Jobs, Jobs, Jobs, Recovery to Crash a trois
Chuck Ponzi December 22nd, 2008
Over 3 1/2 years ago, I posted my first “Jobs, Jobs, Jobs, Recovery to Crash” post and followed up when layoffs began in 2006 to corresponding residential lending.
My basic premise was that housing created a lot of imbalances, most notably in job creation. This included both traditional construction jobs as well as well paid professional jobs in lending and real estate sales. At the time, the ranks of California realtors had swelled to nearly one in every 50 adults in California, and loan brokers were probably not far behind. This not only supported high prices, but also ensured that even a slight downturn in one would result in a crash for the other. Indeed, when sales volumes hit their lows last year, it was hard for many real estate agents, or even loan brokers to continue to exist which is evidenced by the Lender Implode-o-Meter.
Today’s news comes from the Inland Empire (and Coachella Valley), which is now sporting some impressive (if downright incredible statistics):
This corner of Southern California had the highest unemployment rate of any area with 1million or more people in the United States — including metropolitan Detroit.
“We are the epicenter of the economic crisis in this country,” said John Husing of Economics and Politics Inc., a leading regional economist.
Federal labor statistics showed the two-county Riverside-San Bernardino area that includes the Coachella Valley with 9.5 percent unemployment in October, compared to 8.8 percent in metropolitan Detroit.
What’s interesting is how much previous forecasts from so many economic think tanks based in SoCal were based on strong employment numbers. While this has steadily worsened, it has not been completely unseeable; I saw it developing more than 3 years ago when I first began the blog as an outsider to the housing market. Shouldn’t more have seen it coming? I would argue no, due primarily to groupthink, and that we are generally programmed in larger groups to not question authority unless that kind of activity is rewarded; something that cannot be said about the last 30 years. Most Americans have been told to shut up, sit down, and take what we give to you. However, this blog is not about social commentary; greed is more of an objective observation to me since it motivates people. Understanding others’ motivations will ensure you can achieve what you want.
Which after all, leads us to the basic questions posed by Southern Californicators:
1. If we came to SoCal for the jobs, and they’re no longer here, why are we still here?
2. If there are no jobs (or the ones available are transitory) why does it cost so much more to live here than anywhere else?
3. Can weather pay the bills; house payment, electric, water, gas, and taxes?
4. If weather can pay the bills, what about places with crappy weather like the IE?
5. Also, if weather can pay the bills, what about cheap places with good weather like Florida?
6. Oh, yeah, can’t forget the once-in-a-lifetime opportunity to have your life destroyed by a massive earthquake.
All of these questions have in the past kept SoCal home prices pretty well tethered to similary type-housing prices in other states. And why did they go so out of whack this time?
Was it Subprime? No, that wasn’t widespread enough, since only a small percentage of the people were getting subprime loans.
Was it Option ARM? Maybe, but that’s a Ponzi scheme that requires a lot of confidence that others have more than you.
Was it Loosening Standards? Maybe, but then you gotta be able to pay off that note.
I believe, in the end, the only conclusion that one can come to after so many other possibilities is that people were irrationally optimistic about housing. Just like internet stocks in 1999. Just like Tulips in the 1600’s. We really have learned nothing, and many will lose their entire lives’ savings from it. Hopefully, most of the innocent can keep their jobs, but I’m not optimistic. I believe unemployment will get worse before it gets better.
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Great post. I think the presence of the entertainment industry adds to the wackiness. And the weather… as someone who lived in the Midwest, the weather is a big plus.
But you are right, people have some very unrealistic ideas about housing. On the various RE forums I read, at least once a week someone pops up declaring what a great investment buying a house is. Never mind that studies have proven this to be untrue. All they would have to do is look at a chart of inflation adjusted home values to see that they are as likely to go up as down, and that’s not even counting in the interest payed, taxes, upkeep.
LA was badly overpriced even before the boom and then just got insane. I wonder how low it will get now.
Chuck, you state that sub-prime was a small percentage of the lending activity which seems a bit mis-stated. The overall total mortgage loans including loans prior to the big swing we encountered may reflect that sub-prime could be a small percentage of the outstand mortgages. The information from different sources showed that sub-prime / Alt-A / ARM loan activity during the past 4 years approached close to 1/3 of the new loan activity. This feeds into the frenzy that occurred when everyone took on more than any traditional loan would have allowed from a buyer’s leveraged amount. If the lending standards had not gotten as lax, would their still be enough demand to maintain the prices that we saw towards the end of 2007…. I do believe we are still going to see additional pressure on the current median price given the next wave of the ARM loans that will reset in 2009 with the compounding effect of a weak employment outlook. I’m a big fan of the site and have always been alignment with all of your views but just a little concerned about your call on this situation…
CK,
Subprime has always been a component of housing, perhaps even, as you state, 30%. Although official statistics pegged it at less than 25% of overall fundings at the peak of activity in 2006, and a significant portion of that was due to the compressed reset schedule most subprime loans had (2/28) vs 3,5,7,10, and 30, so they were more likely to be a larger portion of transactions than of the housing base. Still, my point was that it the problem could not be explained simply by that effect. Perhaps if I said “Subprime, maybe” instead of “Subprime, no” the sentence might have read slightly different, but had similar meanings. Any way you slice it, subprime alone could not have created the bubble. For example, most of the rest of the developed world had a housing bubble too, but very few countries had an equivalent “subprime lending”. It all came down to an increased appetite for risk lulled away by excessive optimism.
Chuck Ponzi
Great post Ponzi, its the “not optimistic” that keep me coming back to your blog
. And you will have to trust me, I am an upbeat happy go lucky guy. I am otherwise an optimist, have a great professional job and great house etc., not in any way affected by the bust (yet). I moved away from there 9 years ago. I did not fall for the blind optimism I saw in my SoCal family and friends that all thought that not only buying homes there, but living there with mostly mediocre pay was a smart thing to do. I left twice, both for the same reasons you state above.
Who doesn’t like nice weather, but at what are you willing to pay for it? Living the paycheck to paycheck lifestyle, or anywhere near it, is not worth it to me.
Now and then I still try to get inside their heads to understand what they were thinking. I grew up in the beach communities amongst the spoiled kids, yet I was very middle class. I know the stereotypes well. My fathers side of the family fit that mold, yet are only now barely upper middle class in SoCal Standards (ie. 100-150k a year there does not mean you are even close to being wealthy or really even well off).
So here goes another theory of mine, of why prices were so out of touch with other areas of the country.
It has a lot to do with the pride of superfluous ownership (lack of better words). To convey that thought a little better, its about making something more attractive only because it is expensive. Certainly not a new revelation, but just in case you need it, here is an example.
Example: two hot sports cars roll off the assembly line one behind the other. They are identical in every way, even color. A dealer walks over with two window stickers, one for 80k and the other for 130k, and slaps one on each car.
Now the dealer walks over to YOU, with the keys and says: “take one, its yours”. Which one would you take? (Me, I would probably take the one with the shortest walk to the driver side door, but you know how the mind thinks).
Looking at a row of house, people see the price tag as a big part of the ‘value’ disregarding what it is worth. Then one day money comes pouring out of the credit machines, and the price is almost irrelevant when it comes to actually paying for it. “Just grab the expensive one”, throw a little bolstered SoCal ego in the mix, and there goes the neighborhood.
The NAR and their many associates feed on this behavior, literally. Is it really a wonder that so many bought into their mantra?
Chuck… yes, speculation was a key component during this run-up. I also state that the financial institutions really cooked this mess by letting the loan standards hit bottom and running complete freedom without any regulations. Again, maybe I was reading into your initial comments too much but it seemed a little of tilt from the Chuck Ponzi I’ve come to know…..
Yes, believe me, weather is a big plus. Even in the sweltering, smoggy IE. Especially for someone getting older. Dealing with snow in the winter can become very tiresome. It becomes impractical at some point if you have the money to move elsewhere. Florida is warm, but there are costs associated with hurricanes. Also, Florida is extremely humid and buggy in the summer. That’s not the case in California. Other states have lower income taxes, like Texas, Wyoming, Nevada, but … It may be hard to understand because you live in SoCal, but there’s a reason that real estate is priced the way it is there. And I say a big reason is the climate. Along the Southern California coast, the climate can’t be beat.
Is the “sweltering, smoggy IE” much better for someone getting older? I prefer clean air and cooler temperatures. To each his/her own I guess.
The number one answer I get from friends and family about why they choose to live in SoCal is weather, access to “culture” and big box stores. Does that outweigh the numerous hassles abound?
I agree with SoCal homes being priced higher due to the weather. I would definitely pay more for better weather. But point being: HOW MUCH are you willing to pay? Is is worth triple or quadruple what a similar house would cost 500 miles away in a less congested, less polluted environment, and that likely has great seasonal weather? That is up to the person, some people have more dollars than sense (cents, ;-P). Additionally, there are much higher taxes, in fact the second and soon to be the highest taxes in the country. Then there is traffic, crowds, water shortages, illegal aliens and other social problems. Time is money. The less time you spend in your car, them more time you could be doing productive activities or spending it with your family. That’s not for me.
What do I know? I have lived in SoCal twice, Hawaii twice, Alaska twice and Washington State once. Finally at 38 YO, I have settled down in the beautiful Kenai Peninsula of Alaska. This is the crappiest weather, the most beautiful and the best State I have ever lived in. I guess there will always be a tradeoff.
(sorry for the life story again Chuck P., har, har, just letting the readers know my from where my point of view comes from: a SoCal export)
Old mess: As nice as it may seem the grass in not necessarily greener beyond the California border. A number of years ago I left a six figure job and moved to the South, with a house almost completely paid off, a business owner for eight years, educated and experienced… there was no way to fail. What people do not see is the diversity of people, jobs, and life styles… something the South does not embrace. Prejudice not only comes in skin tones, (Blacks, Latin’s, New Yorkers, Californians, Floridians….) all in the name “Northerners” (even though you are from Southern California). After a year and a half of little to no work (the resume shouts “outsider”) a job at Home Depot or Wal-Mart would have been a welcome sight. However, after depleting all of our savings, and living off the equity of the house, I hobbled the family back after seven months of separation. I am glad to be back after the loss of hundreds of thousands of dollars – if there is no work here, I can drive farther, and call companies that will at least take my call.
New mess: The first month of the return… our rental house was robbed – only about twelve hundred dollars of computer, camera, and I-pods were taken, but after a few days of inspection, our pass-ports, social security card, and credit, and banking statements were taken. I quickly took the money out of the bank and placed it safely into the stock market… good thing, someone could have stolen all our money. In order to buy a house in Palmdale which is all I can afford now… I need to take the 50 percent losses due to the recent market woes, pay taxes on the withdrawal lower my over-head by two hundred fifty dollars…. Oh yea, I suppose to find out at the end of this month whether I have a job or not.
The criminal bail-out: – What Wall-Street, the oil companies, the executives at banks, car companies, and government officials do not understand is that…. they maybe helping breed the next in-house generation of terrorists! -The next 9-11 event maybe done by just a few angry tax payers….
…….And I had my concerns about the Klan
Mr Mac, if only more people thought like you..and had the —– to expose the bastards who plan the highs and lows while they pull the rug from under innocent but also greedy and more often ignorant in American society….maybe and that is a big maybe we could have prevented the mess..because $$$ buys the best cover since they already have high power attorneys and gov’t officials in their world wide web….the world could have prevented most of the wars and especially this financial disaster worldwide.
Simply put ladies and gents of this tiny but could be mighty blog….who are the real bank owners…the real $$$ movers behind the corp names, foundations and organizations??????????????????????????????
the internet is great for researching and getting info…while always considering the source and agenda of those who post the info…again $$$ buys the best cover including gov’t officials as in the deregulation of the markets banks etc…if you don’t think this all was planned …you are very ignorant….if enough people get mad enough and have the —– just maybe we can expose the greedy bustards!
Re: your #6 “earthquake” point – the “not if but ‘when’ ” is much more relevant than one might think. It will take years for the IE, Antelope and Coachella valleys to recover from the RE crash, and the proverbial Big One is not proverbial any longer. It is overdue (according to the geoscientists at JPL), it will be bigger – m7.8 – than any quake in previous recorded SoCal history, and it will start in Coachella, rip straight through the IE, and then through the Antelope Valley.
http://www.shakeout.org/scenario/
I can’t predict the effect of this on those areas or even to all of SoCal, but it will certainly be another value-depressing effect (in addition to the thousands who are hurt or killed).