Source: here
On June 2, 2010, In Unintended Consequences, By Chuck Ponzi
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.
On May 28, 2010, In Uncategorized, By Chuck Ponzi
On May 14, 2010, In California Insolvency, By Chuck Ponzi
Schwarzenegger is appearing to do what we all hope the termed-out governor would do. Cutting. Axing. Hacking. Removing.
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!
On May 10, 2010, In Uncategorized, By Chuck Ponzi
On May 5, 2010, In Uncategorized, By Chuck Ponzi
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.
On May 4, 2010, In California Insolvency, By Chuck Ponzi
As many expected, California’s recent lightening of the budget problems were just an aberration and reality has once again kicked in.
Arnold is under attack from all sides, everyone thinks they have a better solution. As a term-limited governor, his best options are to take drastic measures and leave a legacy of strong footing. We’ll see.
There is so much waste, fraud, and abuse in our California government, one of the worst in pension benefits for state, county, and local employees. I wish everyone could have a pension, but the waste and abuse have made that not possible. Gaming the system within California has been raised to an art form.
The LA Times tells us that the reprieve California had believed it had won with an improving economy has been erased in April.
The April collections came almost entirely from personal income taxes. Most corporate and sales taxes have not yet been reported. If they, too, come in below projections, the state’s budget problem would grow worse.
The decline sets Sacramento back as next month’s deadline for passing a budget approaches. Lawmakers face a deficit of $18.6 billion — about 20% of general fund spending — with no easy options left for addressing it, as they have already cut state services severely and temporarily raised income, sales and vehicle taxes.
“One pillar of the budget solution just got destroyed, and there’s nothing that can happen between now and June that can get back the $3 billion,” said Stephen Levy, director of the Center for Continuing Study of the California Economy.
I suspect that the elections in California will prove to be polarizing this year. Even the Rasmussen polls show the state is deeply divided with plenty of room still to run, politics are shaped by economics this year more than in recent memory.
The more California raises taxes, the more productive companies and people flee the state. The more benefits it offers, the more that don’t have them will flock here. It’s a display of perverse incentives. Unless there is some outside force that generates significant growth and inflation, we have many more years to suffer economic unpleasantness.
On April 28, 2010, In Bubble, By Chuck Ponzi
Malinvestment.
Misallocation of Resources.
Schiff is right AGAIN
Our next bubble is still building. This blog could go on forever!
Every once in a while, some personality who has little sense other than a basic understanding of economics gives a rationale that is so absolutely appalling, that it requires one to filter out everything they say after that point.
Maria Bartiromo is one such person after her tirade on Tech Ticker.
She says “I don’t think there’s anything wrong with boom-bust economies, personally.”
Well, Maria, if I have to tell you, I’m sure you’ll have little understanding of it.
From a technical STRICTLY ECONOMICS perspective, she may be right. Bubbles, which are primarily made of excesses, produce something of substantial value to many over the medium or longer run. Unfortunately, you can’t feed your families, clothe them, or tell them bedtime stories with economic growth. The fundamental mismatch between Ms. Bartiromo’s understanding of how the world works in economics and GDP growth with boots-on-the-ground economic realities of individuals is fundamentally flawed. You see, this is about HUMAN SUFFERING, not about a few percentage points of output. You see, happiness is not measured in economics by the average, but rather by the disparity.
In fact, consider the tale of 2 countries
Consider Country A, whose GDP is $1Trillion, but 95% of that goes to 1 single person with the remainder shared among the the rest of society who lives in abject poverty compared with Country B with an equal number of people with only $800Billion GDP shared almost equally with a large and stable middle class. Would you say there is more human suffering in Country A or Country B? It’s clear that while these are caricatures of economies, I can’t imagine anyone concluding that people in country A are happier with a higher GDP per capita than Country B. It’s all about access to opportunity and a level playing field. We are looking less and less like B and more and more like A.
You see, Ms. Bartiromo, it’s not about the level of economic output, it’s about economic inequality. If there is any morality in the world (and I believe there is), it should be to provide opportunity for ALL to build wealth. This isn’t about socialism or capitalism, there is sufficient abundance in this world for ALL to have an excellent quality of life, excellent education, and access to redress for harm. Unfortunately, the middle class has been under assail for too long in this country. Economic equality equals more political stability, and the key to economic equality is protection for the poor, and limits for the rich.
Her galling out-of-touchness with America is appalling. It’s the modern-day equivalent of Marie Antoinette’s famous “if they have not bread, let them eat cake”.
On April 2, 2010, In Uncategorized, By Chuck Ponzi
High value retirees are going to bail us out of our overpriced homes in California?
Oops, guess not now that we have budget problems, and taxes are only likely to get worse.
I thought there was only “Taxachussets”, but now it seems that California is probably the worst place to retire financially. I guess paradise costs, right?
The most expensive, and therefore worst, state for retirees is California. Seniors in the highest tax bracket not only pay a whopping 10.55 percent income tax rate, but they also pay an 8.25 percent sales tax each time they go shopping. For a few people, though, the draw of Napa Valley, Hollywood celebrity sightings, and Yosemite might be worth the cost.
True, just be rich if you come here.
