Saturday, October 17, 2009

The Coming Housing Bust - Business Week

I guess it's time that I out myself. I have been writing this blog for four years and in that time I spoke about the housing bubble well before it was a national concern, I wrote about GM's failing management strategy, oil prices, and banking failures. There will be much more to discuss as the US recovers from the "Great Recession".

Two weeks ago my phone rang. It was a Business Week reporter who wanted to discuss a thought I had posted on the Hot Property blog. All the research I am doing shows that we will have a large housing problem as soon as the boomers begin to retire in mass. In short, there are too many large suburban and exurban homes that will not be desirable to younger generations. This thought was first established in a 1989 paper by N. Gregory Mankiw and associates titled "The Baby Boom, Baby Bust, and the Housing Market". This paper surmised that as baby boomers aged and moved into smaller houses population growth and demographics would not be strong enough to backfill into these homes. We know now that this paper was premature yet I believe it's still relevant.

I spoke for a few minutes with the reporter about my thoughts on the matter. We had a great discussion and I'm pleased that the article was more or less on par with what we discussed.

It's even more relevant today than it was then - we are in a long term energy price spike. Higher energy prices have always resulted in a conservation movement in this country and I don't expect this time to be any different. This could be the start of a long downhill trend for the housing market, regardless of any short term upticks or stabilization of the market.


Monday, October 05, 2009

The Economics of Camping

Another summer has come and gone and while camping is winding down in a majority of the US, it's just coming into season in Florida. Camping has always been one of my more enjoyable hobbies and I had an interesting exchange with a campground host at my last outing which lead to this post.

It should be clear to everyone by now that we are in a recession (or maybe just exiting one). Why then have camping rates risen so much over the past year? The Florida Parks Service has raised campground fees at many campsites 10% or greater, with one park (Rainbow Springs) having a 20% increase in camping fees. Why would the parks be raising the camping fees when the economy is weak. I had a wonderful conversation with an employee of the Parks service at the headquarters in Tallahassee when I called to ask him this exact question. He clearly stated that costs have risen since the previous rate hike, especially utility expenses. Check. He also stated salaries of the park staff. Check. I asked him what sort of falloff in visitors they would see from this hike (the price elasticity) and he admitted it would probably be brutal in the beginning before starting to come back. Double check.

I have to believe the parks service had someone run the price elasticity of demand to determine if total revenue would increase or decrease with an increase in price. Without the snowbirds coming, a decrease would be guaranteed. Yet, so many snowbirds come to Florida with their RVs and I cannot see them turning around just to save another $6 per night. There is no easy substitute product for Florida RV sites, and private camps often have high fees. Sure, maybe some will go to Texas but if an east-coaster tries to save a few dollars on camping they'll probably spend more on fuel. I do believe there is a price at which people will begin to feel camping is too expensive, and I believe we have crossed that point.

Let's take the hypothetical John Doe family. Mom, dad, and two kids. Assuming their camping purpose is to save a little money when visiting Disney World, let's see how much they would save by camping. For the parameters of the model, we will assume that this family will camp 2x per year, that camping gear lasts 5 years, and they would not use the gear outside of camping. Let's look at the expenses of the Doe family:
Tent: $75
Cooler: $20
Sleeping bags $20x4=$80
Other supplies:$10 per night (includes stove, lantern, firewood, charcoal, plates, napkins)
Camping site fee: $30 per night

We're going to remove food from this model as that is required whether camping or not.

The model looks like: CN = ((T+C+S)/10)) + O + S
Taking the total supplies the cost to camp (T+C+S) is $17.50 per night. Add in supplies and site fee and we arrive at a grand total of $57.50/night to camp (CN).

It's not too hard to find hotels close to Disney for $57 a night. The only places to camp around Disney for $30 a night are at least 1 hr drive away from the parks. In almost every circumstance, except as noted below, it would be equal or cheaper to stay in a hotel. *Exception: the Doe family gets immense enjoyment out of camping, which cannot be quantified in this model*

Thesis: Many campgrounds are going to price themselves out of the market.

Tuesday, August 25, 2009

What's really going on with the Housing Market

The past few days have seen a flurry of news articles about how housing prices are "up" again. What exactly defines "up"? Just a shrewd bit of reporting. According to this Reuters article, prices are up 1.5 in June vs. May. The article does state that housing prices are still way down year over year. Since when did we start to compare individual months? Could it be that housing prices were up in June since May was a cooler month, and warm weather is known to draw out shoppers? I don't know. Maybe people were buying less foreclosure homes in June vs. May, causing the numbers to turn positive. Who really knows?

What I do know is that the only numbers that matter are year-over-year (YoY) numbers. Until this turns positive, don't believe for a second that a housing recovery is anywhere close.

Ironically, this article states that "23% of mortgages are delinquent in Florida for the second quarter of 2009".

I have a feeling this housing market correction is in the 3rd inning of a 9 inning game.

Wednesday, April 08, 2009

Inventories down, but demand up?

There's an interesting article in the WSJ today about businesses that have cut inventories so much that at the current rate of consumption there will be a production rebound in the next few months.    The article said that 2/3 of CEO's expect demand to soften in the next 6 months while only 1/3 expect it to strengthen.  The best quote was from the Josam Corp CEO (maker of industrial drains), who said he believed the worst is behind us.  

That's my position too.  

I spend too much time reading news and comments on the Internet message boards, but I am astounded at the pervasive negativity that so many people see to have.  I posted on one forum that I think the first quarter of 2009 will be the bottom (viewed in retrospect) and I was immediately flamed by those who "know better", asking me to put my money where my mouth is.   I have done just that (via the stock market).

In Spring 2003, negativity was at levels seen today, with common perception that the economy would never recover, only to start a sustained bounce that exact month that ended the year with the largest GDP growth since 1984 (7.8% in 3Q 2003), and 20% rise in Dow for the year.

In fall 2007, as the economy was quickly decelerating, there was a high level of positiveness even though all the data pointed to a huge, and I mean HUGE credit crunch in the making (starting in July 2007), and housing price declines on the way.  

In summer 2008, people were talking $5/gallon gas for the foreseeable future.  (Note my posting in July 2008 that oil would be below $100/brl by fall, and in my thinking, I wouldn't have imagined the fall to $30, I expected somewhere around $60-65). 

My point is, using what I call my 'human-emotion' index, which is not scientific by the least, but if one goes against the common thought in society we can see data and turning points missed by the mania of the moment.   That's what I see today.

*Sorry, I don't like to WSJ articles since it requires a subscription, but the article is titled "Glut of Goods is Easing".  

Thursday, March 19, 2009

Long Time

I can't believe I haven't updated this blog since July 2008. At that time, I was overseas for a while and had some free time in the morning, but since I've been back in the 'States I've been busy. I'll try and spend some time writing every day, but I'm not sure where to start.

Let's start with the bank failures. As predicted, some major banks have failed (WaMu, Wachovia) and mainly because of the mortgage mess. WaMu was well known for thier lax lending standards and aggressive expansion. Why WaMu sees a need to open a ton of branches in Florida is anyone's guess, I have noticed that Chase has shut many of them down. Wachovia was brought down by the Golden West acquisition.

Bank of America so far isn't choking the way I expected on Countrywide, but this is likely because of government help. Recently, BofA accounced they will retire the Countrywide name, which is a prudent considering they were one of the the largest offenders in subprime, liar's loans, etc.

Where do we go from here? Citi is in major trouble, BofA isn't far behind. There will be more failures. An upcoming wave of mortgage defaults will stress all the banks. We are just now seeing resets in 2007 issued loans, and all my sources tell me the only thing being issued then was fraud. Time will tell, but its' not smooth sailing ahead. It will get better, but there will be some pressures in the short term.

Oh, and oil is up to $50/brl today. See my post from July 13, 2008, and who would have thought oil moving up to $50 would ever happen again?

Monday, July 28, 2008

The Banking Crisis - Where will it end?

There has been lots of discussion about the banking crisis for the past year so let's take a look at some of the primary causes of this crisis and what it will take to end it.

First, the banking crisis was caused by lax lending standards and nothing more. Many people were approved for mortgages they never should have received had banks been following traditional underwriting guidelines. This was caused by the global glut of savings looking for some kind of return, however small, with a secondary cause being that banks were more than happy to loan out the money with little to no research into the actual ability of the borrower to repay. Some pundits have cited over-reliance on standard indicators such as a FICO score but to me that's treating the symptom and not the disease - if people want to receive a loan, they should have some kind of skin in the game in the form of a downpayment.

Another contributing factor was the ability of banks to package these toxic loans into securitized assets that received good ratings from the likes of AM Best and S&P.

The real question is when will this crisis end? It will end when all these toxic loans have been written off the balance sheets of the banks. This will require massive (read: trillions of $$) losses from the banks and the best indicator of this will be when the masses begin to believe that it will never get better and banks are giving out very few loans. I cannot begin to predict when that will happen, but as a SWAG I would say sometime in fall 2009 which gives us another 12 months of interesting lessons in history from which people should, but will probably fail to learn from in the future.

Thursday, July 24, 2008

Grad School - The End is Near

Some of you who have followed me for a while know I am finishing up a graduate degree in Economics.


I intially began to study econ in 2002 trying to understand what happened in the dotcom bubble and how to keep it from happening again. Then we had the mother-of-all-bubbles in the housing mess and I was really curious to take my education to a higher level and I joined a Masters program in Econ in fall 2006. Fast forward two years and I am down to my last class. I will not write a memoriam until I complete it all but I can say it seems like just yesterday I was starting and today I am looking at the finish line. My understanding of economics has increased by magnitudes and I have a much more critical mind in determining what is happening in the economy today and actions taken by the various players.


For instance, Hank Paulson has been widely criticized for the Bear Stears bailout--or buyout, however you see it. Media reports that he wanted a very low price ($2) paid to shareholders to force them to take a loss and send a message of moral hazard throughout the markets - i.e. that companies that make bad decisions will have to pay. To the average lay person it looks like some people are walking away with stuffed pockets but sending a message out about losses definately causes a strong market reaction.

Economics has provided me with a large set of tools with which to better understand the markets and why people sometimes act the way they do, or a theory called rational expectations.