Figuring out housing prices isn’t rocket science.  There is no need for a master’s degree in financial engineering to figure this out folks.  Even as the housing market continues its downward slump, we are still at overpriced levels.  Why?  Well historically, housing as an investment only tracks with the nation’s inflation rate.  That is until […]
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Figuring out housing prices isn’t rocket science.  There is no need for a master’s degree in financial engineering to figure this out folks.  Even as the housing market continues its downward slump, we are still at overpriced levels.  Why?  Well historically, housing as an investment only tracks with the nation’s inflation rate.  That is until a bubble appears and people start getting the notion that this time is different.  I’m going to give you a very straightforward math equation on determining how much home you can afford.  This is the maximum price you can pay without putting yourself into financial jeopardy and maintaining a cushion:

Wait a minute.  You mean to tell me that the ridiculously simple equation above is the solution to restoring sane housing prices?  Pretty much.  I’ll explain why this is in a second but you need to remember that for nearly a decade, we had no semblance of checks and balances.  No documentation loans clearly went on no established ratios since you had the ability to make up your family financial balance sheet.  Even with some documented toxic loans, lenders and Wall Street did not care and took the loans anyways.

Now why is the 3 times yearly gross income rule a good one?  First, you need to remember that as a rule of thumb, you should try avoiding spending more than one-third of your monthly income on housing.  If you want to find out how much a month you will be spending on your home, a quick way of figuring that out is this:

This is a quick rule of thumb.  For example, if your mortgage amount is $100,000 you can expect to have monthly housing costs of $1,000.  Many investors usually have these formulas in the back of their mind when determining a good value for a property.  These costs include the following:
Principal

Interest

PMI

Insurance

Taxes

Maintenance

Upgrades

A big mistake made by buyers, realtors, and lenders during the bubble was the fixation on principal and interest only.  In fact, some of the main selling points of interest only loans were the cheap monthly payment.  Well that was only one cost of the above many items.  Some of the most toxic pay option ARMs didn’t even include the full interest amount.

You may be thinking that this is too simple.  Too straightforward and maybe, it belongs on some morning kid TV show.  It is this simple however.  And that is why people don’t like it.  Sort of like losing weight.  The formula for that is, eat less calories than you burn in a day and you will lose weight.  Yet getting this discipline is the hard part, not the equation.  What this tells us is housing prices have still a long way to go to adjust.  I’ve put together on this chart below the U.S. median home price and also the U.S. median household income since 2000 to track the housing bubble.  Just for kicks, I threw in the L.A. County median price to put one crazy bubble next to an amazingly insane out of this world bubble:

*Click to enlarge

As you can see from the chart above, U.S. median income for the past decade has remained stagnant.  Yet home prices appreciated at an unprecedented pace.  On the top of the chart, I quickly put the price-to-income ratio just to give you an idea of how high prices rose.  Already in 2000, prices were at a 3.6 ratio, a little higher than we would like.  Then all of a sudden, you have a non-stop growth to a ratio of 5.5!  This was simply unsupportable.  In addition, if you think that is bad, the peak price-to-income ratio in Los Angeles County hit above 11 at the height of the bubble.  Meaning, the median home price in L.A. required the median household to spend 11 times their yearly income.

Now this would not be such an issue if incomes had kept pace, which clearly they did not.  So it leads you to the question that if household incomes weren’t keeping pace, how did people manage to pay more for homes?  In one word, credit.

The above chart goes to show a clear sign of what has occurred in this past bubble.  More and more of a family’s income went to servicing current debt payments.  When we consider the $700 billion bailout plan and one component of injecting capital into banks the primary reason again is to get credit going.  This of course should lead you to question why we are trying to spur credit (debt) when debt is what got us into this mess in the first place?  Nowhere do we see legislation trying to clamp down on stricter lending.  In fact, the marketplace has suddenly tightened up and the government wants to loosen it up again.

The government has led the way in acquiring debt so you would expect similar behavior from the populace:

Total public debt has blasted through the $10 trillion mark and with the price tag of these bailouts, we can expect to see $11 and $12 trillion very soon.  At a certain point you need to return to prudent lending standards yet at the moment, the government seems to want to return to the heyday of the housing bubble.  We can’t go back since we have reached a critical inflexion point.  That is, we cannot throw more debt at the problem and expect it to go away.  That is why certain states like California will not see a housing bottom until 2011 or even deeper into the future.

Take a look at real median income produced by the Census Bureau:

What you’ll see is slowly growing household income, that is until this decade where income even dipped a bit.  Of course, some of that growth also comes from the fact that we now have 2 workers per household which has increased since the 1950s.

Is the formula for housing prices really that simple?  That is, 3 times gross household income is the maximum value of a home one can afford?  It is.  So if your household income is $100,000 you can buy as much as $300,000 worth of home.  If you make $1,000,000, you can buy up to $3,000,000.  Makes you wonder if we’ll ever see these ratios again.
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A Math Formula to Solve the Housing Market? Mathematically Determining how Much Home you can Afford.

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■Real Homes of Genius: Today we Salute you Buena Park. 717 Square Feet for $465,000.
■Doing The Housing Bubble Math Dance for California.

Via [DrHousingBubble]

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Politics caused the global economic crisis. Can politics fix it? Doubtful.

Source [blownmortgage]

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Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

Not all that much seems to have come from the G7+ meeting this past weekend. We somehow expected more than: “The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

In its statement the Fed said:

“In order to provide broad access to liquidity and funding to financial institutions, the Bank of England, the European Central Bank, the Federal Reserve, the Bank of Japan, and the Swiss National Bank are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.”

And just in the nick of time, we observe, this being options expiration week.

(more…)

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Filed under: Earnings reports, Mattel, Inc (MAT), Hasbro Inc (HAS)

Hasbro (NYSE: HAS), a toy maker which competes with Mattel (NYSE: MAT) and JAKKS Pacific (NASDAQ: JAKK), reported earnings for the third quarter on Monday. The top line increased 6% to $1.2 billion. The bottom line came in at $0.89 per diluted share. If you adjust the earnings reported in the previous year’s quarter for a tax benefit, then the growth rate for the current quarter in terms of per-share profit becomes a very decent 14%.

According to this source, Hasbro beat analyst expectations by three pennies. That’s a lot better than the usual penny. In addition, management came ahead on the revenue front as well. But did the stock rally on this news? No, it didn’t. As of this writing, Hasbro’s shares are trading down 7%. I’m surprised to some extent. I at least would have figured a flat performance for the stock. Hasbro is a big name when it comes to toys, and it sells merchandise based on big brands such as Star Wars and Transformers. We are now in the Christmas-shopping season; it’s Hasbro’s time of year. Thing is, though, Wall Street is worried. It doesn’t matter that the market is up as I compose this piece (by the time I submit it, the major indexes could be easily be down 300 points for who knows what). And Hasbro’s stock is going to suffer right along with the market. Not only that, but the stock will probably be pressured just because no one knows exactly how much toy buying will go on.

Still, Hasbro’s stock was strong earlier in the year, it pays a dividend, and the company was in the market buying back some of its shares during the quarter. Long-term investors I’m sure are willing to snap up some Hasbro. Like I say, it has some powerful properties to sell (although I do wonder how its Star Wars: The Clone Wars product line will do this Christmas since the movie didn’t perform so well). However, it might be prudent to wait for a higher yield in this market. The company did well in Q3, but the fourth quarter is not going to be easy for any business.

Disclosure: I don’t own any company mentioned; positions can change at any time.

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Break out the bubbly, hang up the festive piñata, and dig out those togas because the goods times are here again!  Southern California home sales are up an “unprecedented” 65% from last September.  That is right folks, happy days are here again.  That is until you look at the actual data in this report. Leave it […]
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Break out the bubbly, hang up the festive piñata, and dig out those togas because the goods times are here again!  Southern California home sales are up an “unprecedented” 65% from last September.  That is right folks, happy days are here again.  That is until you look at the actual data in this report.

Leave it to the spin masters to turn a pathetic report into an amazing feat of economic accomplishment.  I’m surprised these people don’t give each other a Pulitzer just for getting out of bed and brushing their teeth correctly.  Yes, the sales volume is up an unprecedented 65% but you can also say in the same headline that the median price is down a record 38%.  Both are unprecedented records and guess which one the media ran with?

Oh yes!  Fantastic.  Time to get my agent on the phone.

Shouldn’t the headline above be 50% of all Southern California home sales are foreclosures?  The L.A. Times does a better job with their headline.  After all, they are here in the area so they have a better sense of what is going on:

The L.A. Times headline offers a much more tempered report and headline.  But leave it to the Orange County Business Journal to tell you how it is:

That is the true headline here.  The incredibly steep drop in prices.  The peak for Southern California was reached only last summer and stood at $505,000.  The current price for a median priced home is now $308,500.  Why is this significant?  Because Southern California has more people than many states in the entire union:

Population:  SoCal by County:

Los Angeles:               9,948,081

Orange:                       3,002,048

Riverside:                    2,026,803

San Bernardino:          1,999,332
San Diego:                  2,941,454
Ventura:                      799,720

Total SoCal Population:       20,717,438

To put this into perspective, Texas has 23 million people in their entire state.  Alaska on the other hand has 670,053 people, or the size of Ventura Country.  Bwhahaha!

Enough of that.  Let us now put on our thinking caps and dig into the craptastic numbers that really show an ugly and Medusa like picture.  You’ll turn away quickly once you see the data but be warned, you may turn into your favorite granite counter top:

Let us first work through the numbers.  I’ve circled the two biggest counties responsible for the sales jump.  You’ll also notice one important point here.  They are the cheapest and have seen the steepest price drops of all counties!  Even though San Bernardino and Riverside account for 19% of the Southern California population they made up 36% of all sales last month for the region!  That is why Riverside is up 106% from a year ago.  Then again, the current median price is $237,500 so how will that person feel that bought a home near the peak in December of 2006 when the median price in Riverside was $432,000?  That is over a 45% drop from the peak price.  The price of a home in San Bernardino county in December of 2006 was $370,000.  The current price of $205,000 is a 44% drop from that point.  What a shocker that homes are selling after having prices cut in half.

Every county in the area is down approximately 30% in one year and much more from the actual peak.  If you really dissect the numbers, this September jump isn’t that big.  Let us take the largest county, L.A. and see how the past 8 Septembers have done:

L.A. County September Sales

September 2008:         6,274 <—”Amazing” 65% jump from last year

September 2007:         4,361

September 2006:         7,917

September 2005:         10,988

September 2004:         10,501

September 2003:         11,395

September 2002:         10,808

September 2001:         8,831

Is this really a number to go running home about?  Just because we had a horrific September last year of course any anomaly is going to give a minor boost in home sales.  In this case, it was the fact that Riverside and San Bernardino had a crazy amount of swap meet like bargains and people bought them up.  It is also the case that 50% of all sales last month were foreclosures.  How is this fantastic news?

In addition, many of these sales occurred in the middle of the summer before the global stock market smack down occurred.  With these numbers my thesis on why home prices in California won’t see a bottom until 2011 is even further reinforced and all 10 reasons are even more viable today.  It is also the case that the summer selling season data has just come to a close.  This is a typical seasonal pattern.  Take a look:

*Click for a bigger picture

Like clockwork, the end of spring and summer are the best selling seasons for housing especially here in California.  The above chart highlights this trend to perfection.  Take a look at the seasonal drops in fall and winter.  The frightening thing is that if you look at the final point on the chart which includes the unprecedented rise this summer, we are at the lowest peak from the last few years.  It will only go down from here since:

(a)  Option ARMs are going to recast in large numbers Q4 of 2008 and Q1 of 2009.

(b)  This last month does not include the global market fiasco.

(c)  California is in a deep recession.  7.7% unemployment rate and the budget is being held together with chewing gum.

(d)  We are entering into the slow fall and winter selling season

Although there are glimmers of hope in this report, there is much more to be pessimistic about.  Prices are going to drop 50% from their peak.  This isn’t some doomsday prediction because as you saw, Riverside and San Bernardino are already down approximately 45% from their peak so they will arrive at this milestone first.  L.A. County which hit a peak of $550,000 is now at $360,000 or a drop of 34%.  If L.A. County can see the median home price lose $190,000 in value in one year, is it a stretch to say we will see another $85,000 reduction in the next 3 years?  Or a better question is what is going to push prices higher?  Jobs?  Demand?  Somehow I think believing prices are near a bottom is unprecedented.

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65% of Southern Californians are Delusional. No wait, 65% Jump in Southern California Home Sales. No wait, 38% Record Median Price Drop. No wait, 50% of all sales are from foreclosures. Housing and Foreclosure Voodoo Headlines.

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Related Posts:
■C.A.R. says 2007 will see a -2% Drop in California. Does This Feel like a 2% Yearly Drop?
■Southern California Housing Report: New Housing Motto: Foreclosure Data is so Bad, it has to be Good! Median Price Down 31% to $348,000.
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!
■Zillowed, Disappearing Inventory, and Free Housing: 3 Major Psychological Reasons Why Housing is Still Declining and Living Rent and Mortgage Free.
■Think Housing Can’t Go Down Significantly in Southern California?

Via [DrHousingBubble]

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