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

Home Starts Chilled By Winter Weather

2010-03-17T03:56:00Z

By SHOBHANA CHANDRA
Bloomberg News

Housing starts fell in February as record snowfall in parts of the U.S. hampered construction, while fewer building permits signaled the recovery in real estate will take longer to unfold.

Builders broke ground on 575,000 homes at an annual rate, down 5.9 percent from 611,000 in January, Commerce Department figures showed Tuesday in Washington. February starts reflected declines in the Northeast and South, which experienced winter storms. Prices of goods imported into the U.S. fell more than anticipated in February, another report showed.

"Some of the numbers reflect the severe snowstorms, but apart from the weather, there's no evidence of a pickup in activity," Michael Feroli, an economist at JPMorgan Chase & Co. in New York, said about the real estate market. "If we see the job market pick up, it'll eventually feed through to housing."

Story continues below

Bloomberg

Partially completed townhouses are under construction in Des Plaines, Ill.

Homebuilders' shares reflect the optimism. The S&P Supercomposite Homebuilding Index, which includes Pulte Homes Inc. and Lennar Corp., has increased about 16 percent so far this year.

Housing starts were projected to fall to 570,000 after a previously reported 591,000 in January, according to the median forecast of 71 economists surveyed by Bloomberg. Estimates ranged from 510,000 to 610,000.

Building permits, a sign of future construction, decreased 1.6 percent to a 612,000 annual rate after a 4.7 percent drop in January. Permits were forecast to decrease to a 601,000 annual pace, according to the survey median.

Paul Dales, an economist at Capital Economics, said the February weakness stemmed from severe winter weather which prevented builders from breaking ground on new projects. But he said the housing outlook remains bleak because of a huge glut of unsold homes, reflecting the weakness in sales and the continued crisis with home foreclosures.

He said that in addition to 3.8 million homes for sale currently, foreclosures could dump another 5 million to 6 million homes on the market.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homebuilding17.3c23cbc.html

Home Sales Down In Inland Region

2010-03-17T03:54:00Z

By KIMBERLY PIERCEALL
The Press-Enterprise

The Inland region remained the exception in Southern California where more homes were sold last month than a year ago, according to the latest report from MDA DataQuick of San Diego, a housing research firm.

In Riverside County, 3,199 homes were sold, 6.5 percent fewer than in February last year and nearly the same number sold in January.

The median price increased 3.7 percent to $197,000 compared to February 2009 and inched up a couple thousand dollars since January.

Story continues below

Click to enlarge

In San Bernardino County there were 2,095 homes sold last month, 9.9 percent fewer than a year prior. The median price dropped a slight $3,000 to $150,000. That price remained unchanged from January although there were 157 fewer homes sold month to month.

The two-county region has far fewer homes for sale than it did a year ago when sales were near record highs on a hefty supply of foreclosures, said Andrew LePage, spokesman for DataQuick.

"Prices had dived to levels we hadn't seen in a long time," he said of the Inland region in 2009. Year-over-year comparisons will continue to show decreases as a result, he said.

The flood of foreclosures to the market has since slowed.

"We hear about the vast array of foreclosed homes that the banks may be holding ... but they're not hitting the market," said Steve Johnson, director of real estate consulting firm Metrostudy of California based in Riverside.

The region's record high unemployment level has affected the pool of prospective buyers, too, he said.

Just eight fewer homes were sold in San Diego County last month compared to a year ago. Los Angeles, Orange and Ventura counties all saw more homes sold than a year prior.

For 20 months in a row, Southern California home sales have continued to tick up when compared to the same month a year ago.

"It's possible the stars won't line up this way again for many years. With prices and mortgage interest rates this low, the cost of ownership is about as low as we've seen it in decades," said John Walsh, MDA DataQuick president in a statement.

Foreclosure sales still accounted for 42.3 percent of all resold home sales last month, still high but lower than the peak last February when distressed homes accounted for 56.7 percent all sales.

The number of homes flipped, essentially re-sold within three weeks to six months of being bought, was 3.4 percent in February, up from 1.6 percent last year

http://www.pe.com/business/realestate/stories/PE_Biz_W_dataquick17.3c234c4.html

Financing the Cassandra Effect – People Choose to Ignore Economic Facts Contrary to Their Benefit. MLS in Southern California Going Up? Distress Inventory 3 Times the MLS Data. Big Salaries of Mortgage Brokers Gone.

2010-03-17T03:42:00Z

In recent months we have seen many articles talking about the lack of predictability in big bubbles like the current credit crisis. Some of these authors argue that bubbles are impossible to predict and therefore preparation is futile. This observation is false simply because history is littered by people that have predicted events including the Great Depression. And it is nonsense on the surface because if you see your friend having 20 shots of tequila it is very likely that it will not end pretty even though it is fun in the moment. What makes bubbles seem impossible to predict during the mania is this collective groupthink where the herd dominates most of the conversation drowning out opposing views. We’ve highlighted many homes during the years here in California and the obvious explanation was a bubble was here and it would burst at a certain point. Yet there is little reward for being the messenger of bad news and this was the tragedy of any modern day Cassandra.

I’ve noticed a few people in other articles and blogs talk about how great of a deal they got on a California home. 30, 40, or even 50 percent off the peak price. Yet this discount in itself is meaningless unless we put it into context of the local economy, incomes, and inflation-adjusted home prices for that area. Yet even today, we see the same psychological trappings of those that bought in 2006 and 2007. “Well it has to go up because it went up in 2002, 2003, etc” and this was the basis of prices heading higher. Today, it is more like “I got a home for 30, 40, or even 50 percent off therefore it is a good deal.” But price alone does not tell you everything. If a low price was the measure of value, then Detroit would be the ultimate value play but there is a reason homes that once sold for $100,000 which seemed cheap a decade ago are now going for $1,000 or even $500.

Now why bring this up? We are seeing unique trends in the housing market. For example, there has been a large amount of sale activity in the Inland Empire:

Source: DataQuick

The amount of sales in distressed markets is astounding. From data showing financing on these purchases, we see that many investors are rushing out to buy homes. But are prices making sense even in these areas where prices are down 50 or even 60 percent? It is hard to tell because these local economics are feeling the brunt of the recession. For example the above chart shows some areas in Riverside County part of the Inland Empire. The sales volume above is intense. For example, in the Temecula zip code above 38 home sold in December of 2007. Today that volume is three times that. The Hemet zip code above is running at double the pace. So the volume is there. But take a look at the unemployment rate in the Inland Empire:

Source: BLS

There is a reason for the extraordinarily cheap housing prices when headline unemployment is 14 percent (meaning the underemployment rate is upwards of 25 percent). As an investor it is hard not to be tempted by low prices. But going out there to view the market, you see in some cases, home after home either boarded up or completely uncared for. Many of these communities are dealing with a large surge of Section 8 renters. Just look at how many rentals are available in these areas and you can see that many investors are getting in over their heads. They are only focusing on one side of the equation in price. They are failing to examine the local economy or trends in the area.

MLS

For the first time in three years of tracking the MLS data have I seen a significant jump in inventory for Southern California. The six counties in Southern California currently have 69,000 homes listed on the MLS. This is up from the low reached in October of 2009 with 64,000 properties listed. Part of this has to do with a large number of short sale properties hitting the list but also, the expiration of HAMP offers for many who simply do not qualify. The housing market has gone from a manic casino to a slow payout slot machine. But only looking at the MLS data is misleading as we already know. We recently found out the massive gimmick Lehman Brothers was using to hide toxic assets. Well the MLS does not tell the entire story.

If we look at distress inventory, we find out that it is true that many Southern California communities have a large amount of distress properties:

Source: Foreclosure Radar

This is being reflected in the median sale price. The median sale price in Southern California has gone up since it hit a low in January of 2009 of $250,000 for almost a year. However, last month it dipped by $17,500. Part of it has to do with the fact that California has a 12.5 percent unemployment rate. A lot of the housing volume has come from investors. Last month 28.9 percent of all Southern California home purchases were all cash. So either people are looking to flip again or purchase to create rentals. But the rental market is already saturated:

The California vacancy rate is the highest on record. So if these investors plan on turning these units into rentals, by supply and demand prices will be pushed lower so hopefully they are factoring this in. Some are taking solace that there will be no tsunami but in that belief, they assume that there will be no further price corrections. This is one large fallacy going around today. Tsunami, trickle, or any other weather comparison prices will correct in many areas simply because they do not reflect the current market. Did we also mention the massive California budget deficit?

Estimated Balance on Distress Properties

One way to get a sense of how much correcting we have, I dug deeper into the distress data. Take for example the top 1,000 properties in Los Angeles County that are scheduled for auction or bank owned:

These homes haven’t hit the market. A handful are on the MLS but not many. If these homes sell today for the estimated value (unlikely since it is a bit high) we would see an average loss of $195,175. Now this is only a sample of the 63,000 distress properties in Los Angeles County. Banks clearly have this data so they rather take on people that have stopped paying their mortgage then realize that $195,175 loss. But this has a timeframe attached to it. Just look at a couple of the mortgage balances. $470,000 would carry a $3,000 to $4,000 total housing payment depending on the interest rate. The loss on that property is roughly $210,000. So they can hold off for 4 years ($4,000 x 48 months) but this won’t happen. The most I’ve seen has been 18 months from when the NOD was filed. Yet the loss at a certain point will be realized. And make no mistake, the reason banks are not lending is because of this. Their internal cash flow is bleeding. They are simply hoping for a bubble resurgence which obviously is not going to happen. Why?

California Big Salaries Down

What people don’t want to talk about deals with the reality that many of the high paying jobs were basically cogs of the bubble machine. Many mortgage brokers, agents, and bankers were getting lucrative income for being sellers of this financial mess, the biggest since the Great Depression:

“(May 2007) Brokers can earn higher commissions – up to 3 percent instead of the typical 1 percent – by having customers buy loans with interest rates that are higher than market rates, with prepayment penalties charged if the loan is paid off before a certain date, and with little or no verification of the borrower’s income, known as “stated income” loans. That’s the difference between a $12,000 and a $4,000 commission on a $400,000 loan.

Leonard said he believes such practices are common, partially because there is no state law requiring the broker to disclose that the borrower is eligible for a lower rate.

Many loans offering the highest commissions have been subprime loans, higher interest rate loans that often are sold to those who have low credit ratings or present other risk factors, such as undocumented earnings. Mortgage industry experts say the majority of defaults in the last two years are tied to these loans.”

With option ARMs outlawed and other toxic junk finding no market in Wall Street, the only game in town is government backed loans that certainly do not carry a $12,000 commission. So what we have is this:

And many of these people were buying in prime areas like the Westside with inflated bubble salaries that are now gone. So the pool of qualified buyers is down for mid to upper tier markets. Going back to the Cassandra effect, the state was satisfied as well because they were collecting large amounts of taxes from these people. They were getting good money from payroll taxes but also, solid revenues from properties that were now assessed at absurd prices. There was no incentive for the state to stop the party. California was an economy that was built by the housing bubble both in employment and housing values. It is now suffering on both ends of the spectrum. That is why our unemployment rate is still at the peak while nationwide the unemployment rate seems to have leveled off. It is also the case why our state government is in an absolute mess. They counted on the bubble revenues:

So what this means is get ready for higher taxes or more cuts. Unless we decide to recreate the housing infrastructure to start another bubble but Wall Street is already done with the housing market and is on to better bubbles to chase with taxpayer money. In other words, California is going to have a stagnant housing market for years to come.

http://www.doctorhousingbubble.com/financing-the-cassandra-effect-%e2%80%93-people-choose-to-ignore-economic-facts-contrary-to-their-benefit-mls-in-southern-california-going-up-distress-inventory-3-times-the-mls-data-big-salaries/

The Five Steps Of The Global Geopolitical Dislocation Phase

2010-03-17T03:39:00Z

At the end of this first quarter of 2010, with increasing signs of confrontation at international level on monetary, financial, commercial and strategic fronts, and as the severity of the social impact of the crisis is evident at the heart of major countries and regions, LEAP/E2020 is able to provide a first anticipation of the ensuing roll-out of this phase of global geopolitical dislocation.

A reminder that this phase can only be a precursor to a sustained reorganisation of the international system if, between now and the middle of this decade, the consequences of the collapse of the world order inherited from the second world war and the fall of the Iron Curtain fully come home to roost. In particular, this development requires a complete recasting of the international monetary system based on an international currency, replacing the current system founded on the US Dollar, the value of which would be based on a basket of the major world currencies weighted according to the respective size of their economies.

At the same time last year we took a full page in the Financial Times on the eve of the G20 summit in London, pointing out that the ideal « window of opportunity » to effect such a radical change would be between spring and summer 2009, failing which the world would be involved in the phase of global geopolitical dislocation at the end of 2009 (1).

The « Ring of Fire » of sovereign debt - Graphic presentation of the ratio of states’ debt and public deficits (% of GDP) - Source: Reuters Ecowin, 02/2010

The failure of the 2009 Copenhagen summit, which brought almost two decades of international cooperation and influence on the subject matter, due to increasing US and Chinese conflict and western lack of agreement on the actual topics (2) is, therefore, a relevant sign confirming our researchers’ anticipations. Due to increasing tensions (zones and subject matters) international relationships become worse, whilst the ability of the United States to play their role as manager (3), or just only as « boss » of those under their umbrella, fades away a little more with each passing month (4). At the end of 2010’s first quarter we can highlight:

. constant worsening of Sino-US relations (Taiwan, Tibet, Iran, Dollar-Yuan parity (5), declining purchases of US Treasury Bonds, numerous commercial disputes,…)
. increasing transatlantic dissent (Afghanistan (6), NATO (7), contracts for US Air Force in-flight refueling tankers (8), climate control, the Greek crisis,…)
. Washington’s decision-making (9) paralysis
. Middle Eastern (10) instability without respite and the intensification of potential Israeli-Palestinian and Israeli-Iranian crises
. increasingly good reasons for having regional blocs (Asia, Latin America (11), and Europe in particular)
. increased monetary (12) and financial (13) volatility in the world
. increasing sovereign risk worries
. the growing criticism of the role of US banks linked to regulation targeting a regionalisation of financial markets (14)…

New York Stock Exchange profitability (in %) from 1825 to 2008 - Sources: Value Square Asset Management / Yale School of Management, 2009

At the same time, without any economic recovery in sight (15), social conflict is increasing in Europe, whilst in the United States the social fabric is, purely and simply, coming apart at the seams (16). If the first event is more visible than the second it is, however, the second which is the more important. Control of the tools of the international media by the United States enables the social consequences of this destruction of US public and social services on the back of the increasing poverty of the country’s middle classes (17) to be covered up. This concealment is made even easier compared to Europe, that the US social fabric has been vaporised (18): weak trade unions, unions very limited by sector, and without general social claims social claims being historically identified as an « anti-American (19) » attitude,… Still, on both sides of the Atlantic (and in Japan) public (public transport, police, the fire service) and social (health, education, retirement) services are in the process of being dismantled, when they are not purely and simply closed; demonstrations (20), sometimes violent, are increasing in Europe, whilst acts of domestic terrorism or political extremism (21) are on the increase in the United States,… In China, growing control over the Internet and the media is, above all, a reliable indicator of increased nervousness of Chinese leaders over the state of their popularity. Demonstrations over unemployment and poverty are on the increase, contradicting the optimistic speeches of the Chinese leaders on the state of the economy. In Africa, the frequency of coups d’état has increased since last year. In Latin America, notwithstanding somewhat positive macro-economic numbers, social discontent feeds the risks of radical political change, just as Chile saw.

OECD Nominal (22) Spending History (as a % of previous year’s GDP) - Source: MacroMarketMusings / David Beckworth, 11/2009

All these trends are in the course of rapidly creating an « explosive socio-political cocktail » which leads directly to strife between component parts of the same geopolitical entity (conflict between federal states/the United States itself, tensions between European Union and member states, Russian republics and the Federation, Chinese provinces and central government), between ethnic groups (an almost universal increase in anti-immigrant sentiment) and a falling back on nationalism, both national and regional (23), to channel these destructive tensions. All this takes place on the back of middle class poverty in the United States, Japan and in Europe (in the United Kingdom, and in European and Asiatic (24) countries in particular, where households and local authorities are the most heavily in debt).

In this context, LEAP/E2020 believes that the phase of world geopolitical dislocation will take place in to five successive steps, laid out in this GEAB issue. That is to say:

0. Beginning of the phase of global geopolitical dislocation
1. Step 1: Monetary disputes and financial shocks
2. Step 2: Trade disputes
3. Step 3: State crises
4. Step 4: Socio-political crises
5. Step 5: Strategic crises

In addition, in this GEAB issue, our team discloses the eight countries which seem to it to be more dangerous than Greece on the matter of sovereign debt ; whilst also giving its analysis of how the post-crisis financial economy will work out compared to the real one. Then LEAP/E2020 gives its monthly suggestions (currencies, shares,….) including a number of criteria to more reliably interpret data in the particular context of this world geopolitical dislocation phase.

---------
Notes:

(1) Joseph Stiglitz and Simon Johnson commentary is now is nothing other than a statement that they consider that the crisis was a missed opportunity to reform the world financial system and will rapidly lead to further pain and suffering. Source: USAToday, 03/12/2010

(2) Americans and Europeans have diametrically opposite positions thereon and Barack Obama’s accession to the US Presidency only made the European’s public position more complicated (because they declared themselves to be « Obamaphiles » straight away) without changing the deal fundamentally.

(3) Even in the field of research, the United States is dropping back rapidly. In the world classification of the best research institutes there are only six American in the first fifteen, as against four European and two Chinese, and not one in the first three. Source: Scimago Institutions Rankings 2009, 03/2009

(4) As shown by Israel’s attitude which now acts in a manner almost damaging to Washington. It is an important sign because no one is better positioned than closest allies to perceive the extent of an empire’s weakness. Enemies or even new or distant allies don’t have the same vision not having the same close contact with the powers-that-be, nor enough historical perspective to be able to decipher such a change. Thomas Friedman’s New York Times editorial of the 03/13/2010 clearly illustrates US elite’s disarray in the face of the increasingly off-hand attitude of their Israeli ally and, equally, the failure of the US administration to react firmly to it.

(5) The tension has risen considerably on this issue which has become a symbolic power play as much as an economic one for both Beijing and Washington. Source: China Daily, 03/14/2010; Washington Post, 03/14/2010

(6) The likely withdrawal of a large number of NATO troops from Afghanistan in 2011 has led Russia and India to develop a joint strategy, notably with Iran, in the event that the Taliban return to power! Source: Times of India, 03/12/2010

(7) Over and above the Dutch government’s fall over the issue of Afghanistan, Germany is now coming round to the idea of incorporating Russia in NATO, an good old Russian idea, on the pretext that NATO is no longer relevant in its current format. Source: Spiegel, 03/08/2010

(8) Europeans are all very angry at Washington’s de facto removal of the European bid for the large contract to replace the US Air Force’s airborne refueling tankers. This decision almost certainly brings to an end the myth (in fashion in Europe) of a transatlantic arms market. Washington will not allow other companies other their own to win such large contracts. Europeans are, then, going to have to seriously consider supplying themselves from their own defence industry. Source: Financial Times, 09/03/2010

(9) Even the Los Angeles Times of 02/28/2010 echoed the concerns of the British historian Niall Ferguson who considered that the « US Empire » could collapse from one day to the next, just like the USSR.

(10) And the fact that all the Arab world is now seriously affected by the world economic crisis will add to chronic regional instability. Source: Awid/Pnud, 02/19/2010

(11) Venezuela arms itself with Chinese fighter planes, which would have been a science fiction scenario only five years ago. Source: YahooNews, 03/14/2010

(12) As anticipated in previous GEAB issues, with the dissipating of the « Greek crisis », there would be a return to the reality of the major trends of the crisis and, indeed, over the last few days we are starting to see, once again, analyses which put a perspective on the United States’ loss of its AAA debt rating, and the end of the Dollar’s reserve currency status. Source: BusinessInsider/Standard & Poor's, 03/12/2010

(13) The chart below shows the ever-increasing volatility characterising financial markets and which is, according to LEAP/E2020, an indication of major systemic risk. Looking at the New York Stock Exchange’s profitability over more than 180 years, one can see that the years of the last decade (2000-2008 and, most probably, 2009) have produced the very best and very worst results. The result is statistically improbable, except if the financial markets, and the trends which move them, have entered a phase of crucial uncertainty, uncoupled from the real economy and its inertia. Order size on financial markets has fallen by 50% in five years, due to the effect of computer and « high frequency » trading, increasing their potential for volatility. Source: Financial Times, 02/21/2010

(14) The recent warning by the Treasury Secretary, Timothy Geithner, over financial regulation of transatlantic derivative risks is only the latest indication of this development. Source: Financial Times, 03/10/2010

(15) Sweden is the latest example, which believed it had come through the crisis only to find itself plunged into recession again when very poor numbers for the fourth quarter of 2009 were released. Source: SeekingAlpha, 03/02/2010.

(16) US unemployment is now around 20%, rising to 40-50% for the disadvantaged classes. To avoid having to face up to this reality the US authorities substantially distort the numbers of people in work and those seeking work. Steven Hansen’s article published on SeekingAlpha on 02/21/2010 called « Which economic world are we in? » offers an interesting insight on this topic.

(17) An analysis, extreme certainly but very well documented, and quite relevant to this situation written by David DeGraw on Alternet on 02/15/2010

(18) Source (including comments): MarketWatch, 02/25/2010

(19) It is the belief that a “Communist” is hiding inside every trade unionist and every demonstrator for social causes.

(20) Even in the United States where students demonstrated against increased enrolment fees, and where the population worries about the closing of half the public schools in Kansas City, whilst in New York 62 fire crews will be made redundant. Sources: New York Times, 03/04/2010; USAToday, 03/12/2010; Fire Engineering, 03/11/2010

(21) From Joe Stack to Tea Parties the US middle class has become more radical since the middle of 2009.

(22) Nominal spending is the total amount of spending in an economy not corrected for inflation. It is, in fact, the value of total demand. Note on this chart how the crisis marks a collapse in demand.

(23) The term « regional » is used in a geopolitical sense here of regional groups (EU, ASEAN…).

(24) In South Korea, household debt continues to worsen because of the crisis, whilst businesses accumulate cash reserves instead of investing, since they do not believe a recovery is at hand. Source: Korea Herald://, 03/03/2010

http://www.leap2020.eu/GEAB-N-43-is-available!-The-five-steps-of-the-global-geopolitical-dislocation-phase_a4420.html

Homebuilder Index Sagging

2010-03-16T03:49:00Z

By SHOBHANA CHANDRA
Bloomberg News

Confidence among U.S. homebuilders unexpectedly declined in March, a sign the housing recovery is having trouble gaining momentum.

The National Association of Home Builders/Wells Fargo index of builder confidence dropped to 15 this month from 17 in February, the Washington-based group said Monday. A reading below 50 means most respondents view conditions as poor.

The report showed traffic of prospective buyers dropped to a one-year low, indicating an extension of a tax credit for purchases is sparking little interest. Projections of record foreclosures this year, a lack of job growth and an end to Federal Reserve purchases of mortgage-backed debt are hurdles for the real estate market.

Story continues below

AP photo

Projections of record foreclosures this year, a lack of job growth and an end to Federal Reserve purchases of mortgage-backed debt are hurdles for the real estate market.

"This is a clear negative for the struggling housing market," said Jennifer Lee, senior economist at BMO Capital Markets in Toronto. "The sector, which had stabilized up until recently, has entered another rough patch of turbulence."

The builder confidence index was forecast to hold at 17, according to the median forecast of 43 economists surveyed by Bloomberg News. Projections ranged from 15 to 19.

The index, first published in January 1985, averaged 15 last year.

The confidence survey asks builders to characterize current sales as "good," "fair" or "poor" and to gauge prospective buyers' traffic. It also asks participants to gauge the outlook for the next six months.

The group's index of current single-family home sales declined to 15 in March from 17 the prior month.

The gauge of buyer traffic fell to 10 in March, the lowest level in a year, from 12. A measure of sales expectations for the next six months decreased to 24 this month, the weakest reading since April 2009, from 27 in February.

Confidence dropped in two of four regions, led by the Midwest, where it fell to 10 from 13.

Confidence in the South declined to 18 from 19. The Northeast showed a gain to 23 from 18, while the West posted an increase to 15 from 14.

While housing is no longer in freefall, distressed property sales and foreclosures are holding down prices. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values mean borrowers are unable to make their house payment or sell their property, according to a RealtyTrac Inc. forecast.

President Barack Obama in November extended a tax credit of as much as $8,000 for first-time homebuyers, and expanded it to include some current owners. The extension covers closings through June as long as contracts are signed by the end of April.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homebuilders16.406dda4.html

Shoe Maker Lauded For Creating Jobs In Moreno Valley

2010-03-13T03:47:00Z

By KIMBERLY PIERCEALL
The Press-Enterprise

Video: Governor highlights jobs creation at Moreno Valley groundbreaking

In the same week when state officials revealed the unemployment rate in Riverside and San Bernardino counties reached a record 15 percent, Gov. Arnold Schwarzenegger and local officials stood in the middle of a Moreno Valley field to cheer job creation for a project first proposed in late 2007.

The construction of a 1.8 million-square-foot distribution hub for Skechers USA Inc. stretching 2,850-feet long between Redlands Boulevard and Theodore Street south of the 60 freeway will require 1,100 workers, they said.

Once built by early next year, the shoe-maker's North American distribution and warehouse headquarters would employ 1,000, about the same number who already work for the company in Ontario.

Story continues below

Stan Lim / The Press-Enterprise

Governor Arnold Schwarzenegger, center, California's Secretary of Labor Victoria Bradshaw and developer Iddo Benzeevi arrive for Friday's groundbreaking ceremony for the 1.8 million-square-foot distribution hub for Skechers USA Inc. in Moreno Valley.

"Out of the thousand, half of those would be new jobs," said Michael Greenberg, president of Skechers, acknowledging that a good deal of workers at its current Ontario facilities would work in Moreno Valley.

Schwarzenegger called the shoe-maker "courageous" on Friday for growing during an economically depressed time, but Skechers had been looking to grow since at least late 2007 when the company expressed interest in Moreno Valley.

The Manhattan Beach-based shoe-maker leases 1.6 million square feet of space in five warehouses and distribution buildings in Ontario.

"To manage distribution through five building is ineffective. It's ineffective, it's costly, there's waste involved," Greenberg said.

Large swaths of the region's commercial real estate space have been vacated during the recession. Of the 18.9 million square feet of industrial space in Moreno Valley and Perris, about 17.1 percent is vacant, according to brokerage firm Grubb & Ellis.

Skechers agreed to a 20-year lease worth $224 million with the proposed building's developer Highland Fairview and its president Iddo Benzeevi.

"We were hoping to do it much faster," Benzeevi said. "What ached me the most throughout the process is ... while things are taking longer, there's thousands of people losing their jobs and losing their homes that could have had jobs and could have provided for their families and saved their homes."

The project, approved unanimously by Moreno Valley's city council in Feb. 2009, faced opposition from community members, environmental groups and government agencies who delayed early approvals.

Riverside County Supervisor Marion Ashley said the development would create "badly needed, family-saving" jobs.

"Right now, any job looks great," he said.

The project has been criticized for creating warehouse and distribution jobs rather than highly skilled high-paying positions, but Greenberg said there would be a variety.

"To ship 100 million pairs of shoes annually, it takes more than just labor jobs to do so," Greenberg said. "There's middle-management and senior management that will be based in the community."

Skechers has about 4,000 employees worldwide, half in the United States.

http://www.pe.com/business/realestate/stories/PE_Biz_W_gov13.30cec29.html

Dollar Bulls Beware

2010-03-13T03:44:00Z

Commentary By Peter Schiff

By late 2009, as the U.S. dollar flirted with multi-year lows against most foreign currencies, big investment players crowded into trades that shorted the greenback. Commentators noted that the anti-dollar momentum had taken on a life of its own and that the trade had become too crowded. It is true that markets have a nasty tendency to move against the crowd. When a lot of traders agree on a particular trade, it's more likely that in the short-run the opposite trade will be a winner.

The 2008 "flight to safety" rally of the U.S. dollar was a once in a lifetime event that presented huge opportunities for aggressive currency traders. By December 2008, after rallying 25% over the previous five months, the dollar topped out. However, there were many speculators who had come somewhat late to the party, as well as many others who had ridden the dollar up and were thus sitting on huge unrealized gains.

Those technical reasons, combined with the re-emergence of strong growth in emerging markets and solid earnings from overseas companies, redirected investment flows away from the dollar. 2009 became a year of dollar weakness, with the buck giving back nearly all of its gains. At that point, most people made the reasonable conclusion that the decline would continue.

As is often the case, an unforeseen event came along that made mincemeat out of the consensus' well-conceived strategy. Once some fiscal squabbling grabbed headlines in the eurozone, the negative sentiment that had built up on the dollar was suddenly diverted to the euro. Catalyzed by the Greek debt crisis, the greenback surged by about 8% in six weeks.

From a technical standpoint, the short dollar trade of late 2009 was too crowded; but from a fundamental standpoint, I don't think it was crowded enough. As with stocks, there can be no long-term substitute to examining a government's fundamentals to determine its currency's worth. Based on the fundamentals, far too many investors remain far too confident about the greenback's underlying viability.

In fact, I do not think I have ever seen so rapid a change in sentiment in my career. The crowd had completely switched sides, with most now betting on the demise of the euro rather than the dollar. This is looking like July 2008 all over again, with the dollar poised to put in over-sized gains. It also presents a good opportunity for those who keep their heads.

In my opinion, the market is now perfectly positioned for a massive dollar sell-off. The fundamentals for the dollar in 2010 are so much worse than they were in 2008 that it is hard to imagine a reason for people to keep buying once a modicum of political and monetary stability can be restored in Europe. In fact, the euro has recently stabilized.

My gut is that the dollar sell-off will be sharp and swift. Once the dollar decisively breaks below last year's lows, many of the traders who jumped ship in the recent rally will look to re-establish their positions. This will accelerate the dollar's descent and refocus everyone's attention back on the financial train-wreck unfolding in the United States.

Any doubts about the future of the U.S. dollar should be laid to rest by today's announcement that San Francisco Federal Reserve President Janet Yellen has been nominated to be Vice Chair of the Fed's Board of Governors, and thereby a voter on the interest rate-setting, seven-member Open Markets Committee. Ms. Yellen has earned a reputation for being one of the biggest inflation doves among the Fed's top players.

Looking for an ally to paper over the administration's gaping fiscal holes, it is not surprising that president Obama made this selection. Yellen has consistently downplayed the dangers of inflation and has made statements that indicate she views the Fed as an extension of the Labor Department, rather than a guardian of our currency. Last month, in discussing what she saw as the Fed's obligation to promote employment, she said, "If it were possible to take interest rates into negative territory, I would be voting for that." She may very well make Chairman Bernanke look like a tightwad by comparison.

It is anyone's guess which sparks will be responsible for igniting the falling dollar powder keg. From a trader's perspective, a sharp reversal in the dollar will catch many investors completely off guard. Those who stepped off the short-dollar train will be stuck on the platform as it speeds away. Those who refused to give up their seats are in for a hell of a ride.

Fewer Foreclosures Despite Mortgage Trouble

2010-03-12T03:46:00Z

By LESLIE BERKMAN
The Press-Enterprise

Foreclosure activity in Inland Southern California and the nation declined in February, compared to a year earlier, which may reflect the efforts of government and banks to prevent a new avalanche of repossessed houses from flooding the market and depressing home prices.

The metropolitan statistical area composed of Riverside and San Bernardino counties last month continued to be a foreclosure hotbed, ranking fourth in the nation. It had one foreclosure related filing--including notices of defaults, trustee sales and bank repossessions--for every 133 households.

Still the total amount of filings at 12,840 was almost 29 percent fewer than in February 2009 and 4 percent fewer than in January.

Daren Blomquist, spokesman for RealtyTrac, which released the monthly foreclosure figures late Wednesday, credited the attention and money that the federal and state governments and financial institutions have put into managing foreclosures. Blomquist said he expects that the controls probably will prevent the dramatic increase in foreclosure activity in 2010 that was seen in previous years.

But a lower foreclosure rate through attempted loan modifications and delay does not mean that the root problem of foreclosures--the inability of homeowners to pay their mortgages--has been solved. According to First American CoreLogic, a mortgage research firm, the mortgage delinquency rate in the Riverside-San Bernardino-Ontario area has been increasing. In January, more than 19 percent of the region's mortgages were at least 90 days delinquent, compared to 13.67 percent a year earlier.

Beacon Economics economist Chris Thornberg called the improvement in foreclosure figures artificial. "How can you have rising numbers of mortgage delinquencies and falling foreclosures. It doesn't make sense," he said.

Thornberg said apparently financial institutions are holding back homes in the foreclosure pipeline and many other delinquent borrowers have not even received notices of default, the first step in the foreclosure process.

Blomquist said more mortgage failures will be generated by high unemployment and a mountain of adjustable-rate loans scheduled to reset to higher monthly payments in coming months. Also he said it is not certain that the downward trend in foreclosures will continue. He noted that although default notices in the two-county Inland area last month declined to 5,456 from 9,504 a year earlier, they increased 21 percent from January.

"There is a little bit of a roller coaster in the numbers and that indicates to me we are not on a long term, consistent downward trend," Blomquist said. He said various government actions, including periodic foreclosure moratoriums and the introduction of loan modification programs, have caused "an erratic trend in the numbers."

Pete Nyiri, owner of Corona-based Top Producers Realty that sells bank-owned houses, said he figures that a surge in notices of trustee sales, the last step in foreclosure, shows that many homeowners are failing to qualify for loan modifications promoted last year by the Obama Administration. Last month, notices of trustee sales were posted for 5,001 homes in Inland Southern California, up from 3,983 in February, 2009.

Nyiri noted that the federal government is shifting into gear a new program to encourage lenders to allow more short sales, where owners sell their houses for less than the mortgages on them.

Under the rules of the Affordable Foreclosure Alternative Program, which becomes effective next month, short sales would be preferred to foreclosure when loan modifications that would allow owners to remain in their homes don't work. The program provides monetary incentives to loan servicers, borrowers, loan investors and second lien holders.

Short sales could resolve a failed mortgage without the borrower entering the foreclosure process.

"If the short sale program gains traction and works, we could see a pretty dramatic impact on the (foreclosure) numbers," said Blomquist. Short sales, he said, "could be a bit of a game changer in 2010."

http://www.pe.com/business/realestate/stories/PE_Biz_W_foreclosures11.41b01dd.html

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/