Thursday, November 16, 2006

Beware the Media!

Long-time friends and colleagues know me well enough to know that I take in my news with a fair amount of skepticism. No matter who you are listening to (in and out of media) its wise to keep mindful of their bias and objectives. Its a pretty simple rule. This is why the nightly news advertises stories about which of your dinner ingredients might kill you tonight!... but the story runs at 11pm... they just want some attention so they can sell commercial time to their advertisers.

Look at the difference between two different stories on the topic of baby-boomers and the implications for housing. From the perspective of Real Estate and Mortgage companies, Realty Times reports of the generation "They've got all the money ... They've got all the real estate, too". The article makes the case for the next wave of Real Estate activity with baby-boomers leading the charge by buying 2nd homes and vacation property. This is no new speculation by the way; stories about this appear weekly.

But look at this article. It basically reports that baby-boomers are far more likely to remodel their homes than move to the beach, or the desert, or to buy a 2nd home on the shore of some lake. And who is behind the so-called study? Home Depot!

The only way you can get a sense of anything out there, especially in the real estate market, is to get as many angles and opinions as possible. Do your best to triangulate reality among all of the self-serving junk in the news.

Friday, November 10, 2006

Blowing Bubbles...

Are we headed for a soft landing? The media has been beating the 'real estate bubble' drum for several years, and in doing so scaring countless would-be homeowners out of buying what would have been a nice investment, not to mention a nice place to call home. But now we are seeing a counter-weight of similar magnitude, in real estate professionals and industry insiders who clamor for the so-called "soft landing" in the housing market.

Stepping back a bit and looking at housing from an economic perspective we might be able to take some of the hot air out of the equation and see what is really happening. Housing is an investment, and an asset in a class of its own based on the function it serves relative to other types of investments. But real estate is still subject to market conditions, cycles, and other typical financial rhythms.

There is no question that housing has seen tremendous gains in recent years, exhibiting characteristics of 'irrational exuberance' that have paved the way to inflated asset prices and preceded significant corrections in value. The most recent memorable example was the NASDAQ and dotcom stock rally that came to an end in 2000. From the peak of the rally to the trough of the correction, the index lost a staggering 71%

Commentary on the asset bubble phenomenon most commonly references a mania in the market for Dutch tulip bulbs during the 1630's, where at the height of the market, people were swapping homes for flower bulbs.

In Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote "that whole communities suddenly fix their minds upon one object, and go mad in its pursuit." Is this what we have seen in the US housing market in recent years?

The characteristics of a cycle turning over are present in the housing market. First we saw a parabolic curve in home values. The Federal Reserve stepped in to raise rates (while the general goal was to curb inflation, it is very likely that the specific goal was to temper home values), and eventually inventory increased. Now prices are starting to come down.

Paul Kasriel of Northern Trust recently published that in the current housing rally, the dollar volume of all sales was at a record high when represented as a percentage of GDP. The implication is that this is an extreme market, and that we should be facing a similarly extreme correction.

Given that the housing market continued to rally in the face of the Fed rate hikes, demand was defined as 'inelastic'. In other words, people did not care that it was becoming more expensive to buy; they just used more liberal loan products, taking on increased risk, and kept on spending. It took 17 hikes of 0.25% each before the market showed a change in mood.

Several economists think that the Fed tightened rates well beyond the neutral point, and expect them to start lowering as soon as January 2007. Cool the jets with higher rates, then slowly ease back into the comfort zone. Its like getting into a car that has been parked in the sun: put the AC on full blast for 10 minutes, and you'll eventually need to back off and find the middle ground.

Paul McCully at PIMCO recently made the case that all of this suggests that a 'soft landing' in housing is nothing but a pipe dream. Demand for housing, he says, is inelastic on the way down, just as it is on the way up. Once the investors change sentiment, rate cuts are not going to bring them back in droves. We saw this with the NASDAQ, and stock market in general. It took an over-correction and under-valued securities to bring the interest back to Wall Street.

So is housing due for an over-correction? Is the 'soft landing' attainable? Kasriel and McCully make for an interesting case. Next we will look at the Kubler-Ross model laid down over the US housing market, and see if we can find any similarities.

Thursday, November 02, 2006

Rock the Vote! TIC Coalition in SF

In San Francisco, affording the home of your dreams takes a lot of money, and a tough stomach!

One of the many areas of political battleground on the streets here in San Francisco is that of affordable housing. There are some interesting social intersections here where the typically egalitarian political mood of San Francisco meets with the stratified financial footing of its residents. I won't go off on a political rant here; I am more interested in distributing some useful info on the coming elections...

In San Francisco, the cost per square foot of house is on the upper end of the spectrum nation wide. In an effort to cut some costs, people have taken to buying multi-unit buildings by joining with other buyers - often times strangers - to pool resources and buy the entire building. They take title as Tenants in Common, which essentially gives each party ownership in the building as defined by percentages rather than by area or a specific unit within the building. In many cases, the next step is to legaly convert the building to condominiums, thereby granting each party exclusive ownership of their respective unit, and the freedom to finance or sell separately from other building owners.

Tenancy in Common housing and condo-conversions have really become a political hot-button in recent years. Because a condo has fewer strings attached from the perspective of the owner, it is usually considered more valuable as an asset, thus the tendancey to want to convert. But proponents of affordable housing issues argue that if the city converts too much inventory into condos, they will eliminate relatively affordable living space for the thousands of people in need.

As is with any political battle, the laws swing back and forth between the two competing interests, and currently represent San Franciscos predominantly liberal politics. There are extremists on each side. There is probably an acceptable range of middle ground for a solid utilitarian community. But at times there needs to be resistance to hold the balance in this middle ground. For example, under current law, some owners will wait 5 years before being allowed to convert, and the process itself takes 2 years (if you are lucky!) just to wade through the bureaucratic process that the city requires. In recent years, legislation has pushed this timeline out to be as long as a decade in some cases.

To many, the idea of owning real estate but being legally prohibited from controlling what you do with that real estate is a seagull poop on the statue of the American Dream. To this concern, the San Francisco TIC Coalition has united as a force to represent the interests of home owners. In a recent advisory, they recommended voting "NO" on Prop H, and cited this page for more info. One thing I will rant about politically is the uneducated voter - so do your homework! But consider them a good resource for the home owner in San Francisco - especially if you are involved in a TIC.

* Several interesting reports on Affordable Housing can be found here.
* More info about the SF TIC Coalition can be found here.