A couple of videos to make you think on the week following Thanksgiving. I don’t endorse all of the ideals posted here, but an informed population is hard to lead astray:
This one has kind of a Saturday Night Live feel, but serious message.
If, after that, you’re not sure if you should laugh or cry, this should lift your spirits.
After Mozilo sold Countrywide, the most trash-filled piece of financial garbage to some rich fools who soon became parted with their money, many in the bubble blogosphere assumed that at the very least, some criminal activity had taken place by CEO Angelo Mozilo who had reaped more than $300 Million (yes, you read that correctly) in sale of his stock.
Imagine all of our surprise when not only did nothing happen, but we heard nothing of the matter whatsoever. What ever happened to financial fraud?
Well, at least the SEC had enough presence of mind to fine the crap out of him and get a settlement check. Hurry, quick, I would cash it right away, but don’t spend it all in one place, you might need to hire some people to investigate all of the other financial frauds you’re responsible for finding. (Madoff, Stanford, etc)
Either way, I’m glad to see SOMETHING happen. Couldn’t happen to a nicer guy, too.
As readers have no doubt noticed, my posting has become more and more erratic and eventually fallen off of a cliff.
Part of that is because my professional life has come to the forefront since it is firing on all cylinders; advancements in that area come with a price tag, and the other part is because I have been diligently seeking a home for my family. With a third addition to our family, we have decided that while there is still a great deal of danger in the housing market, we have decided to purchase a home. Make no mistake, I am not advocating buying a house at the present time for financial reasons, I think we have a lot of malaise at the present time, but after all is told, it is about the same price as renting, since interest rates are very low. I intend to occupy the house for a long period of time, making my entry point less important to my longer-term emotional and psychological well being of my family.
If anyone wondered, yes the house is a foreclosure, and yes it requires a lot of work. I highly recommend having a good agent in your corner, since negotiating without one doesn’t strengthen your position, and my agent, Brad Davidson offers a rebate of a portion of his commission to offset your efforts in finding the house. If you’re in the market, I recommend contacting him at WeHelpUBuy Realty. He’s a good friend and excellent agent.
In the end, we waited over 6 years before becoming homeowners again, we found that the emotional decision to buy a home is quite powerful for people that have already owned; it was for us.
Feel free to ask any questions that you might have in the comments; I will be as honest as I can, keeping my identity private.
Felix Salmon, blogger of the New York Times has done a good job of following what strategic, or otherwise, defaulters have been doing for some time. I would say that not only is the trend going to continue, it will likely be the death of the housing market. Because, if you think about it, why would someone continue to pay if they know that they can live rent or payment free for more than 2 years.
People normally only lived in their homes for 5 years, and according to FHA standards, you can buy 3 years after a foreclosure. With the money saved from payments, you could live for nearly half of the cost of renting, only suffering occasional negative credit events. Throw in a good age discrimination lawsuit, or some other such rubbish, and I suppose someone who is 60+ could live quite a long time in a home without paying.
I often relate back to a friend of mine who TRIED to give back their mansion in Laguna Niguel for 26 months. The banks FINALLY took it back only after a short sale. If someone wanted to, they could drag out the foreclosure process with regular short sale offers and requests for 3 or more years, I believe. In Southern California, where rents on SFH’s can be 3K+ per month, that means that a person could amass over 100K in that time, sufficient enough to live off of for some time afterwards. One could be debt free otherwise, have lavish vacations, buy luxury cars, or simply save by stopping payments on their home.
And, so long as the banking system is in a state of quasi-nationalization, there is no reason for the banking system to foreclose. In the present state where all foreclosures are seen as BAD in the mainstream media, banks would rather suckle off of Uncle Sam’s teat than try to force deadbeats to pay up; it’s a politically stable decision. Indeed, it seems we are approaching the day when the US Government is paying everyone’s mortgage, at least indirectly in the name of maintaining our financial system. Ironically, many of us laughed inside when we saw the clip of the girl screaming “Obama gonna pay mah mortgage!”. The laugh, it seems, is on us. He is “gonna pay (our) mortgage!” Well, actually not mine, I rent. Only in today’s America, can we see that renters are treated with such disdain that they get neither tax breaks, legal protection equal to homedebtors, nor could we have our payments stealth-subsidized like deadbeats do. If there is no god, there must at least be a karma out there ready to bitch-slap our country something fierce. There will be consequences to the federal government paying everyone’s mortgage, and I only hope that if that means a total collapse of our country’s fiscal state that many of us who were conservative will be able to escape with a portion of our hard work’s output intact.
In his own words, there are no more low-hanging fruit (in his mind) in the California budget. Of course, that’s only if you ignore the elephant in the room which includes the government employees’ exorbitant pay and benefits packages, or if you ignore the no-bid public services contracts. Yeah, there’s nothing else to cut except major portions of the budget.
From the LA Times:
Elimination of CalWorks, the state’s main welfare-to-work program, would affect 1.3 million people, including about 1 million children. Average family grants are around $500 per month. Abolishing those payments would save the state more than $1 billion, the administration said.
Families would also lose state-subsidized day care under the governor’s proposal; about 142,000 low-income children would be affected. The state would save $1.2 billion with such a cut. Preschool and after-school care would remain in place, as would some federally subsidized day care for the neediest children.
Local school funding would remain at its current amount. Education officials say that amounts to a multibillion-dollar cut, as they won’t have the funds to cover scheduled cost-of-living raises and other increases. Education spending has already been rolled back substantially, forcing many districts to impose layoffs, eliminate programs and increase class sizes.
The governor had been expected to call for the elimination of in-home healthcare for the elderly and disabled. Instead, he proposed cutting roughly a third of the program’s budget to save $637.1 million. Previous efforts to scale back the program have been blocked in federal court. Schwarzenegger’s budget does not say how the new attempt would withstand a legal challenge, citing future “consultation with stakeholders.”
The plan would reduce prison costs by shifting the responsibility for state inmates to the local level, as the governor has proposed before. The state would save $244 million by sending low-level felons to local jails instead of state prisons. Counties would receive $11,500 per offender to help pay for probation, drug courts, and “alternative” methods of custody, such as home detention.
The governor is proposing to borrow $880 million in gas tax revenue and other funds from state transportation programs to help balance the budget. He has also revived a plan to raise more than $200 million by installing automated cameras to ticket speeding drivers at red-light intersections across the state.
As I travelled to work this morning, I wondered to myself what would happen the state took seriously the enforcement of traffic rules… yikes!
These austerity measures only serve to exacerbate the problem. Indeed, this is precisely why governments should end structural deficits, because then there is nothing to borrow in times when it is really needed. Nothing was set aside in California in the past 30 years. Nothing.
If our seven fat years are behind us and we look forward only to 7 lean years, California will most assuredly be emptying out. This does not bode well for housing prices going up in Southern California any time soon; not that I thought they ever would.
Even after these cuts, it appears that this will only partially solve the shortfall. Up to 50% more in cuts may be necessary.
Arnie, get your axe!
Casey Mulligan of the University of Chicago Economics wrote a great article at the New York Times today that explores the possibility that a significant portion of the housing bubble was actually justified, and that the new normal that we have reached might be some how a new normal. You really should read the entire article because it clearly dissects with a factual and reasoned bias, just how much housing prices should be.
From The Bubble Side:
Meanwhile, bubble theorists also say that today America is “overbuilt” as a result of the bubble. With too much housing and no additional demand to be supported by market fundamentals, real housing prices should, according to the bubble theory, be lower today than they were in the late 1990s.
From the Non Bubble Side
But another interpretation is that a large fraction of the housing price boom was justified by fundamentals (and next week I’ll consider some of the specific fundamentals that may have permanently increased housing demand in the 2000s). If so, we are probably asking too much of the Federal Reserve and other regulators to accurately disentangle bubbles from fundamentals the next time that asset prices rise.
I’m very much looking forward to his next installment, if this one is any gauge to the next one.
However, I’ll point out some concerns that I already have with the generic type of analysis.
1. I’ll side with many real estate agents in this in one way: Real Estate is local. Yes, you heard me right. However, this only damns places like Orange County and LA more than Inland California. While the inland areas have fallen as much as 80% in some areas, much of the coastal areas have remained priced barely below peak pricing. While the pressure in some areas is upward, much of the higher priced homes still have significant pricing problems, most notably manifested as years’ worth of inventory. Getting into Million+ homes and in some cases there are possibly decades of inventory at current prices and volume. We’d need to create a lot more wealth outside of housing to support the current prices.
2. Tax benefits are currently a major sticking point for many areas. With so much uncertainty about the future of our fiscal problems, both at a state and national level, one can expect a pretty significant overhaul in this area. Especially when considering that it would require an income substantially within the current executive administration’s definition of wealthy, and therefore fair game for further taxation.
3. I think Mulligan is oversimplifying the “bubble theory”. He assumes that bubble believers simply extrapolate based on inflation adjusted housing prices, leaving the above issues aside and ignoring the elephant in the room, credit prices (interest rates) and credit availability (looseness). There must be some factor that addresses the issues of credit, perhaps in the form of some coefficient (we can be assured that this is not 1), or as some derivative (because of the risk of selling into a restricted or pricier credit market). These mean that housing prices cannot be reflected dollar for dollar by interest rates, but rather a portion of lower interest rates while a portion goes to reward the borrower for taking on the risk of buying in a cheaper credit environment and selling in a pricier one. Few buyers consider the full 30 year or longer amortization of a loan in each and every home purchase. It is, after all, a place to live for the time being.
Nevertheless, this type of open debate means that at least we can consider the option and decide for ourselves, which if anyone remembers, is a far cry in sentiment from the bubble days of 2005 when the mere mention of a housing bubble would cause eye rolls and latent anger. I believe that there is overwhelming evidence that Coastal California has a significant imbalance between incomes and housing prices still to resolve. One has got to give sooner or later.
As a parting shot, I’ll present Mulligan’s chart which shows typical bubble theory pricing (lower than 1990′s). I’d put my own thinking a bit between both of them. I think people are still way too optimistic about housing in much of Southern California, and it’s reflected in the house prices. When it fails to deliver the goods, the actual price appreciation will need to eventually erase the “bubble gains” of the past decade.