Real Estate comments

Local Sales (DQ)

2009-09-26T21:53:00.000-07:00

The latest stats on home sales were released by DQ news (ok, I'm tardy blogging them). Basically the trend is a weak 2Q2009 home sales. Oh, the local REIC is trying to make it sound like its almost a seller's market.

It will be interesting to see how we do this winter. We're unlikely to see 2003 before late next year or early 2011 in 90505, 90274/90275, and 90277. But 90278 is almost there. A little winter weakness and it could be there...

With the huge fraction of California mortgages not being paid... its going to be interesting times ahead.

Got Popcorn?
Neil

DQ news, July

2009-08-20T17:58:00.000-07:00

I mentioned before that July and November are two months where the data should be just lumped into the quarterly numbers. Unless something had really broken out, the data for those months can be very noisey.

So I charted data from dqnews.com. Sales aren't great for a July. But nor were they bad.

Price per square foot is back to 2004/early 2005 levels. I notice 90278 is slipping back to 2003 values. This could be interesting.

From my perspective, I find the linear drop in price per square foot in 90275 very interesting. Its a linear trend down. $17/ft^2/MONTH! The trend was for zip codes of interest to be dropping $30/ft^2/YEAR! I will be very curious if this trend continues. Since 90278 and 90274 did not drop as 90275 did... I suspect its a trend that is about to be broken. As a potential buyer. :( But then again, one more month of this trend erases a bubble year, in four months!

Basically, nothing broke the downward trend. We have only August left of the 'sales months' of the year. Overall, the dq data (LA times) showed a lot of areas struggling to sell.

Got Popcorn? (Thanks for the icon on CR Ken!)
Neil

Inventory

2009-08-04T16:03:00.000-07:00

I've been lazy tracking inventory. One data point in a month. oh well... at least I have detailed past data to compare with. The quick summary is that inventory is starting to climb up in many areas, but is still low compared to the last few years.

Note: DC and Houston are starting to look quite healthy; since their job situation is 'ok,' they could be done with the downward trend. The only question is hidden inventory.

Here in California, 9% of the mortgages are in default. That's a HUGE hidden inventory. If those mortgages are fixed so that the 'owners' can afford the mortgage, that's the same as cutting the home sales price.

Note on the upgrade market: Its dead here in California. I do not expect it to return for 5 to 7 years. Since the areas I want to buy are at inventory levels at or near the levels before everything fell apart... and Alt-A is just starting to tickle the market... I'll wait.

I still think the bottom in prices (National and South Bay LA) will be February 2011. I expect a long 'churning flat' after then as ALT-A and prime implode. Between now and then... we exit this 'calm of the storm.' I'm coasting until I see the August data (in September). July is a non-event for Real Estate in California. No conclusions should be made off July data (good or bad, same is true for November). But to get through this storm, we have the seasonal October-February "Buyers Market" to get through.

Let's just say the OC Register's attempts to make it sound like bidding wars are the norm amuse me; the best strategy for a home seller is to price below market and let the market work (bids up the home to market). Yawn. I've been suggesting that strategy to sellers for two years. Now let them mention how many chase the market down...

Keep in mind Realtytrack's latest on foreclosures:
"In spite of the industry-wide [foreclosure] moratorium earlier this year, along with local, state and national legislative action and increased levels of loan modification activity, foreclosure activity continues to increase to record levels,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes’ are now worth represent a potentially significant future risk…."

There is no Real estate price recovery until incomes improve.

But the whole point to my plotting data if for you to make your own conclusion. Just realize how hard it would be to do a worse investment than SoCal Real Estate during the last five years.

Got Popcorn?
Neil

Local Sales Data

2009-07-20T17:01:00.000-07:00

Home prices continue to drop. All of the zip codes I plot dropped in $/ft^2 terms. Only 90275 had decent sales volume (of course, where I wish to buy). I set up trend lines months ago on $/ft^2 and have not had any reason to adjust them. The market appreciated about $70 per square foot anually on the way up. Now its dropping at the rate of $30 per square food anually on the way down. Or is it...

May, June, or August are the three critical months of the local sales year. In terms of $/ft^2, May and June have been weak. This implies either buyer resistance/fear or that the market is about to capitualate. I think its the later, but the data does not *yet* prove it. It does look like 90275 has broken below $450/ft^2, but let us wait for August data to confirm that.

I should mention a little about the local selling seasons. I'll post July's data, but I'll warn you there are two months locally that do not deserve to have any conclusions made on their data: July and November. November is due to the holidays. The data could fluctuate any which way that month and it wouldn't tell us a thing. July is a weird month. Sales can spike or plummet in July and it would probably correlate best with vacation packages or the price of steaks at Costco; its certainly not a month that produces numbers of interest (locally). Yes, this July is also impacted by 'Bear Chits' (California IOU's) too. Hence, we'll make conclusions after August's data is available. February is the darkest month of the bad selling season (October-February). However, December does have a spike in closing, but I speculate that is just for tax advantage and does not compare to June-August closings. The exception being December 2007 (with the market turning south).

Another caution: While prices seem to be turning down since April at a faster pace, I would hesitate to make a conclusion before seeing the August data. If you cannot tell, I'm expecting no surprises that waiting buyers wouldn't like to see. But I'm not yet ready to declare a major change.

Note: Some friends & coworkers are noting its tougher to procure a mortgage above $417k locally too. Rumors are that mortgage insurance above $417k loans is tough to find. If that is the case, prices in this region of 10% down payments is going to make a huge belly flop. I suspect everything possible will be done to bring back the 'conforming jumbo' ASAP with 10% down. I do not think that any effort will work out, but the REIC will try. (I'm a fan of *real* down payments to stabilize a society.)

We could see the dollars per square foot drop pretty quickly soon... or it could be a blip. Stay tuned.

Got Popcorn?
Neil

The graphs:
Note that the slopes on the sales trendlines are calculated by excel:

Inventory

2009-07-01T19:34:00.000-07:00

I'm chuckling reading the comments from my last post. Yes, Inventory is down, but I still find it interesting. I also find there is a disconnect. Homes show up in the local MLS already with an offer. While I can only point to one agent doing this, I wonder, are homes being marketed before being put on the MLS? Significant? I doubt it, but interesting.

Ok, Inventory is way down. Everywhere I've been tracking. Heck Phoenix is below 40,000 (I lack detailed historical data as OCRenter used to have great data before that blog went private, so I didn't bother to track it.) Remember when it was 64,815 in Phoenix? 3/26/2008 is the peak I recorded. But there might be a day when it was fractionally higher. Today Phoenix is at 37,828!

Palm Beach (which by Ziprealty includes areas too far away to really be palm beach, but I was lazy and just used their inventory) peaked at 132,636 on 2/28/2008 (which was estimated to be a multi-year inventory at the time). Now its at 90,478. So Palm Beach county is still in deep chit.

Do note my south Bay LA only includes Torrance, Redondo Beach, RPV, PVE, Rolling Hills, and Rolling Hills estates. Yes I realize Hermosa and Manhattan beach would be among the high end areas... but I skipped to only tracking where I wish to consider buying.

Oh, I've been recording data since 11/9/2006 just for the record.

So in celibration of the Bear chit (California IOUs), I bring inventory graphs!

June Real Estate Emotions.

2009-06-21T10:17:00.000-07:00

Well... I missed the transition to Capitulation. But in the zip code I care about, you can see a roll into it starting a week ago. Why do I say this? People I know who own and I thought could afford multiple homes are now putting their *primary* home on the market. Families I know who proudly held onto oversize homes are suddenly finding an urge to downsize and move closer to grandkids. Quite a few people just decided to 'retire' (business dried up) and move full time into their vacation home.

While Capitulation seems to be happening is Phoenix and a few other cities, it certainly isn't national. Ok. We're towards the last part of the best time of the year for sellers.

For California, the budget debacle will probably be blamed for tipping us into Capitulation. But I do not think the budget is the root cause. Its just a coincident event. Any tax increase will just be an excuse to cut unprofitable business ventures. Any layoffs will be minor compared to what is naturally happening.

I'm seeing more people going to mocking buyers. We've been hearing this since 2003. Its not going to work on the people that held out that long. Investment emotions have to be worked through. It is a process that cannot be skipped. We've gone from being too invested in real estate to 'doubling down.' Instead of investing in infrastructure, we've extended the bubble. Which as kept the builders building... which lowers the final bottom price. :)

The latest update by Fitch is that CA real estate prices will drop 36%.

Their national prediction seems reasonable. I would have put California price drops, in a longer timeframe, at 30%. We'll see which is right.

In December I noted: "What I'm noticing is that no one seems to be willing to say real estate is a bad investment!" 40% of the local homes are selling to investors!

What I'm seeing is homes that are well priced and qualify for a FHA loan are selling quickly. But what really interests me is that the 'well priced' home is getting better month by month. Local sales are pitiful. Where are the months that break 100 sales per month? That used to be typical for many of the local zip codes? Ranch PV (90275) Sold a mere 17 homes in May at a Median price of $970k. Wait... that is a conforming loan with 20% down! There is an absolute wall above conforming+20% down. Heck, conforming +10% down is slow.
DQ-link, updates to latest (no archive)

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 local market.

What I'm seeing is people are willing to jump in (FHA). If they miss-bet... well, it was only 3.5% and they're planning to keep 10% of the home's price is a crush fund.

As I noted before, the home market is still 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 only a month or two to wait until the start of Capitulation and then another year for the emotion to do its job. We're rolling into the emotion. Let's face it, at today's prices, a buyer must go 'all in' to purchase. Any financial hiccup and they lose their down payment. Should it surprise anyone the market is retreating to FHA? Oh, a few are trying to get ahead.

I'll update this figure when we're into capitulation. We're so close I can almost taste it. The buying season is dying off. Pretty much everyone I know has a close friend who has been hit hard by this downturn. Heck, everyone I know also knows someone with a failed flip.

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~~ Mid to late summer (update) 2009 well into 2009.
11 Despondency (start of market price bottom) Not before Summer 2010 (updated). Possibly as late as end 2010 (unchanged). 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 miss prediced too short of a panic (six months, it looks to be 10). We're just now blending from Panic into Capitulation. Remember, Capitulation is the time of the greatest price drops. I'm referring to total rate of dollar value drop off. I'm thinking Lancaster might be close enough to the bottom.

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.

Now, there are some positive indicators out there.
But look at CR's latest on DC.

Prices track incomes.

Thus, why I think there are a few areas worth buying into. For most, wait.
The #1 indicator I'm seeing is that some of the loudest 'Prices always go up' people I know have put their homes on the market. These homes would have easily sold for $1.3M to $1.7M during the peak. All quickly drop their prices to below a million. Some then sell, some are still sitting. All above a million... sit. Its the homes that were going for $1.9 to $2.2 that seem to be able to fetch $1.3M right now.

The local equivalent of Case Shiller has been dropping fast. I'm really going to be interested to see the $/sqft for September 2009-February 2010 (see two posts ago). It has the feel of a sharp turn down coming (not yet here).

Until employment improves, housing will tank. Too many areas are near or breaking 10%. What I'm worried about is that people I *never* talk economics/housing with are scared of depression. That meme has taken hold. I'm talking about parents I interact with to be a parent. Around the kids, it should only be about the kids. But too many parents are fearing for their job.

I'm going to remember this spring bounce of optimism. It was interesting. It makes it clear why my fellow bears insisted emotions last a year. I will modify that, they can only change if the seasonal mood helps enable the change. For the stock market its 'Sell in May and go away.' For housing, the spring selling season is quite the drive.

Oh, five friends have admitted selling every stock, mutual fund, etc. They have retreated to T-bills. I'm talking everything (including 401k's). Too many have not made money for two decades in the stock market. While this could reverse quickly... it indicates a sharply changing emotional state. Of those I know who invest in real estate, only a small fraction have any capital left. With 40% of sales to investors... it will get interesting.

Late edit: I notice the latest REMax commercial is sellers 'waiting for the market to heat up' instead of 'buyers kicking themselves for not getting into the market.'
Rotfl. While I appreciate the Realtors (tm) must advertise to both sides of the market... I think their advertising board might be accepting reality.

Got Popcorn?
Neil

Blog recommendation

2009-05-27T16:28:00.000-07:00

I was recommended this blog and its well worth the time to read it. For those looking into Long Beach, or lofts, I found it an excellent read.

Yea... Its on CR's blog roll too. Time is too precious to review all of them!

http://www.longbeachhousingblog.blogspot.com/

Got Popcorn?
Neil

Trends updated

2009-05-21T11:54:00.000-07:00

This is an update with the recently released April data for California.

My conclusions are not changing. While the last few data points are above trend, there is no break in the overall downward slope. We should expect a season spike this time of year, but what the CAR is raving about is a really weak seller's season. In none of the zip codes is there anything but noise around the long term trend.

I'm assuming that any potential 90275 buyer looks at that coastal developments that are failing:

http://www.terranea.com/,
Wait... they next a tax break!
http://www.dailybreeze.com/news/ci_12302705

Terranea is locally famous as the reason it was given the go ahead based on the expected tax revenue for the city... hmmm...

or
http://www.trumpgolfcoursehomes.com/

ROTFL. Their own web side points out that out of the first 5 homes constructed, only one is is escrow!?! So Trump sues the city as some of the lots are unstable (the local 'slide zone' that swept the signature golf course hole into the ocean)... sigh. 1 out of a planned 50 sold. Trump, leave the city alone. This is like your Baja, Tampa, and other projects, a failure.

One out of 50 sold... talk about a missing the boat. Its called 'hamburger hill' for a reason. People stretch to get into the good school districts in RPV. The 'flashy money' is in Manhattan beach, various Westside areas, or elsewhere.

The data really says it all:
1. The price per square foot is declining.
2. Sales are slow. Again, only Rancho Palos Verdes, 90275, broke 20 sales in an area where, for this time of the year, pre-bubble sales would break 30 per month for every zip code!

Why am I being harsh on the coastal developments? They are far overpriced for the local market. When that one home closes in Trump National, it will skew the data. How could the only sale above $2 Million out of 20 sales not skew the data? I have no idea where in the $8M to $10M price range that sucker is going to pay. But ouch... RPV is not where people buy estates. Oh, there are a few true ones in 90274. That is not 90275. There simply is not a market for the combined 82 McMansion 'estates' these two developments are trying to sell.

I have not done my real estate emotions lately. Basically, we're still in Panic. Capitualation isn't here yet. But that is next... When these charts turn down, we'll know we hit the next investment emotional state.

Got Popcorn?
Neil

Long Term trends for 5 zip codes

2009-05-12T19:47:00.001-07:00

A coworker has been saving the DQ data since March of 2003. Sadly, the REIC pulls the data off after a new version is released.

But this data tells quite a story. Sadly, it has personal information so tied in with it, I haven't had time to scrub it. This is the *full* data set for LA county though.

Since I'm only interested in single family homes, that is all I will plot. Also, the data is on a bunch of excel spreasheets in varying formats, so there was quite a bit of effort just to sort out the data for a few zip codes. I have all the torrance zip codes... but whenever sales were low, it was "n/a" if the data was ugly and a high value if it showed what the REIC wanted people to see... Grrr...

I really think the graphs speak for themselves. But I'll still comment. ;) These are my first choice zip codes to buy into. Look at that sales graph! It tells us clearly this area is *not* done dropping.

90275 is my first choice zip code to buy into. As with Case Shiller, we can see that the price per square foot peak was in 2006. Just earlier than Case-Shiller!

Look at the sales trends. Notice the long term decline? It looks like people were 'priced out forever' before this data series even started. This leads credance to the theory that the bubble really started earlier than many people suspected. Certainly earlier than I was aware.

I've been curious which areas 'align' where I wish to buy. 90274 was easy too eliminate, its low sales rate and variety of unique (and pricey) properties had me cutting it first. But then I noticed that these three zip codes align on a price per square foot basis... Notice how they all align? So much for it being 'different here.'

We're not ready to buy now. But this data strongly suggests that waiting is the best strategy. We hear the noise of the recovery... there might even be a blip. But the long term trend is clear. Prices and sales have yet to recover. Sales must recover 12 to 18 months before prices. So waiting is pretty safe. :)

I'm still shocked how 90275 dropped from 60+ sales per month to where 20+ sales in a month is considered something for the CAR to brag about. Note: All 5 zip codes should be seeing 20+ sales per month! Not one out of five! Most actually should be seeing 30+ per month... None are above that threshold (yet).

Now to take off the bear's hat. One truism that the bears have held is the downturn would be as steep as the uptick. So far, its at a much lower slope (I 'eyeballed 90275). Does that mean?:
A) 'green shoots' is sort of working...
B) The worst lies ahead
C) The theory was wrong

They say the 'trend is your friend.' Well, this is an interesting sales trend (same sales per month plot, with a few trendlines). The sales trendlines do look like they are approaching a singularity. This, to me, implies we're at or near the sales bottom. Certainly by next February. That isn't the same as a price bottom though.

Inventory

2009-05-05T22:11:00.000-07:00

I've been really bad at both blogging and tracking inventory. Mea Culpa. Inventory is down everywhere I'm tracking and crossing through 2007... EVERYWHERE! The most dramatic drops, which I haven't been charting, have been in Palmdale and Lancaster California.

Palmdale has 1,094 homes on the market. Peak was at 3,281 on 9/17/2007 (per my snapshot).

Lancaster has 1,133 homes on the market per zip realty. Peak was 3,521 on 9/27/2007 (ten days after Palmdale).

Greater Palm Beach Florida is even below 100,000 (peak 132,636 on 2/28/2008)

Phoenix is at a mere 45,086. Remember when it was at 64,815 on 3/26/2008? On 5/4/2008 it was still 62,071.

Something seems odd though. Why is LA inventory down so much? Why is any inventory down so much when so many people are known to be doubling up. I speculate the foreclosure moretorium... But is that enough to explain it? I see two groups of buyers. Those confident of their job who are leaping at the chance to buy and those being more hesitant.

Ok, inventory graphs that speak basically for themselves. We're crossing through 2007 pretty much everywhere:

Case-Shiller released seasonal worst month of year

2009-03-31T08:15:00.000-07:00

The Case-Shiller data for January was just released. Normally, the fastest price drops of the year happen in this data set. Now, for Florida and maybe a few other places, it looks like February could be worse; but for most areas we expect slower price drops until November.

So expect your favorite Realtor (tm) organization to state how much the market is improving.

Since Calculated Risk does a much better job of documenting the big picture, I focus on the last 3 cities that held their Case-Shiller above 200: Los Angeles, Miami, and DC.

I believe the derivative provides even more information than the absolute number. Notice the seasonality? The greatest drops are October-February. Suddenly for march the slope changes, pretty much every year and I do not expect an exception for 2009. However... I still expect the overall year to be negative. Loan rules keep being rewritten.

I also wonder when the black hole of 'off the market foreclosures' will be relesed. Sorry... but I know of too many people who haven't made a payment in 9+ months. When the time comes, they'll move back in with mom and dad. Too many bedrooms for too little income.

What is it with journalists pointing that the price declines are easing in LA?!? A 2.87%/month price decline might be less than the peak of a year ago, but it points to a bottom in 2011, not even 2010!

Now I'll do a caviat. You could see miniscule price increases, per Case-Shiller in May-August. But... they will be given up in the winter.

e.g.:

yeahoo article

Oh, any price increases will require the job market to stop sucking. Do you think that will happen? Historically, the price bottom is about 12 to 18 months after the employment bottom (or when employment is starting to rise again).

Thankfully, unless there is a huge surprise to the downside, I think we're starting to come to the end of the worst of this recession. Now when are we going to fix the trade deficit? We have to (again, as we did for a little time under Reagan). By trade deficit I mean oil and goods (China). Not to mention, its going to be 7 years before easy credit rears its ugly head again (and it won't be as easy for 70+ years).

Got Popcorn?
Neil

Saturday Music

2009-03-28T07:22:00.000-07:00

Mea culpa to all the blogs that started this trend years ago.

But I've been having too much fun watching bearish Youtube songs this morning.

You've got the Fed was a nice morning song:

Got Popcorn?
Neil

Data and regrets

2009-03-27T16:26:00.001-07:00

I'm really regretting not recording the LA Times data from DQ news more often.

My only other snapshot is from July 2008.

http://www.dqnews.com/

Why? I'm comparing $/ft^2 both where I want to live and some 'interesting areas.'
I just captured the Febuary data.

Just a few zip codes of interest on home much the SFR $/ft^2 has dropped:

Lancaster 93534, 93535, 93536 are down 26%, 33%, and 22% respectively
Manhattan Beach 90266, is only down to $702/ft^2. (1% drop)
Malibu 90265 is down $501/ft^2 or a 22% drop
Palmdale 93550, 93551, 93552, 93591 are down 33%, 22%, 28%, and 49% respectively
Palos Verdes Pen (90275), down 3% (but very few sales, 7 SFR homes)
Pasadena 91101, 91103, 91104, 91105, 91106, 91107 is down 20%, 14%, UP 37% to $470/ft^2, and down 4%.
RPV 90275 is down to $410/ft^2! or down 18% from July! (My first choice zip to buy.)
Redondo Beach 90277, 90278 is down 5% and 19% (nicer area down more?!? Wait... only three 90277 sales in February...)
Torrance 90501, 90503, 90504, 90505 area mixed, down 6%, NO SALES, down 8%, and the last two are up 5%

There is much more. I really wish I had taken more data for I do not know the month to month variety (extreme due to low Febuary sales). I would also like to compare with February 2007, 2006, 2005 (ok, before I was blogging here).

What does this tell us? Not much. Without knowing normal month to month variation... I could be makign conclusions off 'noise.' But what about the price increases (numbers in bold above)? That is price increase per ft^2. I'm not sure what to make of it yet.

But RPV (90275, had only 12 Single family (SFR) sales and 4 condos in February with inventory of 148 to 153 during the month... (per snapshots by me of ziprealty inventory on 2/1/2009, 2/23, and 2/26). Hmmmm... 164 on the market today.

but 90274 is more interesting. 8 total sales (1 condo) and inventory of:
PVE: 98
Rolling hills 21
Roling Hills estates: 44

Hmmm... 163/8=20 months of inventory. Me thinks the great squish down continues...

Off topic:
I've secured my job, but I will be expected to travel 1/2 time. Certainly not the end of the world, just not my ideal. For example, my lunch today was spent holding my infant daughter on a pony saddle! She loved it. If I'm traveling, such events with 'Daddy' will happen less. One makes choices. Note: New efforts are being done to 'accomodate my preference' to spend more time at our main location. But spring and Summer (at a minimum) will be spent with a lot of road time.

Also, the wife likes the idea of a Macbook. I almost forgot I promised her that our next computer could be a Mac... 'Could be' is becoming 'will be.'

I'll take snapshots more often and I've added Ventura, Orange, Riverside and San Bernadeno counties (its all on the same web page, so why not).

I speculate we are in the last major year of decline. But are we? This doesn't mean rush to buy... (Its best to buy after the bottom.) Late edit: I have posted in the past that, for myself, its best to buy before the bottom for best inventory selection. I still believe this. But its tough to blog with advice for those *really* following and those just reading for the first time. But the trend will be interesting.

I'll restart my 'emotions' series after I travel for a bit more. So do not expect a February update. Overall, people are excited to buy. But I look at those Palmdale $/ft^2 that were once much higher and now are $43 to $94/ft^2. I'd swear I saw it break $300/ft^2, but I didn't save that snapshot of the data.

Oh... notice I never talked median price? Worthless statistic in my opinion.

Got Popcorn?
Neil

Wife to be laid off

2009-03-25T10:00:00.000-07:00

We knew this was likely as she works for a bank.

My wife has received notice that she will be laid off in 5 weeks.
The severence package is... unbelievably fair. Over a year of pay
and benefits (minus 401k matching, serously the only cut!).

My job has also become far less secure. :(
Oh, I have an out. By 'volunteering' for a high travel assignment,
I secure my position for a while. (In negotiation, I only found out yesterday.)
My previous boss wants me back and I do not have enough supporters to be
'bullet proof' at headquarters. :( But it means a ton of time away from
my wife and daughter.

Kinda sucks after getting another awsome review
(but pay raises are tiny this year, my lowest ever).
But my skill set has gone from being in short supply to a surplus with layoffs and
a few individuals 'reading the tea leaves' and taking early retirement.

Thank God we didn't buy. Why?
1. Our little two bedroom cottage has low rent (for the area)
2. Lawn service is included
3. Its not that hard to clean
4. Down payment sitting in CD's. :)
5. We can *easily* rent on just one income.
6. We were living as if we had bought a place that cost $850k, money has been 'tight.' Now that is an 'artificial tight' as we were pocketing the
difference into our 'car and furniture fund.'

One of the reasons I haven't blogged as much is the nervousness that these
two events would happen. Now that they have... at least we know how to adapt.
Heck, after travel pay and benefits, we should save more in 2009/2010 than
any other year. But I do hate the travel and we'll have to hire a maid (I refuse to let my wife handle cleaning chemicals while breast feeding).
I did this travel for years and burned out on it.
I've only been off it for three months and did not wish to go back. But in this
economy, its not a time to be picky. At least I'm not burnt out on travel anymore.

Oh, this travel is why I felt so qualified to do the national emotions. I'll be back at it. All corners of the US. Sigh... Hawaii travels to visit us not vice versa.

Family has volunteered to help my wife while I'm away. In particular, there will
be four weeks I'll travel while she must work. ugh...

Oh, if you travel and like to read. Buy a Kindle. I LOVE it! My one splurge lately. What book are you in the mood for? I have over a dozen loaded and two of my favorite authors are about to release a number of books onto the Kindle. Warning: the available selection is much more limited than Amazon advertises. Tons of classics, but weak on releases over the last few years.

Got Popcorn?
Neil

ps (late edit): What laptops do you recommend? My personal one just overheated/fried and needs replacement (right after a FULL backup, no file losses). I'm looking for a *tiny* one
as when I travel its best to have computer for work and another for leisure. Why?
#1, work turns off the wireless (no free hotel Wifi).
#2, no installing software on the work computer (e.g., games, firefox, etc.)
#3 I often leave the work laptop 'on site' for file transfers.

I'm seriosly thinking Linux, but how is the photo editing and speadsheets now? When I last used Linux, I had to dual boot into Windows for those features.

What I need:
100GB+ of storage (huge photo collection, mostly of my daughter, that I will not do without)
2GB+ memory
Minimal games capability (I haven't bought a new game in 3 years... I play maybe
one hour per week, but its good R&R when frustrated.)
3+ hours of battery life.
Some ruggedness as travel is hard on a laptop.

I own an external DVD writter (USB), so I can do without that built in.

I'm willing to consider an Apple laptop too. I guess its time to read the reviews..
But then again, if I give up the games, the Kindle's internet access is just good enough (and I could buy a portable USB frame for photos). Decisions... Decisions...

Neil

Miss titled articles

2009-03-23T12:50:00.000-07:00

Its spring and the NAR is publishing reports about how "its a great time to buy."

In this mistitled article I found an interesting quote:

Determined to remain in their homes, 72 percent of adults reduced spending in the past year in order to make monthly mortgage or rent payments, mostly by cutting discretionary spending such as vacations, entertainment and eating out. Regardless of age, most Americans are cutting spending back from some aspect of their life to pay housing costs, according to the survey.

But “It’s not all doom and gloom,” said Move, Inc., CEO Steve Berkowitz. “We found Americans are optimistic about homeownership despite concerns. They’re doing everything they can, from reducing discretionary spending to pay their mortgages, to planning to take advantage of the administration’s new program to stop foreclosures.”

Wow... that's a spin. (emphassis mine) Quite bluntly, people are waking up to the fact their home isn't affordable. The economy will not function if everything is being done to service debt.

Home sales are down at a normal level. What happens if they actually drop to a recessionary level?

Got Popcorn?
Neil

Retirements, interest rates, and home inventory

2009-03-19T14:52:00.000-07:00

Companies are doing retirement buy out packages right now. Not great ones... but when you consider the low interest rates, people are able to cash out their pensions for large amounts.

What this is bringing to the table is home inventory. I congradulated a few people retiring this week. Its all the same story:

1. They already have their home in escrow (to sell) in the 'beach cities.' This is *before* commiting to retire.
2. They are retiring to already owned (mortgaged?) property outside of the 'urban zones.' (Either on water or on a mountain with a spectacular view.)
3. Cash out of the pension
4. Large stock market losses (forcing sale of urban 'work area' home)

All wish they could have sold for the $250k more of 2006. But all realize now is the time to move on.

Oh... I know more than a few companies where these workers will be 'unemployed.'

Interesting consequence of low interest rates (home will sell, pension cashes out for more). But what does this do for the company (Due to the pension benefit hit)?

I'd imagine similar effects are going to hold true with government workers. (Sans pension cash out.) Has the government tried to help the retirement scenario in order to make the layoff scenario less scary?

Side note: Multiple of these retirees were considering buying a downsided place (e.g., a condo) in the beach cities of LA to 'keep in touch' with friends. More than one has realized:

1. Large boats are cheap today $30k for the floating condo!
2. Slips are available (rare for LA) and the fees are reasonable.

Got Popcorn?
Neil

Daily Breeze on South Bay LA home sales

2009-02-27T08:08:00.000-08:00

Hat tip to Ben Jones' excellent HBB blog.

http://www.dailybreeze.com/ci_11797406

I find it very interesting that less than 30 homes sold on the PV Peninsula last month. There are 313 on the market as of last night. I haven't been tracking the inventory much this year (I'll get better), but have 277 homes for sale in the four cities that make up the PV on 1/5/2009, 297 on 2/1/2009, and 309 on 2/23/2009.

The LA times lists the January sales as 9 single family and 3 condos (from DQnews).

277/12=23.08 months of inventory. Now, I expect some spring improvement, but its very unlikely we'll drop below a year of inventory in 2009.

I think we're approaching a local capitualation as Realtors (like the one in the daily breeze article) are now conceeding 2009 is a lost cause. They're swamped with desperate sellers and very few buyers.

I think its the perfect time for the Screen Actors to rattle their saber. Will they strike? I double dog dare them. ;) (The blowhards are powerless.) edit: I have friends who work the film industry. I do not take joy in what's happening, but the SAG had over a year to be sensible and instead they were stupid. This once powerful union went from feared to sidelined in less than four years. If they strike, many middle class individuals will be hit hard. The 'big name' actors are effectively corporations that will be fine. Just the threat of a strike forced industry wide cutbacks for the entire 1Q 2009. Let's see how SAG handles commercials. This will make or break the union. There was a lot more money flowing around when negotiations first started. Now they're going to be fighting over the scraps instead of the ribeye steak.

Got Popcorn?
Neil

edit: One of my coworkers bought on the PV peninsula in February. He knows of other February 'sales' that went pending amoung his friends. So I expect sales in February to be much better than January. But not enough to drop the inventory enough to matter. There are too many homes overpriced by $1M+ over what the market will bear today. But I bet the Realtors will spin this. March sales will show us how truly broken the market is.

Case Shiller

2009-02-24T08:04:00.000-08:00

Case-Shiller just published their December results. Its a bit scary. Since other blogs do a better job of discussing the 10 and 20 city results, I'm going to focus just on the last 3 cities that remained about 200: LA, DC, and Miami. They are all crashing and going down together.

The chart of the three is here. But its going to be the next chart that tells the story:

What is the trend of the monthly losses for each region? Amazingly, they are behaving very similarly. This implies that its a national phenomenon. Its not 'different here.' Now, we're at the point of rolling losses. I'm watching the ex-urbs of LA almost stabilize (they're still dropping) while the inner core is now pulling down Case-Shiller. Where I want to buy, my wife is seeing 30k to 50k drops per Month!

Notice how all three cities have stabilized at about a 2.5% drop per month? Also note the last spring selling season. For March through July, the rate of drop decreased during the seasonal 'sellers market.' It wouldn't surprise me if DC's rate of drop went to near zero during the selling season. I suspect Miami and LA will show much smaller 'seller season' trends in 2009.

August through February is the 'buyers season.' Its very clear on last year's Case-Shiller derivative. The only question is how will employment and the overall economy effect buying?

We've had two straight years of declining home values. I stand by my prediction that 2009 will be the most brutal year for price drops nationally. With the Asian markets now net sellers of Fannie and Freddie backed bonds... The 729k 'conforming jumbo' is a bit of a joke. They're going to be tough to aquire.

Do note that in the case of LA, these 2.5%/month price drops were occuring while everything possible was being done to slow down the entry of foreclosures onto the market. All those stupid laws have done is:

1. Tighten up mortgage rules
2. Delay the introduction of inventory until the spring buying season (which I call 'sellers season' as it is the best time to sell a home during the year).

Some areas will fall harder than the cities I ploted. I have no desire to beat up on Detroit, so I'll do no more than mention it. Las Vegas is doomed. Same with Phoenix; both are dropping faster than the examples listed.

Doing some simple charting, we won't see an increase in Case-Shiller before the 2011 selling season. There is quite a bit of downside potential between now and then. Oh, if you get the bargain of a lifetime, go ahead and buy. I'm going to wait until 2010. I still see price drops ahead greater than $100k. Thus, its not yet time to buy.

Got Popcorn?
Neil

California passes a budget

2009-02-19T08:24:00.000-08:00

Yahoo article

The one tax increase I was hugely in favor of, the gas tax increase, was removed at the last minute. Ugh. Yes, I'm a bit obsessed in my belief that our trade deficit is part of what made this mess. Oil is far to large a component of that deficit to not make strategic policy changes to cut consumption.

Many of the other tax increases... I consider a problem.

I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. -- Winston Churchill

Wise taxes and tariffs have a role. I would have supported up to a 50 cent per gallon increase in gasoline taxes! We need better roads, a bus system, and even rail. (I expect two people to dislike the last: my best friend and Rob Dawg.) Then again, I have relatives who design rail projects and if they could be installed from precast (in a factory) concrete assemblies, it actually makes economic sense. ;) Assuming you also build bus terminals to anchor major destinations (e.g., LAX, union station, Burbank airport, etc.)

I'm glad there is a budget. I'm just very upset the wisest tax in the whole package was cut. The only problem is that in six months the state will have to panic and put together a revised budget to handle the further drops in income, capital gains, sales, and property taxes.

Got Popcorn?
Neil

Skiing in the Netherworld?

2009-02-18T17:17:00.000-08:00

Ok, I'm about to recommend an article in the OCRegister's Real estate section.
I'd better check on season tickets for skiing in the afterlife... ;)

The Article

Let's see... bottom in 2010...

No price appreciation before 2013...

Hmmm... I would slide the 2010 to 2011, but gee, we finally have a post that removes the 'six month' blinders! I'm shocked!

Oh, on bidding wars, I'm noticing that has cropped up on the HBB blog today. There are too many pigs going through this python. Too many surplus homes. We've talked before how these lies would keep cropping back up...

A little reminder on my thinking:
I'm still planning, assuming I'm employed then, to buy in 2010. Now... I'm also assuming homes drop most of the remaining 30% they should be dropping by then too. If not... I'll wait.

As to bidding wars, I'm not going to ever believe that. Even if true, what's the worst that happens? You find the next good home.

Bidding wars do not become common until inventory drops below 3 months. Be really suspicious if you shop during these high inventory times and people discuss bidding wars. Oh... under-market priced short sales, foreclosures, and estate sales will probably attract bidders. One wise seller, in a down market back in 1992, noted that if you price your home initially at 97% of market price, you should expect to sell for 102% of the current market price. He sold at 103% of what we agreed was a fair market price.

I'm going to consider finding the place listed at 102% of market price and bid below market. How much further below 'market' will depend on the conditions then. There is always a market clearing price. So sellers with 100% equity can always sell. So Mr. Banker... what's the sales price? ;)

Got Popcorn?
Neil

Optimism for future?

2009-02-18T09:22:00.000-08:00

There are many indixes still cliff diving.

But one I've been posting on a while is showing some recovery,
the baltic dry index:

Now, I'll be excited when this breaks 2,500 from its current 1,895. At that point mothballed ships will be pulled out of port and put back to use. It implies the rate of ship mothballing should be slowing.

Part of the reason I'm posting this is the bearish blogs have been invaded by people who seem to want a depression. There is a huge difference between warning about one and wanting one. The whole point is to try and keep it to a 'deep recession' at worst. Some people want to see their 'political enemies' punished for no other reason than they think its their right. Ugh... that is very short sighted at best.

I've had people get very angry at me for not being pro-tax on taxes that would kill employment. Instead of debating economics, they make fun of voodoo economics. Fine. But I know of enough people who will lay off if their taxes are increased too much. This is the boiling frog syndrome. If you change things too fast, the frog will jump away.

There are taxes that I would like to see raised. I'm convinced the cash flow out of the USA to pay for oil is killing us economically. Recall that is far more money than we send to China and India! So raise the gasoline tax governator. Heck, I'm pro raising the car registration tax.

Build infrastructure to enhance the economy short and long term. How I wish the unions would allow pre-fabricated elevated buildings, road, or rail to be put in. For long term a city needs transportation to prosper. While we're at it, upgrade LAX, SFO, OAK, and build San Diego a proper airport (multi-runway with one runway long enough for long haul).

Mostly I'd like to see carpool/bus lanes built and bus terminal built analogous to the ones I've used in Europe and New York. I'm pro-rail, but the current system is so corrupt that rail is an economic nightmare. sigh... Why could they do it 100 years ago but not today?!?

Otherwise this will get worse. I've been investigating the 'Autobahn' method of stimulus. In that not only do you build infrastructure, but you force companies to assign workers to the project so that those companies are then forced to go out and hire new workers. Oh, mostly you take the unemployed. You then also work those workers under... harsh conditions that makes everyone glad they have a city job. The US' 'New deal' wasn't that bad. But I'm wondering if the US needs this sort of program to reteach a work ethic and to 'shut up and appreciate' what you have. I've read translations of letters written by lawyers forced to work the autobahn. Why do I bring this up? I do not want to go down the path Germany did... (Certainly not in certain extreme situations). But if you wish a depression... Don't expect those in control at the start to necessarily chose the path out.

So let's celibrate good news. We'll need it over the next 18 months. I'm done with schadenfreude. Oh, I want the worst criminals put in jail. But if you want to go after a large group, they will band together in an unpredictable way. Set up better laws and regulation.

And read Adam Smith. The latest people to invade the blogs are good at mocking. Yea for them, but so were the Realtors (tm) in 2005-2007. But its also obvious the new commentors haven't read the background text books. Not even Marx. They just want a change in society... that won't happen. Oh, society is going to change. But I've yet to see it go a way where Adam Smith doesn't get the last laugh after a few decades.

Got Popcorn?
Neil

Not much has changed

2009-02-01T18:03:00.001-08:00

I've been really busy in my personal life. So I haven't paid much attention to real estate. Emotions? They're strong here in California. Intense panic. But I see no evidence that nationally anything has moved on.

My last emotions post in December Seem as current as ever.

I missed tracking inventory for January. Oops. I'll update and then post.

I personally know good people losing their jobs. Outside of Healthcare and IT, I know of no industry hiring more than it is laying off.

I really hope things return to the 'deep recession' path.

Got Popcorn?
Neil

Happy New year

2009-01-01T16:29:00.000-08:00

Predictions for 2009:
1. More layoffs than 2008. :(
2. High end areas will see their greatest percentage drop off of this downturn. (National)
3. A few areas, mostly those that took their medicine early, will recover (but very few, and not enough to cause any panic buying).
4. A tightenting of credit. Most areas will see high down payments required for Jumbos. I also believe that Fannie and Freddie will have to introduce a 25% minimum down payment for 'conforming Jumbos.' Expect those 'conforming Jumbos' to be tough to get too!
5. Real Estate transaction rates fluctuate, but with the year ending at recessionary levels. I can see a horrid January and February with the *possibility* of a spring rally. But will there really be a spring rally (Nationally)?

The last is going to be important. Several events have been happening that are important. For example, California is trying to sell far more debt than the market will accept. They have to cut spending. Will their be a tax increase? Sure. But its near the Laffer curve effect. How close? I wish I could predict that...

I also predict that the 'skeptical bond market' will return. May at the earliest, most likely later in the summer. This will impact the next administration's spending plans.

The real estate market, as well as the economy, is like a HUGE ship. Its momentum is amazing. I have often neglected the momentum. I believe this is the #1 reason I have tended to 'overpredict' the speed of the recovery. Right now the momentum is turning down. That's right, the rate of economic decline is getting worse.

But here is where I part with some bears. I see the worst of this economic crisis being in the Fall. Now... I'm not talking real estate. I'm discussing the overall economy. (Most jobs and incomes.) But between now and then... is about 3 million jobs going 'poof' (net). (Compared to ~2 million in 2008). This implies a net unemployment just in the double digits.

But here is what worries me. Government interference is removing the incentive for free enterprise to expand. Why bother when its less risky to accept a handout? e.g., one of the reasons given for high home prices in DC was the diversified economy. Now that it is becoming more government centric...

The hardest hit economies are going to be those that depend on credit. Ok... stop laughing. I'm trying to start a serious point and I'm not trying to be 'Captain obvious.' Certain economies *really* need a fresh input of ~~sucker~~ venture capital to expand: Pharma, tech, and for some reason movies... (it should be a mature industry by now...).

The next hardest hit are going to be those that rely on Ad revenue.

I've blogged before how the automotive states are unusually hard hit. That won't stop... they need credit to 'oversell' basic transportation. But now the mess will spread to Sillyvalley, Hollywood, 'Tech' (due to the need for venture capital or Ad revenue), and a dozen other businesses.

When everything overexpands... everything contracts together.

My forward indicators:
1. International travel
2. Baltric Dry Index (ugh... UGLY!)
3. FedEx (companies ship a lot as they ramp up)
4. Middle/upper middle class birth rate (they will spend on kids like nothing else!)

Maybe its my age or maybe there is an uptick, but only #4 looks ok for now (but this could be distorted by my peer group, I do not claim to base this on statistics). Everything else scares me.

Off Topic: The wife and I have moved into an 'estabilished neighborhood' into a very fairly priced rental. I noted before how rental availability was sky-rocketing. So we moved. Due to the cost (friction) of the move... we are convinced we will only move once more (if its our choice).

OcRenter just blogged that he bought in a good school district, estabilished neighborhood, for 45% off peak. I consider that wise. I'm willing to buy within $100k of the bottom. We're not there yet. Not where I want to buy.

Since most of the renters I know have given up on buying in bubble markets... There will be quite a bit of mobility in 2009. I'm curious on the 2008 United Van lines survey...

Got Popcorn?
Neil

Philly Fed Map

2008-12-23T14:53:00.001-08:00

CR has an article up on the Philidelphia Fed Map.

Its worth looking at:
http://www.calculatedriskblog.com/2008/12/philly-fed-november-state-coincident.html

Or broken up:
http://www.calculatedriskblog.com/
2008/12/
philly-fed-november-state-coincident.html

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...

Got Popcorn?
Neil

Real Estate Emotions: December, continued Panic

2008-12-21T06:36:00.000-08:00

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.

Got Popcorn?
Neil

Inventory and mania

2008-12-14T13:54:00.000-08:00

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?
Neil

It doesn't feel like Peak Season

2008-12-05T09:38:00.000-08:00

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?

Got Popcorn?
Neil

In Memoriam: Doris "Tanta" Dungey

2008-12-01T10:40:00.000-08:00

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.

http://calculatedrisk.blogspot.com/

Neil

Real Estate Emotions: November, continued Panic

2008-11-28T16:36:00.000-08:00

We're two months into panic now. Let's be blunt, 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.

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 818 ~~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 waspredicting a short panic (six months instead of a year) that blends right into Capitulation; but now I wonder if panic won't persist for a whole year.

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.

We won't be done with the real estate decline until the emotions cycle through. So relax. Its a long time until buying time.

Got Popcorn?
Neil

End of the Economic world!

2008-11-20T18:38:00.000-08:00

Not really...

But the Yugo is exiting production.

I find it ironic that its demise is mostly due to it no longer being the cheapest car in the world. I also feel bad as I've been making fun of Yugos since 1989. ;) I had no clue they were still in production!

The factory is being upgraded to produce "anti-credit crisis car."

Got Popcorn?
Neil

CA debt projection for next year

2008-11-18T10:30:00.000-08:00

I'm amazed at the debt projection trend for 2009 for California. It was planned to be a $9billion dollar debt. I've gone through news articles on Google to see how its growth with time.

Basically, the debt projection is growing $1.2 Billion per month give or take.

late comment: The dates on the x-axes are the projected debt by news article date in 2008. In September of 2007, the projection was ~$9billion.

Anyone who thinks raising taxes needs to talk to someone who employees people. Everyone from my employer to my mechanic will 'suck up' tax increases by reducing head count in California. As much as people like to discredit Reaganomics, the reality is that we've gone too far on the Laffer curve in the state of California. Make fun of 'supply side' economics all you want. But I know of more than a few doctors who will not expand their offices as the added take home revenue cuts their hourly wage. Heck, I was able to see one business study (about a year ago) where taxes pushed an expansion so far into the red, that if the business owner had expanded his take-home would have dropped!

What's sad is economically California is far better off than Florida, Arizona, Nevada, Michigan, and Ohio. Sadly, I think it will take the layoffs of 2Q 2009 and 3Q 2009 to wake people up. :( The layoffs until then will be trivial in California. (Not the case for Michigan and Ohio.) Yes, I called a *really bad* economic year trivial.

Now when will people wake up and realize turning factories into condos and shopping malls is only good if the overall economy is in balance. Oh, I agree with the mills of Connecticut being turned into apartments and condos. Those jobs should have been automated away. But driving out jobs that pay more than the median income for a region? That's just silly.

I'm going to be *very* curious to see how the advertising slump (which has gone past the tipping point) and the Venture capital crunch effect California. I see no way either will reverse within two years; its going to be dot bomb part deux with interest due.

Got Popcorn?
Neil

ps
see the supply/demand curve in my last post to see why the 120 day attempted halt in foreclosures in California is doomed. It might be remembered as the state's Smoot-Hawley.

Why I'm not posting

2008-11-15T08:11:00.000-08:00

I haven't been posting as most of the news hasn't been housing related but rather broader economy. I have no intention of starting a stock blog just as we repeat the dot bomb bust.

Naked Capitalism notes how the rates for shipping have plummeted. Too much. The ships are returning to port. Its not worth running them at today's rates:
http://www.nakedcapitalism.com/2008/11/yet-more-trade-finance-worries-not-for.html

There are several instances of letters of credit being refused. In particular, I'm hearing a TON of rumors from people who should know that Russia letters of credit no longer will be accepted and than cargos going to Russia are having to be reloaded as the payment cannot be completed.

Also I expect my readers to also be Calculatedrisk readers. Quite blunty, the commodities crash has created a very simple issue: Customers cannot afford to accept delivery of anything that has substantially decreased in value (copper, lumber, non-precious metals). Every is giving little examples here and there of deliveries being refused as payment would bankrupt the receiving company. Heck, with the reduction in consumer spending, who needs to produce more.

I also expect you to have been reading Calculatedrisk or Nakedcapitalism's articles

California is also trying to slow foreclosures. Basically the market is going from the roaring times at Point A (black dot). Due to job losses and tightening credit, we were moving to Point C via Point B. Why not direct? At first demand dropped while the sellers 'held out' in denial; In English, the demand curve shifted (From Demand1 to Demand2) while we stayed on the Supply1 curve. Thanks to foreclosures and underwater owners, we are now drifting to the Supply2 curve and the Demand2 curve (Point C).

California is tring to artificially limit supply. They think this will increase demand and put us back at A or C'. But...they cannot drive the demand curve, only the supply curve.

So the best case scenario is back to point B. (This won't happen, the economy is too broken.) There is a huge risk to this stupid strategy. 1. Banks go on a loan strike and buyers flee the state. It also could 3) keep housing costs so artificially high that it effect unemployment driving us to a new demand curve. So it will drive us to a new demand curve (Demand 3). So the question is... will we end up at point D or E? Heck, we could get a 'slingshot effect' with more supply and go to F!

Faith is being lost in the system. What I'm seeing with shipping and airline demand is past the breaking point. If the government doesn't stop treating the symptoms and instead offers a cure... we're going to go into Depression. If Obama does too much to bail out the auto industry or airlines... it will create a trade war and that will be Smoot-Hawley II. If the government doesn't stimulate demand... that too is really bad. I vote for infrastructure that will help stimulate business for decades. Other countries will not tolerate it if we become protectionist. Smoot-Hawley was bad as it destroyed import/export jobs faster than the manufacturing jobs it was supposed to create. Heck, it destroyed manufacturing jobs too as our exports were tariffed at the other end. Bailout packages that give our industries too much of an advantage will have the same effect.

Got Popcorn?
Neil

Some Inventory Graphs

2008-10-31T17:55:00.001-07:00

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?
Neil

Real Estate Emotions: October, Panic it is.

2008-10-29T10:24:00.000-07:00

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.

Got Popcorn?
Neil

Shipping

2008-10-23T18:44:00.000-07:00

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
TEXT
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.

Got Popcorn?
Neil

DQ reports California Sales

2008-10-20T10:46:00.000-07:00

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.

Got Popcorn?
Neil

WSJ: Downey Curtails some lending

2008-10-16T13:53:00.000-07:00

http://online.wsj.com/article/SB122417946627541287.html?mod=rss_Business

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.

Got Popcorn?
Neil

Dubai: WSJ

2008-10-09T15:24:00.000-07:00

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...

Got Popcorn?
Neil

Real Estate Emotions: September, Start of Panic

2008-09-30T10:29:00.001-07:00

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!

2008-09-25T19:06:00.001-07:00

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

Got Popcorn?
Neil

Eating the Seed corn: Short Selling

2008-09-22T14:25:00.000-07:00

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)

2008-09-17T10:20:00.000-07:00

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)

2008-09-16T19:40:00.000-07:00

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

2008-09-16T08:42:00.001-07:00

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

2008-09-13T11:44:00.000-07:00

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

2008-09-10T17:43:00.001-07:00

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?

2008-09-08T16:01:00.000-07:00

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

2008-09-06T23:13:00.000-07:00

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!

2008-09-05T19:46:00.000-07:00

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

2008-09-01T14:37:00.000-07:00

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

Troubled Banks

2008-08-29T17:26:00.001-07:00

Finally!
A blogger has gone to the trouble of quantifying which banks are in trouble.

This list is unofficial. I also like how the author has composed a list of banks that have reserves that far exceed FDIC guidelines. The author 'tubeguy' calls them nice banks. Those could be called safe havens.

Nicebanks part 1
Nicebanks part 2

Largest watch banks are Westbank (Puerto Rico), AM trust of Georgia, and Chevy Chase. In other words, banks that are a fraction of the size of Indymac. (Whew!) I think some large banks will get into trouble, but if that's more than a year away... they will have the time to earn a bit of income decreasing their chance of trouble.

Black backgrounds are banks that the FDIC has already started to play their role.

The first seventy are colored red (if not black) due to 'an effective tier 1 leverage ratio less than 4%' (below FDIC guidelines, but not officially) In rough numbers, every bank colored red would need to fail to create the impact of Indymac's failure. This is good news. It implies that there is a less chance of a premature shock to the financial system. (Assuming stocks hold up, we do not have another Indymac that went from 'officially healthy' to receivership in two weeks, etc.)

Do note that there are about 6000 banks in the US (I think that number includes credit unions). So most banks are healthy and thus can be skipped in this discussion. I'll be following this list to see how it grows.

Every Friday one has to look to see what (if any) banks failed:

Today's failure,
Note: West coast failures could still happen. Its a 3 day weekend... a typical time for the FDIC to clear house. But lookie... 100% coverage of all deposits. So head to the new bank and just order checks (a 'no biggie') :)

http://www.geocities.com/tubeguy@rogers.com/troubledbanks.htm

Please also look at gasoline deliveries. We're in a bad recession if those numbers are not revised up:
http://tonto.eia.doe.gov/dnav/pet/hist/a103600001m.htm

Next day edit:
Economist article on American Banks

From the above: The trajectory is steep: Institutional Risk Analytics, which monitors the health of banks, expects more than 100 lenders—most, but by no means all, tiddlers—to fold over the next year alone. Alarmingly, the ratio of loan-loss provisions to duff credit is at its lowest level in 15 years.

.....

Ms Bair has indicated that banks with risky profiles—which already pay up to ten times more than the typical five cents per $100 insured—will be asked to “step up to the plate” with even higher premiums. This would ensure that safer banks are not unfairly burdened. But it will heap yet more financial pressure on strugglers. Bankers’ groups have already started to protest loudly.

How much will be needed? Possibly far more than the FDIC is letting on, reckons Joseph Mason of Louisiana State University. Extrapolating from the savings and loan crisis of the early 1990s, and allowing for the growth in bank assets, he puts the possible cost at $143 billion.

Got Popcorn?
Neil

CR chart on seasonality of home prices

2008-08-27T14:38:00.000-07:00

Just a short time ago the question was raised in the comments if home prices were that seasonal. CR brings it up at the end of this post:

Please see the graph at the bottom of this CR article and the comments below the graph.

By the way, the book "Home buying for Idiots" and the book "Home selling for idiots" also bring up how during certain months of the year you will get more (or less) selling a house.

Interesting BBC video on Spain's housing meltdown (planned ex-urb):
http://news.bbc.co.uk/2/hi/business/7584047.stm

Its global folks.

Got Popcorn?
Neil

Bank Issues

2008-08-27T11:13:00.000-07:00

Minyanville on Bank Health

I'm struggling to understand how the FDIC can first put a bank on its problem list just 2 weeks before it becomes the third largest bank failure in US history. (Indymac)

I'm going to have to concur with Minyanville. How could a bank with more assets/liabilities than all of the other 1Q2008 'troubled banks' combined not be added onto their troubled lender list until 2 weeks before it failed (and long before the FDIC reports the quantity of banks on the list)?

The FDIC needs to speed up the process. Yes, yours truly is advocating a government department speed up hiring! Sit down, breath deeply. You won't see that advice from me often. ;) The best thing for the economy is to shake out this issue and get it over as quick as possible.

The greatest danger to the economy is to small businesses. For a small business to function, its too common for them to need more than $100k in their accounts (or $200k for a 'mom and pop' business) to function. The FDIC limit must become inflation adjusted and take into account the impact on small businesses. $250k/individual or $500k for a mom and pop operation seems a reasonable level of insurance.
CR didn't miss that the FDIC's fund is running low

Indymac to cost FDIC more than predicted

So now the healthy banks are going to be required to pay more for the mandatory insurance. Gee... that won't do anything to exacerbate the current credit crunch... or could it? ;) Yes, my proposal would put more accounts into the insured category. Sadly, that should have been the case for years.

Oh... and put the reserve limits back at the old standards. That would tighten credit short term, but would allow for 'flexibility' during the next credit shock. Sigh... why were the old lessons so thoroughly forgotten?

Late edit:
Bankruptcy filings up 29%

Business filings were up 41%. Ouch.

Got Popcorn?
Neil

Case Shiller for June Released

2008-08-26T07:57:00.000-07:00

I speculate we're season a seasonal effect in the reported Case-Shiller numbers. The rates of decreases are dropping with a few cities flat (+/- .25%/month) and we're even seeing Boston, Denver, Atlanta, and Minneapolis having healthy price increases! All of the cities that broke a Case-Shiller of 200 are still declining.

Most of the cities that broke 200 will continue to drop. The best months of the year have yet to be reported on and it looks like DC will go flat for August with a small chance of it going positive.

Notice that the large drops started last year in September and reached their peak in January/February. It wouldn't be that surprising to see a seasonality in the rate of losses.

One thing that annoys me about predictors is when they won't admit the data isn't supporting an earlier predictions. One should of course update predictions based on new data. While I've been avoiding making predictions for this time of year, I must admit that the strength of what I believe to be the seasonality is doing much better than my expectations. So we need to look at the data going forward to see if:

1. This is a seasonal slowdown in the pain or...

2. Home prices have dropped enough to regain "stickyness"

I believe that the securitization rate of mortgages points to #1, but one must always consider all of the alternatives. Even alternatives that didn't seem to make sense six months ago.

My prediction remains that we'll enter the 18 months of the greatest home price drops starting this Fall (late Fall?). If I sum it up, about 1/3rd of the cities are still dropping quickly. About 1/3rd of the cities are near flat (within +/- .25%/month), and a third of the cities are seeing good appreciation. Yes, the cities dropping are dropping far faster than those appreciating.

Further note on Seasonality: Traditionally August and June are the two strongest selling months of the year. So if this is not seasonality, we would expect July to be stronger than June. If July is weaker than June its still possible to have August the strongest sales (by prices) of the year.

But then there is that pesky credit crisis. ;)

Got Popcorn?
Neil

National July Sales/Ineventory news out

2008-08-25T10:04:00.000-07:00

July Existing Home Sales: Record Inventory

The best graphs, as always, are at the above link.

What struck me is this: July sales 501k
Fraction of July sales Foreclosures or Short Sales: ~1/3rd.
In other words, normal resales are at less than half of the peak! (2005)

Also notice something from the curves, 2008 is constantly a lower fraction of 2007 than 2007 is of 2006. In plain Englinsh: The downside is accelerating.

August normally will vie with June to be the strongest sales month of the year Nationally, and for most places that will hold true. But not for Florida and a few other areas that have their best weather at other times of the year.

The WSJ has its take on the data:
The slight increase in the headline will provide some support to claims of a bottom in the market forming. However, the fact that 40% of sales activity came from banks selling foreclosed homes tends to suggest that absent a fire sale in housing sector, we have some ways to go before things truly stabilize. More troubling was the continued increase in inventories. … The data supports our call of the housing sector not seeing anything resembling stabilization until mid 2009 at the earliest. – Joseph Brusuelas, Merk Investments

Whoa... in California foreclosure sales are still happening slower than properties entering foreclosure. Yikes! I believe the ~33% value versus the 40% number. I'm bearish... to a limit. Real estate cycles are slow. Once the California foreclosures really pick up speed, good luck restarting the jumbo market. That is when we'll see the 25%+ down payment requirements. Not for months... But probably sometime in 2009.

Inventories are very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of weak demand and eroding prices. … [T]here is still a considerable distance to travel before prices sink to levels necessary to balance supply and demand in the housing market. By our estimation, the national home price measure as calculated by S&P/Case-Shiller, which shows a cumulative 18% drop through May from the July 2006 peak, is roughly two-thirds of the way through its ultimate total decline in this cycle. – Joshua Shapiro, MFR Inc.

I agree with everything in the above except the 'two-thirds of the way through' bit. I think we're about 40% of the way through to as much as 50%. No more.

We're also still in the seasonally best time of year to sell a home. As I noted above, August and June vie to be the peak selling months of the year normally (see CR's graphs). CR thinks we'll peak at 12 months of inventory, I think we'll pass that this Fall/Winter. Not by a lot though. (I hope... the alternative is rather scary.)

Got Popcorn?
Neil

Illegal Immegrants returning home?

2008-08-23T15:40:00.000-07:00

One press release from the Mexican consulate in Dallas is making the MSM rounds.

Fox News

The illegal immigrant population in the U.S. has dropped 11 percent since August of last year, according to the Center for Immigration Studies. Its research shows 1.3 million illegal immigrants have returned to their home countries.

While this is good news (proper liquidity in the labor markets) if true... I wonder.

I guess Mexico will have a large labor force to get those oil fields pumping again. ;)

Now, how many Spanish speaking children were born in the US last year? Sorry, but one reason our economy works is one set of laws and one language. I'm pro-immigration, but I would prefer a system that required English proficiency testing first. Oh, I'm all for offering English classes to those already here (and to the Koreans... Ghad, how can so many Ghettos of LA have 70%+ of their population unable to speak English?)

OT: One of my side interests is exploring how the world is consolidating to five major languages (all the others are shrinking): Mandarin, Spanish, Russian, Arabic, and English.

Got Popcorn?
Neil

2008 Job losses

2008-08-23T14:22:00.001-07:00

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463,000 jobs have been lost in 2008.

However, there could be a lag in the recovery of the labor market, as there was following the end of the 2001 recession.

"Job losses tend to be persistent, and the economy does turn before the job market," Karl added.

And Crary concedes that the credit crunch remains a big wild-card for any economic and job market predictions.

Although I couldn't help but notice the optimistic economist is predicting job gains for 2009 and 2010. Automotive?!? Sorry, but downsizing vehicles are here for a few years. With China and India coming online and the horrid mis-management of the Mexican oil fields (production down 37%), I see no return to the SUV craze nor the *need* for surplus vehicles as we saw during the bubble.

Jobs lag the economy. The economy is turning down. We're over-invested in too many sectors for a quick recovery.

Got Popcorn?
Neil

Best Places to Earn a living

2008-08-23T10:00:00.000-07:00

Because not everything is gloom and doom. ;)

Forbes has this article

In Forbes' order:
Houston
Minneapolis
Boston
Washington D.C.
New York, NY
Pittsburg
San Francisco
Dallas
Milwaukee
Philidelphia
Funny though.. .Minneapolis and Boston are having major real estate declines...

Milwaukee is known to be having major issues due to the drop in tooling orders (its America's #1 city for 'old school' machine tools).

Houston I see as #1. Why? Its doing a phenomenal job of attracting high end manufacturing. Its not just the commodities bubble.

Pittsburg is doing well too. It didn't bubble too much and the banks there (e.g., Mellon) are among the healthiest.

Dallas I'm a bit surprised... I wonder if this article was written on stale data.

So overall, I think this article was bunk. Yea... NY and DC are still doing better than most. But some of the cities on their are in economic dire straits and thus this is just a fluff article. But its a fluff article that will make people feel good.

But is that enough to get us through the credit crunch and the Fall/Winter slump in real estate sales? I don't think so.

Got Popcorn?
Neil

Apartment Buildings lose immunity to housing chill

2008-08-23T08:46:00.000-07:00

Hattip http://bubblemeter.blogspot.com/

WSJ Article on Apartment real estate

But now the specter of job losses is beginning to spread the gloom into that sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates are beginning to fall in many cities.

Its only going to accelerate.

Economist quoting Bernanke
he (edit: Bernanke) suggested that the worst “second-round” effects of the financial crisis are about to be felt: “the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.”

Yet the primary drivers haven't peaked. Credit is still tightening, foreclosures continue to grow, and now layoffs.

In my opinion the greatest risk to the economy is the impact of bank failures upon small businesses. Small businesses need to keep $200k to $2M of cash in their checking accounts just to operate. (e.g., payroll, inventory) Since the FDIC limit hasn't been inflation adjusted in... too long. I propose lifting it to $500k ($1M for a couple). Yes, this will weaken the dollar (due to the Fed printing money). But a planned recovery has less downside potential than the current process of covering 50% of Jumbos at Bank A, 100% at the First Bank of Podunk, and 0% at another bank.

We're in a recession that is going to get worse. But there is no reason it should be any worse than the 1974 recession; but that would require sensible regulatory changes.

But let's look back at apartments (WSJ article):
But that competition isn't nearly as big a problem as job-loss trends. "A lot of folks think it's the shadow market that's softening rents. It's really a jobs issue," says Richard Campo, chief executive of Camden Property Trust. The Houston-based REIT saw rents fall 1.4% last quarter from a year earlier in Phoenix. Arizona shed some 87,000 jobs in June and July.

Yet for only six months have the drivers been strong enough to cause doubling up. Jobs going forward will be weak for at least 18 months. Expect rents to continue to soften. The housing surplus is too great to ignore.

Got Popcorn?
Neil

Repost of this month's inventory, affordability, and SoCal foreclosures

2008-08-22T20:51:00.001-07:00

This is a long post and it took a bit of work to create. So rather than have it lost after so other posts, I'm bringing the charts back to the front. Please grab a drink as there are a ton of charts to wade through. But I ask you the reader to look at them as a group; they're related. We're in a new point of the market. You'll find sales and foreclosures for DQ news, afford ability from Wells Fargo, and inventory from ziprealty and the MRIS.

If you're not a bit scared after reviewing these graphs... I think you've missed something. We have proof of tight credit, foreclosures exceeding sales in more and more markets, and a general bear market that is entrenched in real estate. In California, foreclosures are happening faster than sales. In other words, the current sales spike that is foreclosure dominated isn't enough to slow the decline nor even the driving forces behind the decline! California and Florida on their own are going to end the mortgage market as we knew it. Too many Billions have been destroyed as is.

Do remember that during the 1990's SoCal downturn, the communities that were immune through 1992... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally. Edit from the first posting: I have no charts to 100% prove this. Believe or not. My main prediction is that 2009 will be the year of the greatest price drops in US real estate. We're not quite yet in the timeframe of the greatest price drops, but we will be soon.

Affordability is shooting up. But wait... this assumes income measurement are following the historical pattern! Please, do not get me wrong. I appreciate Wells Fargo Keeping the same methodology. But one assumption about these charts is that grey market income is *not* declining. Can we assume that anymore? Certainly not in Southern California. I believe, as with many metrics, that the change in incomes is being under-recorded. I do not fault Wells Fargo, they are doing the best job possible. LA is also in trouble due to Hedge funds cutting the funding of "Hollywood." Also, do you see advertising spending going up or down in 2009? Advertising has been keeping the Westside market alive. If that revenue drops significantly, expect things to get worse quickly.

I've selected the same cities for a while. Notice the spike up in affordability. Its all due to a drop in sales price. Mostly due to foreclosure sales and

Here is a close up on the latest. Do review the previous graph of where affordability has been historically. Note: For some cities (e.g., DC), I expect the new plateau to be at a slightly lower level of affordability (due to the city establishing 'economy of scale' in the world market).

National inventory isn't growing like it used to. If it wasn't for all of the markets with huge amounts of 'shadow inventory,' I would think this downturn was closer to being done than it is. We'll hit a bottom; but not before 2011 and more likely in 2013 or so.

If there is one thing to scare you, it should be the drying up of the Jumbo mortgage market. Look at the hit SoCal is taking. Thankfully, DQ News has published information on the distribution of mortgages.

I'm going to be posting this chart I from Deutsche Bank over at Patrick.net. It really shows how the real estate market is in a brave new world:

We're at the point where many markets are now driven by foreclosures. Since there is better data for Southern California than many other markets, I'm plotting my home region. But these charts plot a trend that would be true of Florida, Arizona, Nevada, Ohio, Michigan, Virginia, and a few other markets. Its brutal now for a home owner to try and sell. The competition from foreclosures will even impact the 'immune' markets. I'm seeing high end properties skip foreclosure (jingle mail) and go straight on the market as bank owned.

I'm plotting California sales and foreclosures by quarter to take out noise in the data. Compare this graph to the next one and Note that foreclosures exceeded sales in California in the first and second quarter! California is getting ready to really implode.

Compare this graph to the above one:

Now on to other cities. Sales are down, but not too bad:

But note the Median price is down. I haven't been in DC for a year, but I'd bet bargain hunting is going on:

Las Vegas is in a later stage of implosion. I know of too many people holding on in Las Vegas who should be selling, so the small drop in published inventory is masking a rising shadow inventory. Once the recession really gets going, expect the next wave of the Tsunami to spank Las Vegas. US Air 'de-hubbed' in Las Vegas for a reason: The Origination and Destination market is dying.

Phoenix has been the poster child of the bubble for a while. IIRC, 40% of the jobs in Phoenix are for growing Phoenix. I'm an airline fan, so I wonder if US air will get into trouble in Phoenix too.

Overall, DC's inventory hasn't climbed much over 2007. But look at Case-Shiller prices, inventory is too high in the region to sustain current prices overall. Counter is that DC's median income has gone up ~6%.

Houston is an interesting case. I posted before how it has the fastest job growth in the USA. But how much is due to the commodities bubble? Part of the reason I'm curious about Houston is that high end manufacturing and IT outsourcing is drifting to the city. Is it enough to insulate it during the later parts of this recession?

This is where I plan to buy. But there is a disconnect between official inventory and what I see on the street. Can we say shadow inventory? ;) Seriously, prices peaking at 11.2X income was insane! Ok, Wells Fargo put it at 9.3X income and now at 6.3X income. Per Wells Fargo, the last recession hit a trough at 3.5X income. My oh my... that leave a lot of downside. Note: Per Wells Fargo incomes have dropped ~3%. Personally, I think the income drop is accelerating.

I've skipped a lot of comment, but note that LA's decline in inventory is mostly due to foreclosures taking homes temporarily off the market. Mostly in the ex-urbs.

This is quite a bit to review here. I ask my readers patience to note the pattern these graphs lay out. Its showing the impact of the credit crunch, income loss, and the recession we are in. I still make no definitive predictions until we get to "Fall, probably late Fall." But soon we will see data showing a major transition. Soon might be November data... Heck, late Fall technically is until 12/20, so it could be in the December data; but I suspect it won't happen at the end of Fall.

Other bloggers are noting the bottom will be a two to three year bog where prices stay low due to the economy and credit tightening. I see no reason to debate that.

Got Popcorn?
Neil

Weak Financial Institutions

2008-08-22T20:42:00.000-07:00

Mish has done a great jobhas done a great job of tracking what financial institutions seems to be in trouble.

Financial Entities On The Brink

Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
MBIA (MBI)
Ambac (ABK)

By no means is this the complete list. Nor will every entity on this list necessarily fail (or more precisely not be rescued).

This chart from Calculatedrisk shows where we are circa June:

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Neil

Ad revenue declining

2008-08-22T11:26:00.000-07:00

My previous article has quite a few interesting graphs! (Inventory, sales, mortgage stats.)

One item I predicted a long time ago (mostly on HBB comments) was a decline in ad revenue. Traditionally, the 'rule of thumb' of a large established industry is to spend ~25% of revenue advertising (note: This can be a fancy store front, no necessarily TV or Radio time and is distributed between the manufacturer and the retailer.). For example, Beer, Cars, soap, and many other consumer goods.

Last week Gannett announced that they were cutting 1,000 jobs because of a decline in revenue.

Ouch. The article puts the blame on Craigslist for the decline of newspaper ad revenue. I think its due to the recession with hard times pushing businesses to Craigslist as a last resort (due to lack of revenue to fund traditional advertising).

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Neil

Affordability, Inventory, and SoCal foreclosures

2008-08-20T15:42:00.000-07:00

This is a long post. Please grab a drink as there are a ton of charts to wade through. But I ask you the reader to look at them as a group; they're related. We're in a new point of the market. You'll find sales and foreclosures for DQ news, afford ability from Wells Fargo, and inventory from ziprealty and the MRIS.

If you're not a bit scared after reviewing these graphs... I think you've missed something. We have proof of tight credit, foreclosures exceeding sales in more and more markets, and a general bear market that is entrenched in real estate. In California, foreclosures are happening faster than sales. In other words, the current sales spike that is foreclosure dominated isn't enough to slow the decline nor even the driving forces behind the decline! California and Florida on their own are going to end the mortgage market as we knew it. Too many Billions have been destroyed as is.

Do remember that during the 1990's SoCal downturn, the communities that were immune through 1993... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally.

Affordability is shooting up. But wait... this assumes income measurement are following the historical pattern! Please, do not get me wrong. I appreciate Wells Fargo Keeping the same methodology. But one assumption about these charts is that grey market income is *not* declining. Can we assume that anymore? Certainly not in Southern California. I believe, as with many metrics, that the change in incomes is being under-recorded. I do not fault Wells Fargo, they are doing the best job possible. LA is also in trouble due to Hedge funds cutting the funding of "Hollywood." Also, do you see advertising spending going up or down in 2009? Advertising has been keeping the Westside market alive. If that revenue drops significantly, expect things to get worse quickly.

I've selected the same cities for a while. Notice the spike up in affordability. Its all due to a drop in sales price. Mostly due to foreclosure sales and

Here is a close up on the latest. Do review the previous graph of where affordability has been historically. Note: For some cities (e.g., DC), I expect the new plateau to be at a slightly lower level of affordability (due to the city establishing 'economy of scale' in the world market).

National inventory isn't growing like it used to. If it wasn't for all of the markets with huge amounts of 'shadow inventory,' I would think this downturn was closer to being done than it is. We'll hit a bottom; but not before 2011 and more likely in 2013 or so.

If there is one thing to scare you, it should be the drying up of the Jumbo mortgage market. Look at the hit SoCal is taking. Thankfully, DQ News has published information on the distribution of mortgages.

I'm going to be posting this chart I from Deutsche Bank over at Patrick.net. It really shows how the real estate market is in a brave new world:

We're at the point where many markets are now driven by foreclosures. Since there is better data for Southern California than many other markets, I'm plotting my home region. But these charts plot a trend that would be true of Florida, Arizona, Nevada, Ohio, Michigan, Virginia, and a few other markets. Its brutal now for a home owner to try and sell. The competition from foreclosures will even impact the 'immune' markets. I'm seeing high end properties skip foreclosure (jingle mail) and go straight on the market as bank owned.

I'm plotting California sales and foreclosures by quarter to take out noise in the data. Compare this graph to the next one and Note that foreclosures exceeded sales in California in the first and second quarter! California is getting ready to really implode.

Compare this graph to the above one:

Now on to other cities. Sales are down, but not too bad:

But note the Median price is down. I haven't been in DC for a year, but I'd bet bargain hunting is going on:

Las Vegas is in a later stage of implosion. I know of too many people holding on in Las Vegas who should be selling, so the small drop in published inventory is masking a rising shadow inventory. Once the recession really gets going, expect the next wave of the Tsunami to spank Las Vegas. US Air 'de-hubbed' in Las Vegas for a reason: The Origination and Destination market is dying.

Phoenix has been the poster child of the bubble for a while. IIRC, 40% of the jobs in Phoenix are for growing Phoenix. I'm an airline fan, so I wonder if US air will get into trouble in Phoenix too.

Overall, DC's inventory hasn't climbed much over 2007. But look at Case-Shiller prices, inventory is too high in the region to sustain current prices overall. Counter is that DC's median income has gone up ~6%.

Houston is an interesting case. I posted before how it has the fastest job growth in the USA. But how much is due to the commodities bubble? Part of the reason I'm curious about Houston is that high end manufacturing and IT outsourcing is drifting to the city. Is it enough to insulate it during the later parts of this recession?

This is where I plan to buy. But there is a disconnect between official inventory and what I see on the street. Can we say shadow inventory? ;) Seriously, prices peaking at 11.2X income was insane! Ok, Wells Fargo put it at 9.3X income and now at 6.3X income. Per Wells Fargo, the last recession hit a trough at 3.5X income. My oh my... that leave a lot of downside. Note: Per Wells Fargo incomes have dropped ~3%. Personally, I think the income drop is accelerating.

I've skipped a lot of comment, but note that LA's decline in inventory is mostly due to foreclosures taking homes temporarily off the market. Mostly in the ex-urbs.

This is quite a bit to review here. I ask my readers patience to note the pattern these graphs lay out. Its showing the impact of the credit crunch, income loss, and the recession we are in. I still make no definitive predictions until we get to "Fall, probably late Fall." But soon we will see data showing a major transition. Soon might be November data... Heck, late Fall technically is until 12/20, so it could be in the December data; but I suspect it won't happen at the end of Fall.

Got Popcorn?
Neil

Major Bank to Fail? Secondary market almost Stopped.

2008-08-19T15:22:00.000-07:00

BBC has a scoop

The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.

US banks are very dependent upon foreign loans. Without the return of our trade deficit via loans, we're a poor nation.

Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was "not out of the woods".

"I would even go further to say 'the worst is to come'," he said.

Without easy credit, our economy will contract. The Alt-A resets do not really get going until the spring. If you thought Subprime caused a credit crisis, wait for the Alt-A crisis (which is concentrated in 'high end' areas).

I found this chart from Deutsche Bank over at Patrick.net:

If that chart doesn't convince you that any property requiring a jumbo mortgage are ready to drop in price... Notice that all the data is normalized onto a annual basis! So every bar is comparable to every other bar. Notice that Alt-A stopped?!? Liar loans drove up the nice areas artificially.

Are you a good enough credit risk for the bank to hold the loan? Do realize, banks can only do about 10% of the mortgages they were doing without the flood of funds from the secondary market!

And you wonder why the Europeans believe our banks are in trouble and the worst is still ahead. (It is... 18 months of pain starting soon.)

I'm going to be a broken record: "We have not yet entered the tightest credit markets of this downturn." We're close. Within 90 days. I've blogged for a long time (two years?) about the mortgage rules during the 'darkest days of this downturn.' That doesn't start before next summer. Yes... summer 2009.

Its going to be a dark and cold Fall and Winter. While there is a chance of one last bear rally... I'm becoming less sure it will happen.

Less than 90 days until the start of the great squish down. Jim the Realtor came up with that term to describe how high end real estate was overbuilt more than other tiers during the bubble. The high end will push everything else down.

Got Popcorn?
Neil

Job growth

2008-08-18T21:53:00.001-07:00

I'm working on an inventory/sales post. But lack of sleep (new baby) is delaying it.

But look what I found:
www.houston.org/blackfenders/10AW001.pdf

US job losses are here year on year. If that isn't a recession...

LA is leading the drop in jobs.
Houston is growing the quickest(no wonder the PDF was found on houston.org).
DC is doing pretty well.

Got Popcorn?
Neil

Default distribution

2008-08-16T19:37:00.000-07:00

CNN article on foreclosures

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

Think about that. Normally Jumbo prime mortgages have a *lower* default rate than those worth less than $417k. 4.03% is unsustainable. Expect to see down payment requirements continue to increase.

Oh yea... I've been predicting 25% required down payments for Jumbo for a while. For Superjumbo, I expect those mortgages to require pledged collateral that exceeds 40% of the home's 'value.' (Not an actual down payment, we're talking individuals who can pledge assets that the bank could accept. e.g., a medical practice.)

That 4% default rate is scary. Yes, its concentrated in CA, FL, NV, AZ, and the VA ex-urbs. But its spreading! The major recasts of Alt-A haven't started yet. Once that happens, we will see the jumbo market really fall apart.

Got Popcorn?
Neil

Calm Before Storm: Ted Spread

2008-08-16T09:59:00.000-07:00

Bloomberg's Ted Spread Charting tool

It looks like we're coming off another credit wave. Late Fall might indeed be the next transition; but if the trend continues, the peak won't be until January or February. Note: The charts tab has an even better image although there is no 5 year chart per se. Do look at the longer term chart to see how the floor has moved to at/above the previous peaks!

I find it interesting how the other indicators are correlating with the real estate emotions. Credit availability (or lack thereof) is a major component of my predictions. Even Dubai (WSJ, subscription) is having cash flow troubles! Note: Due to their massive infrastructure programs absorbing the wealth inflow the local banks are short on cash as they also try to fight massive inflation.

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Neil

Spain pledges economic stimulus

2008-08-14T22:01:00.000-07:00

The housing bubble is global. Its impacts will, mostly via the credit crunch, be felt globally too.

BBC article on Spain

The government has admitted that 2008 and 2009 will be tough, with Span's GDP growth rate slowing sharply.

But it said Spain should return to GDP growth of about 3% starting in 2010.

Understatement. Spain is the Florida of Europe. The overbuilding was spectacular. While the greatest concentration of investors were British, the mania wasn't limited to them.

Easyjet specialized in flying people to their various investment homes. I wonder how that airline will do? (I like their business model, but it could be falling apart.)

I plan to start posting more and more articles on how the real estate downturn is having a global impact. There is no "its different here." 2009 is going to have the greatest drop in global home prices ever. We'll also see the greatest drop in National home prices too. If your area hasn't taken its medicine... its about to. Oh, some should do ok until the fall. But bond buyers have wised up.

Even Sallie May is having trouble organizing all of the FHA insurance. Remember their huge losses in the S&L crisis? Since the majority of 2008 home buyers have already forfeited their down payment, I see down payment requirements only increasing. At some point, no one will sign up to insure FHA loans. (Not yet, not even really that close to that point. But it will happen. Maybe in 2010?)

Interesting times ahead. This global downturn is past the point of being able to ignore. I'm curious to see if freighter rates stay low or if they can spike back up for Christmas.

Got Popcorn?
Neil

Foreclosures

2008-08-14T16:27:00.000-07:00

Foreclosures continue to climb

During the great depression, about 25% of all the homes in the US were foreclosed upon. I do not think we'll hit even close to that limit. However, foreclosures continue to climb.

Ok, I cry uncle. I didn't expect Las Vegas to be the first to be *almost* at 1% of the properties in foreclosure. 1 in 106 homes are in some process of foreclosure in Nevada!

California: 1 in 182 (Merced is the worst hit with 1 in 73, Stockton/Modesto at 1 in 82)
Florida: 1 in 186 (Cape Coral, with 1 in 64 wins the national booby prize)
Arizona: 1 in 195

Now here is a quote that scares me:
But, according to Sharga, that decrease was helped along by rule changes in Massachusetts and Maryland that prevented lenders from issuing filings for up to an additional 90 days after borrowers first fall behind in their payments.
Would you lend where you cannot foreclose? Probably not without some 'meat in the game' to cover the added costs. :)

Oh wait:
"Now, both states are creeping back up," he said. "The 90-day lull in Massachusetts is being followed by a whole run of properties [in delinquency]."

What about "Immune" Arlinton?
Well, a triple cluster of foreclosures. But this quote stuck out:
“There have been very few home sales,” she said, “Because people haven’t really come to reality and dropped their prices enough … [But] you hear about some of these whole developments out in Fairfax or Loudoun where you’ve got 20 to 30 percent of the houses foreclosed. It’s not like that.”

Diffusion theory of Real Estate... it always holds true in the long term. :)

NY foreclosures up 44% But a small fraction overall. But this is global. You can google and find the increase in Britain, Spain, Australia, and most locations in the world.

Just think... the Alt-A resets do not really start until the spring. Those loans were mostly into premium areas.

Not to mention, credit overall is tightening. Quite a few banks are one the watch list: Downey Savings, WaMu, Chevy Chase, Wachovia (note: Can they BK their divisions off and keep the main bank going? They seem to have done brilliant firewalls a la their Bluepoint Insurance group.)

Got Popcorn?
Neil

MLS listings are missing large amounts of distressed inventory

2008-08-12T17:45:00.000-07:00

This article at Sacramento Real Estate Comments is worth a read.

The foreclosure wave has added another way in which MLS listings are not accurately reflecting true resale inventory conditions. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 19 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory…

While the article focuses on the hardest hit areas, the inventory is probably true of most of the US. Anecdotally, I know of two multi-million dollar foreclosures that should be in the MLS, but are not. Hence... this hasn't begun.

Bloggers speculate that banks are holding inventory off the books to keep from having to 'mark to market.' The list of banks going deep into unhealthy territory is almost unprecedented. Why almost? The previous real estate mania that led to the "S&L crisis" gives us a clue about what is about to happen. Go to www.bankrate.com and see how well your financial institution is doing. I only know of a few two star banks on the immanent 'watch list.' But if you are banking at a one star institution... Think about getting under $100k. I know too many people still trying to get their insured (through joint accounts) money that was above $100k from Indymac.

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Neil

Retail For Lease

2008-08-12T04:44:00.000-07:00

The number of retail stores offered for lease is staggering. I'd guess 70% of the square footage offered is still occupied.

The one exception I'm seeing is well designed medical retail plazas. Our pediatrician occupies one three blocks from our rental. I *really* thought it was a very poor location for any retail back when I first noticed it under construction.

The various medical offices are doing wonderfully! The Pediatrician is hopping (a 25+ year practice that needed a larger office), the Dialysis center lobby was overflowing. There is even a small non-chain specialty Pharmacy that seems to be doing really well! Now, the center isn't fully set up (yet). The 'imaging center' is still moving in the machines.

But what struck me is that the liquor store and coffee/bagel place are struggling.

So there is some long term upside out there. Recessions are a good thing as they move surplus labor from overstaffed industries into growth industries. Its going to be interesting, for medical requires quite a bit of training to transition.

I'll be more curious to see how many people are willing to accept a manufacturing job who previously were 'white collar professionals.' ;)

Got Popcorn?
Neil

Inventory

2008-08-09T23:51:00.000-07:00

A few graphs. My first child has been born and that's keeping me... from sleeping! (And blogging.) Mom and Child are doing extremely well. :) So with very little comment, I'm posting inventory graphs. The one big change is high foreclosure areas are seeing a sharp drop in inventory. But that's a false drop in inventory; soon enough the homes will be back on the market. However, I do expect banks will market a la builders: One MLS listing for dozens of homes.

Why am I still posting? To stay sane! 24/7 feeding/cleaning/codling doesn't activate the mind. Oh... I was going through the graphs seeing how the squiggles indicate trends... but I'm not going to be able to post concisely tonight, so I will do so another month.

Friends are still listening to Realtors (tm). Somehow they still have credit with people! Sigh... I *think* I just convinced a good friend to wait six months before buying. Six months in an area dropping 2% per month! Yet the Realtors were able to convince them that its not really dropping. Sigh... (These friends also recently had a kid.) The "it will drop enough to put you child through your alma mater" seemed to be the winning argument.

How do I know this? The Credit Crunch. LA is dependent on "Hollywood" and Hollywood is dependent upon suckers loaning them money on favorable terms. In 2009, far fewer movies are going to be shot. I'm very curious to see the terms of financing for 2010 movies. We're looking at a multi-Billion dollar haircut in 2009. Mostly by cutting known unprofitable projects that somehow still get funded.

The next big hit is going to be the California budget. That just scares me. That budget will effect the whole US economy. In general, when states cut spending is when a recession is recognized.

Expect my posts to be infrequent for a while. I'll focus on:
1. Inventory
2. Real Estate emotions
3. Case-Shiller.

Got Popcorn?
Neil

Map of Prime foreclosures

2008-08-03T22:56:00.001-07:00

From the NYTimes, hattip Marin Real Esatate bubble:

To be clear, this is PRIME foreclosures.

California and Florida are obvious epicenters. But look at the Northeast corridor. The stupid expansion in Central California is obvious from the map too.

A new prediction: 20 months to go until the end of the darkest days of this housing downturn. Mind you, its going to be a roller coaster ride soon. Not yet... soon.

Got Popcorn?
Neil

Strong US productivity

2008-08-03T19:55:00.000-07:00

Strong Productivity Defies Trend

This article is well worth the read. Why am I posting something bullish? 1. Its not going to be *that* bad and 2. this is one of the trends that will pull us out of the recession we're in... By say late 2010 or 2011.

The whole article is worth reading and there is a graph in there worthy of close examination. (Sorry, subscription required, but sometimes the links work without an account.)
The productivity growth in exports is well above the economywide average. In a paper last year, a group of economists found that manufacturing plants involved in producing exports had significantly higher labor productivity than those that weren't. The same holds for services.

The only way we're going to pull out of this is export oriented jobs. The obvious candidates would be banking (or other financial), manufacturing, or tourism. The other choice is high taxes that drive skilled workers to become expatriates who send back cash to their families (a la the illegal immigrant labor force that upholds Mexico's economy).

I personally believe we'll have a partial resurgence of manufacturing in the US. Yes... I understand there is a long term trend to higher "value added" jobs. But we went too far and did so too fast. Quite bluntly, we replaced manufacturing with unneeded sales jobs! Whiskey Tango Foxtrot? There is an internet out there to do much of that; I believe this recession will drive consumers to develop 'low purchase cost habits' that won't go away for a while. Well... not completely. The sheeple do have a way of proving that Ditech's ads really are nothing more that ironic poetry for profit.

We're approaching the October through February time frame. That will be a time of scary news. So in a way its time to pull back and realize that when J6P starts stampeding with his fellow lemmings towards the cliff... Then there is blood in the streets and its time to start buying. (Not this winter... NEXT winter. This winter is the warm up act.) 2009 will be the year of the greatest price drops of this downturn.

Got Popcorn?
Neil

Auto Sales Plunge

2008-08-01T17:07:00.000-07:00

Edit: Auto Sales are at a meager 12.5M annualized rate! Normally, you would expect the drop to be from the 16.4 to 16.8million autos down to say 14 Million. This is BEFORE almost everyone exited the Lease market.

Any predictions for next month? How about September (by then there will be little auto leasing occurring)? The average American has been taking on loan terms for more than the new vehicles value (due to being 'underwater' on their trade ins). Now with fast depreciation and the sell off of the auto companies' own finance arms... I'm thinking we'll see a very unusual credit contraction for auto purchases too.

One of many links (CNN)

The traditional Big Three Detroit automakers saw their share of sales in their home market plunge to a record low of 43%, well behind the 49% share of Asian brands. But even the Asian automakers had trouble providing U.S. consumers with the fuel efficient vehicles there were looking for, as most of those overseas brands also saw sales drop from year-earlier levels.

A traditionally strong sales month... sucked.

Why didn't Honda's sales spike? Seriously, their drop was puny but when compared to an expected 13% pop, what's going on?

A few luxury brands, such as Mercedes and BMW, also weathered the storm to post modest gains. But sales fell for makers of low-priced cars, such as Mitsubishi and Hyundai.
I'm shocked. With so many poseurs making up their buying base, I'm surprised how the sub $100k luxury brands are holding up.

Oh, by plunge, look at the YOY numbers and annualized sales rates... Until new product lines can be developed, I expect people to just 'make do' with their current vehicle. The trend seems to be that people want either a vehicle that gets 2X their current vehicles fuel economy or 40+mpg. Why the later? I'm not yet seeing vehicles that get 60mpg (2X my vehicles gas mileage). ;)

Got Diesel? Seriously, I have a friend who is hanging on in Detroit only due to Diesel engine development (Toyota, GM, and possibly other clients). With China and India's freeway network expansion... that will mean less foreign oil for the US. I could only dream that the West Coast cities actually get mass transit NETWORKS!

Got Popcorn?
Neil

Another Bank Failure... Well its Friday!

2008-08-01T16:51:00.000-07:00

Hattip Calculatedrisk

FDIC report

Note: Previous article is an update on Case-Shiller.

"First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority."

Anyone else notice a pattern in the receiving banks? They're never the one's the bloggers are wondering if they could survive through 2009.

Personal comment: Its going to be ho-hum until another midsize or larger institution fails. While its not yet COB here on the West Coast, I expect no more failures today (there are no indications of mass food orders for after hours work at the FDIC... that I saw blogged).

Conveniently, the FDIC has had banking law changed to make it easier to take over LARGE institutions: From the discussion thread on CR.
Sheila and Ben' Love Child writes:
commented out bank name is to big to fail until the removal of the Federal Reserve Act's Rule 10B requested from the FDIC presented in the Housing Bill.

"The exemption in the new law, which was requested by the FDIC without objection by the Fed's Board of Governors, was aimed at making clear that once banks are taken over by the FDIC, capital rules no longer apply because they are effectively owned, operated and in liquidation by the government."

NOTE: I do not expect a big bank failure in August. After that... almost certainly. Until then, its going to be a string of banks that you and I probably aren't that familiar with going by the wayside.

Got Popcorn?
Neil

No city above 200 on Case Shiller

2008-07-29T11:30:00.001-07:00

Every city in the case Shiller is now declining-except Denver. There is no "its different here" anymore. These results are for May, possibly the strongest month of the year for SELLERS! Yet prices declined in all areas measured by Case-Shiller. This is before the July tightening of credit. Its a bummer Case-Shiller lags so much... but for such good data, we must be patient.

Here are cities I've been tracking. Now all indications are that prices are continuing to decline since May. Previously, I've predicted about a 25% under-run of the long term trend line. I still predict 2009 will be the year where the nation has the greatest price drops.

These are the derivatives. I graph what fraction of the homes value is being lost per month. Despite how weak this spring/summer selling season was, price declines slowed. However, do not forget, we are exiting the best time of the year for SELLERS! The traditional time of the year for price corrections is October through February. With the integral of price declines to date, I think the market is close to breaking.

I see this fall as the transition to the real-estate emotion of Panic. I see the spring being a switch to Capitulation. Capitulation is the time of the greatest price drops. I think we are in the process of witnessing a "bear market rally." Next month's data will probably show some further improvement in the loss rate (June). I'm sure the NAR will tout that.

A comment on Denver: I'm hearing about pretty brutal price drops now. So they've dropped enough to have a minor "spring bounce." Ok. They'll be giving that back up this Fall with interest. Yawn.

I plot the MONTHLY price drops. My final conclusion is to note that a 4% per YEAR drop is the equivalent of free rent. With credit tightening further, I see the slight "bear market rally" ending in August and starting a faster drop starting in the Fall.

Here are a few individual city graphs:

More Bank Failures. Well... its Friday!

2008-07-25T22:59:00.000-07:00

http://biz.yahoo.com/ap/080726/bank_takeover.html

The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.

Oops. Nothing to See here, move along.

But what struck me was this quote:
"It's very important that Arizonans know that their deposits are secure," said Felecia Rotellini, superintendent of Arizona Department of Financial Institutions. "They are well-managed and the 1st National Bank of Arizona issues should not cause any panic in Arizona."

Whiskey Tango Foxtrot?!? Ok, its one thing for us bloggers to speculate on the next bank failures, but its another for a government official to express worry in such a fashion! I'm sure the Arizona Department of Financial Institutions is always on the look out for financial panic (bank runs). But to mumble that off to a reporter? The FDIC should stop wasting time looking at blogs and instead look into the state agencies... and when they get around to it, the reserves of their member banks.

http://www.fdic.gov/bank/individual/failed/banklist.html
That is seven failed banks in 2008. Its funny, on Calculated risk there are a few Trolls making fun of how we bloggers look for Friday bank failures. Well... Two banks failed today.

Note: This is no Indymac. That failure was a big one. 28 branches... yawn. Although only 70% of deposits were insured (the rest, I assume, were above the $100k limits.

Comment on Indymac: For those with insured accounts (joint accounts) over $100k, its almost random who is getting paid and who is having to wait. I know of someone having to go back for a third time to try and get out their excess funds.

Got Popcorn?
Neil

California wage proposal

2008-07-25T00:53:00.000-07:00

Ok, it was probably stagged to get headlines. The Governator is proposing cutting state wages in CA to $6.55/hour until a budge is signed. LA Times article . I do not take this proposal seriously.

But a scary thought, the state needs to raise $10 Billion quickly during tough credit times. Otherwise its not going to function until the April tax collection time. I'm thinking this budget will not get resolved for a while.

During the Great Depression, Federal wages were twice cut. Will California have to lead off with a government wage cut? I'm serious. The crisis is that bad.

Any which way, this state will have affordable housing by 2011.

Got Popcorn?
Neil

California Sales

2008-07-20T15:06:00.000-07:00

DQnews recently posted California sales. What struck me is that 41% of Southern California Sales were foreclosures! That means only 1/3rd as many owner-owned homes traded hands in June of 2008 versus 2006!

Think about that for a minute. Considering how much tighter credit is going to become and how there are more foreclosures waiting to happen in the backed up system than their are buyers for the next 12 months... Consider the implications. Southern California, combined with Florida, Ohio, Michigan, Nevada, and Arizona are really hurting economically. All real estate is local, but all credit is national. Heck, their have been a few articles on how banks will no longer loan against bonus income as that is too variable. One must now save the bonus checks and use them as part of the down payment. How un-American. ;)

California sales in general were so-so. Notice the trend line going forward? Every year has a drop in sales from June on. There is no month later in the year that would be expected to be better than the month we just went through.

LA sales started the year anemic and have grown to weak. LA inventory is at 120,000+ units per zip realty! With over 21 months of inventory, do not expect this city to turn around in 2008 or 2009. There has never been a case post WWII where New York City or LA has had a recession and the rest of the nation didn't follow.

San Diego is the lead lemming. With the shear amount of construction, employment flight, and misguided policies, this city will be hit hard. Only Miami rivals in the number of condos being constructed. Both with have to become far more affordable to end the current glut.

The recent trend in the SF Bay Area sales should give an indication of where that over-hyped market is going. Yes, this is one of the strongest economic areas of the US economy. However, as the rest of the nation weakens, it cuts IT spending which hurts the Bay Area. This area will be worth watching. I can see prices dropping 40% from the peak (per Case-Shiller).

There are only about six weeks left in the California home sales season. Every single graph I've plotted shows that September has very weak sales in a normal year and that the next strong sales month is March. This time, there is too much in the foreclosure pipeline to create a strong spring selling season for 2009.

My last article was my real estate emotions article. Due to the economic pain in California, we are one major event away from Panic. I think we'll hold on until the Fall, but if a big enough even rolls through... it will happen earlier. Since California does more to fund the Federal government than any other state... there is no "its different here." Quite bluntly, the economy is not in a position where it could handle California contributing 10% less to the Federal coffers.

Got Popcorn?
Neil

July Real Estate Emotions

2008-07-17T18:54:00.000-07:00

This aricle is early. Why? The emotions due to the Indymac closure. I believe we are one to two major bank failures away from an acceleration to the next emotional state. Even without the bank failures, we're going to hit panic by the late Fall. The economy is that bad! We're still in desperation... but its only going to take one or two more trigger events to send us into emotion #9: Panic.

This is a photo of what the lines are like at Indymac. Its not ust this Pasadena location, I've seen it at several others. People are moving their money around... its not normal. If Indymac had failed in the fall, it would have sent us into panic. Since if failed now... its wait and see if another big bank sends the real estate emotions forward. Note: I always expected bank failures. Its just odd watching them be the drivers.

I'm halting doing the Kubler-Ross scale. I haven't found it to be a good predictor of anything... Not when all of the lemmings are going towards the cliff together...

I've been using the following graph to illustrate the emotion changes versus the ARM resets. At this point, it might be better to graph versus something else... or maybe I'll keep it; the missed payments have put us into quite the credit crunch.

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.
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've decided to redo the 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. We could be into panic as early as August (I think we've survived July). But most likely, it will happen seasonally. That is unless some of the large banks we're concerned about are taken over by the FDIC. We're on an accelerated cycled. 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 Capitualation. Remember, Capitualation is the time of the greatest price drops. At least in the markets that survive until then.

Take on a Boarder

2008-07-16T23:38:00.001-07:00

You wouldn't believe what's on ABC right now.

How to save money...

1. Take in a border
2. Make your own coffee (with a hint to use the counter top)
3. Drink tap water
4. Put yourself on two wheels. *
5. Adjust the thermostat (Turn down the A/C or heat)**
6. Bundle phone, internet, and cable
7. Pare down your plastic (Call for a lower rate)***
8. Get a library card, (but it was for renting videos... sigh)

* "What the smart person is doing today, instead of buying that 2nd car, is to buy a scooter."

** We recently stopped this (Wife is pregnant) and its raised our monthly bill by $5... huh?

*** Why not just do without and pay them off? Sheesh!

Note: The border comment had me laughing! We already have a housing surplus and they're advising people

There has been discussion that this is the 'Back to basics Christmas.' Yea... I think we're already there. (Hat tip Rob Dawg...)

Got Popcorn?
Neil

Bank Emotions

2008-07-16T08:17:00.000-07:00

Other blogs are reporting that there have been disturbances at Indymac and Wamu branches as customers cannot get at their money in a timely fashion. (e.g., a relative spent four hours in line at Indymac until they finally wised up and gave out numbers and most of the line was told to come back two days later!)

Why am I blogging this? I've been predicting we'd switch to the next real estate emotion, Panic, in the Fall. I still think that is the case. But here in California, I think we are one more large bank failure away; at most two bank failures.

My timeline still looks to be accurate. It looks like the FDIC will drag out the failures. But there is more uncertainty than ever.

For those of you who thought ever rising real estate prices were a good thing. Thanks, you just screwed 10,000 savers out of their money. Ten thousand is the number of Indymac customers who's deposits were not insured.

Am I the only one who finds it funny that the TV cameras focus on the "#1 Savings and Loan in LA" signs up at every Indymac?

Got Popcorn?
Neil

Mortgage insurers raise bar

2008-07-15T08:04:00.000-07:00

Insurers add that they are pursuing the kind of more disciplined behavior that may have helped avert the housing crisis. "Clearly, the pendulum had swung a little too far in terms of flexibility in underwriting," says Len Sweeney, chief risk officer for AIG United Guaranty, the mortgage-insurance unit of American International Group Inc. "Some of the movement we've made of late is back to a more prudent approach."

Michael Zimmerman, a spokesman for industry leader MGIC Investment Corp., says, "So far, we're only losing the business that we no longer want to write. The long-term objective of anybody in the housing industry should not be just affordability but sustainability. I think for the last few years, the drive and the focus have been solely on affordability."

The WSJ article

This is a map where the insurers have declared the region a declining market. Remember, redlining is illegal in lending. They must paint with a broad brush. So in effect if a region starts to decline, the whole region becomes tougher to buy into.

The article is worth the time to read in its entirety. I recommend an online subscription to the WSJ. Its nothing really that new to the housing bloggers, but it does point to why the market is not going to turn up anytime soon. The #1 reason in the article: Mortgage insurers are making rule changes that will last years. Mostly due to too many of them having to 'wind down' their business.

Got Popcorn?
Neil

14,280 Where are you?

2008-07-15T07:52:00.000-07:00

This is not a stock blog, but look at what stocks did this morning. The DJIA is at 10,895. We've dropped 3,395 points without being in an official recession.

A dollar will only by 0.626 Euros. Ok, we're fine at 104.29 Yen to the dollar, but that's quite an overnight drop.

Oh, I'm sure you heard that gasoline pushed retail sales up. I like how they published numbers excluding auto sales but not excluding gasoline...

Wholesale inflation is the fastest in 27 years:
http://biz.yahoo.com/ap/080715/economy.html

Yet housing was supposed to turn up in the 2nd half of 2008! I don't think so.

Got Popcorn?
Neil

Old Advice on buying

2008-07-11T13:50:00.000-07:00

As we watch the markets go into epileptic seizures, its sometimes a good time to remember the sage advice on when to buy. Now, I'm very focused on buying a home to *live* in, so all of this advice is geared towards that, but could equally well apply to stocks or bonds. Note: Its not time yet to buy any of them. We have to get through 2009 at a minimum. I personally think we'll inflate our way out of this, so invest as you see fit.

The best advice I've been given:

1. "Be fearful when others are greedy and greedy when others are fearful." Warren E Buffett. My comment: I have a few coworkers who screamed "buy now or be priced out forever." In a way, they are perfect investment emotional indicators. Remember, the lowest home prices are during the transition from Despondency (emotion #11) to Depression (emotion #12). We're in mid-Desperation (emotion #8). I do think the people buying now are emotional knife catchers. To buy before Capitulation (emotion #10) is just silly. Note: Some bloggers thing we're only in Fear (emotion #7).
My last emotions article remains current.

2. And also from the Oracle of Omaha: " Price is what you pay, value is what you get". With that is his "Margin of safety." My translation: Never pay value, always assume you've overvalued the asset. If you cannot buy at a discount to par, wait or move on.

3. Buy what you know. This is from a book called The richest man in Babylon I haven't read the newer edition, but I think the old edition is the best seven Americanos you'll ever part with. In Real estate, it means to research the areas you're going to buy long before you buy. I like www.homefair.com to compare areas as a start.

I also think for real estate novices (not the bubble bloggers on year 3+), that the book Home buying for dummies. Me being me... I also read home selling for dummies. :) (Bwaaaahaaaaahaaaaaha!)

4. Buy when its tough to get a mortgage. I first heard this from my grandfather; its old sage advice. For when its tough to get a mortgage, you just do not have to deal with all of those pesky emotional investors. They seem to be afraid of the paperwork. This is when you have negotiating leverage. Note: Its not tough to get a mortgage by historical standards. By 2010... I think it will be tough to get a mortgage.

5. "Its better to buy a year late than a year early." This is also some old advice. Since its been told to me for decades, I'm not sure who to credit with this advice. The last year of a downturn might see prices drop 5%. The first year of an up-tick generally sees a 3% increase. If you're socking the money away, whip out a spreadsheet and figure out how your life would be better waiting. Play with interest rates, down payments, savings rates, unexpected expenses, etc.

Where I want to buy, I still come out ahead renting over buying. There is no reasonable scenario, at today's prices, where buying is wiser. After 30 years, assuming reasonable home appreciation rates, wage inflation, investment returns, and such you will see that your lifestyle is ahead renting (for now). Some areas this isn't true anymore. (e.g., Palmdale CA). But is it time to buy there? I think in six months it will be even better. See point #5. ;)

Note: The book reference in point #3 recommends buying your house. I agree. But that book was also written prior to Florida 1925/1926. ;) It was written back when 50% down and a 10-year mortgage were typical too, so wild real estate speculation was less common. (But somehow it missed the 1849 San Diego bubble... hmmm... Hey, its a short book! Very worth the read.)

And if you get all of your investment advice off the internet... I think you're being foolish. My recommendation is to read and understand. Be a wise investor. Do not invest off what I say. Rather, invest when you know you're ready. Step #1, get ready. :) (Save a down payment, know what you can afford, know where you would like to buy and pick alternatives!) Basically, read the books I've recommended. Their advice is pretty good.

Got Popcorn?
Neil

Foreclosures and dark humor about Christmas

2008-07-09T02:17:00.000-07:00

I have reason to suspect that a coworker I really like is about to go into default on two properties; the home and an investment. Basically, this individual has used up all of the reserves trying to keep from losing the investment house and thus will now probably lose both. I've talked about how many of my coworkers invested heavily in real estate during the bubble. Now we're finding out who was swimming naked; its not a pretty picture.

This brings no joy to me. Its not one thing that convinces me that 2009 will be the year of the greatest price drops; its an accumulation of evidence. Hopefully this snippet gives you some insight into why I'm hunkered down to survive a bad year.

That bad year includes Christmas. The humor regarding Christmas is pretty dark on more than one blog today (e.g., CR). In fact, its downright gallows humor. Like all gallows humor, this isn't about wanting it to happen; its about expressing the known downside in a way to relieve anxiety. I think the bear community is seeing the writing on the walls. Expect Christmas 2008 to Suck (from a retail sales standpoint). Its not a question of if we're in a recession, but where we go from here.

Got Popcorn?
Neil

I don't get it.

2008-07-06T22:07:00.000-07:00

The WSJ might have typed too quickly:

In the apartment market, the "shadow market" of unsold homes offered for rent continues to keep renters out of apartments. Otherwise it is a strong market for landlords. They continue to benefit from the housing slowdown that has created more renters and led existing renters to defer homeownership given the tightened mortgage market.

Renters are not going into apartments but somehow landlords have a strong market? Or is it that there are a lot of landlords right now? ;)

I usually really like the WSJ, this time I think the reporters tripped over their fingers.

later in the article:
"Rental demand hasn't really picked up in relation to the falling home sales, which implies that people are doubling up or tripling up or moving back with their parents," says Lawrence Yun, chief economist for the National Association of Realtors. He expects that to change in the near-term, in part because "it's not sustainable to keep adding roommates."

We have more bedrooms per capita than ever. So actually, it is sustainable to fill up those McMansions... For YEARS!

I should be nicer, most of the article is on retail and the predicted surplus of retail space for a long time. :) But sometimes you read something and go "huh?"

Got Popcorn?
Neil

Credit Tightening

2008-07-06T22:00:00.000-07:00

WSJ's 'ahead of the tape'
More than 55% of U.S. banks tightened lending standards for large and midsize companies in the second quarter, according to a recent Federal Reserve survey, the highest since the first quarter of 2001. In the two other instances of such harsh tightening since 1990, a steep profit decline followed three quarters later, notes Citigroup chief U.S. strategist Tobias Levkovich.

A profit decline 3 quarters later... In other words, it hasn't really begun.
The article is on the start of earnings season. Its not bullish. But out of fairness and keeping to 'fair use', I'll leave it to those who subscribe.

Got Popcorn?
Neil

Banks Get Pucker Butt

2008-07-06T10:04:00.000-07:00

You cannot turn around without finding an MSM article on the credit tightening. Its to the point now that I think that J6P is finally realizing making a deal with the loan sharks isn't aways in the best interest of the borrower...

Calculated Risk has more on the HELOC TIGHTENING. My take is the banks have no choice. If they let people extract every penny, they'll go under. Heck, with over $1 Trillion of unused HELOC's committed to... Where the heck would the banks get the cash?

The LA Times is noting how RV sales are "Carrening off the Road." If you read the link, its another note on how SoCal sales were really based on home equity extraction. We've been seeing the same story in Automobiles too... Note how pure RV loans are drying up too? This isn't just about gas or credit. Its the unwinding of a bubble market. RV sales are at 1981 sales rates.

Hat tip HBB Remember all of those adds to invest your 401k into real estate? I can remember flying to Florida for a family visit and it was a deluge of adds along the way to extract the 401k and put it into Florida real-estate. Well this link talks about people borrowing against their retirement accounts to keep their house too.

BMIT is showing how many sellers are still chasing down the market. Is it just me, or have we bears become so numb we don't even pay attention to homes that are not setting new records of time on the market?

Bearmaster has one of her great statistical articles up. It looks like the Realtors are still in denial. That's scaring buyers to other states... Just commenting on the standoff, its not going to be won by bluffing. I am surprised July is starting strong...

I haven't made any predictions between now and the Fall. I don't intend to. It could be interesting... it could just limp along. But by the Fall the seasons and the emotions change.

Got Popcorn?
Neil

Happy 4th of July

2008-07-04T08:38:00.000-07:00

Enjoy the 4th!

Today, a BBQ to celebrate my Nana's birthday; but also another celebration. My best friend and his lovely wife had their first child yesterday. A boy. Since soon I shall become a father, I'm excited for them.

Minyanville points out the flaws in the employment stats! A must read.

Mish talks about ghost towns:

Since these haven't been written off yet... The worst is yet to come. This Fall for a crisis, for it to really hit the fan will take until Spring of 2009. Why? The financial system has become 'brittle.'

Bearmaster has more data on Redondo:

Bakersfield Bubble talks about how Lehmen is losing their shirts on bad investments.
I happen to agree with the comments that the next stage of this downturn will be high end properties pushed lower by stock losses:

Bubblemeter has a story on more bottom calling:
I swear... its a bunch of REIC kids saying "Are we there yet?" The true bottom isn't until 2011 to 2015. I still see 2009 having the greatest price declines. Ok, not for the areas that have already lost 60% to 70%+! But for the 'core areas...'

Got Popcorn?
Neil

Don't get between me and my coffee!

2008-07-01T21:38:00.000-07:00

12,000 jobs to be cut at Starbucks. :(

Well, not quite the end of the world... But if you've ever seen me go through my 6th MUG of coffee during the day, you'd know I feel for all the closed starbucks.
Starbucks cutting 600 stores, 12,000 jobs

Although, I do wonder, how many cities have more than 600 Starbucks retail outlets (including those inside supermarkets). ;) Like Santa Monica... ;)

I happen to really like the Starbucks 'bold' coffees. Oh, I cheap out and often buy Trader Joe's, Cosco brand, or other good but lower cost beans; but at least once a month I buy a bag of Starbuck's beans. I remember what coffee was like pre-Starbucks and I dread returning to those days of poor quality coffees.

Note: My coffee is strong and black. If you can see light through it, its not great coffee. So I'll focus on Starbucks instead of the Horrid June car sales (kudos to Honda).

Got Popcorn?
Neil

Google Analytics

2008-06-29T11:42:00.001-07:00

I switched to Google Analytics at the end of May. For some reason, it took a few days to get the site feed up and going. Maybe this is due to my lack of articles for a bit? ;)

Site Usage
2,379 Visits
3,179 Pageviews
1.34 Pages/Visit
82.18% Bounce Rate
00:02:15 Avg. Time on Site
45.61% % New Visits

My latest records show that I'm getting a constant ~700 visitors a week (this is down from late last year). Its is my goal to write enough articles to make the time worthwhile for my readership. Do note that in August my first child will be born, so if there is downtime... I'll just have to rebuild the viewership. ;)

To my daily visitors from Bangalore, Norway, and Sweden, thank you. I'm pleasantly surprised to have daily readers from that area. Almost half my readership is from the massive "Westside LA" routers in West Hollywood (includes Santa Monica inland). While I have a decent readership in the SouthBay part of LA, I was surprised more of my readers live north of the 10 freeway.

The article previous to this is my inventory graphs.

Got Popcorn?
Neil

Inventory At records!

2008-06-29T10:31:00.000-07:00

Ok, national inventory is 200 below the highest peak I've measured, but since so much shadow inventory is being kept hidden off the market, its obvious we're at an all time inventory peak! Some cities show declines, but the number of for sales signs not in the MLS makes me wonder are we only seeing a false decline in their local inventory?

Seriously, its one thing to manipulate the spin, its a totally different sin to manipulate the numbers. This is really frustrating home sellers (as their homes are not making it onto Realtor.com and other national selling sites quickly).

Ok, rant off, now some charts.

In a word, wow! Yes, the slope of growth is slowing... But if anyone expects that BS spring recovery, you can see its not going to happen. 2009 is going to be the steepest year of price drops (nationally).

This is just fishy. If you drive around, the 'for sale' signs dominate. Yes, some is the drop in inventory in the ex-urbs... but in the nice core, 1/4 of the inventory seems to be shadow inventory! And the ex-urb inventory only dropped to be processed from a foreclosure into a REO.

South Bay LA: ALL TIME PEAK INVENTORY!

Inventory is up a bit... but look what happens if you break out a few cities. You can really see the plague of flipping that went on in Torrance and Redondo beach. Do not think the nearby cities will be immune; the REIC really put a cancer into this area:

What about other areas? DC and Houston March along. I think the only reason Houston isn't falling apart is that the state of Texas has been extremely pro-active in recruiting companies out of the bubble markets to their cities. The low workers comp is alone a nice incentive. Add to that the moving reimbursements, lower taxes, and lower cost of living... and you can understand why Aerospace is leaving some of its older bases and moving to Colorado and Houston:

DC is at a record inventory. Now what would it be like if the shadow inventory were properly added in? I have no feel on the size of the shadow inventory there. But if there is one thing I've learned, the louder an area screems 'its different here' the more likely it is to have Shadow inventory.

Is the mother of all bubbles in Phoenix or Las Vegas? Both are burning down their months of inventory... both have declines in their inventory. But how much is real and how much is the time lag for conversion to REO (or shadow inventory)? I know too many people trying to sell Las Vegas property to even begin to believe they're within 18 months of the bottom. Phoenix, in a way, is in worse shape. They have far too much of their employment based upon expanding Phoenix (its been described as plumbers building for electricians...).

Notice something? Las Vegas and Phoenix are now showing much improved inventory turn times yet they still have FAR more inventory than is healthy. They're both above the 8.7 month inventory 'trip line' that triggers fast declines in sales values until inventory can be brought under 5 months. But as I've noted, there is Shadow inventory out there. In Phoenix is mostly homes being processed to REO's. In Las Vegas, its that massive condo building boom.. and the REO's. I'm going to be *very* curious to see the August numbers for both. Heck, I'm going to be very curious to see the August numbers for everywhere!

There are many things I can accept in life as just salesmanship. But the growing fraud in the inventory numbers is that: fraud. If you sell a stock as a sure thing there are regulations. When are the regulations on real estate transactions going to be enforced? (Its not as if there are not laws out there.)

After an investment mania there must be ambivalence. We have a long way to go. If you wish, read my real estate emotions article to see the long path we have yet to travel. The inventory suggests we have a long way to go. The fact that the REIC feels they need to hide the current true status of the inventory... implies its worse than this bear was stating.

If you're going out to buy, understand you must bargain like an a-hole. If not, you are the sucker. If you're a seller, realize that high value mortgages are becoming tougher and tougher to acrue. I'm also starting to see those who have owned for a *long* time realizing that its sell now or own for the rest of their lifetime. Its funny watching the local realtor trying to convince families that have owned since 1975 not to sell... for once they set the comps... those will be the comps. But on streets were few (if any) homes have sold in decades, we're starting to see inventory. I know of two homes being prepped for sale where I would *love* to buy. In both cases, the owners are treating the sales like a stock or auto sale; you price to sell and nothing else matters. Yes, you shine it up to sell... But you also price it to sell.

I've mentioned before I know dozens of people who will never have to sell any of their real estate. But I've also mentioned that they would sell *at any price* at some point to become liquid. I didn't expect them to wake up this early; they've been smart investors their whole lives, so I should have given them more credit. Besides, some realize their businesses will have to go into hibernation for 2+ years. At this point, they're retiring.

Why the long winded conclusion? *Everything* is aligning for 2009 to have the steepest drops in prices. The only counter examples are the manufacturing moves to the Carolinas, Texas, Alabama, and other low cost of living states. But manufacturing jobs do not create a real estate frenzy. But they are the start of the recovery. (Yes, far before the bottom... but some reasons I do not see a Depression.)

June and August vie to be the peak selling months of the year... normally So I'll be very curious to publish an article after August. ;)

I still think the wheels come off in the Fall and in Spring of 2009 I see a convergence of numbers that scars even this bear. e.g.j: Alt-A forced resets start in mass, taxes are due, employment, airline/auto/municipal employment declines, savings depletion, integrated impact on consumer spending due to high oil prices, dollar decline, slowing velocity of money, credit crisis, Hedge fund failures, and baby boomers waking up to the fact they haven't saved enough as a group to retire. Oh, I should also mention that the price range of homes I want to buy in are influenced by stock market performance too. By the spring, all of those who will buy to get out of the stock market will have bought.

Got Popcorn?
Neil

Shadow Inventory

2008-06-28T19:04:00.000-07:00

Now this is taking it to a new level.

San Diego listings not making MLS

Ok, we joked about one way the bubble 'would be contained' would be to hide listings. Now this is apparently a technical error, but its held all new listings off the national MLS for 30 days in San Diego!

I like to use ziprealy to find out the status of neighborhoods, but far too many listings are missing. Its amusing how broken the market is. But in this case, San Diego sellers are frustrated as they are missing out selling during those critical first few weeks. Most homes sell within a few weeks or languish. In this market, that is just unfair to the sellers.

We need an open MLS.

Got Popcorn?
Neil

June Real Estate Emotions

2008-06-26T21:56:00.000-07:00

With the focus on oil prices, its almost not worth writing what I consider my signature article. The talk is all about "middle class price out" in between discussions on new $15,000 motorcycles that get 50 or 60 mpg. (Sweet rides! If I wasn't about to become a father... oh, I think a few 'fish stories' on mpg are creeping up around various social circles.)

If you read last month's article, don't even both reading except for the concluding paragraph. Despite oil, stock prices, economic pain... The investment emotions haven't progressed at all. This is the weakest summer selling season in over a decade. Most comparisons are too the 'peace dividend recession.' And yet... there is a false hope out there.

We're continuing on in the major emotional transition state of Desperation. The amount of anger in the system seems to be oscillating with no perceptible national change this month. I expect anger to peak either this summer or next summer; the Ponzi victims remain upset that the news about the emperor being naked is getting out Why? active emotions peak in hot weather

I just love this quote. Its so appropriate to the housing bubble:
Ponzi's supporters were outraged at the officers who arrested him. 17,000 people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.

http://en.wikipedia.org/wiki/Ponzi

To the Kübler-Ross grief cycle and what fraction of the population seems to be in each emotion.

Stability: 40% (Old homeowners and bubble bloggers)
Immobilization: 17% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 15% (This one must be discussed)
Bargaining: 5% (Ok, we can cut the price and lead the market)
Depression: 5% (We're going to lose our home. Just let them take it...)
Testing: 5%
Acceptance: 5% (Stop payming, we're toast. Move back in with mom.)
No change.

Comment: None. No change. We're in idle. My data has big holes in it every year this time of year... it seems to be a time that buyers are ambivalent about real estate (in general, not everyone obviously). Or maybe its just me enjoying the weather change. :)

Onto the investment emotions. We're deep in desperation, with Florida trending into Panic as the front runner. This is the same graph I updated in January; emotions are progressing on that timeline. Option-Arms are hitting their limits and helping drive the correction and emotion changes. For most of this year we'll stick in desperation. Anyone who thinks this will turn quickly is trying to sell you something.

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. Probably late fall
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 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.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...) about 2017
15 Optimism (cycle starts again)

Sellers bet the farm (house) on appreciating real estate and those days are gone. This year will only begin to shake out the more feeble 'homeowners.' 2009 is when I predict the greatest price drops (both nominal and real prices). The bottom is a long way off... We'll be into 2010 before we have enough information to guess when the bottom *might* occur.

The option-ARM resets will be the motivator in 2008/2009. Not the planned resets, but the loans hitting their limits (due to negative amortization) or when J6P realizes their overpriced McMansion isn't the road to riches they imagined and putting 50%+ of income into a failed investment is just throwing good money after bad. Recall, over 90% of Option-ARM borrowers only pay the minimum; that negative amortization is going to drive the market in 2008 and 2009 as more and more home-debtors flee the pain.

The time to start looking is when your local news goes from covering the foreclosure bargains to why its smart to rent. Until that happens, the wanna be Trumps will be liquidating their failed mini-empires. This will drive investment emotions. Emotions, income, and inventory will drive transaction rates and prices.

Yea... an almost copy and paste of last month's article which was a copy of the month's before. Really, nothing much changed. I expect no change until the Fall. Ok, I HOPE for no change until the fall. Otherwise I'll have to change my prediction from "R" to "D" if it happens much ealier.

Got popcorn?
Neil

Case Shiller April Results just out

2008-06-24T08:44:00.000-07:00

The MSM started the morning with articles stating how the rate of decline was improving. Then I noticed they changed their headlines.

http://biz.yahoo.com/rb/080624/usa_housing_caseshiller.html

Do you see a recovery here? Do you see, along with record seasonal inventory, sales below decade lows, and tightening credit a reason to go out and buy? The next 15 months should see the most rapid price declines. I still do not see an emotional change until the Fall (again, probably late Fall). But I'm paying more attention. I still see a convergence of factors that will transition us another emotional state in April 2009.

Capitualation is the emotion with the greatest price drops. I predict that will happen in 2009 not 2008. For home sellers, I believe you have until the end of July to get out. Sell now or be priced in forever (or until you walk away).

Oh... there will always be sales. I do not predict the Realtor commisions to drop below .25% of GNP (a normal recession bottom). Last I saw on CalculatedRisk, we're down in the 0.5% of GNP range (a pretty accelerated rate of real estate sales by normal measures). That's right, what we see now is the results of STILL ACCELERATED REAL ESTATE SALES. When we go to recession levels of sales...

Of course the NAR is still predicting a recover in the 2nd half of 2008. That's a joke. Leading indicators from San Diego (thanks to Jim the Realtor, there are good Realtors out there) show that the credit tightening above $800k is accelerating. No one should be buying above $600k without 25%+ down. Soon we'll be back so sane lending practices. Somehow we're still at loose lending standards. (How? Oh yea... the Fed is pumping money which is killing the value of the dollar.)

Its all a question of when the Fed switches to a strong dollar policy. If you have a large down payment saved up, you should be looking forward to that event (for it will lower the montly costs of home ownership).

Got Popcorn?
Neil

Defunct Airlines

2008-06-21T09:09:00.000-07:00

Sadly, this is a horrid market for the airline business. Worldwide 35 have failed so far during the first six months of 2008.

Compare that 35 to the YEAR totals
2007: 30
2006: 25
2005: 40
2004: 41
2003: 58
2002: 37
2001: 42
2000: 19
From:
http://www.justplanes.com/AirlineHist.html

What to note from this history:
We were just coming out of the post 2001 airline failure time frame.

Edit: Classier Image to one more appropriate for this blog.

I'm expecting it to only get worse. Yield is down, passenger count is down, and fuel costs are up, up and up. So far I've seen announcements for US capacity to be cut about 8%. That will translate to 8% fewer jobs, 8% (or more) less advertising (once the current pre-bought air time expires), and about 10% less fuel burn (they are preferentially cutting kerosene hogs).

The trickle down through the economy hasn't even begun. I'll leave the reports on retail to the other blogs that are doing a better job. I'm an aviation nut as well as a bubble blogger. So I'll keep reporting on the economic indications from airlines.

The poster child of the airline downturn is Las Vegas right now. Its falling apart. Only Hawaii is seeing similar levels of service cuts. Why? These are vacation markets. Vacations are optional in a downturn. We're seeing the same impact almost everywhere that relies on vacation traffic (e.g., DC) Somehow, Florida is still doing ok (in terms on number of travelers. I do not have the stats on spending.)

An aviation thread on Las vegas:

Got Popcorn?
Neil

Auto Sales

2008-06-20T16:42:00.000-07:00

China is on track to sell 10 million cars to its population this year. Anyone doubting that we're in recession should look at this:

China is trying to keep their oil subsidies in the ~$26Billion/year range. That means that as their consumption increases, they will approach world prices. The recent price hike is but the first step (they still are about $1/gallon under world prices).

Also, do not forget that India's consumption is increasing too.
From:
www.marketoracle.co.uk/Article345.html

Now India auto sales are a fraction of the US and China. They're about 100k per month (not quite). But with Tata passing Hyundai to become the #2 auto seller in India... with the upcoming Nano they could break away and push India into the big leagues. That is, assuming India Highway construction can catch up to China's construction.

Why does this matter? Oil is impacting the economy. A huge fraction of jobs are tied to cars. Are car sales down due to the economy or gasoline sales? I believe both. Fewer car commuters is a good thing long term if they can be accommodated by efficient and effective mass transit. Short term that's an issue. Unwanted rapid changes in the economy are a destabilizing influence.

Can I hope that LA can reclaim some of the huge amount of land dedicated to cars and re-allocate it to better uses? (Start with rail and later put in some trees!)

Got Popcorn?
Neil

Bank Downgrades

2008-06-20T12:27:00.000-07:00

Calculated Risk has a link on how BofA is being downgraded due to the risks inherent in the Countrywide loan portfolio. So which banks do you think will be downgraded or fail within the next 12 months? How about even within 2008?

Wachovia, Indymac, Downey and a dozen others are obvious targets.

I'd like to hear what are the weak links internationally. Heck, update me on the East coast wink links too!

Got Popcorn?
Neil