Tuesday, December 23, 2008

Philly Fed Map

CR has an article up on the Philidelphia Fed Map.

Its worth looking at:

Or broken up:

Points to make:
1. California isn't leading the pack down.
2. There is a core of 'flyover' states doing 'ok'
3. Virgina is doing well while Maryland is falling apart. Interesting...
4. All of the Automotive production states are dying.

What worries me is that only two high population states are even doing ok. None of the high population states are growing strongly. Most of the high population states are really hurting...

I do wonder how Oregon and Washington turned south so quickly... that has bad implications... Take some time to look at a port. Its scary out there...

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Sunday, December 21, 2008

Real Estate Emotions: December, continued Panic

Holiday emotions seem to be blunting the 3rd month of panic. I'm questioning the chance of a quick emotion change. But then again...there are always cycles withing cycles and this could just be the pause before panic progresses on. The credit markets do seem ready to move things along...

What I'm noticing is that no one seems to be willing to say real estate is a bad investment! Too many are itching to buy. Thus... We seem to be getting further from capitulation.

But then we see rates on jumbo and jumbo conforming disconnecting from the standard product. Not to mention the jobs situation. Nothing like a dose of financial reality to splash cold water onto the bare scalp of a Trump wanna be.

As I noted last month, its worse than I expected. I'll repeat what I've been saying: "For those waiting for the crash in house prices in high end neighborhoods, the big drops happen during Capitulation." You have four or five months to wait until the start of Capitulation and then another year for the emotion to do its job.

For the business cycle, let's look into one of the rare forward indicators, the Baltic dry index. Basically, there is very little demand to charter ships.

The above is from Bloomberg

You can now charter a ship for pennies on the dollar compared to six months ago. This is a really ugly forward indicator. Until this index shoots up a lot (say to 5000 from the current 733), it implies an imploding world economy. Yea... things are much worse than I thought they would be.

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...

I wonder if everything falling apart won't correct house prices like the stock markets. Oh... there will be a six month delay (or more). We're on an accelerated cycle. Panic started barely within my fall prediction. 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. I would love it if someone who point out a forward looking indicator that isn't ugly.

To think, the majority of layoffs lie ahead.

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Sunday, December 14, 2008

Inventory and mania

No mania can end until investors stop thinking it will recover quickly. A conversation at work convinces me that we're not even close. Coworkers seriously believe we're close to the bottom. They're itching to buy. Well actually... more are itching to sell.

Five were grousing that they're having trouble finding renters while at the same time they're talking about buying homes to rent!?!

I've been a little remiss in updating my inventory charts. Still, they are better than once a month data. In general, inventory is at or just below last year. However... sales above $400k are almost universally down as is the situation with foreclosures dominating the market!

I expect credit to continue to tighten in 2009. Too many coworkers have bought 2nd, 3rd, 4th, or 5th homes on credit. They're buying nationally. If you've heard of a city, I'm certain they've bought there. Most consider subsidizing rent the first 3 to 5 years 'normal' and a loss that will easily be made up with appreciation. But the credit keeps tightening and they keep getting surprised by the plummet in rents and sales prices. This isn't over. Heck, most layoffs I know about won't even occur until the 2nd or 3rd quarter of 2009. (Big companies move slowly...)

So I stand by my prediction that 2009 will be the the year of the sharpest declines in US real estate. This is despite certain areas being near their bottom! For its not until about March that the resets even start on the prime loans. Layoffs and the venture capital shortfall will be the news of 2009.

For most of the nation, 2009 will erase that year of appreciation that never should have occured: 2003. We'll be down to 2002 prices by February of 2010 in all but a few areas. No areas will be spared the decline.

But I want to emphasize some areas are very near the bottom. If a cash buyer will make a 7% rate of return... The maket is pretty much done dropping.

Then again... the stock market hasn't even priced in the secondary effects of Davoff... One isn't truly in a recession until the states bring their budgets in line with revenues either. When the biggest donor state in the union gets the 'dry heaves' in about March (California), everyone will feel it.

Note: I still think Florida will get the worst of the economic brunt (Years of inventory and a reverse of migration!), 2nd Nevada, 3rd Michigan or Ohio, then (in no particular order): Arizona, Illinois (auto parts), and then California. But since no state exports money like California to the Feds... the ripple will be felt nationally fast.

To the graphs:

Since the South Bay of LA is where I hope to buy, a more detailed graph broken down by city. Notice the drop in inventory for 2008? Its more than compensated by an EXPLOSION in rental availablity. Fewer homes might be for sale, but that is only because sellers are so far "under water" they are desperate and will rent to cut the monthly loss. (Its been well documented for Pheonix and is obviously spreading nationally):

A comment. The equilvalent sales are the sales normal sellers are getting. In prior years, bank sales were too tiny to matter. This is not the case for SoCal in 2008 and its obvious 2009 will be truly dominated by foreclosure sales. Any further attempts to slow foreclosures will only tighten credit. That would only put things towards the advantage of those waiting with a large down payment.

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Friday, December 05, 2008

It doesn't feel like Peak Season

This is the time of year where its past when a water borne shipment can fill a Christmas shortfall, so the air freight market normally is at its peak. With jet fuel prices plummeting... One would expect good freight profits. But...

" It doesn't feel like peak season here at FedEx. 12 wide-bodies will be parked this month and an additional 8 more in January. No plans to lay-off or furlough any employees. We will decline 15 options for A310 in early 2009.
from airliners.net

Note: FedEx declining the A310 (used aircraft converted to freighters) is no surprise with their standardization on 757 based freighters.

How many airline employees are going to be laid off?

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Monday, December 01, 2008

In Memoriam: Doris "Tanta" Dungey

Tanta, we never really got to know you. But oh did we respect you.

The co-blogger for CR has passed away. We will all mis her 'ubernerd' posts and insight.