Illusions of Consumer Credit Health

Total U.S. revolving debt (credit that can be used repeatedly up to certain amount as long as payments are being made–basically credit card debt) reached almost $1 trillion in September 2008 (at $975.7 billion) and fell to $866.1 billion by year end 2009—a drop of $92.0 billion.  This debt declined even further to $864.4 billion at the end of January 2010. 

Great news—right?  I mean it’s positive news that consumers are reducing their revolving debt—correct?  Unfortunately, the reduction in debt is not consumers paying off this debt, but rather the charge off of these debts by U.S. banks as non-collectable. 

Of the $92 billion decline in 2009, banks wrote off $83.3 billion of that amount—or 90.5 percent.  As far as actually paying down revolving debt, U.S. consumers paid down just $8.7 billion in 2009, less than 1 percent of the balance on the books at the beginning of the year.

Total consumer debt outstanding (essentially, total consumer indebtedness outstanding less mortgages) tallied just more than $16,000 per household in 2009, down approximately $300 from 2008.  But the right-off of just revolving credit was more than $500 per household, so total consumer debt in 2009 rose, net of the right-off of bad loans on credits cards.

Download graph

Bottom line is that we still have a credit-heavy system, and some of apparent good financial news, particularly on the credit side, are but mere illusions.

Why credit-card payoff? Consumers are dumping debt

Trulia Reports That Sellers are Reducing the Urge to Cut Asking Prices Portending a Bottoming of Prices and Setting the Stage for Price Increases Down the Line (NAR Summary)

Fewer Sellers Are Cutting Prices

Newton’s third law of motion states “For every action there is an equal and opposite reaction.”  Take a look at the Jones on Real Estate Blog entry on February 26^, 2010, when I discussed the economic impact of the actions of Congress and the President to ‘protect consumers’ from fees and charges by credit vendors. Part of that protection was a component requiring banks to obtain consumers permission to be charged for overdraft privileges. 

Bank of America has announced that they will no longer allow overdrafts on debit cards.  So that solves the problem of getting consumers permission to charge them an overdraft.  What the CARD Act essentially accomplished was a significant reduction in the availability of consumer credit. 

Banks are not canceling overdraft fees—they are canceling overdrafts.  Period. And to this, no one should be surprised.  Newton sings true again. 

Bank of America to deny debit card overdrafts

The Federal Reserve Bank has purchased a majority of the residential lending packages put together by Fannie Mae, Freddie Mac and Ginnie Mae since early 2009.  Total lending for purchase and refinance one-to-four family homes in 2009 is estimated to tally to $2 trillion of which the Feds bought $1.25 trillion (confirming that historically, half of all lending flowed through Fannie and Freddie).

Good news is that the Fed is not anticipating a quick sales of these assets, as to do so would cause a major decline in the value of these and a rapid increase interest rates

Bad news is that this signals the end of record low rates. 

ANALYSIS – Fed to linger in agency MBS market after exit

The Chinese calendar has 12 recurring animals that are themes for the year and are repeated each 12 years.  This year, 2010, is the year of the Tiger, with last year the year of the Ox and next year, the year of the year of the Rabbit. 

The respective professions servicing the real estate transaction business could have similar but not so uniformly-recurring names.  We should have named 2003 the year of the Lender since a record $3.76 trillion of lending for residential purchases and refinance transactions was completed.  And 2005 could have been named the year of the Builder (with a record 2.176 million total new dwelling units permitted).   Based on home prices, 2010 should be known as the year of the Property Tax Appeal. 

For years if not decades, ad valorem (based on value) property taxes ratcheted up every year.  Today, however, with declining property values, property taxes should decline—as long as the tax rate remains constant (and assuming that exemptions and other potential exclusions and deductions have not changed).  Property taxes are basically the assessed value, then reduced in some states by an assessment ratio, and exemptions—such as homestead exemptions, multiplied by the property tax rate.  As property values decline, so should property taxes. 

The National Council of Real Estate Investment Fiduciary’s report that commercial property values (these are income-producing properties held by pension funds), which peaked in 2007, are now off an average 39.5 percent (see my post dated February 12, 2010 for full details).  NAR reported home prices peaking in July 2006 at $230,200, and settling at a preliminary $172,500 in 2009—a 25 percent peak to now decline.  So potentially, typical property tax payments on housing could decline 25 percent.

The following table takes median home prices as reported by NAR from 144 Metropolitan Statistical Areas (MSAs).   Only those MSAs having at least 25 of the prior 40 quarters were included in the analysis. 

Each state has specific rules as to how to go about appealing property taxes, filing deadlines and reassessment changes.   Most assessors require property-specific comparable sales and do not generally use overall market percent changes.  In addition to professional property tax companies that manage and appeal property taxes for property owners, data sources include Realtors®, local online information sources, appraisers, and in many cases, the assessor’s office or the clerk and recorder’s office.

This is not the time to be nice – this is the time to be aggressive and do what is right.  A change in the assessment rate today will govern tomorrow where you future property taxes will trend. 

That makes 2010 the year of the Property Tax Appeal. 

Homeowners Hold Ground Against Rising Property Taxes

When the government starts paying more and providing better benefits, more and more individuals will pursue government employment.  A report today from USA Today newspaper shows that the average government employee makes 20 percent more in payroll than employees in the private sector.  And that is before benefits.  The US Government spends more than $40,000 per year on benefits for their workers versos less than $10,000 for the private sector counterparts.  Thus the average total payroll and benefit cost of governmental employees is 64 percent greater than US private sector counter parts. 

Should this be of concern to the tax payers?  Yes–since it is our taxes that pay for their jobs.

Compounding this is the increased growth in jobs in the Government sector.  The change in the number of jobs by state (including the U.S. Virgin Islands, Puerto Rico and Washington, DC), from December 2008 to December 2009 found that only one of the 53 entities had job growth in that time—Washington, DC.  While the US economy lost 3.55 percent of all jobs in that period, Washington, DC, grew almost 1 percent (0.86 percent) and was the ONLY positive job growth entity.  So not only are we paying government workers more, we are also paying more of them.  Not only are we borrowing money today to finance both the cost and number of governmental workers, but we are building in a requirement for higher taxes—assuming government does not shrink.  And it rarely does.  

The table below (prior to the article) shows the percent change in jobs from 2008 to 2009. 

Not a good trend for taxpayers.  

Federal pay ahead of private industry

Residential real estate agents and brokers thought the sky was falling when existing home sales dropped from 7.25 million on a Seasonally-Adjusted Annualized Rate (SAAR) in September 2005 to 4.49 million SAAR in January 2009—a reduction of 38.1 percent.  In comparison to commercial’s plunge, the residential decline is akin to a mosquito on an elephant.  Real Capital Analytics reported that total commercial sales activity in the U.S. dropped from $557.8 billion in 2007 to a minuscule $54.4 billion in 2009—a whopping 90.2 percent implosion. 

Good news is that 2010 is shaping up to be better than 2009–but how could it be worse?  Sales are finally picking up.  Bad news is that is it is most all driven by distressed properties.  Good news is that the buying opportunity for commercial real estate today is the best it has been since the late 1980s.  And fortunes were made by those focused investors that took the opportunity to acquire quality assets at bargain basement prices then.  We will once again see fortunes made by the opportunities available today–and likely at least in the next 12 to 18 months.

Rather than the infamous, “Drivers, start your engines,” it is now, Buyers, make the offers.”

We will look back four to five years from now (if not sooner) and slap ourselves for not having bought more.

Signs of Hope Seen in Investment Sales Activity

This is a story that will be repeated on both coasts of the US and in between in coming months declaring that housing markets have stabilized.  Key to this, however, is understanding that the definition of stabilization is an increase in sales activity coupled with a stabilization in housing prices—not a rise in home prices.   

Paramount to defining a market is first defining what is normal.  The last normal period we saw was probably 2002–following the 2001 recession and prior to the long-term unsustainable large number of sales driven by Greenspan’s low Fed Funds rates in a hot economy (hence those sales volumes were unsustainable).  Most important in defining where a market is going is the number of sales—not the price.  Where ever sales go, prices will eventually follow.  Prices lag sales typically by two years.

The first graph shows the number of existing home closings per month in Florida.  The seasonality of these sales clouds the trends.  The average number of sales per month for the prior 12 months (and thus the seasonality aspect is removed) is shown in the second graph.  The number of sales in 2002 was, until now, the last time normal was seen.   Sales have finally returned to the 2002 level—and prices will eventually follow.  The third graph is the weighted median Florida home price.  And finally, the last graph shows the lag effect of home prices.  Note that prices are sticky upwards. That means that prices go up and tend not to readily fall back, but when they do fall they lag the number of sales. 

While the number of sales peaked in 2005 and started declining in 2006, prices really did not turn south until 2008—a lag of two years.  The same is likely true for recovery.  While 2009 saw a return to normal in the number of sales, prices probably do not recover (to normal) until 2012.  Strengthening that statement is the just-commencing wave of Alt A and Option Payment Arm Loan defaults that take place in the next 12 to 18 months (and are thankfully the last remnants of the housing bubble). 

So where are prices going?  If we are correct in saying that prices lag sales by approximately two years, and that sales have returned to normal today, then prices for Florida homes in the next 24 to 30 months will likely return to the $180,000 to $190,000 level (Florida median) and that is conservative.  When that happens, construction commences again.

If my forecast is correct, Florida homebuyers today are looking at gains in value in the next 24 to 30 months of least 20 to 25 percent—at that is an attractive return in today’s economy.  And that price level is still significantly below the $250,000 peak price levels seen in 2005 and 2006. 

Yep—the markets are stabilizing and prices will return to normal.  For the first time in four years, the light at the end of the tunnel is not another train. 

Close to Home: Punta Gorda, Fla., market has stabalized

It appears in tough times that family once again becomes a focus.  Coldwell Banker’s Study finds an increasing trend in buyers searching for homes that comfortably house several generations. 

http://www.marketwatch.com/story/more-buyers-looking-for-multigenerational-houses-2010-02-26?siteid=nbih

Existing Home Sales in Jan 2010 Up 11.5 Percent vs.  Jan 2009 But Down Sequentially 7.2 Percent vs. Nov 2009 — Prices Unchanged Year-Over-Year  — One Month Does Not Make a Trend

Existing-home sales fell in January but are above year-ago levels, according to the National Association of Realtors®.