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.

Got Popcorn?


James said...

You write that many of your co-workers own multiple homes -- may I ask the general nature of your place of employment? I'm sure you won't want to be very specific, but just an indication of how large your population of co-workers is, what fraction think themselves real estate investors, and what their average ballpark income is, would be interesting and give context to your post.

The Anonymous said...

Neil - please be sure to look at the WSJ today. They have a story on about how CALPERS waited til near the peak of the bubble to invest in real estate, and then invested heavily in CA, AZ & FL. Classic!

The Anonymous said...

Neil - not to beat on you, but this came fromyour buddy irvine renter.

"In the market bubble of the late 80s, the low end of the market got bid up to rental parity, and the high end was pushed well above. When prices crashed in the early 90s, the high end crashed first, then the low end got hammered."

Again, this fits with my limited research of the CA bubble you and I debated previously.

Luckily, high end is coming down now, but this is clearly not a repeat of the early 90s crash. I dont think you are of that mindset anymore, but just be cognizant of this as you decide to "buy" or "hold". Good Luck.

wannabuy said...

The anon:
I agree the pattern is broken. We are not repeating the 1990's. Due to the loan resets and income disparities... its happening differently.

I'll hold off for other reasons now.

As to Calpers... ugh. What a bad joke. I've been watching their poor investments. California's deficit is looking to be going to $40/billion for 2009! About March will be a crisis.

Got Popcorn?

sandman said...


Are you waiting on pins and needles to hear how much Calpers invested with Madhoff? :)

wannabuy said...



Oh, just to be clear, low end always leads the high end. We're just about to see the predicted "Great Squish down" that's been predicted (thanks to Jim for naming it!).

I cannot come up with a reasonable scenario where it I'm not better waiting to buy than buying. This will be a long downturn.

Oh... there will be a point where its smart to buy again. But that might be after a resolution to Calpers... (ugh, what a disaster). Maybe that is why working Californians are fleeing the state. Not yet record numbers. We'll see the reverse 'Grapes of Wrath' in 2009.

Oh, California has lost ~$31 Billion in projected revenue for 2009. Thus we will *not* be sending ~$50Billion to the Feds.

When the skeptical bond market returns...

What is scary is the following states are in *far* worse shape than California:

Notice all the free upgrades to last minute shipping? Our total Christmas shopping has been $16 this year. Oh, we'll buy more for the kids, but it will only be ~$100 more. Why? We're saving to buy one of those expensive homes.

The Panic of 1907 was caused by too much US capital being tied up in real estate. We get to repeat history...

Got Popcorn?

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