Tuesday, July 29, 2008

No city above 200 on Case Shiller

Every city in the case Shiller is now declining-except Denver. There is no "its different here" anymore. These results are for May, possibly the strongest month of the year for SELLERS! Yet prices declined in all areas measured by Case-Shiller. This is before the July tightening of credit. Its a bummer Case-Shiller lags so much... but for such good data, we must be patient.

Here are cities I've been tracking. Now all indications are that prices are continuing to decline since May. Previously, I've predicted about a 25% under-run of the long term trend line. I still predict 2009 will be the year where the nation has the greatest price drops.

These are the derivatives. I graph what fraction of the homes value is being lost per month. Despite how weak this spring/summer selling season was, price declines slowed. However, do not forget, we are exiting the best time of the year for SELLERS! The traditional time of the year for price corrections is October through February. With the integral of price declines to date, I think the market is close to breaking.

I see this fall as the transition to the real-estate emotion of Panic. I see the spring being a switch to Capitulation. Capitulation is the time of the greatest price drops. I think we are in the process of witnessing a "bear market rally." Next month's data will probably show some further improvement in the loss rate (June). I'm sure the NAR will tout that.

A comment on Denver: I'm hearing about pretty brutal price drops now. So they've dropped enough to have a minor "spring bounce." Ok. They'll be giving that back up this Fall with interest. Yawn.

I plot the MONTHLY price drops. My final conclusion is to note that a 4% per YEAR drop is the equivalent of free rent. With credit tightening further, I see the slight "bear market rally" ending in August and starting a faster drop starting in the Fall.

Here are a few individual city graphs:

Friday, July 25, 2008

More Bank Failures. Well... its Friday!


The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.

Oops. Nothing to See here, move along.

But what struck me was this quote:
"It's very important that Arizonans know that their deposits are secure," said Felecia Rotellini, superintendent of Arizona Department of Financial Institutions. "They are well-managed and the 1st National Bank of Arizona issues should not cause any panic in Arizona."

Whiskey Tango Foxtrot?!? Ok, its one thing for us bloggers to speculate on the next bank failures, but its another for a government official to express worry in such a fashion! I'm sure the Arizona Department of Financial Institutions is always on the look out for financial panic (bank runs). But to mumble that off to a reporter? The FDIC should stop wasting time looking at blogs and instead look into the state agencies... and when they get around to it, the reserves of their member banks.

That is seven failed banks in 2008. Its funny, on Calculated risk there are a few Trolls making fun of how we bloggers look for Friday bank failures. Well... Two banks failed today.

Note: This is no Indymac. That failure was a big one. 28 branches... yawn. Although only 70% of deposits were insured (the rest, I assume, were above the $100k limits.

Comment on Indymac: For those with insured accounts (joint accounts) over $100k, its almost random who is getting paid and who is having to wait. I know of someone having to go back for a third time to try and get out their excess funds.

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California wage proposal

Ok, it was probably stagged to get headlines. The Governator is proposing cutting state wages in CA to $6.55/hour until a budge is signed. LA Times article . I do not take this proposal seriously.

But a scary thought, the state needs to raise $10 Billion quickly during tough credit times. Otherwise its not going to function until the April tax collection time. I'm thinking this budget will not get resolved for a while.

During the Great Depression, Federal wages were twice cut. Will California have to lead off with a government wage cut? I'm serious. The crisis is that bad.

Any which way, this state will have affordable housing by 2011.

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Sunday, July 20, 2008

California Sales

DQnews recently posted California sales. What struck me is that 41% of Southern California Sales were foreclosures! That means only 1/3rd as many owner-owned homes traded hands in June of 2008 versus 2006!

Think about that for a minute. Considering how much tighter credit is going to become and how there are more foreclosures waiting to happen in the backed up system than their are buyers for the next 12 months... Consider the implications. Southern California, combined with Florida, Ohio, Michigan, Nevada, and Arizona are really hurting economically. All real estate is local, but all credit is national. Heck, their have been a few articles on how banks will no longer loan against bonus income as that is too variable. One must now save the bonus checks and use them as part of the down payment. How un-American. ;)

California sales in general were so-so. Notice the trend line going forward? Every year has a drop in sales from June on. There is no month later in the year that would be expected to be better than the month we just went through.

LA sales started the year anemic and have grown to weak. LA inventory is at 120,000+ units per zip realty! With over 21 months of inventory, do not expect this city to turn around in 2008 or 2009. There has never been a case post WWII where New York City or LA has had a recession and the rest of the nation didn't follow.

San Diego is the lead lemming. With the shear amount of construction, employment flight, and misguided policies, this city will be hit hard. Only Miami rivals in the number of condos being constructed. Both with have to become far more affordable to end the current glut.

The recent trend in the SF Bay Area sales should give an indication of where that over-hyped market is going. Yes, this is one of the strongest economic areas of the US economy. However, as the rest of the nation weakens, it cuts IT spending which hurts the Bay Area. This area will be worth watching. I can see prices dropping 40% from the peak (per Case-Shiller).

There are only about six weeks left in the California home sales season. Every single graph I've plotted shows that September has very weak sales in a normal year and that the next strong sales month is March. This time, there is too much in the foreclosure pipeline to create a strong spring selling season for 2009.

My last article was my real estate emotions article. Due to the economic pain in California, we are one major event away from Panic. I think we'll hold on until the Fall, but if a big enough even rolls through... it will happen earlier. Since California does more to fund the Federal government than any other state... there is no "its different here." Quite bluntly, the economy is not in a position where it could handle California contributing 10% less to the Federal coffers.

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Thursday, July 17, 2008

July Real Estate Emotions

This aricle is early. Why? The emotions due to the Indymac closure. I believe we are one to two major bank failures away from an acceleration to the next emotional state. Even without the bank failures, we're going to hit panic by the late Fall. The economy is that bad! We're still in desperation... but its only going to take one or two more trigger events to send us into emotion #9: Panic.

This is a photo of what the lines are like at Indymac. Its not ust this Pasadena location, I've seen it at several others. People are moving their money around... its not normal. If Indymac had failed in the fall, it would have sent us into panic. Since if failed now... its wait and see if another big bank sends the real estate emotions forward. Note: I always expected bank failures. Its just odd watching them be the drivers.

I'm halting doing the Kubler-Ross scale. I haven't found it to be a good predictor of anything... Not when all of the lemmings are going towards the cliff together...

I've been using the following graph to illustrate the emotion changes versus the ARM resets. At this point, it might be better to graph versus something else... or maybe I'll keep it; the missed payments have put us into quite the credit crunch.

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. Late Fall without a trigger
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 end 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 (The worst is over...) about 2017
15 Optimism (cycle starts again)

I've decided to redo the graph on emotions and value, for its not really a sin wave, its much more of a rounded sawtooth...

We're pretty much right on schedule. The only new bit is that one or two more trigger events will put us into panic. We could be into panic as early as August (I think we've survived July). But most likely, it will happen seasonally. That is unless some of the large banks we're concerned about are taken over by the FDIC. We're on an accelerated cycled. Each emotion is supposed to be for a year in a normal environment. Well... The housing bubble overshot the normal levels, so the downside will be more severe and is happening fairly fast. At most 9 or 10 months per stage (on the way down).

I'm predicting a short panic that blends right into Capitualation. Remember, Capitualation is the time of the greatest price drops. At least in the markets that survive until then.

Wednesday, July 16, 2008

Take on a Boarder

You wouldn't believe what's on ABC right now.

How to save money...

1. Take in a border
2. Make your own coffee (with a hint to use the counter top)
3. Drink tap water
4. Put yourself on two wheels. *
5. Adjust the thermostat (Turn down the A/C or heat)**
6. Bundle phone, internet, and cable
7. Pare down your plastic (Call for a lower rate)***
8. Get a library card, (but it was for renting videos... sigh)

* "What the smart person is doing today, instead of buying that 2nd car, is to buy a scooter."

** We recently stopped this (Wife is pregnant) and its raised our monthly bill by $5... huh?

*** Why not just do without and pay them off? Sheesh!

Note: The border comment had me laughing! We already have a housing surplus and they're advising people

There has been discussion that this is the 'Back to basics Christmas.' Yea... I think we're already there. (Hat tip Rob Dawg...)

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Bank Emotions

Other blogs are reporting that there have been disturbances at Indymac and Wamu branches as customers cannot get at their money in a timely fashion. (e.g., a relative spent four hours in line at Indymac until they finally wised up and gave out numbers and most of the line was told to come back two days later!)

Why am I blogging this? I've been predicting we'd switch to the next real estate emotion, Panic, in the Fall. I still think that is the case. But here in California, I think we are one more large bank failure away; at most two bank failures.

My timeline still looks to be accurate. It looks like the FDIC will drag out the failures. But there is more uncertainty than ever.

For those of you who thought ever rising real estate prices were a good thing. Thanks, you just screwed 10,000 savers out of their money. Ten thousand is the number of Indymac customers who's deposits were not insured.

Am I the only one who finds it funny that the TV cameras focus on the "#1 Savings and Loan in LA" signs up at every Indymac?

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Tuesday, July 15, 2008

Mortgage insurers raise bar

Insurers add that they are pursuing the kind of more disciplined behavior that may have helped avert the housing crisis. "Clearly, the pendulum had swung a little too far in terms of flexibility in underwriting," says Len Sweeney, chief risk officer for AIG United Guaranty, the mortgage-insurance unit of American International Group Inc. "Some of the movement we've made of late is back to a more prudent approach."

Michael Zimmerman, a spokesman for industry leader MGIC Investment Corp., says, "So far, we're only losing the business that we no longer want to write. The long-term objective of anybody in the housing industry should not be just affordability but sustainability. I think for the last few years, the drive and the focus have been solely on affordability."

The WSJ article

This is a map where the insurers have declared the region a declining market. Remember, redlining is illegal in lending. They must paint with a broad brush. So in effect if a region starts to decline, the whole region becomes tougher to buy into.

The article is worth the time to read in its entirety. I recommend an online subscription to the WSJ. Its nothing really that new to the housing bloggers, but it does point to why the market is not going to turn up anytime soon. The #1 reason in the article: Mortgage insurers are making rule changes that will last years. Mostly due to too many of them having to 'wind down' their business.

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14,280 Where are you?

This is not a stock blog, but look at what stocks did this morning. The DJIA is at 10,895. We've dropped 3,395 points without being in an official recession.

A dollar will only by 0.626 Euros. Ok, we're fine at 104.29 Yen to the dollar, but that's quite an overnight drop.

Oh, I'm sure you heard that gasoline pushed retail sales up. I like how they published numbers excluding auto sales but not excluding gasoline...

Wholesale inflation is the fastest in 27 years:

Yet housing was supposed to turn up in the 2nd half of 2008! I don't think so.

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Friday, July 11, 2008

Old Advice on buying

As we watch the markets go into epileptic seizures, its sometimes a good time to remember the sage advice on when to buy. Now, I'm very focused on buying a home to *live* in, so all of this advice is geared towards that, but could equally well apply to stocks or bonds. Note: Its not time yet to buy any of them. We have to get through 2009 at a minimum. I personally think we'll inflate our way out of this, so invest as you see fit.

The best advice I've been given:

1. "Be fearful when others are greedy and greedy when others are fearful." Warren E Buffett. My comment: I have a few coworkers who screamed "buy now or be priced out forever." In a way, they are perfect investment emotional indicators. Remember, the lowest home prices are during the transition from Despondency (emotion #11) to Depression (emotion #12). We're in mid-Desperation (emotion #8). I do think the people buying now are emotional knife catchers. To buy before Capitulation (emotion #10) is just silly. Note: Some bloggers thing we're only in Fear (emotion #7).
My last emotions article remains current.

2. And also from the Oracle of Omaha: " Price is what you pay, value is what you get". With that is his "Margin of safety." My translation: Never pay value, always assume you've overvalued the asset. If you cannot buy at a discount to par, wait or move on.

3. Buy what you know. This is from a book called The richest man in Babylon I haven't read the newer edition, but I think the old edition is the best seven Americanos you'll ever part with. In Real estate, it means to research the areas you're going to buy long before you buy. I like www.homefair.com to compare areas as a start.

I also think for real estate novices (not the bubble bloggers on year 3+), that the book Home buying for dummies. Me being me... I also read home selling for dummies. :) (Bwaaaahaaaaahaaaaaha!)

4. Buy when its tough to get a mortgage. I first heard this from my grandfather; its old sage advice. For when its tough to get a mortgage, you just do not have to deal with all of those pesky emotional investors. They seem to be afraid of the paperwork. This is when you have negotiating leverage. Note: Its not tough to get a mortgage by historical standards. By 2010... I think it will be tough to get a mortgage.

5. "Its better to buy a year late than a year early." This is also some old advice. Since its been told to me for decades, I'm not sure who to credit with this advice. The last year of a downturn might see prices drop 5%. The first year of an up-tick generally sees a 3% increase. If you're socking the money away, whip out a spreadsheet and figure out how your life would be better waiting. Play with interest rates, down payments, savings rates, unexpected expenses, etc.

Where I want to buy, I still come out ahead renting over buying. There is no reasonable scenario, at today's prices, where buying is wiser. After 30 years, assuming reasonable home appreciation rates, wage inflation, investment returns, and such you will see that your lifestyle is ahead renting (for now). Some areas this isn't true anymore. (e.g., Palmdale CA). But is it time to buy there? I think in six months it will be even better. See point #5. ;)

Note: The book reference in point #3 recommends buying your house. I agree. But that book was also written prior to Florida 1925/1926. ;) It was written back when 50% down and a 10-year mortgage were typical too, so wild real estate speculation was less common. (But somehow it missed the 1849 San Diego bubble... hmmm... Hey, its a short book! Very worth the read.)

And if you get all of your investment advice off the internet... I think you're being foolish. My recommendation is to read and understand. Be a wise investor. Do not invest off what I say. Rather, invest when you know you're ready. Step #1, get ready. :) (Save a down payment, know what you can afford, know where you would like to buy and pick alternatives!) Basically, read the books I've recommended. Their advice is pretty good.

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Wednesday, July 09, 2008

Foreclosures and dark humor about Christmas

I have reason to suspect that a coworker I really like is about to go into default on two properties; the home and an investment. Basically, this individual has used up all of the reserves trying to keep from losing the investment house and thus will now probably lose both. I've talked about how many of my coworkers invested heavily in real estate during the bubble. Now we're finding out who was swimming naked; its not a pretty picture.

This brings no joy to me. Its not one thing that convinces me that 2009 will be the year of the greatest price drops; its an accumulation of evidence. Hopefully this snippet gives you some insight into why I'm hunkered down to survive a bad year.

That bad year includes Christmas. The humor regarding Christmas is pretty dark on more than one blog today (e.g., CR). In fact, its downright gallows humor. Like all gallows humor, this isn't about wanting it to happen; its about expressing the known downside in a way to relieve anxiety. I think the bear community is seeing the writing on the walls. Expect Christmas 2008 to Suck (from a retail sales standpoint). Its not a question of if we're in a recession, but where we go from here.

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Sunday, July 06, 2008

I don't get it.

The WSJ might have typed too quickly:

In the apartment market, the "shadow market" of unsold homes offered for rent continues to keep renters out of apartments. Otherwise it is a strong market for landlords. They continue to benefit from the housing slowdown that has created more renters and led existing renters to defer homeownership given the tightened mortgage market.

Renters are not going into apartments but somehow landlords have a strong market? Or is it that there are a lot of landlords right now? ;)

I usually really like the WSJ, this time I think the reporters tripped over their fingers.

later in the article:
"Rental demand hasn't really picked up in relation to the falling home sales, which implies that people are doubling up or tripling up or moving back with their parents," says Lawrence Yun, chief economist for the National Association of Realtors. He expects that to change in the near-term, in part because "it's not sustainable to keep adding roommates."

We have more bedrooms per capita than ever. So actually, it is sustainable to fill up those McMansions... For YEARS!

I should be nicer, most of the article is on retail and the predicted surplus of retail space for a long time. :) But sometimes you read something and go "huh?"

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Credit Tightening

WSJ's 'ahead of the tape'
More than 55% of U.S. banks tightened lending standards for large and midsize companies in the second quarter, according to a recent Federal Reserve survey, the highest since the first quarter of 2001. In the two other instances of such harsh tightening since 1990, a steep profit decline followed three quarters later, notes Citigroup chief U.S. strategist Tobias Levkovich.

A profit decline 3 quarters later... In other words, it hasn't really begun.
The article is on the start of earnings season. Its not bullish. But out of fairness and keeping to 'fair use', I'll leave it to those who subscribe.

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Banks Get Pucker Butt

You cannot turn around without finding an MSM article on the credit tightening. Its to the point now that I think that J6P is finally realizing making a deal with the loan sharks isn't aways in the best interest of the borrower...

Calculated Risk has more on the HELOC TIGHTENING. My take is the banks have no choice. If they let people extract every penny, they'll go under. Heck, with over $1 Trillion of unused HELOC's committed to... Where the heck would the banks get the cash?

The LA Times is noting how RV sales are "Carrening off the Road." If you read the link, its another note on how SoCal sales were really based on home equity extraction. We've been seeing the same story in Automobiles too... Note how pure RV loans are drying up too? This isn't just about gas or credit. Its the unwinding of a bubble market. RV sales are at 1981 sales rates.

Hat tip HBB Remember all of those adds to invest your 401k into real estate? I can remember flying to Florida for a family visit and it was a deluge of adds along the way to extract the 401k and put it into Florida real-estate. Well this link talks about people borrowing against their retirement accounts to keep their house too.

BMIT is showing how many sellers are still chasing down the market. Is it just me, or have we bears become so numb we don't even pay attention to homes that are not setting new records of time on the market?

Bearmaster has one of her great statistical articles up. It looks like the Realtors are still in denial. That's scaring buyers to other states... Just commenting on the standoff, its not going to be won by bluffing. I am surprised July is starting strong...

I haven't made any predictions between now and the Fall. I don't intend to. It could be interesting... it could just limp along. But by the Fall the seasons and the emotions change.

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Friday, July 04, 2008

Happy 4th of July

Enjoy the 4th!

Today, a BBQ to celebrate my Nana's birthday; but also another celebration. My best friend and his lovely wife had their first child yesterday. A boy. Since soon I shall become a father, I'm excited for them.

Minyanville points out the flaws in the employment stats! A must read.

Mish talks about ghost towns:

Since these haven't been written off yet... The worst is yet to come. This Fall for a crisis, for it to really hit the fan will take until Spring of 2009. Why? The financial system has become 'brittle.'

Bearmaster has more data on Redondo:

Bakersfield Bubble talks about how Lehmen is losing their shirts on bad investments.
I happen to agree with the comments that the next stage of this downturn will be high end properties pushed lower by stock losses:

Bubblemeter has a story on more bottom calling:
I swear... its a bunch of REIC kids saying "Are we there yet?" The true bottom isn't until 2011 to 2015. I still see 2009 having the greatest price declines. Ok, not for the areas that have already lost 60% to 70%+! But for the 'core areas...'

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Tuesday, July 01, 2008

Don't get between me and my coffee!

12,000 jobs to be cut at Starbucks. :(

Well, not quite the end of the world... But if you've ever seen me go through my 6th MUG of coffee during the day, you'd know I feel for all the closed starbucks.
Starbucks cutting 600 stores, 12,000 jobs

Although, I do wonder, how many cities have more than 600 Starbucks retail outlets (including those inside supermarkets). ;) Like Santa Monica... ;)

I happen to really like the Starbucks 'bold' coffees. Oh, I cheap out and often buy Trader Joe's, Cosco brand, or other good but lower cost beans; but at least once a month I buy a bag of Starbuck's beans. I remember what coffee was like pre-Starbucks and I dread returning to those days of poor quality coffees.

Note: My coffee is strong and black. If you can see light through it, its not great coffee. So I'll focus on Starbucks instead of the Horrid June car sales (kudos to Honda).

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