Guest Post: Wall Street Journal's Brett Arends - Why Housing is in a Depression

My interest was in this topic piqued by a story on late night TV last night when a story broadcast by the ABC Network mentioned that in the United States around one quarter of home owners had negative equity in their homes.

This led me to doing a little googling this morning where I found the following story on Marketwatch about the sorry state of housing in the US.

I have to state I had no idea that this many people had negative equity, I thought it was just under 10%.

Shame on me.

Now I know little about real estate but what I do know is that this is a very serious situation, for the US and the rest of the world, in terms of the economic fallout, given the sheer number of people in negative equity.

Remember it is what tipped us up in 2008 in the first place and it will continue to drag on the global economy no matter how much printed money the Fed throws at us.

Read on dear readers:

June 1, 2011, 12:01 a.m. EDT

BOSTON (MarketWatch) — It’s official. The house price collapse is now worse than it was during the Great Depression.

That astonishing piece of information comes from the researchers at the think tank Capital Economics.

It follows Tuesday’s news from Case-Shiller that house prices fell again in March, as the double dip gets worse.

Writes Capital Economics’ senior economist Paul Dales, “On the Case-Shiller measure, prices are now 33% below the 2006 peak and are back at a level last seen in the third quarter of 2002. This means that prices have now fallen by more than the 31% decline endured during the Great Depression.”

Hmmm. Recovery? What recovery?

It’s yet more proof that the nationwide financial bust is far worse than Wall Street is pretending, and it may be getting worse instead of better.

But try telling that to the Dow Jones Industrial Average DJIA -0.74% , high as a kite — in more ways than one — above 12,000. What is Wall Street smoking?

Capital Economics says the latest double-dip in housing should come as no surprise. It’s very much following a pattern seen in the early 30s, when a brief recovery also petered out. The same has also happened in other big housing busts around the world, the think-tank says. It believes prices are going to fall even further before we hit rock bottom, maybe sometime next year.

The double-dip in housing, which has left nearly 30% of homeowners in negative equity, increases the chances that the Fed may resort to Quantitative Easing III — although they will probably call it something else, if only to save their blushes.

In some ways, the collapse in house prices is even deeper than Case-Shiller is telling you.

After all, the official data take no account of inflation. During the Depression we had deflation — so while your home was worth fewer dollars, each dollar was more valuable.

Today we have (modest) inflation. If Fed chairman Ben Bernanke gets his way, we’ll get a lot more. We probably need it. Compared to wages, housing is now back to levels last seen in the late 1990s (see chart).

And the Case-Shiller data masks huge variations in housing markets. Prices have collapsed many suburbs, exurbs, rural areas, and in well-known disaster sites like Miami, Las Vegas and Phoenix. Meanwhile the declines have been much milder in places like Manhattan or Boston. Some high-end real estate is actually selling well. The buyers have money.

Is there a silver lining to this? Well, maybe.

If you can get the financing, housing is now cheap. Really cheap. Capital Economics reckons housing is now 24% undervalued, and is the cheapest it’s been in thirty-five years.

With mortgages rates on the floor, and inflation surely brewing down the road, housing in many parts of the country looks like a good deal. But you’ll have to be patient to see the biggest rewards. Capital Economics says, back in the Depression, it took 19 years for house prices to recover to their previous peaks.


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Banking Madness!

My adventures with Bryce the Banker have kept myself and many others amused and there is yet another tale to be told about the ASB in Albany and its approach to customers now that the economic wolves are seemingly at their customer's doors.

When I visited Bryce the last time I asked him what the chances of me getting a loan to buy an investment property was.

He kind of laughed nervously and mentioned it was harder now than it was a year or so back but thinking to myself, considering I seemed to be the only middle class Kiwi who didn't buy an investment house during the housing boom, I now thought it was a good time to buy one.

Consider this:

1. Housing is approaching realistic asking prices
2. Your expenses are now likely to be recouped by the rent received
3. Interest rates are lower by at least 2% than during the boom

But then also think about this:

Even though my financial position is now stronger than it was a few years back and the investment case to buy a house for rental purposes is much more attractive, the ASB Bank and probably yours too is unwilling to lend as much money for that purpose.

Interesting that in some cases at the height of the housing boom that banks were lending more than 100% mortgages and throwing money at monkeys while now they will barely consider you even though you now back their deposits and lending through your taxes.

A case for some contrary investment thinking, in other words good sound financial practice, is clearly needed within our banks and the staff that they employ.

Treat each customer and lending case on its own individual financial merits and you will please your good customers and keep your CEO from losing sleep at night.

End of lesson.


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c Share Investor 2009

The Joneses Real Estate business fails to keep up with market conditions

The prospect of the only float this year, so far, to kick off, certainly piqued my interest and following in The Joneses, a cut price, flat rate real estate agent that planned a back door listing on the NZAX early this year.

c Fox Corp 2007

According to the Real Estate Institute, The Joneses real estate business model
was flawed and it led the their liquidation. The business case is no Bart Simpson
fly by night though, the Joneses simply undercapitalised and were unable to function
in the current property and stockmarket downturn.

Its business model differed from the run of the mill Real Estate agents like Barfoot and Thompson, Century 21 and Harcourts, who all charge much larger selling fees on a sliding scale, tapering off as the price they might get for your house gets higher-no incentive here to get a better price for the seller.

Unfortunately the Joneses were not able to keep up with the market uncertainties surrounding them.

In the face of a marked and welcome (in my opinion) downturn in Real estate sales and property prices the IPO was bound to have “done a Burger Fuel” and tanked because the appetite for real estate and sharemarkets in combination was a recipe for disaster.

Joneses management say the business model was sound and I would agree with that. Their problem was that they needed volume of sales for this business model (just like most businesses) and their cash flows simply ran out before they reached critical mass.

The Real Estate Institute came out today and trumpeted their old fashioned model as the only one that could be a success and clearly they were rubbing hands together as their competition bit the dust but they shouldn’t be too quick to dismiss the likes of other cut-price real estate companies that operate successfully.

This sector works well overseas and here but is expensive initially to set up.

Increasingly these days, individuals have become savvier when selling property. Negotiating fees with the full price brokers and as the internet and businesses associated with the net matured, to allow that media to process house and property sales, websites like Trademe have taken business off the big boys.

Contrary to popular belief the best person to sell your property is you. You know better than anyone else, you know your suburb like the back of your hand and the incentive really is there for you to get the best price.

It is human nature for us to be lazy and that is where these Real Estate agents see the gap and try to fill it. We “just don’t have the time”, or “we don’t have the expertise” to sell our house, quite frankly that is bullshit. It ain’t hard.

The laziness also extends to the agents, their “incentive” to get you a better price just isn’t there. When their fee slides downwards as the sale price of your house goes up then one can see they just aren’t living in the real world or working for you or the buyer. They are in it for themselves.

How much extra time do you have to spend at work to pay the $15,000.00 or more these companies charge?

But I digress.

Given better market conditions the Joneses IPO would have been a success. As with most things financial, timing can be 80% of your success. The Joneses management were just not able to time the market to make this thing a goer.

Having said that, clearly the capital to help make this business float wasn’t there from the beginning and the IPO would have allowed them cash to develop the company in a sustainable way.

It would have been wise for Joneses management to have got extra capital from the get go, make the business profitable for a number of years, then list.

The stockmarket is better off without the likes of the Joneses in its present guise and one can see a return of such a company to the market when financial stability returns to the global equities and the real estate sectors.

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c Share Investor 2008

Can the Joneses keep up with the market?

The Joneses will have to work hard to satisfy stockmarket
investors that theirs is a company worth investing in to
make the IPO a success.


A dearth of IPOs in New Zealand so far this year and what we have had has mostly been unmitigated garbage.

News released yesterday that The Joneses , the cut price real estate agent, is going to list on New Zealand Exchange's alternative market, in mid-February 2008 piqued my interest somewhat.

Now I guess your initial reaction might be hell, I don't trust real estate agents, and you could be forgiven for thinking that but I can see some promise in the idea that the owners of the Joneses', TJRE Holdings and director Chris Taylor have.

Kiwis have no listed exposure to the residential property market and we just love to invest in residential property, at the expense of the sharemarket mind, but what an opportunity to combine the two aspects.

The company is very small and has been operating since last year, with offices in Dunedin, Christchurch, Auckland and Wellington, so the possibility for good growth is there.

Revenues from house sales commissions are estimated at NZ$1.2 billion, with Barfoot and Thompson in Auckland taking up the bulk of that. The revenue is certainly there so it is a case of the Joneses upping their ante to keep up with the Barfoots and LJ Hookers of this world.

In the absence of more details of how the company is structured and how revenue is made, presumably through a cut of the sales commission, one cannot make a serious decision to plunk any shekels down yet.

Time to look at the industry and see how this model might work/fail if you want to invest.

Bring on the prospectus.


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C Share Investor 2007