More Anecdotes

Judging by the superb “quality” of the responses to “Two Anecdotes” (several highlights appear a bit later), I thought it would be appropriate to follow through with a few more anecdotes.

The first set is from my friend George Palous at Freebuck.com:

George Palous:

“Mish, I know that you have been following the troubles in the restaurant biz. Here are a couple anecdotes for you.

“I had to meet with an associate for lunch across town, so we agreed to meet at an intersection where we knew that there were a number of chain restaurants. We agreed to meet at the Olive Garden. (Love their salads.)

“We got there and the Olive Garden was closed down, shuttered, and the sign removed. Next door, there was supposed to be a Cracker Barrel; well, the last time I looked, there was one. No Cracker Barrel, no building, just an empty lot. We drove over to the Coyote Grill, closed. Finally, found that TGI Friday’s was open. I’m not a fan of Friday’s, but when you are hungry, you take what you can get. You would expect that Friday’s would be packed on the lunch hour, since the three local competitors were closed. But there was plenty of room and quick service. My associate knew the hostess, who said that there were a lot of patrons coming in from the other restaurants, but it was still slow.

“This is a busy intersection right off the freeway exit near plenty of office buildings. Prime location. These restaurants have been in business for at least a decade. They are well-capitalized national chain restaurants. That they all closed in such a short period says a lot about the state of the industry.

“P.S. Just went past a freshly closed Outback Steakhouse. Once again, it was in a prime location on the freeway in an affluent suburb.

“In a related industry, the Minnesota nightclub business is in free fall. I am a part-time weekend warrior with a guitar and I know this industry pretty well. The nightclub industry has been in a long, slow decline since the 1980s as a result of raising the drinking age, aggressive DUI enforcement, and poor demographics. But the change in business over the last year has been shocking. Patronage appears to have dropped dramatically all over the cities. Many of the area’s most venerable watering holes are now in bankruptcy. Many are closing permanently. A new smoking ban was just introduced in St. Paul and Minneapolis city limits that has devastated the urban nightclub scene. But things are not much better in the suburbs.

“Now we are starting to see a phenomenon that I never expected: lower drink prices. Not everywhere, but in many places. They start in the form of aggressive drink specials. $2 on a weeknight or $1 Tuesday drink and sink. Then bar owners see that cheaper drinks really do increase traffic, so they lower the everyday price. I think that we are seeing the beginnings of a price war. Unheard of in this business.

“There is a new trendy mega-nightclub that features national musical acts. I know some of the people who run the place, so I often get complimentary tickets for shows. Over the summer, I got free tickets for Cheap Trick, Pat Benatar, and Head East. I thought that I was a real VIP until I found out that most of the audience also got comp tickets, and the place still wasn’t full for any of the shows. These are big-name national acts that should be able to easily fill a 1,000-seat club, particularly with free admission. This shows not only how weak the nightclub industry is, but also the concert biz.

“Consumers in this part of the country seem to be cutting out a lot of discretionary entertainment. Nightclubs and restaurants may be the early warning signs of a more severe downturn to come. What’s next? Sports?”

Mish:

Thanks much, George. Lower drink prices, huh? Price wars? Gee, who woulda thunk that? I guess we will see about sports.

Of course, you are talking Minneapolis (for now, anyway). I wonder what Rush Street, Chicago, looks like now. Anyone out there with some anecdotes? If so, send ’em in. I suspect drink prices in the big markets will be the last to go, but I have no doubt that restaurants, grocery stores, condos, strip malls, nail parlors, etc., are seriously overbuilt almost everywhere.

Anecdotes do not make a trend, of course, but I suspect we are seeing the start of a SECULAR trend change away from consumption. That idea led me to some bold predictions about prices in “Inflation du Jour.” It is way too early to tell, but price declines — whether they occur or not — simply are not crucial to the deflation debate. As long as credit keeps expanding, inflationists are correct.

Let’s move on to the next case in a post made by Smithosity on the San Diego Creative Investors Association Message Board. This one is a classic. Please tune in:

Smithosity:

“I am quite new to real estate investing. It would seem that I know one-tenth about R.E. investing as many of the regular contributors to this board, and even less than the ‘experts.’

“Sometimes, however, I think that the ‘experts’ should just spend one week in my office observing the financial profiles of our refinance applicants. I believe their outlook would be much different.

“Most people simply cannot believe the profiles that we see.

“I am the sales manager of a branch office of a top-10 national lender.

“My office of seven loan officers takes plus or minus 100 loan applications per week, 90% of that coming from cold calls.

“Of the last 100, I have taken some simple statistics and have found the following:

· 68/100 had LTVs over 80% at time of application
· 16/100 had LTVs over 100% at time of application
· 78/100 had back-end DTIs over 55%
· 31/100 had back-end DTIs over 70%
· 23/100 had FICOs under 500
· 81/100 had credit card debt above $10,000
· 54/100 had credit card debt above $20,000
· 18/100 had credit card debt above $50,000
· 66/100 had pay-option ARMs
· 27/100 had pay-option ARMs and mortgage lates
· 22/100 were either in forbearance or had been in forbearance within the past 12 months.

“We took 14 applications today and we cannot qualify a single borrower for any type of loan. We are subprime; in fact, sometimes I say we are sub-subprime. We can qualify almost anyone for a loan. Not today.

“Let me tell you about just one borrower from today:

· Husband and wife
· Husband on fixed-income military retirement $1,800/month
· Wife makes $9,500/month as a registered nurse
· 5 properties with $3,400,000 in mortgages
· All mortgages currently have prepays
· 8 interest-only mortgages
· 1 option ARM deferring $3,500/month
· 3 in Chula Vista and 2 in Escondido
· No more than $75,000 equity in any of the homes (verified by comp checks with 3 appraisers)
· All properties with front-end LTV over 90%
· $65,000 credit card debt and $672 Mercedes payment
· One property had 3 mortgages, one of them hard money
· 621 mid-FICO
· 2×30 in the past 12 months
· Not a dime in the bank.

“They have been making mortgage payments with their credit cards and refinancing to pay off the credit cards. They are at the end of their rope, but refuse to throw in the towel.

“This is not even an ‘extreme’ example. I could show you dozens of these every single week.

“I just wish the experts would see what I see. I think the statistics released would be different.

“Granted, I only see applications from San Diego and Imperial counties, but this is just getting out of hand.”

Mish:

Thanks, Smithosity. People should go and check out some of the comments to that thread. Her credentials were attacked and defended.

It seems some of the real estate bulls are getting more than a little testy these days, judging by responses to posts on my blog and to Smithosity. Here are a few samples, all responses to my blog. The first is in reference to my brother-in-law, who passed away unexpectedly last week with a massive heart attack at age 55. He was not a smoker and seemed like he was in good health.

“Hey Moron,

“Here’s hoping that the next person to have a heart attack is you. Get a life, and quit posting 100 times a day. Your wife’s gotta be some kinda ugly.

“Aron”

“Are you the idiot who posted earlier today that home prices are going back to 2000 levels? Do you have any basis, or do you just pull numbers out of your fat ass? No educational accomplishments. No professional accomplishments. But a wannabe economist. Go back to wedding photos, jackass.

“Aron”

“Any slack in today’s housing market will be more than offset by tomorrow’s economic expansion. You loyal Mish supporters can defend his doom-and-gloom scenarios forever, but that only proves that your lives must be as shallow as his. Misery loves company is an apt aphorism for this kind of loyalty.

“Realist”

“JWM in SD argues for renting over buying. I’ll bet he’s a low-wage renter with little or no hope of ever owning a home in South Dakota, due to his below-average income potential. You see this attitude wherever the cost of real estate reflects a high-quality lifestyle. I understand that Mish has his roots in Danville, Ohio, America’s armpit (Greg’s Note: Mish is from Danville, Illinois.). My recommendation: Move to a locale that you can afford. Stop criticizing those of us who earn enough to live in a deluxe neighborhood. In other words, your beer income won’t be the standard for those of us with a taste for champagne. We’ll just keep on working harder and smarter.

“Realist”

I have to admit to laughing out loud at the idiocy of someone wishing me dead because I think real estate prices are headed back to 2000 prices (or lower). On a more serious note, I wonder if the anecdotes from George Palous might be providing a road map. First it was Detroit, Ohio, Indiana, Colorado, and Georgia. Then the bust spread big-time to Florida, where it was said that a bust simply could not happen, and now we are seeing places like Minneapolis and Phoenix reeling.

How many people were employed by those restaurants in Minneapolis? What happens to them? What happens when that spreads from city to city to city, as it surely must?

Right now, things still SEEM OK. Credit is still expanding. Commercial construction has not hit a slowdown YET. I think “YET” is the key word. It makes sense for commercial properties (restaurants, nail salons, strip malls, etc.) to lag. As subdivisions are built, retail follows. We are adding a huge new Wal-Mart near us. I am sure it will employ hundreds. But at what expense? When I moved to the area eight years ago or so, the one or two grocery stores were jampacked. Now I can walk in any grocery store (all have eight lanes) and many times only 2-3 lanes are open (with at most a one-cart wait), even at what used to be the busiest times.

Population has soared, but I bet the number of grocery stores has gone up 300%. Our population has not gone up 300%. Everyone is attempting to steal others’ (or even their own) customers. This personal anecdote suggests the retail and restaurant expansion boom is on its last leg, lagging housing by some unknown number of months.

When it ends, in the wake of a housing bust, I have but three questions to ask:

1. Where is job growth going to come from?
2. Where are wages headed?
3. Where are housing prices headed?

Oops, I almost forgot. I have one more question: How do you get inflation out of the answers to that?

Regards,
Mish
September 20, 2006