- Richard Russell has written The Dow Theory Letter since
1958. He is a wise man. Here is what he says about the housing market in
San Diego where he lives:
- As far as the US consumer is concerned, real estate is
"where it's at." Half of all US families now own some stocks
or mutual funds But the amount of money US families have in real estate
far outweighs what they own in stocks. Therefore, what happens to the price
of real estate, homes, condos -- is crucially important at this time. This
is particularly true since US families now hold over $7 trillion in mortgage
- Let's start with an anecdotal story. I ran into an old
neighbor a few days ago. This fellow owns 250 units in San Diego. His oldest
son manages 1,500 units. I asked him what was going on in real estate.
He told me that we're past the peak, that prices are softening, and that
it's taking longer to sell property in La Jolla and throughout San Diego.
He added that all his real estate friends agree with that appraisal.
- I get Robert Campbell excellent "Campbell Real Estate
Timing Letter" (858 481 3235). This is a unique report that uses a
clever type of technical analysis plus fundamentals in analyzing the San
Diego to LA real estate situation. Campbell follows a number of items such
as "existing home sales," "new home building permits,"
"foreclosure sales," "notices of default," and he gives
each category an index number. Then he works all of his various categories
into what he calls his "Real Estate Crash Index." When this Index
drops below zero, it's time to get out of Southern California real estate,
or at least it's time to batten down the hatches on what you own.
- "I believe the California housing market is a bubble
that is nearing its final hours," writes Robert in a report that I
received yesterday. His Real Estate Crash Index has finally given a bear
- Robert computes that California home prices could drop
as much as 42%. He comes to this analysis in a very logical and scientific
way based on current and past statistics, which I won't go into here. But
I will include the following paragraph from Robert's current report.
- "The median price CA (California) house, for example,
now sells for $533,000. If a buyer puts 20% down, the carrying cost for
principle, interest, property taxes, and hazard insurance with a 30-year
fixed-rate mortgage of 6.5% is $3,400 per month. If the buyer only spends
35% of the family income on housing payments -- which has been an historical
norm -- this family must be earning $116,000 per year. Earning only the
average of $60,300 per year, buyers are purchasing twice as much home as
the can really afford. Given these statistics, is it any wonder that interest
only and negative amortizing loans now account for 70% of all CA home purchase
- "As the CA housing mania ends and the concept of
risk returns to its rightful place, there is going to be a rush for the
exit doors. Speculators are going to find out -- and many for the first
time ever -- that as demand continues to soften, liquidity in real estate
investments is far lower than they envisioned when they went in."
- Russell Comment -- California real estate is priced far
above the average or the median price for US real estate. Nevertheless,
San Diego has been a leader on the upside, and many consider San Diego
to be a sensitive bellwether area. The current issue of Smart Money magazine
(a WSJ publication) carries an article entitled "Property Predictions."
The article lists "Overvalued, "Fair Valued," and "Undervalued"
real estate area. San Diego comes 7th on the list of "Overvalued."
The article lists San Diego real estate as 61% overvalued.
- Thus, as prices turn down, San Diego and much of the
West Coast could take a beating in real estate. Nevertheless, as I said,
San Diego was one of the first places to see surging real estate prices,
and San Diego is evidently one of the first places to see weakening real
- San Diego real estate is now soft, inventories are too
high, there are too many condos, and prices here are beginning to come
down. I believe the rest of the nation will follow. The real estate bubble
has backed into a spike and is beginning to deflate.
- Wednesday, November 16, 2005
- New Home Sales Fall 40% In N California
- News Ten in Sacramento has some breaking news. "The
latest figures on home sales in Sacramento give further evidence that the
Northern California real estate market is slowing down. A report from the
California Building Industry Association shows new home sales in Northern
California fell 40 percent during the past three months, compared to the
same period last year. It's the sharpest such drop in the last 15 years."
- "Pam Deangelis sees the slowdown as a correction
in a market that's been overheated for several years. Deangelis said a
year ago people would come in panic buying mode. 'They would come in and
be anxious to buy anything we had available,' she said. '"Now they're
in panic selling mode because it's taking them longer to sell their existing
- "Deangelis added Cresleigh Homes is no longer taking
contingency offers, because some would-be buyers have been unable to sell
their current homes."
- "To counter the decline, many developers are offering
incentives to buyers. Some are putting in thousands of dollars in upgrades
at no extra charge, while others are discounting the base price of homes
by five to 10 percent."
- "The cooling of housing market appears to be accelerating,
although the market has been trending downward for much of the year. In
the first ten months of 2005 new home sales fell by 14 percent over the
same period in 2004."
- Homebuilder Confidence Sees 'Sharp Decline'
- The homebuilders trade group has their internal index
out this morning. "Responding to sharply lower measures of consumer
confidence as well as rising mortgage rates and other factors in recent
months, single-family home builders are adjusting their market expectations
downward to a still favorable perspective, according to the National Association
of Home Builders/Wells Fargo Housing Market Index (HMI) for November."
- "The index declined eight points to rest at 60,
a level well above the midpoint that indicates the majority of builders
still see conditions as positive in their markets. 'No huge drop is in
the cards, the sharp decline in the HMI probably overstates the actual
degree of deterioration in the single-family market, and it's most likely
that we're engaged in an orderly cooling process that will lead to somewhat
lower home sales and production in the future,' added NAHB Chief Economist
- "Each of the HMI's component indexes registered
declines this time around. The index gauging current sales activity fell
eight points to 66, while the index gauging sales expectations for the
next six months dropped nine points to 64 and the index gauging traffic
of prospective buyers fell five points to 46. The last time the HMI hit
60 was in May of 2003."
- "In the West, the HMI fell from a very high level
of 91 in October to a still-impressive 78 in November, while in the South,
it declined from 76 to 68. In the Northeast, the gauge slipped six points
to 61, while continued job-market weakness in the Midwest brought that
region's HMI down from 45 to 38."
- Skeptics Line Up Against Homebuilders
- The homebuilder DR Horton reported earnings this morning.
"The No. 1 U.S. home builder, on Wednesday posted a better-than-expected
fiscal fourth-quarter profit and raised its outlook for the current year
on strong demand nationwide. But some analysts were cautious and unwilling
to overlook industry cost pressures, slowing price increases and rising
inventory of existing homes for sale."
- "Horton may feel some pain from Phoenix, Arizona,
one of the hottest U.S. real estate markets, when speculators who have
helped drive up median prices 49 percent, flee the area, unloading homes
en masse, said Raymond James analyst Rick Murray."
- "'We suspect the future of this market may unfold
similarly to the recent slowdown in Washington, D.C., or a situation similar
to the events that transpired in Las Vegas a little over a year ago,' Murray
wrote. While the inventory of homes for sale is low in Phoenix, where Horton
is the market leader grabbing 9.6 percent, it has more than doubled over
the year, Murray said."
- "Horton ended the quarter with a backlog of 19,244
homes on order and awaiting construction." As was posted yesterday,
there are a record 500,000 new homes sitting on the market. Speculators
are using the public homebuilders as a low cost play on the housing bubble.
- "Even the National Association of Home Builders
now concedes the housing market may be full of little tiny bubbles. NAHB
chief economist David Seiders Seiders seemed to agree with a rising chorus
of other economists. 'We're on the cusp of change,' the economist said
after a presentation by David Berson, his counterpart at Fannie Mae, who
told the conference that 29 of the top 100 metropolitan statistical areas
are experiencing price gains that are not sustainable."
- "David Wyss, chief economist at Standard & Poor's,
came close to throwing his hat in the ring, too, pointing out that the
number of 'seriously over-valued' markets has increased from 30 percent
to 'almost' half within the last year. Historically, Wyss reported, the
ratio of the average home price to average disposable income has been 2.6.
But the price-to-income ratio is currently 3.2 on a national basis, and
two to three times that in many cities, he said."
- "In San Diego, for example, houses cost 9.68 times
the average household income. In San Francisco, the ratio is 9.19. And
in New York, it was 8.62. These ratios 'have to come down,' the rating
agency's top economist warned. And whether prices decline or continue to
rise at a slower pace depends on the strength of the overall economy."
- "Seiders pointed out, 'Things continue to be very,
very good for the housing market, but its role as an engine in the economy
is coming to an end.'"
- Signs of Sickness in the U.S. Consumer
- Tuesday, November 15, 2005
- On September 15, theTrumpet.com ("Record Earnings-Record
Debt") reported that the personal savings rate was negative for the
first time since the Great Depression (excluding the month following 9/11).
Now, the personal savings rate has been negative for three months in a
- Following a revised minus 0.3 percent rate in June, and
a revised minus 1.1 percent rate in July, consumers again spent more money
than they earned in August, with the personal savings rate at minus 0.7
- Personal income during August also fell by 0.1 percent,
as did consumer spending-by 1 percent (Washington Post, October 1). What
makes these statistics worrisome is that even though consumer spending
decreased proportionately more than personal income, people still spent
more than they earned. This indicates people had to dip into savings, sell
assets, or take on more debt to maintain their standard of living.
- Consumers are finding it increasingly difficult to keep
up with their debt.
- A record 4.81 percent of credit card accounts were at
least a month behind in the second quarter of this year (USA Today, September
28). This number surpasses the prior high, set the previous quarter. Unfortunately,
over the short term, things are not looking good for credit-maxed Americans.
Many credit card companies have been raising the minimum monthly payments
and have been switching to variable interest rates that rise and fall with
the short-term federal funds rate. New regulations doubling the minimum
payment are also set to take effect this year. This means that a greater
and greater portion of income belonging to people with credit card debt
will be used to make minimum payments.
- Personal bankruptcies also set a record in anticipation
of the October 17 change in U.S. bankruptcy law, which tightened the requirements
for personal bankruptcy filings. September filings were at all-time highs,
averaging approximately 9,000 per day, 50 percent higher than last year.
About 1.24 million Americans declared personal bankruptcy this year through
September 17. Thirty-seven states have seen the percentage of bankruptcy
filings jump by double digits since March.
- Swelling energy costs are also starting to build pressure
on the American consumer. In fact, the rise in gasoline prices alone is
starting to squeeze some.
- Any one of the hundreds of thousands of Angelenos or
New Yorkers that suffer through two-hour daily commutes will tell you how
gas prices are taking a bite out of their bank accounts. As gasoline prices
have spiked, so has the use of credit cards to pay for it. People are trying
to put off the pain of paying for as long as possible. All across the country,
rising gasoline prices have been linked to increased theft. Last year,
gas thefts more than doubled over the previous year to $237 million.
- Home heating and energy costs, reflecting record-high
oil and natural gas prices, will also hurt consumers-this winter, especially.
- Higher borrowing costs are also starting to pressure
American consumers and small-business entrepreneurs.
- The U.S. Federal Reserve has been increasing short-term
lending rates since June 2004. Since banks must base their prime lending
rates upon the Federal Reserve rate, this has led to higher loan rates.
On average, these loans are now at 6.75 percent, the highest in the last
four years. These rates are used for many short-term loans, including home
equity lines of credit (Startribune.com, September 29).
- Declining consumer spending, a negative savings rate
and falling personal income bode ill for the U.S. economy.
- Consumer spending accounts for two thirds of U.S. economic
activity. As consumers continue to feel the pressure of rising energy costs,
credit card payments and interest rates, watch for consumer spending to
keep dropping. Ultimately, this will lead to recession-and with all the
other problems of the economy, it has the potential to be a doozy.
- For more explanation on why consumer spending is vital
to the American economy, read "The Burden of John Q. Consumer."