Feb272007

I am IrvineRenter (Inventory Cholesterol)

Hello Everyone,irvinerenter_money_magazine

I would like to say a special “thank you” to Zovall and IrvineSingleMom for inviting me to join them as a poster on the Irvine Housing Blog. I have not been a reader or contributor to housing blogs very long; in fact, my wife regrets ever showing me these blogs as I spend too much time with them. I would like to take this opportunity to tell you a bit more about myself and summarize my outlook for the Irvine real estate market.

First, I need to remain anonymous. I will share some facts about myself and some generalities, but for reasons of paranoid self-preservation (I wear a tinfoil hat); I must keep my identity a secret.

I have lived in Irvine since 2003, and I lived in San Diego from 2001 to 2003. I sold my house in Florida before moving to San Diego and I chose not to buy in 2001 because I thought the prices were too high. Little did I know a massive speculative bubble was about to take off. I am fairly financially conservative: I am unwilling to finance a home with exotic terms (meaning other than a 30 year fixed rate mortgage). I carry no debt, I pay no interest, and I am in a position to purchase if the price and the terms were to my liking. I get annoyed at being called a “bitter renter.” These facts about me influence my perspective and come through in my posts.

I have a Masters Degree in Land Development (there is actually a degree in this), and I work in the real estate industrial complex (REIC). I am an entitlement project manager for a local real estate developer. My job is to take raw land and obtain permission to build houses on it. Because of my line of work and the people I am in contact with on a daily basis, I have a unique perspective into the wholesale side of the real estate market. My company buys raw land, often from individuals, but sometimes from other investors or companies. I do my thing, and then my company sells entitled lots to builders: they are our only customers. Irrespective of what the builders may say in public statements, I see what they actually do in their private dealings. I cannot and will not share details of the projects I am involved with or specifics of deals I see, but I can and will convey general happenings and trends I see in this market as it reveals a lot about the future of home prices.

I do not have an incentive to lie in order to hype the market. My livelihood is tied to the real estate industry, but my income is not derived directly from residential real estate transactions. Realtors, mortgage brokers, and many others depend on these transactions to survive; therefore, they have a strong incentive to convince buyers to step forward even if it is not in that buyer’s best interest. I have no such incentive. I can provide an objective analysis of the market from an industry insider’s perspective without being tainted by transaction dependency.

Also, I have a fascination with financial markets. I became particularly interested after losing money in stocks in 2000, and I devoted much time and attention to the workings of financial markets in general and the markets for stocks and real estate in particular. As a hobby of sorts, I trade stocks using a self-created automated trading strategy with Tradestation.com (I am not opposed to speculation in liquid assets like stocks). My posts will focus on real estate, but I may draw upon experiences or concepts from other financial markets in my analysis or examples.

There are many reasons to post to a blog like this. It is nice to have a forum where I can share my experience and insights with others, and there is an element of camaraderie and entertainment too. However, the passion behind my posting comes from my desire to stop people from being ruined financially by buying in today’s market. I am a housing bear, and I make no apologies for it. If I can save even one potential new buyer from bankruptcy, I will feel good about what I have done here (Sorry, I don’t have much sympathy for current [email protected] Borrowers – FB’s. I have compassion for ignorance, but disdain for avarice). That being said, why am I such a bear?

The Future of the Housing Market

I would like to share a series of posts from other blogs that summarize my reasoning better than I could:

Evidence of a California Housing Bubble

Risks of a Serious Home Price Decline

Housing in 2007

What is a Bubble?

There’s a Housing Bubble — A Fact-Filled Opinion

In summary I would note a few basic facts/opinions:

1. Price levels are determined by the balance between supply and demand.

2. Demand was increased by sub-prime buyers and loose lending standards. This was the primary mechanism which inflated this bubble.

3. The previous demand stimulus is being removed from the market.

4. The supply of homes for sale is increasing, and it will continue to increase. This supply will drive prices lower.

5. Prices will decline until fundamental valuations bring new buyers to the market (like me).

I would like to expand on #4 above because it is the most important point moving forward. Look at housing inventory as being like cholesterol: a high level is usually bad, but the ratio of good inventory to bad inventory is even more important. Good inventory is discretionary sales inventory. These are sellers who would like to sell if they can get their price, but they really don’t have to sell. An inventory of for sale homes made up of good inventory, even if there is a lot of it, will not drive prices down. A large amount of good inventory may slow the rate of appreciation, but it won’t take prices down. In contrast, bad inventory is composed of those homes on the market that must be sold at whatever price the market will bear.

Bad inventory has three main sources: life-changing moves, homebuilders and foreclosures. Life-changing moves are people who must sell a home due to job relocation, layoff, divorce or other factors. Homebuilders must build and sell homes, or they will go out of business. These two sources of bad inventory are ever-present, but usually a small enough percentage of the overall market that they don’t take prices down.

The final, and most important, source of bad inventory is foreclosures. This is where the action is. When foreclosures increase above levels where the market can absorb them, prices decline. When foreclosures increase dramatically, prices decline dramatically. This is what is going to happen over the next 2-3 years as all the sub-prime borrowers and over-extended homeowners buckle under the weight of their mortgage payments. Foreclosure statistics are the numbers to watch.