Friday, March 9, 2007

Coming to a town near you: UNEMPLOYMENT!

Columbia Aircraft lays off 59

Seaswirl to close Culver plant

Construction lull spurs 140 layoffs at Bright Wood

Prediction: You'll soon see an announcement about the closing & laying off of all Unicom employees in Bend.

We're starting to see a disturbing trend in Central Oregon, something that was unfathomable just 6 months ago: Unexpected Unemployment.

We're soon going to hit the sort of unemployment numbers that Central Oregon is famous (infamous?) for: usually 2-3% above the national average. Jefferson and Crook counties are well on their way to double digit unemployment. What's going on? Late last year the paper was full of articles decrying a lack of workers as being the areas biggest challenge (Worker shortage tops list for area executives). Now, in the blink of an eye, we're getting some of the areas biggest employers announcing partial layoffs, or outright shutdown.

You might think, "Hey, housing prices CAN'T have anything to do with this, do they?". And I would say, Yes, yes they do. Because in a bubble, especially one driven by leverage (borrowed money), the velocity of money speeds up. Everyone is trading the bubble good faster and faster. You need look no farther than the rapidly increasing unit volumes of home sales of the past 6 years to find proof of this. Some of the spillover effects of a large part of the population feeling wealthier, is that non-bubble companies also start to bask in the glow of Bubbletown. Everyone is doing great! In fact usually the only trouble is figuring out who will serve the Fat Cats the Dom Perignon because we're all Fat Cats!

But then a funny thing happens: One of the guys who is loaning the money, actually says "No" to someone who asks for more money to buy the ever rising bubble good. Then another. The another. Then bubble buddies look for the only source of liquidity they really have, and that's selling the bubble good itself. Which prompts another. Then another. And as rapidly as things went up, they go down.

Except a funny thing happens on the way down. A lot of money has been spent on bubble goods, money that in ordinary times would have been invested in a variety of other things, like building airplanes, boats, and things like that. Instead of giving living wage employers a tax incentive to relocate here, we bought Dom Perignon. Instead of investing in workforce training, we bought Hummers. Instead of expanding the UGB to increase buildable land for affordable housing, we bought magazine ads to get 4 people on each Bachelor Pine Marten chair, instead of 3. We bought prime rib, when we should have brought prime employers here to diversify our economy. The bubble economy has become too concentrated, and the effects of diversifying our economy is gone, because we bet it all on bubble goods. And the bet has busted.

That's what we're seeing and will continue to see for many years. We have an extremely polarized economy: we've bet it all on housing and real estate. And while the lending was free & easy, this made us feel like a million bucks! But there's no more to lend, and actually we're starting to see that "we" have less money now:

Cascade's annual report showed a 2.8 percent dip in net income in the last three months of 2006 compared with the previous quarter, and core deposits - or deposits from long-term customers - dropped by 8 percent during that same period.

So, finally as the wealth effects of the bubble years begin to unravel, the spillover effects start to dry up, liquidation of bubble assets push down everyones net worth, and we all basically start to feel poorer... and finally people start losing their jobs. Don't be fooled. The Bend real estate bubble that still has people and publications from every corner trying mightily to uphold it as long as humanly possible is collapsing, and this financial implosion will ultimately put you or someone you know, out of a job. Maybe not today, maybe not tomorrow, but we are about to see the worst rash of job loss this area has ever seen. And the SOLE CAUSE is the housing and RE bubble.


Anonymous said...

"the job market further deteriorates (which it will, mark my words), things will get desperate here."

Wow. Only took 3 days for this to come true from your previous post. Good call. I guess. I have friends getting laid off at Columbia. :-(

adhor said...

Only took 3 days for this to come true from your previous post.

Got any stock tips?

Anonymous said...

the SOLE CAUSE is the housing and RE bubble.

That might be going a little overboard. Brightwood layoffs are almost certainly linked to housing, but Seaswirl & Columbia? Don't think so.

But they might actually contribute to a negative downward spiral in housing around here. Especially Seaswirl. Culver residents will "see" their home values "swirl" down the toilet.

Anonymous said...

The only good thing about "see-ing" my values "swirl" (good one btw) is that I bought my Culver house years ago... even selling at a loss of today's values will be a luscious chunk of change.

I feel bad for those who bought a year ago. Or a week ago. :(

Anonymous said...

Yeah, that's why I moved to Portland (or Seattle) instead of Bend - didn't want so much risk. Good luck to you all. Hang on tight.

Anonymous said...

Stock tips?
I'm still shorting Bank of the Cascades. I have made a LOT of money on the short so far, and I think that its still got quite a way further down to go. It still trades at a significant premium to Columbia River Bank and other regional banks. But their core markets of Deschutes Cty and Boise are both in deep trouble.
The stock is around 25 today, and a year ago it was still below 20. I'm betting that it goes back down to that level within the next few months.
Of course I could be wrong.
-CACB Shorter

Anonymous said...

Don't know if you're wrong or not, CACB Shorter, but I suppose if I were short in CACB stock I might be writing lots of blogs about shorting CACB stock.

Do you copy the NASD on these?

Bend Economy Man said...

>>I suppose if I were short in CACB stock I might be writing lots of blogs about shorting CACB stock.

CACB Shorter is, like the rest of us, an anonymous blog-poster, but from reading his posts I think he's got about as much integrity as an anonymous blog-poster can have. He's never made any secret of his financial interest in CACB's stock price falling. I mean, his handle is CACB Shorter. I don't think anyone who's read his posts has any doubt that he's done his research and has come to the conclusion that the stock is overvalued.

Bend Economy Man said...

...and I might add that his bet has been a right one over the last few months.

Anonymous said...

Dear Bend Economy Man,
Thank you for your kind words and support as always. I'm humble enough to know that blogging about CACB is not going to move its stock price. Its the lag effect of the economy weaving its way through their quarterly results that will move the stock--as the Street realizes over time that the growth stock valuation applied to CACB no longer makes sense.

This blog has been about the Bend property bubble. As the bubble deflates a lot of people certainly get hurt, and I myself am seeing a paper loss on my own property here. I have simply pointed out over these past months that shorting CACB is one possible way to hedge the losses that our property values are taking. I have also pointed out what I perceive as the arrogance and double dealing of CACB management, who totally overpaid for the F&M acquisition, and who were aggressively selling shares of CACB throughout 2005-2006. They walked away with plenty of cash.
-CACB Shorter

Here is what I posted in October 2006, as I faced a storm of critics on the blog:

Dear all,

I’m the guy taking the big short position on CACB (Bank of the Cascades), and I appreciate the advice and commentary from many of you on this, thank you.

I agree that shorting entails significant risk and one must proceed cautiously. One must have the fortitude to weather a situation where the stock goes up a lot, and potentially never comes down.

In my situation, the CACB short position is a small part of the portfolio, much smaller than my long position in Bend real estate. Indeed, on balance, I’d be much better off of the bubble roared back in a big way. I should be a bubble booster but I realize that humble old me am not going to bring the bubble back. However, for various reasons I am also not in a position to sell my Bend property, so the short is a bit of a hedge. (Best case would be to make a near term gain on the short and a long term gain on the property).

Regarding the specific case for the short, that has been outlined in earlier posts. Who knows what will happen, but so far I am luckily “in the money,” as the current valuation is below the price at which I shorted.

In the past few days, there have been the following developments regarding CACB:

-Two of the five (?) analysts who follow CACB have downgraded their recommendations on the stock. One to a “underperform” rating and another to a “neutral rating.” The analyst sentiment has now gone to negative on balance.
-CACB posted strong quarterly results for the quarter ending Sept 30th. You can read the full earnings press release on their website. Here is what the CEO said in the press release: "We are seeing solid loan demand despite moderating real estate markets," said Patricia L. Moss, president and CEO. "It is a unique feature of Cascade's fast growth markets that steady population in-migration should help mitigate the effects of the current nationwide slowdown in real estate." (She did not mention that she sold ~$300,000 of CACB stock in early September. Note that she leads with the “Bend is different” argument with great confidence!!)
-The stock did drop ~3% following the earnings release. I did also note the following additional items in the earnings release:
-CACB has almost doubled their bad debt provision in the quarter. Up to $2.2M from $1.1m in the prior quarter. This provision now equates to over 20% of their net income, which itself was boosted by an extraordinary gain in the quarter.
-Non-performing assets as a % of total assets jumped by 220% versus the prior quarter, though are still low
-Mortgage originations dropped 6.4% from the prior quarter, despite this new quarter covering the peak summer months, and despite the fact that the prior quarter did not include the F&M Bank acquisition for that full quarter. (Is this what the CEO called “solid loan demand” in her statement???)
-Deposit growth flattened to zero. That means some combination of customers suddenly not earning so much money, “in-migration” slowing down, or CACB losing deposit market share to competitors. Indeed, non-interest bearing deposits were down 12% from the prior quarter, and the press release has some tortured explanations about this. It appears that they did some massaging to have the overall deposit numbers appear flat. Here is a quote from the press release: “Management believes that the seasonal lift in deposits historically experienced in Oregon markets during the summer may have been mitigated somewhat by factors related to moderating real estate activity.”
-CACB reconfirmed that 66% of their loan portfolio is real estate –related.
-Non-interest expenses (ie overhead costs), increased from the prior quarter. The press release notes “Going forward management expects non-interest expense to gradually increase as it adds staff appropriate to support Cascade's infrastructure and ongoing growth goals.”
So certainly the business fundamentals for CACB have weakened. And despite this, the press release also confirms that bank’s dependence on real estate (“66% of loans are real-estate related”) and the CEO’s firm conviction that Bend is different (She said "It is a unique feature of Cascade's fast growth markets that steady population in-migration should help mitigate the effects of the current nationwide slowdown in real estate."). Meanwhile, CACB management continued to sell their own shares during the past few months. Why aren’t they buying, so as to benefit from their home market’s “unique features.”?
AND YET, CACB stock price has still soared over 10% in the past month, 35% in the past 3 months, and 85% in the past year. Its valuation is still way out of whack when compared to comparables such as Columbia River Bank. Finally, the analysts tracking the stock have started to downgrade it.
I will maintain my short position on this stock.

Bend Economy Man said...

CRUEL JOKE - it was just 5 months ago that the local "aviation industry" was
bullying COCC for not turning out enough vocational graduates to address the "work force shortage for the local aviation industry." COCC, probably at Columbia Aircraft's behest, offered a composite manufacturing course, but the cocc-on-the-rock couldn't get enough students to sign up, so they canceled the class, much to the chagrin of the "aviation officials."

"Aviation officials see lack of skilled labor," The Bulletin, October 18, 2006.

Maybe the students of COCC had a better idea of trends in the "growing rapidly" Central Oregon "aviation industry" than the so-called "officials"?

Anonymous said...

I think COCC should work harder to leverage its name.

I went to the school bookstore last year looking for suggestive T-Shirts using the word "cocc," but was sorely disappointed. There's money to be made there, I'm tell ya.

Bend Economy Man said...

The frustrating thing about being a thinking person and reading the media around here is that you miss the "punch" and tough questions that would be asked in a bigger, more competitive market. It shouldn't have to be on a blog that we point out the delicious irony of a company laying people off just several months after lambasting the local community college for not turning out enough qualified workers.

If we had something like the New York Times, the San Francisco Chronicle or even The Oregonian reporting on economic developments in Bend, they wouldn't just parrot the press release of one of the area's largest employers when it announces it's laying off 10% of its workforce. They would do at least a couple minutes' research and call these people up and say "wasn't it just 5 months ago you were complaining that the area didn't have enough composite materials fabricators? What happened since then?"

And in a one-newspaper market, it's not as if they have to do a Lexis-Nexis search to find this stuff. They just have to search their own website like I did. You have to think that at least Chuck Chiang, the writer of the October article, remembers what he wrote.

But I think I know what happened. When bad economic news happens, pointing out delicious irony and holding people accountable is last on The Bulletin's mind. They just don't want to embarrass people with tough questions.

Anonymous said...

“What it going on with all these subprime lenders going under?”

By: Larry Wallace

Here is what this letter will cover:

A) The 4 types of loans, what is in trouble and what is not.

B) Understanding why subprime is in trouble.

C) Understanding how all this will effect you as a Real Estate Agent.

D) The good news.

A) 4 Types of Loans:

1) “A paper”: Clean loans, good credit (usually <680 score), some reserves, no income problems. Many 100% loans still are A paper.

2) “Alt A”: Mostly A paper, but something small is off. Credit a little low (maybe down to 640), no reserves, etc. But a good file.

3) “Subprime”: Rough credit w/scores < 620. BK’s, Problems with income and assets. Loans still to 100% LTV. Stated income OK.

4) “Hard Money”: Private funds lent almost exclusively on the value of the property. Usually the LTV’s are low, less than 80%.

B) Why subprime is in trouble:

· At the heart of the turmoil is the subprime mortgage market, which has grown significantly over the last real estate boom (1995 – 2005). Approx. 35 percent of all mortgage securities issued last year were subprime, up from 13 percent in 2003. Pension funds, insurance companies, hedge funds and others all started investing in subprime during this period. Lots of money chasing the same subprime loans led to a drop in underwriting guidelines as each subprime lender tried to “compete” on lower rates and easier qualifications.

· In addition to rough credit, over 40% of subprime loans have not documented income. In theory, this is OK, since the higher interest rates are supposed to make up for the risk associated with these loans. Also, during an appreciating home market, borrowers in trouble sell before they default. However, a subprime borrower in financial trouble may not be able to sell if they bought in the last 2 years and put little or no down. It is these subprime borrowers that are defaulting at a rate much greater than the mortgage investors expected. Subprime has a current default rate at about 12.6% vs. 4.7% for all mortgages combined.

· Since the investors now do not know how to quantify risk on subprime loans, they have stopped purchasing them. Thus, the subprime market has dried up and many of the subprime lenders are going out of business.

· Lenders that have gone out of business, are in serious trouble, or have sold include: First Franklin, New Century (Home 123’s parent), Freemont General, Ameriquest, Option One, Accredited, OwnIT, MLN, REsMae, Decision One, Encore, Fieldstone, AmeriTrust, Aegis, Ocwen and over 20 others. Note: these are not your “known” mortgage lenders like B of A, Wa Mu, Wells Fargo, Countrywide, IndyMac, etc.

C) How will this affect you as a Real Estate Agent?

Some of the crazy deals we have been doing over the last 5+ years will no longer be doable. So that will effect you. But that is not the bulk of your buyers, so the loss of these deals should be minor. There is always going to be plenty of money available for good loans that make sense. As an example: we still have lenders offering 100% financing for A borrowers, full doc, with credit scores as low as 620! And 100% financing for Alt A borrowers, stated income and scores down to 680! These are pretty liberal guidelines!

D) The Good News

· “These [subprime] problems are likely to be contained and not spill over into the prime mortgage market.” – David Lereah, National Assoc. of Realtors, chief economist , 3/13/07

· Crazy underwriting guidelines may be gone, but very generous guidelines are still with us – as listed in the example in #C above.

· Interest rates are holding at very good levels.

· Nationally: “Existing-home sales are expected to slowly improve from what appears to be the cyclical low last fall, but we think there will be some additional pain in the new home market, which hopefully will start to rise later in the year.” – David Lereah, National Assoc. of Realtors, chief economist, 3/13/07

· Locally: Bend and Central Oregon continue to outperform the National Statistics.

So, don’t let the negative media scare you. There is money for almost all of your buyers.

Thanks for your business.

Larry Wallace

Anonymous said...

Nice try, Larry Wallace, but you're whistling in the graveyard. The reason is that those people from CA who are dying to move to Bend can't sell their house, because the person who wants to buy their house can't sell THEIR house, because the person who wants to buy their house can't sell THEIR house, because the entry-level buyer who was going to buy it now suddenly can't get the financing. And the people who DO get financing now have 3X the choices they had last year, and they've been tipped off to realtor strategies like multiple false offers to get and keep the prices up.

I'll bet you're thanking for business... any business.

Anonymous said...

BEM, before you start saying good things about major-market newspapers, take a look at the LA Times. They did a story on a poor lady who was about to lose her house because of her loan reset. Of course, it took a blogger and his readers to find out that Sharon was secretly a flipper who had even stooped to selling houses to her husband to get more financing. Sad, down-and-out innocent homeowner? No, creepy flipper lying doing creepy flipper things on several houses.

And what does the LA Times do when flippers tell them this stuff? They reply that they don't have staff for investigative journalism?

So what is the LA Times? Apparently it's a piece of crap that relays wire stories and comes up with lame local human interest stories. They have a flipper right in their grasp and they can't bother to do the public records look up that bloggers can do.

More at:

Bend Economy Man said...

OK, well, are you saying that I misunderestimated the laziness of reporters in general when it comes to reporting on RE?

It's funny that when it's some kind of, say, political scandal, even a tiny one, teams of crack reporters fan out to interview second-grade teachers and neighbors, researchers are dispatched to university archives to review old term papers, or with our own local Tom DeWolf scandal, virtually no local stone was left unturned. I've never seen a local story reported as thoroughly as the Tom DeWolf groping scandal.

How many of us are affected by the RE bubble? 100%. Seriously. You'd think it would be the story of the decade. But it seems like the papers are sending out their JV squads to cover a varsity issue. Too bad.

Bend Bear said...

Just when it seemed all hope was lost, KLRR 101.7 of all places had a blurb this morning on their 8:00 am news report about how the local RE slump (or "leveling off" if you read The Bulletin) is affecting many people's disposable discretionary income. Talked about how homeowner's increased difficulty in borrowing additional funds on their house, combined with higher variable rate mortgage payments, credit card, etc is, in turn, affecting local businesses - with the exception of local auto dealers, apparently cars are still selling well. The reporter even interviewed a local business owner, and Bill Valentine for his thoughts. Kudos to KLRR for fair and balanced reporting.

Bend Economy Man said...

>>Talked about how homeowner's increased difficulty in borrowing additional funds on their house, combined with higher variable rate mortgage payments, credit card, etc.

Basically beginning to confirm what a lot of us have thought when driving by an open garage door in a Bend mini-mansion and seeing that the three-car garage is packed to the rafters with an SUV, a sports car, 2 jet-skis, a ski boat, 2 kayaks, skis and snowboards, $1000 mountain bikes for the whole family, fly rods, wetsuits, windsurf and kiteboarding setups, and a lot of other stuff that's lots of fun but loses half its value by the time you leave the store parking lot:

A lot of people around here are in debt up to their eyeballs.

Some who have fewer compunctions about invading their neighbors' privacy have gone to the Deschutes County website and seen just how much lender paper is filed on these houses. You'd be amazed that there are plenty of normal folks who are nickel-and-diming away their equity every few to several months, say $15K at a time.

Anonymous said...

>>Some who have fewer compunctions about invading their neighbors' privacy have gone to the Deschutes County website and seen just how much lender paper is filed on these houses. You'd be amazed that there are plenty of normal folks who are nickel-and-diming away their equity every few to several months, say $15K at a time.

I'm compunctionless. I'd like to do this. Are you referring to the D.I.A.L. Assessor's Office website?

Bend Economy Man said...

Not DIAL. The Deschutes County Clerk's Online Recording System Web Query. DIAL gives you purchase price info, but not later security interests filed with the County Clerk to establish priority in the event of a foreclosure.

By the way, the only part that's new is the website. Ever since medieval England there's been a publicly available database where security interests on real property are filed.

Bend Economy Man said...

By the way, that website is password-protected but it takes about 5 minutes to get a password if you register.