto the world stage.

http://en.wikipedia.org/wiki/World's_busiest_airports_by_passenger_traffic

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Neil

Friday, March 21, 2008

WSJ: Woes in Condo Market Build

The WSJ is one of the better newspapers out there. Its housing news is only a few... years behind the housing blogs. But it has an interesting article on condos.

One option for a developer is to convert the condos to apartments. However, these projects are usually financed with the presumption that sales of individual condos pay off more than rents from a comparably sized apartment building. Also, lenders typically expect developers to pay off condo construction loans with the millions of dollars they receive when closing on the sales. Such a quick payout isn't possible if the developer is only receiving monthly rental payments.

The article details the thousands of condos entering a dozen markets: Miami, Phoenix, Atlanta, San Diego, and Dallas. The article points out that the condo can undermine an otherwise healthy real estate market... but wait... they note that most buyers just cannot qualify for a $500k loan anymore. Maybe that is why the market is falling apart?

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Neil

Thursday, March 20, 2008

WSJ: Home Vacancy Rates Post Sharp Increase

If you haven't guessed, I regularly read the Wall Street Journal. Its one of the few publications left that seems to do excellent investigative journalism.
IN THIS ARTICLE
its noted that the home vacancy rate has gone up to 2.8%.

"The higher the vacancy rate, the greater is the degree of stress on pricing," said Jim Diffley, managing director of regional services at economic-research firm Global Insight in Waltham, Mass. "It's a measure of how far the market is out of whack."



Normally I avoid blogging about Florida, its disheartening how out of whack the bubble is there. But look at those concentrations. Ugh... The article goes off track at the end and ignores that the latest census data that shows Florida's 'growing population' has slowed and job growth... Well that looks to be in reverse.

The article has an interactive graph that is worth looking at. It shows amazing levels of unoccupied housing in Las Vegas, Florida, California (Sacramento being the poster child), and all around NYC. The table above shows the worst poster children.

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Neil

Saturday, March 15, 2008

Inventory status

I prefer to look at inventory in graphical form that compares year over year inventory. I do this by plotting a graph for each area with a different color for each year. In order to get enough historical data, I reference a number of housing bubble blogs who have been taking the data for many years. In some cases, the REIC itself is a good source of the data, but only on a end of month basis. My preference is to use the near-real time inventory of Ziprealty. Why? Numerous blogs use it as a reference and anyone can log on and look at the data



National inventory keeps climbing. The region of Ziprealty coverage seems to have stabilized on the zones it covers. So, within reasonable tolerances, changes in Ziprealty inventory are mirroring the National Changes. However, it is but a subset of national inventory. Expect more negative price pressure in 2008 than in prior years.

Moving onto looking into individual large cities. Regular readers know that DC prices, per Case-Shiller, have dropped an amazing amount. Since sales are down (previous posts here), the normal climb in inventory only means one thing: buyers can be pickier.






For Houston, the inventory trend is pretty flat. Its certainly elevated, but it isn't adding to the burn. So Houston home prices will go with credit availablility.










Starting to break down a region more, we see that Arlington is building inventory faster than in the past. When we also look at sales...











This picture speaks for itself. Sales are weak. We're past the panic buying. Welcome to the new housing market.




Here is LA's inventory. Its elevated compared to prior years but flat. What I'm seeing in the details is fewer homes listed in the Antelope Valley but more in the beach cities.

What about sales?




Speaks for itself... What about the larger region?






Oh... What about the largest state of the union as a whole?







I'm not doing too much comment this article as the trend is pretty obvious. We've all heard the news on the various I-banks having cash flow issues. Its all due to the real estate investment mania. I'm waiting to buy for a long time. You? Homes are becoming a very illiquid asset. With inventory turn times in many places measure in years, it will take a sharp drop in prices to restart the market.

Import inflation and domestic deflation.

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Neil

Foreclosures running at 2 million per year

I'm sitting watching Bloomberg this morning and they had a Boston Economist (Zuckerman?) saying we're heading towards a perfect storm.

Per CalculatedRisk (Great Blog, if you're not reading it, why?) new home sales are below a SAAR of 600,000 homes per year. In other words, foreclosures will add more homes onto the market than new build.

Also, think about how many rental units were removed from the market in the last seven years due to condo conversions. Over the next two years the vast majority of those units will re-enter the market. New build condos will also enter the market. In some areas, like Phoenix, this has already broken the rental market. In other areas, e.g., DC, its going to create a three year deflation on rents.

January sales show a SAAR of existing home sales of 4.89 million. I doubt that rate will be maintained. Most likely existing home sales will be below 4.5 million. Most likely the foreclosure rate will increase too. What happens to home prices when foreclosures are half to 2/3rds of the market?

If you are a buyer, realize that 2009 should bring down prices in the "elite markets" more than 2008. The power is in the buyers hands. Remember, as a buyer, you have the money that everyone else wants. No one is entitled to your money. Get the most for it.

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Neil

Thursday, March 13, 2008

GSE's having trouble selling Mortgage Bonds

Scary article on CNN

Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.

There is no making this pig fly again. This is going to tank the home price market.

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Neil

Wednesday, March 12, 2008

Hub travel down dramatically at Las Vegas

I also frequent aviation forums. Normally, the topics have nothing to do with real estate. However, THIS THREAD

US's ASMs at LAS are down 27% year-over-year,

Translation: US Airways has cut Available seat miles from Las Vegas by 27% in one year. Partially, this is due to competition from Southwest airlines, but its also due to weak O&D at Las Vegas right now.

How much of the downsizing is due to consolidation at Phoenix? How much due to high oil prices? How much due to lack of demand at Phoenix?

Read the post by SirOmega, #32. If SirOmega isn't a Housing Bear on the blogs... he is in person. (Note, that is a moderated forum, so post deletions might change the number of the post.)

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Neil

Saturday, March 08, 2008

Call for someone to organize a dinner

Folks. My life is too crazy for me to plan a blogger dinner.

Don't worry, my life is going well. Does anyone want to volunteer to organize?

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Neil

Friday, March 07, 2008

Job Losses

http://biz.yahoo.com/ap/080307/economy.html

WASHINGTON (AP) -- Employers slashed 63,000 jobs in February, the most in five years and the starkest sign yet that the country is heading dangerously toward recession or is in one already.

Oil is up a penny as I type. If the Fed doesn't stop the weak dollar policy, it will break the economy when oil goes over $120/bbl. Our trade deficit is what is breaking the back of the economy and oil is 2/3rds of that. Since we wouldn't impliment oil conservation policies, the "invisible hand" is doing it for us. The only car companies to do well are those that offer really fuel efficient vehicles: Honda 'Fit' sales leaped up last month.

We're in a recession. The time to pretend it isn't happening is over. Home prices haven't even dropped to the level of previous peaks when normalized for wages or rents. With job losses, that means J6P will move back in with mom and dad.

There will be quite the buying opportunity in a few years. But the investment emotions have to run their course. We won't even see the peak national discounting until 2009 when we get into capitualation.

I'm amused how the Realtors (tm) are starting to use reverse phycology. "The market has dropped so much you have to buy before it rebounds." Guess what, that 'rebound' isn't scheduled until 2012 to 2014 and will take until ~2017 to return to peak bubble prices. In too many areas, buyers just cannot qualify to buy a home with other people's money, so it doesn't matter what the used home salespeople say. Prices will correct to what the local economies can support. We built up far too many salespeople after 9/11 and now its time to purge those jobs out of the system.

When it gets cheaper to buy than rent, its ok to buy. Just understand you're locked in place until ~2015. Can you afford to wait that long? The longer you wait to buy, the shorter the time you will be locked in. For example, someone who buys in 2011 will probably be able to get out by 2013.

But I'm not as gloomy as others. I see companies moving jobs to economies that will continue to grow through even the worst downturn. e.g., Bangalore. I'm talking US citizens to manage new R&D centers. A quick way to see how quickly a region can grow as look at its transportation surplus. Bangalore and Hyderabad get brand new airports this month. Very few US cities are expanding: DEN, IAD, IAH, and a bunch of the Florida airports are our major growth. Very few of our cities are building rail or modern bus terminals. So we're going to be stuck. Cest la vie.

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Neil

Wednesday, March 05, 2008

WSJ: FHA raises loan limit to $730k

FHA officials predicted the increases in California would aid about 33,000 individuals. The new loan limits will be in effect through the end of this year. The goal is to invigorate the market for larger mortgages, which should help push down interest rates.

Holy crap.... Read This article from the WSJ Maybe subscription required (I have one and think its worth it.)

Now why is San Diego only at $697.5k? The table in the article is interesting... and scary.

From the article:
"From what we understand there are not going to be a lot of areas in the country except for California that are going to be at the maximum," Mr. Glavin said.

Umm... what about FL? VA? DC? NY? NV? AZ?

Yes, of the top 2% of 'income earners,' half are in California (2%= ~$200k/year).
But it isn't the only super bubble imploding. But wait... people must qualify. Only 33,000 are expected to be helped by this?!? There is more than that number in dire straights in the Antelope Valley alone! What about the Inland Empire or the SF Bay Area?

Forget any bank holding onto a loan $729,750 or less now without FHA insurance. Also expect anything above $729,750 to require one heck of a down payment, asset and income verification, and an interest penalty. If anything, this will only emphasize how bad the market really is. Hey... the homes I like are $950k to $1.4M... Hmmm.... Yes. I think they'll drop that much.

A note: Some areas have now dropped to afford ability that is just worse than the past historical worst case* examples. Ok... we're going to overshoot the other way. We're in a credit crunch that has only begun. Good solid companies are finding they cannot use their 'cash' portfolios due to poor money market selection. So normal investment that should kick in... cannot.

edit: * added two words for clarity.

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Neil