-- Posted Tuesday, 9 May 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, May 9, 2006
For investors who’d rather be smart than lucky
The article below, from Fortune, is important because it shows that at least one big-circulation, mainstream business magazine is capable of speaking bluntly about the coming real estate crash. Granted, it includes a disclaimer of sorts in the sixth paragraph – the obligatory warning to “take-a-deep-breath” if everything you’ve read up to that point sounds a little too scary. And it presents a very alarming statistic without becoming duly alarmed – namely, that the two-dozen U.S. cities that constitute the “bubble zone” account for fully 60 percent of the nation’s residential real estate value.
But Fortune’s head, at least, is in the right place, even as many other news sources, including The Wall Street Journal, continue to quote respectfully the dwindling bunch of shameless bozos who insist that there is no real estate bubble. Rick’s Picks readers should be familiar by now with my deflationist arguments to the contrary, but I’ve reiterated several of them that are especially relevant at the end of the piece. Here, first, is the article, with a New York dateline and Shawn Tully’s byline:
Sellers Drop Prices
The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.
The message is clear. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers' pockets, and ignited a building boom that bolstered the nation's economy. But it's over. The great housing bubble has finally started to deflate.
You won't find that news in broad national statistics or the upbeat comments from the real estate industry. The latest official figures, for example, show both new and existing home sales rising in March, a mixed bag on prices - and a record number of new homes on the market.
Pressure Will Worsen
But FORTUNE's on-the-ground reporting - in what up to now have been some of the nation's hottest areas - paints a very different picture: Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day - so the downward pressure will only get worse.
"The buyers' sense of urgency is gone," says Bob Toll, CEO of luxury builder Toll Brothers (Research), who has long been a housing bull. "They see the market going soft, so they stall."
Take a deep breath. We're not forecasting a nationwide housing collapse. For one thing, the vast expanse of America between the coasts was never touched by real estate mania and is in no danger of a meltdown. And even some overheated markets - including Manhattan, Los Angeles and California's Orange County - are still simmering.
Boston, Miami et al.
But things are suddenly looking very chilly indeed in four coastal cities - Boston, Washington, Miami and San Diego - as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento. So far this year, monthly sales have fallen 11 percent to 25 percent in Miami, Boston, northern Virginia and San Diego, according to local housing experts.
The prognosis is even worse in Phoenix, where only 4,500 homes sold in the first three months of 2006, vs. 6,100 for the same period last year, and in Sacramento, where new-home sales plunged 57 percent in the first quarter (compared with the first quarter of 2005). In California it now takes six months to sell a house, twice as long as a year ago. (See a slideshow of home prices in all the troubled areas.)
And what's happening in these areas is a sign of what may be coming in the rest of the bubble zone -- the two dozen or so mainly coastal cities and their suburbs that have seen prices soar in recent years and account for 60 percent of the nation's residential real estate value.
Triple Threat
The problem is as basic as beams and trusses: The triple threat of soaring prices, higher mortgage rates and relentlessly rising property taxes has drastically increased the cost of ownership and put many homes out of reach for a huge number of potential buyers.
In California, for example, only one household in seven can manage the payments on the median-priced house, now selling for $561,000. It takes an income of $134,000 to afford that home, which might be a modest three-bedroom ranch in a bland subdivision. The affordability gap is driving buyers to the sidelines, replacing the frenzy with a growing void as buyers wait for prices to drop.
Welcome to the dead zone
The Dead Zone
With houses hovering beyond the reach of most potential purchasers, formerly frantic markets grow eerily calm. People who rush to list their homes, hoping to grab a fat gain just before prices break, take them off the market.
Sales shrink as buyers float low-ball offers, and sellers refuse them. Realtors and mortgage brokers find other jobs. The bubble areas turn into Dead Zones.
There's no mystery about what it will take to close the affordability gap and bring the markets back to life: Prices will have to come down, and incomes will have to move up. Right now the ratio of home values to incomes in the bubble zones is about 40 percent above its historical average. So the only question is how much of the adjustment will come from rising incomes and how much from falling prices.
On that point there's reason to be hopeful. In the past, housing declines almost invariably occurred while the economy was suffering through a recession. This time the housing downturn is coming during a period of strength, with GDP surging nearly 5 percent in the first quarter. If the economy keeps chugging along, household incomes should grow at around 4 percent a year.
Stimulant Will Vanish
Under those conditions one likely scenario is that housing prices would drop 10 percent to 15 percent in the bubble zone over the next 12 months, then remain flat for maybe four more years while incomes catch up.
But there's another possibility. For the past few years the housing boom has driven the economy, adding jobs in construction, remodeling, and real estate services. And consumers gorged on the equity in their homes, taking out a total of $2 trillion via loans, refinancings, and sales over the past five years.
Those powerful stimulants, which added a full point to annual GDP growth, will soon vanish. If corporate spending or some other force doesn't come along to pick up the slack, we could go into a recession that would cut income growth to zero. Then inflated housing prices would have to shoulder the entire, wrenching adjustment, falling 30 percent or more over several years.
No Bragging Rights
In either case, many individual homeowners have nothing to worry about: They can simply stay put and ride out the cycle. The only thing they'll lose is the opportunity to brag about their paper profits. And in some places, appreciation has been so sharp that a seller could see prices plunge 30 percent and still make a hefty gain.
The real losers will be those who bought recently at inflated prices and are forced to sell, usually because they're taking a job in another city or can't make the payments when their adjustable mortgage rate jumps. And speculators who bought overpriced condos in hope of a quick killing are going to get hosed.
My response:
- The article fails to understand that even a “mild” drop of 2% to 3% will suffice to bring on a severe recession or even an economic depression, since it would subject every mortgage payer in America to effective real rates approaching 10%
- It asserts that most regions of the U.S. won’t be affected by the coming real estate bust, since they never boomed in the first place. In fact, all homes, even in relatively uninflated cities like Muncie and Tulsa, will fall in value if “bubble zone” real estate deflates. There is hardly a jerkwater town in America, even in Mississippi, where you cannot find subdivisions burgeoning with $400k homes.
- The obligatory “take a deep breath…” disclaimer in the sixth paragraph contrives to ignore a scary and absolutely critical fact presented elsewhere in the article -- that the bubble “zone” accounts for 60% of U.S. home values.
- It hypothesizes that real incomes could grow at 4%, closing the housing affordability gap. In fact, real income growth has been stagnant for decades and is certain to fall, not rise, as the phony financial economy begins to implode and layoffs skyrocket.
- It cites supposed 5% GDP growth reported recently as evidence of a strong economy. In fact, the brazenly manipulated, statistical picture of a “strong” economy is absolute rubbish – so much so that in a recent WSJ/CBS poll, no fewer than 77% of the respondents said the condition of the economy was a “serious concern”.
It sometimes seems as though Fed chief Bernanke and all the other eggheads are not in on a “secret” that constantly insinuates itself on the lives of working stiffs, to wit: The economy of jobs and incomes has been barely inching along for years, requiring that most of us work harder than ever just to stay afloat.
To their credit, Fortune’s editors recognize that a potentially devastating real estate bust has already begun, even if it is not yet statistically compelling. A silent deflationary collapse is indeed well under way, manifest in the quietly widening spread between sellers who refuse to come down and buyers who no longer expect to pay up. The spread is likely to widen quite a bit more before distress sales at the margin start to pull down average prices, but until that occurs don’t expect the mainstream press to “get it”.
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Avoid MyInks.Com
Canon, HP, Brother and other printer manufacturers recommend OEM replacement ink cartridges because, they say, third-party products contain inferior ink that will clog the print head. I’ve found this to be true, at least for my Canon, although I was able to revive my printer by repeatedly soaking the print head in denatured alcohol and running it through the deep-clean cycle a zillion times.
Whatever you decide, I would strongly advise you to steer clear of one vendor in particular, MyInks.Com, one of the largest cartridge sellers on the Web. If you order just once from them, you will get on the mailing list of their marketing director, the overbearing, loathsome “Jodie”. Jodie is as aggressive a mailer as I have ever experienced, as tenacious as a leech. Customer service is absolutely unreachable, as is a human being at MyInks’ headquarters in Glendale, CA.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 9 May 2006 | Digg This Article | Source: GoldSeek.com
