The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice. -- Mark Twain

Meredith Whitney Confirms Call on Spending Rebound

Posted: June 28th, 2010 | Author: | Filed under: Uncategorized | No Comments »

Well here it is in the press, then.  Three days after my post Recovery Is Not, Meredith Whitney said in an interview with CNBC that the rise in consumer spending is due to people no longer paying their mortgages, and that we are unequivocally in for another dip in housing.  Hey, do you think she’s been reading my e-mails?  No, really – she’s an awesome economist and I want to be just like her when I grow up (except for the part where she marries the pro wrestler- I’ll keep my amateur one, thank you.)  She hesitates to call a “double dip” for the economy as a whole, but that’s typical of economists in the press.  If the evidence is not overwhelming they will not indulge in predictions, lest the news becomes a self-fulfilling prophecy or lest they end up wrong and thus damaging their credibility and careers.  I, with little to lose on that front maintain it is likely we will see a broader dip, as housing is at the core of all the trouble we are in.  I would not be surprised to see that happen in California, at any rate.

If you have ten minutes to catch up on economic news, I highly recommend you take a look at Meredith Whitney’s fabulous interview with CNBC (and note- it is a rare occurrence indeed to find an economist who justifies the description “fabulous” when interviewed).

From “Business Insider”
Meredith Whitney: The Rebound in Consumer Spending is Just The Result of People Not Paying Their Mortgages
by Gregory White

Housing Still Overpriced

Posted: June 21st, 2010 | Author: | Filed under: Uncategorized | No Comments »

I stumbled across this version of Robert Shiller’s famous inflation adjusted home price index, and it provides a really great visual for what’s going on with home prices right now. The red line shows the price level we’re at now. You can see clearly that home prices nationally are still higher than ever before in history despite a 30% fall from the peak of the bubble. You don’t need to understand the math or any complicated economics in order to imagine the trajectory here will continue to head south for a while.

For those of us watching the California real estate market, there are two things to keep in mind looking at this chart. For one thing, the chart is tracking the national market. California is a much more extreme case than that represented by national statistics. It was pretty much at the epicenter of bubble price distortion and held out longer than most of the country before beginning its drop back to earth, especially in Los Angeles. So it has farther to go and will take longer to do it. Los Angeles and other west coast cities in the state are still considered to be some of the most overpriced cities in the country and therefore face a more dramatic correction ahead than most of the rest of the country.

Another thing to keep in mind is that bubbles always overshoot to the downside before reaching stability. This is evident when looking at the history of market bubbles. There is never the “soft landing” we heard so much about in the press when we were first beginning our descent. (Don’t hear much about that anymore, eh?! I guess Depression era unemployment numbers and the threat of a total banking system meltdown blew that one out of the water.) I wouldn’t be surprised to see housing undervalued before this is all played out, especially in California.

“The harder they come the harder they fall, one and all”
– Jimmy Cliff

From: Pragmatic Capitalism
June 14, 2010

Recovery is Not

Posted: June 18th, 2010 | Author: | Filed under: Uncategorized | No Comments »

There is a prevailing attitude in the press that we are in economic recovery, but I would be hesitant to trust that. Off the top of my head I can see a couple of reasons we seem to be in recovery, but they are not fundamentally sound.

One is that government bailout money and incentives have temporarily supported the housing, auto, and stock markets as well as the banking sector. Much of the banking system is in a “zombie” state, meaning it would be bankrupt, dead and gone if the government wasn’t supporting it with tax dollars. All this bailout money went to the banks so they could continue operating and lending, but they have hoarded the money instead of lending and made a lot of investments for themselves in the stock market. In this way the stock market has been artificially supported and is riding much higher than fundamentals would have it. The housing market has been supported in too many ways to count. The government has been the sole investor in mortgage backed securities since the crisis hit full force in 2007. They’ve been buying a bunch of junk assets way over market price (or WE have, actually, as tax payers). They’ve been subsidizing home buying with tax credits and wasting a whole bunch of money on foreclosure prevention that is totally failing and in my opinion unethical to start with.

But the time has come where the money well is running dry. The mortgage buying scheme has ended. The tax credit has ended. Unemployment insurance extensions are ending. The efforts to stop foreclosures have all failed and been a complete waste. Citizens are growing angry. They no longer want to support all this nonsense. Renters and responsible homeowners are tired of paying for other people’s financial folly. The middle class grows poorer and the poor grow desperate. The powers that be are going to find themselves having a harder time getting support for this sort of aid to the irresponsible. Traditional economists say we need more bailout money, that we learned from The Great Depression we need to keep spending. Perhaps this would have been a viable plan if we’d invested those tax dollars more wisely. In any case, I doubt it will continue because people are becoming distressed about it.

Everyone’s excited that we’re in a recovery and consumer sentiment is up. Spending has increased. Well, I hate to be the bearer of bad news (no, actually I love it- the truth sets you free!), but there is no fundamental support for this sentiment. Unemployment continues, property prices are still moving downward, the stock market is creeping down as well and most importantly there has been absolutely no increase in household income. So where is the money coming from to support this spending? For one thing, people have stopped saving again (after a brief move out of negative territory in the wake of the crisis of 2007). For another, they have stopped paying their mortgages en mass. They are living in their houses but not paying mortgages, insurance, or rent. That’s a pool of money that adds up quickly, and as fast as it does people are spending it. Banks are so overwhelmed with the backlog of distressed property on their hands they are taking up to two years or longer to process foreclosures and evict the squatters. That’s a lot of spare cash redirected into the marketplace. But of course it won’t last forever.

Don’t believe the hype. Be prepared for a second leg down. Banks are beginning to miss thier TARP payments and many are at risk of failure. The FDIC is in the red. California is definitely not out of the woods. The situation here is extreme. There will be more cuts in the public sector. There will be a second wave of foreclosures in the mid to upper tier housing markets. There is even a possibility that Los Angeles may be forced to file for bankruptcy. That said, I leave you with words of wisdom from my old fictional film friends and spiritual advisers, Bill and Ted,

“Be excellent to each other.”

L.A. Housing Still Too Expensive

Posted: June 6th, 2010 | Author: | Filed under: Uncategorized | No Comments »

The So Cal housing market is still vastly overpriced in the medium to high price ranges.  The subprime blowout has caused lower end markets to drop closer to sustainable prices in areas like Riverside and Lancaster.  However, medium to high range markets have remained stubborn in returning to affordable pricing.  This is due to a number of factors.

For one thing, the medium to high priced housing market is supported by more financial cushion, as opposed to the subprime where people tend to live paycheck to paycheck with no buffer.  When funds become short for low income families there is no extra money to keep them from slipping right into foreclosure and bankruptcy.  For another thing, the reset dates for subprime loans have come and gone already and we have worked through that end of the “exotic loan” funded housing crisis.  However, this is not so in the medium to high end Alt-A and prime lending markets.  The exotic loans originated for this sector had much longer teaser rate periods before recasts would set in.  There is a huge tsunami sized wave of Option-ARM loans just now beginning to recast.  The medium to high range market will see vast numbers of foreclosures over the next two two five years.  Areas where prices have held up relatively well so far are now going to fall in much the same way the subprime areas did.

When the higher end markets start to fall in price the low end will see further reduction due to the downward pressure.  The further collapse of the housing market comes at a time when there is a huge level of unemployment.  California has one of the highest unemployment rates in the country.  We are also in the middle of a huge budget crisis with years of further revenue loss ahead, which means more unemployment.  Former Mayor Richard Riordan predicts bankruptcy for Los Angeles by 2014.  Mayor Anthony Viaraigosa is proposing massive cut backs.  Banks are not lending and access to credit continues to dry up.  Commercial real estate has begun to follow the collapse in suit.

How do we know when real estate is fairly priced at sustainable levels?  One key indicator is to look at income to price ratios.  Put roughly, the median household income in any given community should be able to support the median price of a home there.  In this respect Los Angeles is still very overpriced.

I recently took a closer look at the situation in the city of Burbank, for example.  The median annual household income is around $65K.  The traditional formula for measuring the affordability of a house is that the price not exceed 2.5 to 3 times annual income.  That would place the correct median house price in Burbank at $195,000.  The Los Angeles area has historically run a little bit higher in that ratio, with prices running around 3-3.5 times median income.  Even if house affordability is evaluated at four times annual income, the median home price in Burbank should not exceed $260,000.  The current median home price in Burbank is over $500,000.

To comfortably afford a $500,000 house, household income would have to be $200,000 a year.  Fewer than 5% of households in the whole nation make that kind of money.  The average household income in LA County is around $55,000.  The average household income in the city of Los Angeles is under $40,000.  And these are numbers that may diminish as unemployment persists.  Housing has a long way to fall in this neck of the woods.  And it will.

Burbank median price:

Bankruptcy for LA:

Option ARM resets: