Wednesday, May 14, 2008
Your eMails
by David Yu
I haven't had a chance to post readers' emails for a long while. There've been some pretty good questions and well written responses that I'd like to share with all of you.
Let's get started.
BASEBALL ATTENDANCE
What would your Major
League Baseball attendance chart in "The Slump of the Housing
Market", Financial Sense May 13 look like if you normalized it to
USA population levels? i.e. take out increases due to population
growth?
David's Comment:
The Major League Baseball's attendance as a percent of the U.S.
population has similar pattern of growth. The small percentage chart
overlaid on the original chart displays almost identical pattern from 2000
through 2007 (see Chart 1 below). So, it would seem that the MLB
attendance has indeed been growing in both absolute and relative terms.
Incidentally, our annual population growth rate of 0.97% is one of the lowest in the world, but it's the highest among G8 nations, namely, Britain, Canada, France, Germany, Italy, Japan, and Russia. What's the implication of that?
Chart 1
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HOUSING MARKET RECAP
David,
Wanted to write you a quick
thank you on your website. I've been passively reading for the better
part of year and find it extremely useful and informative.
I was interested to hear any thoughts you had around the housing market
and homebuilders in particular. I'm struggling to understand how the
market is turning bullish in the short-intermediate term on these (XHB
is up 13% this year, individuals are up 10-40%) given the recent
earnings and economic data.
I see the argument that the worse the current #'s are the quicker we
will pull through and into a recovery (and return to profitability), but
I find it really hard to ignore that housing prices have only fallen
10-20% in FL, CA, AZ, NV after a 70% run-up in 4-5 years (where
Fibonacci retracements would lead to believe that we should see at least
another 15-20% fall in these markets, lasting well upwards of a year).
Which leads me to homebuilders, who have just started to take operating
losses after slashing payrolls as much as 50% and pulling out/scaling
back nearly all growth markets. While most have beefed up cash positions
(I don't see many going bankrupt) given the negative to flat near-to-mid
term operating outlooks and a shaky at best longer term outlook, I'm
struggling to see how the market is pricing these at even 10 to 15 times
2010+ earnings (assuming paper losses in 2008 & 2009 due to more mark to
market write-downs). Any thoughts? (I understand if you don't have time
individually, hopefully I gave you an idea for weekly write up topic).
Thanks again for the great information, best to you.
Trevor Schilling
David's Comment:
I appreciate a well thought-out message like this. Trevor, as per my
Slump of The Housing Market editorial on Sunday, this housing market
cycle has quite a way to go before it hits the real bottom. For one
thing, some of the problems are structural, and structural problems
don't just go away overnight. I'm not sure about Florida or Arizona, but
one of the structural problems with California's real estate market is
that it's losing its population.
While the sporting events attendance and the U.S. population have been growing in tandem, California has been bucking the trend. Chart 2 below shows a long-term gradual erosion of California's Net Domestic Migration of the population. I had posted this chart quite a while back to address the same issue.
Chart 2
In addition, California's unemployment rate had recently surged past 6%. So, the two most important elements, population and employment (NOT interest rates) that create housing demand have been diminishing in California. And that alone provides sufficient support for my assertion that this housing market contraction cycle has yet to run its full course.
Unscientifically, another gauge of a housing market bottom is that NO one wants to talk about real estate anymore, just like back in 1997 and 1998. Right now, real estate's still one of the main topics in the news and at the dinner tables. My estimate is that this is another 7-year cycle that won't run its full course till perhaps 2012, give or take a year.
Nonetheless, like I said, nothing runs straight to the bottom. When the price level had fallen so much, bargain hunters and speculators are due to come out. Private equity and hedge fund groups have been out buying mortgage papers and land. It may be time for the housing market to have a little bounce.
My point is this. This year may not turn out to be as bad as everyone had anticipated because the worst is yet to come.
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MORE HOUSING MARKET RECAP
Hi David
I read your article today and it's the first thing of yours I've read on
Safehaven. I used to live in Walnut Creek for 15 years prior to the last
5 years in Pleasanton. As a Commercial Banker, it seems somewhat flawed
to use the downtown Walnut Creek area as any economic gauge, as both
Walnut Creek and Pleasanton are, or are surrounded by, highly affluent
areas of the Bay Area. Walnut Creek and Pleasanton are what I
like to call Disneyland due to the lack of connection to the financial
reality of most Americans or Californians. They are markets I would
expect to be last or laggards in showing economic stress.
I know quite a few restaurant owners in both markets, and from my
questioning them is seems that most established restaurants are off on
average so far this year 5-15% in gross revenues. And, there has been a
shift down the price point for dining out.
There is an obvious reason for the increase in million dollar listings.
In talking with my mortgage broker sources over the past several years
there are numerous people in the bay area especailly the 680 corridor
with household incomes beteen $120-175K that own million dollor homes
because they took out an exotic mortgage to qualify. They essentially
bought their house and maybe specualated on another home because they
got in with an exotic mortgage. In the more affluent markets that has
just starting to show stress. I have a great example for you; I have a
prospect that wants a business line from me and he is a contractor
specializing in remodel (bathroom and kitchen) work. He told me that he
owns his house worth $900K versus debt of $800K, and 3 rentals all in
Pleasanton, and all with minimal equity. His rentals do not cash flow
and he only takes $6-7K per month in income from his business. He tells
me
he is making payment option 4 on all four home loans. So, I had to ask
what that was. He said it's the payment option where he is paying less
than full interest and the loan balances are going up.
This one example reflects 2 issues in the affluent areas of the Bay
Area. First, this indvidual is making $6-7K per month and by NO means
qualifies for an $800K loan on any traditional loan program I know of.
There are a lot of homeowners in the bay with this issue and as their mortgage comes due and reprices the reality is they bought a primary residence they could never afford in the first place. Secondlay, this individual also represents the speculator that bought investment real estate with little to no money down using exotic mortgages. In my last discussion with this indiviual all 4 homes will be coming to the market soon.
The affluent areas of the bay
area are just getting started with their real estate issues.
Sadly, a house worth $1,000,000 dropping to $900,000 doesn't really make
the monthly payment that much cheaper or that home more affordable
espceially if the banking environment now wants to see more skin in the
deal, which most people don't have. I'm expecting further declines in
real estate values and another wave of foreclosures sometime later this
year, which translates into more supply and tougher real estate markets
and consumer spending.
I think the greater problem that has rarely been discuessed by most is
the coming change in demographics behind the large baby boom population.
I review personal financial statements of this demographic frequently,
and the majority of them have the majority 65-80% of their net worth in
their house, which creates no cash flow for retirment. It's only a
matter of a couple years when they hit 65 and start to review their
options of selling their home in the Bay Area and moving to the valley
or out of the state entirely. My afther is 62, and I had hime sell his
house in 2004, and he can't waite to retire and move out, and his
friends are all looking for retirement destinations outside of the state
for their affordability on their pending reduced incomes.
David's Comment:
Thank you for taking the time to share your thoughts and personal
experience. It's much appreciated.
Contractors, and everyone else associated with real estate, are really suffering right now. That's the deflationary effect that's somehow neutralizing, for whatever the magnitude may be, the Fed's recent liquidity blast. But, this could turn into a liability when the damage is no longer contained to the lower segment of the food chain. Your experience as well as statistics of increasing number of high end property listings seem to indicate that the affluent may have started feeling the heat.
I agree with you, by all means, that the worst is yet to come.
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OF MORTGAGE AND THE CPI
Good article, I would like to offer
additional fundamentals to your ultimate case of further housing
decline--the Alt-A loans are coming up for reset, and ultimately the
long term interest rates will increase when our creditors can no longer
afford to take the currency losses and our decreased buying of their
products due to our consumer retrenchment which is now getting rolling.
In addition, I do agree to disagree about being in recession, as the
"core CPI" is a meaningless number to everyone but the US Govt who uses
it to steal from the salaries of govt and military workers and social
security recipients. Any household's "checkbook" CPI shows that the
inflation number is much higher, and has been for a couple of years, so
it is substance over form--the great accounting question...the substance
of experiential inflation means we are in a real recession --over the
form of a NBER definition based on a meaningless number----history will
prove out---only too late for so many unknowledgeable and naive
investors.
Best Regards,
Pat Kelly, Retired Analyst
Putting it all
together......
While the March year-over-year change in the official CPI was only 3.98%
...
The true CPI, based on the same standards as those that prevailed before
the Clinton administration, is now 11.58%!
This means that the gap
between the official CPI and the alternate CPI is now a whopping 7.6
percentage points.
In other words, the U.S. government could now be understating the CPI by
a full 7.6%!
David's Comment:
Thanks, Pat. Sooner or later, these chickens will have to come home
to roost.
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So, you see what I meant that too many people, including yours truly, are still talking about real estate. It shows that there's still a lot of interests in real estate. Now, that can't be the bottom, can it?
Since institutional investors and the big boys aren't playing nowadays, neither am I. I'd be gone again the next few days for some R & R's. Hopefully, we'd get some playing time next week. Before I go, I'd like to leave you with this chart. Feel free to kill some of those gray cells, as Hercule Poirot, my favorite Agatha Christie's Belgian detective, would say about using our brains.
Normally, after a seller accepts the offering price and puts the residential property purchase transaction into an escrow (pending sale), barring additional negotiations on defects or credits, the sales price stays pretty much intact till the escrow's completed (sold). Therefore, the median price of pending sales usually follows the sold price closely. Why is it then, since last June, these two median prices started to drift apart? The median price of pending sales in the East Bay of the San Francisco Bay Area has fallen almost 10% below the final sales price. What's so significant about this?
And, that's it folks! I'll be seeing you all next week.
email: dyuguard-2@yahoo.com