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Tuesday, January 02, 2007

2007's Breathless Pause

Wall Street is closed today, so we have time for a little sober reflection.

Calculated Risk has an interesting dialogue going on upon the discrepancy between the financial pundits and the homebuilding company executives. The Streeters claim that's all bright and rosy, with a new dawn for the housing industry visible over the horizon. The homebuilders are saying otherwise, and Lennar is the latest to chime in:
Lennar (Charts) also said it has "not yet seen tangible evidence of a market recovery." And it announced it would sell much of its interest in a joint venture known as LandSource, which owns a major amount of undeveloped property near Los Angeles.

The ongoing weakness in the home building market will cause Lennar to take a pretax impairment charges of $400 million to $500 million due to the revaluation of some of its assets.
...
Including those value adjustments and write-offs, Lennar said it will post a net loss per share between 88 cents to $1.28, compared to the net income of $3.54 a share a year earlier.
Someone's confused. It is the homebuilding executives who face legal penalties for misrepresentations, so I tend to rely on their statements. YMMV.

In other news, MLN USA is not funding loans, but there are rumors of buyouts. It appears that their account executives are being furloughed for two weeks. I think there may be competition for the servicing arm, but I doubt the burned brokers are going to be easily swayed to submit loans to MLN again after being left in the lurch. Never mess with a salesman's money.

Orange County is headed for a rough housing year; this OCRegister blog entry points out the problem:
Us: How do you think O.C. will differ from the nation or state market?
Leslie: Because of the greater-than-average inventory of unsold homes on the market, sellers in Orange County will need to be especially motivated and realistic if they are really interested in selling in today’s market. There is a lot of competition, so only those homes that are priced to sell and are in excellent condition will sell quickly.

Us: What events might change your outlook, pro or con?
Leslie: A recession or spike in mortgage rates is the most obvious negative scenario for housing.
I don't agree with the overall positive forecast of only minimal price drops in OC, however. Take a look at the HousingTracker's listing prices since October, 2005, and DQNews' reports of sales. There's a bad year ahead. List prices are down for the 25th, 50th and 75th percentiles:
25th percentile:
Oct 1, 2005: $514,900.
Jan 1, 2006: $499,900
Jan 1, 2007: $496,000
50th percentile:
Oct 1, 2005: $629,900
Jan 1, 2006: $629,000
Jan 1, 2007: $605,000
75th percentile:
Oct 1, 2005: $780,000
Jan 1, 2006: $775,000
Jan 1, 2007: $735,000
The downward trend is clear, and the subprime weakness is going to start to accelerate that trend. Prices have outstripped incomes in a big way in Orange County, CA, and now they are going to start to slowly converge again.

Right now it looks like mortgage rates are still going up. For the last three weeks, purchase money apps have been dropping and rates have been rising.

The existing home sales report for November was widely reported as being favorable. If you look at the non-seasonally adjusted numbers, it looked awful. The west and south have sprung leaks now. I guess I should post separately about that, because when you are into the second year of a multi-year downturn the valid comparisons get a bit more complicated.

Pending home sales for December will be out on the 4th, but any hope of a real semi-recovery is really pinned on mortgage rates going effectively lower (because subprime rates are going higher, and therefore to get the same overall sales we need lower prime rates), and that seems quite unlikely at the present time.

Bottom line? I cannot find the "bottom", the "recovery" or much optimism for housing in the current numbers. The big effects of the housing downturn will start to radiate through the overall economy in the first quarter as actual building follow permits down the tubes, the weakness in the construction sector impacts incomes, and the refi cashouts are constrained. The consumer can no longer be bailed out of the negative savings rate by extracting home equity increases, so it is going to be hard to sustain growth in the economy overall in 2007. Everything else would have to happen exactly right, and that is unlikely. A drop in gas prices to about $1.80-$1.90 a gallon would do it, but this I don't expect. Unfortunately, the consumer is going to be further squeezed by increases in property taxes due to revaluations in many areas, and gas prices are increasing around the country.

I think the economy will start to contract in the first quarter. We won't have official confirmation of recession until late in the year. A better indication of how things are really going for consumers is going to be fast food prices. Watch for those value-priced menus in late summer!


Comments:
Update from Behind the Orange Curtain:

While recovering from surgery, I took walks through downtown Anaheim as part of my post-op exercise program.

I've always been curious about new construction, and have been watching three new four-story buildings (mixed retail and CONDOS!!!!) going up near my house.

Well, I walked into the sales office for one of them -- "Loft Condos" (i.e. zero bedrooms, just alcoves and floor areas allocated for beds in what used to be called the living room) from $400-600+k (translates to $3000-5000/mo mortgage + property taxes, not including HOA squeeze). Sample kitchen in sales office -- brush stainless appliances, granite countertops -- triggered immediate "DIE YUPPIE SCUM!" reaction.

RE agent on premises claimed that target market was the myriad of DINK couples and/or singles coming out of college with six-figure starting salaries; repeated mantra that "prices will drop no more than 5-10% before going UP UP UP UP UP".

Despite a good layout and urban arrangement, architect's graphics of finished building look like a 1920s-era Bauhaus-style Euro-industrial building/factory; features include lots of security and access control (i.e. keep the common rabble where their presence can't contaminate Their Betters).

All for $3-5000/mo (plus HOA squeeze) for the next 30 years.

Again, Die Yuppie Scum.
Die Flipper Scum.

The Headless Unicorn Guy
 
The Orange Curtain? Laughing, over here.

A 10% drop on a $400,000 condo is a loss of $40,000. Okay, I guess if you put that down in cash you can afford to still walk away, but it's gonna hurt. But very few are putting down that 10%.... That's the problem.

That's why I think prices behind the "Orange Curtain" (a reality-filtering device, right?) will drop more than most. A lotta of upside down people who bought with unsustainable mortgages are going to be hurt badly.
 
"Behind the Orange Curtain" has been a joking reference to The OC for around 20 years.

I understand why the downtown Anaheim area is building up; the entire area got bulldozed for "urban renewal" 20-30 years ago and the current construction boom is infilling the resulting vacant & parking lots with a uniform mass of 4- to 5-story mixed use buildings. This creates what in German is called a Stadtkrone and in Greek is called an Acropolis -- a "crown of the city", an easily distinguished urban center amid the tract houses. With the entire area having been built up in the last real-estate boom, "infill" to higher density is the only way to accomodate further real-estate growth.

Still, I would have liked to retain more than one building of our original downtown. Fullerton (a couple miles north of Anaheim) did that, and it looks like a TOWN instead of a series of modern/postmodern building projects. Anaheim allows mixed-use zoning (which could help cushion a condo price crash), so a lot of the new construction has retail on the ground floor and office or residential above, returning to the common pattern of older urban centers. A lot of the block-sized new construction even breaks up their facades into imitation of the smaller buildings of previous eras, giving a more human scale to the large buildings. However, compared to the actual older downtowns of Fullerton, this style comes across more as Disneyland Main Street.

This does not change the fact that the prices being quoted on the new Loft Condos (zero becrooms, three baths) are at least twice what a realistic price for the area should be. (Realistic prices estimated from Zillow history graphs and the rule-of-thumb that $800/mo in rent equals about $100k in price.)

The Headless Unicorn Guy
 
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