Monday, October 30, 2006

Denial in the face of decline

Went to a couple of open houses in South Bay this weekend. I didn't sense a lot desperation, but the realtors were certainly not in stand-off mode that they were a year or two ago. They were much more engaging. I even got a "now is a good time to buy." Yeah ... right. Talk about rolling the dice. Anyone buying now, unless you're getting 20-30 under asking price is going into negative equity IMO. If you're going to live there forever, no problem, but if you think you might want to move in 5-10, you should rent an equivalent place for half price, because you'll be lucky to get what you paid for it. If you have to sell any sooner, you'll be in deep, deep debt for a long time.

Home prices drop dramatically - Nationally, the median price of a new home plunged in September by the largest amount in more than 35 years, down nearly 10 percent from September 2005.

Housing Decline Slows the Economy - The bursting housing bubble slowed economic growth in the third quarter to 1.6 percent, its slowest rate of expansion since the first quarter of 2003, according to a preliminary estimate by the Commerce Department. Economists were expecting growth of around 2.1 percent, down from 2.6 percent in the second quarter. There's no doubt that another huge drop-off in residential real-estate investment was again a prime culprit in the economy's sharp slowdown.


GAO chief warns economic disaster looms

"Housing is in a full-blown recession" - Merrill Lynch economist David Rosenberg. Link
The principal culprit: housing construction, which plunged at a 17.4-per-cent annual rate, the worst performance since the recession of 1991.

Worse, new-home buyers can now expect that the value of their investment will fall. In the U.S., the national average price of existing single-family homes dropped by 2.5 per cent over the past year, the worst showing since this data began to be compiled in 1969.

Tuesday, October 17, 2006

Maybe not EVERYONE should own a home

Edit note: The title of this post is not meant to convey a classist or elitist attitude. Worthiness is not the context of the statement but rather, financial prudence. Many may "deserve" to buy a house but that doesn't make them capable of keeping it.

This chart shows home ownership as a percentage of the national population. While the goal of increasing ownership may have good intentions, it may not be realistic. Is it a good thing to promote buying overpriced assets? That may sound like a slanted take, but the reality is that 5% represents people buying things they can't afford. Is that something we should look at and consider to be a good thing? It would be one thing if they (houses) were within reach of buyers by traditional lending standards, not bought with "creative" or "toxic" loans, and (fundamentally) valued at or close to a historically normal level.

So I believe this 5% increase, which also represents a 5% increase in historical levels of Demand, is due to the following:

1. Speculation - the expectation of appreciation, that borrowed money would make them more money. People buying befoer they could afford so that they could start getting rich quicker, or before they were "priced out forever."

2. Dangerously "creative" loans. Yes, they monthly payments look low. Especially when you're only paying the interest on the loan, or an even lesser teaser rate. These loans actually work and can be advantageous in an appreciating market, but if the market turns, those borrowers can find themselves in deep kimshi.

3. Fraud - realtors and lenders "helping" people buy home that they really can't afford, either through deception, or taking advantage of "unsophisticated buyers", not advising them and not practicing "full disclosure". There is also outright fraud, with lenders "fixing" the numbers of "no-doc" loans and appraisers overvaluing homes.

Does it make sense that home-ownership can go from 64% to 69% (almost an 8% increase) while wages are stagnant and home prices going thru the roof? No wonder foreclosures are soaring.

Friday, October 06, 2006

A rose by any other name .... a rose, but in the case of how this bubble ends, it is apparently anything but.

Study sees '07 `crash' in some housing (free registration required)

David Lereah, slimeball used-car salesman extraordinaire / spin doctor / professional liar of the NAR, thinks you can polish a turd by giving it another name. Or that housing won't crash if you don't use the word "crash". Please people ... soft landing. It creates the magical feeling of pillows and slow-motion euphoria. But I guess that's why dealers no longer sell "used cars", only "pre-owned". That's why 800 sq. ft. is "cozy", not "tiny". I didn't grow up on a farm but I know what bullshit smells like. Listen Dave, your lying is partially to blame for all this you phony, bought & paid for, lying thru your teeth, scumbag puppet (too harsh?) And no amount of lipstick is going to make this pig any less of a pig. You can call it a "correction", "bust", "crash", whatever, but calling it a "soft landing" brings to mind memories of Baghdad Bob and a chuckle. "Baghdad Dave" .... hmmm ... fits. Actually I think we should all call it a "crash" just to be fair: to counter-balance the lies, fraud, and collusion so prevalent in the REIC. BTW, I also refuse to call a "used" car "pre-owned". It makes me feel like a stupid sap.


Applying the word "crash" to sagging real estate markets in some parts of the country, a new study predicts that in the coming year, the nation's median home price will decline for the first time since the Depression.

Real estate prices in more than 100 of the nation's 379 metropolitan areas have a "significant probability of decline" by this time next year, according to Moody's

The prognosis was more dire for 20 other cities in the report's so-called "crash" area, where it predicted that prices would decline by double digits from their peaks before leveling off next year and into 2008.

The most serious price slides are seen in southwest Florida, numerous California metro areas and in the Phoenix, Las Vegas, Washington and Detroit areas, according to Zandi.

David Lereah, chief economist for the National Association of Realtors, disagrees with the severity of the price downturn in the report. "I don't think I would use the word `crash,'" he said. "When you use a word like that, it's almost a self-fulfilling prophecy in the housing market. These are people's homes. Their retirement is depending on it."

Zandi defended the use of the word and his choice of 10 percent price declines as a benchmark. "It's a round number, but it's also a rule of thumb that would be applied to the transaction costs in selling your home," he said. "If you have less than 10 percent equity and your prices fall by 10 percent, you're toast."

But Zandi sees a somewhat bright side. "Even though this is a very serious correction, that these [market conditions] are things we haven't seen before, I am still arguing that the economy is going to hold together, that there's enough strength to overcome housing's weakness."

"That's nonsense," Kasriel said. "The housing market is an accident waiting to happen. We're already seeing a slowdown in employment growth, and a lot of it is housing-related. We're also seeing a slowdown in consumer spending, and that's housing-related."

"It's beyond me how something that has dominated the U.S. economy in the past four years and is clearly in a recession now won't have spillover effects on the rest of the economy."

Tuesday, October 03, 2006

Bueller? ..... Bueller?

You gotta love Ben Stein. He is truly a renaissance man who I have a great deal of respect for. This is nothing earth shattering, but I wanted to post it anyway.

From Ben Stein.

"In March of 1990, after two years of looking for a house during a hysterical real estate boom, I bought a modest home in Malibu for exactly $600,000. The real estate crash to end all real estate crashes began the next month. Within three years, I couldn'’t have given that house away. If I'd been able to sell it, I might have gotten $350,000 for it.

The price languished in the same miserable range for a few years, then revived, and then took off for the moon. By early 2005, I might have been able to sell it for $1.8 million.

“Then, in the early months of 2006, the real estate boom collapsed. I could put the house up for sale, but there are few buyers out there. I certainly couldn'’t get anywhere near what I could have gotten for it in early 2005.

There's a bit of a moral here. When real estate crashes happen, they rarely involve that elusive creature called "‘the soft landing." Yes, friends, when real estate starts to fall after a meteoric rise, it tends to fall hard."

FB's Anonymous anyone?

Notices of Default are up 250% in San Diego and about 45,000 properties in some stage of foreclosure in California. These may not simply be people who bought in the last year. A lot of people took a HELOC and sucked out every bit of "paper gain" that the bubble gave them. These loans have to be paid back of course, or the "lendee" will lose their home.

Here's a couple charts for ya. These are form the article "Lenders gone wild".

This is significant in a couple ways - and I'm not talking about the shocking #'s of stupid loans, I'm talking about the impact of any foreclosure. First, anyone who loses there home adds to Supply AND the inertia of falling prices. Second, since the owner's credit is ruined, they will not be part of Demand for quite a while. Third, and most importantly, it shows that price decreases will not be limited to places where there was excessive building. Demand is detached from Supply.

I could say a bunch of stuff about people seeing their homes as investments and taking out $$$ like it's an ATM to finance shameless lifestyle purchases, but you already know that. It's probably more insightful to recognize that a lot of people pulled $$$ out of their homes to buy "investment" properties, in effect, leveraging their equity to make more $$$. It's important to realize that leveraging works both ways - it can work for you AND/OR against you.