Tuesday, December 16, 2008

"All the Arrows Were Pointing Down"

From Forbes:

Drive along Interstate 80, just outside the city of Sacramento, Calif., and scores of gated and planned communities await. Only they're not what developers envisioned. Sidewalks are empty; homes are unoccupied. Blame the heady days of the real estate boom. Easy-to-acquire mortgages, plenty of open land and generous zoning provided new homes to scores of buyers. Between 2000 and 2005, Sacramento-area builders doubled production.

But as prices dropped and demand dried up, builders cut back. This year, there are expected to be 6,140 new constructions in the Sacramento metro area. That's down from 20,370 in 2005, according to the National Association of Home Builders (NAHB). Median prices are now $212,000, down from $375,000 in 2005. For many residents, this is old news. Sacramento home builders and buyers engaged in the same behavior leading up to, and following, the Savings & Loan crisis. That's when construction doubled and then quartered once prices fell. Indeed, it's a market prone to booms and busts, which not a good sign for long-term investment.
From the Sacramento Business Journal:
CB [Richard Ellis], Greater Sacramento’s largest commercial real estate brokerage, wanted the market outlook this year to be more of a low-key panel discussion with fewer numbers bandied about. Office chief David Brennan joked that all the arrows were pointing down anyway.
...
CB’s land group...declared that prices for residential land hit bottom late this year — a bottom they weren’t ready to call in 2007 as land buyers and sellers executed very few deals.

The pressure to unload land has become too great as homebuilders sold at deep discounts, at about 25 to 30 cents on the dollar, CB senior vice president Randy Grimsman said. That trend will increase next year, said senior vice president Peter Nixon....About 70 percent of the land deals will be lender repossessions, he predicted.
From the Sacramento Bee:
San Francisco-based regional brokerage TRI Commercial is closing its Sacramento office as of Friday and consolidating local operations in Roseville...In response to our questions, TRI issued a press release calling the closure a "strategic move" based on prospects for diminished revenue next year. The release states that the 12 agents in the Sacramento office will be invited to meet with managers in Roseville, but it doesn't say how many – if any – will be offered jobs.
From the Sacramento Business Journal:
Stunned by a dramatic decline in loan applications and a frozen secondary market for small-business lending, Comerica Bank trimmed its operations, including a processing and sales center in Sacramento. The banking giant eliminated 64 jobs nationwide, including 10 in the Sacramento region.
...
Comerica handled 15 loans for a total of $9.1 million for the first nine months of the year in the Sacramento district, a 56 percent decline from the 34 loans for a total of $19.4 million for the same period in 2007. Lenders in the Sacramento SBA district saw loans decline almost 38 percent. Nationally, SBA loan approvals were down 29 percent.
From Business Week:
[Thomas] Lawler [economist and founder, Lawler Economic & Housing Consulting in Vienna, Va.] says he's seen prices begin to stabilize in some places—Sacramento, for one, and even some areas outside hard-hit Las Vegas. He believes that if Congress and President-elect Obama launch a big economic stimulus plan on Day One and homebuilders bring no new inventory onto the market for six months or so, the national housing market could find its bottom by the third quarter of 2009.
From the Average Buyer blog:
Back in late 2006/early 2007 I couldn't find a RE agent (and we looked hard) that would tell me a home was overpriced, nor could I find a broker who would only give me a quote for a 30yr fixed loan (2 other quotes that lowered my monthly payment always seemed to come with it). So its interesting to see how history gets revised.

25 comments:

Jacob said...

...and homebuilders bring no new inventory onto the market for six months or so, the national housing market could find its bottom by the third quarter of 2009.


So all we need to hit bottom is for all the builders to go out of business...

And the additional job losses from building and anything reliant on that wouldn't cause a further decline?

Diggin Deeper said...

With Fed funds at 0-.25% rates for 30 year fixed loans are projected to be around 4.5% shortly.

Hmmmm....it looks to me like we're on a mission to transfer from one bubble (RE) to the next(Bonds). Get it while you can as these rates seem too good to be true right now...

Jacob said...

Eh, I was watching an episode of house hunters international and it was in Japan and apparently the rates there were 1.5% or so.

When the fed offers me a loan at 0% like they do for banks I might get interested, otherwise I will watch the bloodbath from the sidelines and see if there is anything I want to buy when the dust settles, whenever that may be.

2008 was pretty bad and 2009 looks like it will be worse. At least we don't have to worry about the Fed lowering rates anymore, they fired their last shot.

It got them a 1 day spike in the stock market and today we are down again.

patient renter said...

[Thomas] Lawler [economist and founder, Lawler Economic & Housing Consulting in Vienna, Va.] ... homebuilders bring no new inventory onto the market for six months or so, the national housing market could find its bottom by the third quarter of 2009.

Patient Renter, Economist and Founder, Planet Earth Economic & Housing Consulting in Sacramento, CA thinks that homebuilders will die from lack of oxygen if they attempt to hold their breath for 6 months with the hope that the market will somehow bottom despite all indicators to the contrary here on Planet Earth.

Diggin Deeper said...

"When the fed offers me a loan at 0% like they do for banks I might get interested."

That would be great if it happens but don't count on it. The Feds will have a hard enough time getting enough buyers for all the debt they'll have to monetize in '09.

The Japanese trade balance is well in their favor, so they don't have to borrow money from the world in order to function. We do, and with the rest of the world doing all they can to stimulate their own economies, I wonder how much will be left over to buy our paper? As mentioned in an earlier blog, over the last 4 months foreign net purchases of our treasuries have averaged $20.4B per month. Not nearly enough to keep the lights on in Washington (we need three to four times that much). On one of the talking head programs yesterday, someone made the comment that simple debt service on our country's current liabilities is running about $1.25Billion PER DAY...

Doing the math doesn't give one a very good feeling when you consider that the debt service, alone, could be as high as the highest deficit we've ever run in this country....

patient renter said...

If debt servicing costs are already that high, how are they keeping the lights on then?

Diggin Deeper said...

PR....

Good question...

Could it be that the Fed is the buyer of Treasury notes? We know they're buying GSE paper.

or

Do they just turn up the volume on the printing presses until they have sufficient funds to finance day to day operations... and then dump the bonds on the market later on down the road?

I think its safe to say that, for now, investors and the American public have flocked to the Trssury market for safety, and in the process have given up making a profit in order to preserve capital. That could easily reverse if the equity markets continue to rally and it appears sustained...

One look at the chart on the 30 yr long bond over the last two-three months really tells all...straight up and reminds me of the charts when RE prices were going up at the height of the boom.

Add to that the dollar breaking down from its .88-.89 high, falling below .80 today, and will pressure rates down the line.

Imo, there's a short window of opportunity to secure the cheapest 30 year financing we'll see in a long time.

Once the bond bubble blows, there's not much left to inflate...

RV6Flyer said...
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RV6Flyer said...

"Imo, there's a short window of opportunity to secure the cheapest 30 year financing we'll see in a long time."

Totally agree. The thing having me worried now is this stimulus working, adding a little pop to the economy/markets, then after it looks as though we are out of the woods, the Obama administration calls for tax increases, rates are raised, and then boom, the economy stalls and deflation comes back--down we go again.

DD, let me know what you think of my current trade idea. I have been patiently waiting to play with this bond market. I still do not think the top has been reached, but I am starting a 3 month selling program of out of the money calls on the 30 year treasury futures. I am then taking the premiums and purchasing investment grade corps with 2-4 year maturities. Entered the first trade this morning. Break even is 2% on the 30 year by the March expiration. 2.25% or higher realizes the full premium. Purchased Caterpiller 2 year notes at 5.65%. New issue due Dec 2010. I hope as things ease, these will trade at a more normal 2% spread over treasuries.

Took a bet and went long on the 10 year notes before the fed meeting as I had a hunch they would talk about quantitative easing and push treasuries higher. Only 10 notes, got out way too early, but still nice little pop.

Thanks.

Diggin Deeper said...

RV6Flyer

Using a 2% spread on corp vs the longer term Treasuries is key to me. If you anticipate, as I do, that we will rally into the New Year and then continue for a short period of time, the trade should be on your side. The longer we rally, the more pressure on the 10 and 30 rates. Money will tend to move out of low yielding treasuries into higher yielding corps for those that might sense they're missing opportunity.

Frankly, I like the etf...TIP. It's a default trade on Treasuries because it gives a much better yield backed by the govt, when straight treasuries are projecting low to no inflation over a 10 year period of time. You buy it for all the wrong reasons today, and you might get rewarded for all the right ones in '09. Do your own dd on this as it's a contrarian play against the deflation picture...

"adding a little pop to the economy/markets, then after it looks as though we are out of the woods, the Obama administration calls for tax increases, rates are raised, and then boom, the economy stalls and deflation comes back--down we go again."

Entirely possible and it supports your trade nonetheless. I think a rally in equities or the economy will be short lived and met with stark realizations that we are not getting out of this mess overnight...am looking for Dow 5000 to hit us next year or in '10.
As for mortgage rates at these levels...it's an early Holiday gift from the govt that probably cannot be sustained once all the cash BB's printed turns into TBills next year.

Cow_tipping said...

Oh yea bottom, must be thursday.
Sure, bottom ... yea, sure.
Cool.
Cow_tipping.

norcaljeff said...

"Migration in California tends to be very elastic," says Mark Zandi, chief economist of Moody's Economy.com. "People move there quickly when the economy is good and leave when it's not."

-kinda kills that often quoted theory that "X # of hundreds of thousands of people are going to be moving to CA every year!!!"
Yea I guess that's true, and they also turn right around and bail when the going gets tough! :)

Diggin Deeper said...
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smf said...

Interest rates matter very little to those that are already upside down in their house.

Diggin Deeper said...

Record low mortgage rates toss housing market a lifeline

http://news.yahoo.com/s/nm/20081219/bs_nm/us_usa_housing_rates_3

Now all the upside down homeowners have a decision to make...and some will bite. Expect a rash of new re-financing to accelerate until the game breaks down...

Rates in the 4's with the 10 yr bond trending toward the low 2's is unprecedented. How long this continues is a WAG at this point. A $300K at 4.5% gives just over a $1500 per mo. P&I.

Buy down rates at new home builders will be even below that to stimulate sales. We're replowing old ground and expecting a different sum...Deja Vu!!!

Just adding a side note....Credit Suisse is giving toxic CDO's to their top management as a bonus this year...how fitting!

sacramentia said...

"Interest rates matter very little to those that are already upside down in their house."

Interest rates really matter if they have an option arm or an alt-a. If they were responsible or risk averse and have a fixed rate mortgage, lower rates are meaningless.

This probably won't stop the slide in housing, but it will slow it down. This activity makes me want to sell what I have left this spring before the rates and Obama fever wear off.

smf said...

"Interest rates really matter if they have an option arm or an alt-a."

Only if they weren't underwater. The bank will not lend money to a person that owes $400K on a house that is now worth $300K.

Unless they bring a check at closing.

This helps people like me. I already have a fixed loan that we can afford, and are not upside down on the house.

RV6Flyer said...

"Only if they weren't underwater. The bank will not lend money to a person that owes $400K on a house that is now worth $300K."

It will help those who buy a new house and walk away from the upside down one. Lenders are still allowing this to happen.

These low rates are actually helping some of the arms when the reset. I know of a couple people who now have a lower rate due to LIBOR being so low.

Buying Time said...

I agree with Sactia, low rates buy people with option ARMs etc extra time, because it keeps their monthly payments low. No sense in walking away till the monthly payments get skrocket (of course if you hit the neg amortization cap, then low rates won't help you).

Moving is no fun, and you aren't likely to get as nice a rental.

patient renter said...

No sense in walking away till the monthly payments get skrocket

On one hand I agree, but on the other hand if the end result is that you're going to walk away, you'd most likely pay less for an equivalent rental than to continue on with your mortgage.

Deflationary Jane said...

As Tanta used to point out time and again, reset and recast are two different things.

The payments stay low for 2/3/5/? years then they recast to full principle and interest payments. If you think the change in just the interest payment was rough on over-stretched borrowers, wait until you see what a full PI payment does to them.

http://www.calculatedriskblog.com/2008/08/reset-vs-recast-or-why-charts-dont.html

smf said...

"I agree with Sactia, low rates buy people with option ARMs etc extra time, because it keeps their monthly payments low."

Does it really change the end result?

And these people were often not even paying full PITI, so a low rate does what?

Diggin Deeper said...

"It will help those who buy a new house and walk away from the upside down one. Lenders are still allowing this to happen."

I'd have to agree but it just makes me burn when I have to consider that WE will allow this...

Losses don't evaporate or mystically go away as if they weren't there to begin with...Consider for every housing loss a bank takes, the value of that loss equates to several yearly incomes of well paid people (not to mention the uprooted family)...and we're witnessing the effects firsthand. BofA announced they were giving pink slips to 35,000 people not because they want to, but because they have to...Yes, there are economies of scale with their recent purchase but in effect, they are shuttering the manpower of a what would have been a very large company....and those 35,000 layoffs will create untold layoffs downline...and we've have to include the auto industry, insurance, Wall St., and the damage those job losses will do overall...

At some point mortgage rates, indeed, won't matter.

If any of you read "Whiskey and Gunpowder" Jim Kunstler's article today, "Change You Won't Believe", was an eyeopener...

sacramentia said...

"Does it really change the end result?"

You're right, but the people in this situation don't think like most on this board. We call them irresponsible, they consider themselves glass-half-full kind of people.

They'll hang on for better days until they can't, and lower rates buy some time.

DJ - to your point, at 4.5% mortgage rate, the 30yr fix payment on a 3/1 interest only Alt ARM from 2006 (~6.5%) at is about the same. I think the Fed did the math.

Deflationary Jane said...

**sighs**

did anyone read the careful explaination of the difference between a recast and a reset? These were people who couldn't afford the full PI payment which is why they went with an ARM. They can't afford the principle repayment, the 4.5 or 6.5 makes little difference.

Those option arms are the killer though. Folks that thought they had 3 to 5 years before they had to really make principle payments are finding out that they hit the 115% cap auto recast much faster then they planned. That's if they even realized they had an auto recast clause in there at all.

We can continue this in the next thread I'm sure >; )