Don’t worry be Happy

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.

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If, after that, you’re not sure if you should laugh or cry, this should lift your spirits.

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No Frog March for Mozilo

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)

Actually, I just hope they don’t blow it all on gold-plated toilets and Porn Parties.

Either way, I’m glad to see SOMETHING happen.  Couldn’t happen to a nicer guy, too.

 

Steve Wynn Rant on Housing


 

Was it a Housing Bubble?

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.

 

MIRAGE

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.

 

Foreclosure Prevention

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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.

 

Impossible Hamster

Thanks, LOLFED

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Is a Short Sale Right for You?

Mark Roth answers the question in Businessweek yesterday.

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?