Only looking at economics for an answer to the housing bubble mania will leave you with many questions unanswered. As in most manias, there is a large element of speculation and irrational exuberance as the godfather of bubbles Alan Greenspan once said. Yet what most on Wall Street and the government lack is some basic […]
Only looking at economics for an answer to the housing bubble mania will leave you with many questions unanswered. As in most manias, there is a large element of speculation and irrational exuberance as the godfather of bubbles Alan Greenspan once said. Yet what most on Wall Street and the government lack is some basic understanding of human psychology. There was very little reason to believe in the economic long-term viability of a product like option ARMs for example. These mortgages derived from an economic model that was operating in a mania. They assumed the mania would run forever. The Alt-A and option ARMs were simply manifestations of a human speculative fervor that believed in the housing mammon. In fact, there was a large contingent of people that simply believed that housing values would never fall. No basis in economics or market fundamentals. In other words, it was a classic bubble.
Yet what is currently occurring in the housing market is similar to a victim suffering from Stockholm syndrome. Stockholm syndrome is a response seen in some hostages in that they feel some sort of loyalty to the abductor. Why does this even occur? One of the theories is based on the framework of cognitive dissonance. People don’t like being unhappy for long periods of time so the idea goes, that some of these victims start loving or identifying with their captors. Now I see many elements of this in the way we are dealing with our current financial crisis. All of a sudden, the government, Wall Street, and many Americans are starting to sympathize with the actual perpetrators of the biggest fraud in a generation. Instead of punishing and fixing the system, many are looking to the banks for assistance.
As it turns out, some of the pricing in housing is now based on government intervention:
“(WSJ) Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.
The government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common.”
If we break down the mortgage market further, the government is the housing market:
Source: San Francisco Federal Reserve h/t Calculated Risk
95 percent of the mortgage market is now backed by the government. As we know, a large part of this growth also occurred with highly risky FHA insured loans that are now imploding at record levels. Last month in Southern California 36 percent of mortgages were FHA insured loans. Now applying the Stockholm syndrome, it would appear that many instead of being angry and calling out the banking fraud for what it is, are starting to believe in what the abductors are pushing. They say things like, “see, the banks are now holding off on the shadow inventory to help the market. Prices are now going up!” As if the banks are concerned about the average American with some banks charging 79.9 percent on credit cards before dealing with the tougher legislation coming in 2010. As you can see from the above chart, the mortgage market is the government which raises the question, why do we even need banks if 95 percent of the mortgage market is directly subsidized by the government? We don’t and certainly not at the too big to fail level. If anything, we should get on the move to start breaking up the banks and renewing a new stronger form of Glass-Steagall. Until the government moves in this direction the current financial deep capture will continue and will siphon off the life blood of the real economy like a leech.
The California Dream Delusion
It is interesting that many people now think the housing market is in the clear. Here in Southern California, we have a fleet of people now starting to love their captors. Some are even capitulating and saying, “enough of this waiting. I’m going to buy because the government seems to have an unlimited buffer to stop housing prices from falling.” They also have given up on the fact that banks are simply not moving on foreclosures in a timely fashion or programs like HAMP have stunted a more normal flow of the market. Yet the question remains, has this really aided the overall economy? It hasn’t. We now are hearing talk of a job-loss recovery. To that I say this, are you kidding me? Sure, people are going to have sufficient money to pay for their mortgage without jobs. Makes total sense if we were in Wonderland. This is the kind of logic you start getting when you start loving the people that have abducted our financial system into some perverted rabbit hole of economic waste.
In fact, there have been a few articles talking about the “brain drain” because of compensation limitations on Wall Street! You have got to be out of your damn mind! People mistake “intelligence” in kleptocracy, cronyism , and financial engineering with actual smarts. They are smart at screwing over our economy so this brain drain argument is absolute insanity. It would be one thing if they were creating life saving drugs or consumer goods but instead, they are an albatross on the rest of the economy sucking taxpayer dollars into their balance sheets. Yes, let us feel sorry for our financial kidnappers. How can they live on a few million dollars a year after all the good they have done? Let us allow them to have the same system that gave them the key to drive our economy off the financial edge.
Look at some of this crap:
Oh no! Our top commanders are leaving the ship. As it turns out, they were on their laptops all day ignoring the financial iceberg ahead. When it came time to jump ship however, they were the only people with lifesavers. This is absolute nonsense. What the above is saying is that AIG for example, will have a tough time paying back their government lifeline because some of their top gamblers will leave to work for another organized crew of financial misfits that apparently will allow more kleptocracy and cronyism since that is how they make their money. Heck, even the notorious Al Capone had this to say about the stock market decades ago: “Its a racket. Those stock market guys are crooked.”
Let us take a look at an area of Southern California where Stockholm syndrome is in full force. Today we salute you Culver City with our Real Homes of Genius Award.
Culver City
Not all areas have felt the brunt of the housing decline. Do people forget that Southern California as a region is still down by 45 percent from the peak? The median price at the peak was $505,000 and we are currently at $275,000. What an amazing recovery. The “bottom” was supposedly hit a few months ago at $247,000. If you factor the 5% artificial increase from the government, we are basically still at the bottom.
For months, I compiled my own home brewed U-6 for California and my rate was roughly 23 percent. Well guess what? I wasn’t so far off:
“(SF Chronicle) Because she works, Duran doesn’t count in California’s 12.2 percent unemployment rate.
But her situation is captured by a broader measure, the underemployment rate, which, in addition to the jobless, includes people who could get only part-time work as well as those who want jobs but were too discouraged to look.
The state Employment Development Department estimates that this underemployment rate hit 21.9 percent in September.”
The chart they use is even similar to the one I have used in discussing the state of the economy:
Apparently job losses are good for real estate. Give me a break.
Yet here is the issue. You have people focused on one niche market and they fail to see the overall trend of things. Forget the fact that the entire region is still near the bottom. They want their piece of Pasadena, Culver City, or something in the Westside. Well guess what? Prices are still not in line. Yet is that reason enough to buy a home just because you are tired of waiting? Then do it. No one will stop you. But don’t make an economical argument for your purchase because it isn’t there. Prices are still too high in these areas if measured by local area incomes and employment trends.
Plus, the dynamics are all over the map:
The median price that includes condos is $460,000 for Culver City. This is misleading because the 3/2 “starter home” market still has a median price of $625,000 – an increase of 6.6% on a year over year basis. Say what? If we look at the data in terms of housing prices, this is the latest data:
Median Price Homes
90230: $541,000 with 9 sales last month (-17.8 percent y-o-y)
90232: $753,000 with 6 sales last month (15.9 percent y-o-y)
Median Price Condos
90230: $353,000 with 18 sales last month (-8 percent y-o-y)
90232: $418,000 with 1 sale last month (-11.6%)
And there is your current break down. If you look at the overall trend however prices are only moving sideways and this is in light of the massive financial bailouts:
Culver City peaked at $620,000 (including condos) and is currently at $460,000. Another way of looking at this is the entire region of SoCal is still down 45% while Culver City is down 25 percent from the peak. As I have said, not all areas are created equally. Yet this is an area full of Alt-A and option ARMs and many of these will recast in 2010. Need an example? Look at this preforeclosure that took a loan from a toxic mortgage specialist, Novastar:
This home last sold officially in 1989 for $176,000. This is a 2 bedroom 1 bath home and is listed at 798 square feet. This isn’t on the MLS but is a pre-foreclosure. Take a look at the ridiculous loan on this place:
Novastar has long imploded but look at the ridiculous loan amount. $572,000 on a 2 bedroom 1 bath home with 798 square feet! This was done in June of 2007 to the original owners. The notice of default was filed in July of this year. You can rest assured this won’t be selling for $572,000. And don’t think this is the only inventory on the market. Culver City has 173 homes in distress. The MLS lists 80 homes, 12 of which are part of the 173. So for Culver City, shadow inventory is twice the size of what the public can see.
I always defer back to local area incomes and jobs. People ask for an answer and I have given it many times but people don’t want to hear it. Prices in many areas are still too high. The government is trying to prop prices up but unless incomes grow, it will eventually fall again. The overall region has fallen nearly 50 percent. But like I have said, some people choose to ignore the macro trend for their pet areas. Does anyone have a crystal ball of when prices will go lower? Of course not. But is that reason to jump into this highly artificial market? I would say no.
Some say that the declining U.S. dollar will help real estate values. Really? If anything, this might provide a tiny boost for commercial real estate but do you see some foreign investor paying top bill for this Culver City home for example? Of course not. They won’t be living there. As a rental? Okay, you might get $1,700 to $1,900 on this place which puts a true value of something in the low $200,000s. We are far from that price point. Clearly people that see things like this don’t understand how difficult it is to manage rental property from a distant location. Plus, your renters get paid in U.S. dollars so they seem to forget that your tenant isn’t going to be paying you in Euros.
Now what do you think will happen when mortgage rates rise as they will? Will the tax credit be forever? The new proposed tax credit has a cap of $7,290 which is tiny in some of these mid tier neighborhoods. Or what about the option ARMs which don’t even qualify for HAMP because of income and LTV ratios? Many will recast in the next few years. There doesn’t seem to be a lot of reasons to believe in prices rising in this area.
Today we salute you Culver City with our Real Homes of Genius Award.
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Real Homes of Genius: Culver City and the Housing Stockholm Syndrome. Approximately 5 Percent of Current Home Price is related to Government Bailouts.
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