GLG News by Kenneth Egan

Implications: We are Reaching a Point Where Public Corporations cannot hide from the market facts--we are also just at a midpoint in the overall RE crisis, and there is more writeoff to come. With 2.3M vacant homes in the U.S., we will continue to see downword price pressures until this number returns to well under 1M.  If new construction and foreclosures add to the inventory, we will see price reductions of 30-40% in the next two years.

Analysis: Writedowns will continue, not only by builders, but by lenders and funds that are involved in RE lending.  Projects will continue to be delayed and shelved.  The government cannot come up with a bipartisan solution to the problem, so more foreclosures loom in the near future, both in residential and commercial.  When large projects go under in the near future, we will be revisiting the crisis all over again.  We haven't yet seen the impact of destination resorts, and golf communities that are partially built out, but are sputtering.  More is coming.

Implications: The government is powerless. Wall Street is delusional. The financial system is in trouble, AND IT WILL GET WORSE.

Analysis: The commercial market is not my forte, and I just posted a similar article about the residential market.  NAR and others(agents, RE franchise owners) would like to have us (or really the buyers) believe that a turnaround is close at hand.  This is so far off the mark that it borders on irresponsibility or immorality.  When we see inventory of vacant homes INCREASING from Q4 of '07 to Q1 of '08..to 2.3 million properties we know that big problems still exist.  Until we see a trend of positive statistics, know that the situation is not improving.  Everywhere we see downward pricing pressures.  It may be the best buyers market in 25 years, but if prices go down for the next two years, perhaps by 30-40%, is this the time to buy?? Don't think so!!!

Implications: A year's worth of new home inventory remains unsold. Regional banks are reporting losses, because of regional builders excess inventory. With increasing foreclosures, and at current building levels, the issues remain. Large projects will be next. Poor sales at destination resorts will start to impact this area--second home sales will decline sharply--already have.

Analysis: The market is attempting to create an illusion.  Just as I hear every day from local realtors that the market "has bottomed", and "it's a great buyer's market", so to does Wall Street want to create good news to get buyers back into the market.  Unfortunately, the reality of builders and destination resorts/golf communities renegotiating their financing tells the real story.   The market is still stalled and reversing.  Banks and builders/developers are at the stage where they are trying to minimize their losses--kind of a "loss-sharing" situation at the moment. It will be several years before the base is stabilized, and several years after that before we see any appreciation in prices.

Implications: We began the "slippery slide" a few months ago. Bigger issues are at play here--it's not just a sub-prime crisis.    

Analysis: In my opinion, we have much bigger issues at stake in our economy, than just a sub-prime crisis, or a buyer's market.
Years ago, a rule of thumb for buyers was, pay 1 1/2 to 2 times your annual income for a home purchase. Really!! And it worked.  We all had enough money for vacations, SAVINGS, medical costs, a new car every 3-4 years, etc.  Today, can you imagine a person paying $150K for a home if they are earning $100K/yr.  I doubt it.
The real issue is taxation, I believe.  We are giving way too much or our income to the government.  In the 70's, when the above rule worked, we were only taxed about 10-15 % of our income, for both Federal and State taxes combined.  Look at where we are now--50%.  This leads to credit borrowing.
A bigger issue is that our government's finances are far worse than those unfortunate persons, who wnet over their heads in borrowing.  What is going to fix their dilemma??
We will see further declines in housing prices in 2008, as demand has vanished.  With 2M vacant homes/condo's on the market, and that number is increasing(!), we are far from heading in the right direction.

Implications: We are very early in terms of the impact on our economy. 2008 will see more non-performing loans, and builders will go belly-up. The loss of the home ATM has taken trillions out of the economy, and with that spending gone, the impact will trickle beyond the builders, to construction material providers of commodities and equipment, as well as general employment.  We are seeing debt-laden builders trying to generate cash, and lumber companies going into bankruptcy.  2008 will be extremely difficult.  What will the impact be of a 20% drop in residential real estate prices??

Analysis: We have not yet seen much of the impact of the housing dilemma. When the agents that are still currently listed as employed start showing up on the unemployment lines in 2008, alongside the mortgage brokers, construction workers, home inspectors and others,, the problem will be much larger. This, coupled with depreciating home prices, will do some serious damage. It will not matter that the Fed floods the market with dollars, as the borrowers will not be there. Forgiving or readjusting some borrowers loans is not a solution in itself. There are nearly 1M unsold new condo's and homes sitting vacant. As the mayors stated recently, they will start causing blight in areas. Banks will take a second "hit" from the loans to builders, that will be foreclosed. I don't have the numbers, but they have to be big.

Implications: Short term solutions creat long-term problems. This is only one of the issues. 2008 is going to be a real test for the USA economy.

Analysis: Dealing with the subprime issue in a band-aid approach does not solve the housing crisis, as the Fed and the banks are only dealing with a part of the overall issue.
The concept of refinancing and pulling equity out of a home(ATM), is or was a Ponzi-like idea.  It is amazing that banks and other lenders did not caution or insist that borrowers never hear the words "just pull the equity out in 1-2 years, and re-fi."  This could not continue forever.
We will need a focus on out-of-work construction people, builders who will be going belly up in 2008, as well as other bank loans, mainly construction loans that will be foreclosed on.  We are fast approaching the point that auctions at 50% of pre-meltdown prices are not even doing the trick.
2008 will be the year of non-performing loans!! 

Implications: We continue to see a large drop in transaction volume. We have no data that shows a return to a sellers market. Bend is one of the top RE markets in the entire U.S., so the data here is significant. A prolonged downturn is likely.

Analysis:

As a RE broker for 30 years, and having seen earlier market slowdowns, I feel that this has the makings of a prolonged downturn, at least into 2009.  Inventories are actually increasing, as transaction volumes lessen dramatically.  Forecasts by builders are rather dismal, and resellers are relatively stuck in their properties.  I predict that small regional homebuilders in some cases will go bankrupt, unemployment of real estate agents and construction-related jobs will begin to increase, and things are going to get a lot worse.  Here in Bend, we are seeing subdivisions now being sold as lots only(with no buyers), or in the case of partially developed subdivisions, huge incentives being offered(with few takers).  Many developers are holding several, or several dozen, unsold properties in their portfolio. When the value of the outstanding interim financing is considered, it is easy to see that we will have more downward pressure on prices.  We could easily see 30% reductions in 2008, and more further on, into 2009. 

Implications: Housing is hurting.  This will impact the economy as the "housing ATM machine" disappears. We are not even in the middle of this downturn. 

Analysis:  With 3.7 million homes on the resale market in the U.S., and 1.4 million new homes sitting unoccupied and not in excrow, the debt burden is hurting a lot more people and companies than even the subprime borrowing situation. Add it up; more than 5 million homes are "on the market".  We are seeing houses stay vacant, and 30 month inventory levels become the norm. We are reaching a point of stagnation, where buyers refuse to commit, and sellers not wanting to drop prices any further. My guess is that the sellers will have to "blink" first, as the only way for the market to develop will be at a lower price level.  The current situation is that the transaction volume is down, but prices are much less so.   The next phase is that the volume will continue to stay down, but prices will drop(2007-2008).  Finally, when prices have dropped far enough, buyers will return, but with more stringent lending practices, the market will not see the fever of 2003-04 for some time.

Implications: Just released statistics from the Office of Federal Housing Oversight show that, for all of 2006, price changes ranked from a low of (5.48%) to a high of 21.39% (Bend's appreciation rate). 

The dynamics of buyer needs is changing.

Demographics in the U.S. continue to change, as a function of changes in our business base, as well as changes in family and individual lifestyle needs.

Analysis: First of all, contrary to what most realtors would have people believe, we are still 12-18 months from any "turnaround", but it is obvious that some areas are going to have healthy appreciation rates, while others stay negative.  Many dynamics, including the Internet, are shaping future growth models.  Included in these is the age-old issues (I'm tired of winter's grey skies, and all that snow), to newer issues of how do I get away from traffic, noise, pollution and crime, and find a bit of peace and community somewhere.

Where can you find a sophisticated city, with lakes, mountains, rivers, 30 golf courses (including a Jack Nicholas signature course), no traffic, and friendly faces?  Where there is less rain than in Los Angeles, and 300 sunny days a year?  The answer used to be Phoenix, but now it is places like Bend. You can call me, or check out www.ken-egan.com to see pictures and the like.  I found out firsthand why Bend is #1.

Implications: This article has excellent insight to the reality that the housing boom has been fueling the economy for some time.  If housing were removed from GDP, we would be growing at about 1% per year, pretty anemic.  The issue of overzealous lenders allowing 100% financing, stated income loans, and other more-than-aggressive practices, will come back and haunt us.

Analysis: The information has always been there...the housing ATM added several trillion dollars to the GDP, which was really like adding adding a loan to the operating income line on a balance sheet.  With no growth in appreciation of value, the lines of credit are "tapped out", plus borrowers, in many cases, are left with loans they cannot repay.  Job losses will accelerate in the housing and related industries.  If GE is laying off 35% of it's lender workforce, what do you think others will be doing soon? 

Implications: Similar scenarios throughout the country show RE market trends.
Who will "blink" first is still a guess.

Analysis: Oregon, as some other states, has a large net influx of people into the state (a 62.5% ratio--second highest in the country), yet here are some interesting statistics:

- Prices up 25%.

- Inventories up 393% since January, '06, but down 23% from August, the peak.

- Transaction volume down 27%, in the same time period.

- One trillion in ARM's will adjust this year, so be prepared for more foreclosures, creating downward price pressure.

- New home inventories are NOT included in these numbers, and still have to be worked down.

- Lastly, affordability continues to go down, so it is entirely too early to say OR PREDICT that the residential market will recover in 2007.

Implications: It is still too early to spot a positive trend.

Affordability is a key ingredient to a turnaround, and affordability will not be reached until prices drop further.

People are backing off spending 50% or more of their family income for housing.

Analysis: As an active, practicing RE broker in the hottest market in the U.S. (Bend, Oregon), I continue to see an environment that causes concern.  In a nearby development, a builder has recently increased advertising greatly, offered major incentives to buyers, and still has a large inventory of unsold houses.  He is considered a mid-range priced builder.  It appears that the top and bottom of the market is doing OK, but the large (75%) portion of the market is still extremely weak.  Builders are now willing to sell their lots off, as well--with very little interest.  The estimate is that 10% of the agents(there are 2,000 in Central Oregon alone), will not renew their MLS(Multiple Listing Service) contract this year alone, so the repercussions of the last several months are, in my mind, escalating into the job market and other areas of the economy. 

Implications: Some markets are hot; others cool or cold.
Different factors now impact demographic shifts.

Analysis: Once again, Bend, Oregon is the #1 city in the U.S. for price appreciation, with a healthy 30.37% increase year-over-year, through Sept. 2006.  In my opinion, this continues to demonstrate that shifts are occurring in the residential real estate market.  There is a preference among people of all ages to move not only to affordable places, but also to place that fit their lifestyle.  We know that younger people are active, and want a good place to raise their families.  What may be less known is that boomers are active, and don't want to move to Florida to get away from winter --they want much more.   They want hiking, biking, nature, and perhaps, seasons.  The reason Bend is increasing 30%, while other cities are struggling, is beauty, tranquility, affordability, and a strong sense of community, with 500 miles of rivers, 150 lakes, no pollution and no traffic.  All of this comes with sophistication to boot, with great restaurants, 30 golf courses, art galleries and the like.

You can see more at www.ken-egan.com. 

Implications: . Downward trends continue, even in "hot" markets
. The conclusion that we are in for a "soft landing" is not based on facts
. RE inventories still need to be worked down, and prices continue to drop

Analysis: Bend, Oregon was recently designated the #1 market of 275 cities in the U.S., with a 36.5% annual appreciation, and 7.5% alone in Q2 of 2006 by Money Magazine and another Federal survey.  However, what we are seeing is a fast turn from closings of residential sales that reflected sales in Q1 and Q2 of '06, to a significant (59%) slip, as compared to October,'05.  Another significant statistic is that 70% of the homes sold had reduced their price. 

It amazes me that analysts can predict that the market will turn around in the Spring of '07, as there are no hard facts to reach this conclusion.  My belief is that it will take through '07 for the market to "correct" itself, with continued price reductions.  Areas like Bend will benefit from "boomers" heading here, from California, the Northwest, and even areas such as Arizona.

Implications: The slowdown is just beginning.
It would be simply a guess to predict the future.
A soft landing is only a "maybe"

Analysis: As the article points out, even in the US' hottest market, builders are pulling in the reins, in an attempt to mitigate the impact of "investors" (i.e. speculators) pulling out of the market.  Short-term profits may lull us all into accepting the "soft-landing" scenario, but we are just beginning to witness the layoffs of builder and subcontractor employees.  What we will not see for a while is the loss of income and reduction in force of real estate agents, mortgage brokers, appraisers, home inspectors, and the entire base of people making their living in a very over saturated industry.

Just look at the numbers in a small market such as Bend, Oregon, and it is easy to project that a significant impact is yet to come.  As small, regional builders cut out $6M or $10M in spending, what is the impact?  Many construction workers have little savings, and the total loss of income throughout the country is, in my opinion, going to have more of an impact than many would like to think.  Finally, keep an eye on interest rates.  If they HAVE to go up, the picture will get worse. So, don't assume a soft landing is guaranteed--far from it.

Implications: Stocks are very sensitive to interest rates.

I doubt that the slowdown is over--it just began 6 months ago.

Analysis: There are a large number of variables that go into the health of the housing market. A number of these are positive, such as the overall increased focus of all Americans on home buying, the addition of minorities, single persons and immigrants to the buyer pool, and other dynamics. However, the cost issues in many cities are making it increasingly difficult for potential buyers to achieve their goals. The reason for the recent increase in share prices of builders is, I believe, tied to one thing--interest rates. As they decline, we will see spikes in the valuations of shares. If, however, we see inflationary trends, and the Fed goes back to raising rates, I believe we will see stocks go down again.