US Economy

[IamBatman]

The mass media, until 6months ago, was still quoting David Lereah who predicted housing prices will keep going up. Lereah wrote the infamous book :Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade—And How to Profit From Them" this book came out right almost to the day when the Florida and Vegas housing prices started tanking. Also, Newspapers are heavily dependent on Realtor Advertisement money. The have no economical reason to report bad news on housing

I came to my own conclusions first by doing the numbers and looking at median income vs housing price, Rent vs Owning, debt to income etc. I've been ready with a sizable down payment for a house for years, and the numbers just don't add up. Renting is still the better option in the Bay Area.

I'd say the media has been way behind the curve in letting the public know of the fiasco, and actually has a role in fueling the frenzy: have you seen how many house flipping, buying, remodeling shows on tv these days?

[25psi_Elise_Killer]

Here's my ultimate contrarian indicator. Whenever these guys publish a book on any market in the world, it means its at a top and has no where to go but DOWN!

[Dietrich]

Originally Posted by serpentor

I came to my own conclusions first by doing the numbers and looking at median income vs housing price, Rent vs Owning, debt to income etc. I've been ready with a sizable down payment for a house for years, and the numbers just don't add up. Renting is still the better option in the Bay Area.

Why do the houses in the bay area remain almost unaffected by this whole housing crash?

[IamBatman]

Originally Posted by Dietrich

Why do the houses in the bay area remain almost unaffected by this whole housing crash?

Sales Volume is now 50% of 2004. Median price is steady because the higher priced homes are selling at normal rates while the lower end is drying up. Much harder to get sub-prime loans these days...

edit: data for Santa Clara county: sales volume.
Resales 2003 2004 2005 2006 2007
June 1,643 2,450 2,175 1,617 1,210
YTD 8,898 11,717 10,349 8,027 6,910

There is A LOT of money in the Bay Area, it will take time to work though all that stock option money. It will still go down, a majority of the people in the Bay Area DO NOT have the money to sustain the high prices. Second to San Diego, Bay Area has the highest percentage of interest only/Neg Am loans in 2006.

http://www.recharts.com/reports/CSHB031207/e31.gif


The surrounding areas that people commute from (Tracy, Stockton etc) have been tanking for a year, less desirable areas like the East Bay, parts of San Jose, and Milpitas are significantly down, the PRIME areas like SF, Peninsula, Mountain View (Google), Cupertino (Apple), will drop last. There is a lot of cash supporting the price in those areas. People are still very ignorant of the situation, I still have very smart people (engineers that are math geniuses) telling me I'm missing out by not taking out a crazy loan to buy a house.

[IamBatman]

Time Frame: this down turn will take years to unfold, not like the dot com bust... It will be like a very slow, painfully slow, train wreck... and the WORST thing that can happen is if the government decide to get involved and start dropping interest again and start bailing out the people that cause the problem. then it will take DECADES like what happened to Japan. All though their RE downturn you can basically get an interest free loan in Japan to buy a house, yet their market is still recovering to this day.

[25psi_Elise_Killer]

Japan has been in a recession forever....

[rraicu]

I had written a few pages but firefox crashed so here I go again (though less inspired) to recreate my blurb. [damn you piclens.dll!!]

I've been lurking on ET for a while but hadn't posted till now. Still looking for the Lotus that suits me best. I'm 23 and undecided but I feel like one is calling my name.

Anyway, here is my opinion on a few issues that have been brought forth in some posts throughout this thread. First, some equity review.

Equity Indices

The Dow30 hitting an all time for a while now isn't too important except for interesting layman discussion. It's a price-weighted index so I don't care much about it except to use it as a sentiment indicator. I'd rather break down a "major" outlook by looking at the S&P500, Nasdaq-100, Russell2000 Small Cap in addition to the Dow30. The SP500 hit a new high this month (barely) while the Nasdaq still has a LONG way to go. The Russell2000 has been outperforming large caps for quite some time although the divergence and outperformance has lagged recently. I've heard much discussion about large caps coming to the forefront for the next few years. Here are some charts showing the pricing over the last 10 years of each index.

Index Charts:






Energy

Now, for the energy (gasoline + crude) points that were brought forth I believe the nominal values of crude and products is not relevant to the future price of energy insomuch as the relative spreads between crude and products. Nonetheless, futures crude has recently swung into backwardation so expectations will be for lower prices in the future. The key play thus far has been the crack spread between gasoline and crude oil. Refiners (and traders like myself) were hedging and speculating on a decline in the crack recently, which did in fact come to fruition. These refiners were making over $20 / blue barrel of crude oil they were cracking into gasoline and now that has calmed down to a cool $12.4 / bbl. (over 35% gaso margin down to 16% [affected by crude prices as well as gasoline]).
Gasoline should maintain its seasonality pricing effect and continue down within the next few months.

3 Year Gasoline:West Texas Intermedia Crude Crack chart [I know, the crack should be 3:2:1 with HO but this is easier to chart]:



Housing

The housing market also has futures associated with it. You can hedge your property value and investment with the CME product. It's not liquid but at least it exists and shows expectation. It trades relative to the Shiller Housing Index mentioned earlier. Find out more here. The curve for every single housing market in the US is in backwardation as well. My question is not how much housing will come down but rather how expansive its effects will be on the economy. Not too long ago headlines were being made by huge put option buying on the XLF (Financial Sector ETF). Since then the XLF has come down a good amount. Even though I'm a buyer of specific companies and industries in the Financial Sector it's a pretty bad looking scenario. Read here on Bill Gross most recent piece on the housing situation. The curve for every single housing market in the US is in backwardation as well.

Whatever your outlook may be on housing, the equity market, the energy market as long as you maintain a solid income stream (cash flow), contribute regularly to your retirement account and maintain a balanced portfolio of ETFs and specific stocks to allocate across the globe and across styles, strategies and markets, you shouldn't stay up at night worrying. As for housing, I know i'll be waiting a few years before I jump on a home. All I recommend is don't expense the HELOC if you don't feel 100% peace of mind.

[Moto44]

Interesting perspective and all good information. So what conclusions do you draw for our original poster?

[smoseley]

Originally Posted by serpentor

Sales Volume is now 50% of 2004. Median price is steady because...

... real-estate has a well-documented sticky downward.

In Miami-Dade county, Sales Volume has decreased 60% in the last year (from over 5000 sales to 2000 sales per month), and continues to drop, yet the mean PSF has only dropped about 5%. (so far)

[KingOfJericho]

Here is another reason I think prices will drop drastically. The people who bought the houses as investments when they were cheap in order to fix them up and sell them at a profit (flippers) have driven up the price of starter homes and taken most of them off the market and turned them into middle or upper market homes. Now, when rates go up and it becomes far tougher to obtain financing, the section of the market that will be the hardest hit will be the upper and middle of the market which has been fueled by lower rates and loose credit structure. What happens when the starter home market is dried up and far fewer people can afford the middle and upper tier homes? Those homes are forced to become the lower tier... and how does that happen? ding ding ding! Prices come down.

Sorry fishguy but look at the NASDAQ in 1999... and take a look at the Russell 2000 (RTY <GO>) instead of the DJIA as it's a much better indicator of the overall market. You sound like the guys in the late 90's saying "If things are so bad then why is the NASDAQ at 5000!!!"

[rraicu]

1. national household savings rate is negative

This was addressed by Ken Fisher in his speech at UCSD's annual investment conference. The big point was that this doesn't matter. The most important reason why it's next to useless as an accurate metric is that it only accounts for an antiquated definition of savings and doesn't include a lot of modern methods of allocating capital.

2. fuel, food, education, medical care, insurance prices sky rocketing; yet its not counted as part of inflation

I also believe systematic improvement is necessary to inflation measuring. To me it sounds like hot air when the the government reporters say their numbers are more accurate because they add more significant figures after the decimal point instead of systematically improving the measurement technique.

3. US currency devaluating

If you're not vacationing in Europe (or anywhere else anytime soon) it's good for our government's debt load and exporters.

4. housing bubble: I think its going to be a lot worse then most people predict.

I was short homebuildingers last year and they had a strong rebound which I took as a loss. I was ahead of the game on the "housing downturn" so even though homebuilders are FANTASTIC value plays right now it's gotta take some hefty cajones getting in, but a long long long term view they are good buys at this level and below. Plus, different regions of the country are different levels of problems & symptoms. Living in CA my opinion is biased but any and all effects will have broad impacts across the nation. Also, I have reviewed properties in eastern europe where they have inreased 500 to 600% in the last 5 to 7 years and no one there expects them to come down in value/price. Globalization is a pretty big beast.

[25psi_Elise_Killer]

I'm a big fan of technical analysis.....Charts are like a religion for me

[rraicu]

What do you trade 25psi?

[IamBatman]

Ken Fisher sure is entertaining to watch when he talks. (he keeps his head perfectly still like a robot, but moves his hands like he's doing kungfu.) but I don't really trust what he says... but hey I don't own a billion dollar investment company. I don't really understand what he means by "modern methods of allocating capital" to me its simple, its either bank, brokerage, retirement...and I guess you can count home equity?

rraicu: regarding home builder stock.. I think your timing is premature. like I said.. its going to be a long painful process.
also home builders are not what I'm worried about...they are screwed in the long run... I'm worried about the bigger picture.. the impact of americans losing their giant ATM, having to pay back debt, and losing their homes.

I don't understand the bubble in places like Spain or UK to make any statments... but to say they are immune to a downturn is crazy to me..

[rraicu]

What I like most about Ken is his portrait on his most recent book, it is totally deceiving. He musta learned a thing or two from chicks and their myspace pictures. =)

Bill Gross recent paper seems to be the prevailing attitude on the housing situation.

No one is immune to a price downturn in housing but in developing countries like Romania there was a long way to go before any sort of parity with housing prices in Western Europe. Nice 3 bedroom apartments in the capital city were going for $40,000 just a few years ago. Not so anymore.

[25psi_Elise_Killer]

Originally Posted by rraicu

What do you trade 25psi?

When i was working, i used to trade listed/OTC options, equities, futures. Now i'm at home trading Pokemon cards.

[XPcarguy]

Originally Posted by serpentor

What causes the huge run up in prices? one reason: The abundance of easy credit. We as americans are addicted to debt. People are buying stuff they can't afford.

It's actually not "we Americans" that caused this. It's those Americans that created the below prime lending tactics. If you live in a place with a lot of demand for housing, then every time you increase the rate at which people can purchase, the money still goes to the seller, not the buyer.

It worked like this...

Take the price the market could bear for a typical entry level condo (first home) in the Bay Area based on year.

2000: $350k (90% and 95% mortgages were pretty common)
2003: $500k (100% mortgages easier to get, rates were lower)
2005: $650k (lenders offering interest only loans)
2007: $800k (lenders now offering negative equity loans.

Every time people run out of money to keep the housing boom going, lenders changed the way things worked to keep prices climbing out of control. Buying a house is the American dream so most people were willing to do anything to get out of that stinky apartment.

I didn't understand the game back in 2000 but not buying was the worst mistake of my life. By the time I realized what was going on, it was too late. I'm frustrated b/c the mainly gullible public went along with the evil plan to make mortgage brokers and realtors rich. In doing so, the prices in my area have stayed so high that I'd have to make a bad financial decision to get in the game.

Actually, I do own a house. I have rental property out of state. But it would be nice to own a place to live in too. I've been bearish on the housing market ever since my $650 bid on a 30yo condo that was listed for $529 was rejected. Win or lose, I'm now waiting for, nay dreaming about the bust. My salary is in the top 95th percentile, my credit is excellent, and I don't have much debt. I shouldn't have to make sacrifices to lifestyle or take out pokeresque loans. It should be friggin easy. It's a farce that it's not.

[IamBatman]

why would not buying be a mistake? its a mistake to chain yourself with a $850K albatross? I love renting, I can move wherever I want to be close to work, close to restaurants, when stuff breaks my landlord fixes it, and my rent is so low compared to cost of owning that I'm socking away 1/3+ of my income..
of course you can say you "missed out" on the gains in housing value, but its just paper gains like nasdq in the 90s. you can do pretty well if you put the money not spent on a house into stocks
. people associate homeownership with the american dream, it about to turn into a nightmare for anyone who bought in the last 5 years.

[25psi_Elise_Killer]

I'm waiting for the housing market to crash and everyone starts to foreclose on their homes cuz their interest only mortgages just required them to start paying principal and no one can afford their mortgages anymore. I'm like a vulture where i benefit from other people misery

[smoseley]

Originally Posted by 25psi_Elise_Killer

I'm waiting for the housing market to crash and everyone starts to foreclose on their homes cuz their interest only mortgages just required them to start paying principal and no one can afford their mortgages anymore. I'm like a vulture where i benefit from other people misery

Not to mention all the variable-rate mortgages.