USB predicting interesting declines in 2007

USB bank is predicting a 10% drop in US home prices in 2007. Head on over to the bubble news network for more details. More than one video discusses the downturn.

http://www.paperdinero.com/BNN.aspx

What interested me was the regions they picked out for the most declines:
1. Florida
2. California (Southern California)
3. Nevada
4. DC

(I might have missed Pheonix...)

Getting information about DC is tough. But I think we all know about the others.

What does a 10% decline mean? For most buyers, wait. In southern California, a 10% drop in prices means about a 100k price drop in the nice neighborhoods. While those prices are dropping, it also means that the would be buyer is able to save cash.

What also interested me is the statement by the USB rep that a decline in home prices entails a drop in consumer spending which will trigger a drop in prices. Ok, makes sense... That will likely force a drop in the Fed rates (short term rates).

This finally ends the inverted yeild curve. I quite frankly expect long term yields to slowly keep climbing. Since the typical mortgage payee's ability to sustain a higher payment isn't there, this doesn't translate into a penny of higher monthly carrying costs. In fact, it implies a dramatic cut in the sales prices.

My prediction is that a 10% drop in 2007 is about right. I'm entertaining estimates of 7% to 15% drops nationally. In southern California? Much higher in San Deigo and OC. But what about the south bay? Due to the extreme prevelence of risky loans, probably a little worse than the national norm, but not much. Home prices are sticky. REOs take a long time to get to market. People are greedy and loath to "realize a loss."

And job losses will force it. First in the mortgage markets, than realtora, lumber, furniture, airlines (and other high end services).

It will be an interesting year,
Neil

Merry Christmas

I'm taking a short break from blogging just to enjoy the holidays with family. In fact, it almost Christmas eve and my gifts to others are waiting to be wrapped. That should be my #1 worry.

I'm not concerned about paying my mortgage (I rent).
My finances are in good shape. (I rent)
Last year I was able to focus on my job and it looks like a promotion will go through.
Did I mention I'm getting married in the summer? :) (Great woman)

I've bought a bunch for Christmas, but I'm being sensible.

Whatever holiday you celibrate (or avoid), I hope you are able to relax and enjoy this time of year. (Or, at a minimum, get double time pay for your efforts to keep this counry running.)


For one week, I'm just going to forget the bubble and spend time with family.
Neil

ps
I lied, I can't stay off the bubble blogs... but that's sneaking a read here and there. I really am going to spend a week with family. :)

U-haul index revisited

It shocks me to be reading on how the U-haul index is getting worse right now. Back in August I blogged about it and there were sites where I cost 4 times as much to rent a U-haul one way as the other. For those who don't recall, the U-haul index is an indicator of the directionality of job flow in or out of a region. So I decided to revisit it.

My previous article:
http://recomments.blogspot.com/2006/08/uhaul-index-job-flow-directionality.html#links

A quick review of the U-haul intex:
1. Pick a city and see how much it costs both ways to rent a U-haul in/out of the area to multiple destinations.

2. The more expensive direction is the direction that has an unbalanced surplus of jobs going in that direction.

3. If all destinations from a city are more expensive, it means a net-outflow of jobs.

4. The further the travel, the more likely prices also reflect interactions of mid-point job flows. But it should give a trend.

I’m going to redo the same cities to/from Redondo beach that I did before. The format is to see how much it costs to go to 90277 (zip code) to the city mentioned and from. Again, I pick a Saturday departure to emphasize the cost penalty of directionality (depart, 26’ truck on 1/13/2007

Prices from city listed to 90277/Prices from 90277 to city listed:

Las Vegas, NV: $1,168 from Redondo, $276 to Redondo

Pheonix, AZ: $973 from Redondo, $181

Dallas, TX: $3,650 from Redondo, $730

Austin, TX: $3,650 from Redondo, $486

Spokane, WA: $5,544 from Redondo, $406

What can we conclude?

First, lets look at the old results from August:

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

In all cases it costs a hefty multiple to get out of Redondo to these out of state destinations. So we see that job flow out of California continues. Whatever crunch U-haul faced to Austin has mitigated a little. A very little… It is still crazy expensive to move to Texas yet a relative bargain to return. The $3k premium to Austin over Dallas has disappeared, that’s it… The difficulty in getting trucks back from Austin is reflected in the discounted return price (compared to Dallas).

It appears I was only a little “optimistic” predicting that by Mid-October Joe Sixpack would know that home prices are declining. But I wasn’t too far off. He and Jane Sixpack know home prices are weak to declining. They just believe the NAR propaganda that prices will recover.

I’m still floored by the demand to Spokane Washington. I have no clue as to why… but the premium has persisted. Is there such a job flow to Spokane that getting there from anywhere is expensive? Pheonix to Spokane was $2,542 while the reverse was $1,117. So there is definitely a Spokane premium. I just cannot believe Redondo is having to pay a $5,000 premium.

The longer people dig their heads in the sand the more population will capitulate and leave the state. On one hand, that’s good for those that want to stay in state. On the other, there is a point to where workers deserting will break the economy.

2007 will be interesting for SoCal real estate. For the most part the California U-haul index is staying the same: bad. Really bad.

Neil

Without a "bubble," buyers are going to wait anyway

There has been much talk about how the press is slowing real estate sales. I’m going to present an argument as to why if buyers do not anticipate incredible equity gains they will wait with no regard to what the press is saying. In other words, common sense, without any knowledge of a bubble, is enough to force down home sales rates.

The first bit point is obvious. Home prices are at incredible heights compared to incomes. Thus buyers are going to be financially tight for a long time if they purchase. Buyers know this and this thought scaring them away from buying or at least making them hesitate. Also, everyone in bubble areas below age 40 knows someone in financial trouble due to the suicide loans, HELOCs, or normal financial distress. I

The second bit is most of the remaining buyers recognize that owning a home in bubble markets is stratospherically more expensive than renting. Thus many, like my fiancée and myself, are adjusting first to the lifestyle home ownership would entail: less dining out, cutting costs, etc. Thus a delay of home purchase.

The third and I believe most important reason is that it is now impossible to save money for the first 5 to 7 years after buying. Most people know a financial cushion is invaluable. Thus, sensible buyers (about all who are left…) won’t be afraid of 2% appreciation. As long as home prices are at such multiples of incomes and appreciation is weak… they will put money away until their down payment and their financial cushion are sufficient.

Since the market cannot sustain current prices without continued fevered sales rates… we have a guaranteed drop in real estate prices. Everyone should have asked what happens when enough people are “priced out forever.” It has happened and thus this is the real estate market we’re stuck with. Press reports might slow the market a little further, but they are not the cause nor the cure.

Neil

"substantial cooling of the housing market."

The fed kept rates constant

On growth, the Fed said that the economy has slowed this year reflecting a "substantial cooling of the housing market." It added the word "substantial" to describe the housing slowdown in this statement.

preceeded by:
In its statement, the Fed continued to signal concerns about inflation, stating, "The Fed judges that some inflation risks remain." That is the phrase the Fed has been using to signal that further rate hikes are still possible unless inflation slows more.

http://biz.yahoo.com/ap/061212/fed_interest_rates.html?.v=10

Its starting... and the fed is between a rock and a hard place. I wouldn't want to be BB... he has a tough job ahead.

A coworker and I just had a discussion and what he wanted to know is "when will they lower interest rates again?" It took a while, but when I explained that if rates don't go up his pension would be reduced... He wasn't as adament about a return to low rates.

Interesting times ahead. Any bets on when the first hedge fund is taken under by credit default swaps?

Neil