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Monday, May 08, 2006

Real Estate: The Tale Of Two Cities

Patrick's Housing Bubble site has a list of RE headlines each day. (Scroll down to the bottom of this page). It's pretty good - the majority of the articles I've been reading seem to be posted there.

I've been following Discovery Bay, CA for months. This graph (pdf) by a local realtor pretty much sums it up. As listings rise, sales trickle lower. In March, 2005, there were approximately 50 homes for sale in Discovery Bay. In March, 2006, there were over 180 homes for sale. In March, 2005, 40 homes were sold. In March 2006, less than 20 homes were sold. The trend continues. In April 20 homes were sold and over 200 homes were listed for sale. That's a supply of ten months, and not surprisingly, prices are being cut. The walkaway percentages give a good leading indicator of home prices, and, of course, the prices are dropping for condos first.

Denver is later on in the cycle, and fasten your seatbelts:
The number of metro homes on the market hit 29,045 last month, surpassing the previous high mark of 28,043 reached in June 2004. Home inventories were up 6.4 percent from the 27,309 homes available in March.
nventories are up 19.2 percent from April of last year despite the addition of 27,200 jobs that analysts had expected would shore up the housing market.

"The logjam of homes is increasing each month," said Steve McGuire with Re/Max Professional in Highlands Ranch. "It is similar to back in the 1980s when we had a high number of foreclosures. The market was impacted greatly."
And now the true ugliness of the situation becomes apparent:
Buyer representatives are telling him that about half the homes priced under $250,000 are either in foreclosure, are owned outright by a lender or the U.S. Department of Housing and Urban Development, or are selling for less than the amount owed on the mortgage, Jalowsky said.
The stagnant incomes in the lower half of the population is now beginning to yield results. Politicians need to understand that illegal immigration has affected one segment of our population dramatically. These numbers bear witness to yet another stripping of capital from this population group. They bought houses ;they could not afford with loans whose terms they could not afford. As the resets hit, they must sell. The flood of houses for sale in this price bracket is dropping prices significantly, even as prices for higher-end properties continue to rise.

The story told by these numbers is the story of our nation, and politicians ignore it at their peril. What's even worse is that most employment/wage gains for this demographic have come in the housing industry over the last 4 or 5 years, and as it collapses incomes will be further depressed in areas like South California and Florida. The two cities continue to diverge across the nation.

You would think that this would be good for the Democrats, but in truth the initiatives of the Bush administration are aimed at buttressing up this segment of the population, whereas the Democrats in Congress seem to be catering to the rich and influential. Look at my previous post - workers at small businesses have flat or declining wages in part because of the huge escalation in insurance costs. A business may well be paying $50-$100 more a week in one year to employ a worker making $10 an hour - there is nothing left for salary increases.

We are at the tipping point. Either we adopt economic policies that will allow for a more broadly-based prosperity, or we watch our nation slowly decline. Real inflation is running something like 10% for lower-income families, and wages are flat or declining. The rage against Washington is very rational.

Warren Buffet laid it on the line at his investors' meeting last weekend:
Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."
Exactly - and dumb economic policies also create economic consequences. Increasing our domestic energy production offers us one of the few feasible ways to offset the trend by generating good jobs, lowering energy costs (thus helping manufacturing and production industries), suppressing inflation and correcting the trade deficit. The Democrats seem hostage to a weird coalition of extremist environmentalist groups and basic economic illiteracy.

Btw, Buffet's comments on the ethanol thang amused me:
Buffett: "Charlie [Munger] and I do not know enough about the business to evaluate it. It depends on government policy and a lot of other variables we're not good at predicting. It's also a very hot area for investors right now, and we don't like looking at things that are hot and easy to raise money for. Generally speaking, agricultural processing businesses have not earned high returns on tangible capital. Ethanol could prove an exception, but I'm not sure how you gain a competitive advantage with any particular ethanol plant."
IMO, predictions of economic production of ethanol from straw sound eerily like the story of Rumpelstiltskin. I'll believe straw can be economically spun into black gold when I see it happening, and not before. Ethanol production was done in WWII, but no one ever claimed it was economically competitive with fossil fuels. I'm willing to hope, but I am not willing to invest in this scenario. Algae might be feasible. Maybe.

But it's all undemonstrated and unproven, and we don't have a few decades to work this all out. We have eight years to begin to change course. After that the debt bomb overcomes us. If we don't change our economic course this decade, in twenty years we will no longer be able to field a military capable of protecting us. Then we will be the tethered turkeys at the turkey shoot.

Nothing has changed since the days of the Biblical prophets. A country that will not look after the needs of its less prosperous people becomes decadent and declines.

you make some very good points regarding the ever broadening bottom, a bottom that more and more contains people who used to be middle class.

A serious problem is the corruption and gangsterism within the labor movement. This contamination means that most people would rather work at starvation wages than join a union. We are looking at the last of the middle class labor people in the auto business; people who made enough money to send their kids to college, buy nice things, take good vacations and spend their money. Now we have a few hundred thousand mega-millionaires and several hundred million working for survival wages; those people cannot afford to buy homes, nice cars, great vacations and so on. One thing those people do have is guns and if we don't find a way to raise wages at the bottom those people will use their guns.
Yes - the income bifurcation is becoming more obvious. And the real eras of prosperity in this country were always associated with broad-based prosperity for all segments of the population. I think the popular resentment against illegal immigration has to do with this. Even if everyone did join a union, millions of people would be ready to cross the lines.

Construction workers used to earn good wages. Now many construction jobs are done by illegal workers for $10 or $11 an hour.

As you point out, many of these people can't buy homes - and many of them can't buy cars! We can't afford to lose the middle class. We just cannot.
Your remarks re 'we can't afford to lose the middle class' are interesting. I'm not sure that is a reality, but rather, we are seeing an adjustment.

When middle income earners purchase half million dollar homes, well, we have a problem. The very class of people who should know how to manage credit, seem to lose all sense when it comes to RE and investments.

It wasn't all that long ago that a 20% down payment was the norm. Now, there are no money down mortgages that defray interest for a period of time. It doesn't take a rocket scientist to understand that won't work for a middle income earner.

It would be easy to blame the banks- but in fact, that would be like blaming McDonalds for a patron that overeats.

I'd be willing to bet the income of the 250k homebuyers in Denver is pretty low. I suspect the 250k-400k homeowners are next up. They seem to be putting off the inevitable because they are still depleting the 25 credit cards they own, borrowing to make mortgage payments.
Well - I do blame the lenders, and those who have invested money in some of these mortgages will shortly be blaming them too. Many of the big mortgage writers are not banks and don't have the same regulatory oversight.

But yes, it is stupid to do what so many have done. It's grasshopper living.

Nonetheless, prospective homebuyers have been able to go right through the mortgage process over the last few years without ever having had anyone speak one word of realism.

Many of these buyers literally did not understand the terms of their loans. The restraint in the past has come from lenders refusing to make loans that carried a high risk of loss. Once the lenders lost all restraint, the borrowers were certain to follow.
MOM, you aren't wrong- but that said, mortgage lenders have become fast money vendors.

At some point, the consumer has to understand- for and by him/herself- the realities of home ownership and fiscal obligations.

Earning $65,000 and signing a loan for $300,000 at 7% with $5,000 down (and tacking that optional inground pool onto the loan) makes as much sense as buying an 18 wheeler and expecting it to fit in the carport.
This is where the innumeracy of the average person comes in.

I would love to see Congress mandate additional disclosures for these types of loans.

I have read enough on financial forums and advice boards to know that many people didn't understand that their loans were negatively amortizing, for example. This is extremely disturbing. It's not just these people who will feel the impact - the effort to recover from these bad loans will cost you and me in the future as the aftereffects of these bad loans rolls through the economy.
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