The Rude Awakening
Laguna Beach, California
Thursday, August 24, 2006 ------------------------- - Housing inventory numbers are in and they don't look
pretty,
- Can you afford to live in your own house?
- What you can do to protect yourself, the markets
hover in anticipation and more...
------------------------- Eric Fry, reporting from Laguna Beach... Concerned readers will be delighted to learn that Laguna's
Boom Boom Room has secured a one-year reprieve. The "oldest
gay bar in the western United States" will not close its
doors after all. "The landmark gay business will remain
another year," the Coastline Pilot cheered. "Activists are
elated by the owner's decision. Laguna will have another 12
months to keep on boomin.'" Alas, no such luck for the housing market. Yesterday's
existing home sales data confirm the fact that the housing
boom-boom is going bust-bust. Sales of existing homes fell
11.2% from a year earlier, while the absolute number of
homes for sale jumped to a new record. Based on the current
rate of sales, a 7.3-month supply of homes awaits buyers,
the most in 13 years. Net-net, the housing market does not
appear to be heading for the "soft landing" that Ben
Bernanke says he expects, but rather, the crash landing
that many of us fear. By now, everyone knows the housing boom has busted. Even
the National Association of Realtors admits as much. Just
last week, David Lereah, the NAR's Chief Economist
delivered a sobering presentation to the NAR Leadership
Summit in Chicago entitled, "Reality Check," in which he
flatly declared, "The housing boom ended in August 2005." To illustrate his point, Lereah provided the nearby table,
detailing the magnitude of the year-over-year sales
declines in the nation's hottest property markets. 
The bust has arrived. The only issues worth pondering, therefore, are how low
prices might fall and/or how long the bust might last.
Without trying to be too specific, we'd guess that prices
will fall a lot and/or that the bust will last a long
time...But that's just a wild guess. The key to these mysteries probably lies somewhere within
the Golden State, the epicenter of housing unaffordability. --- Special Investment Alert ---
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By Eric J. Fry Imagine a country of 10 million citizens. Imagine it is one
of the wealthiest countries in the world. And yet, it is a
country where only 14% of the population can afford to buy
the median-priced home. The reader requires no imagination...This "country" is Los
Angeles County, the least affordable metropolis in the
nation, according to the NAHB/Wells Fargo Housing
Opportunity Index. Only 1.9% of the new and existing homes
sold between January and March of this year were affordable
to L.A. County residents earning the median income. Orange
County, home to both Disneyland and your California editor,
ranked #2 on the list. (For the record, your editor is
renting). How did California housing become so ridiculously
expensive? One word: Credit. Without easy credit, and lots of it, California real estate
could never have achieved its epic valuations. Credit not
only enabled first-time buyers to "stretch" a bit, it also
enabled and emboldened speculative buyers, speculative
builders, second-home buyers, second-home builders and
every other variant of housing market
participant/speculator. But because financing became so exotic, and speculative
participation in the market became so great, the
simultaneous unwinding of both will be as pleasant as
hanging out with your in-laws during a root canal. The unwinding is already beginning. The NAR's Lereah offers
a succinct explanation and post-mortem: • Mortgage rates rose almost one point
• Affordability conditions deteriorated
• Speculative investors pulled out
• Homebuyer confidence plunged
• Resort buyers went to sidelines
• Trade-up buyers to sidelines
• First-time buyers priced out of market As a result, Lereah explains: • Sellers' market transitioning to buyers' market
• Home sales plummet, prices lag, inventories rise
• Cooling markets left with high percentage of exotic
loans
• Builders offering non-price incentives
• Days-on-market lengthening
• Residential construction activity slows
• Home prices beginning to soften We all know what happens NEXT. But we just don't know how
bad it will be. Please allow your editor to offer a prediction: · Home sales continue plummeting
· Prices begin to plummet
· Exotic loans begin to squeeze over-leveraged
homeowners
· Prices plummet some more
· A bull market in housing begins in 2020...or maybe a
little sooner. The California real estate market provides some helpful
clues about the likely depth and duration of the bust now
underway. Since the California boom relied heavily upon
exotic financing to plug the gap between affordability and
purchase prices, the gap between affordability and purchase
prices widened to extreme proportions. Every valuation gap that relies on credit, rather than cash
and income, is likely to narrow eventually...especially
when the burden of existing credit is on the rise. And
that's exactly what's happening in California. Almost 40% of the state's homeowners — compared to 29%
nationally — pay at least one third of their income for
housing, according to the Public Policy Institute of
California. Even worse, one fifth of all recent home-buyers
pay more than HALF of their income for housing.
Furthermore, California home-buyers have increasingly
financed their purchases with unconventional loans, such as
adjustable rate, negative amortization and interest-only
mortgages, rather than traditional fixed mortgages.
Just under a third of mortgages initiated or refinanced in
California this year have interest-only components,
compared with 1.4 percent in 2000, according to
LoanPerformance. This tactic may have seemed quite savvy
when rates were low, but it seems much less savvy now. 
Highly leveraged, adjustable-rate home-buying has become so
prevalent in the Golden State that the California
Association of Realtors (CAR) recently changed its
"affordability" methodology. The Housing Affordability
Index (HAI), when the CAR launched it in 1984, assumed a
20% down payment and a fixed-rate mortgage. But that's "old
school" now. The new and improved affordability index
assumes a 10% down payment and an adjustable-rate mortgage.
Despite the new methodology, A California must still earn
almost $100,000 per year to "afford" the state's $482,000
median-priced home. And Despite the new methodology, the
ability of first-time home-buyers to purchase the median-
priced home stands at an all-time low. 
Very few Rude Awakening readers will be shocked to read
that California homes are beyond the means of most
California residents. But what you may be shocked to read,
is that California homes are also beyond the means of the
folks who actually own the homes. "You know what I just read?" the cable guy said as he was
clipping wires in your editor's new home. "I read that only
8% of the residents of Orange County could afford to buy
their own homes, if they had to buy those homes at today's
prices." "I believe that," your editor replied. "That's one of the
reasons I just sold my home in New York. I could not afford
to have purchased it at the price for which it sold. That
seemed crazy to me." "It's gonna get worse," the cable guy predicted. "Two years
ago, you rarely saw a 'For Sale' sign around here. Now
they're everywhere. A lot people are still in denial. They
aren't lowering their prices much yet. But they're
starting. My son lives on a block over in Aliso Viejo where
the houses are all about the same. Last year, one of them
sold for more than $900,000. This year, a couple folks put
their houses on for $775,000. No offers. So the lowered the
prices to $725,000. Still no offers. About a month ago,
they dropped the prices to $675,000." "Any offers?" "Nuthin.'" A courtesy call to your editor's former real estate agent
in New York confirmed the bi-coastal breadth of the housing
bust. "How's the housing market back there in Westchester?" your
editor inquired yesterday. "Dead," the broker replied. "You got lucky." "I feel that way." "You got very lucky," the broker continued. "I had a couple
other lucky clients last spring. But since then, nothing.
There's just nothing happening." Hmmm...If wanna-be home-buyers cannot afford to buy homes,
and EXISTING homeowners could not afford to re-purchase the
very roofs over their heads, who will be buying houses? Or
to re-phrase the question, how much lower must prices fall
to restore some semblance of affordability? A lot lower, we predict. [Joel's Note: Earlier this year, one of the world's
greatest living economists made three very shocking
predictions. Now they are coming to fruition. Homeowners
around the country are slowly coming to grips with the fact
that the value of their biggest investment is eroding...and
the dollars they used to buy it are becoming weaker and
weaker all the while. You can continue to look the other
way and hope for the soft landing that Bernanke is hoping
for, or you can get real and protect yourself. In the report below, you will find Dr. Richebacher's three
predictions for this year and the five investments you can
use to protect your future. Don't put it off any longer;
it's all right here: The Richebacher Report
http://www.isecureonline.com/Reports/RCH/ERCHG851 --- Special --- Are You Ready for Denver Flu? Important Information on the Deadly Infection That's
Killing the Housing Market Make no mistake: The game is up in housing. "Denver Flu" is
spreading...and even mortgage lenders say prices could
tumble up to 20%. But one group has already had a chance to see 124% betting
against the bubble -- and it's preparing to rake in much,
much more. Here's everything you need to know about "Denver
Flu" -- and how it could be your ticket to 300% gains over
the next few years. http://www.isecureonline.com/Reports/DRI/EDRIG810 ---------------------------- [Joel's Endnote: Earlier in the week we asked Rude readers
how the housing market is looking in their neck of the
woods. The news was not good. Actually, it was closer to
terrible. We'll be previewing these letters in upcoming
Rude columns as we monitor the bubble burst for you. If you would like to chime in with a market reading from
your own neighborhood, address your mail to
aussiejoel@the-rude-awakening.com Cheers, jOEL ---------------------------- 
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