Celente Predicts the Greatest Depression

I first came across Gerald Celente while perusing the internet a couple of years ago.  He was calling the United States “fascist” and warning of economic collapse.  His views were so pessimistic and anti-establishment I was initially tempted to dismiss him as a rogue wacko.  Upon further examination, however, there did seem to be an underlying plausibility to much of what he was saying and I decided to read more.  I looked into his background.  It turned out the man has been a very successful trend forecaster, business consultant and author since the 1980’s, having predicted among other events the 1987 stock market crash, the collapse of the Soviet Union, the 1997 Asian currency crash and the 2007 subprime mortgage scandal.  The Los Angeles Times called his company, Trends Research Institute, the “Standard and Poor’s of popular culture.”  Praise and recognition of his work by a wide assortment of iconic sources such as the New York Times, The Wall Street Journal and even Oprah Winfrey grace the home page of his company’s website.

Gerald Celente now predicts we are headed for what he is calling “The Greatest Depression.”  He forecasts growing unemployment, social unrest and violence ahead, and warns the state of the economy is going to get much, much worse.  In a new interview on Tech Ticker, Celente points to the demise of the middle class as being at the heart of the problem and believes the only way out of the situation will be for the US to restore its production capacity so wealth is redistributed from the super rich to the rest of the economy.  He says we need to grow a new manufacturing base in fields that will profit and provide expanding production in the future, like bioengineering and green technology.  “We went from a country that used to be merchants, crafts people, manufacturers… to clerks and cashiers,”  he explains.  He says the government is getting in the way of progress, because it is squeezing out the entrepreneur while all the breaks go to the biggest and wealthiest, and then the taxpayer is left holding the bill.  “We the people are supporting people who build houses.”  The government’s effort to create jobs with stimulus funding has amounted largely to wasteful spending on projects that won’t provide long term growth, and so there will be no meaningful employment created from it.  Celente predicted in 2009 there would be no recovery, just a cover up.  Now, as the stimulus money runs out we will see the economy continue to decline.

I highly recommend you watch the full six minute interview with Gerald Celente at the link below.

Tech Ticker, Yahoo Finance
The Great Recession Will Give Way to the “Greatest Depression”
Interview with Gerald Celente
August 20, 2010
http://video.yahoo.com/

Double Dip Hits So Cal Housing

Talk about double dipping.  The numbers are just in from Data Quick and it seems July saw a dip in both the number of home sales and the median sales price in Southern California.  Sales were down a steep 21.4% last month from the year before.  Median price fell 1.7%, or about $5,000 in one month. Usually price declines lag a dip in home sales by 12 to 18 months and it is highly irregular to see both indicators dip simultaneously.  Sales seem to have dried up due to the government tax credit ending, and prices are falling as more foreclosures flood the market.

It is also interesting to note that July is usually a busy month in real estate with summer sales.  When we see the market in free fall during what is supposed to be the peak buying season, it is telling us homes are too expensive without government intervention.  Now that the tax credit is no longer available, prices are forced down.  Meanwhile, newly released jobless numbers show there were 500,000 new applications filed for unemployment insurance last week.  That alone was enough to send the DOW tumbling 145 points yesterday.

It looks as though we have just have entered a double dip in Southern California housing.  Expired subsidies, record foreclosures and rising unemployment have bum rushed the barricades just as we begin our slide into the seasonal downturn.  We might even say that rather than seeing a double dip we are merely witnessing a continuation of the downward slide we were already on.  I’m afraid there is no dam strong enough to hold back this raging river.  Home prices will continue to fall.

Data Quick
Southern California Home Sales and Median Price Dip in July
August 17, 2010
http://www.dqnews.com

Bloomberg
Jobless Claims in US Rose to Highest Since November
Bob Willis and Courtney Schlisserman
August 19, 2010
http://www.bloomberg.com

Reseda Price Check

Recently I got into a discussion about housing in Los Angeles, and Reseda was mentioned as a place that may have reached an affordable level for purchasing a home.  Of course, on an individual basis what is affordable is relative to a given buyer’s income and other personal variables, and so any area may or may not be considered affordable depending on those factors.  Thinking about the issue more objectively, however, I was inspired to take a closer look at the income-to-price ratio in the enclave to find out in real terms if Reseda has hit a pricing equilibrium or if it still has room to fall.

Reseda is a quiet neighborhood in the city of Los Angeles, located in the central west San Fernando Valley.  It was developed from a small farm town into one of the Valley’s first suburbs in the years following World War II.  As much of the neighborhood was built up in the 1950’s, Reseda is recognized for it’s Mid Century architecture and Modern era housing tracts.  Today it is one of the most racially and culturally diverse areas in Los Angeles.  The town has been immortalized by songwriters like Tom Petty and Frank Zappa, and featured in films such as Boogie Nights, Magnolia, and the Karate Kid.  It is known as a working class neighborhood without much glamor, but offers some good magnet and charter schools along with a reasonable cost of living.

The median annual household income in Reseda falls right into line with the median of the greater city of Los Angeles, at just under $50,000.  In this respect Reseda stands as an almost perfect example of a middle class Los Angeles neighborhood today.  Because of this, the area was not only hit by the wave of subprime loan defaults that popped the housing bubble in 2007, but is also beginning to see mid-tier market correction as a second wave of defaults hits the prime and jumbo loan markets.  Since the effect of the latter default wave has not entirely played out, I suspect we have not seen a pricing bottom in Reseda.  But let’s see what the numbers say.

As I’ve said in the past, house prices in any given area should be in line with the income level of the people living there.  If we use the traditional formula that a home should cost no more than the equivalent of two and a half to three times the buyer’s annual household income, the median house price in Reseda should come in right around $150K.  I decided to run a search with the Multiple Listing Service and see what Reseda has to offer at that price.  The result was comical.  There is currently one property listed for sale at $150K, and nothing for less than that.  This includes all single family houses, condominiums, townhouses and multi-family dwellings currently on the market.

Since Los Angeles has often run a slightly wider income-to-price ratio historically, I figured I’d up the median home price to four times annual household income just to be generous.  That would bring the Reseda median to around $200K.  Running a search at the revised median brought up a total of twelve properties for sale.  They are all condominiums, with 90% being short sales.  There are currently 156 homes listed for sale in Reseda.  Twelve short sale condos do not a median home price make.

So what is the current median home price for Reseda, actually?  It is $300,000.   While this is a huge drop from the bubble peak high of $534K in 2006, it remains fifty percent higher than incomes in the area can truly support.  If we look at this another way, it would take a yearly household income of $100,000 to properly support the purchase of a typical home for sale in the city right now.  That’s more than twice what people who live there make.  And here’s a final test… just ask anyone enjoying a $100K annual income in Los Angeles if Reseda is a neighborhood they would aspire to buy a home in.  They’ll most likely find that idea very amusing.

Reseda Income Statistics:
citydata.com
http://www.city-data.com

Reseda Median Home Price:
Trulia Real Estate Search
http://www.trulia.com

Los Angeles County Statistics:
US Census Bureau
http://quickfacts.census.gov

Los Angele City Statistics:
citydata.com
http://www.city-data.com

Median Up, Market Down?

Have you heard the news?  The median home price is going up!  I heard about it on National Public Radio yesterday.  That must mean this recovery thing is working out after all.  Yahoo!  We’re all gonna be rich again!  But wait a minute, I also heard yesterday that the stock market fell over 265 points on fears that the economy is headed for further trouble.  Hmmm… maybe I’ll put that champagne back on the shelf till I take a closer look at this one.

…the grand old Duke of York,
he had ten thousand men;
he marched them up to the top of the hill,
and he marched them down again…

Okay, well upon taking a second look at the situation I’m afraid my bottle of bubbly’s gonna have to do a little more shelf time.  Put away the glasses.  It seems we are merely witnessing the effects of that old $8K federal tax credit here.  The increase in median we are witnessing is due to numbers from April through June, when people were frenetically trying to get in on the tax credit before it expired.  What’s more, when we look closely at the statistics we can see that they represent only major US cities- and just two thirds of those at that- according to the National Association of Realtors, who authored the report.  For the greater US, the national trend was actually flat.  Well, at least flat is not a decline.  Or is it?

…and when they were up, they were up,
and when they were down, they were down,
and when they were only halfway up,
they were neither up nor down…

This brings us to a point you don’t hear about much in the media.  You can’t trust the median home price to let you know what’s happening with real estate values.  It is not a precise indicator of the overall trend.  Why?  Because housing prices are actually moving differently depending on price bracket.  The low end hit a level of affordability a while back, but the mid to high end markets are still in a bubble and overpriced.  What’s happening now is we are seeing higher priced homes in more desirable areas beginning to fall to a level that is somewhat affordable.  As people begin to buy homes in the mid to higher end of the market, the median is driven up.  Prices overall are not rising, but more expensive houses are selling because they continue to fall in price.

Allow me to illustrate.  Let’s say there are four homes that have recently sold in total.  They are in lower priced areas that are less desirable to the majority of buyers, and three of the houses sold for $100K while one went for $200K.  The median price would be $100K, meaning that half the homes sold below that price and half sold above it.  Now let’s say time goes by and we start to see prices falling in the mid tier market.  The fall in price is delayed in this market in part because of the nature of the loans that most homes were purchased with, which I will explain in more detail later.  The mid tier market consists of homes in safer areas with amenities such as good public schools, clean parks, or access to a wider variety of shopping and entertainment.  As the mid tier is hit with a wave of foreclosures, homes that were priced at $700K begin to sell at $400K.  There are a lot of people waiting to buy who didn’t want to purchase in a low end area.  Now they see their chance to move forward.  It’ll probably be a stretch, but they realize they can finance a home at $400K through the FHA with a 3% down payment.  They begin to jump in.

Suddenly we see homes selling at higher prices.  This gets factored into the median.  If we throw a couple of houses priced at $400K into our earlier equation, the median shoots up to $200K.  Now we have six homes with half the homes selling for less than $200K and half for more.  The median home price has risen by $100K.  Are home prices rising over all?  No.  Home prices are falling in higher priced markets and that causes the median to rise.  Initially, the only homes selling were in low priced markets and now there are homes starting to sell in the mid tier.  As the mid tier falls in price and begins to become affordable it puts further downward pressure on the low end, so prices there continue to fall as well.  Why buy a house in a low end neighborhood when you can get one in a nicer area for a fraction more – or maybe for the same price if you just wait a little longer?  The low end cannot compete and will have to drop prices even further.  In no way are prices going up over all.

It is helpful to think of the housing market as being more like four separate markets right now.  These are the low end, the mid tier, the high end and the super rich.  The latter is sort of an obscure category in which very few can afford to buy, as it consists of houses over $20 million or so.  Historically it has operated independent of trends that affect the rest of the market, but in this economy even those properties are losing value and seeing price reductions.

The reason the different pricing tiers are falling in value at different paces is due largely to the way home purchasing was financed during the bubble run up.  Generally the low end market was sold using suprime mortgages, while the mid to high end was sold using Alt-A and prime loans like Option-ARMs.  In simple terms, the higher end loans had longer teaser rate periods before the monthly scheduled payment would be recast.  The real estate crash began with defaulting subprime loans.  All that inventory has just about cleared in terms of defaulting, though there is still plenty of low end inventory on the market and in REO limbo under bank ownership, which has yet to hit the market.  However, we have yet to experience the full impact of the wave of foreclosures hitting mid to high tier markets as Option-ARMs and prime and jumbo loans default.  This chart from Credit Suisse has been circulating on the internet for years, but it’s worth another look and perhaps some of you haven’t seen it yet.  (Click on chart to enlarge.)  We are still beginning our climb to peak second wave default.  Remember, the first wave brought the whole economy down like a house of cards.

The defaulting of Option-ARM loans alone will push prices lower ahead.  We are just beginning to see this happening.  Defaults are happening at record numbers but it will take some time before we see them hit the market in full force as they get caught up in the pipeline of the foreclosure process.  California will be hit hardest, as more than half the Option-ARM loans issued were in that state alone.

Foreclosures are at an all time record high across the country right now, with bank owned inventory at Freddie Mac having increased almost 80% from this time last year.  Unemployment is, of course a huge factor as well.  With these forces converging upon the housing market at once I cannot imagine any real sustainable price increase in housing for a long time to come.  In fact, I’d predict we see quite the opposite effect with the correction continuing to the downside.  Here’s another pertinent chart I stumbled across recently at Calculated Risk, showing the default in government insured loans at Freddie Mac, which doesn’t even include the huge pot of California jumbo loans that are too expensive to be covered by the institution.  (Click on chart to enlarge.)

So as you can see, the median price may be rising in the housing market, but over all prices are headed down.

Forbes
House Prices Are On The Rise, But It Doesn’t Mean Much
Francesca Levy
August 11, 2010
http://blogs.forbes.com

Real Estate Channel
California Median Home Prices Increase 23.2% in May, Sales Up 1.2%
Michael Gerrity
June 23, 3010
http://www.realestatechannel.com

DQ News
Southern California Home Sales Dip, Median Price Rises From ’09
May 18, 2010
http://www.dqnews.com

Duke of York illustration, Steve Morrison