May 2008 Charleston Market Report

8/9/2019 May 2008 Charleston Market Report

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www.charlestonmarketreport.com

May 2008

In This Issue:

Cartoons

Thoughts While BoredI am NOT an Economist

Be Careful Bottom Callers!

The Spin Stops Here

Fannie Mae: The Next Shoe to Drop?

Oil

Stock Market

Charleston Data


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Thoughts While Bored

* How come Obama never walked out of the "Hate" church?* How did John McCain get such a hot Sugar Mama for a wife?* What agent and company will be the first to start a foreclosure bus tour in Charleston?* What sort of data is The Fed looking at to make their decisions?* How come almost every politician is a lawyer?

* Dogs rule! They always give you unconditional love and never complain.* Crime pays on Wall Street.* Fishing just became much more expensive than golf due to increasing gas prices.* What are you going to do with your stimulus check?* How can our gov't afford these stimulus checks with a trillion dollar deficit?* Did you know 2 million people are behind bars in America?* Maybe we should build more prisons in the US instead of residential houses and condos.

I am NOT an Economist

Let me state that I am NOT an economist, although I did minor in Econ in college. I often get asked thatquestion. Besides, economists are generally wrong when they make predictions. The analysis and predictions I

have made in The CMR over the past two years have been very accurate. Instead of dabbling in theory andmodels like most economists do I "hang out" in reality via supply and demand trend analysis. You would thinkmore economists would utilize this type of analysis since supply and demand is the first thing they teach you inEcon 101. What really helps me see the trends is my background in real estate, appraisals and securities. Thereal key for me as I have stated in the past, is the use of technical analysis, which I learned from the best atDorsey Wright & Associates when I worked for Wachovia Securities Private Client Group. There are only ahandful of us in the country that use technical analysis in real estate, where I fine tuned indicators on my owntime. Very few stock brokers use it in the securities biz as well. I am happy to say that I am currently amember of an appraisal forum that is currently teaching appraisers how to use trend analysis in reports. Theseappraisers are on the cutting edge and are leaders in their field but unfortunately 99.9% of the appraisers in the


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US have no clue how to utilize these techniques. I love to learn and I am currently working on getting myCCIM. I have one class down and three to go! I would encourage everyone who reads The CMR to continue toexpand your minds because "knowledge is power" and it will make you better at whatever you do.

I have to admit I have been real slack updating the monthly and quarterly reports on the website. Since thereare many new subscribers just click here if you want to check out some of the past reports that have been sentout before you subscribed to The CMR.

I am going to jump around to a bunch of different topics this month. I am not going to put any Charleston realestate sales and inventory data in this report since the Q1 2008 was just sent out and is now available atwww.charlestonmarketreport.com if you have not seen it yet.

Be Careful Bottom Callers!

The Charleston Post & Courier ran an article a few weeks ago titled Analyst predicts revival of housing marketnext year.Here are some of the highlights of the article:Mary Graham, the chamber's senior vice president for public policy, also repeated her prediction of a reboundin the new home market by early next year. She said last month, and repeated again Tuesday, that she thought

existing homes sales will start to turn around by the end of this year.

"I think we've already hit bottom," Ford said. "We've been going on about two years in this slump. I think we're

over it. I've heard more positive news from custom builders and volume builders since January than I heard all

last year."

My Comment: What data are they basing these predictions on?? I believe the Mrs. Graham and Mr. Ford areat least one year early in their predictions. I hope they are right but I doubt it. The key for the national andlocal housing market to turn around is lending/credit. The credit markets have to normalize before thehousing market will rebound. The reason this is key is that sales will never rebound if most potential buyerscan not get financing. Even once credit normalizes it will be tighter than the go-go days. We may see an Lshaped recovery where real estate sales remain stagnant after it bottoms out but only time will tell.

The Current Formula: Less sales = Increasing Inventory = Declining home prices = Negative Equity =Increasing ForeclosuresIt does not take Einstein to figure this formula out.Charleston also relies heavily on buyers from out of town selling their home first before they move here so whathappens on the national real estate market scene is important to the Charleston Real Estate Market.

I also think the Charleston Metro Chamber of Commerce should be careful with their local predictions andanalysis. This is the same Charmber who relied on Al Parish to do their local economic analysis work foryears. Dr. Parish is about to go to the Pokie (Jail) for a couple of years for investment fraud where bilked hisclients out of millions of dollars. The guy was managing money or "claimed to be" and never had any securities

licenses. Not a very bright thing for a guy to do who has a PhD. You would think he would have more wisdomthan that.

Opposing views to Mrs. Graham and Mr. Ford:"In general, most markets are pretty tough. We're still seeing pricing pressure out there and I think for the

foreseeable future we're still going to see it."Beazer Homes CEO Ian McCarthy on conference call, May 16, 2008

[Toll Brothers] chief executive, Robert Toll, said traffic levels at its communities were "the worst that we haveever seen."


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"I don't think we're anywhere near a bottom in housing. We're going to have a big inventory of unsold,unoccupied homes that's going to take three or four years to clear out."

Eli Broad, founder, KB Homes, April 28, 2008

"[T]he message is very clear: The single-family housing market is still deteriorating..."

NAHB President Sandy Dunn

"[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to

deteriorate in recent times..."NAHB Chief Economist David Seiders.

I foresee this real estate market getting worse before it gets better, especially on the high end of the market. Inthe Charleston Tri County we have over a year's worth of houing inventory right now and approximately 20months of condo/townhouse inventory. I would probably multiply my inventory numbers I pull from the MLSand tag at least another 5-10% onto them because many agents do not put all of the active listings in the MLSand of course there are the FSBOs. Prices are dropping in many parts of Charleston. When you average allthe sales it does not look as bad as the rest of the country but it will get worse since we are almost past thespring season....Trust me. The main reason it gets worse is as the economy worsens people lose jobs and manyhomes were purchased at the top of the market during 2005-06 with ARMs that are now resetting with higher

payments that homeowners can not afford or refinance out of. Many of these homeowners face a scenario ofnegative equity. (See graph below) So if you want to buy a home in Charleston or anywhere else make sure youdo your due diligence and do not get trapped buying an asset that could fall below the price you pay for it.There are pockets in this market where there are good deals just make sure you and your agent understand thesescenarios.


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Scary Graph of the Month

The Spin Stops Here!

One of the reasons I started The CMR two years ago was when I was an appraiser was I saw so much horribleinformation being produced by different entities in the real estate industry that it made me want to start a sitewhere people could get reliable info. I wanted everyone to have a source of some truthful information about thelocal/national real estate market and the economy. Yes there is a bunch of incorrect info out there.

Below is an example of the quotes the NAR has put out over the past few years that are just not true as themarket has weakened. If you are a member of the NAR you should write them and tell them to just start tellingthe truth. The professional Realtors out there deserve better research from the NAR than what Lareah andYun have been providing over the years. Maybe the truth will set them free.

The funny thing about the graph and comments below is that David Lareah (Former NAR Chief Economist) justrecently said this recently in a May 6 Newsweek article:


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Economist David Lereah was once the housing market's biggest cheerleader. Now he says the bust isn't nearover, and home prices still have a long way to fall. I wonder if he realizes he has no credibility among those ofus that do honest analysis of the real estate market.

"We're not at the bottom," he says. "[People] want it to be near the bottom, but we're not there yet. The leading

indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low? There's

still supply out there in abundance? This thing is going to get worse before it gets better."

Could this be a contrarian indicator that we are near a bottom????? What a change of opinion since his days atthe NAR.Lereah says that the industry may begin to see a slight uptick in sales later this summer, which could signal the

start of the recovery. Home prices, however, will continue to fall. According to the latest numbers from theCase-Shiller index, the average U.S. home has lost around 15 percent of its value since the market's peak.

"We're probably going to end up with a 20 percent [decline], but if I'm wrong it will be even more than that," hesays.

Each quote below corresponds to a numbered circle above.

Tracking NAR Spin

1. "There's no question there is a strong demand for housing from a growing population." -David Lereah, NARChief Economist2. "For the foreseeable future, the demand for homes will continue to outstrip supply" -Al Mansell, NARPresident3. "We've been expecting sales to remain at historically high levels, but this performance underscores the valueof housing as an investment and the importance of homeownership in fulfilling the American dream." -DavidLereah, NAR Chief Economist4. "We are returning to more balanced markets between home buyers and sellers. We feel confident thathousing is landing softly as rates continue to rise." -David Lereah, NAR Chief Economist5. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housingsector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid" -David Lereah, NAR Chief Economist6. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housingsector which remains at historically high levels." -David Lereah, NAR Chief Economist


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"After five years of booming sales, we are now experiencing normal market conditions across most of thecountry most owners can expect steadier gains in home values for the foreseeable future." -Thomas M.Stevens, NAR President7. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annualprojection, which tells us the market is stabilizing" -David Lereah, NAR Chief Economist8. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, therecould be some lift to home sales, but it'll likely take some months for price appreciation to rise." -DavidLereah, NAR Chief Economist

9. Existing-home sales stabilized at a sustainable pace in August -NAR10. "The worst is behind us as far as a market correction" this is likely the trough for sales. When consumersrecognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into themarket" -David Lereah, NAR Chief Economist11. "It looks like we're moving beyond the low for the housing cycle last fall, and buyers are responding tohistorically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory ofhomes on the market is supporting prices." -David Lereah, NAR Chief Economist12. "Fundamentals have improved in the housing market and buyers see a window now with historically-lowmortgage interest rates and competitive pricing by sellers," -David Lereah, NAR Chief Economist13. "We also may be seeing some losses as a result of the subprime fallout. However, this is masking improvedfundamentals in the housing market, with lower mortgage interest rates and motivated sellers." -David Lereah,

NAR Chief Economist14. "Buyers who've been on the sidelines may want to take a closer look at current conditions in their area ifthey wait for sales to rise, their choices and negotiating position won't be as good as they are now." -Pat V.Combs, NAR President15. "The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months ispromising because this was the first region that underwent sales and price weakness after the boom. Now, itappears that it will be the first region to climb back, indicating that other regions could follow a similar path." -Lawrence Yun, NAR Chief Economist16. "The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted ina fairly high number of postponed or cancelled sales?Once we get through these disruptions, we'll get a bettersense of where the actual market is in late fall as conditions begin to normalize," -Lawrence Yun, NAR Chief

Economist17. "Existing-Home Sales Rise in November, Market Likely Stabilizing" -NAR18. "Home sales remain weak despite improved affordability conditions in many parts of the country, but wecould get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed fundsrate," -Lawrence Yun, NAR Chief Economist19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NARSource:

Tracking Realtor SpinJames BednarNew Jersey Real Estate Reporthttp://njrereport.com/index.php/2008/04/09/tracking-realtor-spin/

Fannie Mae - The Next Shoe To Drop?

Effective June 1, 2008 Fannie Mae will roll out their new underwriting guidelines and they are going to bedifficult for originators and borrowers to deal with because Fannie is getting stricter with their lending standardsdue to the recent lending implosion. Fannie also has had its leverage guidelines increased by OFHEO in aweakening economy. With home prices declining around the country and a quasi government agency that ispoorly managed being given the green light to increase its leverage is a very dangerous sequence of events.When you combine the Fannie Mae's recent Q1 2008 earnings and take a peak at the big picture you may havethe making of another "Anatomy of A Collapse." Let us all hope and pray this collapse does not occur becausethen the real estate market would really get messed up. I foresee the nationalization of Fannie and Freddie inthe future via another government bailout.


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Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates homeprice declines.

From Kevin Depew at Minyanville.com:"The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller index

versus Fannie Mae's own index upon which their price projections are based. According to Fannie Mae,

because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas.Fair enough.

Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% home

price decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There's just one catch with

those projections increases. They strip out the impact of foreclosure sales.As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie

Mae index."


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Below is the most recent stock chart on FNM:

Here are the recent Fannie Mae highlights:

May 6: FannieMae Q1 net loss $2.19 billion; expects worse for next year. Cuts dividend, raises $6bncapital. Shareholder equity now below 0--> regulator said it will loosen restrictions on Fannie Mae'scapital once the company has raised the $6 billion. FreddieMac reports May 14.

OFHEO Annual Report, April 15: FannieMae and FreddieMac "remain a significant supervisoryconcern." OFHEO director Lockhart in March: companies may need $10 billion each.

March 24: Federal Home Loan Banks allowed to increase purchase of Fannie&Freddie guaranteed MBSby $150bn

March 19: F&F regulator cuts the companies' surplus capital requirement to 20% from 30% to helpexpand their combined $1.5 trillion in mortgage investments and revive the home-loan market. Initiativeis expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securitiesmarket--> together with lifting of cap limits (see below) this should allow the GSEs to purchase orguarantee about $2 trillion in mortgages this year.

Shenn: The regulator to Fannie Mae and Freddie Mac removes limits on their combined $1.5 trillionmortgage portfolios, despite $3.55bn loss at FannieMae, $2.45bn loss at FreddieMac (with more lossesexpected.) Agencies hold or guarantee about $4.9 trillion in home-mortgage debt.

Interest rate on new prime mortgages is based on 30year Agency-backed MBS minus 1-year Treasurybill--> spread widened to 22year high in March on credit concerns.

Source:http://www.rgemonitor.com/175?cluster_id=7169


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Oil

One of the predictions I made for 2008 in the Q42007 CMRthat was emailed on 1/20/08 while oil traded foraround $88 per barrel was:* "Oil will hit $125-$150 per barrel. Sell your Suburbans in Mt. Pleasant soccer moms!"Not bad huh? I guess it depends whether you were long Crude or are just trying to afford filling your car ortruck up each week.

Perception is reality. Confidence in the consumer is clearly shaken by the sharp increases in food and gas

prices. The CMR has talked about this way before the main stream media picked up on it. We all feel poorerwhen the neccesities in everyday life such as gas and food erode our monthly budgets. Since oil prices are theroot of this problem I feel real estate will have a difficult time recovering until these inflationary trends end.Why? One of the main reasons food prices are increasing is because of the increase in fuel prices. It is a trickledown effect where the retailers have to pass on the increase in transportation costs to the consumers via raisingthe retail price of everything in the grocery store.


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A major problem with oil is that it basicly funds our enemies around the world such as Iran and Venezuela andterroism from such sources as Saudi Arabia. George W. Bush and all the politicians say we are "addicted to oil"but nobody comes up with any solutions for alternative energy. All we do is cry and complain about howexpensive gas and oil is right now. We put a man on the moon over 40 years ago and we invent new technologydaily but we can not seem to find an alternative fuel source for our cars. I find it ridiculous and suspect. Heck,I have been in golf carts that go almost 30 mph so why can't we make them go 70-80 mph and make cars out ofthem?


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The reality is that Canadians pay approximately the equivalent of US$4.92 per gallon of gas and the Europeanspay approx. $9.00 per gallon. Here's something that should make you nervous-this is the first year thatemerging markets will use more oil than the U.S. I'm talking about countries like China, India, Russia, and partsof the Middle East. According to the International Energy Agency (IEA) those countries are expected toconsume 20.67 million barrels a day this year, an increase of 4.4%. The IEA predicts that U.S. demand will

contract 2% to 20.38 million barrels daily.Remember that there are three billion of them and only 300 million of us. Per capita, we're still using a lot moreoil than our friends in India and China. The really bad news is they want to use oil the way we do.*Chinese drivers bought 5.5 million cars, minivans and SUVs and three million commercial vehicles, up fromjust 1.6 million vehicles sold in 1997.*Sales are expected to grow 15% to 20% this year.*In the future, China's auto sales are expected to grow by one million vehicles annually through 2015.*Meanwhile, India is poised to zoom past China as the world's fastest-growing car market. Sales of passengercars in India increased 12.17% to 1.5 million in this past year.*As a result, China's oil imports are expected to nearly double by 2020, and India's oil imports are projected tomore than triple over the same time period.

Click Here for a cool graph on the history of oil prices.

Another reason behind the surge in oil prices has been The Fed's policy of cutting rates which has weakened theUS Dollar. Many economists believe that the Fed will halt cutting rates and maybe even start raising them dueto inflation concerns. This would be good news for the dollar if it occurs. Clearly the cuts from the Fed are nothelping the US Real Estate market as home prices continue to decline in most markets and we all areexperiencing the pain of inflation. Maybe the Fed will get a clue and fine tune their policy.

Each of the red numbered arrows reflects the size of Fed interest rate cuts in the last six monetary policydecisions. Each box encapsulates those trading days surrounding the decision.


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Source:Money and Markets

Stock Market

Sell in May and Go Away?

"According to the Ned Davis (NDR) database, starting in 1950, $10,000 invested in the S&P 500 Index everyMay 1st and then liquidated every October 31st would only be worth $10,026 today. That's right: had youstayed out of the stock market from November through April and only been in the market from May throughOctober, you would have had no change during the last 57 years. 21 of those years would have been negative;

36 were positive. This happened during the same period that stock prices were rising about 75% of the time andmarkets made extended upward moves.

Another Accurate Prediction from The CMR

On 1/208/08 I wrote:*"The stock market is oversold and there will soon be a nice rally in what appears to be the beginning of abear market. This rally may be spurred by the Fed dropping rates 75-100 bps. Got cash?"* Since then the S&P 500 is up 7.5% while we are in the midst of a recession and credit crisis.Again, this is why I use technical analysis. If I listened to the doom and glood of the main stream media Iwould never had made that statement.* Instead of dropping rates 75-100 bps The Fed dropped them 200 bps. OOPs! That is why I call him Ben"Bunyon" Bernanke.


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Charleston Data

Just like The Factor with Bill Oreilly The CMR "Is Always Looking Out For You." I found this cool websitefor rent data which you can check out at www.zilpy.com. Below is a rental heat map for Charleston. Reallycool stuff!


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Just in. It's over! Do the math honey!

Pic courtesy of The Drudge Report

Thanks,brad


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Disclaimer

The research done to gather the data in The Charleston Market Report involves examining thousands oflistings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data andinformation within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market iscyclical and will have its ups and downs. Past performance cannot determine future performance. The purposeof the Charleston Market Report is to educate you on current and consistent market conditions by reportingleading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or other

professional services. If legal, tax or other expert assistance is required, the services of a competentprofessional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not aproduction of my employer. Statements on this site do not represent the views or policies of anyone other thanmyself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Everyeffort has been made to make this report as complete and accurate as possible. However, there may bemistakes. Therefore, this report should be used only as a general guide and not as the ultimate source formaking money in real estate.

Documents

May 2008 Charleston Market Report