by Calculated Risk on 8/08/2005 01:12:00 PM

My guess is this will be the theme for the month of August: Housing inventory spikes in 'burbs.

Inventory of single-family houses is piling up in Greater Boston in a sure sign the residential real estate market is slowing.

Buyers are taking advantage of the increased inventory, waiting longer before they make their offers and hitting more open houses. Sellers, meanwhile, many of whom are trying to cash out near the height of the market, are growing increasingly frustrated as their houses sit on the market for weeks and months.

First, there is a seasonal component to inventories - they usually rise in August. So its important to do a YoY comparison.

The number of listings of single-family houses in 17 towns in Greater Boston was up 25 percent or more last week compared with one year ago. And those houses are taking longer to sell. In four towns, listings increased 50 percent or more.

Second, some see this simply as a return to normal market conditions:

The slowdown is not a bubble bursting, and in many cases is merely a return to more traditional market conditions, after months of record-breaking sales volume and prices.

Others are less sanguine:

The "huge amount of inventory" is bringing prices down in Milton and Quincy, said Betsy Trethewey of Re/Max Landmark in Milton. Sellers are not acknowledging the changing dynamic, though, she said.

Price reductions from $20,000 to $60,000 are not unusual, she said. Sellers are frustrated, and some are angry, she said. "They've been very spoiled for the past few years. They're not accepting the truth of what is actually happening," Trethewey said.

Sellers traditionally are slower to realize when the market is changing, usually because their information is more dated than buyers'.

Or maybe the housing story will be the spreading of the bubble. There are bubble concerns in Fort Collins, Colorado housing and Sioux Fall, South Dakota farm land.

Fort Collins might have a housing market not only as overheated as Denver but also nearly as overpriced as San Francisco, Atlanta and San Diego.

A shift in the types of mortgages being used in Fort Collins may indicate the city is facing a steep housing market with buyers struggling to find a way to afford homes, according to recent statistics.

Of Fort Collins' April purchase loans, 42 percent were interest-only mortgages, in addition to 33 percent of refinances, according to LoanPerformance, a San Francisco real estate information service.

Or maybe the story will be rising foreclosures:

"Foreclosure inventory is up nearly 10 percent compared to July 2004 -- an uncharacteristic upward trend throughout the summer months," said Brad Geisen, president and CEO, Foreclosure.com. "More significantly, we are seeing an increase in foreclosures in a majority of states. These blanket increases may indicate that factors such as weakening sustainable home ownership and the volatility of the housing market are beginning to add to the geographic economic factors that contribute to foreclosures."

I think the August story will be rising inventories, followed later by fewer transaction. The foreclosure story is probably for next year.

by Calculated Risk on 8/07/2005 10:15:00 PM

Dr. Paul Krugman writes in Monday's NY Times:

This is the way the bubble ends: not with a pop, but with a hiss.

Over on Angry Bear I added a chart showing the slow, steady price declines associated with previous housing busts. Krugman also addresses bubble "denial" in his commentary. Krugman writes:

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

His commentary is short, and for those looking for proof of a bubble, Krugman doesn't come close. But as I wrote in the comments to the previous post:

I now understand there is no way to convince everyone there is a bubble. I suppose that is a third "bubble" characteristic:
1) Fundamentals out of line.
2) Excessive Speculation.
and 3) Denial!

Krugman thinks the bubble may have already started deflating. If inventories rise as much as I expect, I will agree.

by Calculated Risk on 8/07/2005 02:54:00 AM

As a follow up to the LA Times article that discussed the slowing San Diego housing market: I spoke with one of the top RE agents in San Diego yesterday and she told me the market has taken a "nosedive". (Her words referring to time on market, not prices). She told me specifically about two of her listings that have been on the market for 45 days that would have sold in a week or two earlier this year.

Also the LA Times article included this comment on the previous bust (1991-1997):

San Diego home prices were virtually flat for six years.

"Virtually flat" is being generous.

Click on graph for larger image.

According to the OFHEO house price index, housing in San Diego experienced a steady decline for six years following the peak in 1991. In nominal terms, house prices dropped 10% in San Diego and didn't achieve their previous highs until Q4 1999 - eight years after the previous peak.

In real terms (adjusted for CPI less shelter), house prices declined 24%, also over a six year period and didn't recovery their value until Q2 2001 - eleven years after the peak.

Finally, this housing bubble appears far worse than the '91 bubble. Earlier I posted a Price-Rent ratio for the US on Angry Bear:"Housing: Speculation and the Price-Rent Ratio". And the same calculation for San Diego.

UPDATE: See link for San Diego Price to Rent ratio.

Based on the price-rent ratio and many other measures, the current housing bubble dwarfs the '91 housing bubble. Therefore it might be reasonable to expect that the bust will also be worse and last longer.

by Calculated Risk on 8/07/2005 02:39:00 AM

The Sunday LA Times features a story on the slowing San Diego housing market.

John Karevoll, chief analyst at DataQuick Information Services in La Jolla, which tracks home prices, called San Diego "our statistical canary in the mine shaft."

"It is further along in the current cycle, and what happens there could predict what will happen elsewhere," he said.

Of course San Diego could suffer more than other areas:

Now, several factors could cause a more pronounced slowdown here, analysts say.

One is the region's far-below-average level of affordability. By one measure, only 9% of households can afford the area's $493,000 median home price — the level at which half of all homes sold for more, half for less. By contrast, affordability statewide is 16%; nationwide, it is 50%.

Another worry is the region's high level of risky loans. San Diego has been a standout in the use of unconventional lending. The region ranks No. 1 in the use of so-called piggyback loans, which let borrowers with low down payments finance a home purchase without paying for mortgage insurance. And the majority of buyers in San Diego still use loans with an "interest only" option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years but could see the monthly payment mushroom in later years.
...
"Those of us with long enough memories know that real estate is cyclical," said Mark Milner, PMI's senior vice president and chief risk officer. "But we've never seen a cycle with so many of these kinds of loans, so nobody knows how the market will react if there's an economic shock."

And some important comments on jobs:

... a shock could come from a wave of job losses. Although San Diego added 20,000 jobs between June 2004 and this June, the biggest gains were in real-estate-related jobs such as construction, according to Hanley Wood Market Intelligence, a research firm.

Analysts say a deflating housing market could reverse that job trend, much as a contraction in the aerospace industry touched off a Southern California housing market downturn in the early 1990s. San Diego home prices were virtually flat for six years.

Virtually flat is being generous (see next post).

by Calculated Risk on 8/06/2005 12:01:00 AM

Oil prices (WTI Sept Delivery) closed over $62 per barrel today. And gasoline is averaging $2.29 per gallon. Gasoline prices are expected to set a new nominal record next week. Despite this relatively high price, demand for gasoline has remained robust.

Click on graph for larger image.

This graph (data from DOE) shows the average US daily demand for gasoline by month for the last 6 years. Although there is some randomness, demand has clearly been increasing every year and demand growth remains robust in 2005.

Most of the increase in gasoline prices has come from increases in the price of crude oil. Both pgl and Kash have pointed this out on Angry Bear. But now, due to some refinery problems, gasoline stocks have been dropping. The AP noted:

At least seven refineries have reported problems of one kind or another, ranging from fires at Chevron Corp.'s El Segundo, Calif., and BP PLC's Texas City refineries to the complete shutdown of Exxon Mobil's plant in Joliet, Ill.

Although gasoline stocks have dropped, they are still in the normal range and refinery problems have not impacted gasoline prices yet.

The DOE comments:

Recent refinery problems point to the potential for higher prices as the next few weeks unfold, but absent any additional major petroleum infrastructure problems, a repeat of the August 2003 price spike is very unlikely.

Since gasoline stocks are low and demand growth robust any disruption (a hurricane in the GOM or a refinery fire) could lead to significantly higher gasoline prices.

Meanwhile, stocks of crude oil remain above normal. The primary reason for the high price of crude, according to the DOE, is the limited excess world production capacity, not lack of current supply. Dr. Hamilton offers some other possible reasons and discusses peak oil issues with geography professor Dr. Robert Kaufmann at the WSJ Online.

The final graph shows oil consumption by sector. You can see why it is important to follow gasoline demand.

The industrial sector has never returned to the 1979 consumption levels (due to a combination of efficiencies and substitutes) and "other uses" has also declined significantly, primarily because electricity generation has moved away from oil. This leaves motor fuel and "other transportation" as the major growth sectors for oil consumption.

This suggests that any reduction in oil consumption will have to come mainly from transportation. To reduce oil consumption for transportation, people will have to drive less, buy more efficient vehicles, or substitutes, suitable for transportation, will have to be found.

So far, even at these higher prices, we haven't seen any evidence of reduced consumption for transportation.

by Calculated Risk on 8/05/2005 09:56:00 PM

The Guardian reports:

The number of personal insolvencies in England and Wales has risen to its highest level in 45 years, official figures showed today.

I wonder if this is related to the housing slowdown? The article provides these statistics:

In the April to June period, the number of personal insolvencies rose to 15,394, the highest since comparable records began in 1960, the Department of Trade and Industry said.

That was up 36.8% compared to a year ago and 11.7% on the quarter. The insolvencies were made up of 11,195 bankruptcies - also the highest on record - and 4,199 individual voluntary arrangements.
...
The main British banks have all reported a rise in bad loans as more people have fallen into arrears with their loan and credit card payments. Barclays today said provisions for bad loans and other credit provisions rose 20% to £706m in the first quarter, although Barclays said the rise at its Barclaycard credit card unit was partly due to an increase in lending.

John Butler of HSBC cautions about a change in the bankruptcy laws, but notes Scotland didn't change their rules and is seeing a similar trend. Butler added:

"The worrying element is that at a time of high employment and low interest rates insolvencies have been rising," Mr Butler said.

I found these comments interesting:

"The recent overall signs that the labour market has started to soften means that there is a growing risk that individual insolvencies will climb markedly further over the coming months," said Howard Archer of the consultancy Global Insight.

"While Thursday's cut in interest rates will provide some very modest relief to debtors, there is the danger that it could encourage people to borrow more," Mr Archer said. "This is something the Bank of England will need to keep a close eye on."

Usually rate cuts are intended to encourage more borrowing. It sounds like Archer is arguing this cut was intended to provide "relief" to overextended borrowers. Wouldn't that require more stringent lending guidelines in conjunction with the rate cut?

by Calculated Risk on 8/05/2005 12:15:00 PM

Kenneth R. Harney writes that Wall Street has put the brakes on Option ARMs. He believes that an Aug 1st S&P negative report downgrade on option ARMs, combined with a new rgulatory guidance in the Fall will be "sayonara" for Option ARMs.

On Aug. 1, Standard & Poor's blew the whistle on option ARMs. After an intensive study of recent mortgage-backed bonds, it concluded that lenders are allowing credit standards to slip too far. And too many of the borrowers using option ARMs are paying the minimum amounts per month, thereby accumulating potentially toxic levels of debt — especially in markets where home values are likely to soften.

“We wanted to jump in before this got any worse,'' said Standard & Poor's mortgage bond director Michael Stack. By “any worse,'' he meant that if credit standards continued to decline, there would be a rising probability of defaults on option ARMs — something unacceptable to bond investors.

A second development potentially affecting option ARMs is under way at the federal financial regulatory agencies. A task force headed by Deputy Comptroller of the Currency Barbara Grunkemeyer is preparing new underwriting and credit risk guidelines on option ARMs, interest-only mortgages and reduced-documentation loans offered by the nation's lenders. In an interview, Grunkemeyer said the new guidelines could be out “by early fall,'' but there is no specific target date.

She said that financial regulators have “noticed that these products have taken off in the past six months.'' The goal of the guidelines will not be to eliminate any particular loan type, she emphasized, but “to make sure banks are offering (interest-only and option ARMs) in a safe and sound manner and doing so in a way that allows consumers to understand the risks.''

Judging by the negligible impact of the previous "guidance", the S&P report downgrade is probably far more important.

Hat tip to Ben Jones - a all housing, all the time, site. I'm primarily following housing since I think it is the key to the overall economy going forward. Housing has been the driver for jobs, credit growth, the declining savings rate, and probably even a major contributor to the trade deficit. I believe the end of the housing boom will lead to slower growth and will have major implications for the World economy.

by Calculated Risk on 8/04/2005 09:00:00 PM

The California Association of Realtors (C.A.R.) released survey results this week showing: "California Households Fall $70,480 Short in Income Needed to Purchase Home; Income Gap in San Francisco Bay Area at $102,230"

California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California, according to the California Association of REALTORS(R) (C.A.R.) Homebuyer Income Gap Index(TM) (HIGI) report for the second quarter of 2005, released today.

Click on graph for larger image.

The Homebuyer Income Gap Index(TM) for California increased 28.3 percent during the second quarter of 2005 compared to the second quarter of 2004, when the gap stood at $54,920, the median household income was $52,630, and qualifying income needed to purchase a median-priced home at $461,280 was $107,550.

Although I think there are some inherent problems comparing medium income to medium house prices, the year over year comparison seems appropriate.

by Calculated Risk on 8/04/2005 01:28:00 PM

As expected, the BoE cut the Repo rate by 25 bps. The BoE believes that slackening demand will keep inflation in check.

...the Committee judged that a decrease of 0.25 percentage points in the repo rate to 4.5% was necessary to keep CPI inflation on track to meet the 2% target in the medium term.

The minutes will be released on Aug 17th and it might be interesting to see the vote on the rate cut. Last month was 5 to 4 against a cut. The Financial Times reports:

The first rate cut by the Bank of England in two years was widely expected and had little immediate effect on financial markets. But it was an important symbolic moment, especially given the contrast with the US Federal Reserve which is still committed to raising rates.
...a lot clearly depends on the UK's consumers. The housing market has stabilised, rather than collapsed, but that still seems to have weighed on spending patterns. Some, however, would argue that the UK is still seeing the effect of last year's rate tightening. As that fades, spending should pick up in the second half of the year. If the optimists are right, this rate-cutting cycle may turn out to be short.

by Calculated Risk on 8/04/2005 02:30:00 AM

David Streitfeld writes in the LA Times: Bad Lands Now Hot Property

Undeveloped -- even bleak -- parcels in a Texas county lure out-of-state buyers looking to jump into the real estate market.

The mania is spreading. Here is a good description of the land:

The soil is lousy for crops, ... unemployment is high and wildlife scarce, except for the snakes. Until a few years ago, one of the biggest businesses in the county was importing New York's sewage, which was dried on a ranch next to the county seat of Sierra Blanca. On windy days, the sewage would blow into town.

The local Judge expresses amazement:

"I don't know what these folks expect for their money," said Jeff Davis County Judge George Grubb.

I know. They expect to sell to the greater fool.