Triangulating Real Estate. 3 New Market Behaviors: Rewriting History, Falling Sales Receipts, and a Sort of Diverse Workforce.

As I was cruising on the 405 this weekend fighting off the 93 degree humid weather, something was stickier than the air and that was the new message being spouted off over the airwaves pertaining to the housing market. Like listening to a compulsive liar, at this point I am amused at what is being presented as investment advice. The stock market seems pacified with the Fed’s actions even though foreclosures are going up by the hundreds each week and folks are scaling back their spending. With this as our context, I was listening to so called “real estate experts” saying that now is the perfect time to buy. Why? Because the market is going down! Yes folks, you heard right. Since the market is tanking you should jump in. Consider it like getting a 25 percent discount on your Titanic ticket after the ship hit the iceberg. The logic (or lack thereof) goes as follows. Since the market is going down, buyers now have the leverage in negotiations. TRUE. Since there is more inventory, you have more choice. TRUE. Therefore, you should buy a house. Sounds good doesn’t it. But what happens after you sign the papers and close escrow? Does the market suddenly stop going down because you bought a home? Are inventories projected to start declining anytime soon? Do we really need to point out how intellectually sophisticated you need to be to buy a Real Home of Genius at this point?

So today we will examine what occurs at the pinnacle of a panic. Amazing behavior occurs in times of distress. Like the powerful letter from the Depression, things can radically change when one lives in a helium-filled bubble. The three new items we will examine are the rewriting of history by housing pundits, falling sales receipts, and a diverse workforce.

Rewriting the Past for a Better Tomorrow

We all remember the massive 416 point drop of the DOW back in late February. Remember what caused it? Well at this point, the subprime implosion was in its infancy at least in the eyes of the mainstream media. The pundits jawboned and talked about the “silo effect” and how housing was much more diverse then a small insignificant subprime market. Oh really? Well the market bought this line of hog wash and went on back to its merry way of being in denial. While subprime outfits were struggling to stay afloat, we have this following astonishing vote of confidence from Countrywide on May 14:

“Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.”

So while the market was hitting a wall Countrywide decided to ramp up subprime loans. Not only were these subprime, but 50 year mortgages! Almost as an affront to the market, the implication seemed to be that the housing game will go on forever (at least for 50 years). It was as if Countrywide was going against the grain and staking their claim on the subprime market. Yet the problem with the current system is we’ve been living in a Ponzi Scheme. I talked about the Ponzi nature of the current housing market in October of 2006 even before any major subprime implosions hit the mainstream media. Now we are seeing the bold move by Countrywide come to roost:

“LONDON (CNNMoney.com) -- Troubled mortgage lender Countrywide Financial Corp. has started laying off employees in an effort to cut costs as it faces a credit crunch, according to a report published Monday.

The Wall Street Journal, citing an internal e-mail sent Friday to employees of Countrywide's Full Spectrum Lending unit, said the company has laid off workers in that division, which handles home loans rated between prime and subprime. The e-mail didn't detail the number of employees laid off, the report said.”

Countrywide employs about 6,800 in this specific part of their business. The question must be asked, why were they pushing 50 year mortgages and hiring more staff as recently as May of this year in their subprime outfit? It definitely sounds like some folks are pining for the days of zero-down-no-interest-reverse-mortgage exotic loans.

Falling Sales Receipts

Americans love to spend. Personal consumption makes up about two-thirds of our gross domestic product. And with our negative savings rate, you can thank your Visa and Mastercard for your nice windfall. Or like many others, you can thank the shiny ATM on the side of your house otherwise known as mortgage equity withdrawals. Not much data has been shed on this pressing issue. However, the State Controller Office of California released figures that should indicate the future of the state. The release shows that total tax receipts are down $787 million below revised figures issued in May. I’m not sure why May was such a Pollyanna month? We have Countrywide hiring 2,000 people and ridiculous sales receipt projections by the state. Could it be that the industry was betting on the summer housing Easter bunny? It is absurd to think this game could go on forever. Leased $50,000 cars rolling off the lot. $5,000 plasma TVs sold on 0 percent interest for 12 months. Granite countertops. Even a boob job is available in 24 monthly payments. At a certain point the psychology of the market tips and people realize debt is not wealth. Even if they don’t realize this, unfortunately a foreclosure or an auto repossession will make this more realistic.

Keep in mind that the state receives tremendous amounts of money via sales receipts and property tax payments. Sales receipts you would think are easier to project. Property taxes however follow a different calendar and we are going to be in for a rude awakening in 2008. For one, folks are going to try to reassess their properties on a lower basis to lower their tax bill. Many will not because they still want to believe the housing market will once again bounce to the sky. Falling sales numbers will also hurt state projections. California is just one example but many other states including Florida, Arizona, and Nevada will have issues next year regarding dropping property tax receipts.

A Diverse Real Estate Workforce

If you haven’t noticed in the last two weeks, we are tremendously dependent on the housing complex. It is estimated that as of the start of the millennium, nearly 30 percent of all added employment is related to the housing industry. With the current housing market, how is this impacting the California workforce?

“The largest year-over job losses were in construction (12,000) and financial activities (7,000)--the sectors most directly influenced by conditions in the housing market. Construction's year-over loss was its largest since August 2002. In June 2007, year-over job losses in California's construction industry exceeded those of the entire U.S. construction sector, which showed a year-over loss of 10,000 jobs. The California financial activities sector's 7,000-job year-over loss was its largest since December 1995. In sharp contrast, the U.S. financial activities sector showed a year-over gain of 117,000 jobs (1.4 percent) in June 2007. Manufacturing (5,900), and natural resources and mining (100) were the other California industry sectors that lost jobs over the last year.”

*Source: California Employment Highlights for June 2007

When we have such a dependency on housing for work and wealth, problems will occur when housing trends downward. The last housing recession as most housing recessions, was inspired by drops in employment. Oddly we are facing a housing led recession here; that is housing going down will force people out of housing related jobs which are normally high paying and this will lead to even lower housing prices and a vicious feedback loop is activated. Will people cutback on their spending when times become tough? Don’t bet on it if the Duesenberry Effect has anything to say about this. Welcome to the new world order of housing. The rules will be updated as we go along and history will surely remember this epic bubble.

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