Chuck Ponzi May 24th, 2006

While we have been busy preparing for the great days of summer in Southern California, another set of clouds is looming over this Spring into Summer’s house buying season. In recent years, prices have consistently taken off in late spring and inventories have dipped in most of the local area’s cities. This late spring has been quite different. As of this publishing, San Diego has added nearly 7K units for sale per ZipRealty so far this year, increasing inventory 50%. Los Angeles has added 12.5K, increasing just over 50%. Riverside has added nearly 8.5K up nearly 59%. And the grand total winner in the area has got to be Orange County with an increase of 7.4K up an eye-popping 102% for the year. If the spring bounce is coming, it had better show up in May. With inventories increasing in these areas by several hundred per day, that hope may just be a fleeting dream.

The worst news of all is that affordable at current prices is some of the worst in the nation according to the Sacramento Bee. The worst part of the escalating home prices is shown in the loss of long-term residents and stable families:

Salinas Mayor Pro Tem Jyl Lutes said being squeezed at home makes people less public spirited and more likely to reject bond issues for schools and infrastructure. A cruel natural selection of rising home prices also is pushing people out of hometowns and farther from lifelong associations and jobs. “We lost 900 kids this year in the Salinas school district,” Lutes said. “Where I teach, a small district, we lost 30. It has that ripple effect. It hurts everything.”

The question is whether this is a product of delayed life decisions, or families moving out. The first can revive growth in later years, the latter virtually guarantee a hard landing. However, it is most likely a combination of both; the ratio to which they occur is critical to understand the future. This natural selection has already claimed at least 10 sets of our friends to out-of-state opportunities including their young children. Who replaces these groups (if anyone at all) is the critical question that decides Southern California’s social future.

Last year, we wrote about this phenomenon and Motley Fool’s take on investing in Californian companies. This marks the just over one-year mark that Fluor Corporation announced it was moving its headquarters to lower-cost locales, and just over 6 months that Nissan announced its departure. With Ameriquest’s recent retraction, who knows what will happen with the local job environment.

Greenspan, noted for his often twisting description of all things financial has loosened that tongue a bit to tell us:

“Home sales are off, applications are off, everything is going in the same direction,” Greenspan said in remarks before the Bond Market Association.
Greenspan claimed that while regional housing markets might experience more severe price fluctuations than others, the national housing market itself would remain stable.

Regional housing markets, indeed.

Greenspan’s successor, Ben Bernanke, is coping not only with the incredibly low levels of personal savings among Americans, but rising energy prices, a stagnating housing market, and soaring gas costs.

Seemingly caught between a rock and a hard place, Americans have little savings with respect to outlays. With balooning debt, commitments have substantially increased to where many families find that current payments consume a great deal of current income with little or no buffer. To encourage savings and shore up support to the dollar’s purchasing power, rates need to go higher; exactly the opposite of where construction needs them to go. There may be no way to walk this line; either way may precipitate an event.

Calculated Risk reports that construction employment in California is statistically down, but we have yet to hear of any distress from this slower employment.

A report from Florida:

Joe Passarelli wakes up anxious and sweaty some nights, wondering how much longer it will take to sell his never-lived-in townhouse south of Stuart. Despite slashing his asking price by $55,000 to $285,000 and keeping vigil at sparsely attended open houses for six months, he still has no takers.

Reminds me of a quote from Aesop’s Fable The Town Mouse and the Country Mouse:

A crust eaten in peace is better than a banquet partaken in anxiety.

Better to count your money or cut your losses in a declining housing market and just walk away than to endure the gut-wrenching of putting your life on hold while your house is for sale.

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Chuck Ponzi May 18th, 2006

The LA Times posted a great piece today regarding a hotbutton of Fed interest rate policy; Inflation.

Yes, the crazy reason that metals are screaming (even this week’s dump of nearly 5% in one day) and we have people worried has reared its ugly head. Those who thought that the FED would be done raising rates or at least take a pause should probably wait a little while before calling their bookie.

Like an uninvited drunken uncle, higher consumer inflation crashed the economy’s growth party Wednesday. But it wasn’t just higher energy prices that caused concern. Rising rents and higher prices for a wide variety of consumer goods, including prescription drugs, swimsuits and school books, were key factors behind a higher-than-expected 0.6% increase in consumer prices in April. The inflation news, reported by the Labor Department, sparked a stock market sell-off amid fears that it would lead to higher interest rates and an economic slowdown.Higher rents in particular were worrisome, accounting for nearly half the surprisingly high 0.3% increase in the core consumer price index, which excludes energy and food costs. Rents have been increasing as many people are priced out of the sky-high home purchase market.

If you missed the market sell off, it was quite painful, including a 200 point bender for the DOW. Talk about crashing the party, the FED still has to take away the punchbowl.

Many of these rent increases and other higher prices could stick around because they aren’t dependent on energy and don’t necessarily respond to Federal Reserve interest rate hikes, economists said.The spread of price hikes to nonenergy areas “suggests that inflation is now a greater risk for the economy,” said Lynn Reaser, an economist for Bank of America in Boston.”It’s still moderate,” she said. “But this report does suggest that if the economy moves closer to full capacity, with the unemployment rate at 4.7%, this could be the beginning, perhaps, of a little more hint of a pickup in inflation.”

Too bad for us. Higher prices are here to stay. It’s only a matter of time before these higher prices start impacting consumers; notice, noone has mentioned wage inflation yet. Still, there seems to be much less in the MSM about offshore outsourcing than in the past few years. That means it is either slowing or we’ve become more accustomed to it and boring news doesn’t sell newspapers.

Mark Zandi weighs in on the topic:

It also was another sign that the economy is shifting gears, perhaps into a phase where growth slows and inflation rises simultaneously, said Mark Zandi, chief economist for Moody’s Economy.com.”We’ve enjoyed an economy that’s been expanding very strongly,” he said. “The next couple of years aren’t going to feel nearly as good as the last couple.”

He just mentioned stagflation! The question is whether Bernanke will allow this to run its course for a few years and play dumb when we have substantial inflation, or if he squashes it proactively. Is he a hawk or a dove?

Relating to the housing market, we have a great little cherry bomb at the bottom:

“There is real pressure to rent now because people can’t afford to buy,” said Delores Conway, director of the Casden Forecast.Rising mortgage rates also are giving landlords more incentive to boost rents. When rates were low, Southern California landlords were afraid to raise rents because mortgage payments were comparable to rent costs, said James Joseph, a Century 21 brokerage owner who specializes in the apartment market.” That timidity is disappearing,” Joseph said.

I’m glad we found a way to mention for-sale housing because I was getting worried that we’d forget about the thing running our economy in the southland. The question is not whether rents will go up (they will), but how fast prices will come down to meet them. The presumption that rent rates are comparable to mortgage payments is surprisingly misinformed.

Our replacement for Scary Gary has arrived. Bruce Norris, at TNG is keeping it real from the IE. His recent article in Forbes is well structured, points out the critical mass that we have reached.

“The word ‘bubble’ has been used so often it has lost its significance. Many economists scoff at the idea while others have been waiting for this over-priced real estate market to ‘crash’ for years. Somewhere in the middle lies the truth and the consequences will be felt by hundreds of thousands of unsuspecting real estate owners. By the end of 2007, no one will need to ask if there had been a real estate bubble.

“Here’s how the California market will make the transition from boom to bust as outlined in our new report the California Crash. It starts with affordability getting too low. When so many people can’t afford the monthly payment, our market loses velocity. Because of that we sell less real estate. The first sign of this happening will be growing inventory of available homes for sale. Inventory has already doubled between 2005 and 2006, going from a 3.3 months supply to a 6.7 months supply. The good news is that the inventory is still mostly owned by people, not banks. That will soon change. “The increase in inventory happens to the builders as well. They have a tougher time selling homes and offer discounts, incentives and cooperation with brokers. The bottom line is that the ‘mood’ will have changed. Unsold inventory means less homes being built in the future. This creates a domino effect because the builder has to lay off workers. What does a drywall hanger do if all of California slows down? Most likely he’ll move to where he can find work. That’s the final nail in the coffin for a real estate market: negative net migration. When an area loses people, demand is gone and so is the artificial “stimulus” that caused the price boom in the first place.

Bruce, thanks for giving us the historical perspective from 1997 to today in your article. You can visit him and his office staff at their website, or drop by their blog for a quick roundup of other southland real estate news.

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Chuck Ponzi May 16th, 2006

Over the past few days, we’ve had the chance to review the proverbial Canary in the Coalmine, San Diego. It doesn’t look good. The spring bounce that has come so often in years’ past has failed to materialize with Sandicor’s reporting of 2,626 sales recorded in April 2006. This is 17% lower than any April in their published records, and a full 34% lower than last years’ April amount. While we agree that the market cannot sustain itself on last years’ price, many in the industry have reassured us that we are not having a slump. This is most definitely not what the data is showing us.

Most noticeably, inventory has been continuing its parabolic rise. It surpassed its all-time record set in July 1995 of 19,250 some time late last month. The population adjusted inventory record will likely be surpassed within 1 month, give or take a few weeks. Still, the professional assure all San Diegans that there is no weakness here; everything is just fine.

Median prices have been flat for at least a year, with considerable weakness shown in recent months that show down since summer last year. Housing analysts agree that houses are not like stocks, and prices will not go down because they have intrinsic value that is not like a piece of paper like stocks.

True, houses are not like stocks in every way, but a market is still a market, and certain attributes of a house ARE different than a stock.

One of the biggest differences between the typical house purchase and the typical stock purchase is that most homes have substantial holding costs while stocks often have little or none (not opportunity cost, just the cost to keep someone from taking it away from you). This is your burn rate. With flat or shrinking equity, time to sell means over time, you lose money, even if you are just standing still.

OK, so let’s look at some hard data:

1. According to Bubble Tracking, Current inventory stands at just over 20K and last months’ sales were 2600. That puts us at roughly 7 3/4 months inventory, a decidedly bad place for the local area to be in.
2. In recent months, the average payment homeowners committed to was just over $2700/month. If you take the premise that the average home is going to take nearly 8 months to sell, the selling opportunity (new holding costs) for the current strike price could be as much as 7.75*2700=or about $20K If inventory goes higher to 10 months, it would be $27K. Keep in mind the average new payment includes equity rolled in, so we don’t really get a lift from current equity.
3. Interest rates are most likely on the rise. We demonstrated that the average spread between Fed Funds Rates and 30 Year rates were about 3%, current rates are about 2.5% too low (payments should be about 50% higher than they currently are). With net out-migration, don’t expect expanding rents or newcomers to handle the coming inventory.

The burn rate for many San Diegans should start to get difficult to handle in the near future….

What’s that? What about foreclosures?

They are picking up steam in the area. California foreclosures are up nearly 30%, and we haven’t even started to feel any pain of losing jobs, the economy is still growing. San Diego notices of default came in nearly 60% higher over last year according to Dataquick.

All this leaves us asking, how is the canary doing? Has anyone seen him lately, because it sounds like he’s not chirping anymore.

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Chuck Ponzi May 11th, 2006

The clowns over at Columbia Business School have a great little parody group going over there that has captured the Zetigeist of current economics and its odds against politics.

You can see the video here. (be prepared, it is both large, and requires a special codec, but watching it is very funny)

The best thing for this country right now is an aggressive anti-inflation policy. We missed it for the last 2 years, but we should not delay the pain any longer. Each day, your dollar buys less and less. Remember, inflation is not the increase in supply of money, creating a process where excess money is chasing limited resources (housing bubble anyone). The money supply is already out of control, and needs to be reigned in. It would go a long way to fight inflation if the interest rates were to jump by 50 basis points in June.

Either way, Bernanke’s tough words and action have shown us that he is no clown. He has far more testicular fortitude than many thought he would. Both his utterances to the media and actions since taking over have show that he is serious, and is much more readable than his predecessor.

For many of the financial media; beware of reading too much into Bernanke’s statements, you are no longer working with G-span and need to just listen to his words until you understand plain english… he will flight inflation as much and wherever he needs to.

However, the real problem is the out of control money supply. Hiking rates will have a far smaller impact than controlling the issuance of liar loans, negative amortization, and zero-down loans. These are the inherent vice in the banking and financial system. Even a weakening of the economy causes these tissues of mortgages to fold like a mortgage bank in OC. I believe we are about to see a much stronger monetary policy from a man who has cajones to make it happen.

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Chuck Ponzi May 11th, 2006

Sorry for the absense, loyal followers. My recent time has been occupied by developments in my professional future. There may yet be some changes to come!

Anyway, I’m the first to admit when I’m wrong, and well… I was wrong. It seems that condoflip.com has been much busier than we thought they would be and have since launched their tools. Currently, the information is very limited, and it doesn’t quite yet appear to be the high-volume transaction intermediary that they thought they would be, but at least they’re up and running, right?

However, the best part of the site was the cool new system they have available to sellers. It’s called the Condo Flip Panic Buttons (Patent Pending).

I have to say, this is way cool. I was impressed that the Zilbert Realty Group was progressive enough to see the need for panic buttons.

While it’ kinda reminds me of the “Terror Security Threat Levels” that arose out of 9/11, homeownership, or more specifically, Florida Condo Flippership, definitely has the ability to induce some panic in people. Almost nothing is selling there.

Here is an excerpt of the explanation of the panic buttons:

What’s A Panic Button?

If you are a seller using Condo Flip, we give you an opportunity to lower your price to a point that makes your condo irresistible to another buyer. Essentially, you are creating a dramatic price drop.

When you have a listing in Condo Flip and you push a “panic button”, your price automatically drops, and thousands of buyers are notified.

Most sellers are Level 1 sellers. They list their condo for sale at a price that would produce a profit. At ANY time, a seller can elect to change their listing to a Level 2 or Level 3 listing with the simply push of a button. When this happens, thousands of prospective buyers are alerted that a price drop has occurred, and you may find that an offer comes to you quickly!

Here is an overview of the three levels in Condo Flip:

Level 1 (Green)
These listings make up the regular Condo Condo Flipâ„¢ marketplace. This is the level that most sellers will use to sell their condos.
The listing price is determined by the seller.

Level 2 (Yellow)
Condo sellers that push the Level 2 panic button will have their condo’s listed price lowered to a break-even point. These become great deals.
The price of the condo is the seller’s original contract price plus 8%.

Level 3 (Red)
When a condo seller pushes a Level 3 panic button, they agree to give up half of their deposit, thereby reducing their price to less than what they paid for it. This is for the most desperate of circumstances.
The price of the condo is the seller’s original contract price less 6%.

I’m interested to see how many sellers will actually use this feature. My thoughts are that it will progress this way:
1. Nobody will use this at first- all will be green; maybe 6 or 12 months while everyone is bleeding cash.
2. First a trickle, then an avalance will go directly from green to red. Only the most stubborn will stay at green or yellow.
3. Years from now (if CondoFlip is still around) you will see an even spread of units over various stages of panic.

Meanwhile, I have been hearing a lot more about unemployment creeping up in the Southland and in surrounding areas. (Golden West, Ameriquest, New Century, Real Estate Agencies etc.) If you thought housing prices were crazy, try paying your payment with no income!

It reminds me of one of my favorite posts some time ago… Jobs, Jobs, Jobs, Recovery to Crash where I predicted over a year ago that just the slowing down to a normal level would result in a massive amount of layoffs (1% immediately with an additional 2.5% ancillary losses) based on historical effects and multipliers. Couple that with the rising cost of living outside of housing, and we may just find a lot of squeezed homebuyers.

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Chuck Ponzi May 3rd, 2006

As is with all manias that have continued far too long, participants start to believe their own propaganda. Some even take offense to opposing viewpoints; as if free speech is a hindrance to their own objective. Just such an mail was sent to the South Florida Sun Sentinal. Sorry, I know this isn’t SoCal, but just wait until it happens here.

In the letter, the author accuses the newspaper of being pro-bubble and therefore creating a self-fulfilling prophecy when real estate slows down.

Earlier this week, and many times in the past several months, you have chosen to run front-page articles on the sales slowdown in the local real estate industry and promoting the concept of a coming “bust.” The fact that virtually all real-estate knowledgeable people said that wasn’t the case, nor was it likely to be, seemed not to enter your thought process. Yet on your front page it went — and down went real estate sales. A self-fulfilling prophecy, no doubt.

I’m a little confused, writer, is a dissenting viewpoint not allowed? If the market truly is as strong as you say it is, it should stand on its own merit, right? Why would a little old thing like a newspaper article change anything about demographics, retiring boomers, or foreigners moving there? If they fabricated stories about terrorist attacks, I might understand, but prices coming down? Wouldn’t that just cause MORE people to buy than LESS? If I know something is extremely valuable, and I can get it for 25% cheaper, don’t you think more people would buy it? It’s as if you have thrown supply and demand out the window, and the market clearing price of homes is more linked to the media’s opinion of its value.

On the flipside, all of the those positive articles about real estate that were splashed on the front page and business sections about the “spotless” track record of house prices don’t constitute a self-fulfilling prophecy?

In Friday’s issue, you covered the comments of the National Association of Realtors’ chief economist, David Lereah, where this highly credible and noted national real estate expert said (quoting your article): “Lereah blamed Wall Street analysts and the media for perpetuating negative hype regarding the housing slowdown. They’re telling us we’re in a bubble and that we’re going to come crashing down. There is nothing that could be further from the truth.” My question to you, dear editor, is this: Why wasn’t that put on your front page instead of in your Business section?

Ohhh… so the problem is not that it was written, but its placement?

Let me take a stab at it. David Lereah, while he may be esteemed, is not a public figurehead. His authority is limited to only the NAR, and his advice is generally directed at Realtors, not the general public. Rising (or Falling) home prices are public information that benefits the general public.
OK, think of it this way. If Lay and Skilling (if you don’t know who these 2 guys are, you probably are a Realtor) made some comment about their wrongdoings, the newspaper could put this either on the front page or the business section because 1. They committed a crime (public) and 2. They ran a company (business). However, if someone like say, Bill Gates made some comment, this would most certainly be in the Business section.

But, just as importantly, you feel slighted that your main cheerleader was shut out from the front page and your rage is uncontainable. You just had to write a letter to the Editor.

In fact, housing in your area is cratering. The warning by the newspaper is their civic duty to notify citizens that they are about to feel a lot poorer if they don’t sell thier homes (a little late if you ask me, but better late than never, right?)

Unfortunately, by writing the letter, you have shown your true colors, you are a realtor. Nobody outside of your group gives a rat’s ass about what Mr. Lereah has to say. He’s an idiot, and how you and your fellow realtors continue to support him despite what the facts say shows how truly uninformed you really are. You see, in the world of Realtors, titles are self-assuming. If I want to call myself an “Expert”, all I have to do is start using it with my name as if it were a title. The same goes for Economist. Does he actually publish scholarly articles or defend complex economic models? No, but he has called himself an economist regardless. I would recommend if you want to change your profession or abilities, just start referring to yourself as a brain surgeon or something along the lines. It works in the land of Realtors, so why wouldn’t it work for you too?

After all is said and done, if your market were as strong as you really say it is, the market fundamentals will stand on their own. The fact that you need a mania just to support the current prices you have doesn’t mean that when the euphoria wears off that people won’t be packing the exits. We already see that with inventory numbers all over the place; record highs for ALL TIME, and we haven’t even seen any price weakness yet… just wait, it’s coming.

True economists know that market clearing prices based on fundamentals will support themselves through bad press, those that are based on fads do not. Are you now suggesting that this time is different? Because if that’s true, we have some Pets.com stock to sell you too.

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