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!

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.

Click here to view the embedded video.

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.

Misallocation of Resources.

Schiff is right AGAIN

Our next bubble is still building. This blog could go on forever!

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”.

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.

Of course, if he “owned” a house, he could live for several years without worry.  Nice.

When the first alarm subsided, the tulip-holders in the several towns held public meetings to devise what measures were best to be taken to restore public credit. It was generally agreed that deputies should be sent from all parts to Amsterdam, to consult with the government upon some remedy for the evil. The government at first refused to interfere, but advised the tulip-holders to agree to some plan among themselves. Several meetings were held for this purpose; but no measure could be devised likely to give satisfaction to the deluded people, or repair even a slight portion of the mischief that had been done. The language of complaint and reproach was in every body’s mouth, and all the meetings were of the most stormy character. At last, however, after much bickering and ill-will, it was agreed, at Amsterdam, by the assembled deputies, that all contracts made in the height of the mania, or prior to the month of November, 1636, should be declared null and void, and that, in those made after that date, purchasers should be freed from their engagements, on paying ten per cent to the vendor. This decision gave no satisfaction. The vendors who had their tulips on hand were, of course, discontented, and those who had pledged themselves to purchase, thought themselves hardly treated. Tulips which had, at one time, been worth six thousand florins, were now to be procured for five hundred; so that the composition of ten per cent was one hundred florins more than the actual value., Actions for breach of contract were threatened in all the courts of the country; but the latter refused to take cognisance of gambling transactions.

The matter was finally referred to the Provincial Council at the Hague, and it was confidently expected that the wisdom of this body would invent some measure by which credit should be restored. Expectation was on the stretch for its decision, but it never came. The members continued to deliberate week after week, and at last, after thinking about it for three months, declared that they could offer no final decision until they had more information. They advised, however, that, in the meantime, every vendor should, in the presence of witnesses, offer the tulips in naturta to the purchaser for the sums agreed upon. If the latter refused to take them, they might be put up for sale by public auction, and the original contractor held responsible for the difference between the actual and the stipulated price. This was exactly the plan recommended by the deputies, and which was already shown to be of no avail. There was no court in Holland which would enforce payment. The question was raised in Amsterdam, but the judges unanimously refused to interfere, on the ground that debts contracted in gambling were no debts in law.

Thus the matter rested. To find a remedy was beyond the power of the government. Those who were unlucky enough to have had stores of tulips on hand at the time of the sudden reaction were left to bear their ruin as philosophically as they could; those who had made profits were allowed to keep them; but the commerce of the country suffered a severe shock, from which it was many years ere it recovered.

Remind anyone of something?

All because of tulips; consider how much worse a housing mania can be.  Look to Japan if you want to see how housing bubbles end.  Theirs ended in 1990.

Click here to view the embedded video.

I say yeah, right.

In most cases, short sales are heavily weighted towards the lender in California.  In many cases, borrowers are better off allowing foreclosure.  Tell the bank to pound sand.

Of course, this is not a moral discourse.  I’ll assume that you’ve done your diligence in trying to keep your property, and haven’t heloced the heck out of the place.

Is a short sale right for you?  In most cases, no.  Mark is dead wrong about California.

What do you think?

From Calculated Risk

DCB?

CALPERS, the California Public Retirement Pension fund is about to learn that lesson the hard way. Formed in the 30′s, but built on the back of the 50s through the 80′s, it’s investment options expanded from solely bonds to real estate, to equities.  During this time, America experienced the greatest growth of real estate, equity, and bond values.  But most of all, of leverage.  Sadly, most of the value “growth” in the US over the past 20 or so years has been attributed directly to monetary growth.  Indeed, as yields on lower risk returns shrink, perception of higher risk equity values go up.  Unfortunately, for many, this mirage has much more power, and this perception that trees grow to the sky and all charts go up and to the right meant that there was little risk in promising free healthcare and pensions to the moon for all who worked for the grand state of California.

Except that it can’t.  The high profile failure of CALPERS has been nothing short of stunning.  Having lost more than 30% of its total value in 2008, it is unclear how the future promises made to state employees can be filled.  Especially when those promises are built on expectations that returns are 7.75% over the long run.

SFGate recently reported that they are considering lowering their benchmark rate above.  As reported:

Larry Fink, CEO of the giant money management firm, BlackRock Inc., with which CalPERS has invested, told its board in July, “You’ll be lucky to get 6 percent on your portfolios, maybe 5 percent.”

Even that might be optimistic.  When mortgages were returning 10% and you could expect a 1% chargeoff ratio and a 1% management fee, you could maybe meet the goal with a moderate amount of leverage.  When mortgages are yielding sub 5% and chargeoffs and management fees eat up most of that, you’d have to create an insane amount of leverage, which only increases your risk, to make it even rationally feasible, if even possible.

Why is this important?  Well, the benchmark rate determines the contribution rates, both of members and the State Government.  This is only one of many elephants in the room in California that noone wants to talk about it.  At precisely the time when the state can least afford to spend even more money, it may be required to.  Which only makes the situation more dire.  State and local government employees in California (in many, but not all cases) already enjoy higher pay than their private enterprise counterparts.  In addition to that, they are afforded better health benefits, vacation packages, and generous pay packages and benefits upon retirement.  When the world has all but forgotten pensions, many state employees enjoy the grandaddy of them all, a defined benefit pension plan.

It even seems quaint to talk about it since few still understand the difference between the defined benefit and defined contribution pensions.  It will suffice to say that the defined benefit is almost always much, much better, and much, much more expensive.  It’s quaint because most people who are not state employees in California do not even have a significant 401K, much less a crappy pension.  This is nothing compared to the Cadillac pension plan that virtually ALL state employees get.

So, to sum it up, California faces a budget shortfall of epic proportions.  It has parlayed every non-GAAP accounting trick in the book to delay the day of reckoning, hoping that pink ponies save them, but they have not.  The bill is quickly coming due, and indeed, the state may have even more troubles.  There is no way out.  Without serious pension reform (hand their asses back to them), taxes will have to be raised.  Given that the state already recalled one governor over licensing fees, I see this one going over like a lead balloon.  Meg Whitman has been campaigning that she can fix this mess.  I’m sorry, but there is nothing that will fix that mess except for a miracle or much higher taxes.  This still will need to invent something seriously out of this world to make that happen, or bite down on the bullet of austerity to balance the budget and maybe put something away for a rainy day (if it gets any rainier, this place is going to figuratively float away).

We need another investment bubble.  Luckily, the goldrush of 1849 proves that there is significant gold in them thar hills.  Perhaps we can put a tax on pickaxes and heavy machinery that will help us cover some of the shortfall.  With the bubbly prices that gold is now fetching, it might just do the trick.  However, I wouldn’t expect the Marijuana tax proposed earlier to make a big dent.  We’d need some serious potheads to move here to make it work (and they’d have to be stinkin’ rich to boot).

No, perhaps we we all need to collectively do as Californian’s is to do what CALPERS will in the end be forced to do.  Lower our expectations.  But, when have you ever known Californians to do that?

However, focusing our entire energy on the positives means that we cane easily forget what we need to improve.  A great leader has the ability to both celebrate the successes while not forgetting the risks and failures.  One of the great potentials of this state is its ability to adapt; and many long-time readers know that I follow alternative energy very closely.  In particular, I love the ideas of small-scale energy production.  Not only because of personal independence, which I greatly favor, but mostly because so much waste and risk is created in large-scale generation and transmission.  Distributed energy grids mean that local generation can be more adaptive and reduce the possibility of large-scale outages (like during the California “brown-outs”) and grid cyber-attacks.

I see hope in California through emerging technologies.  Technologies that answer the problems of today.  If you haven’t yet heard of the “bloom box”, I recommend the below video.

Click here to view the embedded video.

Long-term California is a great place to be.  We only need to fix what is wrong with our present problems, and everyone can share in the prosperity together.

By staying current on emerging trends, you might also be able to increase your investments.  I know that my personal accounts more than doubled last year (2009) due to some timely purchases of energy-related investments.  Let’s all hope more come from our state.

KPBS San Diego did an interesting piece on raising taxes in California and Prop 13′s effect on this.

Thirty-two years ago, Californians en masse went to the polls and approved the largest tax-limiting legislation in recent history.  Basically, it limited the property taxes that could be assigned to a property.

In response, many municipalities responded by building more hotels, retail, and more while limiting the amount of houses (municipalities earn more money from sales and occupancy taxes than on property tax).  This leaves the state perpetually building too few houses, and worse, restricting adaptive reuse of residential real estate into higher density because of the reassesment rules.

Personally, there are 3 major qualms I have with Prop 13.

1.  This is not a homestead exemption, so it does nothing to favor homeowners over landlords (who already have strong incentives through.  This is landlord welfare.

2.  Commercial properties are not exempted (they have a fixed base as well).  This is fundamentally flawed, since it favors property-owning companies who lease as their primary business.  This is corporate welfare.

3.  There is no means test.  Millionaires have the same exemptions as indigent elderly.  This is welfare for the rich.

Unfortunately, taxpayers were sold that little old ladies were getting kicked out of their homes.  While this is true, we could avoid the landlord, corporate, and rich welfare by instituting some changes to the original proposition.

Instead, we have serious imbalances because cities favor not building homes unless they have significant Mello-Roos attached to them, allow corporate transfer of assets to perpetually avoid reassesment, and allows non-citizens and non-tax payers of California to receive the benefits of everyone else’s pain.  How do you feel about prop 13?

The money shot for me?

RAND (Caller, La Jolla): Thank you for taking my call and thanks for this discussion. I would just like to put two issues on the table. The main one is something that really shocks me, never comes up in these types of discussions, which is the distinction between commercial properties and homes. Of course, nobody wants homeowners to be taxed out of their homes but Prop 13 also holds down the property taxes paid by shopping malls, office buildings, all kinds of commercial properties. And they have a loophole that homeowners don’t have, which is that they can sell the holding company that owns the property and then someone else can take ownership of that property but, theoretically, it hasn’t changed hands, just the company has changed hands. And so there’s many commercial properties in the state that have not been reassessed for many years and they’re not paying the cost of the essential services that they need to stay in business. And I think that that aspect of Proposition 13 is very unfair and needs to be changed.

The dog ate my homework:

The academic at the centre of the ‘Climategate’ affair, whose raw data is crucial to the theory of climate change, has admitted that he has trouble ‘keeping track’ of the information.

Yeah, but…

Professor Jones also conceded the possibility that the world was warmer in medieval times than now – suggesting global warming may not be a man-made phenomenon.

And he said that for the past 15 years there has been no ‘statistically significant’ warming.

At least we’re staying scientific:

‘Of course, if the MWP was shown to be global in extent and as warm or warmer than today, then obviously the late 20th Century warmth would not be unprecedented. On the other hand, if the MWP was global, but was less warm than today, then the current warmth would be unprecedented.’

Ladera was carved out of some leftover parts of Mission Viejo abutted to San Juan Capistrano, and for the most part is searing hot in the summer with no views to speak of, has insane choked off traffic to get to the 5, or you endure ever-increasing tolls from “The Toll Road Company” whose stated objective is to siphon off as much of the local wealth as possible while crying foul and getting “Community Reinvestment” money from the Federal Government.  Good to see that even if the rich won’t support the toll roads, everyone else gets to with their taxes (without the benefit of actually using the roads.

Our subject today is 40 Lewiston Court, Ladera Ranch, now for sale for $1.1M.  At the peak it sold for 2.2M, and is having a hard time finding a bottom.

Here’s the beauty.  And, by the way, this is what 3% of 1.1M will get you in OC today:

I guess Realtors here haven’t yet gotten the memo: the internet sells properties.

But, between you and me, the most interesting part is not the cesspool that your neighborhood is, but rather the cesspool that is in the back yard, lovely.  Mosquito abatement anyone?

Please, for the love of god, will some knifecatcher step up to the plate?

Edit: South OC tracker already featured this one.  She gets around.

I said it then, that this was fear-mongering and disingenous.  The crises of 2009 and 2010 and 2011 will be products of those decisions.  The decisions made then by the Banking Cabal (whose long fingers include Paulson, Geithner, Bernanke, Summers, Blankfein and others) will eventually lead to financial indenture.  For those who saw this coming, let me share with an excellent quote:

“Naturally the common people don’t want war; neither in Russia, nor in England, nor in America, nor in Germany. That is understood. But after all, it is the leaders of the country who determine policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.”

Ten points for anyone who can tell me who wrote that.  Or at least which decade it was written in.

We were lied to.  Plain and simple.

The past few years have certainly challenged the idea that real estate prices only go in one direction. But the downside of the “American Dream” is even more pronounced, says James Altucher of Formula Capital.

Owning a home has “never been a great investment,” Altucher says, noting housing went up a dismal 0.4% annually vs. 8% for the stock market from 1890 to 2004, according to the Social Security Advisory Board.

Moreover, Altucher says the notion buying a home is a ticket to financial security is a “scam” perpetrated on the American people by corporations seeking to keep us in debt, less mobile and with the storage to purchase all sorts of needless consumer goods.

That’s a provocative statement, hard to prove, and certainly subject to debate. Such a view also leaves out the intangibles of home ownership, such as the stability and other benefits raising a family in a community can bring.

Still, it’s hard to argue with Altucher’s main point, as detailed in a recent Daily News article: from a purely economic basis, there’s a lot of downsides and hidden costs to home ownership that get lost in the “American Dream” discussion:

* Insurance premium.
* Property taxes (which usually offset any tax deduction you get from your mortgage interest).
* Maintenance (pipes break, electricity problems, etc.).
* Remodeling costs.
* Utilities (utilities and maintenance for renters is often reflected in the rental price, but it’s not reflected in a mortgage when you own).
* Yard work, pest control, etc. (again, rents usually have this built into the price, but mortgages don’t).
* A down payment of at least 15%, which is $90,000 on a $600,000 home.
Closing costs, usually 5% of loan amount, or another $25,000.

Rather than concentrating so much of your wealth in a potentially illiquid asset, Altucher says most of us would be better of renting. If you want to bet on a housing recovery – and he does believe housing is a good short-term bet here – Altucher recommends buying a REIT like the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).

So if buying a house is a bad investment, should the more than 20% of American mortgage holders currently under water just walk away, as some advocate? Check the accompanying video to hear Altucher’s take on this highly controversial topic.

Click here to view the embedded video.

“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.

We have broken from reality–a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.

We’re now in the midst of unlimited spending of the people’s money, exorbitant taxation, deficits of trillions of dollars–spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.

A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.

We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.

We assume that by keeping the already-known torture pictures from the public’s eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.

The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.

We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.

Of course, it could all be a bad dream, a nightmare, and that I’m seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”

Some time ago, he wrote Chinese asset markets have become a giant Ponzi scheme that perked up my ears and got me to thinking.

But, his more recent piece in Caing has me thinking he’s talking about Southern California:

The overwhelming desire for getting rich quick dominates every nook, fissure and strata of Chinese society.

Ok, replace “Chinese” with California, and you’ve got a definite match.

Bubbles exaggerate reality but are not formed out of thin air. Cheap money and strong growth are the usual ingredients for bubble-making.

This is almost exactly what I wrote with “What is a bubble?” several years ago.  However, most interestingly is what is happening in China, and happened in California:

China’s property market is creating winners and losers based on timing. All other factors – including education and experience — have been marginalized as the economy rewards speculators. And as more play the game, the speculator ranks rise and fewer people work, perhaps contributing to a labor shortage.

This is exactly what happened during Southern California’s property bubble.  Many people got rich simply by being in the right place at the right time.  Many of them were incapable of understanding the circumstances of the rise, and so therefore simply did more of the same (buy real estate) without understanding the underlying problem that widespread repetition of that practice would cause a housing shortage (too many people “storing” housing instead of allowing it to be bought).  Rents reflected the “real demand”, and appreciated strongly.  Meanwhile, properties exploded with enough appreciation in 2 years to account for 30 years of inflation to support the prices.

The most poignant in my mind was a short-sale that Brad (my co-blogger and realtor) and I visited.  The original owner was trying to sell from a purchase made in 1996 at more than 300K lower than the short-sale.  The “owner” was so destitute that when the pool pump broke and they were unable to replace the $800 unit, the resulting ground shift due to hydrostatic pressure when quickly emptying the pool caused many more thousands in damage to the surrounding concrete.  They had been trying to support a 600K+ mortgage with a single income from working at Macy’s.  When regular equity withdrawals worked, the Ponzi scheme continued.

In normal times, the ponzi would have never worked, but because of the bubble, it allowed the “owner” to continue to persist in a property many times more expensive than they could support.  At the peak of the market, this would have sold for more than $1M, requiring the income of several well-paid professionals, not a single retail salesperson’s income.  The world did not make sense in 2006.

This separation of is true of a speculation/investment-centric economy.  This is part of the reason why most people make terrible investors; the concept of time is nebulous and fraught with uncertainty.  Indeed, I wrote (and bolded) in What is a Bubble? the following:

The most fundamental concept of investing is the concept of timing. The most fundamental flaw in most participants logic is that the asset provides more than just money… everything that costs money is an investment and can be traded again for money, nothing more.

This Southern California phenomenon of irrational belief has been covered extensively in another blogger’s repertoire, Irvine Renter’s Southern California’s Cultural Pathology.

We are quickly approaching the Day of Reckoning in our housing market. In my view this will be Armageddon for California debtors: the spending will stop, they will lose their homes and with it their illusion of wealth, and they most definitely will not be enjoying life. The cause of all the weeping and gnashing of teeth will not be some exogenous event, but rather a direct result of the circumstances they themselves created.

My thoughts exactly.

Which makes me wonder.  Krugman is hardly even close to a contrary indicator, but has nevertheless been a strong supporter of even more fiscal stimulus as the problem increased in intensity.  One cannot fault him for being a flip-flopper.  When he takes a point, he sticks with it.  Which is why it’s not surprising to see him write this:

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

The bigger question is… is this just part of the schtick, or is it a really likely to be that bad.

My gut reaction after absorbing current economic news is that it is.  However, it is easy to make 2 types of mistakes in a deep recession:

The first one is that momentum has a lot to do with the physics of the downturn… it will go along until there is sufficient uplift from other economic factors which counteract the downward pressure caused by household deleveraging.  At this time, I cannot forsee what that is, but it’s normal to not be able to see the next growth area until it is upon us.  Personally, I wouldn’t be surprised to find it being related to energy, alternative or otherwise, since at current oil prices, many alternatives can still be profitable (just not ethanol or solar).

The second one is that growth does not normally come from the area of the last economic bubble… housing will not lead us out of the downturn, and this is where much of the economic commentary is now.  Think 2003 when journalists were still covering the tech stock market, while housing was going gangbusters.  It wasn’t until we were deeply entrenched in a bubble of absolutely massive proportions that the general focus changed.

At the same time, a grave risk has arisen with respect to another bubble, especially one in gold.  Unlike the 2 previous bubbles in stocks, which provided useful (albeit squandered) capital to very useful web-based technology and increased productivity and bubble in housing, which substantially increased and improved our housing stock, gold does little to provide anything of use to our country.  You can’t eat it, you can’t live in it, it doesn’t improve productivity, and it certainly doesn’t earn any income; which makes this the worst kind of bubble; an unproductive one.  At the end of it, we will only have great piles of shiny yellow metal.  Difficult to store, illiquid, and barely wanted.  But, that is looking past the peak.  In the meantime, we can all feel safe in saying that we will continue to delude ourselves that little blocks of shiny yellow metal makes us safer, or richer, or god forbid happier.  Personally, I’d be more interested in ensuring that we have adequate stocks of food, water, and financial reserves, both in households, and in government to prepare us for further downturns.  As sure as the famine of 7 years came after the 7 fat years, so too will recessions follow booms; it’s the natural order of things.

This natural order has not been able to take its natural course; the worst banks in lending are still wards of the state.  Instead of our chance to build a smart, efficient, and secure banking system, instead, we are perpetuating a bloated, mismanaged, stupid, and short-sighted banking cartel.  Eventually, nature will have to be satisfied.  As sure as the invisible hand balances the supply and demand, so too will the banking system that never cleansed itself of debt through bankruptcy stagger on, zombified with bad housing bets that the population can never and will never pay for.

Housing, on the other hand is woefully oversupplied, with shadow inventory reaching monumental proportions, with only more stacking up behind it faster than it is depleted.  We’ll drag this housing recovery out another 10 or 15 years at this rate.

Can you guess what the new year is going to be like?  Chuck’s predictions coming soon.

Any thoughts as to why over the last 1.5 years, 90 day lates have doubled while bank owned halved?

Any conspiracy theories?