Monday, January 28, 2008

California: 61% above historic norm

Historically, median home prices and median incomes have always shared a close relationship. From the mid-1970s to 2001, the historical ratio of median housing value vs. median household income was consistently between 2.6 and 3.0.

What this essentially means is that median home prices were (on average) 2.8x the median household income for the last 30 years. Using this 2.8 formula, it is very easy to estimate what median home prices would be if the most recent bubble never happened.

Median Home Prices by Region

Region Current Median* What the Median Should Be % Difference
Northeast $258,600 $145,760 44%
Midwest $159,800 $133,941 16%
South $173,400 $122,875 29%
West $309,800 $146,297 53%

It is obvious to most people that we are in the midst of a national housing bubble. Nevertheless, there are still plenty of naysayers who are telling anyone who will listen that there are local bubbles only.

Using the 2.8 formula, it is clear that local bubbles aren't the problem. Median home prices are inflated in every U.S. region. In the West, where the median household income is $52,249, median home prices are more than double what they should be. The situation is similar in the Northeast, where the median household income is $52,057.

Median home prices are not quite as high in the South and the Midwest, where median household incomes are $43,884 and $47,836 respectively. Even so, prices are still 30 percent higher than what they should be in the South and 16 percent higher than what they should be in the Midwest.

California Median Home Prices

Current Median* What the Median Should Be % Difference
$402,000 $158,606 61%

There is no doubt about it. California was hit hardest by the housing bubble. Although prices have always been slightly elevated in the state, they grew by leaps and bounds during the housing boom.

The result is that home prices are 61 percent higher than they should be given California's media household income of $56,645. In some areas of the state, such as San Francisco and Oakland, median home prices are so inflated that they are more than 11 times the median household income.

From: What if housing bubble did not happen

Friday, January 25, 2008

Bear Markets

their gain or loss for 2008 so far (statistics are as of yesterday morning) --

Dow down 7.5%
S&P 500 down 8.4%.
S&P 400 down 10.32%
Russell 2000 down 9.48%
Wilshire 5000 down 9.09%

Crude oil (bbl) down 9.8.%
Ethanol (gal) down 5.5%.
Natural gas up 1.9%
Unleaded gas down 9.3%

Aluminum down 1.9%
Copper up 1.0%
Gold up 5.7%
Silver up 7.4%
Platinum up 1.9%

Cattle down 6.3%.
Corn up 2.9%
Wheat up 2.3%
Soy beans down 0.8%
Cotton down 1.5%.
Lumber down 6.4%
Coffee down 3.7%
Orange Juice down 6.9%

Frankfurt DAX down 20.18%
London FTSE down 13.13%
Hong Kong Hang Seng down 13.38%.
Paris CAC down 17.41%
Tokyo Nikkei down 16.29%
Seoul Composite down 14.16%
Singapore Straits down 14.2%
Sydney All Ordinary down 15.10%
Tapei Talex down 12.91%
Shanghai down 12.86%.

Let me put it this way -- Unless you've been in gold and silver, you've probably been losing money this year, at least so far.

What do I look for when I'm looking for a bear market bottom? The classic method of identifying the area of a bear market bottom has to do with VALUES. At great bottoms such as 1932, 1942, 1949, 1974 and 1980-82, stocks were selling at great values. By that I mean that blue chips were selling at price/earnings ratios in the 10 and below range. They were also offering fat dividends, many in the 6 to 8 percent range and even higher.

Those were big bear markets, and they ended with stocks selling "below known values." That type of vicious, even brutal bear market is rare, and they come along maybe once or twice in a generation. Whether we are operating in that type of extreme bear market, of course, I don't know. As I said, these bear markets are rare and they are associated with disastrous conditions. The odds are always against this type of severe bear market appearing..

All true bear markets end in downside exhaustion. The public is out, traders have disappeared, most professionals are beaten, the news is grim, and sentiment is black. One hears such expressions as "It's the end of capitalism as we know it," or "Wall Street will never recover from this one." The public is disgusted with investing. The newspapers are filled with horror stories about investors who have lost their money.

Often, but not always, amid such despair, the Dow or the Transports will sink to a new low. But the companion Average will not follow -- a dramatic non-confirmation takes place. This is what occurred at the 1974 bottom. The non-confirmation will mark the final bottom. And strangely, it's been my experience that at that time investors are so beat-down, so discouraged, that few even notice the dramatic non-confirmation in the Averages.

From: dowtheory

Tuesday, January 22, 2008

Hillsborough: number 1

25 top-earning towns

1. Hillsborough

3. Los Altos Hills

7. Blackhawk

17. Saratoga

21. Piedmont

23. Alamo

CNN Top Earning Towns

Tuesday, January 15, 2008

Stocks: DOWN volume was 92.5% of up

You hear a lot of arguments about whether the great American consumer is going to continue consuming. Last night I went through the daily charts of about 25 leading retailers. If consumers are still flocking into the stores, it seems to me it should show in the retailers. It hasn't. In fact, just the opposite is true. Even in the "better" stores such as Coach or Tiffany where the wealthier clients are supposed to "keep on buying, regardless of the economy" the indications are strongly negative.

Is Tiffany the place where wealthy people go to buy diamonds? It once was, but not any more. Tiffany is now just a better-class chain store, catering to a somewhat "better-off public." It doesn't seem to matter. These days the direction of Tiffany's stock is down, down, discouragingly down.

Ironically, diamond prices have been heading heavenward. The latest cover of Rapaport magazine (the bible of the diamond business) shows a large arrow pointing north. Within the arrow you read, "Diamond Prices 2007, Up, Up and Away. " Sorry Tiffany, when you decided to go for the middle class buyers and volume, I think you lost the really big spenders. But your stock -- what a waterfall.

Ralph Lauren, he's of the fancy Polo Brand. You too? Ralphie has made multi-millions with his concept of dressing Americans to look like retired millionaires or at least like Harvard preppies. He's done an excellent job of it, and now he sells everything from luxury towels to men's ties to women's evening gowns. The stock hasn't paid attention, at least not recently.

Coach brought in some really good designers, and the stock took off like a rocket on the upside. It was as though Coach had become a whole new company. But something awful has happened to Coach's stock. What ever it is, it hardly looks like a prediction of growing sales.

Whole Foods has been a winner, at least, up to recently. The food is good, the prices are high, and now competition is coming in from some of the huge food chains such as Ralph's and Safeway. At any rate, the stock has been whacked. People looking for lower-priced food? Could be.

What's wrong with three-dollar coffee? Nothing, except you can make a good cup of coffee with the new Nestle machine and those little capsules that cost about a half a buck each. And think of the money they save if they drink two cups every morning at the office instead of buying their coffee at Starbucks. You know the old joke, there are just too many Starbucks. You're in a Starbucks, you go to the bathroom and there's another Starbucks in the bathroom. Whatever, the stock has been on a downside tear.

I really like the Target stores. They offer great value in their merchandise. I think the Target stores are superior to Wal-Mart stores. But that hasn't helped Target's stocks, which has done the equivalent of a swan dive. What you see on this chart can't be good for retailing -- or am I missing something?

So in answer to the question, "Will consumers cut back on their spending in the weeks and months ahead," my answer is "Judging from the retail charts, I think they will cut back, if they haven't already."

And are the high-end people holding up their spending? My answer is, "If they are, I don't see it."

The Fed must have received a hint of something very unpleasant, because the latest rumor is that a Fed Funds cut of maybe .75% is coming at the end of the month. That would be a shocker. Well, the charts above are sort of a shocker, and the way the stock market is going, it may be "shock time" all around!.

So far, I haven't changed by recommendation. Gold and cash, cash and gold. And the oft-recommended utility stocks have really held up remarkably well, at least so far.

To repeat, I don't like the stock actions above, I don't like them at all. Remember, roughly 70% of the Gross Domestic Product of the US comes from consumer buying. Roughly 19% of the world's GDP comes from the buying of American consumers. It's not a very appetizing picture. Maybe it's time to climb down into the storm cellar. I hope I'm wrong, but I'm thinking that a large economic storm is building, and it's aiming to hit hard in the weeks and months ahead.

There were 811 advances on the NYSE and 2524 declines. DOWN volume was 92.5% of up + down volume -- almost surely a 90% down-day, which is a panic down-day, and a very bearish indication.

There's something very wrong occurring in the US and throughout the world. I'm convinced that it has to do with the whole sick banking system. It was hard to find anything that was up today.

It's a dash was for cash. But how safe is fiat paper?

Expect to see the central banks of the world set forth an avalanche of fiat currency -- the idea will be to get cash into the hands of consumers. But what if consumers are afraid to spend the cash -- instead they want to save it? Ah, then we have that rarity -- it's called "pushing on a string."

Overseas markets are getting killed. Hang Seng Down 1,232.7 or Down 4.77%

From: dowtheory

Sunday, January 06, 2008

New book

Friday, January 04, 2008

Dow signals a recession: if it drops below 12,743

On November 21 the D-J Averages provided us with a bear signal, as the D-J Industrial Average confirmed the prior breakdown of the Transports. But bear signals are usually accompanied by surging volume, scary plunges, and fear selling. That didn't happen on November 21, and that had me wondering. The market continued down with the Averages hitting November lows of 4366.78 for the Transports and 12,743.44 for the Industrials.
Nothing is simple and mechanical in market analysis. Sometimes you have to use your instinct and your intuition and your grey matter. I was a bit taken aback by the lack of high volume and fear selling at the November 21 bear signal. After the bear signal, the Industrials lost only 56 points, taking the Dow down to its November 26 low. Such a minor loss following a bear signal seemed not only odd but suspicious. Therefore, I surmised, if this is really a bear market, the Averages should continue lower -- in fact, they should re-confirm the bear market by breaking below the next set of lows, the November lows.

Breaking to new lows would be doubly important, because the news was turning grim. The big banks were being hit by outrageous losses in subprime mortgages. The Financial Indices were falling apart. Warnings of hundreds of thousands of foreclosures were the talk of the town. Leading economists were warning of "a recession in 2008" and those warnings are still with us.

If all these ghastly events lay before us, then surely the bear market should continue and the Averages should dive to new lows below their November lows. And that still might happen. But you know something -- it hasn't happened.

I'm not a dreamer. I know what it will mean if the November lows are violated. It will be the market's forecast of tougher times ahead.

But what if the November lows hold? What if one or both Averages refuse to violate their November lows? I would take that as a sign that the stock market has discounted the worst. I would take it as an indication that the stock market has absorbed all the bad news and the bearish forecasts and has said, "We see the worst that lies ahead, and we've discounted it.

There isn't going to be any recession. The housing and banking situations may be bad but they will be managed."

Friday the Dow is 12,870

From: Dowtheory

Tuesday, January 01, 2008

Brain-Dead Predictions about Housing

January 2, 2008

What would the New Year be without some predictions? Rather than strive for wild guesses from the edge, I'm going with predictions so obvious they qualify as brain-dead. Nonetheless--or perhaps because of their tremendous obviousness-- they carry profound implications for the U.S. economy and culture.

1. Housing prices will fall farther and longer than every guess being bandied about in the mainstream and financial media. You know the stories--expert #1 foresees a 15% drop, expert #2 says a 30% decline is possible in the frothiest markets, etc.

Why fuss around with namby-pamby numbers like 15-30%? I'd say it's absurdly obvious that 80% to 100% declines are already baked into some areas--yes, houses won't find buyers for a $1, i.e. the value will suffer a 100% decline to zero.

2. The housing market won't turn around in 2008--or 2009, 2010, 2011, either. The really smart folks will be saving their money for 2012 or maybe 2013, when years of grinding losses will have stripped the assets of everyone who bought real estate with the idea of retiring on the proceeds. At that bottom, everyone will be disgusted with real estate, both residential and commercial, and no one will be dumb enough to sink dead money into an asset class which continues to decline in value year after year.

At that point, say Q1 2013, then housing will again become a buy.

How can a house become worthless? Just ask residents in depopulated areas of Detroit. If people pull up stakes because jobs disappeared, then houses drop to zero value. This is not some bleak future--this has been the case in areas of Detroit for many years. (Note that the larger Detroit-Ann Arbor-Flint metropolitan area actually gained population in 1990-2000.)

Will this happen everywhere? Of course not. But four other easily predictable forces will trigger huge declines in areas which have been seen as "safe from price decline."

3. Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions nobody wants at any price. Add a dash of decay which acts as a catalyst, and you speed up the abandonment of the exurb.

4. People will "double up" as the economy sours. As I have commented here many times, the population of San Francisco rose by 52,000 (7.6%) in the dot-com boom in 1995-2000, even though the number of new housing units increased by only 5.4% between 1990 and 2000. Take a look at these numbers, all courtesy of the U.S. Census Bureau:

housing units in S.F. 2003: 346,527
residents in S.F. 2003: 751,733

residents per unit: 2.17

housing units in S.F. 1990: 328,471
residents in S.F. 1990: 724,000

residents per unit: 2.20

Looks pretty stable, right? But the population was 776,733 in 2000--meaning 50,000 people moved into the city in the late 90s and 25,000 had left by 2003.

The city added 18,000 units in the full decade 1990-2000, which historically correlates to about 37,000 residents. Indeed, the number of residents per housing unit has actually declined since 1990.

So what's the point? Just this: 5% of a population can move in or out of a city regardless of how many housing units are present. Simply put: people double up in boom times when housing is in short supply and in recessions when money is short.

Many single people bought houses they couldn't afford in the bubble. So did families. So where are they moving? In with someone else is the answer for many. Some people who are trying to hang onto their homes are taking renters, who then leave vacant apartments or condos behind, while others who have bailed out are moving in with other family members or friends.

Take 75 million housing units nationally and 5% of the population doubling up, and you get 4 million empty residences. You think the inventory of empty homes is high now, look what happens when people start losing their jobs. They will get very creative about living quarters, and very creative about cutting expenses they can no longer afford like mortgages and rent.

Houses can't be moved (at least not cheaply), but people move all the time. And when they move away from places, the price of housing in that area declines. It's supply and demand, and as money gets tight the demand for housing drops. People take roommates, move back home, double up.

5. Houses built where they should not have been built will be abandoned. Large swaths of known floodplains are now covered with subdivisions in the Sacramento Delta region. No doubt the same can be said of certain stretches of the Mississippi River region and other coastal and riverine flood zones.

Back in the good old days of say, 2007, governments might have reckoned they had the funds to rebuild dikes and other engineering wonders to protect a few thousand new homes. But as the economy sours, governments are suddenly short of funds. And as people leave those distant suburbs, then the stark reality will become apparent: it isn't worth tens of millions of dollars to protect a few thousand homes (many standing empty) which should not have been permitted in the first place.

Of course the homeowners will feel entitled to government protection; it is a natural assumption that if the county allowed the builder to build the homes, then it was "safe" to do so. New Orleans is not the only inhabited area with grave risks of flooding; the willy-nilly building boom saw thousands of houses tossed up on land which was rather clearly unsuitable due to heightened risks of flooding, etc.

Will government buy out beleaguered homeowners? No doubt there will be cries to do so, and other voices noting that governments are now broke or in deficit mode. Lawsuits will be filed and much money will be spent resolving a crisis which resulted from lax approval of questionable building sites.

6. Poorly built McMansions will be abandoned as the costs of repair exceed the value. Those of you not in the building trades may scoff at this, but go find a "new home" which has had the plumbing fixtures and copper piping ripped out (to be sold for the scrap value), a swimming pool filled with guck and leaky flashing around the chimney, not to mention broken windows, buckled hardwood veneer flooring and damp, rotten carpets. The cost of fixing all this is huge, especially if water has leaked into the framing or subfloor.

Although I can't locate the source, I remember reading that in the depths of the 1930s Depression a premiere commercial building in New York sold for less than the installation cost of its elevators in 1928, just before the Crash.

If you doubt that property can drop 80% or more in value, recall that real estate remains a business proposition: if you can't make money owning this asset as a business, not as a speculation, why buy it? If you can't rent the property for a profit, and keep it rented through thick and thin, then why risk buying it? Owning a property which sits empty for months or years is a very sure way to go broke. If you can't sell it, then you walk away and start over. That's Capitalism with a capital C, folks.

In honor of football season, let's trundle out a football metaphor: you can toss the ball in the end zone, but if there's nobody there to catch it, you still lose.