California Solution for Budget Crisis: Minimum Wage and Laying off People. But Who Will Buy the $500,000 Foreclosures?

31 07 2008

California Solution for Budget Crisis: Minimum Wage and Laying off People. But Who Will Buy the $500,000 Foreclosures?

Posted by: admin in Real-estate news

/* Style Definitions */ table.MsoNormalTable {mso-style-name:”Table Normal”; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:”"; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:”Times New Roman”; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} You really have to tip your hat to our politicians. The House approved the biggest bailout in the history of this country although they are trying […]
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You really have to tip your hat to our politicians. The House approved the biggest bailout in the history of this country although they are trying to highlight the Congressional Budget Office report that the total price tag will cost approximately $25 billion. Yeah right. Yet what seems to be more astonishing is the vast majority of Americans seem oblivious to the entire bill. It looks like it will have Senate approval and will be signed into law by the President soon. Only a few of those in Washington sounded any sort of alarm regarding this. The greatest financial robbery in American history and few seemed to pay any attention.

Today is the first time in a week that people are coming back into reality. Sales of existing homes declined to a 10-year low and Ford posted their largest quarterly loss ever. Ford is now being forced to double their hybrid production and move away from their reliance on trucks like the F-150. So much for a second half recovery. Washington Mutual isn’t getting the benefit of the doubt like so many other companies that were getting a free pass these last few days. They are now quickly heading back to a 52 week low on their stock price. As people dig into the legislation it is apparent only a handful of institutions stand to benefit.

I’m not sure if any of you listen to the KNX Business hour here in Southern California but for the last few days, they’ve had a couple of bank Presidents, some who are on infamous lists, stating that all is okay and they are well capitalized. One of the representatives was saying, “we did not do subprime loans so we are okay.” Yet they fail to mention their extensive portfolio of Pay Option ARM loans and Alt-A products that will prove to be just as destructive.

For those of you still interested in following the $15 billion budget short-fall here in California, we are now getting fascinating ideas on how to solve the state’s problem. Keep in mind that the budget is now overdue by three weeks and both sides are digging in. It doesn’t help when the California unemployment rate has now skyrocketed to 6.9%. Just look at how quickly the curve is turning upward:

This budget fiasco has brought out some of the most interesting solutions:

- Let inmates out early to save some money (fun for the whole family).

- Balance the budget via future lottery revenues (Big Spin baby!).

- Close public parks (who needs these?).

- Shut off healthcare to those who can’t pay for it (why not!).

- Raise taxes.

The list does go on. Well yesterday the L.A. Times got their hands on a proposed plan by the Governator on forcing some action by the state politicians to get a budget enacted as soon as possible. So what are some of the new solutions? Here is a brief recap:

- Cut 200,000 state workers pay to the federal minimum wage of $6.55 an hour until a budget is signed.

- Immediately lay off 21,855 part-time workers and stop overtime payments for almost all employees.

- Cease all hiring.

Now look again at the unemployment rate. What do you think laying off people will do to that rate? Also, let us say that 200,000 employees have to deal with lower pay checks until a budget is signed. So many people are living paycheck to paycheck that it will undoubtedly set many people behind on their housing payments. Politics aside, in the short run this will increase the unemployment rate and also create further stress in the housing market. This is checkmate folks. This is not a sign that things are turning around.

We need only look at the stress in the California housing market which had 120,000+ notice of defaults filed in the second quarter:

It really takes no rocket scientist to figure out that the budget fiasco and further job cuts are going to hurt the prospects of any housing rebound. WaMu is looking at major job cuts. Wachovia is looking at cutting 10,000 jobs, many that will be here in California. Just wait until Bank of America carves into Countrywide Financial. There will be nothing left except a carcass. Yet bear market rallies have a way of sucking people back in. Listening to folks during this one week bad news orgy was amazing. It was as if earnings didn’t matter anymore. These earnings reports are horrific. Here are some companies that have announced not so hot earnings:

- Washington Mutual

- Wachovia

- American Express

- Google

- Apple

- Texas Instruments

- Ford

We can list more but this 600+ point rally (which just got a reality check) was completely removed from the reality on the ground. This budget stall is only going to further add fuel to the flame that we are currently facing. Why is this such a big deal? Because $300 billion of those $500 billion toxic Pay Option ARMs set to recast are here in California:

What sectors are booming? The government is basically saying that they are not going to be hiring anytime soon and they are the largest employer. Housing and finance related jobs are being slashed (i.e., WaMu, Wachoiva, and Countrywide) and many regional banks are only months away from having the FDIC knocking at their door. The few fields that do have some hiring are in healthcare, engineering, and accounting. Yet those fields require hard skills that take at a minimum, a few years of college training. What are all those involved in the real estate, finance, and insurance sectors going to do now that they have a skill set that isn’t in high demand? Those jobs are being filled by currently trained workers. They can head back to school but that will take a few years. And with the cost of education going up and credit being tighter, the price of a college degree isn’t so cheap anymore. Consumption will fall even lower. You can spend (money you don’t have) on consumption items or go back to school.

*Source: State Farm Insurance

By the way, our two largest public university systems just hiked fees this year:

“(LA Times) University students will pay 10% more in fees at Cal State campuses in the fall and at least 7% more in the UC system to make up for what officials say are shortfalls in state funding.

The raises were approved Wednesday over the protests of students, who complained that charges have nearly doubled in a decade without regard to the escalating costs of textbooks and housing.”

I think the Governator is trying to force the hand of those in Sacramento. There is a lot at stake here with this budget. We aren’t talking about a $2 billion state budget. For California the Governor is proposing a $141 billion state budget. I know every year we get the same dog and pony show about the budget. The talk is always the same, “this is the worst budget ever!” or “I’ve never seen things this bad!” but sadly, this year those words are factually true. There will be some absolute difficult choices to be made. From the looks of it we can expect a combination of cuts and tax hikes. Even the Governor’s current move should it go through will add to the problems in the short run.

Let us say the budget doesn’t get enacted until late August and add in a few additional weeks to let the proposals filter through. Now we are talking September. That can mean two paychecks being slashed from over 200,000 people and 21,000+ job cuts. We already know how understated the unemployment data is gathered by the government. So those part-time workers are currently considered part of the employment force and now with this move, we’ll immediately add an additional 21,000 people onto the 6.9% unemployment rate.

This action practically guarantees a tight fiscal year. Now who in the world is going to be buying these homes? Maybe we do need some more subprime lenders to qualify people on minimum wages for these homes.

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