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

Hands Off the Housing Market!

Posted: July 27th, 2011 | Author: | Filed under: Uncategorized | 1 Comment »

How long do we have to wait for housing prices to return to an affordable level?  I am incredibly frustrated by how slow the process is.  Billions of tax dollars have been thrown at the housing market to prop up prices.  It has done nothing but slow price discovery and make the banking class richer.  It’s as though no one cares there’s a whole generation of young people with no foreseeable pathway to ever buying property of their own.  It is a terrible injustice.

Potential responsible home buyers (disclosure: like me!) continue to sit on the fence, waiting for the old formulas for buying safely to someday make sense again. Like, how about the idea of not spending more than three times your annual income on the price of a home?  Or keeping the monthly combined cost of your mortgage, insurance, taxes and maintenance comparable to what it would cost to rent the same property?  These old ideas seem entirely outmoded and ludicrous after enduring the mental distortion of the bubble years, but this only serves as testament to the high degree at which such distortion in the market and in our thinking persists.

Most of Generation X is either dealing with the consequences of having spent way too much on a house during the bubble, or is laying low waiting out the storm and growing old renting.  Younger people have it even harder.  They are putting off having families.  They are living with their parents, unable to find work or service expensive college debt let alone get anywhere near working toward home ownership.  The old privileges of the middle class are no longer available to the wide group they once were.  The wealth of the middle class is being transferred to the top.  All the government intervention in housing we’ve seen over the past five years has made matters worse and threatens to drag the pain out for years to come.

As we say goodbye to the Fed’s QE2 program to purchase the mortgage backed securities no investor in their right mind would buy (because they’re a complete pile of worthlessness), we can expect to see another round of government effort to prop up housing prices by the powers that be.  A couple of days ago I read in the Wall Street Journal that President Obama mentioned during a recent town hall meeting on Twitter he has some new ideas brewing regarding further support for housing.  The administration is looking into the possibility of creating incentives designed to lure investors into the market.  One such plan would require taxpayer-owned mortgage giants Fannie Mae and Freddie Mac to relax their rules for lending to investors.

OMG.  Really!?  This latest idea sounds to me as though they intend to have the already struggling middle class pay to have rich investor types buy up all the real estate and keep prices out of reach for everyone else.  In other words, the government’s intention is to support all the forces that blew the market into a bubble in the first place.  This is already the case with the misuse of FHA lending to allow middle and high income buyers to purchase overpriced homes in desirable urban areas with close to no down payment, and with how caps on conforming loan limits were raised at Fannie and Freddie to accommodate ridiculously inflated bubble prices.  Government loans and incentives have essentially taken the place of all those toxic mortgage products that are no longer available because they led to financial meltdown.  People are still being lured into risky investing on overpriced property, with the taxpayer covering the risk.

In a quote from his Twitter town hall meeting on July 6th, President Obama clearly states the government’s goal is to raise home values.

“I think the continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected. And so that has continued to be a big drag on the economy. We’ve had to revamp our housing program several times to try to help people stay in their homes and try to start lifting home values up.”

There’s a bit of an Orwellian aspect to these statements.  Is Obama saying he wants housing to bottom out or does he want to re-inflate the bubble so it can’t bottom?  I suppose the administration has been hoping to engineer a price bottom, but alas market dynamics don’t work that way.  In either case, the “Making Home Affordable” campaign seems like a bit of a misnomer when the larger goal is clearly to lift home values from already hyper-inflated levels no one can afford to begin with.

In the short run, propping up the market creates the illusion of wealth and recovery.  It can be argued that this illusion is important to maintain so people don’t fall into a state of panic.  We have softened the crash and therefore have possibly prevented what some argue would have turned into a more devastating financial depression than we’ve experienced.  Proponents of economic stimulus maintain that is indeed what we have achieved with our public investment in housing and banks.  So perhaps the effort wasn’t entirely worthless.  No one is sure how things would have played out had we just kept our hands off the correction.  However, in the long run our insistence on keeping the housing bubble inflated does not come without adverse consequences.

The adverse consequences are troubling and abundant.  One consequence of the buoying of housing prices is that first time hopefuls and young folks can’t afford to buy.  The young middle class that traditionally sustained the market has been driven out.  There is no new generation of buyers.  This will prove problematic for baby boomers, who as a whole have not adequately saved for retirement and are counting on the equity in their houses to provide a nest egg.  As we spend our tax dollars covering bad bets in the housing market, the middle and lower classes fall further into debt and the gulf between rich and poor grows wider.  On top of that, the very homeowners that some of these programs were designed to help have mostly just been further drained financially on property they can’t really afford and will likely lose anyway.  In the meantime, “too big to fail” banks have grown even bigger with stimulus money and mergers.  As housing stagnates, the economic crisis drags on and the threat of a long term deflationary period grows with the potential of inflation problems even farther along the path.

The thing is, no amount of stimulus or subsidizing will hold back the housing correction over the long term.  In this sense it is ultimately wasted money.  We have already poured billions into the effort and nothing has stopped the downward trend.  The Bush administration’s TARP program, for example, only served to prop up banks and other financial corporations.  The “too big to fail” financial sector was provided with cheap loans to keep business going, but used the funds to bolster their own faltering balance sheets instead of lending anything out.  This did little to stimulate home sales or lubricate the housing market.  It did not stop home values from plummeting.  Prices have fallen 30% nationally since the implementation of TARP, and more than 50% in some harder hit areas.

The results produced by the HAMP mortgage modification programs have been equally anemic.  First, these programs have essentially done nothing to reduce what is owed on the vastly overpriced homes people bought during the bubble years.  The modifications merely lengthen the pay back time or lower the interest slightly so the monthly nut is less.  People are left on the hook for a lifetime of debt with all their money going toward paying off their homes.  Secondly, most modified loans end up in default anyway because they do not actually make homes affordable.  In most cases even the reduced monthly payment proves too much for most homeowners to bear.  The government’s mortgage modification programs have merely provided a way for banks to squeeze even more money out of homeowners who will end up in default anyway.

Remember the tax credits offered to people buying homes at the beginning of the year?  That did actually turn the market around for a moment – even drove prices up in some areas.  It was ironic to see some people chasing $6,500 or $8,000 tax credits on properties where the price had been pushed up $20,000 by the temporary demand.  In Los Angeles, where I live, the frenzy even led to bidding wars!  Of course, the upward bounce ended abruptly as soon as the credit offer ended, and the market quickly resumed it’s downward spiral.  In another layer of irony, national home values have now fallen more than the amount the credits provided.  I was just reading that in the San Fransisco Bay area the median home price fell $38,000 just in the month following the expiration of the tax credit offer.

These are just three examples of the failure of government intervention to have any long term impact on raising prices in the housing market, but the list goes on.  There have been five times as many programs designed to support housing employed since the correction began, and all have ended with a similar lack of success.  The fact is, the deflation of the housing bubble is an event more vast and powerful than most people understand, including most economists and leaders in Washington.  It is the nature of bubbles that all the wealth they create is lost in the wake of their popping.  To slow that process is just to prolong the inevitable.  Buying a little time might have been appropriate in order to get our ducks in order and prepare ourselves to face the crisis efficiently, but how much longer are we going to draw this thing out and at what expense?  The cure is becoming the problem.

No amount of fiscal stimulus is going to stave off the correction in housing.  Buyer beware when considering investing in today’s market.  Counter to popular belief, there are few great deals out there and we have not seen a price bottom.  There will be considerable loss ahead in many segments of housing, especially in the mid to high tier range.  The powers that be are either lacking in competency to understand and deal with the reality of the situation, or they just don’t have your best interest at heart.  So, what to do?  I’m going to keep waiting… and in the meantime I submit to our leaders this proposal for making home more affordable:  Hands off the housing market!

What we need is awareness, we can’t get careless
You say “What is this?”
My beloved, let’s get down to business
Mental self defensive fitness
(Yo) bum rush the show
You gotta go for what you know
Make everybody see, in order to fight the powers that be

-Chuck D

U.S. Government Wants To Rent Foreclosed Properties
July 22, 2011

The Wall Street Journal
U.S. Tackles Housing Slump
Nick Timaros
July 12, 2011

San Fransisco Gate
Home-Price Declines Are More Than Tax Credit
Kathleen Pender
Thursday, June 16 2011

The Wall Street Journal
High Default Rate Seen for Modified Mortgages
James R. Hagerty
June 16, 2011

Ten Cents a Dance

Posted: July 9th, 2011 | Author: | Filed under: Uncategorized | No Comments »

My credit card company just sent me a check!  That’s right.  I don’t pay them; they pay me… and they’ll pay you too if you’re willing to dance.

During the Great Depression some women moonlighted as dance partners to earn money.  Commonly called “taxi dancers,” or “dime-a-dance girls,” they worked in large dance halls where a ten cent ticket would buy a patron one dance and a few minutes of company.  In that climate of extreme economic scarcity the privilege of a few minutes of affordable entertainment was in high demand, and the women soon found themselves earning more in a few hours of dancing than they would at a full time factory or retail job.  In today’s climate of economic hardship I’ve been doing a little dancing for money, myself.  Oh, no, no… I’m not talking about striptease.  I’m afraid I don’t have quite the ambition (or the abs) for that kind of thing.  I’ve been dancing with snakes.

A couple of years ago, when my oldest son was in kindergarten, we had him in a charter school in Hollywood which meant we had about an hour and a half of commuting time each day between the school and our home near downtown LA.  I took to listening to the car radio to pass the time, where I ran across Dave Ramsey’s financial advice show.  You may be familiar with his work already as he is quite well known, but it was the first time I’d heard of him.  He has a very interesting and unusual take on the subject of personal finance.  As a born again Christian, he bases his advice on the teachings of the Bible.

The rich rules over the poor, and the borrower is servant to the lender.
Proverbs 22:7

Ramsey’s number one piece of advice is to get out of debt.  To carry credit card debt is to be enslaved, he explains.  He advises us to save and spend within our means, rather than resort to borrowing.  He asks that we cut up and throw out all our credit cards.  Where Suze Orman focuses on the importance of FICO score building, Dave Ramsey asks us to give up our FICO scores and get off the credit grid entirely.  Cash is king.  He calls the credit card companies “snakes,” and warns that if we play with them we will get bit.  But then, I can’t help but think of the Pentecostals of Appalachia who handle venomous snakes in service of their commitment to their Christian faith.

Behold, I give unto you power to tread on serpents and scorpions, and over all the power of the enemy: and nothing shall by any means hurt you.
Luke 10:19

I suppose I enjoy just a bit of risk in my financial ventures.  Perhaps it is not for everyone.  I have taken out not one, but two, dividend paying credit cards.  These are credit cards that pay a small percentage back to me for every purchase made.  Ten cents a dance, so to speak.  Those funds collect over time, and when a minimum limit is reached may be requested in the form of a rebate check.  The trick to dancing with snakes is to remain aware and attentive at all times.  Never carry a balance, so as to never pay interest.  The interest is where the card companies make their money, and it is usually set at an intolerably high rate.  Believe me, I learned the hard way on that front and paid through the nose for several years to get rid of the debt I ran up on my cards during college.  Now I charge only what I know I will be able to pay off immediately when the bill comes due.  By doing this I build my FICO score and collect the dividend points I will later be able to retrieve as a check.

One obvious danger of the dividend credit card account is that it presents an incentive to run up more charges than you can afford to pay off immediately, because you earn more back more quickly with increased use of the card.  I have on occasion, especially for larger purchases, deposited the funds I’ll need to pay off the card balance in a savings account until the bill comes. That way I am not caught off guard without enough.  We have come to think of credit cards as a simple way of getting hold of quick cash so we can indulge our drive for immediate gratification.  This is where the trouble starts.  If we think of credit cards only as a tool to build a strong credit history and reap dividend dollars, we can actually profit from their use instead of ending up slaves to debt.

I like to use my cards for purchases I’d make anyway, like groceries and gas.  If I have a larger purchase coming up that I know I can pay off right away I’ll throw that on the card too.  I just charged a hotel room, for example, and before that amassed a good chunk toward my dividend refund by charging some dental work for my son I knew would eventually be covered by insurance.  I started off small and worked up to bigger items as I became more familiar with the debt burden I’d be able to handle.

Other dangers are of the usual credit card variety, like forgetting to pay on time so that you are fined or your interest rate is jacked up.  That would defeat the purpose of the dividend card pretty quickly.  I use a computer calendar in conjunction with an online checking account to send myself e-mail reminders when bills are coming due.  This makes it easy to never miss a payment.  It perhaps sounds like a lot to go through, but once the system is set up there’s very little time needed to maintain it and get your bills paid perfectly.  A good organizational system saves time, effort and money in the long run.

Dishonest money dwindles away, but he who gathers money little by little makes it grow.
Proverbs 13:11

So I’m heading out now for that hotel room I booked with my dividend card for a weekend of sun and fun on the So Cal coast… and now I’ve got a little bit of extra spending money in the bank too!  Thanks, dividend card!  Hmmm… maybe I’ll invest it in some proper dance lessons and make a business for myself.  I might even buy my very own snake.

Dave Ramsey

Wikipedia: Snake Handling