Tuesday, February 28, 2006

Inflation......It's back!!

You see it everywhere, but everyone is afraid to talk about it. Inflation. It's touching every aspect of our lives, fuel, heating, electric, rent, real estate, almonds (has anyone noticed that almonds are up more than 100% in the last year?), etc.

But we, led by the venerable Mr. Greenspan, have been fed a steady diet of "Well if you strip out volatile numbers like food, fuel, energy, housing, etc, inflation remains in check". Pardon me but, huh?

So here's the rub, inflation has to be dealt with and the longer it persists, the greater the risk to the equity markets. The equity markets are humming along at 5 yr highs (Nasdaq excluded) and there seems to be some concensus that the fed is only thinking about one or two more rate hikes. I think there is a perfect storm brewing - a weakening economy that is pinched by inflation (think 1978-82).

Couple this with retail investors plowing back into stocks - the little guy tends to be a great contrarian indicator, the last time he was this bullish was Mar 2000 (ouch!) - and I think we're set up for a prolonged period of tough slugging in the equity markets.

New Home Sales Data....Weak but ....

Sales of New Homes Decline, Inventory a Record
So the headline number clearly was attention grabbing and much was made of the weak housing data last week.

"New-home sales fell for the fourth time in six months during January, while inventories climbed to another record."

Two things to remember -

1) Inventory is the real story here - new home sales are a fraction of the total real estate market, but inventory build up is going to start pinching the builders.

Couple this with the weak outlook put forth by Toll Brothers (cut their est. delivers 3 times in 3 months) and you can see that the new McMansion era is slowing pretty dramatically.

2) Weather was a huge plus to the industry in 2006. New housing starts soared due to the weather, but inventory is building because buyers are taking a more wait and see attitude.

I'm trying not to be a "bubble bursting" blog, but the canaries are singing. Twenty-five years ago a real estate bubble bursting meant a few part-time realtors lost their jobs. Today, up to half of the new jobs created in the past year were related to real estate and the reach of the real estate boom touches every part of our economy.

I could walk through a scenario by which housing prices fall leading to dramatically lower Federal tax receipts in 2007 and 2008, which severely curtails all Federal spending and then our little "expansion" at Ft. Drum gets postponed until 2014. Right now I'd call that a 5-10% probability, but that's up from about a 2% chance a year ago.

Monday, February 27, 2006

Friday, February 17, 2006

Walmart Supercenter's Impact on Watertown?

This is going to be a very interesting story to follow. Has anyone noticed the ripple effect of the new Leray Walmart Supercenter on Arsenal Street? I bet the store managers at the Salmon Run Mall, Kmart, Kohls, Price Chopper and Hannaford have noticed.

It's purely anecdotal evidence at this point but on Tuesday afternoon this week Sam's Club had 1 register open and 4 cashiers helping one customer. Walmart at 7:30pm on Thursday night had 2 registers open. Anyone that has parked at Walmart in the last week has seen open spots in the parking lot that never existed before.

Is this a trend or just a temporary shift as people test out the new Supercenter? It is tough to say right now, but it could be the beginning of a major shift in Watertown's retail landscape.

If Target moves to Arsenal Street this does change the equation, but if I were Target I'd be seriously looking at all those "FOR SALE" signs out on Rt. 11. Thoughts?

Connecting the Dots - The Ripple Effect of a Housing Slowdown.

Let's work with the assumption that the US Real Estate Market is slowing (the North Country is something of an abiration right now because some people think all of these soldiers making $31,000/year will lead to dramatically higher property values?).

Real Estate and it's related industries have salvaged the US Economy from the depths of the dotcom bubble. It has been noted that as many as half of all new jobs created have been in Real Estate. Mortgage Brokers, Agents, Appraisers, Contractors, Landscapers, etc, etc. Without a powerful real estate market the US Economy is likely to revert back to it's sputtering 2002 ways (for this discussion we are ignoring the unbelievable amount of spending driven by consumers that are withdrawing equity from their homes).

Note - "Washington Mutual Inc., the largest U.S. savings and loan, said Wednesday that it was laying off 2,500 support employees in its mortgage unit.
The Seattle, Washington-based company said it was also reducing the number of mortgage processing offices to 16 from 26 and sending some of the work to “lower cost domestic and offshore locations.”

Condo Cashouts - The Dotcoms of Real Estate.

In 2004 and 2005, condos in every major market from Boston to DC to Miami were printing money for their owners. Well, that has begun to change. As speculators realize that demand is slipping, interest rates are rising and they might be stuck with a large unattractive mortgage on a condo, these fringe investors (real estate traders might be a better term) are starting to dump these properties at a meaningful rate.

Well, you might say, that's their loss, not mine and you'd be partially right. When speculators start dumping properties it can lead to entire revaluations of markets.

In Miami, at the Jade Residences at Brickell Bay, more than 20 percent of the building's 352 units are on the market. In San Diego, about a third of the 96 units in the Alicante, a condominium that opened last fall, are listed for sale and sellers are already starting to cut asking prices. - NY Times 2/17/06

The unfortunate result is that innocent bystanders, homeowners in neighboring buildings, etc are likely to be severely affected by these market shifts.

How does this impact a homeowner in Jefferson or Lewis County? An increasing percentage of property bought in the last 2 years has been financed by Interest Only (I/O) mortgages or Adjustable Rate Mortgages. Many, many factors are contributing to future increases in the 10-yr bond rate and the weakening US housing market is one of these factors. A rising interest rate environment is going to pinch many homeowners that did not account for the interest rate risk in their mortgage.

Consider the other recent data points which may be the early warning signs of our own Economic Tsunami.......

An index measuring home loan activity drops to its lowest level in two years the third consecutive weekly decline. Mortgage applications fell for a third consecutive week as demand for loans to purchase homes dropped to its lowest level in more than two years, an industry trade group said Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Feb. 10 decreased to 574.1, down 7.3 percent from the previous week's 619.3.

Going back to 1929, Kasriel found just a dozen years in which households spent more than they earned by his calculation. Two were during the Great Depression. Three were in the decade following World War II, when consumers unleashed pent-up savings accumulated during the war (when there was little available to consume). The other seven years of negative savings have occurred since 1999. - Yahoo Finance - 2/17/06

Friday, February 10, 2006

Is it a Real Estate Bubble, a Balloon, a Souffle....

As they say a rose by any other name...

It is pretty clear that the major metropolitan markets, San Diego, Dallas, Boston, Miami, NY, DC are starting to see some sharp imbalances in their real estate markets. Inventory has been building dramatically in the first six weeks of 2006, but prices remain relatively firm (DC new home inventory was up 900%). As your Economics 101 professor taught you - when supply exceeds demand prices will eventually fall, the big question is how far, how fast and how does this relate to Northern New York?

Clearly, housing prices have accelerated their appreciation in the past two years in Jefferson and Lewis Counties. Why? Logic would dictate that increase demand, with little change in supply is driving prices up. True there has been an increase in demand (it's hard to quantify without precise census data), but you can see it on Arsenal Street. More people are living here than two yrs ago. However, I would argue that access to cheap financing and aggressive lending practices is equally responsible for the latest surge in prices. Today's homebuyer would not have been in the market for a home 5 years ago.

So, nationwide we are experiencing a real estate slowdown, 2006 and 2007 represent major rate adjustment years for people with adjustable rate mortgages, the trade and budget deficits are so far out of control that interest rates have to continue going up DESPITE a weakening of our fiscal outlook, and yet there are more than 10 listings in the north country right now for land priced at over $100k/acre (one as high as $400k+/acre). That price point is one that might be acceptable in Newton, Mass or Summit, NJ, where land is scarce. The one thing I think we can all agree on is that land is not scarce in Northern NY.

Look at this lovely plot in Clayton - 0.7 acres of heaven for $250k.

In future posts, we'll address the Fort Drum expansion circa 1989 vs 2006, the problem with banks abandoning all sense of creditworthines and the macro issues facing the consumer.

Please post your comments - without dialogue the blog is not very valuable.