Real Estate Emotions April Update

Edit 4/29/08: 2nd Edit 4/30/08, original edit removed, back to the main article on the assumption the comment section returns to gentle discussion. I encourage multiple views. I'll even go so far as to point out it doesn't matter if you buy within six months of the bottom. It just will not impact your standard of living. That said, I strongly believe in the old school mortgage rules. If you are not buying with the type of mortgage your parents bought with, you're running a high risk of being a foreclosure statistic.

But if you haven't noticed, I value graphs. Far more useful than tabular data. I also believe in plotting out the season differences too (e.g., plot by month with a new line per year)

My job involves implementing what the pendents say will never work composed of mindsets that inherently cannot agree. I'm posting less this week as I promised a technical miracle by Sunday three years ago. My best current estimate is we'll finish by Saturday! ;)

small wordsmithing edits below on 4/30/08 to 'clean up' No change in thought or conclusion.

We're continuing on in the major emotional transition state of Desperation. The amount of anger in the system seems to be oscillating with a major upswing this month. 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 edit: active emotions peak in hot weather .

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



Stability: 40% (Old homeowners and bubble bloggers)
Immobilization: 17% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 15% (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 (another 2%). No, people aren't skipping emotions, that's just the overall trend.

Onto the investment emotions. We're deep in desperation, with Florida trending into Panic as the front runner. Note that Florida, due to their multi-year inventories, high taxes and insurance, and low wages is pulling ahead of the pack in all of 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 ***** since mid/late February 2008
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. Debt to income is at insane levels.

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

Got popcorn?
Neil

Many states appear to be in recession as deficits grow

Interesting article on Yahoo.

Last week, the Washington-based Center on Budget and Policy Priorities said 27 states are reporting projected budget shortfalls next year totaling at least $39 billion.

I realize that its normal for some states to run a deficit. But click on the article. Look at the graph. Basically the states in the most trouble are the bubble markets.



Never before has the US been so leveraged at the city, state, national, and personnel level. Many news stories start with "the nation clearly in recession." Its not the media driving the story, its what their audience wants to hear.

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Neil

The American love affair with the shopping mall is undergoing a trial separation

Sometimes it take a foreign perspective to really capture the moment. Basically, with news of investment properties losing 2/3rds of their dollar value, I'm not expecting foreign investors to come in and save any market.

One blogger asked how to make graphs of Austin.

I've been playing with www.Trulia.com and the graphs seem ok. Not 100% accurate (e.g., others are posting far more researched price/ft^2 data, but its a great start). It shows that most areas still haven't found their market clearing price. However... some areas are into the next stage of the trend. As prices drop sales accelerate. Its a self feeding trend that brings those areas to a bottom fairly quickly. However, due to the substitution principle in housing, this will only create a price drop wave that will go through those communities still holding onto wishing prices.

Here is an Austin Example. Note how harshly the credit crisis hit the city during the winter. Can they maintain the newly re-found momentum into the summer? I doubt it with the credit crisis:




















How What about prestige communities? We've been reading for a year how only the cleanest and nicest homes are selling. I've seen a 15% BETTER trend than these graphs suggest. Basically, the owners of the less nice homes are trying to price up against the nicest homes. Only a few sell... With four or more months of inventory on the market, those willing to discount for a sale can always undercut the stubborn.

Palos Verdes, CA:




















Alexandria, VA:























But but but... "Its different here." Yes, there are worse selling locations. e.g., Ashburn VA is now selling for a more than a quarter off discount and the trend is the buyer's friend:




















Its worth looking at Corona, CA. Why? Now that large homes are available at conforming mortgage prices, sales have spiked up again! Now, these are only knife catchers, but this is a clear demonstration that at the right clearing price, there is a market. With most buyers locked out of jumbo mortgages, expect to see this trend continue everywhere. Every market has a floor under which sales will be stimulated again. Once that floor is found... it only accelerates the price drop! In this case, getting down to circa 2007 era conforming loans appears to dramatically open up the qualified buyer pool. Ouch at that 1/3rd off price...








Rumor mill from my sources is that jumbo loans are drying up in April; we're in a state worse than the October credit crunch per word off the street. Doubt me? Go to the .mortgage broker forums If true, we should see even further reduced sales from March in markets that require them. The same rumor mills say that in many jumbo markets, prices have had to be discounted 5% to motivate *any* buyers to act. We won't see the data for a bit. I really wish Case-Shiller was available on a zip code basis.

For those looking to buy, the consensus over at the HBB is that we're in the bottom of the 3rd inning. Its the spring selling season so the 'Home team' is up to bat. I'll let the graphs speak to how they're doing. Everyone knows that US real estate is being discounted. Even the BBC. Can you imagine what the headlines will be like once the kids have finished going back to school? I'm still amazed the government is implementing policies that will only increase the overhang of surplus housing rather than letting it be soaked up quickly. Credit isn't done tightening. The Fed can help liquidity, they cannot legislate it.

The number of sellers on the sidelines is mind boggling. For every person I know who is waiting to buy, there are two I know of trying to sell their 2nd or 3rd homes... Eventually those surplus Florida condos will fill up. There will be enough inventory to drive prices back to sane price/Income ratios.

Got Popcorn?
Neil

Chinese Stock Market Plunge

The Chinese stock market is about to pass the 50% off milestone. Between this and risking global food prices, it could be an interesting year leading up to the Olympics. The WSJ earlier noted that as much as 50% of Chinese corporate profits were profits speculating in their own stock market.

Don't be foolish to ignore this trend just because it is 'over there.' China buys billions of US airliners, computers (or parts), software (despite huge piracy), and other US goods. In a repressive state, the economy either grows or there is civil unrest. Oh, I expect the Olympics to be a rallying point for Sino patriotism, but how long afterwards will the 'glow' last?

ORIGINAL WSJ ARTICLE



















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Neil

Why we need Case Shiller

This is an LA Times Article has been getting a lot of attention on the mortgage broker blogs.

Why? Look at this graph:





Holy cow! Yes, the Southern California real estate market has hit the skids. Why? Jumbo loans are tough to get and it looks like not that many qualified buyers really have enough money for down payments... at today's prices (e.g., drop the prices!).

This credit contraction is spreading fast. The total dollars being transacted are dropping fast. California recessions tend to spread... (Its a big state.) Consider that Florida, Phoenix, Las Vegas, and DC are also pulling the market down...

Calculated risk has some great charts up today. I recommend reading.

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Neil

Inventory

Well... I'm tired of waiting for some areas to report their sales. With inventory spiking up this weekend... its time for graphs!


Nationally, we're at a two year peak and there is plenty of time until we reach the 2008 peak in inventory. Its getting interesting. Since a picture says more than a thousand words:














What about Phoenix? The big daddy of them all continues to have monster inventory. But look at what is happening with all the foreclosures. Inventory is flat to slightly down! Due to the scale of inventory in Phoenix, this implies a crash is either in progress or months away from starting. I think the multi-year inventory has finally crested and a tidal wave of price reductions is in progress.















What about DC and Houston? The Chart says DC is getting weaker and Houston will stay fairly flat.















Now some claim the inner areas of DC are different. Yea right... look at the chart. Compare 2008 inventory and sales to every other year. Notice a trend (note, future months have zero sales... ignore that bit, its a placeholder).



















And precious Alexandria? bwaa haaa ha!

















Normally I cover a few more regions, but I'm waiting for their sales reports. So expect an update in a few weeks. Until then, realize "Its different here." Yep, credit continues to tighten. Those wise souls with a down-payment are going to be sitting pretty. But wait. Investment emotions and inventory are both indicating the major prices declines will be through 2009. Obviously, those areas that have already lost 40% or so of their "value" won't have a worse year in 2009. But no where has hit bottom. Too much of the nation has over a year of inventory!

And as a wise blogger noted, "When everyone wants to get out, no one wants to get in." We're not at that point yet. When we reach that point. LOW BALL!!! Housing is a business deal, not an entitlement.

Got Popcorn?
Neil

Light after the dark

There is always light after the dark. So I'm going to write a bit about recovery after the coming recession. For our economy will recover, albeit with a new personality. Yes... that bad a recession.

Part of what is hurting the economy is oil prices. Our economy is dependent on cheap energy, but should be using it more efficiently. High oil prices will drive consumer habits towards more efficient use of energy. Let's face it, business will adapt to the energy prices quickly. Its J6P and his heated/cooled McMansion and SUV that need to adapt.

But there is more oil out there for the drilling. I've had this argument with friends for years. One is the new field off the coast of Brazil. But guess what. There is a HUGE known field that isn't being pumped!

But the expansion is more important strategically for Aramco. In three years, Aramco plans to open the spigots on what could be Saudi Arabia's last giant reservoir of crude: the Manifa field that stretches from the kingdom's east coast into the Persian Gulf. The field, first discovered in 1957 but later mothballed, is slated to pump 900,000 barrels a day of heavy Arabian oil.



In this WSJ article on a refinery expansion (subscription)

The article is focused on the refinery. But it notes it can also use Canadian oil shale as a source of oil.

I'm hoping we'll invent a bacteria to process saw grass into Ethanol or diesel. But that's up to one inventor pulling off an amazing improvement.

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Neil

Economic indicators

Airlines are considered real time indicators of the economy. More so their passenger traffic rather than their financial health. However... one has to question the following stats.

In the last week, the following airlines have folded:
Aloha
ATA
Skybus
Champion (small turboprop operator).

Many more are in trouble.

Its not done yet. All of the majors are looking to contract a la post 9/11. :(

For those trying to claim a bottom, that is usually six months after exiting the recession...

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Neil

A little humor on home prices

A fellow bear sent my this graph, modified from a CR graph, for a chuckle.













Obviously the green line is non-physical. But look at the blue and red lines. We have YEARS to go in the bust.

I've been crazy busy at work, but I still continue to acquire data for my inventory graphs and from other sources. In a way, we simply need the spring bust to be seen for what it is so that the real problem can be fixed: Housing prices are too high! We had easy credit which created an investment mania that must now go through its natural course.

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Neil

edit:
My best wishes go out to the employees of the three airlines that failed this week: Aloha, ATA, and Skybus. Anyone who is a denier of this bubble needs to come up with a fast explanation as to why air travel, a coincident indicator of the economy, is dropping so fast. Its not just fuel prices. The demand side is down. Its a sad state when the #1 topic on the aviation blogs is who will fail next. In this environment, rumors can bring a company to its knees. Sadly, the demand has dropped far more than the tiny amount of supply that's been removed from the system. Also, due to high gas prices and tightening regulations on MEW, the demand curve had dropped down. Thus, supply will have to be severely curtailed to get most airlines back to a profitable situation. :(

We're just starting to see large scale job losses. This will drive home prices back to historical values quicker than the last housing bubble. Look at the current downslope on the red line. That is unprecedented.

Source CR article

I agree 100% with CR. Prices will not bottom for a long time, but in 2010 they'll be close. I'll go a step further, I believe in 2010 it will be smart to buy. But it amazing to think, prices could drop 30% to 60% from TODAY's values before hitting bottom. Yes, that's a huge spread. Its all dependent inflation, incomes, credit availability, savings rates, and house buyers' investment emotions. Anyone who buys in 2008, in any of the bubble markets needs a JT. DC, LA, Las Vegas, Phoenix, Florida (yes, the state!), California, every secondary home market, and quite a few more will not see a bottom until 2010 at the earliest. 2012 to 2015 is a safe call for the national bottom. Its not possible to have a bottom earlier. I doubt it will be later. Prices will drop too far below replacement costs... Just as we overshot too much, we'll see most bubble markets undershoot by 10% to 20%. A couple will overshoot further.

Got Popcorn?
Neil