All posts by George Mann

THE SUBPRIME AUTO LOAN BUBBLE

AUGUST 18, 2022 – Everyone wants to know what this cycle’s The Big Short is. This time around it is subprime auto loans. Albeit, it is also prime auto loans.
Currently, 15,000 vehicles are being repossessed every day. The expectation is more vehicles will be repossessed this year than were sold in all of 2019!!!
I can go on and on about this significant crash. But, it is just easier to tell you to go to YouTube and search for Lucky Lopez and listen to his videos.
The bottomline is there will be LOTS of deals in the car market over the next 2 years. He notes it will take about 6 more months before this is seen everywhere.
I have found only one stock that could be shorted – Credit Acceptance Corporation (Symbol – CACC). It is down this year. But, simply about the same as the overall market. It will be interesting to see how it does over the next year.
Enjoy this video with Danielle DiMartino Booth and Lucky Lopez. As I mentioned in a separate post, I think Danielle’s service is the best out there.

https://app.hedgeye.com/insights/120295-webcast-deep-dive-with-danielle-dimartino-booth-lucky-lopez?type=guest-contributors%2Chedgeye-tv

Shalom,
The Mann

40-60 AND BUBBLES

JULY 18, 2022 – As a kid, the first thing I could read was the stock market page in the newspaper. Probably since I was 5 years old I have been analyzing markets.
Early on I recognized a 16-year pattern in the stock market. I lived thru the 1966-1982 sideways (down when adjusted for inflation) market. I noticed that the market went up significantly after WWII into 1966. And looking back, we can see that from 1982 to about 1998 (actually 1999/2000) the market soared again. It hasn’t been quite as clear since then.
However, in looking at bubbles I think a pattern exists. I recall an appraiser friend telling me that you make your ‘big bucks’ in your 40’s. I assume that continues thru your 50’s. That seems very logical. People from 40 years to 60 years old invest in stocks, buy real estate, buy boats and cars, on and on. This is when they have the most amount of money to invest.
So, let’s look back at the generation before the Baby Boomers. This generation was born from 1931 to 1947. Adding 60 years to the first people and 40 years to the last people, yields 1987 to 1991. Exactly when the S&L Crisis peaked and burst.
My fellow Baby Boomers were born from 1948 to 1964. Adding 60 and 40 years, yields 2004-2008. Again, right on target with the great housing bubble.
Generation X ranges from 1965 to 1980. Adding 60 and 40 years, yields 2020-2025. And here we sit in the middle of ‘The Everything Bubble.’ With the top already in place, I assume this means we bottom by 2025.
In the last crisis there was a funny bumper sticker going around – ‘Lord, give me just one more bubble!’ Sure enough, we got another one. So, for those that missed out on this one and are wondering when the next one will occur…..Generation Y (aka Millennials) ranges from 1981 to 1997. Adding 60 and 40 years, yields 2037 to 2041. A ways off for sure. And honestly, I don’t have a clue what will be in a bubble at that time. What is left? Maybe since cryptos came about after the last bubble, the next bubble will be something that has yet to be invented.
If you and I are around and remember this post, let’s have a chat in 2037:) Of course, let’s chat before that so we are invested early on in the bubble item(s).

Shalom,

The Mann

SUBDIVISION APPRAISERS NEED TO ADJUST ABSORPTION IMMEDIATELY

LAST UPDATED – SEPTEMBER 18, 2022

JULY 17, 2022 – REMINDER TO CHECK BACK AS I WILL UPDATE THIS WITH NEW INFORMATION AS I RECEIVED SUCH.

There are times when the data available to us real estate appraisers suddenly become (almost) useless. For example, after Hurricane Katrina almost all real estate data in New Orleans prior to the hurricane was all but worthless. Manhattan had 9/11. The entire country had the lockdown in Spring 2020.
Today the entire nation is facing this in regard to residential real estate. Basically, the data thru Spring 2022 is no longer reflective of current market conditions. Nor future market conditions.
It is time for subdivision appraisers to look almost solely through the windshield and no longer the rear-view mirror. There is no excuse for using absorption rates over the past year to forecast absorption over the next year or two.
We have the training to forecast future supply and demand. It is critical we do such now. For those familiar with the Appraisal Institute’s books on Market Analysis, you know that it is time to perform Level C analyses. Look forward, not backward.
I will add items to this post as they come out. For starters, the following items are support for reducing absorption rates significantly. I am sure you will come across similar items in your research.

ADDED SEPTEMBER 18th – Mortgage rates are above 6% for the first time Since 2008. These rates are still cheap. But, people have been spoiled with the artificially low rates over the past decade. If you can’t afford a loan at 6%, you shouldn’t be buying a house anyway.

Per the Mortgage Bankers Association (MBA), the average home purchase loan size is only increasing at a 2.1% YoY rate now versus a 12.1% YoY back in April. This is a leading indicator for home prices.

Redfin’s weekly pending home sales tally of homes under contract has tightly tracked MBA purchases this year. Through the week ended September 4, this forward-looking gauge was down -29.3% versus year ago levels. Because demand is softening, supply is likewise loosening — Redfin’s age of inventory has risen on an annual basis since mid-July. (Quill Intelligence)

Pinto now predicts that by the December holidays, average home prices will hover around 6% higher than 12 months earlier. But the first seven months of 2022 are already in the can, and they show a total gain of 10% from January through July. To register a 6% increase for the year, prices must fall 4% over the next five months. That course would mark a severe reversal from the ever-rising tide of the last few years. And the drop will be anything but consistent across America. “The declines in the West will continue to be the most severe,” says Pinto. “The high end will also continue to be hit hardest.” So far, America faces nothing resembling an outright crash. But for the average homeowner, it will hardly bring cheer that the closer they get to the holidays, the more they’ll be watching the value of their cherished ranches and colonials fade. (American Enterprise Institute)

MBA noted that in addition to mortgage application activity remaining at a 22-year low, it was seeing, “average purchase loan sizes continuing to trend lower, as purchase activity at the high end of the market is weakening.” Blasting a warning to not be premature in looking for a bottom, this report was followed by the National Association of Realtors’ July Pending Home Sales Index, which registered the lowest reading since September 2011. Because this gauge is the most leading within the residential real estate universe, the best that can be said is to expect more of the same. (Quill Intelligence)

ADDED JULY 29th – Taking the unexpected in turn, June new home sales fell 8.1% to a 590,000 seasonally adjusted annual rate; each of the prior three months were revised downward. Chalk up revisions to cancellations. Nonetheless, the -50.5% annualized decline in the six months ended June has so few precedents, you can count them on one hand: 1966 near recession, 1980 recession, 1981-82 recession, 2007-09 recession and 2010 payback from home buyer tax credit. 
 
Pending total home sales collapsed 8.6% in June to the levels consistent with the last three recessions. The near-40% annualized plunge in the six months ended June was rivaled by the 2007 housing bust, 2010’s homebuyer tax credit hangover, and the COVID-19 flash recession. (Quill Intelligence)

((One of the best services I subscribe to is Quill Intelligence by Danielle DiMartino Booth. They analyze data in unique ways. Homepage – Quill Intelligence They have a Daily Feather sub that I think is $500/year. I guaranty it will be the best $500 you spend on a subscription!))

From Joel Kan, a Mortgage Bankers Association economist. ‘After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market.’

“Americans are canceling deals to buy homes at the highest rate since the start of the Covid pandemic. The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to… Redfin. That is the highest share since early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago. Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.” CNBC (Diana Olick)

((I will add that a local Realtor told me that in the past 7 years she had six purchasers walk away from their contract. In the past 2 weeks, she had 16 (!) purchasers walk away.))

On Tuesday, Zumper’s National Index for two-bedroom apartments falling 2.9% in May was all the rage in chatrooms (link above for full skinny). After the close, Black Knight dropped this bomb: “The annual home price growth rate fell by more than a full percentage point in May, the largest monthly decline at the national level since 2006.” We would remind you that May is the strongest seasonal time of the year for rent and home price gains. Both have begun to stumble. (Quill Intelligence)

All in all, about half (53) of the metros in this analysis saw more than 25% of home sellers drop their asking price in May. More than 10% of home sellers dropped their price in all 108 metros, driving the national share of price drops to a record high.  The uptick in price drops is symbolic of the slowdown in the housing market. Many buyers are backing off amid skyrocketing home prices, surging mortgage rates, high inflation and a faltering stock market.  (Redfin)

June 27 – Bloomberg (Alex Tanzi): “US cities that saw some of the biggest jumps in home prices during the pandemic now have the largest shares of price cuts, according to… Zillow… Overall, the proportion of active real estate listings with lower prices has increased in all 50 of the largest US metropolitan markets tracked by Zillow. In these cities, 11.5% of homes saw a price cut in May, on average, up from 8.2% a year earlier. The share of lower listing prices rose the fastest in real estate hotspots like Salt Lake City, Las Vegas and Sacramento, California… Among the 50 metros in Zillow’s data, 32 had more than 10% of listings with a price decline.”

June 30 – Bloomberg (Prashant Gopal): “The housing slowdown is helping to solve one of the US real estate market’s most intractable problems: tight inventory. With fewer buyers competing, the number of active US listings jumped 18.7% in June from a year earlier, the largest annual increase in data going back to 2017, Realtor.com said… And new sellers entered the market at an even faster rate than before the pandemic housing rally began… Active listings more than doubled from a year earlier in metro areas including Austin, Texas; Phoenix; and Raleigh, North Carolina, the data show. They climbed 86% in Nashville, Tennessee, and 72% in the Riverside, California, region.”

June 29 – New York Times (Conor Dougherty): “For the past two years, anyone who had a home to sell could get practically any asking price. Good shape or bad, in cities and in exurbs, seemingly everything on the market had a line of eager buyers. Now, in the span of a few weeks, real estate agents have gone from managing bidding wars to watching properties sit without offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are poised for big declines.”

“Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition,” says NAR Chief Economist Lawrence Yun. “Contract signings are down sizably from a year ago because of much higher mortgage rates.” Pending home sales have fallen 13.6% from a year ago. Economists have pointed to rapidly rising mortgage rates to explain buyers growing more cautious. The monthly payment on a median-priced single-family home, assuming a 10% down payment, has risen by about $800 since the beginning of the year due to the increase in mortgage rates. Rates have jumped by 2.5 percentage points since January.

Home buying conditions for the top third match the lowest on record. If you’re curious, that top tier is responsible for 58.7% of home sales. By extension, they account for 56.5% of furniture sales. In a weekend chat with Ivy Zelman, she said she expects home inventories to be up by 70% YoY by the time we ring in the New Year. Redfin’s latest data corroborate the downside building — the brokerage’s proprietary gauge of pending home sales fell 10% YoY to the lowest since May 2020 while requests to tour homes sunk 16% YoY, the biggest decline since April 2020 when the pandemic slammed the sector. (Quill Intelligence)

On the heels of the release, Zelman & Associates warned, “In the months ahead we expect homebuilders to respond to softening demand with increased incentives and even price cuts in an effort to stimulate activity.”
 
Excerpts from Monday’s NAHB corroborate Zelman’s concerns: 
 “Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home.”

“In another sign of a softening market, 13% of builders…reported reducing home prices in the past month to bolster sales and/or limit cancellations.”

“Affordability is the greatest challenge facing the housing market. Significant segments of the home buying population are priced out of the market.”

Rather than move, a growing number of investors are making their way for the exits. As reported yesterday by Bloomberg, KKR, Blackstone and Amherst are among housing investors who have “cut buying activity by more than 50%.” At least they’re not joining Starwood Capital in jettisoning portfolios of single-family rental portfolios…yet. Yes, this will leave a nasty bruise on a market overly dependent on leveraged, deep-pocketed, price-agnostic buyers. (Quill Intelligence)

((I will finish by adding this thought. With interest rates up at least 250bp since the beginning of the year, I believe it would be prudent for appraisers to look at the past sales rate for houses that were priced about 50% higher than your subject’s houses will be. My logic follows.

Your subject expects to sell houses at $400,000. Assuming a 30-year mortgage with a 5.5% interest rate, the monthly payment will be $2,271. I just assumed a 100% LTV to make the analysis shorter. We all know that people buy a monthly payment, not a price. Last year, the same $2,271 monthly payment at a 3.0% interest rate could buy a $540,000 (Rounded). Therefore, I think it would be better to look at the past absorption rate for houses in the $550,000 price range instead of the $400,000 range.

That said, we still need to look to the future. All past absorption rates still need to be adjusted downward SIGNIFICANTLY. I don’t know by how much. Personally, I would apply a 50% drop to begin with. In a few months the data may well suggest a 75%+ drop. And I wouldn’t project any rebound for at least 2+ years. My two cents.))

Shalom,

The Mann

STEP 2 IN THE HOUSING REVERSAL HAS OCCURRED

JUNE 14, 2022 – It is rare that you see and know a peak is occurring as you speak. Three months or a year down the road it is easy to look back and see when a top occurred. But, while it is going on….that is difficult. Being in the forest makes it tough to see the trees.
There are 4 steps for the housing market (any market for that matter) to go from growth to decline.
Step 1 – Acceleration in appreciation begins to slow down. This occurred 6+ months ago.
Step 2 – This is occurring now. Annual home appreciation in June will be lower than it was in May. We will look back at May-June 2022 and see the rollover in annual appreciation. Essentially, acceleration has turned negative. Better to call it deceleration.
Step 3 – This is the opposite of Step 1. The steep upward slope of accelerating price appreciation now becomes a steep downward slope of slowing price appreciation. This will occur the remainder of 2022 and into 2023.
Step 4 – The final step occurs when the accelerating slow down (think of slamming on the breaks) takes the market from price appreciation into price decline. This seems a far way off. But, I think we might be in for a surprise and see declining home prices quicker than we expect. We shall see.
As an aside, Bitcoin (slightly below $20k) and Ethereum (around $1k) are nearing major lows. The next move should take both to record highs (4x-5x moves from these levels).
Shalom and Happy Heterosexual Pride Month!
The Mann

600 CHILDREN UNDER AGE 13 KILLED IN CAR ACCIDENTS ANNUALLY

MAY 25, 2022 – As the expected leftist attack on guns occurs after the tragedy in Texas yesterday, some perspective is needed.
I have long pointed out that cars are FAR more deadly than guns in this country (and the World, I presume). For the past 13 years, at least 600 children under the age of 13 have been killed as passengers in automobile accidents. This excludes those killed while walking or riding a bicycle.
19 deaths by a gun is 19 too many. But, it isn’t the gun anymore than it is the car. When we make it illegal to let kids ride in cars we will save more lives than if somehow we got rid of all 400+ million guns in America!
One more realistic priority is to raise the driving age to 18 years old. This alone will save more teenage lives than anything else we can do.
As they say, taking away my gun because someone else kills people with their gun is as logical as taking away my car because others drink and drive and kill people. Stupid leftist woke logic. Well, that is repetitive:)
Prayers to the families in Uvalde and to those all around the country who lost 118 relatives to a car accident death yesterday. Yes, 118 people on average die every day in America in car wrecks!!! Not every month or so. Every day. Put severe restrictions on driving cars and you will save the most lives.
I am waiting to hear the public call for major restrictions on the use of automobiles. If you care about lives, this is the campaign you will take up. Not complaining about guns.
Lastly, I love the people that cheer the Ukrainian people for taking up guns to defend themselves. Yet, these same people, complain about our 2nd Amendment right to do the same! Your own government is usually your worst enemy. Just ask Ukraine which has been part of Russia for most of the last 1200 years.
Ahhh, but being logical with a woke leftist is impossible.
Shalom and Godspeed,
The Mann

HOUSING MARKET SHOWING SIGNS OF TOPPING

APRIL 14, 2022 – The housing market has been incredibly strong since the pandemic started two years ago. Prices are increasing at a record pace. The supply of houses for sale is at an all-time low. Of course, what goes up, must come down. But, when…Tops in financial markets take awhile to form. Bottoms are usually a spike panic low – a V-shape.
We are starting to hear of markets where list prices are being lowered in mass. With mortgage rates up from around 3% last Fall to 5% this week, the number of potential buyers has dropped by many millions.
It will take awhile for the momentum to slow, stop, and then reverse. But, the signs of this occurring are in place and starting to mount.
One leading indicator I follow peaked in the 1st quarter of 2006. This was a full 2.5 years before the Lehman Brothers event the public recalls as being the start of the last recession. Of course, the recession started in 2005 and 2006 and Lehman Brothers (and others that went under) was the end result of the decline that had already occurred. In fact, this indicator bottomed in the 1st Quarter of 2009 and turned up from there.
This same indicator peaked in early December 2021. It has declined 29% since then. That doesn’t mean home prices will decline this much. (For perspective, the leading indicator declined about 85% and house prices declined about 30%.) It just suggests a peak in the housing market is on the horizon. The Case-Shiller U.S. National Home Price Index topped out at the end of the 2nd Quarter in 2006. Just a few months after the leading indicator suggested it would. I think the current momentum is too strong to have prices turn down this year. In fact, it will be tough to have prices turn down next year. But, it is now a decent chance of occurring.
Economists will confirm that as the housing market goes, so goes the overall economy. If the housing market slows done and rolls over, expect the same for the national economy.

Shalom,

The Mann