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Saturday, February 06, 1982

02.06.2007 - Tuesday Open Thread

This is your open thread for Tuesday, February 6, 2007. Please post random links and off-topic discussions here.

30 comments:

T,V & Mr.B said...

Things are gonna get ugly soon. David Rosenberg of Merrill Lynch said yesterday "looking at the inventory backlog and still stretched affordability levels, this story is far from over." and Jan Hatzius of Goldman Sachs said that "By itself, (inventory at 2.7%) would point to a fairly enormous supply overhang and little prospect of a bottom any time soon."
The headlines aren't touting it YET, but little pieces of news are coming out here and there that tell a very scary story. and it isn't just the wackos spouting off, these are main-stream, analysts. Very soon, the feel good, "Bottom has hit" stories are gonna be gone.

Crashcadia said...

t,v & mr.b
On top of that, sub-primes continue to go belly up and banks are starting to fail. The real scary thing is that hedge funds are starting to tip over.

T,V & Mr.B said...

My feeling is that even those that are proponents of the bubble, will be suprised at how bad things will get and those that think the bubble is a figment of someones imagination will look back and say, Holy sh..!!!!!
Main Stream Media will start popping this stuff eventually in little tidbits and then it will be the headline news in no time.

stephen said...

But it hasn't even started in the Seattle area to any real extent. Prices from absurd levels are being reduced but overall even houses with several drops seem over priced.

Posted yesterday:
This is greatest flip I've ever seen. Bought in Nov. 2006 for $625K
now for sale for $840K.


This is what we are seeing too. Folks are just seemingly pulling prices out of their butts, based on nothing more than "that's what I want".

We looked at one in Duvall over the weekend that was an old 1914 house on a nice 10k lot. The owners bought it 10 months ago for 260 something and have it on the market for 345 now. To be fair we did not go inside but only walked around and peered through windows but from what we could see we are talking some inexpensive linoleum,indoor out carpet, cheap white tile squares on kitchen counters and some paint (The cabinets did also look new). I figure maybe 10 grand, maybe less (wife said hubby was in construction so I'm not counting labor).

The outside paint seems fresh but cracked and peeling meaning it was likely not sanded properly before being painted and the roof I think is a lost cause. At some point composite was laid over dilapidated wood shingles and one section looks like the whole base of the roof underneath is caving in.

All and all not a bad job at cleaning up a fixer but as my wife pointed out the 345 asking leaves nothing for the next person to continue with.

If prices do not go down, a lot of flippers at the end are going to make a ton of money for little investment or work.

softwarengineer said...

RENTS ARE GOING UP

If you're a real estate investor, you're in better shape to rent out your investment for more money.

I don't believe there exists a bottomless barrel of money for landlords to tap, the household income stagnation the last 5-10 years took care of that. Irrespective, there does exist a wait and see portion of the real estate market that's qualified, but rents now to see where the housing bubble evolves later. These are smart investors.

T,V & Mr.B said...

Yeah, Sellers here are pulling prices outta their rear. they want to get while the getting is good. I actually think it is a sign of impending doom. Jack up that price, pray to St. What's his name, hope to god for a taker and get out. I will say it now...If anybody turns down lowball offers, they are iiiiiiidiooots!

Terry said...

t,v & mr.b & crashcadia,

It is scary to read what is starting to happen in other parts of the country. It makes me wonder how safe my savings / investments are. Where is a good place to have your funds if the deflation of the real estate bubble takes the whole economy with it?

FinanceGuru said...

Terry - The only safe place left is under your mattress, lol!

Crashcadia said...

Teri,

Your guess is as good as mine.
Watch out for safe funds as they are often waited with mortgage backed securities.

I have picked up some gold and some international funds but beyond that, you tell me.

Lukasz said...

Tim,

Are you planning to update the Seattle Bubble Spreadsheet with January data?

Thanks,

A.

Terry said...

financeguru,

I guess it was pretty lame to say the "whole economy" is at risk. What I probably should have said is that some savings / investments are more vulnerable to upcoming "corrections" in real estate valuations and lending institution practices than others. Have any readers of this blog been thinking about where the safe places are to save / invest?

Peter said...

Check out this flip.

Current owner paid $445,000 on 6/28/2005. Not sure how much they spent on the interior reno, but it looks cheap. Tile countertops, tile floor, etc. etc. On the market now for $749,950. The wife and I did a drive-by, and the view picture in the listing is complete crap - that's not the view you get from that house.

I'm thinking of making an offer of $450,000 on it.

biliruben said...

Terry -

The correlation between the overall economy and the stock market is marginal at best. That holds doubley true when looking at individual stocks. There are plenty of stocks that will likely do well through a recession. I'm weighting a bit more heavily towards value stocks, as a more conservative approach than normal for me.

If you are really concerned, buy CDs or T-bills, returning 5+%, and wait out the uncertainty.

If you are really certain of a crash, short the living crap out of builders and lenders. I'm doing some of that. I closed my positions up in builders, and I'm waiting longer than I hoped on the lenders.

My shorting was more of a hedge against a precipitous decline in my houses value, however.

Brian said...

ING Direct guarantees 4.5% on a savings account if all else fails...

I am trying to remember as Bush I left office and Clinton came in the country seemed despondent economically and things were bad at the beginning with Clinton, but he turned out to be Julius Caesar. I wonder if that's what will happen now as we ease into the final dog days of Bush II?

synthetik said...

>ING Direct guarantees 4.5% on a savings account if all else fails...

Your savings aren't safe as real inflation numbers may be 8-9%. Personally I am buying Silver, Gold and miners; while shorting a few subprime lenders at the moment. Owning a US based asset of any kind (stock, fund, house, automobile) seems like risky business.

>left office and Clinton came in the country seemed despondent economically

I don't think that presidents weigh as heavily on our overall economic system as we'd like to think. Clinton benefitted from one of the greatest economic expansions in history, which, i believe was mainly fueled by technology (computers) and the productivity gains therein.

We were actually entering recession as Bush II took over, the FED was already lowering rates like crazy.

It would appear, however, that Bush II's policies have been a complete and utter economic disaster.

As you know, I forsee recession for 2007-2009+ so Bush II may go down in the history books as the worst US President, ever - and deservedly so, imnsho.

T,V & Mr.B said...

Terry,
" guess it was pretty lame to say the "whole economy" is at risk."

Not really Terry. It is at risk. whether that risk will come to fruition or not is anybody's guess. I tend to think that after all this plays out, there is going to be some real damage. But then I am just some dumb BF from Alaska and don't have the savy knowledge that, that there Fi-nance goooroo has.

Terry said...

crashcadia, billiruben, brian, and t,v & mr.b.

Thanx for the feedback. Count me as one of those who have a vague bad feeling about future economic conditions.

It may have been said before somewhere, but it is my inexperienced opinion (and I may be stating the obvious)a major reason for the bubbles we have been experiencing is that there is alot of liquidity sloshing around chasing whatever best returns happen to exist at the moment, i.e. everyone piles into tech stocks, everyone piles into real estate .... What's the next "big thing" after real estate?

Matthew said...

Exurbs hardest hit in recent housing slump-
Distant suburbs of major cities experiencing biggest decline in price and sales since summer of 2005.


http://www.tiny.cc/EXwFs

T,V & Mr.B said...

Terry,
perfectly said. who knows what the next "big"thing will be? I tend to think a lot of people are gonna lose their shorts on this ponzi scheme. Maybe Biliruben or Crashcadia, brian or Mister bubble might be better to speculate on that than I.

Crashcadia said...

Terry
I have found the investment you are looking for:

lockbox

Matthew said...

i've noticed flipper eric is MIA. Is this a sign?

The Tim said...

Lukasz,

I most certainly am, however the data has not yet been released. I'm checking at least once a day, and will hopefully have a post up about the latest data shortly after it is released.

I may be a bit slower than usual, because I am in Atlanta for a work conference, and not at a computer very often.

MisterBubble said...

Re: next big things.

I am one of those people who believes that the housing equity bubble was a response to an incomplete collapse of the stock market bubble. Alan Greenspan panicked, and gave the country an equity sugar high, when he should have been putting more than a few noses in the recessionary corner. Thus, the same sleazebags who were trying to get rich overnight by selling dog food on the Information Superhighway are now flipping luxury townhomes in Bellevue.

I sincerely believe that this bubble is going to be a disaster for the entire US economy. The collapse in home equity will trigger a drop in consumer spending, which will trigger layoffs, which will further exacerbate the real estate collapse. No sector of the economy will be safe.

People have an unsustainably high standard of living in this country (as evidenced by our negative savings rate and willingness to chase any fly-by-night "investment" opportunity). I fear that only a full economic depression is going to readjust our expectations.

So there's my question: where do you put your money in a depression? I don't claim to know the answer. The freezer might be as good a place as any other....

T,V & Mr.B said...

Mr. Bubble, Your comments "The collapse in home equity will trigger a drop in consumer spending, which will trigger layoffs, which will further exacerbate the real estate collapse" is right on the money and I truly don't understand why people don't get it. Kostin of Goldman sachs, (I beleive I mentioned in a previous post) has said that spending has already dropped from 7% to 4% ofr GDP and is likely to half again in 2007. Withdrawls from mortgage equity will fall from 13% of discretionary cash flow to 7% this year. It won't be good. It already ain't good, it will just take some time to show up on the books.

Matthew said...

Ardell over at RCG says 2007 will be just like 2006!

http://tinyurl.com/2ps449

Greg said...
This comment has been removed by the author.
Greg said...

An interesting statistic at a 4 decade high: homeowner vacancy rate

Vacant Homes For Sale Cloud Economic Hopes

Alan said...

From the US census Historical Income Tables.

In 2005, 20% of US households had incomes of more than $166,000.

Using the 3x rule of thumb, 20% of households in 2005 could afford to buy a house for more than $498,000.

I am going to assume that this area has a slightly higher income distribution.

What percentage of the Puget Sound population can own SFH's in Bellevue/Redmond/Kirkland?

What percentage of the Puget Sound population wants to live in Bellevue/Redmond/Kirkland?

The Tim said...

Alan,

Unless I'm reading the table you linked to incorrectly, that would actually be just five percent of households making $166,000 or more. The top 20% make $91,705 or greater, with the top 20% to the top 5% making between $91,705 and $166,000.

So that would be a ~$275,000 house. Heh.

Alan said...

Thanks, Tim. I just came back to correct my post. I saw that each column was 1/5 and didn't notice the last one was 5%. That number did seem high to be for 20th percentile of income. Wikipedia has some other numbers that did not jibe with my interpretation. I came back to read more carefully and saw my error.

So 5% of the population can support $500k homes. The Puget Sound Metropolitan Area has around 3.2 million people. Say the average household size is 2.4. That leaves support for around 67,000 residences costing $500k in Seattle/Tacoma/Bellevue.

King County by itself had 792,000 housing units in 2005. 63% of these were single family residences (or more specifically 37% were multi-unit structures). That makes approximately 500,000 SFH's.

Including condos, the median price for each of these homes was $400,000. Conservatively, there are 250k SFH's that would sell today for more than $400k, but only 67k out of that 250k could sell for more than $500k (due to income-controlled demand). And that is only if all of the homes outside of King County in all of Seattle, Tacoma, and Bellevue sell for less than $500k.

As I've said before, if prices do not drop there is something that I do not understand about economics (which very well may be the case). I do understand how loose lending practices could lead to the price/income imbalance that I see.