Friday, June 06, 2008

WSJ: Real Estate Woes of Banks Mount

"As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.

Ok, that is a given. The chart on projected bank failures is amazing. I keep repeating that the indicators are that the steepest drop in home prices will be in 2009. This chart shows the steepest losses in construction loans being in 2009. That implies that 2010 could be even worse than 2009. Yikes!

edit: WSJ source article I shouldn't forget my source links. ;)

The time to pretend everything is ok is over. The LA Times this morning has an interesting article on how jobs that see peak demand at the onset of a recession... are becoming very difficult to get (e.g., lifeguards).

Side note:
I thought by now I'd have enough additional information to blog a new article on job transfers. Instead, the big companies are being clever. They're moving 500 jobs here... 500 there. Never a big enough move to make headlines. Certainly not enough of a headline to compete with GM, Ford, and Chrysler cutting truck production.

Too many of the "upper middle class" are poseurs without savings. Never before have we been in a situation where so many of our high wage earners need to borrow to maintain appearances.

Oh wait, people tried to warn about this since 2005!

I love this quote:
"Americans are basically living a lifestyle that they can afford as long as the unexpected doesn't happen," said Robert Manning, a consumer finance expert at the Rochester Institute of Technology.

Why? It makes me laugh. Recessions are to be expected. This one is just beginning. Most people are about to learn why we never let total DTI exceed 35% (That is 35% of gross income to service monthly debt payments. I really dislike thinking in monthly payments... but since most Americans think that way, I'll accommodate the majority and write in monthly cash flow terms.)

I just drove the LA freeways this morning to do some errands. I honestly expected to lose 20 to 30 minutes in traffic. When I arrived at my destination early, I pulled us I was shocked to see only one of the freeways (55 down in Orange Country) was red (to signify bad stop and go traffic). While many people I know are trying to carpool, what is this doing to the economy? At a minimum, this implies further slowing car sales (fewer miles=less need to replace the car or a longer life of the vehicle if its sold used). I think this will trickle down to auto shops, tire vendors, and the whole 1/6th of the US population employed in selling, maintaining, building, or otherwise tied to the auto industries.

Since there are more than two major industries still on the decline, we can expect the recession to get worse. I'm a huge fan of such simple "rules of thumb." They help cut through the BS we hear too much of. But it also keeps me from becoming too bearish for un-needed reasons. Unless I can identify 3+ industries in decline... I know the economy is going to grow. Today we know construction (plus related, such as lumber), airlines (but not aircraft manufacturing (yet)), automobiles, and finance are all declining industries. Yes, there are bright spots (tech), but not enough to offset four major industries in decline. Not to mention too many states have yet to rationalize their budgets. Traditionally, the MSM peaks their discussion of recessions when the government jobs are cut back (either hours, positions, or pay).

Overall, we have a long way to go. If anything, the downside emotional states will linger. I think we're in an uptick of a big "down 5" as the Elliot wave theorists like to say.

Edit: NYTimes "heat map" of delinquent loans.

California hasn't even begun to enter the stage. So many of the "Prime Adjustable" haven't adjusted... and while the prime fixed has a low default rate, it is creeping up. Notice the map is for 90+ days past due. Once California implodes, good luck getting a jumbo mortgage.

Got Popcorn?


The Anonymous said...

Neil said...

"airlines (but not aircraft manufacturing (yet))"

Sounds like might be the death knell for the invulnerability of Seattle (boeing).

Incidentally, a little OT, but I am assuming you have seen this - its what weve always wanted - case shiller on a zip code basis:

Pretty much puts the final nail in the coffin regarding the idea that "inner areas are experiencing big price declines" dont ya think?

Oh well, there is still hope. I heard not to long ago your Palos Verdes experienced a big YOY drop in median sales so it may still be coming. Good for you.

May numbers for Arlington? No good for me - months of inventory whittled all the way down to a very robust 4.2 and prices down a mere -5% YOY. Oh well, maybe next month!

tj & the bear said...

Ed McMahon sorta disproves the theory that people in multi-million dollar homes haven't lived beyond their means, doesn't it?

p.s.: So sorry to hear that Arlington is a little behind. I'm sure they'll catch up before too long.

wannabuy said...

Incidentally, a little OT, but I am assuming you have seen this - its what weve always wanted - case shiller on a zip code basis:

I'm very interested to read that file! First I apparently have to update my acrobat reader... As someone who loves technology, its often frustrating how often little incompatibilities create issues!

But as to the wealthy not feeling it... I'm about to blog on that. Where I want to buy the restaurants are dying. But that is for my new article.

Thanks for the link. As soon as I fix the technical, I'll read it. I'm very curious to see the time lags and methodology (its tougher to do Case-Shiller accurately on small sample sizes).

It amazes me how many have lived far beyond their means. I see in too many zip codes homes for sale at prices I never would have seen a year ago.

Got Popcorn?

wannabuy said...


I now have my computer fully working again. Stupid Norton Antivirus screwed everthing up during a standard "click to upgrade" process. Thankfully nothing was lost and Lavasoft's product is now installed and much better.

I looked at "The Anonymous's" link. Since most of the projected drop in high end housing is since the start of the second half of 2007...

I'll agree with the charts in the pdf above being accurate for a year ago. But I see areas of the LA chart that are down $250k, by my own personal observations, since August of 2007. Areas that are starting to really see pain.

Not to mention the late start to the relocation season. There is an unusual amount of haggling going on in the contracts area. I wonder if a few will be terminated? But I also know some large contracts that would have been the inspiration of the relocations are starting a few months later than my initial estimates. Moves that I expected to be happening now are rescheduled for July/August. Cest la vie. I'm patient.

But it is good to compare and contrast. different areas will be hit differently. But sit down with your favorite restaurant owning buddy (my latest article). I'm an unusually chatty engineer... I tend to enjoy a conversation with small business owners. Let them tell you the real story. Of course some will do better than others...

Got Popcorn?

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