Real Estate Emotions: September, Start of Panic

Last month I blogged on how the bank situation and how it would push the emotions. How many banks failed this month? I'm still a bit in shock with that. So while there is a risk of calling it a few weeks early; I'm calling the emotion Panic.


The real estate market is very seasonal. I thought it would take the poor sales of Fall/Winter to get us into Panic. Instead... The 'Invisible hand' did its job.


I've been using the following graph to illustrate the emotion changes versus the ARM resets. The missed payments have put us into quite the credit crunch. Alt-A is only two seasons away!

















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: since mid/late February 2008 to late September 2008 (~8 months)
9. ****Panic*****: Current state, started Late September 2008.
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. There will be a long market bottom.
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 created this 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. Panic started barely within my fall prediction. We're on an accelerated cycle. 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 Capitulation. Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.

I'll blog Case-Shiller later in the week. You'll see that the seasonal 'gravity' on prices is increasing. This is the derivative. Its going in favor of buyers waiting. Think about what this will do to mortgage defaults. Heck, the Alt-A resets in Miami alone will clobber Jumbo loan default rates. Add in Phoenix, Las Vegas, and...

Yea. Capitulation sometime in 2009. We can ignore the emotions and come to the same conclusion. Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, this is more likely to be a more protracted downturn than the last one.

Got Popcorn?
Neil

Wamu Failed!

Its only Thursday and Wamu just failed. This is easily the largest bank failure in US history.
FDIC Link


$310 Billion in deposits! Absolutely dwarfing Continental Illinois Corp.($40 Billion, estimated $83 Billion in today's dollars) and Indymac ($32 Billion)(the two previous largest failures).

So JP Morgan gains a significant West Coast presence. How many jobs will be lost out west?

I'm glad I haven't done my September real estate emotions yet... this could be sending the market into panic. I'm not sure if its there yet... In some areas, oh yea... But Nationally?


Calculatedrisk.blogspot.com is doing the best coverage.

4X the size of the previous largest bank failure! There is an electronic bank run going on right now. If people withdrawl their cash and buy gold (and 'bury it in the back yard') there is absolutely nothing the government can do from this being the worst recession of our lifetime. This is going to kill the velocity of money. How many airlines will fail? How many states will see middle class flight as they cut services to the people who actually earn money?

Oh... I'm already predicting that. (Unless you survived the Great Depression...)

Edit: Wamu *never* made the Fed's troubled bank list! (If it did, it was on the same day as its failure.) Statistically, it did such a fine job of cooking its books, it wasn't even on the 'troubled bank' list. Oh, most bloggers were wondering why it wasn't failing...

Edit2: Notice the ads are now stating 'times are tough' (Home Depot), 'Saving the planet from high gas prices' (Mitsubishi), and otherwise are selling to people trying to save money?

WSJ says drinking spending less


Top executives at Pernod Ricard SA said Thursday that Americans are cutting back on purchases of its liquor products in bars and some are seeking cheaper brands when buying alcohol at stores, in a sign of a worsening economy.

"There's no question there are some negative numbers" in the bar and restaurant segment, Paul Duffy, chief executive of the French drinks titan's U.S. arm, said at a New York news briefing.

Sales at grocery stores and other retail outlets continue to grow at healthy rates, but there has been "some tick up in trading down" to less-expensive brands, Mr. Duffy said. In an interview, he added, "We wouldn't characterize [the shifts] as a crisis."


Much more in the article worth reading.

As Scoobie says: Rho Rho

Edit #2: Link on 32 banks about to fail

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Neil

Eating the Seed corn: Short Selling

This is an opinion piece. I haven't seen anyone put together the numbers yet to fully quantify what I'm speculating on. Naked Capitalism estimates that $200 Billion has been transfered from shorts accounts to closing those shorts.

Normally the role of short selling keeps a 'hot stock' from overshooting. As the stock becomes over-bought to its fundamentals, short sellers step in. Once the stock dives back down to supportable levels, the short sellers "take profits" and buy up the stock. This helps keep a stock from becoming too over-sold. There is a natural group ready to party with their profits.

With short selling on financial stocks banned:
1. It created a short uptick as shorts were closed.
2. Those shorts are gone. There is no downside protection. The $200 Billion (estimated) buying pool is gone.

If we start a new downward bearish stock trend there will be no quick recovery bounce. Normally short sellers jump in when there is an uptick to close their shorts. Now they'll be on the sidelines (maybe with put options, but that doesn't have the same stabilizing effect).

Healthy companies have cash and can penalize undue short selling with a stock buyback. It takes a company short on cash to be a short target. Those companies probably had overpriced stock anyway... I consider short selling a stabilizing effect on the market.

The law of unintended consequences will now come into effect. October is a scary stock month. Will we make it though ok?

Most of my competition has too much of their portfolio in stocks. So...

Interesting times ahead.

Also, printing money is going to really drive import inflation. I still predict domestic deflation combined with import inflation. The US standard of living is about to take a hit.

I've been asked by a relative to look into the effect of today's economy on medical spending. So that will be my next blog (unless I get to my emotions article first).

Got Popcorn?
Neil

Resurrect the Resolution Trust Corp. (WSJ)

I've been arguing for two years to bring back the RTC. I'm happy to see this WSJ article (hattip Calculated risk) with Volker recommending it too!

Can we have Volker back as the Fed chair? Please!

here is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.


What isn't mentioned in the article is one of the RTC's best functions: To seize foreclosures, clean the title, and get them back out onto the market at 'market prices.' What they do is demand a roll call of who has claims on a property (taxes, repairs, 1st and 2nd mortgages, etc.) They then award each claim shares based on the dollar amount of the claim and the type of claim. e.g., For every $ of a 1st mortgage, one share. For a second, every $10 is a share... The house sells and after fees the shareholders split the proceeds on a per share basis. The new owners have the home free and clear and all claims that predate the deed transfer from the RTC must go through the RTC.

Bring back the RTC! Too many cities are in purgatory without it: Sacramento, Las Vegas, Phoenix, Palm Beach, Miami, Orlando, Tampa, Los Angeles (and suburbs, including the OC), San Diego, DC ex-urbs, and most likely a dozen other places (or more). I'm not for big government; but the RTC did its job well last time and is overdue.

It looks like my prediction that the RTC would be reformed 1Q08 was a bit premature... How do I know its needed? All of my wife's talk shows are about the economy. I think its funny how they're pointing out how those that 'live on a budget are ok.' ;)

Coworkers are in trouble and DOZENS (perhaps more) are staring to look into short sales; this isn't trivial. Let's just say our employer can determine that this breaks the terms of employment... But there are ways to work this out.

Got popcorn?
Neil

Banks trying to unload commercial property debt (WSJ)

Last spring, securities firms and banks were able to sell commercial real-estate debt for discounts ranging from 5% to 20%, small compared with many residential mortgage securities. But that discount has been widening.

In other words, the smart money long ago 'cut and ran.' This real estate mania is over. Now we, unfortunately, have to deal with the downside.

late in the article:
It was in this climate that Lehman tried to save its neck by putting its $30 billion portfolio on the block last week. Lehman was hopeful because more than 70% of its whole loans were used to finance the relatively strong part of the real-estate market, such as offices, hotels, apartments and retail properties.

But the firm also had large amounts of debt tied to residential land, where values have been decimated. The firm negotiated into the final hour to sell the assets, but never reached a deal because it wouldn't cut its price enough, according to people familiar with the matter. And now comes the expected liquidation.

In other words, land loans are now being recognized as financing the derivative of real estate. In too many areas, homes are selling for less than the cost of construction. So land... is going to be a tough sell. But wait... CR has been blogging on the overbuilding of offices, hotels, and retail. Apartments are in that no-mans land. Not as overbuilt as other real estate, but having to compete with all of the FB's trying to rent until the "V recovery" that won't be.

If everyone is trying to get out... no one is trying to get in. This is going to further tighten the real estate noose. In other words tight credit will persist for years. So much for a quick job recovery...

Got Popcorn?
Neil

Readers input on down payment requirements

With all of the current turmoil in the financial markets, what is your guess on the change in down payments for 2009 and 2010? This isn't a stock market blog nor should it try to be one; but the current turmoil should have an impact on credit availability. So narrowing that down to mortgages, what do you think the impact will be?

Got Popcorn?
Neil

Knife catchers

Every few months at work some coworker taunts me for not buying. Invariably, its when they've called a bottom. So far, the best in this group has had to watch a comparable house sell down the block for $80k less than they bought. Only one has listened to me and accepted that real estate bottoms are not "V" bottoms but rather long flats. That decision saved him $50k in two months. (The home is still for sale, but that much cheaper.)

At some time there will be a bottom. I'll buy when I'm certain that the total downside risk is less than $100k. Where I want to buy... isn't there yet. But I've seen quite a bit of my competition buy in suburbs that, to me, are less desirable than where I'm going to buy.

Demographics are in my favor. Most baby boomers cannot retire without cashing out their real estate (primary residence and investments). This year was the first year of accelerated retirements. Next year, at my company, the retirement rate is set to double.

Its going to be interesting next year to see how the credit crunch progresses. Heck, its interesting this weekend! (Go to calculatedrisk.blogspot.com to see the discussion.)

Got Popcorn?
Neil

Inventory Calm before the storm

We're in the inventory dip before the annual peak. Last year's inventory (2007) peaked nationally and in most areas about on September 27th. The year before it was a bit earlier, on September 20th. Yet there is, for some reason, always a step down at the start of September.

This inventory is incomplete. DQ news will take ~10 more days to put out there results, so I'll do an update with California by country, Las Vegas, and a few other areas I've been letting others collect the data on.

In general, inventory is at about last year's levels. It will be interesting to see sales going forward. Inventory is high. Some areas are holding up better than I thought they would at this point. But... with this week's news on Lehman, Fannie, Freddie, and the concerns with every major bank that was a leader in mortgages... I'm sticking with my previous real estate emotions predictions. We haven't jumped off that roller coaster by any means. But... LA's and in particular the south bay's inventory is dropping by the numbers... but not the number of signs one drives by. Not to mention the foreclosure process is over a year behind the curve.

And I'll let CR blog retail (empty stores). Shudder... Its ugly out there.

Without further comment, the graphs:

Remember when?

Do you remember how a year ago the trolls on the housing blogs were saying how Fannie and Freddie entering the jumbo market would sent prices back on their upward spiral?

I wonder how much longer the GSE's (or whatever they're called now) will be able to offer loans above $417k. There never was an appetite for the bonds backed by this toxic debt. There are really two choices:

1. Put in new rules that apply to mortgages between $417k and $729k that reduce the risk to bond buyers. I would propose that it will take larger down payments (25% or 15% plus PMI), lower DTI (35% maximum), and proof of reserves. Obviously something that would create a "V-shaped recovery."* ;)

Got Popcorn?
Neil

* There is no V-shaped recovery. This downturn will be 'in the bog' as other bloggers called it. For 2 to 3 years prices will be sticky on the downside.

Federal highway trust fund running out of FY2008 Cash

Funds low for gas tax funded highway fund


While the other blogs talk about the largest bailout ever!

John Horsley, executive director of the American Association of State Highway and Transportation Officials, said the funding delays proposed by Peters will "have grave repercussions for the states, for hundreds of thousands of workers in the construction industry, and the driving public."

"It will worsen the financial crises many states are already facing, and it will delay or halt needed transportation projects and leave contractors and suppliers with IOUs instead of cash to pay their workers," Horsley said in a statement.

This is the scary time of the economic cycle.

Got Popcorn?
Neil

Another Bank Failure... Well its Friday!

Silver State Bank, Henderson NV

As of June 30, 2008, Silver State Bank had total assets of $2.0 billion and total deposits of $1.7 billion. Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3 percent. At the time of closing, there were approximately $20 million in uninsured deposits held in approximately 500 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Note a huge bank.

This is #49 on the Troubled bank List but is 170th in size of the banks on the list. It is about 6% of the size of Indymac when they went under. Edit: FFDIC over at CR commented that any bank over a billion taxes the already stretched staff of the FDIC.

Are we at the point where this is a failed bank every Friday?

Got Popcorn?
Neil

Tardy August real estate emotions

Please see my last article for a list of troubled banks. Note: I expect a few bank failures that didn't make that list. God bless creative accounting. ;)

Why are the banks important? It would take an Indymac sized bank to push us through an early emotional transition or enough small banks to add up to that level of uninsured deposits. Right now... I consider that unlikely before the next chronological shift.

The real estate market is very seasonal. The poor sales of Fall/Winter will drive us to the next emotional level (Desperation to Panic). This will be the toughest emotional call for me. Why?
1. I'm not traveling like I was. No more 3+ states every month (New Baby, I'm staying grounded through 2008).
2. The local emotions are no longer the quiet passive emotions. FB's are no longer suffering in silence. Yea... this is an artifact of the later states of desperation. But it does mean that while my work site has employees from 12+ states... its tougher to separate the local emotions from the visitor emotions and keep a national perspective.



I've been using the following graph to illustrate the emotion changes versus the ARM resets. The missed payments have put us into quite the credit crunch. Alt-A is only two seasons away!

















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. There will be a long market bottom.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (The worst is over...) about 2017
15 Optimism (cycle starts again)


Last Month I created this 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. But most likely, it will happen seasonally at the end of Fall. That is unless some of the large banks we're concerned about are taken over by the FDIC or the stock market tanks. Neither can be ruled out... We're on an accelerated cycle. 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 Capitulation. Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.

Late Edit: Why are SoCal emotions starting to become overwhelming,
From Mish












Notice something? For SoCal, the 'gravity' on prices is increasing. This is the derivative. Its going in favor of buyers waiting. Think about what this will do to mortgage defaults. Heck, the Alt-A resets in Miami alone will clobber Jumbo loan default rates. Add in Phoenix, Las Vegas, and...

Yea. Capitulation sometime in 2009. We can ignore the emotions and come to the same conclusion. Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, this is more likely to be a more protracted downturn than the last one.

Got Popcorn?
Neil