Simple math

The most talked about presentation on the web (for housing)

You've probably already heard about Lereah's new powerpoint at the Leadership summit in chicago. If not, please read it as the cheerleader of realestate is now a bear. In particular, a polar bear.

Now for the simple math. From the presentation 28% of home sales were to investors in 2005. *Assuming* investors stop buying (they will), and sales don't slow further (they will):

(investor sales * 12 months) divided by (100%-investor sales)
is equal to the number of months it will take to sell the flipper inventory if only flipper inventory sells.

Or (28% * 12 months)/(100%-28%)=4.7 months.

I cannot imaging flippers can command more than 30% of total sales. So that gives us a minimum "time of falling home prices" of 15 months if everything goes well for the flippers.

It won't.

Neil

ps
A shorter version was first published on David's excellent bubblemeter blog.

Tinyurl:
http://tinyurl.com/esg89
Full link
http://www.realtor.org/Research.nsf/pages/presentations_use?OpenDocument

Uhaul index-Job flow directionality

The iron is frostbitten

The “U-haul index” is supposedly an accurate indicator of job flow. What does this mean? Quite simply this, if you can rend a U-haul from city X to city Y and vice versa, which way is cheaper? The jobs are flowing in the *expensive* direction.

Now, one has to be careful in the interpretation of the results. For example, if I pick Las Vegas to Dallas we must understand that Southern California to Texas job flow will effect the results. Example: If a bunch of jobs are fleeing Los Angeles, its cheaper to have a U-haul driven by a paying customer at least part of the way and thus we might see the Dallas to Las Vegas portion of the trip subsidized by U-haul charging Los Angeles to Dallas customer an extra fee that includes the cost to ferry the U-haul from Las Vegas to Los Angeles.

But if we look at a costal start, we minimize the impact of this. However, the longer the drive we experience a greater chance of price interactions. Thus, we must look at multiple destinations and forget trips to Florida or New England from California.

So what are the U-haul costs from Redondo Beach to a variety of destinations? All prices are for the 26 foot truck on September 22^nd. I picked a Saturday travel date as it will emphasize the job flow directionality via the prices (peak demand times pay the full directional penalty). Searches were performed on 8/15/2006 at just before 9pm pacific time.

90277 to Las Vegas: $638 Return: $226

90277 to Phoenix, Az: $670 Return: $131

90277 to Dallas Texas: $3,389 Return: $827

90277 to Austin Texas: $6,439 Return: $575 Yes, over 10X more expensive!

90277 to Spokane, WA: $4,845 Return:$199

What can we conclude?

1) In every instance, its cheaper to go to Redondo Beach than to leave it. This tells me that jobs are fleeing Los Angeles, big time.

2) U-hauls are pilling up in Austin Texas. Wow! Its not that far from Dallas, so the added $3k+ in costs can only be due to local dealers crying uncle. If the housing bubble dies late anywhere, I’ll bet on Austin.

3) Spokane Washington also has an odd premium. Since I did Austin early and Spokane late in my search… it wasn’t search order. So is someone hiring in Spokane? Hiring big?

4) Phoenix and Vegas have premiums, but not like other areas. Is this due to a geographical effect? (But Austin and Dallas were $3k+ apart… so that cannot explain everything…)

5) This says nothing about population growth! Nothing! Why? If someone is not affluent enough to be middle class, they don’t hire a U-haul, they just fill up their one car and go (e.g., students, illegal’s, etc.)

6) This index says nothing about the upper middle class or big corporate moves. However, I’ve participated in enough corporate moves to know that with every campus shutdown, there are those who treck out on their own. So while the U-haul index will miss the magnitude of a large corporate relocation, it won’t miss the entire effect.

Basically, Los Angles from a middle class housing and employment perspective… is going to get hammered. We’re not looking at a subtle downturn what so ever. Expect Southern California housing prices to start sliding in a manner that isn’t going to be pretty. When? Who knows. I’ve been predicting by the ides of October (10/15/2006) that “Joe sixpack” will know that housing is declining in value.

This is but one more indicator to show that the market is heading downhill for Southern California and doing so fast.

So what does this have to do with a blog about buying a house? Simple. One strikes when the iron is hot, not when its at a temperature that would make an eskimo proud. Wait before buying in Southern California. Your wait will probably extend into 2008 or even 2009, but don’t buy in 2006 and beware the falling knife 2007. For home buyers, the iron is frostbitten right now.

Its all about alligators

Investments that bite back

How many people do you know whom own investment property? If you take a little time to ask, its amazing! You cannot turn around at any event without bumping into a real estate “investor.” Ok, I’ve always known quite a few prosperous families who had their vacation home; but in the past it was people whom could afford vacation homes. Now I’m going to tell you why the housing market will crash and crash hard.

You see, its all about the Alligators. Many have heard that an investment property is often called an “Alligator.” Why? As soon as you cannot afford to make the payments, it eats you. ;) How many people own “Alligators” that will soon be chomping away?

Drive around North Redondo Beach in the South Bay area of Los Angeles. Look and see how many nice new town homes have been built. Notice how many are for sale and are empty “never lived in?”

Then take a bit of time to tour homes in South Redondo Beach (say “Hollywood Riviera”) on a Sunday during open house hours. Notice something? None of them are occupied!

I’ve been through too many open houses with my fiancé where the realtors were afraid we wouldn’t be interested in the house (we weren’t).

Other real estate blogs have noted that if there is appreciation greater than nominal interest rates, home “owners” can extract equity every year. In fact, in a fast appreciating market at absurdly low interest rates they can do so “pain free.” At some point they just sell their California (or other bubble market) home and move on to a lower cost area.

Well the musical chairs have stopped. The economist Thornberg has finally put out a shingle so that he can speak about housing as the bear he currently is.

“A hard landing could come if housing prices begin to fall, Thornberg said, in large part because that would scare consumers accustomed to watching their net worth rise on paper. Their spending pullback and a corresponding drop in construction could push the economy into recession.”

From:

http://www.latimes.com/business/la-fi-thornberg15aug15,1,4462297.story?coll=la-mininav-business&ctrack=1&cset=true

Folks, real estate investment is the most margined investment of our lifetimes. Gee… Almost like Florida 1926.

Those Alligators are hungry and they’ll drive the market for the next few years. I once read (sorry, I forgot where) that a real estate investor is a real estate speculator who has lost money. How long can flippers feed the alligators?

Neil

Market waking up (but still sleepy)

Market waking up

Its been another month and not much has happened. Oh, inventory is building up in the south bay of loss angeles. The shear numbers of homes and townhomes on the market is staggering.

What I have for my non-existant readership base is a question: Whom has been buying homes here for the last few years?

This isn't a rehtorical question. Quite simply, far too many of the homes for sale are empty. Where are the owners living? Why is so much housing stock in the beach cities of Los Angles sitting empty (or with micro furniture in it taken from a model home)?

My theory: The residents of Los Angeles are cashing out and moving elsewhere. I wonder if even during the 1950's the USA built homes as quickly as we've seen the last few years. So has Los Angeles exported its homeowners and we're left with a bunch of flippers about to find out its midnight and the ball is over?

Personally, I think jobs are quietly being exported to other states (or even other countries, but mostly other states). Yes, a huge immigrant population is providing cheap labor; but unless something has really changed, Manhattan beach isn't about to be taken over by families earning at or below the median salary for the region.

Now for my prognosis.

July might or might not be negative YOY (Year over year) for the median sales price. Might?!? Yes, sales are dropping, price reductions have become the norm, and soon sellers will have no choice but to chase down the market.

A comment for those who think most sellers will "withdraw" from the market and decline to sell for reduced prices:
1. Anyone who bought before 2001 will still make a *huge* fortune cashing out. Don't you think once prices begin to slowly fade that some people will opt for an early retirement rather than wonder if their "next egg" will drop in value?
2. We're starting to see rates reset. Ok, the "tidal wave" isn't for 10 months, but more and more people are unable to keep up with their suicide loan.
3. Soon the smart speculators (flippers) will realize that the current market price represents the highest potential profit and they'll stop dreaming and start selling. Most flippers will try to hold on and will be forced to "feed the alligator" once their rates reset.
4. Soon (ok, maybe 3Q2005) many people with neg-ams will hit their borrowing limit. While that sound innoculous... it isn't. Once the maximum neg-am limit is reached on an option-arm... the loan minimum payment schedule automatically resets to an amortized loan with high payments that *include* principal. If someone is struggling to pay 75% of the interest... when their payment suddenly is 160% to 180% of what it was... they're toast.
5. In a declining market, no one rushes to buy.
6. I keep hear about people transfering to areas that are more affordable; it also seems that the great hordes who were once willing to move into this State from afar... just aren't coming in anymore (at the incomes that could buy a home before 2009).

And to think... we're almost done with the summer selling season...

By the "Ides of October," the market will hurt.

This is not what I want to happen. I just want to be able to afford a home in the region I love.

But wages cannot support these home prices. Don't be silly and think companies can afford to raise wages right now... The profits aren't there. If anything, layoffs are coming.

Oh, in my quest to evaluate the market... Its just too obvious *most* of the homes that were for sale before the summer are still on the market. Maybe its just the neighborhoods I'm interested in...

Neil

Real Estate comments

Real Estate comments

Alright, here is my second posting. Basically, I have started reading up on the other online real estate blogs out there. I cannot over-recommend a few if you're starting to look into buying a home:
http://thehousingbubbleblog.com/
http://sacramentolanding.blogspot.com/
http://bubbletracking.blogspot.com/

Basically, I have become of the opinion that we're in a flat market until about mid-September. Then... expect your world to be rocked as the market falls out.

Let's take the example of where I want to buy, the "south bay" region of Los Angeles county. About 29% of the buyers in 2005 were "flippers" (aka, speculators) looking for that "greater fool." Many of them realize they're sunk. So basic math says the "for sale units"/"buyers" is going to go up by:
(1+29%)/(1-29%)=182%!!!

Note, I assume that flippers jump out of the market as a whole at the same rate they bought in. I also just assume the rest of the market stays the same. But let me tell you why the buying and selling will get further out of ballance (in my opinion):

1. Buyers "panic bought" last year (2005) in bidding wars with speculators. No need for that in 2006!
2. Nice housing inventory coming online. :) I can't believe all of the new construction in the South bay.
3. It seems like everyone I know who is retiring is getting the *ell out of LA. It doesn't matter where they go, their retirement is being padded by the sale of their house. (Maybe they cashed out, maybe they had no choice. That doesn't matter, what does is high income people seem to be leaving LA.)

We're almost at the inventory point where enough sellers will discount to drive down the median price. Please read the other blogs as to why the median price doesn't matter when most of the sales are rebuilt or new housing. Yes, new in the south bay! Drive around North Redondo and look at the McMansions being completed/sold. Those $700k box homes are now each a pair (or more) or $1.05 mill McMansions. Since the contracts for many of those were written in the "buy at any price" 2004/2005 season... of course what's selling is pricey.

But look at the sales rates plummet. Others have noted that 8.7 months of supply seems to be the market breaking point. With inventory growning and sales weak, when will be hit that point?

Do note I predict that before the market crashes we'll see a final "end run" on housing. It wouldn't shock me at all to see one last 10% boost in median sales prices. But by September, the floor will fall out.

Will it start in San Diego? Pheonix? Sacramento? DC? Miami? Somewhere else in Florida? Las Vegas? Denver?

Have no doubt, by Christmas 2006 even the major media will be clued in to the housing bubble burst. Yes, even realtor subsidized rags like the LA times will have to face up to the facts. Its going to be too brutal to ignore.

Knowing the market will fall is easy. Now when do I buy in?

Supposidly 40% of all new California white collar jobs since 2000 have been real estate transaction related. Why? Shouldn't the internet have cut the number of required jobs per transaction?!? My next loan will be internet based. My "buyers realtor" will almost certainly be a discount realtor that I find on the net. No way am I paying $12k+ to have someone help me buy a home when I'll do 80% of the work ahead of time. :)

Interesting times ahead.
Neil