Phil De Carolis' Blog (Be Sure To Visit www.PhilDeCarolis.com)

California Doing a Rendition of the Housing Industry on the Budget – $20 Billion Budget Deficit and Massive Amount of Distress Inventory. How Banks Raided the U.S. Treasury with the aid of the Federal Reserve and have Damaged Housing Further.

2010-03-10T14:38:00Z

The banking system has captured our government and frustration is boiling over. Yet those in the housing and banking industry seem complacent and even self congratulatory that we “have avoided Great Depression 2.0.” Really? Now we’re taking advice from the same group of cronies that led the economy off the financial cliff. And the most troubling thing is we are at the height of unemployment even though the headline rate seems to have steadied out. California’s unemployment rate still continues to move upward hitting 12.5 percent. Yet all is well in delusional banking world since their idea of a solution is simply not foreclosing. What is even worse, these banking crooks are now offering fire sale deals to other banks and hedge fund investors! I’ve contacted a few banks about short sales and in many cases, preference is being given to “all cash” investors. Glad those bailouts are supporting the crony banking system.

One of the most troubling trends is the belief that all is well because banks aren’t foreclosing on homes or the fact that there is no second wave. Really? Let us look at nationwide foreclosure filings shall we?

Who needs a second wave when the first wave is still in place? Some in the housing industry seem to be patting their back that there won’t be a second wave of foreclosures (even though it is still high) and base this on the mounting distress inventory with Alt-A and option ARMs but no actual foreclosure filing. The wave is hitting as people stop paying their mortgage. Take for example option ARMs. Nearly 50 percent of all outstanding option ARMs are at least 30 days late. In other words, the borrower isn’t paying the mortgage! Yet in some form of twisted abracadabra housing logic, this is avoiding the wave because banks are ignoring the problem. The wave was the distress. Foreclosures are still on the market. The bank balance sheet is still loaded with mortgage junk. But just because banks are putting their hands over their eyes doesn’t mean the issue was avoided. In fact, it is corrupt to the core and the way they acknowledge this is absolutely stunning. The fact that we have no solid financial reform after 2 years of major crisis is incredible. Banks simply ignoring missed payments while taking trillions demonstrates what has become of our financial system and their idea of dealing with the problem.

Take for example HAMP:

“(Huffington Post) As of the end of January there were over 116,000 permanent modifications and over 67,000 permanent modifications pending final approval,” Geithner wrote in his letter, which the panel received last week. “This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of total modifications who have completed the trial modification and are at a point in the process where they are able to convert to permanent.”

HAMP has been an absolute failure. Yet HAMP is symptomatic of the bigger issue. Banks were able to raid the entire U.S. Treasury and Federal Reserve for $13 trillion in backstops and bailouts, with no questions asked but then start talking about moral hazard when it comes to HAMP:

“Kucinich was pessimistic about the ability of any program that doesn’t involve principal reductions to help floundering homeowners. “Instead, we’re going to stay on this slow path to default, foreclosure and personal bankruptcy,” Kucinich said. “And our economy is going to continue to suffer.”

He added: “It’s funny that moral hazard is a concept when it comes to Main Street but not to Wall Street,” a reference to the massive bank bailouts.

More than 2.8 million homes were lost to foreclosure last year, according to data provider RealtyTrac. The firm expects a record three million foreclosures this year.”

I’ve talked with colleagues who are Republicans and Democrats and both are absolutely appalled by what is going on with Wall Street and the housing industry. They have transformed our economy into one giant casino and houses are now life sized Monopoly tokens that are traded on the New York Stock Exchange with no regard to local economies. Moral hazard applies to the masses yet those rules don’t apply to the plutocracy that sits on Wall Street. While the stock market soars from the March low by a stunning 68%, job creation is nowhere to be found:

Where are the jobs? Last month they blamed the snow and now next month, we can expect a big boost because of Census hiring. That is great that we have thousands working at $16 or $17 an hour with no benefits but then what? Are we going to do the Census every month? Most Americans realize that things aren’t as rosy as Wall Street is leading on. And California is certainly not doing any better:

California Doing a Housing Industry on the Budget

“SACRAMENTO, Calif.—Gov. Arnold Schwarzenegger said Tuesday that he vetoed the largest piece of legislation in a package of budget bills because it did not take immediate steps to cut spending.

Democratic lawmakers said the bill would have shaved $2.1 billion from the $20 billion shortfall projected for California’s budget through June 2011. So far, the Legislature and governor have agreed to just $200 million in spending cuts.

“It’s extremely important that we immediately jump into action and make midyear cuts,” Schwarzenegger told reporters on Tuesday. “We’re spending, right now, $600 million a month more than we’re taking in. It’s irresponsible.”

This came out on Tuesday by the way. We still have a $20 billion shortfall and are spending $600 million a month more than what is being brought in. So what does that mean? It means more cuts or higher taxes. How is this good for housing? More importantly, how is this good for the state economy? If we look at the unadjusted unemployment rate California is up to 13.2 percent unemployment (headline). We are seeing 23 percent underemployment. This is something none of us have seen in the modern era. Yet those in the banking and housing industry are claiming mission accomplished just because banks aren’t moving on foreclosures. This is their ultimate solution. Because that is all they have. This suspension of belief is their idea of avoiding the second wave. Humor them and take this out to the logical conclusion.

Many Californians are underemployed as we have highlighted. Those that are employed, can expect tighter wages and higher taxes thus cutting into their disposable income. So how does this create higher home prices? Even if banks “trickle” out inventory once that inventory hits the market it confronts the economic realities people have to live by. That is why when we show examples of short sales they are selling at deep cuts. Home prices have to reflect local area incomes and what people can afford. Unless we plan on bringing back toxic waste mortgage sludge like Alt-A and option ARMs, people can only buy what their income can support.

If things are so fantastic in the housing market for California, I’m sure builders are out there in mass right?

Not exactly. Because there is a glut of housing on the market. And more importantly, that second wave of housing is sitting on the banks balance sheet. So they won’t be making construction loans when they realize just how much inventory is really out there. Just look at the above chart. Building permits and construction jobs are at the trough. No visible turn around. And take a look at notice of defaults and foreclosures:

The only reason the foreclosure number has fallen was because of HAMP (which as we now know is a failure meaning more short sales or foreclosures will hit the market soon because many on trial mods will not make it to permanent modification status). Whether it is a flood or just a steady trickle, this will happen. And these homes sell for lower prices thus pushing area prices lower. This is the next round for mid to upper tier markets. They have bought some time but it is running out. Eventually there will have to be some realization of local economic factors.

I was curious to see what industries were adding jobs:

Who will be buying the homes in 2010? More importantly, why would people be overpaying for homes? The above chart shows no real improvement in the real economy. In fact, all the banking industry is doing is stalling the inevitable but at the same time sucking the taxpayer dry. With the $13 trillion in bailouts and backstops we could have had enough to pay off every single residential mortgage in the United States and taken everyone to Disneyland. Instead, we are financing the crony banking system full throttle robbery of the American people.

http://www.doctorhousingbubble.com/california-doing-a-rendition-of-the-housing-industry-on-the-budget-20-billion-budget-deficit-and-massive-amount-of-distress-inventory-how-banks-raided-the-u-s-treasury-with-the-aid-of-the-federa/

Proposal To Exempt Victims Of Foreclosures And Short Sales From Big Tax Bills

2010-03-09T14:47:00Z

By LESLIE BERKMAN
The Press-Enterprise

State legislation to protect people who lose their houses in foreclosure or short sales from a big tax bill passed a significant hurdle this week, winning Assembly approval. The state Senate is expected to vote on the proposal Thursday.

Passing the Assembly by a 47-27 vote, the bill authored by Sen. Lois Wolk (D-Davis) would exempt people who did short sales or received loan modifications or lost their houses in foreclosure last year from having to pay state tax on any mortgage debt that was forgiven. Otherwise the forgiven debt would be considered income for the homeowners even though they received no money from the sale of their home.

Both the state and federal government extended a lifeline to homeowners in 2007 when the market was flooded with mortgage failures by temporarily exempting the tax on forgiven debt. However, while the federal exemption continues through 2012, the state's expired at the end of 2008.

With an April 15 tax deadline approaching, tax accountants say many of their clients are scared and uncertain how they would pay the added tax if the state does not pass legislation.

Brian Winter, a tax preparer at Jackson Hewitt in Riverside said a lot of his clients facing a big state tax bill because of the expiration of the state exemption don't have jobs or enough money to meet the obligation.

Winter said a person with an annual income of $50,000 and $100,000 of debt cancelled on a house would be "on the hook" for about $8000 in additional income tax. He said most likely some of his clients would be forced into bankruptcy.

Many people who thought they were exempt from the debt forgiveness tax under both the state and federal law, Hewitt said, were shocked to receive 1099 forms in the mail from their lenders that need to be filed with their tax returns to report the cancelled debt.

As state law now stands not all homeowners who have a foreclosure, short sale or loan modification will take a state tax hit. According to the Senate Revenue and Taxation Committee, for example, debt forgiven on a first mortgage used to buy a house even now is not taxable. That is not true, however, if the original mortgage is refinanced and money taken out to buy a car or for another investment.

Sandi Aplin, a tax accountant in Moreno Valley, said the tax laws pertaining to forgiven debt are very complex and require the attention of a professional tax preparer. She advised that those who have had mortgage debt forgiven should apply for extensions on filing their 2009 state tax returns to give the state government time to take action to help them.

Winter said he recommends that his clients hold off on preparing their state tax returns until the first week in April.

Prospects for the Wolk legislation are clouded by uncertainty whether Gov. Schwarzenegger will sign it. The governor vetoed similar federal conforming legislation in the past because of the attachment of a provision that would establish new tax penalties on individuals and businesses that file unfounded claims for tax refunds.

Craig Reynolds, Wolk's chief of staff, said a clause with the same purpose is included in the new legislation but the proposed penalties are narrowed to apply only to large corporations and the super-wealthy.

The governor has argued that the controversial clause should be taken out of the bill and considered in separate legislation, said Schwarzenegger Secretary Aaron McLear.

http://www.pe.com/business/realestate/stories/PE_Biz_W_taxbreak10.27c43b3.html

Unlocking the Jobs Dilemma

2010-03-09T14:44:00Z

Commentary By John Browne

Productive, private-sector jobs – the lifeblood of a sound economy – are under assault by politicians in the United States and Western Europe, who have unwittingly taken a number of steps that make future job losses a foregone conclusion.

In the 1980s, as a Member of the UK Parliament and elected Chairman of the Conservative Small Business Committee, I led discussions on the issue of job creation. At that point, the British labor market was dealing with technological advances that threatened traditional industries and an influx of highly competitive Eastern European workers who drifted westward in the waning days of the Cold War.

Pushing back against those who wanted to preserve an untenable status quo, the Conservatives recognized that defensive measures like excessive regulation, high taxes, and favored bidding for government contracts were antithetical to business growth. Fortunately, Margaret Thatcher was Prime Minister. Her understanding of economics, combined with her ability to communicate and lead, resulted in the adoption of pro-business polices. The British economy soon flourished, creating many profitable new jobs.

Despite his rhetoric to the contrary, the Obama Administration is actually leading the US in the opposite direction. By raising taxes on business owners, monopolizing credit, and increasing business regulations at a frightening pace, current policy is turning the employment landscape into a rather sterile promontory.

Meanwhile, the media has selectively focused on the recently passed jobs bill, which includes meager tax-credits for new job hires. If this bill has any effect, it will be to encourage cash-strapped entrepreneurs to make hiring decisions that are unjustified by current business activity.

In reality, employment’s future is being decided in the credit markets. Here, the Fed’s zero interest rate policy is redirecting investment capital towards government. When banks can borrow from the Fed at zero percent and buy long-dated U.S. Treasuries yielding 3 to 4 percent, there is little incentive to take the risks inherent in business lending. Business credit is, therefore, tighter than even a severe recession would ordinarily dictate. This lack of credit is starving the private sectors’ ability to create jobs.

Furthermore, the current ‘progressive’ activism on display in Washington is breeding great uncertainty in the board room, making businesses even more cautious in an exceptionally difficult planning environment.

In fairness, the seeds of job destruction in America were sown years before Obama rose to power. In recent decades, in response to intense lobbying by big banks and corporations, some key changes were made that reduced market flexibility. These included abolition of the Glass Steagall Act and the weakening of anti-trust laws, without concurrent efforts to remove preferential treatment for those companies deemed “too big to fail.” These moves appeared to extend the free market, but in reality they allowed big banks and corporations, like Citigroup, AIG, and GM, to squeeze out smaller competitors in good times and fall back on government support in bad times.

The increased powers of the crony capitalists were used to drive down the prices of suppliers, many of whom were small businesses or farmers. At the same time, financial profiteering created ownership wealth on an unprecedented scale, greatly increasing the wage gap between owners and workers.

Finally, the creation of the largest speculative asset boom in history by former Fed Chairman Alan Greenspan led inevitably to a massive bust, causing economic hardship and dislocation for millions. If the likely double dip recession occurs, even more jobs will vanish.

Most American job losses in recent decades were due to outsourcing to more competitive economies, because of the harmful effects of our domestic government policies. Big spending by government now is unlikely to cure this deleterious situation. The only realistic solution is to shrink government and remove subsidies and guarantees to big business. The United States must become fundamentally competitive once again by unleashing the power of the entrepreneurial spirit. Otherwise, the "giant sucking sound" of good jobs heading overseas, as Ross Perot famously described it, will only grow louder.

http://www.europac.net/externalframeset.asp?id=18314&type=browne

Real Homes of Genius – Aggressive Price Cutting in some Mid-tier California Housing Markets. La Mirada Home Selling for half-off 2006 Price. 13.2 Percent Los Angeles County Headline Unemployment rate.

2010-03-08T14:37:00Z

On Friday the California Employment Development Department released preliminary figures on California unemployment. As it turns out, the unemployment problem ran deeper in 2009 than many had initially thought. The current unemployment rate is 12.5 percent which means the underemployment rate for the state is probably closer to 23 percent. Mix that in with Alt-A and option ARM loans floating out in the market and you can understand why there are still problems in the California housing market. The unemployment report is in sharp contrast to what is going on in Wall Street. The stock market rallied even though we have yet to add one net job since the recession started.

The California budget is mired with systemic problems and many state and local government are going to be battling with cuts over the next couple of years even if the economy starts recovering. If we actually look at unadjusted unemployment figures, the unemployment rate for Los Angeles County and California is a stunning 13.2 percent:

Source: EDD

Very few of us have ever seen an unemployment rate this high for the region. And we are starting to see some aggressive price cutting from banks in some select mid-tier markets to reflect this lower wage economy. It is hard to tell what is going on internally on the balance sheet of many banks but it isn’t good.

Today we’ll look at what I would consider a mid-tier city in Los Angeles County that is starting to see some aggressive price cuts. Today we salute you La Mirada with our Real Homes of Genius Award.

Half Off From 2006

La Mirada like many cities in Los Angeles County saw a massive jump in housing prices. When prices were out of reach in other locations La Mirada was considered a good middle class place to buy a modest home. This seemed to be enough to justify massive increases in prices. The median price peak was reached late in the spring of 2007:

June 2007: $555,000 (median La Mirada home price)

In that month, 40 homes were sold in the city. Today the stats look a bit different:

January 2010: $380,000 (median La Mirada home price)

In January 25 homes sold. Now, much of this of course has to do with it being winter but a 31 percent price cut in less than three years is significant. Yet prices are still too high given the household demographics. We’ll get into that in a minute. First let us examine the home above in better detail.

The above home is a 4 bedrooms and 1 bath home. It is listed at 1,312 square feet and was built in 1953. When I go into the history of California housing this was one of those massive building boom times. This home was purchased near the peak back in 2006. This home was financed with toxic mortgages up to the very common 100 percent mark:

Let us run the numbers. The home was purchased for $514,000 with an 80/20 setup:

1^st mortgage: $411,200 (80%)

2^nd mortgage: $102,800 (20%)

Now I know some of you are stunned about this but this was very common in California. In fact, those toxic option ARMs were being handed out like Pez candy. The notice of default was filed back in December of 2008, then in March of 2009 the NTS was filed. It took another nine months from that point for this home to go into bank owned status. The home hit the MLS on 1/19/2010.

But here is where I’m noticing some reality based pricing. Back even a few months ago, you would see bank owned homes hit the market at outrageous prices and banks simply sat back and did nothing. On some areas and some homes, pricing seems to be aggressive on the downside. Take a look at this place:

Price Reduced: 03/03/10 — $284,900 to $259,900

A 50 percent haircut from the 2006 peak price. Before you jump up and down this is exactly what we’ve been talking about. It seems like in some markets banks are being more realistic with their pricing. And they should be. Take a look at the household demographics for the city:

So let us run the FHA insured loan numbers here since at the current price, it clearly meets the criteria (4 out of 10 homes sold in SoCal were FHA backed last month).

3.5% down payment: $9,096

The median household family bringing $61,000 is taking home roughly $3,900 net per month. So roughly 43 percent of net pay is going to the home payment. Does this make sense? It would seem a bit high but it is certainly more in line than other areas and certainly far from the bubble peak. And this is now the next phase and I expect to see more of this going forward. We went from areas in the Inland Empire seeing big haircuts, to lower priced L.A. County areas, and now we are seeing certain mid-tier cities cut prices aggressively. In my book, a 50 percent cut is significant.

Should you rush out and buy a home? No. If the numbers work and you find a home you like, go for it. Yet the reality is, if L.A. County has a headline unemployment rate of 13.2 percent then the unemployment and underemployment rate is closer to 24 percent. In other words, 1 out of 4 people in L.A. County are either out of work or working part-time for economic reasons. Does that really sound like a healthy market? Frankly, many people are focusing on their career and employment and are putting aside the Wall Street and real estate industry obsession with housing as the center of the universe. Without solid employment, home prices will still go lower. And keep in mind the current household income figures are based on 2008 Census figures and we won’t have more up to date data until September of 2010. In other words, the income data is much worse than it appears.

And about that shadow inventory? Let us take a quick look. The MLS currently lists the following for La Mirada:

Non-distress: 45

Short Sales: 28

Foreclosures: 13

And this is what is lurking on the bank balance sheet:

Pre-foreclosure (NOD): 124

Scheduled for Auction: 188

Bank Owned: 39

Some had a question about double counting but these are all unique properties, nothing is double counted in the above data except for the 13 MLS foreclosures from the 39 bank owned properties. 86 properties on the MLS and 351 properties in distress. This above home is one of those “trickle” down homes that is supposedly going to make the market better because we won’t see a flood. A 50 percent price cut sure doesn’t seem like prices are going to boom as some in the housing industry would like you to believe and even with a drip strategy for the shadow inventory, prices will still come down to reflect economic reality. And why would it matter how properties are released onto the market? The distress is as plain as day. Just look at the above stats. People with a NOD, auction scheduled, and losing their homes are not in a stellar financial position. People now have to go with government backed mortgages and even though these are easy to get, they are based on verifying income. And with 13.2 percent of L.A. unemployed that is proving to be a challenge in itself.

Today we salute you La Mirada with our Real Homes of Genius Award.

http://www.doctorhousingbubble.com/real-homes-of-genius-%e2%80%93-aggressive-price-cutting-in-some-mid-tier-california-housing-markets-la-mirada-home-selling-for-half-off-2006-price-13-2-percent-los-angeles-county-headline-unemploy/

A History of the California Housing Gold Rush – The Financial Expansion of California Real Estate from 1850 to 2010.

2010-03-06T14:35:00Z

California has gone through many boom and bust cycles. Since it became the 31^st state in 1850 California has been home to many speculative manias. An enormous population boom in the 1800s was brought on by the California gold rush. Booms like this led to the rise of cities like San Francisco. Los Angeles in the early 1900s found its footing as an entertainment hub and this led to massive expansion. Since that time we have seen countless real estate booms and busts. The current housing boom and bust cycle is the largest and most widespread in the state’s 160 year history. As we look at historical data there is no lack of hyperbole when it comes to selling California real estate. It would seem that every year is a good year to buy. Of course as many are now finding out, timing is usually a bigger factor in determining housing success than investment savvy.

We first should look at the history of housing from a historical perspective because many old paradigms of housing have fallen. Let us first look at nationwide data from 1910 and 1920:

Source: Census Archives

I decided to dig up some old Census data to show how dramatically housing has shifted over the years. Many in the housing industry assume that real estate has always been the way it currently is but forgetting about history can lead many into challenging situations. In 1910 and 1920 the majority of Americans rented their home. Of the 20 million dwellings in 1920 only 4 million were mortgaged. Today, the majority of American households own a home. The homeownership rate has fallen since the crisis started. California is not immune to this trend:

The nationwide homeownership rate stands at 67.3 percent down from the peak of 69.4 percent back in 2004. In less than a century the housing market completely transformed. We went from a country dominated by renters to one dominated by homeowners:

So how did we go from a large number of renters to a majority of homeowners? Much of the jump came because of government financing in the housing market:

Source: Hoover Institution

In the middle of the Great Depression the National Housing Act of 1934 was passed to bring on more affordable mortgages and also created the Federal Housing Administration (FHA) and the Federal Savings and Loans Corporation. The central reason for this was to stem the issues deep in the foreclosure crisis of that time. The FHA and the FSLIC created the network to allow steadier access to mortgages in the market. Some factors that came about from this was the push for suburban sprawl and also less focus on improving inner city housing.

There have always been promoters of real estate. Even in the depths of the recession people were championing real estate in California:

I found this piece from a 1933 California newspaper. The cries of available supply, lower taxes, and benefits to the real estate industry were already loud and clear back in the 1930s. You would think that the Great Depression would at least dampen the spirits of housing promoters but that didn’t seem to stop many. If a Great Depression didn’t stop the promotion maybe a World War? Not even that could stop the hype:

The above comes from a 1942 newspaper spot. One thing is certain when it comes to California real estate. There is always a boom going on, it just depends who you ask. Timing is such an important factor in purchasing real estate. Many who bought in California from 2004 to 2007 took the brunt of this current housing bust. But the usage of highly toxic mortgages has created a long lasting legacy of problems that we are still working through. The problems are still embedded in the market and many mortgages sit in a financial state of suspension. This will continue at least throughout 2010.

Let us look at California housing prices going back to 1940:

Source: Census

Home prices have gone up steadily since the 1940s. Some decades saw much higher price growth. The biggest jump came between 1970 and 1980 when home prices went from $23,100 to $84,500 increasing by a factor of 3.65. This decade has seen the slowest growth since the 1940s. In 2000 the median California home price came in at $211,500 and today the median home price is $247,000 (an increase of 16 percent while the state’s inflation rate is closer to 30 percent over this timeframe). So California real estate has now witnessed a lost decade adjusting for inflation. The likelihood of seeing a nominal lost decade in prices cannot be ruled out. Some areas in California like the Inland Empire are already seeing this happen.

Yet what has really happened in California was the transformation of housing into a speculative commodity. This can be seen by how much income is eaten up by home prices:

It is tempting to look at the above chart and say that home prices are overall cheaper than they were in the 1980s if we factor in the median home price and household incomes. However home prices are still too expensive and if we look carefully above household incomes never really caught up after the massive inflation of the 1970s. Access to debt covered up much of this lost purchasing power. The current median home price in the state is also deceptive because of the massive amount of foreclosure re-sales in the last two years. Most of these have come from lower priced markets while mid to higher priced areas remain in bubbles. The above chart highlights the overall sales in lower priced markets and still comes out showing a very expensive market in California.

Much of the rise in home prices this past decade came because of maximum leverage mortgages that didn’t even take into account incomes that were falling further and further behind. Many of these mortgages didn’t even look at income. The above chart pulls points at each decade so we miss the 2007 peak in home prices. If we include that point the chart would look like this:

When you look at the peak price data, it shows how historical this bubble was. In places like Los Angeles and the Bay Area many homes that are still selling for peak prices were built back during the last home building craze in the prime counties. Take a look at this 1942 ad:

Much of this massive construction took place decades ago in some of California’s biggest and oldest cities:

Massive population centers are nothing new for the state. And a growing population will increase housing demand but not how most think:

Source: Legislative Analyst Office

California is still lacking in affordable housing. The days of cheap fuel will make it harder for other Inland Empires to sprout up from the ashes. People forget that California has an enormous amount of land that is similar to Arizona and Nevada. The Central Valley has plenty of room. Why don’t they build this out? For one, access to employment but also the cost of energy to keep these new cities up simply does not make economic sense. It is unlikely that we will see $1 gas again so fuel is going to impact the suburban sprawl dream that started back in the 1930s. New housing has to be smarter and more compact near city hubs. Look at places like Tokyo for example. We always hear the real estate building crowd that we need more friendly permits but then they go out and build sprawl just like they did back nearly 100 years ago. Is this really good for our longer term prosperity? Also, it might have reached its natural end. People can’t afford to commute from these outer regions.

There is no arguing that the population will grow in California over the next decades. Yet to assume that this will mean another real estate boom is incorrect. Look at China for example. They are now contending with mini bubbles in real estate and they have massive population centers throughout the country. The big issue in the coming decade is going to be smart and affordable housing. Ironically many of the current government programs are making housing unaffordable by propping up failed banks. It also keeps the current structure in place since so much money is involved. Yet that doesn’t mean it is smart policy going forward.

So what will we see in the next decade? It is very likely that the homeownership rate will dwindle lower in California. As more and more people are classified as “part-time” workers with no employment security, a large part of our population will need the mobility of renting or simply won’t have the income to purchase a home. When people purchase a home, it requires a level of security in their employment. If a large part of the population doesn’t have that, many will opt to rent, some by choice but many others because of economic reasons. City hubs will probably see bigger growth as people move closer to employment opportunities. This isn’t the 1920s when 1 out of 4 people were farmers. It will definitely be an interesting decade when it comes to California housing.

http://www.doctorhousingbubble.com/a-history-of-the-california-housing-gold-rush-%e2%80%93-the-financial-expansion-of-california-real-estate-from-1850-to-2010/

The Dominos of Default

2010-03-04T14:42:00Z

Commentary By John Browne

The bad news for Greece is that despite some help from abroad, and some attempts at internal reform, investors are still leery of the troubled state. The good news, if you can call it that, is that they will soon have company in the penalty box.

Now that investors have come face-to-face with the reality of sovereign default in the developed world, greater scrutiny will befall those countries with fiscal conditions similar to Greece. The United Kingdom is a cause of great concern, with a debt ratio rapidly approaching Greek levels. The economic challenges facing Britain are aggravated by a Labour government that is pushing the country further toward socialism. As a result, from mid-2008 to today the pound sterling has lost some 25 percent of its value even against the US dollar. Debt and socialism are a toxic mix for investors.

When I served as a Member of Parliament, under Margaret Thatcher, freedom literally burst upon Britain. We dropped the top rate of income tax from 92 percent to 30 percent (generating far higher tax revenue); abolished foreign exchange controls overnight; and demolished socialist controls by, for example, allowing people the basic freedom to own their own telephones! A wave of enterprise sprung up and Britain once again was referred to as ‘Great,’ without causing wry smiles. Though it may be astounding by today’s standards, we instituted a public debt repayment schedule. Thereafter, sterling soared by almost 100 percent between 1985 and 1995.

Great Britain has, until the present, never experienced more than two successive socialist governments. Today, the Conservatives, who covertly support the surrender of UK sovereignty to the socialist European Union, are seen as offering little alternative to socialist Labour. Despite the appalling economic record of the current Labour government, recent polls show a serious risk of a hung parliament after this summer’s general election. Suddenly, investors face the real prospect of a fourth socialist government. This specter, combined with the massive debt and misspending of the past three administrations, has led to serious out-flows from sterling and UK government ‘gilt-edged’ bonds, or ‘Gilts.’

As in the United States, the economic problems encumbering the UK and most of Western Europe are deep-rooted. They stem from many decades of dependence on monetary expansion to ‘paper over’ fiscal irresponsibility. GDP growth has been obtained by government subsidies of consumer demand, financed by debilitating taxation of productive enterprise, unimaginable public debts and massive currency debasement.

Alas, it is also becoming painfully clear to investors that, unlike the past, the problems are now too big for the same old government remedies.

Whereas the recent first wave of recession caused individual people and companies to face bankruptcy, the looming second wave threatens entire governments. Who can bail out governments if a number of them default simultaneously? The IMF is a sort of ‘central bank of central banks,’ but it is largely backstopped by the United States. Will China, Germany, or other creditor states be willing to assume the role of global guarantor? If so, what will this mean for the sovereignty and competitiveness of the old pillars of the Atlantic?

Greece is a small economy. But its debt problems highlight fault-lines undermining the euro, and with it the socialist dream of a United States of Europe. Today, Greek ten-year bonds sell at yields north of 6 percent, nearly 300 basis points higher than similar maturities in German, Danish, or French sovereign bonds.

While Britain’s debt has become a cause for some concern, investors have drawn hope that the Conservatives would carry the coming election and restore some semblance of fiscal order. However, recent polling has exposed the risk of a hung parliament. Suddenly, the previously unthinkable notion of a British default crossed into the realm of possibility. Ten-year British Gilts sold off to yield above four percent, a significant premium above the country’s Continental rivals.

In other words, the free market has priced in a loss of the UK’s prized ‘triple A’ credit rating, while the perennially laggard and politicized rating agencies merely issued warnings.

As we have said before, the United Kingdom, as one of the two main bulwarks of modern finance, is the figurative ‘canary in the coal mine.’ It is my belief that just as Greece preceded the UK, Britain will precede the United States along the dark and dangerous shaft of excessive debt. Although the United States is nearly five times larger than the UK, our financial difficulties are in nearly the same proportion. In many ways, problems in the U.S. may be more intractable.

Although the Federal Reserve is actively holding down the short end of the yield curve to near zero, 10-year notes are currently yielding more than 3.6 percent. If the Fed were to cease purchasing Treasuries, or the rating agencies were to become realistic, the free market would drive the 10-year into dangerous territory.

History is littered with examples showing that socialism kills enterprise. The UK and EU are largely socialist. The US is becoming increasingly so. This political trend, coinciding (unsurprisingly) with a major recession, invites catastrophe.

It is one thing for prudent, rich states like Germany to bail out small states like Greece. But few states have the ability or the will to bail out financial giants like the US, EU, or UK. If such a maneuver were attempted, it would surely drag the entire world into depression – and I don’t take the Chinese or the Germans to be that foolish. Absent a reasonable avenue for rescue, we are increasingly likely to see these formerly steady giants topple. If you’re stuck in their shadow, look out.

We have long alerted readers to the possibility and even likelihood of sovereign defaults. Once a key domino falls, collapse can be devastatingly sudden. Those heeding our warnings should be wary of socialism wherever it lurks. Be glad that darkness strikes first on the other side of the Atlantic, but be wary that are close behind.

http://www.europac.net/externalframeset.asp?id=18288&type=browne

The Housing Metrics of Southern California – Seasonal Home Sales, Inflation Adjusted Home Prices, Tens of Thousands Living Rent Free, and the Japanese Experience.

2010-03-02T15:54:00Z

People are realizing the problems in the housing market are simply a bigger reflection of the lingering issues in the overall economy. There have now been a few stories comparing California with the issues being experienced in troubled Greece. JP Morgan Chase CEO Jamie Dimon echoed his concerns regarding California. The markets seem to underestimate how profound the issues are in the California economy. What is more troubling is California is merely a reflection of other states. The Legislative Analyst Office projects deficits deep into 2014 and each year we experience a deficit will require higher taxes or deeper cuts. That is why focusing on jobs is such an important barometer for the improvement of the overall economy. Without one net added job in California people are already counting the next housing boom. The numbers simply do not reflect this assumption.

I want to examine some of the nuts and bolts of the market because this is where the real story is. We know that millions of foreclosures have flooded the market. We can understand how toxic option ARMs have become to the market even years after they were originated. But what does this mean going forward? First, let us examine the median sale price and monthly sales of Southern California over the decade:

Source: DataQuick

This is a fascinating look at the market. Even during the boom we clearly see the seasonal pattern in sales. Each fall and winter sales drop as more people take inventory off the market. Spring and summer overall are bigger sale months because of school schedules, family commitments, and just a general acceptance that this is when more inventory enters the market. But you’ll notice in 2006 that the trend radically shifted. The crash hit and sales plummeted. An interesting phenomenon occurred where the median sale price didn’t peak until the middle of 2007 well into the monthly sale crash. So it would appear that sales would actually lead future prices. So the jump in sales would indicate much higher prices going forward right? Not necessarily. Even with the jump in sales, we are nowhere close to the average sales per month over the decade. I ran the monthly sales number for the past decade and the average monthly sale number for Southern California is:

24,604 Sales

This includes fall, winter, spring, and summer. In January we had 15,361 sales and the last time we had 24,604 sales or higher was back in August of 2006. Prices have come down but the bulk of the drag to the lower side has been in lower priced home sales. Much of this has been driven by foreclosure re-sales. But another important factor to look at is how much are families committing to their monthly mortgage payment? With Alt-A and option ARM products families were able to stretch their budget. Since the bulk of loans are now backed by the government lenders are now at the very least verifying income. Let us look at the monthly mortgage payment over this time:

Source: DataQuick

The above tells you a lot. While the median home price in Southern California is down by 46 percent from the peak the typical monthly mortgage payment is down 52 percent from the peak. People are committing to half the monthly payment amount and this has more to do with the health of the economy. I know many would love to have a $1,170 monthly mortgage for a place in Southern California. This is already happening in many areas but not in higher priced regions like Culver City or other parts of the Westside.

It helps to look at a handful of examples to highlight what is really happening. Let us look at pre-bubble prices in areas that have corrected versus areas that still seem elevated:

Source: DataQuick

Now this data tells us a lot because over the past decade incomes went stagnant. The overall inflation rate for California was 25.6 percent:

So if wages don’t explain this rise in prices and inflation isn’t the reason, can it be that some areas are still in mini bubbles? This is very likely. And this doesn’t apply to the entire state of California. Some areas have corrected fiercely and prices seem to be more in line with inflation and wage increases:

You’ll also notice the difference in overall sale numbers. What on the surface may seem like an enormous crash actually looks like a correction to the inflation adjusted mean. I find it fascinating to see many communities heading back to the 25 to 30 percent inflation rate of California and are somehow finding a bottom in this range. But many areas are still over priced and this will need to adjust either with higher incomes coming from better job growth or further price corrections. Part of what is forgotten when examining the shadow inventory is the fact that these are properties in heavy distress. The L.A. Times ran a piece confirming what we have been talking about for over a year:

“(LA Times) It’s been 16 months since Eugene and Patricia Harrison last paid the mortgage on their Perris home. Eleven months since the notice got slapped on their front door, warning that it would be sold at auction.

A terse letter from a lawyer came eight months ago, telling them that their lender now owned the house. Three months later, the bank told them to pay up or get out by the end of the week.

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.”

Now this wouldn’t be such a big deal if it were a handful of mortgages. But just look at this mind blowing chart:

Source: LA Times

Mortgages that are 90 days late and a foreclosure hasn’t been filed are up to a record shattering 5.1 percent. Now think about that. How is this a sign that things are good? So we’ve reached a point where simply staying put in your home, rent-free is a strategy being used by banks to deal with the foreclosure crisis. The big losers are the prudent in this country. How many Americans are paying their mortgages diligently, probably needing to take a second job if there is one to be had, just to make sure they pay their bills? Wall Street has the luxury of making disastrous mistakes and yet they are bailed out to the tune of trillions of dollars and offer billion dollar bonuses. Those that over extended are then put in a lottery essentially where some can stay rent free for one and even two years before an eviction depending on when banks get to it. Others are kicked out quickly. Some are put into HAMP. The big issue? No clear uniformity to what is going on. What is wrong with renting? Half of those living in giant Los Angeles County rent. There is this stigma attached to renting a home and massive subsidies for homeownership. This carefully orchestrated play is now being held up even though tens of thousands now are living rent free in over leveraged homes. Housing seemed to work well when it was a boring, track inflation play that if you were lucky after 30 years, you had a place over your head and no mortgage. Since when did it become a rule that every 5 to 7 years you had to “trade up” a “starter home” just so you can progress forward? This twisted logic seemed to make sense because how else were most families going to save $100,000 to $200,000 just for a down payment on a 1,000 square foot home in a decent area? Of course that broken trend is now unraveling.

So putting this altogether, why would anyone want to buy in this current climate? Transparency is really not to be found. What real reform have we gotten after these two agonizing years? Is this reason in itself to buy? The headline data seems to tell us things have stalled but if we look at a deeper analysis, foreclosure filings, those 90 days late and with no foreclosure pending, bankruptcies, and other in the trenches data we realize that the market really isn’t healthy. We have yet to add one net job since the recession started. How are home prices going to go up? So let us assume the next big play is to simply turn ourselves into Japan and go for our second lost decade by putting banks into a permanent zombie position and ignoring problems. Pretending someone in a home that isn’t paying their mortgage is somehow good is probably a clear example of turning our housing market into a zombie market. Yet how is this good for prices? The same arguments were made in Japan and prices went nowhere for over 20 years!

It is interesting that the flurry of buyers jumping into the market have tapered off in the last few months. There was a period of two months where the tax credit and uptick in sales seemed to move a large number of people off the fence. There was a good amount of e-mail during this time. This has now waned significantly. But guess what? Prices are still near the trough. Why? Because incomes are stagnant. Maximum leverage mortgages are gone. Unless you plan on staying put for 30 years and can cover your mortgage comfortably, that future buyer is only going to be able to afford what their household income can stretch with a government backed loan. And looking at that typical monthly mortgage payment for Southern California it isn’t jumping up quickly. In other words, know the metrics of where you’re buying before jumping in.

http://www.doctorhousingbubble.com/the-housing-metrics-of-southern-california-%e2%80%93-seasonal-home-sales-inflation-adjusted-home-prices-tens-of-thousands-living-rent-free-and-the-japanese-experience/

Construction Decline Continues

2010-03-01T15:58:00Z

By SHOBHANA CHANDRA and TIMOTHY R. HOMAN
Bloomberg News

Construction spending in the U.S. fell in January for a third straight month, led by declines in commercial projects.

The 0.6 percent decrease to $884.1 billion followed a 1.2 percent drop the previous month, Commerce Department figures showed Monday in Washington. Commercial building fell 1.4 percent, swamping a 1.1 percent gain in home construction.

Recent home sales figures show the industry at the forefront of the deepest recession since the 1930s will be slow to rebound. Foreclosures that are projected to reach record levels this year may restrain homebuilding, while rising office vacancies will probably discourage new commercial projects.

Story continues below

AP photo

A rebound in housing activity in January was not enough to offset widespread weakness in commercial areas from office construction to hotels.

"We haven't really seen much improvement in housing," Michael Englund, chief economist at Action Economics LLC in Boulder, Colo., said before the report. "Residential construction is still weak. On the non-residential side, builders are hesitant to go along on new projects and banks are reluctant to provide the capital."

Economists forecast spending would decline 0.6 percent in January, according to the median of 42 projections in a Bloomberg News survey. Estimates ranged from a drop of 1.8 percent to a gain of 0.3 percent.

Other figures from the Commerce Department Monday showed consumer spending increased in January for a fourth consecutive month, a sign that the biggest part of the economy may contribute more to growth in coming months.

The 0.5 percent increase in purchases was more than anticipated and followed a 0.3 percent gain in December that was larger than previously estimated. Incomes climbed 0.1 percent, short of expectations and reflecting declines in dividends and interest.

The U.S. economy grew at a 5.9 percent pace in the final quarter of 2009, the best performance in six years and faster than previously estimated, the Commerce Department reported last week. Commercial construction fell at a 13.9 percent pace, while homebuilding expanded at a 5 percent rate, the figures showed.

The contribution to the economy from residential construction may be restrained this quarter as sales of new home slumped to the lowest on record in January. New-home sales, which compete with cheaper foreclosed properties, fell 11 percent in January, the Commerce Department reported Feb. 24.

http://www.pe.com/business/realestate/stories/PE_Biz_W_economy02.3c4f69f.html

Don’t Bet on a Recovery

2010-03-01T14:41:00Z

Commentay By Peter Schiff

It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose colored glasses handed out by our nation’s leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The “remedies” are postponing, perhaps indefinitely, a true recovery.

The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.

However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.

I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.

Beyond the question of “how” the spending could be achieved, is the deeper question of “why” such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?

During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate related riches.

However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.

The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace – the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.

Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being “created” by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.

Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it’s not just about confidence; it’s about cash.

The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.

That, in a nutshell, is our government’s plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.

http://www.europac.net/externalframeset.asp?id=18262&type=schiff

Tax Credit Raises Questions

2010-02-26T18:54:00Z

By CAROLE FELDMAN
Associated Press Writer

If you bought a home in 2009, you could be eligible for a tax credit. Figuring out which one can be confusing.

There's one credit for first-time homebuyers and another that primarily benefits homebuyers who owned a home before. But don't mix it up with the first-time homebuyer credit in 2008, which actually was a long-term loan.

There are maximum income levels and maximum sales prices. And vacation homes or rental property don't qualify.

"If you want to spend two hours reading the instructions and translating them and finding out whether you qualify, yes, it's relatively simple," said Jeff Schnepper, an MSN Money tax expert and author of "How to Pay Zero Taxes."

Some questions and answers about the homebuyers tax credit:

Q: How many people are claiming the credit?

A: "In all, 4.4 million households are expected to claim the tax credit before it expires," Lawrence Yun, the Realtors' chief economist, said in December.

Q: How many versions are there?

A: There are actually three.

The first credit, for first-time homebuyers, was really a long-term, interest-free loan that has to be paid back over 15 years. The maximum credit was $7,500 for a principal residence purchased between April 9, 2008, and June 30, 2009.

The second iteration made the first-time homebuyers credit a true credit -- it doesn't have to be paid back -- and raised the amount to a maximum $8,000. It applied to homes purchased between Jan. 1, 2009, and Nov. 30, 2009.

The third change extended the eligibility dates to homes purchased through April 30, 2010. It also added a credit for long-time homeowners who purchased a new residence between Nov. 7, 2009, and April 30, 2010, but at a reduced value -- up to $6,500.

Q: Do I automatically qualify if I purchased a house during those periods?

A: No. To qualify, the house has to be used as a primary residence. If purchased after Nov. 6, 2009, it cannot have cost more than $800,000. If you're a long-time homeowner, you had to have lived in the same house consecutively for five out of the last eight years, though you need not have lived in or owned that house at the time you buy your new home.

For homes purchased after Nov. 6, 2009, the credit also begins phasing out for individuals with modified adjusted gross incomes above $125,000, and for married couples filing jointly with incomes above $225,000.

Q: How do I claim the credit?

A: There's a form, 5405, to fill out. You'll also have to submit a copy of your settlement statement, usually Form HUD-1, with the names and signatures of all parties, the property address, the sales price and date of purchase.

To avoid refund delays, the IRS recommends that long-time homeowners who purchase a new home also provide documents to show they meet the requirement for consecutive years lived in their old house. These can include mortgage interest statements, or property tax or homeowner's insurance records.

Q: Do I have to wait until I file my 2010 taxes to claim the credit for a home purchased before the deadline in 2010?

A: No. "You can choose to claim the credit on your 2009 return for a home you bought in 2010 that qualifies for the credit," the IRS said.

Q: I purchased my home in 2008 and filed for a credit on my tax returns. Do I still have to pay it back?

A: Yes. When Congress did away with the repayment requirement, it did not do so retroactively.

Q: What if I decide to sell the house I got the credit for or convert it to a rental property?

A: You will have to pay back the credit if you don't keep the purchased house as your permanent residence for three years.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homebuyer28.1bdd3f6.html

Will the Pause Refresh?

2010-02-26T18:45:00Z

Commentary By John Brown

The world is currently in the eye of an economic hurricane. The leading edge of the storm, which made landfall in the second quarter of 2008, raged until the first quarter of 2009, and nearly demolished the world’s financial system. By sand-bagging with trillions of freshly-printed paper currencies, fudging accounting rules, subsidizing key financial houses and markets, and calming the masses with half-baked rhetoric, a worldwide collapse was averted.

But the calm is deceptive.

Because of the lull, Western governments have allowed our structural deficits to fester. Now, their spokesmen are predicting sunny skies for the foreseeable future. The Federal Reserve Chairman speaks of “exit strategies” and President Obama asserts that his stimulus package has prevented a second Great Depression. This inability to see past the horizon means our politicians have squandered our final chance to build sturdier shelters in advance of the hurricane’s trailing edge.

Last week, the International Monetary Fund (IMF) announced that it would dump a further 200 metric tons of gold onto the market. With temporary strength in the U.S. dollar and economic recession still threatening in America and Europe, such news should have caused gold to break below key support levels of $1072 and $995. But the price of gold fell only slightly before resuming its upward trend. Why was gold so resilient given the arrival of all this new supply?

As we have mentioned in previous commentaries, gold is not, as is widely believed, merely a hedge against inflation. Gold is also an insurance against catastrophe. Clearly, based on global fiscal and monetary profligacy, we all have rising consumer prices in our future. But before that gets out of hand, the Western world looks to be hit by the second half of the storm that struck in ‘08. Although the Associated Press has officially designated our current environment as “the Great Recession”, by the end of 2010 our economy may be more accurately described as a depression. If so, gold would be expected to plummet in value (along with other asset prices). But this assumes that the economy will behave as if it were supported by a sound currency. That assumption no longer applies, so we must adjust our expectations accordingly.

On this frightening occasion, we are at sea in a currency of paper backed only by the hot air of political bluster and dishonest accounting. Today, for the first time in modern history, it is not just individuals and private companies that face destitution, it is entire nation-states. Furthermore, it is not only minor players like Greece and Italy, but major pillars of the global market like the United Kingdom and the United States.

The re-introduction of the Health Bill in the U.S. Congress, albeit amended, illustrates vividly that Washington’s entitlement regime shows no sign of corrective discipline whatsoever. If, following the papering over of the Greek problem, international investors resume their selling of U.S. dollars and the underlying Treasury securities, the U.S. dollar may lose its reserve status – and the United States will, for the first time in living memory, face the possibility of default.

It may take years for this to happen. In all probability if downgrades are forthcoming, the United Kingdom will be the ‘canary in the coal mine’ and will be marked down in advance of its larger, and more indebted, progeny across the Atlantic. It is likely that such shocks will initially trigger U.S. dollar strength before the panic selling sets in. But what alternatives are there for cautious investors when the world’s reserve currency is no longer safe, and its chief competitors, the euro and yuan, are not stable or transparent? The answer is precious metals. Conservative investors are making this move early, beginning a secular bull market in this asset class.

On the sovereign scale, those countries, possibly including China, India and Switzerland, that are positioned to pull their wealth to the sturdy shelter of gold stand to survive the hurricane, battered but viable. Those countries, like the UK, which have squandered much of their real wealth and productive capacity, will likely subject their citizens to an era of unnecessary privation.

Turkey’s Awakening: Its Gradual Exit From The Western Camp

2010-02-26T18:44:00Z

Taking advantage of the ongoing systemic crisis, and of the weakening of the US and of the Western superstructure over which the latter’s might is based, Turkey has entered a process of fundamental redefinition of its key geopolitical interests. The new priorities ready to break out by 2012 will account for Ankara’s most profound reappraisal since the country joined NATO in 1952. This process illustrates a return to the Kemalist vision of Turkey’s vital interests (1) i.e., different from the agenda set for the country by big powers. It is quite ironical that this evolution is initiated by leaders of religious-oriented party, the AKP. There will be substantial geopolitical, economic and commercial consequences to this strategic shift which challenges the traditional vision of a pro-Western Turkey waiting to join the EU.

Turkey and its regional environment - Source: Comité Valmy

In the Eastern Mediterranean region, the relation with Israel is often a reliable indicator of a country’s relation with the Western camp altogether. Indeed, for more than a decade, the West has been defining itself along the Washington/Tel Aviv guiding line. But, in this regard, in the past few months, Turkey seems to have undertaken to move away from this line which, for many years, it used to follow as closely as possible. The attack on Gaza by the Israeli army in December 2008 is the marking event of this change of tone first, of orientation then. Since then, Ankara has gradually undertaken to move all the way backward along the road to its diplomatic and military cooperation with Tel Aviv. Two recent examples: Ankara’s decision to ban Israeli air force drills from Turkey; and its barring Israel from participating in a NATO exercise in October 2009 (2), soon followed by the announcement that Turkey would hold military exercises with Syria (3). We are far from the military and strategic behavior expected from a faithful ally of the United States and a prominent member of NATO.

However, changes in strategic priorities in the region have been brewing ever since the USSR collapsed, turning Turkey’s decade long and cold war-related dead-end position into a wide open space with huge cultural, economic and commercial potentialities. Since then, under the compliant Turkey, it was possible to catch glimpses of a country growingly reluctant to put the uniform lent by a Western world with regional aims more and more alien to Turkish interests (4). As long as the Cold War went on and the Soviet threat was on the borders, Turkey agreed to be a “Western tower” on the Middle-East chessboard. But since 1989, interests between the Tower and the King or Queen have increasingly diverged, a bad omen for the rest of the game on two aspects:

. on the one hand, Turkey will get increasingly reluctant to comply with Washington’s exhortations, as already suggested by a series of negative reactions (5) which provoked an upsurge of hostility towards Turkey within NATO. Something new is happening: the legitimacy of Turkey’s NATO membership is being questioned by leaders from other NATO member states.

. on the other hand, Washington’s and/or the Alliance’s policy in the region will be growingly hampered by a reluctant Turkey developing its own specific regional strategic approach, possibly opposed to NATO’s. Ankara’s good relations with Tehran (6), far from the ideas of sanction or embargo vigorously advocated by Washington, provide another glowing warning signal.

In short, the Turkey/NATO relationship is about to reach a point of no-return. The Turkish case is another striking example of the general process of disintegration currently affecting the Alliance (a theme already developed in previous GEABs) whose leader no longer has neither the vision nor the means required to control all its members.

Ironically, it appears to LEAP/E2020 that the other component of Turkey’s « anchoring » to the West, i.e. the promise of EU accession, will be the decisive factor in Turkey’s exit from the Western camp. Indeed this unkeepable promise, result of EU leaders’ lack of courage and imagination which led to official entry talks in 2005, will create two important conditions of the new orientation of Turkish foreign policy:

. first, the democratic requirements linked to EU accession have gradually compelled the Turkish military to go back to their barracks and stay there. For decades, they were used to run the country in the shadow of political puppets, dismissing them if necessary when some electoral outcome annoyed them. Thinking of themselves as protectors of Ataturk’s legacy, in fact they were mostly concerned about controlling the country and making the most of the NATO, EU and US manna rewarding their loyalty to the Western camp (7). As they grew weaker, they deprived the West from its most faithful ally in Turkish society. Another example of the irony of History.

. secondly, EU’s obvious reluctance (among the general public in particular (8)) to the perspective, even far in the future, of Turkey’s accession became clear for Turkish citizens in the past four years. Meanwhile, the discovery that the so-called « accession negotiations » (9) were no negotiations at all but on the contrary an obligation for Turkey to comply with the 90,000 pages of EU’s legal, moral, commercial and cultural corpus (the timing of the « acquis communautaire » is the only negotiable thing), has triggered a feeling of rejection among Turkish population of what suddenly appeared as a “colonialism by law”. Little by little, the under-forty Turkish generations began to think that the Europeans didn’t want them and that their country was therefore engaged in a dead-end. This process of awareness is a key phenomenon because it has put an end to forty years of an unchallenged official stance according to which EU entry was the sole desirable future for the country. Simultaneously, the Muslim party in power (who supported the project of EU accession under duress only (10)) gained the support of a non-religious stream of opinion opposed (or at least reluctant) to EU entry.

From Russia (whose nationals flock Turkish beaches) to Central Asia (where Ankara is conducting a proactive trade and cultural policy towards Turkish speaking countries), Iran and Syria, Turkey is quick in building a new diplomacy intended as a synthesis between the political and historical territories of the Ottoman legacy, Muslim religious proximity and its own specific interests as a regional power and crossroads. The combination is played by means of pendulum effects in which NATO and the EU are becoming mere components of Ankara’s diplomatic game, and no longer a basic data (which NATO used to be) or main objective (which the EU used to be).

Americans and Europeans shouldn’t be mistaken! According to LEAP/E2020, there will be no turning back. Since NATO is in a process of disintegration, there is no reason why Ankara should stop going it alone to this intermediary position at the centre of a geopolitical equilibrium involving Russia, the EU, Iran and any influential power between its Southern border and Egypt (Washington, for the time being). NATO’s last loyal allies are the generals of the Turkish army. In ten years from now, around 2020, they will be replaced by younger generations (11) who will agree on seeing their country in the future as a “bridge between East and West”, knowing that a bridge doesn’t belong to any of the banks it connects, otherwise it is no longer a bridge but a dead-end (12).

Turkey at the centre of the energy supply network - Source: JapanFocus, 12/2007

This goes for the European Union too. Even if the political will is now missing, Brussels’ and Ankara’s bureaucracies will certainly go on with the accession negotiations. But they will never be finalized, sinking year after year into the quagmire of general indifference. Indeed an enlargement is only the result of some political will. But the main supporter of this enlargement, i.e. Washington, now has other fish to fry and lacks the necessary influence to overcome the strong opposition of the European general public (they can’t even convince European troops to stay in Afghanistan). As to the EU, no political leader will take Turkey’s entry as a workhorse by fear of losing the election. From Ankara’s point of view, an alternative future to a European Turkey has appeared. If the EU understands that and soon proposes a state-of-the-art strategic partnership to Turkey, this dream will be one of a Turkish Turkey at crossroads between the various surrounding powers. But if Brussels sticks to its accession project, leaving no alternative, it runs the risk to push Turkey in the opposite direction, that of a Muslim Turkey. Ironically, one often gets the opposite of what he strove to get if he fails to take into consideration the dreams and expectations of the concerned people.

In conclusion, according to our team, Turkey’s shift out of the Western camp, itself in decay, far from being a problem for Europe, is only another facet of the global systemic crisis and of the gradual obliteration of structures inherited from the post-1945 world, thanks to which, by 2015, the Europeans could have a Turkish partner, with an appeased identity, able to be a useful intermediary in their relation with the Middle-East and Central Asia.

Turkey: a « Pont Neuf » (13) between East and West

--------
Notes:

(1) Kemal Atatürk, founder of modern Turkey, has indeed imagined and wished for his country to diverge both from its Ottoman past and from decisions set by the big powers of the beginning of the 20th century (UK and France in particular). The fact that he rejected the Treaty of Sèvres and the consequences it had on Turkish territory is meaningful in this regard. In his political will, he also clearly expressed what kind of a thread could link him to any future heirs: “I leave behind no verse, dogma, or arcane doctrine as my moral heritage. Rationality and science are to be regarded as my legacy. (…) Time flows quickly; subject also to flux is the perception or interpretation of happiness and misery by nations, societies, and individuals. In this world, claiming to spell out certain fixed, unchangeable ideas denies both the existence of rationality and science. (…) Thus, those who desire to follow in my footsteps can only assume the role of my moral inheritors if they affirm the primacy of rationality and science.” They could be for instance those who would have the courage to dismiss obsolete recipes.

(2) Source: Reuters, 10/14/2009

(3) We remember Turkish Prime Minister Recep Erdogan’s scene in Davos in January 2009 when he suddenly left the floor because he couldn’t speak the same amount of time as Israeli President Shimon Peres. Source: Tribune de Genève, 01/30/2009

(4) As already suggested by the difficulties met by Washington in persuading Ankara to let them use their Turkish bases for attacking Iraq in 2002/2003.

(5) Like in April 2009, when Turkey opposed to Fogh Rasmussen’s NATO bid as new Secretary General because of his support to Danish media over the caricature crisis. Source: France 24, 04/03/2009

(6) Turkish Prime Minister Recep Erdogan insists on calling Iranian President Mahmoud Ahmadinejad a friend of Turkey and declares that he won’t accept double standards towards Iran on nuclear issues. Source: The Guardian, 10/26/2009

(7) The IMF also played an important role in this regard, as Turkey has been one of its biggest clients for decades, thus enabling the West to run the country by proxy. The country’s exit from IMF’s adjustment programme in 2008 is also the moment when this strategic shift in Turkish diplomacy became visible. As a matter of fact, Ankara is now extremely reluctant to sign any new loan agreement with the IMF. Sources: EurAsiaNet, 07/02/2009; BrettonWoodsProject, 06/17/2009

(8) An increasing proportion among the European elite no longer wishes Turkey to join the EU. Turkey’s recent diplomatic shift has persuaded them that Ankara’s vision of the future is less and less compatible with the EU project. Source : EUObserver, 04/04/2009

(9) For decades, the Turkish elites, never denied by their EU counterparts, made their citizens believe Turkey’s EU accession was a process where each party covered half of the road. In 2005, this idea started to be recognized as a lie.

(10) Traditionally, the pro-Muslim movement in Turkey was opposed to EU entry. But if Paris is well worth a mass, Ankara was well worth a hypothetical enlargement.

(11) In the coming five years, the risk remains that a bunch of worn out generals backed by Washington tries some military coup. But this risk is small and would probably end up like the Russian generals’ coup against Mikhail Gorbachev in 1991.

(12) In fact Turkey is a double-bridge: between East and West, but also between Black Sea and Mediterranean. Moreover, in the 21st century, a bridge will also (especially) be a pipeline (gas or oil), a field where Turkey is also a central player thanks to the Nabucco project whose key is Iran.

(13) The « Pont Neuf » is, as its name doesn’t tell, Paris’ oldest bridge.

http://www.leap2020.eu/Turkey-s-awakening-Its-gradual-exit-from-the-Western-camp_a4361.html

Home Market's Bumpy Recovery

2010-02-23T18:52:00Z

By ADRIAN SAINZ
The Associated Press

Home prices edged up in December, the seventh straight monthly gain and another sign the housing market continues its bumpy recovery.

Prices aren't anywhere near the zenith of the housing boom -- they are down 30 percent from the peak in May 2006 -- and there are worries that the recovery may not last. But prices have been steadily increasing from month to month, climbing almost 4 percent off the bottom in May.

The gradual improvement is important to the nation's economic recovery. For most Americans, their home is their largest asset, so as values climb homeowners feel wealthier and more comfortable spending. And, for homeowners who currently owe more on their mortgages than their properties are worth, rising prices will rebuild equity.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday rose 0.3 percent from November to December, to a seasonally adjusted reading of 145.87. The index was off about 3 percent from December last year, nearly matching analysts' estimates.

Home sales data for January, out later this week, are also expected to show gains over year-end levels as buyers took advantage of low interest rates and temporary tax credits.

Anna Piretti, an economist at BNP Paribas, said the price increases are "further evidence that conditions in the house market continue to stabilize."

"While conditions remain challenging in Florida, house price conditions appear to be improving in the Western states, with gains recorded in California, Nevada and Arizona," Piretti wrote in a research report.

Los Angeles was the biggest winner out of the 20 cities with home prices up 1.4 percent on a seasonally adjusted basis in December over November. San Diego was up 1.1 percent and San Francisco increased 1 percent. Analysts attributed the California gains to many investors seeking to scoop up foreclosure properties and buyers taking advantage of cheap prices.

"California is an efficient market," Cameron Findlay, chief economist at LendingTree.com, said. "Buyers are more astute in terms of monitoring market changes and, in general, they will always lead the market out of a recession."

In Denver, prices rose for the 10th month in a row, while prices dipped in key markets like Miami, New York and Chicago.

Some economists fear that demand and prices will fall after two federal tax credits expire in April. And, a Federal Reserve program aimed to keep mortgage rates low is set to end March 31.

"Prices have stabilized and are starting to rise, but forces that will bring them back down are growing," wrote Patrick Newport, an economist with IHS Global Insight.

The Case-Shiller indexes measure home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices increased 50 percent since the beginning of the index.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homeprices24.3c8a313.html

Real Homes of Genius – Pasadena Million Dollar Home or $3,500 a Month Rental? You Decide.

2010-02-23T16:46:00Z

The latest report from First American CoreLogic shows that 11.3 million properties with mortgages are now in a negative equity position. If we add in those “near” negative equity we find that roughly 30 percent of all homes with a mortgage balance are underwater. For California, that number is higher with 35 percent of homes with a mortgage being placed in the negative equity camp. If we ran the numbers for Alt-A and option ARM loans I wouldn’t be surprised to see that number above 70 percent. The market is clearly still in deep distress. As I have stated from the start, we will have no real recovery until job growth enters the picture. This is such an obvious statement but the banking and real estate industry seemed fixated on housing as the panacea to a full economic recovery. Housing and the banking industry led us into this mess to begin with.

I took a look at data from the Employment Development Department (EDD) of California and last year was another record year for California in terms of unemployment claims paid out:

“(EDD) A record high 1.4 million Californians were certifying for UI benefits in November 2009, according to the most recent information available. In all of 2009, EDD paid $20.2 billion in UI benefits that not only helped sustain families during this difficult time, but also helped support local communities struggling to survive the economic pressures.

The prior record of UI benefits paid in a single year was set not too long ago in 2008, when the EDD paid out $8.1 billion in UI benefits to out of work Californians.

That’s a 149 percent increase in the total UI dollars pumped into the State’s economy in 2009 at a rate of about $80 million a day.

The $20.2 billion paid in benefits in 2009 translates into an economic impact of about $32 billion dollars when you look at how UI dollars spent on basic necessities leads to further spending in the general economy. The U.S. Department of Labor estimates the economic multiplier is $1.60 for every dollar paid out in UI benefits.”

Did you get that? In 2008, an already bad year $8.1 billion in UI benefits were paid out. Last year, that number went up to $20.2 billion and we are still near the peak unemployment rate of 12.4 percent:

Source: BLS

I’ve had this conversation with a few colleagues in the real estate industry. Whenever they mention that California real estate is at a bottom I always ask them what industry is going to make up for the million and more jobs lost. They don’t have an answer. Heck, in the 1990s it was all about the tech sector so that was supposedly going to give every Californian with basic HTML coding abilities and a Geocities account a $60,000 a year job with no college degree. When that bubble burst, it then was every Californian was going to work for the real estate industry making $100,000 simply by popping on a suit or a skirt and pushing mortgages or property in the mania of the century. That bubble burst. So what gig is next? Can we at least get some jobs going before we start jumping on another real estate price bandwagon?

One major flaw with the current thinking in the housing market is assuming mortgage rates are somehow going to stay low forever:

Examine the above chart very carefully and enjoy that sub-5 percent rate because that is not going to last. We are at the lower bound. Even if we revert to historical averages of 9 percent, that will absolutely tank the California housing market. Keep in mind that a large part of the above is because of the Federal Reserve buying up $1.25 billion in agency mortgage backed securities debt. That game is quickly ending and this in itself has probably shaved off 100 to 200 basis points. In other words, mortgages are going to get more expensive.

But let us show this massive disconnection with another on the ground example in Pasadena. We’ll even pick a prime zip code in the area. Today we salute you Pasadena with our Real Homes of Genius Award.

Pasadena Dislocation

I decided to pull data on 91105 zip code in Pasadena. A middle class two income area where the median home price is now $657,000 (down 25 percent from last year). So certainly this area has seen a correction but is the correcting over? A good way to measure market metrics is looking at lease rates and home prices for the immediate area. First, let us look at our home for sale:

The above home is listed as a short sale which now seems to be gaining further momentum thanks to programs like HAFA. The home is a 3 bedroom and 2 baths home and is listed at 1,978 square feet. It has been on the market for over 40 days. Let us look at previous sales history:

Last Sale Info:

Sold 08/17/2006: $1,000,000

Not too long ago this was a million dollar home and the current list price is $949,000. So I went ahead and tried to search for a rental in the immediate area. These are hard to find but are extremely illuminating in giving us a sense of whether current prices are too high or low. So I found this home on the next street over:

The rental is a 2 bedrooms and 2 baths home listed at 1,504 square feet. The current asking rent is $3,500. Now let us run some numbers. We’ll assume that you are putting 20 percent down for the home purchase:

20 percent down payment: $189,800

The latest tax data shows the home running $11,381 in taxes in 2009. So we’ll assume the monthly carrying costs:

$4,310 (PI) + $948 (T) + $395 (I) = $5,653 for each monthly payment

I’m assuming for the insurance that you are actually vigilant enough to get earthquake insurance in California (many homeowners don’t even have this). So this is a significant difference. But let us assume you buy this home. And rates increase modestly to 7.5 percent in five years and you plan to sell. What is the future buyer looking at?

$5,308 (PI) + $948 (T) + $395 (I) = $6,651 for each monthly payment

With a modest interest rate increase, the payment jumps up $1,000 to $6,651. This is why we have a lot of correcting to do. Rates are artificially low and many are assuming the current environment is going to stay this way for a long time. It will not. I’ve mapped out these properties just in case you think they are miles apart:

Are these homes exactly the same? Of course not. But this is as close as you are going to get to seeing the insanity in the mid-tier of the market. Now here is the reason ignoring jobs and subsequently income data will lead to additional corrections. Let us assume you gross $10,000 a month in Pasadena and want to buy this home. Can you?

Not even close. Your monthly payment is up to $5,653 and you are netting $6,731. Sure you can up your withholdings but that won’t change the numbers drastically. Your housing payment remains fixed.

http://www.doctorhousingbubble.com/real-homes-of-genius-%e2%80%93-pasadena-million-dollar-home-or-3500-a-month-rental-you-decide/