Friday, October 31, 2008

Some Inventory Graphs

Please see my previous article on Real Estate Emotions. We're in Panic.

Basically, inventory is down a bit everywhere. I hear quite a few people talking about waiting (up to 3 years) for when the market improves. Hmmm... could this be one of the reasons real estate recovers after a drop so slowly? ;)

National inventory says that nationally we should expect another year like 2008. However, at this point in the economic cycle one would expect layoffs to be driving home prices. Thus one will feed the other. Everything I look at points to 2009 being the worst year in home prices in US history. Yes... worse than 1931.

So I'll start the inventory with the two cities that should have the least downside risk. Now, we've watched their ex-urbs get hit, so I expect 'substitution' to pull down the center. But I'm not expecting a huge drop in either unless employment does even worse than this bear is being too optimistic. I see a chance of at most a 20% drop for both, with the worst areas being those alleged immune high end areas where we'll find out the poseurs in 2009. Most of the downside for these two areas will be due to the tightening of credit and some job losses.

I'll switch to a city that I think will be in the Running for the worst Real Estate market in 2009. Other contenders are Las Vegas, Palm Beach Florida, and Phoenix. This is my home city of LA. While nominal inventory is going down... Look at the malls. Not just all of the new ones going up, but the empty stores at the existing.

Greater LA is a metropolis that has many industries, but too many are running off advertising revenue. I assume you have been following the trend in that LA is doing fewer movie and TV shoots (minutes of filming) and more advertising. Hmmm... Add budgets are down... and just how much of Santa Monica is employed in internet companies dependent on ad revenue? I still see a 35%+ downside for SoCal.

The South Bay portion of LA is where I wish to buy. Less ad revenue dependent than 'the Westside', but it will be hit by that downturn too. It is also the US home of Aerospace engineering but it is looking at budget cuts and that means salary cuts. Aerospace will lose a minimum of 20,000 jobs in the South bay between now and Christmas 2009. :( It could be as high as 50,000. Yikes! So hang on, there is a bumpy ride ahead.

The housing bloggers have been obsessed with Phoenix for years. Inventory remains persistent above 60,000. It will be healthy again once its below 30,000! Something like 40% of Phoenix's peak employment was working to grow the city. The joke was that it is a city where Plumbers build homes for Roofers and Realtors. Possibly on Las Vegas and Palm Beach truly have as much downside risk.

Part of the reason I'm bearish nationally as too many high population states are going down. No bailout will help. In fact, the bailouts are only keeping the builders building and this increasing the downside potential everywhere there was building (which is... everywhere!).

A little more discussion on SoCal. Over HALF of sales are now foreclosures, yet the banks are still selling foreclosures slower than they are building up on the books! This is a doomsday scenario: Declining jobs and a monster inventory overhang. Oh... If you think your area is immune, what exactly was all the media coverage about 'California equity locusts' about if we weren't driving up prices everywhere! Seriously, every area will drop to where its incomes can support housing.

Oh... to think that the people who know bonds are speculating that during the summer of 2009 the government will lose its ability to keep propping up the economy. Bond buyers are supposed to be skeptical... there is enough momentum to keep things going for a bit. So the transition to Capitulation might not happen until this summer bond event. Cest la vie. Its going to happen. That will put those with savings in a very good space. :)

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Wednesday, October 29, 2008

Real Estate Emotions: October, Panic it is.

Last month I blogged on start of panic. At the time I thought I could be calling the emotion early. The last 30 days have proven we are definitely in Panic. Only in Panic do we see the shifts we are. For those waiting for the crash in house prices in high end neighborhoods, the big drops happen during Capitulation. You have five or six months to wait until the start of Capitulation and then another year for the emotion to do 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 (six months instead of a year) that blends right into Capitulation. Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.

Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, there is a chance of a protracted downturn than the last one.

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Thursday, October 23, 2008


We're at the time of year where shipping should be ramping up.

We should be seeing raw material shipments ramping up for the Christmas production season. Instead, ships are being parked. Ok, partially due to Brazil and China refusing to sign a new iron ore agreement. But also due to week demand.
Baltic Dry Index at Naked Capitalism

Who quotes bloomberg The Baltic Dry Index, a measure of commodity-shipping rates, fell to the lowest in more than six years in London yesterday as slowing economic growth cuts demand to move coal, iron ore and steel. Commodity shippers will begin to collapse within the next six months and ``significant'' numbers may fail within two years, according to Fearnley Fonds ASA, a specialized maritime investment bank.

``Demand for commodities is definitely slowing down,'' Yu Mengguo, a senior analyst at Jinpeng International Futures Co., said in a phone interview from Beijing today. ``That's being reflected in tumbling prices, which we can't see the bottom for right now.''

Commodity prices are slumping worldwide on speculation a global economic slowdown will reduce demand. The Reuters/Jefferies CRB Index, which tracks commodity futures prices for 19 raw materials, plunged to the lowest in four years yesterday.

The Baltic Dry Index fell 66 percent in the three months to Sept. 30, the largest quarterly drop since the exchange began compiling the data. The measure of commodity-shipping costs is down 62 percent so far this month at 1,221 points, after rising to a record high of 11,793 points on May 20. It fell for a 13th consecutive day yesterday.

Translation: Shipping jobs are disappearing.

WSJ on the shipping decline
What struck me from the WSJ article:
On Thursday, package-delivery giant United Parcel Service Inc. said it had "precipitous declines" last month in volume of next-day-delivery products, a high-margin business, a month when shipping normally has begun picking up ahead of the holiday season.

Where are you Rob Dawg? Christmas is looking to be as you predicted it.

WSJ already reported on declining premium airline passengers.
The International Air Transport Association, a global trade group, says that demand from premium airline passengers began to wane early in the summer. After modest growth during the first five months of the year, premium traffic dropped slightly in June and then fell 1% in July, compared with demand levels a year ago. That decline "most likely reflects a fall in business travel, driven by the increasing weakness of major economies," the association says.

Or just look up your favorite airline's ticker symbol and plot its two year graph. :(

Forbes on rail
At least rail traffic isn't too bad. Mostly thanks to coal and grain
Volume rose 0.9 percent in the West, where cargo is primarily carried by Union Pacific Corp. (nyse: UNP - news - people ) and Burlington Northern Santa Fe Corp. (nyse: BNI - news - people ) Volume fell 1.6 percent in the East, where freight is mostly hauled by CSX Corp. (nyse: CSX - news - people ) and Norfolk Southern Corp. (nyse: NSC - news - people ) Hurricanes Gustav and Ike dragged down volumes in previous weeks.

The number of carloads last week was down 0.1 percent from last year to 336,457 cars, AAR (nyse: AIR - news - people ) reported.

Intermodal volume rose 0.8 percent from a year ago. Intermodal involves moving freight from one method of transportation to another, such as truck to rail.

So far this year, shipments on U.S. rails are down 0.2 percent compared with the same period in 2007.

I also find the trend in oil prices very interesting. I predicted oil would get back to $80/bbl, but that was for ~2Q2009. Demand destruction is an indication that both people and product are not being moved.

Great lakes shipmets up just confuses me.
But CR had a chart showing that Texas up is a growing area... Is great lakes cargo being railed to/from those growing areas? I cannot help but notice that the Great Lakes states are falling apart economically...

So transportation is a mixed indicator right now. But I believe strongly that if businesses are not moving ore or flying to initiate new business, its a strong negative indicator. But its not all dark.

I remain convinced this is a reflection of the Bank Panic of 1907 and not 1929. Oh, that was an ugly time. But there are durations of ugly.

Edit 12/24: CR on declining port of LA-Long Beach Traffic
Inbound traffic should be peaking for the year as retailers prepare for the holiday season. Inbound traffic is off from August, and about 12% below last September.

Outbound traffic fell off a cliff in September, and is 17% below August 2008, and at about the same level as a year ago.

So bad... but not yet ugly at the ports.

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Monday, October 20, 2008

DQ reports California Sales

DQ news link

Let's see...

SoCal Home sales are now ~50% foreclosures.
At the county level, such foreclosure resales ranged from 36.8 percent of September resales in Orange County to 68.9 percent in Riverside County. In Los Angeles County foreclosure resales were 39.1 percent of all resales; in San Diego 47.3 percent; San Bernardino 63.1 percent and in Ventura County 44.0 percent.

SoCal mortgages:
Before the credit crunch hit last August, 40 percent of sales were financed with jumbos, then defined as over $417,000. Last month just 13.2 percent of purchase loans were over $417,000.

Wow... 13% over $417k. Folks, that is a lot of homes for sale with no qualified buyers. This report is the most qualified ever.

Oh, sales were up. Higher than August. But its also evidence that the only buying is extreme bargain hunting. Several internet companies announced layoffs recently (redfin, Zillow, and a few minor ones). Anyone know the concentration of jobs in the Westside? I've seen some very poorly written articles on job losses from Santa Monica, but they are not of the quality worth linking to. Is there a real trend? Or is it just fear?

To think, all of the layoffs I have foresight into do not start until 2Q2009 and really do not get going until 3Q2009 (per current plan). I'm not thinking this will be a big Christmas season. Oh... quite the opposite.

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Thursday, October 16, 2008

WSJ: Downey Curtails some lending

Downey Curtails some lending at the WSJ

Downey Financial Group Inc.'s savings and loan unit will close its wholesale loan department and shrink its retail operation, affecting about 200 employees, as it said fewer borrowers are able to qualify for loans amid the ongoing credit crisis.

Downey has been on the bank watch list forever. If it wasn't for their parent company trying to rescue them... they would already be done.

What is really telling:
Of all the large lenders that wrote option-ARMs, in particular so-called Pick-A-Pay mortgages, Downey is one of only two -- along with BankUnited Financial Corp. -- that remain independent. Wachovia Corp., Countrywide Financial, Washington Mutual Inc. and IndyMac Bancorp were among the top five issuers of the failing loans. All of them have been forced to sell themselves at fire-sale prices to healthier banks -- or, in the case of IndyMac, to be liquidated after being seized by regulators.

Easy credit is not going to resume shortly. Too many companies are having trouble rolling over their debt.

FYI, I'm reading a book titled "The Panic of 1907" by Robert F. Bruner and Sean D. Carr. I've changed my mind on which recession we're imitating. Why? Parallels to 1907:
1. Over investment of capital in real estate.
2. Liquidity crisis. In particular, the inability of governments and companies to roll over debt.
3. Government (treasury) and banks wasted their remaining capital on treating the symptoms and not the issues.
4. Much denial and mockery of the bears, but 'sophisticated money' left the troubled banks and trusts early (often six+ months before these institutions failed).
5. It was an interconnected bank crises that fell apart when member banks called in their loans.
6. The role of President Theodore Roosevelt will apparently be played by a new president...
7. Other governments are putting in place laws to restrict the flow of capital to the US.

I'm sure there are more... But I also believe in Mark Twain's quote, “History doesn't repeat itself - at best it sometimes rhymes”. We're seeing a pretty bad rhyme of 1907 in 2008. I'll blog more on this as I'm fascinated by this book and the historical similarity.

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Thursday, October 09, 2008

Dubai: WSJ

In today's panic-stricken debt markets, the uncertainty means higher costs for big and prudent borrowers. The cost of insuring $10 million worth of Dubai debt for five years has risen to $247,500 a year, up more than fivefold from the beginning of the year, according to CMA DataVision, a price-discovery service.

CMA, which calculates a "cumulative probability of default" for sovereign borrowers, estimates the likelihood of Dubai defaulting over the next five years is just shy of 20%. That's up from 4.3% at the beginning of the year.

So... Someone besides Iceland might default on their Sovereign debt. Now, a 20% risk of default really isn't that bad. One has to look at it in order of magnitude (Factors of 3). That could be as low as a ~6% risk or it could be as high as a 60% risk.

Either way, it looks like a huge fraction of the world's cranes might suddenly become available... just as no one else wants them. :(

WSJ on Dubai

But wait... Dubai is among the most heavily indebted governments in the wealthy Persian Gulf. Standard & Poor's estimated at the end of last year that Dubai government debt represented 41.8% of gross domestic product, compared with 22% in Bahrain and 2.9% in Abu Dhabi.

Ok, this isn't Iceland's 1200% of GNP debt by any means. But one of the things that awoke me to the global nature of the bubble was a reader by the handle of SMF alerting me to look into the bubble in Dubai. Heck, I argued with him that Dubai wasn't really a bubble at the time. (Oops... Point SMF.) This credit crunch is brutal. To have have a nation with a large wealth fund in a cash crunch... is interesting...

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