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. :)

Got Popcorn?


The Anonymous said...

So, DC goes from one of the "Four Horsemen of the Apocalypse" to one of "the two cities that should have the least downside risk"...

And re: the immunity idol of Arlington (which if you had graphed it your readers would see inventory was lower than 2007, 2006 and closing in on 2005 levels), it went from "40% off in nominal dollars" to "at most a 20% drop".

Glad to see you adjust your precictions to meet the data, but I have to wonder, why were you so fixated on the devastation of this area in the first place? Was it Lance and his catcalls of "priced out forever" and "its different here" that got to you?

Yes all areas in DC had enormous gains over 2000, but a funny thing happened during the bust: some high end areas started melting down while others didnt. Lance & co were not very civil with the way they pointed this out, but still, there was some truth to their crowing - some areas are indeed "different" in that they do not burn all the way down, and some people were in fact "priced out forever".

Its not to say I am happy about this mind you, but I saw no other explanation for the huge data discrepancies we all saw. That was the thing that killed me about you. Youre obviously smart, and very accurate on macro levels. Yet you saw this same Arlington & Alexandria data we all saw and couldnt really accept that much of their gains werent likely to go away.

Well now that you have, I can honestly say that I no longer see any bias in your predicitons. "At most a 20% drop" looks reasonable to me, and defensible with based on the data out there. Thats not to say it could be much greater than that, or much less of a drop than that, but either way, at least now you arent ignoring the data that suggests these areas are different (one "high end" area craters, the other "high end" area has moderate drops). Welcome back to reality Neil, we missed you.

wannabuy said...

So, DC goes from one of the "Four Horsemen of the Apocalypse" to one of "the two cities that should have the least downside risk"...

Yes. I have changed my opinion. :) It was really bad a year ago. Now your ex-urbs will allow growth!

I still believe the credit crisis could bring DC down. The overhang of raw land is also a downside.

DC was a horseman though. Look at the equity destruction down in the ex-urbs. But I like to look at data and move forward. The damage to the banks is done. I still see Chevy Chase bank is very weak and probably will fail (~75% chance).

Did you ever see the series "Highlander" where one of the four horsemen became a good guy? That is what I see having happened with DC.

In effect DC was lucky. It shed enough of its bubble early. I'll even admit our 'conversations' had me look into DC data to see what was different.

Now... do recall Case-Shiller really ignores condos. There is still a monster over-build of condos in DC, in particular near my favorite DC hotel, the Westin in Arlington. (Ghad... the number of new towers...)

But I'm biased towards single family homes and a surplus of nice housing, once it becomes affordable, is a boon to an area. e.g., long term I consider all of the condos in downtown LA and San Diego a potential boon too.

But not for 2009. ;) Condos in 2009 are a lead boat anchor.

FYI, part of the reason my mind changed is housing became 'affordable enough' for the military. A few years ago, the Colonels I know who are the aides for DC generals were panicking to get staff out of DC due to the cost of living. (e.g., to Huntsville, Colorado Springs, and a few other cities). They ended up having to downsize DC staff less than I predicted to get to stable levels. Cest la vie.

I'll happily point out where I'm wrong. As I've noted before, I'm always trying to improve my predictions. Bearmaster can tell you how 'over-accelerated' my first attempts were. ;)

Partially as I see certain other cities having their downward momentum accelerated much more than I earlier predicted. e.g., the cut in ad revenue for LA is like a plague over industries I never thought it would effect.

This isn't over. It will be interesting to see how I must modify my predictions in the next emotion. Sadly... excluding DC, I've tended to be too optimistic... :( I'm still not going into TJ's economy camp.


The Anonymous said...

Well I have to give you credit for admitting that. Early on I had you pegged as a true myopic partisan, kinda like Lance, except on the other side of the spectrum. The difference is Lance never could admit he was wrong on anything -- you have -- so props to you.

Its funny, back when I was still lurking (about a year ago), I started saving predictions of yours regarding Arlington which I thought were going to be spectacular failures (i.e. huge spikes of inventory - huge numbers of months of inventory). Back then there was so much venom in your postings, I really wanted to stick it to you. So as these predictions failed, I was going to trot them out one by one, and get your reaction. Its petty, its childish, but thats how hopped up I got at one point. Now there is no need to do this as we are in general agreement on the direction of things.

Glad to see that my earlier rantings caused you to look at the data again - I too thought that much of the problem inventory was shed back before the credit crisis really got going - apparently the problem was not what I said, but the way I said it. Again, coming right out (from just previous lurking) and attacking you was wrong.

I agree with you that its not over, and I will reaffirm that if things get much worse (or much better) it can cause DC to further erode, or dramatically improve. Yet given what we see right now, I think your predictions are pretty darn good. Cheers.

Quantalyst said...

'...during the summer of 2009 the government will lose its ability to keep propping up the economy...until this summer [sic] bond event'

Whoa! Where did this come from?

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