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Pasadena Buyer Agent Real Estate Thoughts
Housing led recession?
Posted at 1:26 PM, Aug. 31, 2006
Could the downturn in housing itself trigger an economic recession?
Mostly because it is accompanied by other factors. Namely, relatively high short term interest rates and relatively high gas prices. These factors are causing falling wages, in real terms, negative saving rates, increasing debt service levels and falling confidence. All of which will led to a significant reduced consumption according to Dr. Roubini. Reduced consumption, in the aggregate, will trigger a recession.
If this scenario comes to pass, then all bets are off regarding a sustained flat housing market.
He believes that the flattening of home price appreciation and increasing debt service levels reduces the withdraw of equity from homes. Many with adjustable rate mortgages (ARM's) will be unable to refinance their homes in the current interest rate environment. Thus, causing credit to tighten due to increasing defaults and foreclosures. The foreclosures will further pressure home prices and the tighter credit will discourage even those with sufficient equity in their homes from borrowing against it. Thus, even those in no danger of losing their homes will slow their consumption because they will be unable to access the equity in their homes.
It is this drop in consumption that triggers a broader recession. The broader recession with the associated loss of jobs will deepen the consumer lead pullback. People who lose their jobs in a recession have a greater chance of losing their homes than those who don't loss their job. This puts downward pressure on housing prices.
So aggregate demand trends may be just as important as employment trends in determining where the housing market is headed.
Today, demand numbers were released. Not so good. While the headline number was a reasonable 2.9%, the report showed that inventories are building. Companies react to building inventories by cutting production. That means reduced hiring, less overtime, and in some cases outright layoffs. Regardless of the trigger for this slowdown, the parallel and substantial slowdown in housing, will make the situation worse.
Dr. Nouriel Roubini thinks so. His reasoning is complex and well supported. It is significant for a well known mainstream economist to argue for a housing led recession. Never has a housing downturn trigger a recession. So why does he think this downturn will?
Housing Bears
Posted at 4:53 PM, Aug. 28, 2006
In the August 28th edition of Barron's, Andrew Bary reports that "the investment community seems to be buying the argument of housing bears that the slump will be long and deep." This sentiment can be seen in the share prices of housing related stocks. The thrust of the article is than housing related stocks have a lot of upward potential if the housing market does not continue in its downward trends.
Although this blog focuses on residential real estate, the line of thought Mr. Bary expresses is interesting. If the investment community is coming to believe in a long and deep housing downturn. then I take note. However, the market's logic still seems weak. As I have written here previously, without a loss of employment, housing prices, in the aggregate, are not likely to fall. Thus, the market seems to be signaling that an economic slowdown and its associated job loss will occur. There is no major broad based stock indices that concurs. This "bears" close watching.
Overbuilding and the drop in volume.
Posted at 11:50 AM, Aug. 18, 2006
Factory orders for new homes have fallen. CEO of Toll Brothers, a large buildier of new homes, attributes the decline in demand to oversupply and substantially reduced speculative buying.
Historically, builders overbuild during booms and create oversupply. Speculative demand is gone due to higher interest rates on loans, especially loans used by speculative buyers. Loans used by speculative buyers usually adjust very quickly to changes in the short term feds funds rate.
How pervasive, in the aggregate, has overbuilding of new homes and condos been? Nationally, there may have been quite of bit of overbuilding in some metro area, think Las Vegas. In Southern CA the population continues to increase and the economy is continuing to grow. The overbuilding here is not expected to be as great as it was during the late 80's boom.
Under these conditions it is highly unlikely that home prices will fall. As long as people have jobs, home prices should be stable. The appreciation seen over the last several years is long gone though.
This does not bode well for many in the real estate business. If buyers are not buying and homeowner's are under no pressure to sell then the volume of home sold should decline substantially. Real estate brokerages make money on each transaction and their revenue will fall significantly as the number of homes sold decline even if home prices remain stable.
Thus, look for a shakeout in the RE brokerage biz if conditions stay like this.
July jobs report not all bad
Posted at 10:31 AM, Aug. 9, 2006
An interesting piece of the jobs report is that the unemployment rate fell in the management, professional, and related occupations category to 2.5%. Jobs in this category include, attorneys and accounts. These tend to be higher paying jobs. Thus, the latest jobs report may be a sign that less people are making more money.
Despite the monthly increase in overall unemployment, overall job growth year over year is still positive. Year over year growth is more reliable than month to month statistics. Perhaps last month's report is a statistical blip rather than a sign of actual weakness in the labor market.
The small business owners that I talk with are desperate for qualified workers and the local Starbucks is hopping at all times of the day and on weekends too, from what I can observe. No sign of reduced spending or decreasing hiring needs there.
Another interesting note is that the 6 month unemployment rate was 4.7% and as it has been for several months. 4.7% is very low from an historical perspective.Why the focus on unemployment and growth? I don't think I can say this enough: People with jobs keep and buy homes.
As the economy slows, consumer at the very least become reluctant to buy large ticket items, like homes. This causes sales to at least slow. If the economy slows more than a little than companies shed jobs and people without jobs do not, in most case can not, buy homes. Also, homeowners who lose their jobs and often are forced to sell and this causes prices to decline. Thus, a solid stable growing economy with low unemployment is a great environment to buy and sell homes.
The evidence in the July unemployment report does not look bad once you dig into the details. Sources for these comments are Gene Epstein, Tom Sullivan, Michael Santoli all from the August 7 Barron's, and the jobs report from the BLS - http://www.bls.gov/bls/newsrels.htm.
National Unemployment July 2006
Posted at 12:09 PM, Aug. 5, 2006
Yesterday, the national employment report was released. The widely report percentage of unemployed rose to 4.8% up .2% since June. While it is almost always better to have less unemployment, 4.8% is not bad. This will be a closely watched number in the months ahead.
Not so widely reported are two components of the report having to do with the length of the work week and hourly wages paid. Both of these two components increased. This suggests that those with jobs are working longer and getting paid more for that work. Employers seem to be reluctant to add jobs in this environment. This is good for stable housing prices because employed people typically don't default on the loans or go into foreclosure.
Questions remain: How long will this stagnating environment last? Is this the beginning of an even steeper decline?
Los Angeles affordable housing bond
Posted at 9:23 AM, Aug. 4, 2006
The Los Angeles city council will place a $1 billion bond measure on the ballot November 7th, 2006. If passed the monies from the sale of the bonds will be used to issue loans and grants for the development of affordable housing and grants to first time home buyers. Real estate taxes are expected to increase by about $14 per 100,000 of accessed value if the measure passes.
Affordable housing is a critical need in Los Angeles County. It is unlikely that the development and sale of these homes and the grants to homeowners would have any material affect on price of housing overall in Los Angeles County or Los Angeles City, in the short term. In the longer term it may enable families to become moved up buyers. Also, homeowners tend to have a vested interest in keeping their neighborhoods safe and clean. (If they don't the value of their home decreases). Business also follow homeowners as the number of homes near business affect the viability of many business.
The measure does have the support of the business community, as this article from the Los Angeles Chamber of Commerce and this article about the Los Angeles Business Council shows. Although, not all are convinced, as shown by a July 30, 2006 LA times article by Joseph Mailander and comments in LAVoice.org.
The larger question of whether government can effective do what the private market place has not done remains to be seen.
Foreclosure Update
Posted at 8:53 AM, Aug. 3, 2006
As reported by RIS Media on July 31, Realtytrac has released its 2006 second quarter Foreclosure Market Report. Nationally, the report showed during the second quarter foreclosures fell 16% when compared to the first quarter of 2006 and increased 25% when compared with the second quarter of 2005. In California, the report showed that during the second quarter foreclosures fell 7% from the first quarter of 2006 and increased 100% from the second quarter of 2005.
It is worth noting that presently foreclosures are not above their historic mean and employment remains high.
Does this mean that we have returned to a normal foreclosure market? Or does it mean that as adjustable rate mortgages are reset in the current market of higher rates foreclosures are increasing?
As long as employment stays high then the statistic to watch is the ratio of foreclosures in adjustable rate mortgages versus the foreclosures in fixed rate mortgages. If this ratio increases foreclosures may increase above the normal trend due to excessive and possible undisciplined use of adjustable rate mortgages.
Pasadena Convention Center Expansion
Posted at 10:14 AM, Aug. 1, 2006
On Monday, July 24, 2006, the Pasadena City Counsel approved $165 million to pay for the expansion of the Pasadena Convention Center. In general, business expansion brings employment opportunities during all phases. Low unemployment and solid job growth bodes well for stable home prices in the local area. Detials can be found here.
Los Angeles County June Home Prices
Posted at 9:20 AM, Jul. 31, 2006
The June Los Angeles County median home price rose again against a backdrop of declineing sales. In Los Angeles County, the median home price was $575,800 according to the California Association of Realtors.
In June, 37% of homes sold within 30 days. When compared with a year ago this represents a 65% decrease of homes sold in 30 days or less. This is more evidence that the market is slowing. And this is a good. The price appreciation seen in the last 5 years was not sustainable over the long haul.
Even with the median County price increasing, some areas had price declines. Historically, price declines are not the same everywhere and last month was no exception. According to the Los Angeles Business Journal homes sold in the Pasadena 91105 zip code showed a 15.5% decline in price while homes sold in the Pasadena zip code 91106 showed a 25.9% increase in sales price.
The median price of a home in the 91106 area is $995,000 while the median price of a home in the 91105 area is $785,000. Last year, those median figures were $790,000 for the 91106 and $929,000 for the 91105. So what does it mean for home prices to see this kind of year over year volatility?
This post is getting long, so I will end here and address the volatility issue in another post.
Hard and rough real estate market landing?
Posted at 2:25 PM, Jul. 30, 2006
Gregory J. Wilcox, staff writer for the Los Angeles Daily News wrote today, Sunday July 30, that some expect a harder than predicted landing for the LA real estate market. But then he quotes Ryan Ratcliff, an economist at the UCLA Anderson Forecast, who believes "that a worst-case scenario of the early 1990s all over again for California is unlikely." A market like the one that existed in the early 90's occurs only during recessions and depressions and no one is presently predicting a recession for Southern CA.
Also quoted in the article is Leslie Appleton-Young, the California Association of Realtor's vice president and chief economist saying "It's more like a return to normal with a bumpier landing in some areas than others," she said. "It's not a replay of the mid-1990s. The economy is growing. We're seeing not spectacular but certainly solid job growth."
So both sources in his article concur with the analysis present in my earlier posts. That is, as long as unemployment and wage growth are stable then housing is well supported.
Neither source predicted a rough landing for the California real estate market. The "rough landing expected for market" headline does however make a better headline than "return to normal market predicted".
Normal Market
Posted at 10:21 AM, Jul. 30, 2006
As you may have heard or even experienced, homes are taking longer to sell now than this time last year. The California Association of Realtors compile an unsold inventory index. This index tracks the number of months it would take to sell all of the homes currently listed with Realtors. Last year at this time the index was at 2.2 months. Presently, the index is at 6.2 months. 6 months is considered a normal market.
It has been a long time since we have seen a normal market. So long in fact that this market seems slow to many. The last 5 years have been a very strong sellers market. In a sellers market, there is strong buyer interest and multiple offers made by buyers on homes in a very short period of time. In this last sellers market some homes were listed in the morning and sold in the afternoon at prices above the listing price.
Don't be fooled. The strong sellers market has become a normal market. Adjust and profit.
Pasadena Unemployment
Posted at 3:34 PM, Jul. 29, 2006
Staff writer for the Pasadena Star News reported on 7/22/06 that Los Angeles County unemployment dropped to 4.6% in June 2006. As reported in the Pasadena Star News, according to Gary Kaplan, president of the executive search firm Gary Kaplan and Associates "the job market is even stronger than at the height of the technology boom prior to 2001".
Mr. Kaplan's comments is another indicator of how much the job market has strengthened since 2001. The strength in employment bodes well for continued strength in the Los Angeles County housing market.
Current Trends - San Diego Price Decline
Posted at 11:15 AM, Jul. 28, 2006
The well publicized San Diego 1% price decline has many people asking me what will happen to Los Angeles housing prices. While I don't have a crystal ball, the current trend is small stable appreciation. The floor on prices is currently held in place, in part, by employment trends.
Staff writer Howard Find wrote in the July 17, 2006 Los Angeles Business Journal that Los Angeles County "should continue to see solid job growth" Employment in LA county is up 2.5% from a year ago, (May 2005 vs. May 2006) according to the July 17, 2006 Los Angeles Business Journal. Thus, baring a large dip in employment I don't presently see any significant fall in Los Angeles County home prices.
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