He Never Saw It Coming
Chuck Ponzi June 29th, 2009
Why are we expecting him to solve the crisis he never saw until it was already on us?
The Creature from Jekyll Island: Power Grab 2009
Chuck Ponzi June 18th, 2009
If there was ever any doubt in your mind about whether there was an intended sinister motive behind a financial collapse, consider the following:
1. The Federal Reserve aided and abetted the Nasdaq/tech bubble.
2. The Federal Reserve intentionally created the housing bubble.
3. The Federal Reserve’s member banks held our federal government hostage in a modern “Financial Terrorism” world where if they don’t get trillions, they’ll blow up our economy.
4. The Federal Reserve inentionally stayed far behind the curve of the housing crash to force their agenda on the Executive and Legislative branches, and capitulation into massive federal bailouts.
If ever there was a secret society, the Federal Reserve must be at the pinnacle; operating a private organization as a quasi-governmental branch that controls our currency and our banking system. Even our Treasury Secretary, Timmy Geithner came directly from the Federal Reserve.
And now they want to control the whole of our financial world. Can you believe this?
At least some of our congress persons are beginning to question letting the fox guard the henhouse.
President Barack Obama’s plan to transform the Federal Reserve into a super-regulator ran into skepticism Thursday from lawmakers who worry that the central bank is not the best suited to keep an eye on firms deemed so big and influential that their demise could hurt the economy.
Democrats and Republicans voiced misgivings as Treasury Secretary Timothy Geithner began a marathon day of selling Obama’s financial regulatory plan to give the Fed more authority, create a new consumer protection agency and bring unregulated sectors of the financial markets under government oversight.
“I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles,” said Sen. Richard Shelby, R-Ala., noting that it also sets monetary policy, regulates banks and handles an array of other functions.
and
Committee Chairman Christopher Dodd, D-Conn., also raised questions about the use of the Fed for such an overarching task over the financial system and blamed it for “dropping the ball” on consumer protections. But he applauded the administration for including a new agency to protect consumers in their banking transactions.
Noting that banking interests already are criticizing the new agency, Dodd said: “The very people who created the damn mess are the ones now arguing that consumers ought not to be protected.”
Geithner said that in setting up the consumer protection agency, the administration was taking power away from the Fed even as it was adding to its authority.
“That is a substantial diminishment of authority, preoccupation and distraction,” he said.
It is likely the Fed itself will mount a defense to keep its consumer oversight duties. Fed officials believe their oversight of mortgages, credit cards and other products fits well with their duties to regulate banks, and that they have the right mix of experts — economists and lawyers — already on hand to do the job.
However, the Fed’s failure to crack down on shady mortgage practices during the housing boom has irked Congress and consumer groups. So has its decision not to speed up implementation of new rules providing consumers with better protections from abusive credit card practices.
Let’s hope to god that they do not succeed.
If your drunkard friend just crashed your car, why would you let them have an even nicer auto? This is really scary that our legislator are so stupid that they would even consider such a notion. We should be on a witch hunt right now, not involved in giving the “sorcerer” more power. This is dangerous stuff.
Why the Housing Bubble is Bogus
Chuck Ponzi June 10th, 2009
It’s always good to look back from where we came. Remember the go-go days of Real Estate in 2005 and 2006? Wish you could capture the zeitgeist in a bottle and open it up every once in a while just to see what it smelled like?
Well, it’s a little rancid now, but keeps the mental olfactory nerves sharp. Almost 100% of what Gary Watts wrote during his spastic fit of insanity in 2005 and sold to realtors and local boards as “research” is conjecture, misleading, or fabricated. I dare anyone to find a single sentence in his entire 2006 projection that was not wrong in some way.
Lest anyone think I am unjustified in my relentless criticism of Gary Watts, I challenge anyone to find any point where he was right in the last 3 years. Consider even the following said in December 2007:
I don’t see a recession in 2008 but should the economy begin to slow down more rapidly than expected or mortgage interest rates begin to rise, that could put a damper on our housing market. On the Pro side, usually election years are very good to real estate with low interest rates and increasing employment, thus increasing the demand for housing!
Whaaaa?
When is the Bottom: Myth Debunking 1
Chuck Ponzi June 8th, 2009
I’ll start off by saying that I don’t know exactly when the bottom for Southern California is, but that I’m confident 2009 is not it, not by a long shot. So, with that in mind, I am beginning a series of systematic exploration of previous bubbles and how we might relate this time around to give us a reference to what me might expect this time.
There seem to be some myths circulating both in the Financial Media as well as the blogosphere about exactly how long housing busts tend to last. To clarify some of these myths, I’ll borrow heavily from 2 of the best know (and contemporary) housing busts, the Southern California 1990’s housing bubble and bust and some from the Japanese housing bubble and bust.
These myths are some that have cropped up at reputable financial media sites and on television often (I believe) because the human attention span is very short. We find it difficult to believe that bad times can persist for a long period of time. We have a coping method that tends to follow a predefined path, often known as the Kübler-Ross Model or Stages of Grief. Over a period of time, we pass through Denial, Anger, Bargaining, Depression, and finally Acceptance. However, keep in mind that just because humans have gotten over the financial tragedy of the 2000’s (which we haven’t), there is no specific reason why that should translate into a financial or economic end to the problems. The real world operates outside of our internalized emotions.
Still, these myths are strong emotional pulls that if believed, will lead you astray. Over the coming week or 2 I will be taking a guided tour through some of the strongest myths that have gripped the housing market. Let’s start with the most pressing one right away:
Myth #1. As soon as the recession ends, housing will jump right back up.
This myth plays on the fear that was found to be prevalent during the housing bubble. It plays on the “buy now or be priced out forever” fear of being left behind. Indeed, one could argue that immediately after the 2000 recession, housing prices quickly vaulted to the stratosphere and left many high and dry. If this were to happen again, all those currently sitting on the sidelines would once again be left in the dust as many others partake in the new propserity of housing wealth.
However, keep in mind that the 2001 recession was not housing led like the July 1990 recession. While both were quite short, they were very different. In Southern California, the effects of the 1990 recession were felt long after it ended in March 1991. Indeed, housing prices had been inflated to bubblicious prices as early as 1989. As the economy strained under high housing prices, both consumption fell as well as pulled a number of financial institutions with it. Albeit much smaller than the present crisis, the Savings & Loan crisis still strikes fear into the hearts of many bankers. That was supposed to be “the big one”, and yet, it appears nothing was learned by that experience about residential prices risk taking. This crisis played out much like the previous crisis, where defaults led to restricted credit which in turn hurt businesses. Households strained under the increased debt load that had been created during the housing bubble in the previous 5 years, and that final crack shattered the weakest financial institutions. The effect snowballed into a full blown crisis, requiring the formation of the Resolution Trust Corporation, or RTC. The RTC did what the banks could not, liquidate assets in a timely manner. This quick liquidation set the stage for a much stronger rally later in the decade and avoided a Japan-style housing bust where banks hold bad assets for fear of becoming insolvent and being remanded into recievership unwillingly.
First off, let’s clearly define how long housing prices fell during the 1990’s following the late 80’s bubble. The following graph is inflation adjusted to 2008 prices, but the amount is not as important as the trip that was taken:
Source: Dataquick and BLS
As the readers can easily see, the 1990’s bubble was retraced in nearly every single major SoCal county. Orange County, for example did not complete a full retrace as it developed from a sleepy surfing and vacation town into a pricey suburb of the LA area. However, for most counties, there was a full retracement to the pre-bubble inflation-indexed prices.
There are some notable trends that one can see in the numbers. First, that falls were fairly mild, so there was a transitory period for homeowners who had accumulated significant wealth through paying down mortgages and through inflation could still “get out” before the door closed. This is important to the swiftness and the after-effects of the housing bust because it differs significantly with the existing housing bust. Indeed, so slight was this housing bust, that many believed we would fare the same this time around (allowing inflation to eat away at the home prices makes them an economically bad decision, but not necessarily a bad financial decision if the price is right and the tax benefits are right as well). With prices clearly more than 20% off in all counties this time around, a recession that it likely to be almost 3X as long as the 1990’s and with reckless speculation not seen since the 1920’s, a “soft landing” was never in the cards. This the hardest landing we will have in our lifetimes. Make no mistake about it, this will not be easily forgotten like the last bubble.
The next notable trend that one finds is that even after the recession ends in March 1991, housing prices continue to fall for 5 additional years until 1996. This was primarily because several of the savings and loans tried to time the market, waiting for a rebound. Only to find that their hesitation caused them to miss higher prices, eventually dumping them later as regulators forced them to liquidate into a softer market. In a housing bust, there is no orderly decline, if we have learned one thing from prior busts, it is this: the longer you wait to foreclose and liquidate the property, the greater the economic loss and the more significant the effect to the financial institution. In fact, so ingrained in the minds of market participants that housing was a risky investment that the greater masses shunned it for some time afterwards, only beginning to buy again when the argument was much more compelling than renting. When buying was cheaper than renting, even accounting for potential losses. We have not yet reached that point, as any further declines wipes out significant equity since in most places in Southern California, renting is still a significantly cheaper option after factoring tax consequences for most locals.
To give you a breath of where we have come so far, the following is the Southern California Housing Prices inflation adjusted for 2008:
Source: Dataquick and BLS
You can see that there has been no transition time for owners to jettison out the escape hatch. While this is primarily a problem to do with mix (very low priced properties selling vs a normal mix), I will explore this more in detail in a future myth review. Please note that even with the dramatic drop in prices, we have not seen a full retracement. With the magnitude of the present bubble in perspective, I find it unlikely that at present course and speed we will simply give up at a retracement to prior fundamentals. I fully expect an overshoot of epic proportions as the bubble that preceeded it was of epic proportions. Here’s a chart showing the 2 bubbles side by side, adjusted for inflation:
Source: Dataquick and BLS
Finally, it is important to remember that when housing does bottom, it does not turn on a dime. It is much like a vast oil tanker that requires significant time and distance to change course. Ingrained social opinions are slow to change, but once they do, they don’t flip flop back. We saw this in the Wile E. Coyote moments of 2007-2008 in our present bubble. This recession is going to be significantly longer, and the recovery substantially slower than previous ones. Indeed, the “truth about jobs” is that there may be many fewer than before because we are no longer driven by a significant bubble in Southern California (at least in the forseeable future) while the late 1990’s recieved a shot in the arm.
Some thoughts about the current unemployment rate (which is over 10% in California at the present time) and future projections over the next 2 years.
Indeed, remember that in past recessions, unemployment peaked some time after the recession ended, hence the effects of the recession being felt much longer than the recession lasting. It is important to remember that the end of a recession only signals that the economy has stopped contracting. It does not mean that there will be a quick return to the heady days of the prosperous times that preceded it. This time might be much worse, as household balance sheets are still carrying considerable debt with litle savings. Until those are rectified, it is hard to see any meaningful reignition of economic activity that is not inflation-linked. And, with joblessness at record levels, any inflation we do see will not be the kind of inflation we saw in the 1970’s, constituting a wage-price spiral.
We’ll touch on that next time when we discuss Myth #2, Housing Prices will jump as soon as unemployment begins to come down.
Will wonders ever cease?
Chuck Ponzi June 5th, 2009
Pigs fly, cows talk, and Realtors are now endorsing lower housing prices in California?
You heard me right. Realtors are beginning to speak like bubble heads have always done.
Painful as it is, all this housing distress has one advantage, says Joel Singer, executive vice president of the California Association of Realtors.
It’s no longer impossible to buy houses in a state where median prices hit nearly $600,000 in the recent boom.
“In a sense, what has occurred is probably in our best interest,” he told hundreds of real estate agents gathered Thursday in Sacramento for a statewide convention. “As brutal as it is if you’re a homeowner who is selling, this incredible drop in prices brings California closer in line to the nation as a whole.”
Today’s statewide median, skewed by high numbers of bank repos and other distressed listings: $256,700.
“That affordability, in itself, will help cure this problem in the future if we can maintain it,” said Singer. “It also makes California, in my book, a more competitive place, something we all need in terms of long-term economic growth.”
The fact remains, high housing prices are a drag on the economy, whether you like it or not. Like an illicit drug, the high produced by rising prices of assets seems like an innocuous and downright positive thing at first. Long-term, the higher percentage of income spent on housing translates into lower consumption and inevitably fewer jobs. Thus, higher housing prices causes the crash; sowing the seeds of its own destruction.
Southern California Housing Bubble Blog has been here to remind people that we don’t want lower housing prices simply so we can buy a house (although that would be a prerequisite for me), it is because it is inevitably better for our society and our competitiveness as a city, state, and country. Everyone can enjoy a higher standard of living with lower prices. Higher housing prices produces more economic friction, locking people into locales that may not economically make the most sense for the whole.
Now, it seems, the only people left out of this, and they are beginning to sound stupid, are our lawmakers. Higher prices do NOT translate into a better economy. It is the higher prices that caused a crashed economy. Let’s all hope that some of our enlightened congresspersons can see the light of lower prices and start to INCREASE the rate of foreclosure, not slow it down this will speed the recovery in our economy.
Free* Government Money
Chuck Ponzi June 5th, 2009
If only it were true.
As my former Economics Professor always said, “TNSTAAFL”. That stands for:
There’s No Such Thing As A Free Lunch
The Tan Man: Day of Reckoning
Chuck Ponzi June 4th, 2009
Much like California, it looks like our favorite Oompa Loompa of Calabasas riches is being charged with civil fraud.
The Tan Man sold somewhere near 300M of Countrywide stock, all the while reassuring investors that nothing was rotten in Denmark.
CNBC has a decent story, but Yahoo outlines it better:
Federal regulators on Thursday charged Angelo Mozilo, the former chief executive of mortgage lender Countrywide Financial Corp., and two other company executives with civil fraud.
The Securities and Exchange Commission’s civil lawsuit, filed in federal district court in Los Angeles, also accuses Mozilo of illegal insider trading.
Countrywide was a major player in the subprime mortgage market, the collapse of which in 2007 touched off the financial crisis that has gripped the U.S. and global economies.
…
Civil fraud charges also were filed against Countrywide’s former chief operating officer David Sambol, 49, and ex-chief financial officer Eric Sieracki, 52.
The trio “deliberately misled” Countrywide shareholders, SEC enforcement director Robert Khuzami said at a news conference at agency headquarters. While they painted a picture of robust performance, the real Countrywide was “buckling under the weight” of soured mortgage loans, he added.
Khuzami said Mozilo reaped nearly $140 million in illicit profits from his stock sales.
Housing Panic would be proud. It looks like Keith finally got his request.
I have long said that the housing bubble would not be over until long after the perp walks have ended.
Schwarzenegger to California: Day of Reckoning
Chuck Ponzi June 2nd, 2009
I love it when a plan comes together – A-Team’s Hannibal
Arnold Schwarzenegger has fired off his assessment of where California is today. In short, we’re screwed.
Declaring that “California’s day of reckoning is here,” Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.
Speaking to a rare mid-year joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.
“People come up to me all the time, pleading ‘governor, please don’t cut my program,’” he said. “They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It’s an awful feeling. But we have no choice.
“Our wallet is empty. Our bank is closed. Our credit is dried up.”
There’s still some hope: Here’s where the cuts are coming from:
Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.
Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; cutting pay for most state workers and laying off others; closing 80 percent of the state’s parks, and wiping out or paring back on health and social service programs for California’s neediest residents.
California is broken and needs to be fixed to keep people here. Maybe that’s not what we want. Growth for growth’s sake has proven to be an untenable solution for us. While we mourn the loss of programs, let us be happy for the new found frugality and self-sufficiency. Maybe some day we can save up in the fat years to prepare for the lean years.
- Deflation , Panic , Psychology , SoCal , Unemployment
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More Mortgage Meltdown
Chuck Ponzi May 31st, 2009
Today I came across a detailed analysis of the mortgage meltdown in California along with detailed graphs, long-term analysis, and an indepth look at where we are in the overall housing bubble.
The T2 Partners paper provided by More Mortgage Meltdown can be downloaded here:
I recommend looking over the entire presentation, as it provides a play by play of where we have come in the last 3 years, and what to expect for the coming 3 years. I agree with the general assessment that we are in the middle innings of the overall price declines (perhaps in Inning 5 of 9), but the real movement is yet to come in the middle and high-end price tiers. Of course, there is no way of accounting for significant outside involvement that might change that outcome, however any change must be structural and permanent (such as offering citizenship to anyone purchasing real estate, offering 20% of the purchase price, no questions asked by the government, or total global thermonuclear war. I doubt many can understand what those outcomes would look like, so we’ll focus on the most likely scenarios.
The key is really what is happening and will continue to happen California. Their assesment, given by Mark Hanson, is in my opinion spot on to how I expect the next 2 years to play out:
California housing — at the low end — is ‘bottoming’ mostly because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.
But the moratoriums are ending and the number of foreclosures in the pipeline is massive — they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to 9 month highs — there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn’t a foreclosure. However, the new ‘batch’ are not only from the low end but a wide mix all the way up to several million dollars in present value.
Because the majority of buyers are in ultra low and low-mid prices ranges, the supply-demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon.
You can find this narrative (and much more) on slide 62.
US Debt Trip
Chuck Ponzi May 21st, 2009
Barry Ritholtz had this up, and it’s interesting how this country has become entranced by what appears to be becoming a cult of personality.
There is serious potential for federal crowding out of private enterprise. That was one of the reasons that the Great Depression lasted as long as it did. The federal stimulus was so unevenly applied that it distorted natural incentives.
Here’s another visualization of part of the problem (added later).
