Real Estate, Housing, and Dynamite...

Now you are probably wondering what these three things have in common, so you can will the Prize on "The Million Dollar Pyramid" (if you don't remember this show, I am probably dating myself). To have won the top prize you better have answered: "Things capable of exploding". And of course, we here at Urbanomics hate to be ahead of the public on things but, damn we did it again. Check out an article from over a year ago, BEFORE...the Subprime (aka Interest Only Mortgage) meltdown began and tell me if the crystal ball was working that day: http://urbanomics.blogspot.com/2006/02/huff-puff-blow-houses-down.html

See in that article we were telling you ahead of time that the numbers just don't match. And I know we hate when someone wants to historically prove things with numbers but what's better than learning from the past. But putting that aside what about the common sense element of things. Over a year and a half ago I thought I was the only person left in America that didn't understand how everyone could afford a home except for me...and at that time I thought I had a good paying job. So for your Urbanomics Rule of the Day, please remember, "If It Sounds to Good to Be True, then Run the Other Way". So read on as I explain in an uncomplicated way why real estate isn't as fun as it used to be. First, the problem was the math wasn't working out correctly with a lot of these new loan gimmicks out there on the market. The last time I check paying only interest only works in the favor of one individual...and thats the owner of the loan. So let me get this straight, I continue to pay all my interest off and get no added value of my principal going down, yeah what a steal of a deal. The only time this great plan works is if you plan on selling your place in a few years and don't care about obtaining any income from your home except for the appreciation on what you sell it for. And that would be a great plan if everything in the world was perfect. But unfortunately for most of us the world isn't perfect and that strategy worked for only a few people. Also, even if this strategy does work, the great Warren Buffett teaches us to have a risk premium calculated in every investment we make. So in plain English here were peoples two problems:

1. People didn't treat buying a house like an investment and never factored in a risk premium (Even plainer: Too many damn things can go wrong with those loans for you to actually benefit from them).
2. Unless your an expert, houses should be treated as a long term investment.

Now I chose these two things because it points that most people didn't think about a house being an investment and truly weigh their options on if it was the best investment for them at the point in time. Basically, if interest only was your "only" option you should have been putting your money to better use. Secondly with the risk of interest rates rising (note at that time rates were at historic lows)you will get crushed if you can't sell your house timely.

Here is the ending result folks...the perfect storm happened. Rates being so low for so long began to rise, although they are still historically pretty low. Your interest only terms expired and peoples very low payments increased because they were now paying interest and principal (what they should have been paying in the first place). Secondly, people didn't treat their homes as an investment and realize that homes are not the most liquid investment. This means that you can't sell them very fast...like you can a stock in seconds. So the outcome: 1. people with bigger mortgage payments they can't afford, so they want to sell -> 2. Now we have too many houses on the market and not enough buyers -> 3. If you can't sell your house then the forclosure man comes a callin'.

The banks and mortgage companies aren't in the business of owning homes. So they are attempting to sell these properties as quick as they can. But one last problem...builders such as Pulte, Toll Brothers, and Beazer are continuing to pump out new homes. So with all these people sell old homes, and builders putting new homes on the market, prices for houses can only go in one direction: DOWN. And the numbers don't lie:
1. Median Home Sales Declined drastically from last year to this year
2. New Home inventory levels are very high
3. Existing home inventory levels are also very high
4. Roughly 30 lenders have gone bankrupt

I'm out but if you or someone you know has experienced the headaches of the housing market...please share.

The Price is Wrong...At Least at the Pump

To blog with a purpose is not an easy thing to do. There are a number of things that are on my mind that will need to be discussed. For instance, there are subjects that I don’t into much and that would be politics. I was aware that a debate took place yesterday and the issues are all close to everyones hearts these days.
The others are how quietly the price at the pump continues to rise. As you will probably notice from my Ballin’ on Wall Street articles…I keep my ear to the streets. I have not been afraid to go on record in the past and I will continue to do so in the future. The dynamics of what we pay at the pump is center to what is happening in the world. Most people don’t realize or often try to forget. Often, someone may respond with who cares or its not going to impact ME…and that’s farthest from the truth.
Gas Ain't Cheap

Now with the price of gasoline at roughly around the $3.00 mark we are right back to where we were over a year ago when the entire country was in uproar. People cried this is price gouging and the oil companies can lower the prices if they want too. There may be some truth to this statement, but the overall “Urbanomics” of the situation reads like this:

Demand for oil with continue to be high – With the addition of China as a world power, oil consumption will continue to rise. And a thought others may not contemplate is demand will continue to come from developing nations that often use petrol or “oil” to power gas driven generators needed to provide power due to their country’s infrastructure that cannot provide reliable electricity.
Supply – The supply of oil has been debated but that not the importance. We do know that overall oil reserves will continue to deplete over time and that it takes a lot of resources to extract it. From companies in the Gulf region, to Canada and it’s oil sands, South America, Middle East and Africa. This allows those countries to charge a premium prices for their product. Through a cartel like OPEC the supply will continue to be controlled to effectively regulate price. The last the effects the prices of oil is the global affairs.
Global affairs help move the price of stock because in our highly modern world the investors must also factor in their two cents. With oil rich nations like Saudi Arabia, Iran, Iraq, Nigeria, and Venezuela constantly in the news, investors have helped to sustain the price of oil by factoring in their own risk premium. For instance, situations like the war in Iraq, or the nuclear capabilities of Iran, elections in Nigeria, and leadership in Venezuela can alter the price of a commodity. Oil fluctuates as these circumstances change. Our interpretation of these events helps to determine if oil in the future will be more expensive than it is today.
So I generally no longer say, I don’t care when it comes to global events because they do affect me. I drive a SUV and pumping gas into that thirsty vehicle ain’t easy. Just makes you wonder where our politicians were when alternatives to oil or infrastructure changes such as modernizing our country’s rail systems could have been evaluated. Until then I urge you to take action and not just to get slapped in the face by the oil tycoons. Arm yourself with some money and buy oil stocks. Now I have sold a number in my portfolio after impressive returns of over 100% but with the resurgence of oil take a solid look at buying on any dips that happen in the oil sector. I know, I know…the oil sector is very generic so I am leanin’ wit it, rockin’ wit it towards: Oil Services, Refineries, and International Oil & Gas Drillers. Let me guess, you want names…well guess what we all want names and picks. Here is my watch list including ownership disclosures:

Oil Services – Weatherford WFT (Currently Own)

Refineries – Valero VLO

International – PetroChina PTR, PetroCanada PCA, ChinaPetro&Chemical SNP