Money Magazine: Expert on Real Estate Market: Uh-oh...

[JavaBuc]

One place I checked in California, my standard of living would go up 38 percent.

The cost of housing is crazy over there isn't it.

I have some good friends living in California.   They all live in houses that cost about 1 million these days.   They could get those same houses in Tampa for about 600k.   However, their salaries are almost double what they would be in Tampa.   It actually works out better living out there and paying the higher real estate prices.   As long as the salaries justify it, I don't see a problem.   Tampa salaries do not justify the prices in the area.

One thing that burns me up is that I get a Tampa salary, but I'm overseas.  Guys I work with out here still get their California salary (plus expat benefits of course) for doing the same job as me.   They make double what I do even though they are overseas.   Being raised in Florida relative to California has disadvantages.

[mjs020294]

Lets try the facts:

Business Analyst II:

CA(San Diego) = $92,400
CA (LA) = $97,935
FL (Tampa) = $82,534
NY (All NY) = $102,539

We have no state tax, property prices are about 50% of the other locations and the cost of living is fairly low.

http://www.homefair.com/Find_A_Place/Calculators/SalaryCalc/index.asp

http://salary.com/

Quit dogging on Tampa.  It is great place to live and things aren't that bad.


BTW - the job above is a mid-range professional job.  Someone with a degree and 5 years experience should be able to get to that level.

[mjs020294]

Averages:

United States~~   44,473
      
New Jersey~~   56,772
Connecticut~~   55,970
California~~   49,894
Pennsylvania~~   44,286
New York   ~~   44,228
Georgia~~   43,217
Texas~~   Â Â         41,275 
Florida~~   Â        40,171  ** No sate tax
South Carolina~~   39,326
Tennessee~~   38,550
Alabama~~   38,111
West Virginia   ~~   32,589

[JavaBuc]

Lets try the facts:

Business Analyst II:

CA(San Diego) = $92,400
CA (LA) = $97,935
FL (Tampa) = $82,534
NY (All NY) = $102,539

We have no state tax, property prices are about 50% of the other locations and the cost of living is fairly low.

http://www.homefair.com/Find_A_Place/Calculators/SalaryCalc/index.asp

http://salary.com/

Quit dogging on Tampa.  It is great place to live and things aren't that bad.


BTW - the job above is a mid-range professional job. Someone with a degree and 5 years experience should be able to get to that level.

What is a business analyst?    I might have to apply for that job.   

[mjs020294]

It varies company to company.  My definition of a business analyst is a role between IT and the business.   Working on business requirements, test requirement, and compliancy issues etc.  That was just one example I used, you can get similar pay for quite a few jobs in Tampa. 

[mjs020294]

That BA job above was level two Java, which is a mid level.  If you have more experience the level 3 jobs pay upto $120k in Tampa.  I was talking to a couple of IT recruiters at a Golf event last week, and theytold me there are 16,000 IT jobs in the Tampabay area. 

With that many jobs there will always be a lot of vacancies.   The hardest positions to fill right now are project management jobs. 

[ufojoe]

Grantham: All the World Is a Bubble
By Brett Arends
Mutual Funds Columnist
4/27/2007 10:07 AM EDT

URL: http://www.thestreet.com/funds/followmoney/10353243.html

How high will the Dow go? 15,000? 20,000?

How about 36,000?

While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.

One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man **CENSORED** Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

Everything is in bubble territory, he says.

Everything.

"From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"

"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "

As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.

"The mechanism is surprisingly simple," he wrote. "Perfect conditions create very strong 'animal spirits,' reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism."

And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."

It's something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP -- equity.

Grantham concludes that every asset class is expensive today compared with historic averages and compared with the cost of replacing it. By his calculations, the only assets likely to beat inflation by any significant margin if you hold them for the next seven years are managed timber, "high-quality" U.S. stocks, and bonds.

As noted in this column several weeks ago, Grantham's U.S. "high-quality" stocks include Home Depot (HD) , Merck (MRK) , Wal-Mart (WMT) , AT&T (T) , Pfizer (PFE) , Johnson & Johnson (JNJ) , Exxon Mobil (XOM) , UnitedHealth (UNH) , Verizon (VZ) and Lowe's (LOW) .

"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."

Ouch.

Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.

As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.

"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."

[bklynbucs11]

He said that the median price for homes sold in 2007 would fall by 1 percent to 3 percent, which would be the first price decline for an entire year on the Realtors' records, which go back four decades.

WOW.....that is a bad crash.   

MJS - before I discuss the rest of your post. A forewarning - the 1-3% drop is forecast by David Lereah, the chief NAR economist. He is the most biased (not to mention braindead) "economist" in the world. This article can describe it better than I can:

http://housingpanic.blogspot.com/2006/03/imfamous-nar-economist-lereah-predicts.html

His 3 novels are absolutely priceless. Keep in mind now that he represents the National Association of Realtors. This is not a group that has the option of being anything but long on real estate - and they can't exactly hedge either because they aren't financial institutions and they don't hold assets. Their business is driven only by real estate activity.

Now, to the rest:

Property market crashes are fairly rare for several reasons:

1 – People need houses, you have to live somewhere.  Stocks are something for the future, a home is here and now.

2 – Supply and demand.  The population in practically every country in the world rises, and the US is not immune to that. 

3 – Builders will slow down construction and sit on the land when the market is slow.  This will effect supply and demand.

4 – Interest rates are still low and they will remain that way for the foreseeable future.

5 – Property prices are still not that high.   In the UK the average price is $380k, in the US it is around $250k, and salaries are much higher here.

6 – Building costs have risen significantly, you can’t build a house for much cheaper than the resale values. 

7 - The building industry will continue to drive prices up once the surplus stock is under control.

8 - With a weak dollar the US is also attractive to outside investors, especially Florida.  Supply and demand again.


The market will stagnate for a year or two mainly because the insurance industry is in a mess and the property taxes need adjusting.  If interest rates remain low (under 8%) and the insurance/tax issues gets resolved we could actually see prices rising within two or three years.

Sorry Java you can wish for a "huge crash" all you want but it isn’t going to happen.  If we did have a significant crash it would mean the economy was in a very bad shape and that isn’t going to help you get a decent job in Tampa.

1. This is the strongest argument against the housing crash because RE is the longest-term asset available. Worst case scenario - people can just sell. THis would be fine and dandy. Except here's your problem. Beyond subprime/alt-a - your homebuyers can be split into 3 sectors - 1) First time owners - 2) 2nd/3rd home buyers for leisure - 3) Speculators. The speculators sector gets wiped out - but these guys have been getting reamed since 2006. They are a bigger portion of the market than you think - but they aren't the problem. The leisure group is least affected - except that the bonuses bankers/traders get will be allocated away from new homes, where it used to primarily flow. Which leaves the biggest portion - first time owners. If these guys could sit on properties, it would be fine.

However, (ands i know this first-hand, I work on the RMBS desk at my firm and moving to an ABS/RMBS Hedge Fund) - first time homebuyers are now the riskiest ones - across all sectors. Even Fannie/Freddie loans are taking hits now. The first-time buyers right now are defaulting/going DQ on their mortgage at rapid pace - even as far as the prime sector. In Alt-A and subprime, the premium that first=time homebuyers have to pay in terms of interest rates right now, all else equal averages out to close to 100 basis points for Alt A (or 1% - so mortgage rate from say 7 to and up to 150-200 in subprime. If they could avoid foreclosure the real estate market would be fine. UNfortunately, a VERY large number cannot.

2. THe population of people who can afford housing and can be called a "prime" borrower has been held steady/declining over the last decade. Proof? Sure. Lets use the peak #'s for mortgage - 2005. Loan performance (whcih covers ~55% of all securitized loans and is the standard loan-level database in the industry) has over $850 Billion in agency (non Fannie/Freddie) loan securitized in 2005 alone. In 1998 - the combined issuance in these sectors - $39 Billion. This is only 55% of the securitized industry - not including subprime/alt-a securitized by Fannie/Freddie (which is small but existent, believe me). It also doesn't include loans held by companies on their books, loans that don't get securitized due to delinquency, and lots of other factors. The prime numbers have risen too - but they have climbed from $71 BB (agency) to $162 BB - only two-fold increase.

So you can see where the new home-owners are coming from. You can't use population as a factor here.

3. Have you seen the performance of builders stocks? Half of these companies are close to bankruptcy man. Want proof:

http://www.iht.com/articles/2007/04/15/bloomberg/bxhome.php

"At least 30 home lenders have halted operations or sought buyers in the past 12 months, including 5 that went bankrupt since November." These guys seriously can't afford to halt construction. Their overhead is HUGE

4. Yes. This is actually true. Rates are "relatively" low - but margins are HUGE - even in prime. LIBOR may be 5.4-ish, but prime rate right now is close to 8.25. And thought mortgages are based on the LIBOR - you are not likely to see many loans (except the most outstanding credit) at rates below prime.

5. Britain and Australia are facing Real Estate trouble as well. This phenomenon actually seems to be broad this time - which is VERY rare for real estate.

8. Iffy. What we're seeing on the markets is less appetite for risk. Before we saw Japanese/Chinese guys who were willing to buy the subordinate bonds structures / Equity/MEzz tranches of CDO's to get the spread. This is VERY rapidly drying up. Even worse though is this. Pension funds are allowed to invest only in investment-grade bonds. Pensions are HUGE consumers of MBS products because the principal repayment is rapidly accelerated due to prepay speeds (rule 1 of pension investing) and the rates are good. Right now though - many of the bonds they used to invest in are trading at WELL below speculative grade - and pensions are selling rapidly.


now points 6 and 7 are the same thing. From a long-term economic perspective you are right. Eventually the market HAS to present buying opportunity. I like to call this "Long-Term Capital Management" Syndrome. This was the most infamous Hedge Fund collapse in history. They took huge bets shorting volatility (meaning they bet Volatility on the SP would decrease over itme because it has to). THe bet went sour. Eventually they were proven right - but not until about 2003 (because after 1998, there was only 1 year before the tech collapse). However, the only way they could save themselves was via an government intervension where the chairman of the NY Federal Reserve demanded that all Wall Street firms at the time come up with $4 Billion dollar in cash in a matter of 6 hours, as well as accepting a default on derivative positions that reached nearly $1.5 TRILLION in exposure (of course htat wasn't the actual loss, it was mitigated by people buying up the back end and settling) but the magnitude was that high.

Moral of the story - simple. Eventually is a VERY long time. The only way you can reach eventually is if there is enough invested capital to absorb massive losses that occur during the crisis. Right now in the real estate market - that is NOT the case. We are seeing many investment banks purchase subprime lenders - which is a very good thing. However, there is a lot more to take into account here - homebuilders, realtors, CDOs, home improvement, etc. Investment banks have money - but they can't bail ALL of these industries out. And even still ,for every lender an investment bank or fund buys, 5 go into default.



People who aren't taking this real estate crisis seriously don't really understand the magnitude of it. THere are nearly $9 TRILLION dollar in mortages outstanding right now. Not all of its at risk - but a very large portion is - probably somewhere around $300 billion at least of default risk in the next 12 months. This doesnt' count homes at risk of not default - but severe devaluation. This is not like Long-Term Cap. There is not enough capital to support that kind of loss - and raising it would be impossible.

BOttom line, this crisis will dissipate  - eventually. But as for this not being  a crash - you are very VERY wrong.

[Morgan]

Java,

Here's a decent value home for you in NE Tampa/New Tampa/Wesley Chapel  $252k

http://www.leonmoody.com/listings/res/56208/more_photos.html

[mjs020294]

BOttom line, this crisis will dissipate - eventually. But as for this not being a crash - you are very VERY wrong.

I said there would not be a "huge crash".    The market will stagnate in many areas, and areas that got over valued too quickly will see sizable falls in property prices. 

I have been through these cycles in the past and the doom-n-gloom never materializes.   The prices continue to rise in the UK, and the average cost of a home over there is already 150% higher than in the US.  Despite earning less and not having the safety net of long-term fixed mortgages, UK prices rarely crash at the end of each cycle.

Florida has its own set of problems with homeowners insurance, but once that is resolved the market will be just fine.  In our sub-division of 1260 homes we currently have 50 on the market and 7 are under offer.  Areas that saw rapid development and construction will not fair as well.  For example another large subdivision near by with 2500 homes currently has 450 on the market. 

[JavaBuc]

Java,

Here's a decent value home for you in NE Tampa/New Tampa/Wesley Chapel $252k

http://www.leonmoody.com/listings/res/56208/more_photos.html

I have no idea where wesley chapel is.   The house looks ok, but I'd have to totally redecorate. 

[mjs020294]

Java,

Here's a decent value home for you in NE Tampa/New Tampa/Wesley Chapel $252k

http://www.leonmoody.com/listings/res/56208/more_photos.html

I have no idea where wesley chapel is. The house looks ok, but I'd have to totally redecorate.

It is north up I75, one of the satellite areas that boomed when the prices rose.  Personally i wouldn't go that far out, not now the market is levling out.  Areas like Wesley Chapel will see a sharp decline in prices because they saw the boggest gains. 

[Morgan]

If you're commuting to Tampa, then Wesley Chapel looks like quite a ways out. I'm looking for a less dense place if I buy -

[buckit]

I think everyone already realizes there will be a huge crash coming soon.

Crash, no. Continued slow down, yes. But, the market can pick back up in a hurry.

It already is.  Once houses began to be priced more correctly, they began to move again...it was simply a market correction, not a crash.

[mjs020294]

I think everyone already realizes there will be a huge crash coming soon.

Crash, no. Continued slow down, yes. But, the market can pick back up in a hurry.

It already is. Once houses began to be priced more correctly, they began to move again...it was simply a market correction, not a crash.

There seems to be quite a bit of activity on our subdivision at the moment.  The prices have adjusted down from the peak advertised price but they have not “dropped’ in real terms.  Three of the four on the market on our street have sold in the last month.  The one still on the market is slightly overpriced and it doesn’t have a pool, which 90% of buyers want in this type of neighborhood.