Look at the Numbers

A professor counseled us to determine what the numbers say for ourselves instead of listening to the opinions of others, and I encourage you to do the same. The Case-Shiller composite index just came out so... I took the liberty of converting to a more understandable format – the actual price during each period assuming each area’s price started at $100,000 three years ago. This makes it easy to really see what has happened.

Here are the data:

	3-years earlier	2-years earlier	1-year earlier	3-months earlier	1-month earlier	Apr-11
Washington DC	$ 100,000	$ 83,105	$ 89,176	$ 90,199	$ 90,059	$ 92,770
San Francisco	$ 100,000	$ 71,954	$ 84,904	$ 81,010	$ 78,859	$ 80,200
Atlanta	$ 100,000	$ 85,276	$ 85,497	$ 81,179	$ 81,131	$ 82,470
Seattle	$ 100,000	$ 83,188	$ 80,829	$ 75,411	$ 74,053	$ 75,260
Denver	$ 100,000	$ 95,067	$ 99,229	$ 95,515	$ 93,830	$ 95,200
Cleveland	$ 100,000	$ 89,519	$ 95,635	$ 90,537	$ 88,121	$ 89,170
New York	$ 100,000	$ 87,659	$ 86,730	$ 85,119	$ 83,666	$ 84,310
Dallas	$ 100,000	$ 94,899	$ 98,114	$ 94,727	$ 93,700	$ 94,140
Minneapolis	$ 100,000	$ 77,921	$ 85,639	$ 81,354	$ 75,749	$ 76,090
San Diego	$ 100,000	$ 79,994	$ 89,387	$ 86,970	$ 85,229	$ 85,570
Los Angelos	$ 100,000	$ 78,719	$ 84,845	$ 83,911	$ 82,865	$ 83,080
Portland	$ 100,000	$ 83,982	$ 83,640	$ 77,663	$ 75,871	$ 75,970
Phoenix	$ 100,000	$ 64,748	$ 68,220	$ 62,940	$ 62,154	$ 62,210
Boston	$ 100,000	$ 92,292	$ 96,774	$ 95,902	$ 92,866	$ 92,680
Miami	$ 100,000	$ 72,736	$ 72,366	$ 70,500	$ 68,494	$ 68,350
Charlotte	$ 100,000	$ 90,038	$ 88,034	$ 84,454	$ 82,514	$ 82,250
Tampa	$ 100,000	$ 78,661	$ 76,802	$ 72,281	$ 71,135	$ 70,850
Chicago	$ 100,000	$ 81,342	$ 80,052	$ 76,964	$ 73,501	$ 73,200
Las Vegas	$ 100,000	$ 67,832	$ 62,055	$ 59,885	$ 58,648	$ 58,220
Detroit	$ 100,000	$ 74,579	$ 72,330	$ 72,135	$ 68,926	$ 66,920

The bad news, most of the lows have occurred in the subject month or one month prior. Translation: it isn’t the bottom until there is an uptick.
The good news is the declines are diminishing which usually portends a bottom.
The other good news is diminishing declines portend smaller declines going forward. I wouldn’t put much credence in the Chicken Little “another twenty percent drop to go” theorists.
But don’t take my word for it. Draw your own conclusions. My professor would be proud of you.

Light at the End of the Tunnel

There are a lot of tunnels in the vicinity of my East Tennessee home town, and often we romanticize the phrase light at the end of the tunnel. Today I want to talk about the reality of tunnels and what the other end looks like for the housing market.

First, long tunnels take us from one place to another and the landscape is often different at each end. The housing landscape parallels this. We left the realm of easily financed McMansions and are going to the land of optimized housing decisions – from Crazytown to Rationality. Those who expect to see the same housing market on the exit end of the tunnel will be surprised.

Secondly, even the climate can be different from one end of a long tunnel to the other; sunny going in and cloudy on the other side of the mountain. The financial climate fits this description. On the exit end, the financial climate is overshadowed by weakened asset values, greater banking restrictions, tightened lending standards and a hurricane of sovereign debt on the distant radar. I even hear rumblings of eliminating the interest deduction for housing. Not exactly fair weather.

But on the positive side, we do generally exit tunnels. (Anyone who has not, raise your hand. Oh, you're not here!) We begin to see light and glimpses of the landscape. In the last ten days , the Wall Street Journal cited three encouraging glimpses:
• Home sales in the $50,000 to $100,000 range actually rose! While this is somewhat propelled by foreclosures falling into this price range, I believe it also foreshadows a trend to smaller, more rational housing decisions. (See the previous blog about Europe.)
• Lewis Ranieri, the "godfather" of mortgage finance for his role in pioneering securitization and mortgage-backed securities, is exploring the creation of funds to provide higher interest rate mortgages to less qualified applicants – which may be darn near all of us. This is a great sign that the financial market sees an opportunity in housing and may step in, albeit slowly, to fill the current void of mortgage availability.
• An article appeared stating that lack of availability of mortgages was hurting the housing market – duh! While this is not a revelation, the magnitude of the problem is. An example given was an applicant with an 800 credit score and 50% downpayment being denied. Makes Ranieri seem even more prescient, eh?

So are these lights at the end of the tunnel? Highly likely. They show a changing landscape (home prices), a responding financial market and pent-up demand. I can’t help but like it. We just have to keep moving forward.

Lessons from across the Pond

Often our blog is a one way communication but today is different. Today is simply a question – what is the home of the near future? Over the past several decades America has moved from simple flats to small suburban homes to McMansions and then a crash. Taking the long view, we must ask ourselves what is the ordinary home in America’s future.

To help us with this question, we can look at other countries and how they have evolved. While our situation is different, we can get some good ideas from beyond our borders.

There are a number of lessons from Japan, but that model may not be applicable. Japanese systems of finance, land use and intrinsic value are vastly different from the US. A better model may be Europe where the culture is more similar to ours. Given this huge assumption, I will venture some thoughts:

• European cities developed different land use patterns due to transportation. Although autos and open spaces beckoned, most people remained close to the cities and used public transportation. As such, they became more immersed in the urban culture with ‘living areas’ other than their homes.
• Europeans never drank the Kool-Aid of 30 year mortgages with tax advantaged interest, so there was no artificial stimulation of home investment. Instead, home investments were weighed against all other spending and investment decisions and optimized in that context. This resulted in smaller, more durable dwellings which delivered greater value over the life cycle. In fact, many European homes seem to have almost endless life cycles due to refurbishments and upgrades (as opposed to replacement).
• Lastly, US land investment may also have been skewed by the above factors. Expansive subdivisions with relatively large lots make sense only if they can be easily financed. Otherwise, the investment in roads, water lines, sewer systems, power distribution and communication distribution appears excessive. Case in point -- the available subdivisions throughout the nation which have been stranded by the recent downturn.

So what will homes in the US look like going forward? Maybe that is the subject of another blog. I’m thirsty and need some Kool-Aid.

Supply Lines and Quality

Usually a title such as this is an introduction to an esoteric discussion of supply chain theory and its relationship to quality; today’s blog is much simpler.

This past week we had a water supply line under a vanity come loose and flood a new home that had been in place, with water connected, for about a week. It was a mess but fortunately no major, permanent damage was done. I visited the site and the builder handed me the culprit – a polymer line which relies upon a compression fitting to seal and provide pullout resistance. Evidently the fitting was tight enough to hold but worked its way loose over the week.

As a company, we could respond in different ways to this situation. We could ignore the matter and hope it was an isolated instance, we could reprimand our plumber (who regularly does a good job) or we could reexamine our materials and processes. As you may guess, the first two options are insufficient. Ignoring the matter just continues the chance of another problem and reprimanding focuses upon the person and not necessarily the problem. Instead, we looked at our material and processes.

Immediately, we changed away from compression fittings. Yes, the new lines cost more but we know they won’t have the specific problem because the line is attached to the fitting in a more positive fashion. We didn’t hem and haw about; we just did it. Secondly, we reexamined our processes to determine if additional checks were needed. The bottom line – we focused on continuous improvement.

While this may sound like a simple and silly example, I am reminded of a phrase from my high school Latin teacher:

Inch by inch, life’s a cinch; yard by yard, life is hard; mile by mile, life’s a trial.
We are working to continually improve inch by inch. It will put us far ahead of our competitors.