August 31, 2009

Doing The Right Thing?

by NYCityBoy

This is the latest in the series of the “Regular Guy” interviews. This is my attempt to hear from people in a way that the MSM would never allow.

We talk about FBs all the time. Most of the time, we talk about them with laughter and ridicule. I do not claim to be above that fray. But I think we have also admitted that many of the people that find themselves upside down, underwater, whatever you want to call it, are also just good, honest people. They bought houses thinking that this was what they should do in life. They were not looking to buy the house, slap on a coat of paint and put in some stainless steel appliances and “flip” it to the next guy.

In this world where house flippers are portrayed as rock stars it seems that it was easy to get caught up in the housing mania. But many people did not know they were getting caught up in the housing mania. They planned to live in the house they were buying. They believed house prices rising on a consistent basis, the way they did in 2002 – 2005, seemed like the new normal. They did not understand the workings of Fannie and Freddie or the process of assembly line securitization. They were being bombarded with tales of “the American dream”. It was easy to see why so many people got caught up in this mess.

As the housing bubble burst it became obvious that many people paid a price that is much higher than what their house would now fetch on the open market. For many of us that might not seem like a big deal. We say things like, “pay the mortgage. You signed it.” Or we go the other route and say, “walk away” like the house was some kind of one night stand. The question of what to do for many is a moral, financial and even spiritual question. It can impact a person’s credit score and we have been told that we are basically only as good as our credit score. It affects our monthly budget. To pay hundreds of dollars more per month than is necessary for housing seems like a huge drag on a person or family. For many it is a question of, “do good people really walk away from their commitments?” I know how I was brought up to answer that question.

The issue is not as simple as black and white for most people. I have an old friend that is underwater. He has wrestled with this very question the past few years. After getting divorced he decided to keep the house that he and his wife had bought. At the time there was no reason to believe that he would get caught up in the biggest housing bust in history. He figured he would have a brother or two move in. They would help him with his monthly expenses. If things did not work out then he could decide to sell and move on with his life.

But as we know the option of selling has been removed for many people. The only options left are to continue to pay or to walk away. For my friend there is not the option to sell since the house is underwater to the point where he would have to show up with a check that is larger than what he could come up with from his savings.

Some people would tell him to do a short sale. That is not much different from walking away. Typically to get a short sale done you have to stop making payments. That will destroy a person’s credit score, almost like walking away. Like a foreclosure, the short sale decision will hang over a person’s head for several years.

With all of this in mind I asked my friend John (not his real name) a few questions about his situation. I think it gives a good insight into the thoughts, and conflicts, that anybody that is underwater is going through.

What is the main reason that you continue to pay your mortgage?

The sense of obligation. I signed a loan. I signed an agreement. I signed a contract. I’m not the type that signs something and then just forks it over because it’s upside down. It’s probably kind of stupid. I borrowed on it. I’m not going to just walk away.

Have you given any thought to walking away?
Absolutely. I think about it every time I sign off on that mortgage payment. I think, “what is keeping me here?” I think about what my dollar could go towards in an apartment. It’s on my conscience a lot. It’s hard to shake that, especially since it’s become fashionable.

Do you worry about the negative hit to your reputation?
Yes. I do. And I know credit is recoverable. But I don’t even know what the hell I need credit for. I’m in such a different mindset. Truthfully, credit means less to me than it used to. If I ever go to another job it’s a factor. I don’t know I want that hanging over my head. It’s definitely a factor in your reputation. I guess I’d like to keep that in tact as much as anything. Probably more that than the credit hit.

What do you think about the people that still have the resources to pay but walk away?
I just think it’s irresponsible. I have the resources. I could walk away but I don’t. I know it goes through my mind. Some would argue it is smart business. It is the thing to do. I guess I see it as irresponsible.

Do you feel that the lenders are playing by the same rules as the borrowers?
No. I don’t. They are certainly out for themselves. They don’t care about people being in homes, building communities or people building wealth. Certainly with government backing and bailouts they have even more advantage. They are taking anything that benefits them. They want to get people in the house to get interest and make money selling loans.

Do you think the government should be bailing out mortgagees or lenders?
That’s a tricky question. I don’t think so. I’m of the mindset of “let things fail” instead of artificially holding them up. It doesn’t fix fundamental issues. But there’s the argument of, if you see your neighbor’s house burning you need to put it out. Letting the financial system fail would have been a catastrophic event but if things aren’t let go I don’t think we will learn our lessons.

Where do you believe real estate prices are headed in your area?
I would not be surprised if they continue to fall. I have taken the approach that they will continue to fall. There’s nothing I can do about it. There’s certainly a lot available to buy. I have no reason to believe they are miraculously going to start increasing without some fundamental change. The frustrating thing is with values dropping my taxes go down but the local government doesn’t want to give up that revenue. At this point I can only expect it to drop.

What are your thoughts on renting?
I think it’s a great thing. In this particular state of things it’s great. Until housing is fixed and stable again when people can build value at a steady pace I think you are better off renting. It gives you the flexibility of going where you want, staying where you want. I envy renters. If I was not in this situation with this mortgage I would absolutely be renting. I would probably be paying half what I’m paying with this house.

Has your attitude toward renting changed the past few years?
Prior to the housing bubble burst I was completely sold on owning. The way things were, the way home values were shooting up, it was incredibly easy to get into a mortgage. There were just so many advantages to getting into a home and owning. I was completely sold on owning. I would say since the bubble burst my opinion has definitely changed. I don’t care about making the landlord money. People say, “you’re throwing your money away”. No. You are just paying for shelter. To be able to call the landlord and say, “this is broken” is a luxury. I don’t get that luxury. I could probably rent a house similar to mine and save $500 to $600 a month. Renting I see completely differently.

What would you tell a young guy that wants to buy just because of a government tax credit?
I’d tell him to walk away. No, run away. I guess it’s going to be different scenario. When I bought in, it was the emotional piece that really drove me. (Now) I would really question it. A mortgage is a big ass commitment. It’s almost like having a marriage. It’s not something to take lightly. It is a 30 year commitment. Some people are okay with that. If you want to keep flexibility and don’t know where you’re headed, home owning is not that great. I’ve had family help to pay for marriage. Without them I don’t know…it would have been tough, by myself. I maybe would have walked.

Bits Bucket For August 31, 2009

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August 30, 2009

In The Suburbs

by the Mysterious Flying MisoR™

From the Reason Foundation, October 2001:
Older Suburbs: Crabgrass Slums or New Urban Frontier?
“Since the 1950s, suburbia has represented middle-class success and the fulfillment of the ‘American Dream.’ More than three-quarters of America’s new population growth has occurred in the suburbs. Indeed, more than half of all Americans now live in suburbs, a higher proportion than any other industrialized nation. More than 80 percent of all demand for office space and new jobs occurs in the suburbs. Between 1988 and 1998, office space in suburbia grew 120 percent, eight times the rate in traditional center cities.

“These communities are far more diverse than commonly perceived and, while some are clearly in decline, many are thriving, both demographically and economically. Indeed, in many ways, the rebirth of the suburban community—like the earlier rebirth of the urban core itself—testifies to the changing nature of the new economy and the remarkable ability of people to find new uses for older things.

“An analysis of the San Fernando Valley, a middle-class suburb north of the Santa Monica Mountains in Los Angeles County, provides a case in point. Developed as a bedroom community beginning in the early 20th century, the Valley is the archetype of midopolis. After a period of decline, vacancy rates for prime office buildings have fallen from 18 percent to 12 percent, and net occupied office rental space has increased by 400,000 square feet. By the end of the 1990s, job creation in the Valley outstripped the rate for Los Angeles County as the Valley employed more than half of the region’s media and entertainment industry. More than 5,000 small, specialized creative firms service the region’s ‘cultural-industrial complex.’ As a result, the residential market remains strong as apartment vacancy rates have fallen from the double digits in 1996 to under 5 percent in 2000. Meanwhile, home prices have remained relatively modest by Southern California standards, ranging from $200,000 to $300,000.”

From the Federal Bureau of Investigation:
“Gang migration from larger cities to suburban and rural areas is an ongoing concern for law enforcement. According to analysis of NDTS 2008 data, the percentage of law enforcement agencies in the United States reporting gang activity in their jurisdictions increased from 45 percent in 2004 to 58 percent in 2008. Moreover, the percentage of jurisdictions reporting gang activity during this time frame increased in each of the seven NGIC/GangTECC regions; however, the most significant increases were in the East and Southeast Regions, most likely the result of the migration of gang members from urban areas such as New York, New York; Chicago, Illinois; and Los Angeles, California, to smaller jurisdictions in these regions.

“Gang migration from urban areas has led to the recruitment of new, younger gang members in many suburban and rural communities. According to the most recent biennial School Crime Supplement to the Bureau of Justice Statistics (BJS) National Crime Victimization Survey, the percentage of suburban students ages 12-18 who reported that gangs were present at school during the previous 6 months increased 17 percent from 2003 to 2005 after remaining stable from 2001 to 2003, and the percentage of rural students reporting likewise increased 33 percent from 2003 to 2005 after decreasing (8%) from 2001 to 2003. In comparison, percentages of both total students and urban students reporting gangs present at school increased steadily from 2001 to 2005 (20% and 24%, respectively).

“U.S.-based gang members are increasingly involved in cross-border criminal activities, particularly in areas of Texas and California along the U.S.–Mexico border. Much of this activity involves the trafficking of drugs and illegal aliens from Mexico into the United States and considerably adds to gang revenues. Further, gangs are increasingly smuggling weapons from the United States into Mexico as payment for drugs or to sell for a significant profit.

“Most regions in the United States will experience increased gang membership, continued migration of gangs to suburban and rural areas, and increased gang-related criminal activity. These increases are largely the result of the continued expansion of gang-operated criminal networks. Better-organized urban gangs will continue to expand their criminal networks into new market areas in suburban and rural locations, where they can absorb unaffiliated local gangs or use violence to intimidate them.”

From the Orlando Sentinel:
“… now that the former bus driver and his roommate have lost their jobs, had their water shut off and found themselves facing foreclosure, suburbia has become a dead-end street.

“The two men represent the extreme of what experts describe as a new ‘outer edge’ of poverty in remote suburbs hit hard by foreclosures. Fueled by ‘subprime’ mortgages that made new homes suddenly affordable for those who otherwise might not have qualified, outlying communities mushroomed during the middle of this decade.

“Wentworth’s roommate recently enraged neighbors by walking the streets with a hand-lettered sign that pleaded for gas money to make the 20-mile round trip for a loaf of bread and boxes of macaroni and cheese. The same remoteness that drew them to the community that straddles Polk and Osceola counties has left them stranded in a sparsely furnished house. The nearest bus stop is a two-hour walk. Existing without running water for more than a week, they have no church or emergency housing within seven miles. Every day they face the prospect of losing power and cell-phone service, which would further isolate them. ‘I would like to stay here. But in the dark, with no light, no water, no phone?’ said Wentworth, 42. ‘… I’ve got no place to go.’

“Some of the new suburbanites are losing their jobs as unemployment nears 9 percent, and they’re losing their homes as adjustable-rate mortgages double their monthly payments. Most of the 7,700 foreclosure filings reported for Metro Orlando in February by RealtyTrac Inc. were in outlying areas that don’t have the social-service safety nets that have long served needy residents in towns and cities.

“Metro Orlando’s outer edge is a ring of foreclosures in neighborhoods built in recent years, often on old orange groves. Wentworth liked the countryside setting and the prospect of getting a new house with a front porch and three bedrooms for $230,000. … Three years after the purchase, only a couple of potted plants sit on the porch. Darkened windows and weedy yards pockmark Poinciana and other almost-new neighborhoods in Volusia, Lake and Osceola counties. Houses near Wentworth’s are going for half what he paid three years ago.

“His house on Superior Court is scheduled to be sold at auction April 2. The one next door sits vacant after neighbors abandoned it, ripped the air-conditioning unit off its pad and hauled it away.

“Wentworth and his roommate made choices that contributed to their predicament. They pinned their existence on a subprime loan with payments that escalated from $765 to more than $1,400 over three years. Health problems and long commutes interfered with jobs. And the English-only speakers could not qualify for a number of jobs that sought bilingual workers.

“Wearing a gray, stained T-shirt with the slogan “Turistas Go Home,” Wentworth said that what gets him out of bed in the mornings is the hope of landing a job. He has filled out applications at school districts and tourist attractions, giving prospective employers his roommate’s cell-phone number even though it could be cut off for lack of payment at any time. Short of getting a job, he said, he’d be happy if he could get to the nearest RaceTrac service station because he has a coupon for a free cup of coffee. The only problem, he said, is he doesn’t have $2 for gas to make the 36-mile round trip.”

And, in other news: How to Raise Chickens in the Suburbs for Eggs

Bits Bucket For August 30, 2009

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August 29, 2009

A Decision Executed Behind Closed Doors

A guest post by Under Fed:

Before Alan Greenspan assumed the position back in 1987, most Americans
likely had little inkling about who the Federal Reserve Chairman was or
what he did. The Black Monday US stock market crash on October 19, 1987
permanently altered this comfortable obscurity, when Alan Greenspan’s
heroic effort to stop the US stock market’s free fall by “supplying
liquidity” was widely perceived to have saved the US economy from a repeat
of the Great Depression. With this rescue operation, Alan Greenspan
instantly transformed himself from low-profile technocratic geek to
high-profile economic rock star.

Skeptics remained doubtful that a rerun of the Great Depression was
successfully avoided. One even wrote a book whose very title strongly
suggested otherwise (Reference: The Great Depression of 1990 by Dr. Ravi

But the Second Great Depression was not to be; the US economy officially
entered and left recession (July 1990 - March 1991, according to the
National Bureau of Economic Research), unemployment subsequently remained
relatively high during the period through 1994 in most of the US, and even
for even longer in some parts (California, for example), and the economy
some how muddled through without a replay of the 1930s. Housing prices
remained soft in many parts of the US during the period from 1990 through
1996, but generally did not see any large, widespread or persistent
patterns of decline. By the end of 1996, less than a decade after the
Black Monday crash, US home prices had generally stabilized from the soft
period they experienced beginning in the late 1980s, setting the stage for
the most spectacular real estate boom in US history over the subsequent
nine year period.

Alan Greenspan’s stature steadily grew in the aftermath of the Black
Monday crash. He held the Fed Chairmanship over the course of four
subsequent presidential election cycles, serving during the terms of three
different presidents of alternating political affiliations.

In August 2005, giving what should have been a triumphal valedictory
speech at the Kansas City Fed’s annual Jackson Hole conference, Alan
Greenspan expressed grave doubts about the economic status quo. Curious
listeners puzzled over his suggestion that, “…history has not dealt
kindly with the aftermath of protracted periods of low risk premiums.”


Earlier that year, in February 2005, Alan Greenspan’s predecessor in the
Fed Chairman position had given an ominous speech of his own at Stanford
University, wherein he described “An Economy On Thin Ice.”


After Alan Greenspan’s retirement, Ben Bernanke assumed the mantle of the
Fed Chairman post in early 2006 with limited fanfare, during a period when
a calm prosperity appeared to have finally settled over the US stock
market, following the turmoil earlier in the decade when the tech stock
bust and the 9/11/01 attacks roiled asset markets and precipitated a
recession. But dark clouds lingered on the horizon. A popular index of US
home prices, the S&P/Case-Shiller 20-city index, began to show a
discomfiting pattern of price decline, something which had been widely
dismissed by real estate experts as virtually impossible on a national


This unprecedented slide in US home prices was accompanied by the onset of
persistent deterioration in both new and existing US home sales.

Another unsettling ripple in the placid surface appeared in December 2006,
when an article in The Economist described a sudden downhill break in the
level of an index to the value of securities backed by subprime mortgages,
called the Markit ABX.HE index.


By early 2007, it was clear that not all was well, as the ABX.HE index
values precipitously declined until large percentages were lopped off from
the par levels of 100 where the indexes had held steady only months


Concurrently, over the course of the first half of 2007, the previously
frenzied private US subprime mortgage lending industry quickly collapsed,
in effect collectively shuttering the entire industry’s operations.

By August, a sense of full-blown panic pervaded the asset markets. In an
attempt to calm nervous bankers, Ben Bernanke and Treasury Secretary Hank
Paulson mutually offered the reassuring message that “subprime was

The earthshaking events which played out from the onset of panic in August
2007 to the present are too numerous, shocking and unprecedented to
adequately describe in this post. The agonizing details are documented in
the Housing Bubble Blog archives for anyone who cares to review them. They
will certainly provide ample subject matter for graduate dissertations,
academic research programs and books for years to come in the fields of
finance, political science and economics. Suffice it to say that by late
2008, what had been the major firms in the Wall Street investment banking
sector had collectively ceased operations as investment banks; many of the
largest mortgage lending firms whose exotic lending practices had fueled
the Housing Bubble had gone out of business; and the leadership at the Fed
and Treasury had undertaken a series of policy responses which one
venerated expert on US banking history characterized as a “rogue operation.”


Fast forward once again to August 2009: Ben Bernanke spoke before the same
Kansas City Fed Jackson Hole conference which Alan Greenspan had addressed
four years previously. His speech quietly lionized his own overwhelming
success in rescuing the financial system from the crisis that had so
violently erupted in the fall of 2008, thereby preventing a replay of the
Great Depression of the 1930s. Shortly thereafter, Barack Obama announced
a decision to reappoint Ben Bernanke to the Fed Chairmanship.


Pundits have recently expressed a wide range of views on the Bernanke Fed
and the Obama reappointment decision:

- Paul B. Farrell

Aug 25, 2009, 12:01 a.m. EST
Dismantle Bernanke’s ‘Happy Conspiracy’ … now!
6 reasons more power for the Fed will destroy capitalism and democracy


- The case against Bernanke
By Stephen Roach
Published: August 25 2009 16:02 | Last updated: August 25 2009 16:02


- Dismantling the Temple
By William Greider

This article appeared in the August 3, 2009 edition of The Nation. July
15, 2009


- For Obama, the Only Choice for the Fed

By Robert J. Samuelson
Wednesday, August 26, 2009


- In FED We Trust: Ben Bernanke’s War on the Great Panic
by David Wessel


- The Bernanke Re-Appointment
By: John M. Mason
Wednesday, August 26, 2009 8:49 AM


- Robert L. Borosage
Co-Director of the Campaign for America’s Future
Posted: August 26, 2009 01:47 PM

Wall Street Rules: The Bernanke Reappointment


- Wall Street Journal
* AUGUST 26, 2009

Bernanke’s Second Chance
Has Ben Bernanke learned his lesson?


The Bernanke Call
Investors want to see the Bernanke put converted into a bullish call.


- Four More Years
President Obama’s wise decision to rehire Ben S. Bernanke
Wednesday, August 26, 2009


- Editorial
A Second Term for Mr. Bernanke?
Published: August 25, 2009



A decision that will affect the material welfare of millions of American
citizens has recently been executed behind closed doors;
American voters generally had no say in the choice. Since you most likely
missed the opportunity to personally weigh in on Mr. Bernanke’s
reappointment decision, at least tell us what you think about it!

- How do you view Mr. Bernanke’s reappointment?

- Is it a foregone conclusion that his actions saved us from a Second
Great Depression?

- Has the “protracted period of low risk premiums” which so gravely
concerned Alan Greenspan finally ended?

- What is a “risk premium”?!

Bits Bucket For August 29, 2009

Post off-topic ideas, links and Craigslist finds here. Please visit the HBB Forum.

August 28, 2009

Without Greed, There’s More Than Enough To Go Around

It’s Friday desk clearing time for this blogger. “When Harvey Clavon took out an exotic mortgage to refinance his home in Santa Clarita, Calif., three years ago, he thought he knew what he was doing. He planned to sell the home before the mortgage reset. Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000. ‘I don’t know what I’m going to do,’ he said. ‘I got duped into the loan, and I consider myself an educated man.’”

“‘This was a loan meant for sophisticated investors, or people who expected their cash flow to increase over time,’ said Elena Warshawsky, a residential credit analyst with Barclays Capital, which expects 81 percent of the option ARMs originated in 2007 to default, with many ending in foreclosure. ‘But then they were extended to all sorts of buyers. Now it wasn’t people hoping their income would grow. It was people hoping their house price would increase’ so they could refinance or sell, Ms. Warshawsky said.”

“Ron Dzurinko, who lives on a fixed income in Sacramento, took out an option ARM five years ago without understanding it, knowing only that he could afford the initial payments of $900 a month. ‘The mortgage person said, ‘It could adjust, but we don’t foresee any major bumps,’ Mr. Dzurinko said. ‘It sounded good to me.’”

“One Utah neighborhood…is loaded with high-end homes with foreclosures and lawns full of weeds. Homeowners in the area say they’re fed up with the eyesores affecting their property values. Angie Snarr has an ever-growing problem in the front and to the side of her home: weeds that threaten to overtake her yard. She’s tried cutting them, tilling the soil, but she can’t keep up and has now all but given up.”

“‘This was actually our dream home when we built, and at this point we can’t wait to get out of it,’ Snarr said.”

“Trump Hollywood oozes opulence, from the sprawling pool deck to the cigar room to the Italian cabinetry and wine fridges in the 200 condominiums, all with dramatic ocean views. Of course, the lavish digs, unveiled Friday, come at a steep price: The condos range from $1.3 million to $7 million.”

“Donald Trump and Jorge Perez, the high-profile development duo behind the $355 million project, say they have lined up roughly 140 buyers so far. Closings start next week. ‘In the end, the cream rises to the top, and this building is that,’ said Donald Trump Jr., wearing a gray pinstripe suit as he stood in for his famous father during a press tour of the tower.”

“Buyers will back out of deals, and sales will be challenging, Perez said. ‘Some people are very, very afraid, asking for discounts that we will not give,’ he said.”

“Lewis Goodkin, a longtime housing consultant in Miami, said…elling the rest of the units will be difficult because most buyers are searching for bargains, he said. ‘The last thing in the world I’d want to be doing today is opening a condo development,’ Goodkin said. ‘This is not one of those things where people who are bigger than life will make a difference.’”

“In the second quarter, the Standard & Poor’s/Case-Shiller U.S. National Home Price Index posted its first upward turn in quarter-over-quarter home prices - 2.9% - since the collapse of housing prices began in mid-2006. Although average home prices nationwide still are down 30.2% from their peak and off 14.9% from the same quarter last year, the uptick in the widely watched index’s April-June period suggests that the rapid descent of housing prices may be at an end. Karl Case, an economics professor and co-creator of the S&P/Case-Shiller indexes, told Bloomberg News the latest result ‘looks like a turn.’”

“‘It’s not going down anymore and it’s beginning to come up. That’s very good for the future of this financial problem,’ Case said.”

“We’ve highlighted proposals, picked through reports, and listened to testimony from advocates concerned that Illinois has an insufficient number of affordable housing units. But nothing illustrates the need better than the scene in south suburban Park Forest yesterday, where hundreds of people lined up outside of the police station just to get their names on a federal housing voucher wait-list that has been closed for a decade. Yesterday morning, FOX Chicago sent a reporter out to the rain-soaked lawn where entire families are camped out.”

“‘It’s almost like the Grapes of Wrath looking at those people,’ anchor David Navarro gasped.”

“An affordable housing complex in Fraser, Fox Run, is in pending foreclosure. The recession made Fox Run’s sustained vacancy rate downturn worse. ‘In the future there will be a need for more affordable housing. But right now, there’s more inventory out there. Occupancy rates are down right now. Not just with Fox Run, but with the entire rental inventory,’ said Grand County Housing Authority executive director Jim Sheehan.”

“More than $3 million will flow into Yuba and Sutter counties in the coming months to help restore, rent out and sell homes caught in foreclosure limbo. Sutter County, which announced its payout in June, will add 10 to 15 restored houses to its stock of public housing, whose waiting list has grown with the two-year recession, according to Gustavo Becerra, program director for the Consolidated Housing Authority of Sutter County.”

“More than 2,600 families are on the county’s waiting list for apartments as collapses in the building and other trades have helped push the local unemployment rate north of 18 percent.”

“The Tuolumne County Board of Supervisors has approved the latest update of the housing element of the county’s General Plan, and, in doing so, addressed concerns by a group of developers who felt their input had not been heeded in prior discussions. The housing market is so bad right now that unnecessary regulation should be scrapped, goes the developers’ philosophy. That has prompted them to ask the county to consider postponing the affordable housing ordinance if the analysis can’t be done in a timely manner. The median home price in the county sits at $232,000; it was $271,000 when the ordinance was adopted in 2008. In 2006, the peak of the housing boom, the median price was $332,000.”

“Several affordable housing watchdogs were at Tuesday’s meeting, and a few of them spoke up during the public comment portion of the meeting. Marge Brown urged supervisors to provide ‘hope for the hopeless.’ ‘Without greed, there is more than enough to go around,’ she said.”

“If consumers are once again to spend the nation out of recession, we need more than Cash for Clunkers. My brother, a self-employed home remodeler, called my attention to an impromptu video made last week by members of the Home Builders Association of Greater Kansas City. ‘We’re drowning here,’ said Travis Graham with Graham Construction, who called for a life raft like that tossed to the auto industry.”

“Housing industry members got a reality check Wednesday at the Builders Association of Northern Nevada’s Mid-Year Construction Analysis, even as increased affordability had some hopeful about an improvement in the market. ‘The big reset button has been pushed and this is the new reality,’ said Brian Bonnenfant, project manager at the Center for Regional Studies at the University of Nevada Reno. ‘We really need to adjust our attitudes.’”

“Of the more than 4,000 actual listings on the market in July, 59 percent were distressed properties, according to Bonnenfant. Adding to real estate’s woes is unemployment. As of July, the size of the area’s workforce has fallen to levels not seen since 2002. Construction, a key sector for housing, saw the biggest drop in employment, Bonnenfant said.”

“Jobs have done a vanishing act in this recession, and Oregon’s official economic forecast released Thursday predicts they won’t start coming back until 2011. The United States has lost 7 million jobs in this recession so far — more than were lost in the past three recessions combined, the state Office of Economic Analysis estimates.”

“‘Those projections seem pretty dire,’ said Mike Gansen, a homebuilder in Eugene and past president of the Oregon Home Builders Association. ‘I would imagine we’ve already hit (a) 16 percent (decline) this year, but a 9 percent loss next year — I don’t know.’”

“Gansen pared his business down to five employees, including himself, from a peak of 11 in 2007. He said he’s not sure when he’ll start hiring again. ‘It does feel better, but I hate to make plans for expansions just to have a false start.’”

“Nearly one in four Alabama homeowners is underwater on a mortgage or close to the brink. One of trend’s key drivers was the proliferation of more aggressive mortgage products during the height of the housing boom in the mid-2000s, said John Kottmeyer, a banking professor at Samford University’s Brock School of Business. Back then, it was common to see mortgages financed with no money down or 10 percent down, instead of the more typical 20 percent down payment, he said. As a result, homeowners didn’t have much up-front equity in their homes. Since then, values have dropped.”

“There’s also the fact that homeowners pay more interest and less principal on their mortgages in the early years, he said. ‘It really is a non-event if you plan to stay in your house for a long time,’ Kottmeyer said. ‘The risk is there if there’s a major change and you need to move. You have negative equity. … that’s what’s leading to foreclosures.’”

“(A) report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the ‘cure rate’ for mortgages that were packaged into securities. Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans…the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%. ‘The cure rates have really collapsed,’ said Roelof Slump, a managing director at Fitch.”

“Merced County’s median home price dipped slightly in July, though it seems to have stabilized after last year’s free-fall. Merced remains the county with the highest foreclosure rate in California. Krotik said one promising sign is that banks are more willing to do short sales. While some owners are losing their homes because of a lost job or other economic circumstances, real estate agent Andy Krotik said the market is still driven by people making a business decision of whether it’s worth paying off a home bought at the boom’s height.”

“For so many, it’s not.”

“New home sales increased from June to July nationwide, but that gain didn’t extend to California and the Bay Area where the expiration of a state tax credit for new home purchases is being attributed for a drop in sales. When the state tax credit was launched in March, new home sales picked up substantially until funding for the $100 million program ran out, said Tim Coyle, senior vice president of the California Building Industry Association.”

“‘Activity has dropped off dramatically,’ said Coyle, adding there are reports of consumers canceling sales contracts to buy new homes after the state tax credit was no longer available. ‘We call it the ‘can’ rate (short for cancellation). Those went way up in July. If you want to keep the momentum going, that means that the state tax credit has got to be renewed,’ he said.”

“DataQuick analyst Andrew LePage noted that foreclosures are also competing with new home sales in California and the Bay Area. ‘Foreclosures are a larger factor in California, especially in the inland areas, including in parts of the Bay Area such as east Contra Costa and Solano (counties),’ he wrote. ‘Those are the areas where it’s extremely difficult for builders to compete with plentiful and heavily discounted foreclosures.’”

“If you’re in the new home sales business, prepare yourself: The supply of finished lots ready for home construction - which has been suffering a huge oversupply hangover in the area - might run out by mid-2010. That’s the view Randall Lewis, executive vice president of Upland-based developer Lewis Operating Corp., expressed at Thursday’s quarterly Real Estate Research Council of Southern California meeting at Cal Poly Pomona.”

“One could easily perceive a rush by developers to sell unfinished lots to builders, but construction costs would need to drop - or new home prices rise - for this to make fiscal sense for home builders, Lewis said.”

“Foreclosure sales dropped 35 percent in Southern California between second quarter 2008 and second quarter 2009. Banks probably aren’t letting piles of foreclosures flood the market even more than they already have for a reason, said Michael Carney, director of the real estate research council.”

“‘My suspicion is that regulators are putting pressure on lenders not to do this,’ Carney said.”

“California’s domestic out-migration…may have a simpler cause than dysfunctional government or high taxes. Houses became much more expensive in California than in the rest of the country during this decade’s housing boom, with the gap growing until early 2007, when most of those emigrating today would have begun to make their plans. Many Californians who already owned homes took their profits and are looking for larger houses in other states, while people in other states were priced out of California.”

“Housing ‘unaffordability,’ says Steve Levy, the boss of the Centre for the Continuing Study of the California Economy, was and is California’s ‘principal competitive disadvantage.’”

“Steve Shea, an acting member of the State Board of Equalization, reported this week that the total value of state-assessed and county-assessed property declined to $4.448 trillion for 2009-10, a drop of $107.2 billion - 2.4 percent - from the previous year. This is the first year-to-year decline in the statewide total since the board began keeping records in 1933.”

“Year-to-year percentage increases ranged from a high of a 7.1 percent gain in San Francisco County, to a low of a 13.4 percent decline in Merced County. Thirty-eight counties posted year-to-year declines, with 14 of them declining by 5 percent or more. Only two counties (San Francisco and Trinity) saw a positive growth rate exceeding five percent.”

“Mike Himes, director of NeighborWorks Homeownership Center in Sacramento, which counsels struggling and first-time homeowners, said his office is seeing more clients facing growing debt and making choices between house payments and other expenses. His clientele includes a growing number of state workers whose paychecks have been pared by unpaid furloughs.”

“‘There’s a lot of money borrowed to stay in the house and keep up with living expenses,’Himes said. ‘This is becoming more and more of a problem.’”

“Half-a-billion dollars in cash was spent on down payments and home purchases in metropolitan Phoenix last month. That tally doesn’t include mortgages on homes. It’s the pure cash figure buyers spent on existing Valley homes in July, according to Arizona housing analyst RL Brown. In his recent ‘Phoenix Housing Market Letter,’ Brown uses the figure to prove the housing market is showing signs of life after last year’s crash.”

“‘The recovery in metro Phoenix housing is becoming undeniable,’ Brown said.”

“Phoenix is not leading the nation in home-prices declines, according to the latest S&P/Case-Shiller home-price index. Las Vegas is No. 1 with a 32.4 percent drop from June 2008 to June 2009. The Valley came in at No. 2 with a 31.6 percent decline. Detroit was No. 3 with a 25 percent drop.”

“A University of California anthropologist says her study of 19th-century silver prospectors sheds light on the recent bubble in the U.S. housing market. Susan Glover, in a report published in the journal Human Ecology, looked at the relationship between what was reported in contemporary local newspapers and the strategy used by prospectors in Gothic, Colo.”

“She compared the 19th-century silver rush in Colorado to the dot-com boom of the late 1990s and the housing bubble that brought on the current global financial meltdown. She said overoptimistic information in the news media and from informal networks over-exaggerated payoffs while underplaying the risks.”

Bits Bucket For August 28, 2009

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August 27, 2009

Bits Bucket For August 27, 2009

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August 26, 2009

Bits Bucket For August 26, 2009

Post off-topic ideas, links and Craigslist finds here. Please visit the HBB Forum. And see the American Visionaries series from Schwarzfilm.

August 25, 2009

It’s China’s Turn To Play

The opinions expressed in this article are ahansen’s, and do not necessarily reflect those of the owner, administration, or readership of

“Shadow Inventory” May Not Be So Shadowy After All….

I recently spoke with a dear friend in Singapore. An international arbiter by profession (or arr biter as he likes to call himself,) “Softhawk” is the go-to guy when somebody’s harbor leaks into someone else’s international trade center and each party wants someone else’s insurance companies to pay for repairs.

Over the last twenty years Softhawk has correctly predicted the unlikely ascendancy of then-governor G.W. Bush, (“Because he is God’s anointed on earth,”) the build-up and eventual bursting of what came to be known as the bubble, (“Do any of these people even know what dotcom means?”) the rise of Shanghai/Guangzhou as international centers of raucous, unbridled capitalism, (“They’re building like it was 1980.”) and the collapse of the Thai baat, (“I’m trying to corner the market on suitcases.”)

Let’s just say the man is connected.

So when he told me that in this last year Chinese investment has quietly shifted its US focus from Treasuries to REIT’s, I took notice. After all, China’s official sovereign wealth fund, CIC, just announced its intended purchase of 2B worth of US REITs via the Treasury’s Public-Private Investment Program, PPIP; (this within a few hours of the FED’s announcement that Treasury would no longer be buying back some 300B USD of its own bonds.)

(Note: the PPIP matches whatever a private investor puts up, then credits six times as much capital—with the FDIC guaranteeing the debt.)

And this is just the “official” investment. According to Softhawk, China has also been busily buying up huge swathes of Africa and Mexico in the last 18 months, and now controls a majority of the deep water ports along the western coast of North America– as well as both mouths of the Panama Canal.

Given all this investment out of de-monitized Treasuries, coupled with the severity of the American housing crash, perhaps not all that “shadow” housing inventory we’ve assumed the banks have “just sitting there” actually is just sitting there. What if a lot of those houses we thought the banks were “holding back” have already been bundled and sold to sovereign wealth funds? Or more likely, bundled, leveraged, and sold as US banks wholesale their losses to the Chinese. As unlikely as it seems, maybe when the NAR crows about an “uptick” in sales, (and at those maddeningly sticky price points,) for once they’re not lying? Apparently there actually are “ rich foreigners” out there. And some of those endless blocks of empty overgrown houses with no “For Sale” signs out front have been sold off to them in bulk. Cheap.

Japanese redux?

In the mid-to-late 1980’s one could drive down miles of Wilshire Blvd and marvel at the thousands of empty luxury condos and office buildings sitting vacant—sometimes for years– and wonder if “The Japanese” really did have enough money to just buy them as pieds- a- terre in case they happened to be in town or needed a place to stash a girlfriend. The silent towers all had tasteful offering signs with absurd asking prices, and no one was buying– yet new buildings kept going up.

Then Sony bought Columbia Pictures, and Toyota announced it was moving its manufacturing plants into the United States. At the very zenith of the commercial real estate bubble (or nadir, depending on where your money was stashed,) a Japanese consortium bought Pebble Beach Golf Club and golfers everywhere despaired—was nothing sacred? Were the Japanese fated to be everyone’s landlords?

For those of us renting (bitterly,) from the sidelines, it was good fun to watch American business interests’ xenophobia competing with their greed. Despite all the patriotic breast-beating and thinly-disguised racism, greed won out every time.

As it turned out, Pebble Beach was that bubble’s Last Hurrah. Things turned very sour very quickly and we all know what happened to the Japanese economy.

And now, apparently, it’s China’s turn to play. It makes sense, of course, for when the dollar officially devalues—as it ultimately must—instead of holding worthless paper, Chinese investors will at least be holding hard assets. Overpriced, certainly, and likely highly leveraged, but real estate nonetheless. Conversely, it would appear that the US has been quietly wholesaling its enormous losses to China. A win win for everyone except us worker bees on both sides of the Pacific, the ones who still have savings accounts.

Make money, not war.

It is notoriously difficult for Chinese nationals to purchase properties in the United States. The yuan is not easily converted to USD, (132B in a suitcase notwithstanding,) and unless one already has assets in the US, the State Department makes it very difficult to acquire any. (We all remember the brouhaha that resulted when China tried to buy Unocal.) But REITs, especially REITs subsidized by US savers, (then matched and leveraged 6x by Treasury and guaranteed by FDIC!) Well, apparently that is doable.

Consider also, that wealthy, politically-connected Chinese have been sending their children to American universities ever since Nixon officially reopened the two countries to trade in the early 1970’s. With the advent of rampant Chinese capitalism and the proliferation of Chinese-owned multi-nationals, a whole new generation of upwardly-mobile tycoons is seeking a hot new status symbol for their children… an American spouse.

Just as a generation of American heiresses was loosed upon an impoverished-but-titled Great Britain in the days of the Robber Barons, so now is a generation of young, mostly male Chinese from powerful families seeking landed (or landable,) American citizens to marry– and buy property with.

A case in point:

Ten years ago my blonde-haired, blue-eyed American niece, lacking appropriate employment after graduating from a venerable US university with a useless degree, expatriated and established herself as an English teacher and part-time television commentator in Jenin, PRC—where the jobs were. The number of well-bred, well-educated American kids who have taken this route may surprise you. It did me. ESL brokers now recruit on nearly all US college campuses, and they’re having a banner year.

Surrounded every day by smart, wealthy, and ambitious young “communists” all eager to learn English and make lots of money, she had a perfectly lovely time for several years, and eventually fell in love with and married the young son of the Agricultural Minister for a large southern province. (A State cabinet position similar to say, the California State Water Commissioner, this is the guy who gets executed if SARS takes hold in the province.)

Although the Minister lives (by our standards,) modestly in a State apartment, at the wedding banquet he and his wife gifted the newlyweds with not only matching gold watches, and a new car, but with a new home as well. In San Diego, CA. USA,–where the groom was set to pursue his MBA.

For “Ba’ba” it was an expedited way to get a half a million out of China and into a US investment. For his son, the sum provided a toehold in a new economy (relatively) free of the political oversight the US State Department would impose. For my niece, it was a dream come true–an adorable husband with international connections, and a nice house in San Diego close to the beach.

Now happily ensconced and not at all concerned with the fact that their home has lost 40% of its value, my niece, who speaks fluent Mandarin and not-bad Cantonese– as well as SD Homeboy Spanish– has combined her love of event planning (she used to put on raves in the CA foothills,) with her language skills, and with a further infusion of funds from Ba, has a thriving business bringing Chinese businessmen into Mexico City then facilitating their financial acquisitions there. Business, she says, is booming. Her husband will complete his MBA next year.

Next project on their agenda? A full-service real estate agency for Chinese investors interested in purchasing defunct US housing tracts and commercial buildings. I gave her the number of a commercial banker friend who has been desperate to unload toxic commercial properties in San Diego and San Bernardino Counties. Apparently they hit it right off.

This new American family is being duplicated all across the country by a generation of kids for whom international borders are essentially irrelevant, and fear of The Foreign a quaint joke.

So, before everyone starts freaking out about outsourcing and national identity– and Asian Hoardes turning the west coast into China’s Sudetenland– please try to keep in mind that with cultural melding comes a new cultural dynamic…and often a whole lot of money. Singapore for example, has in only forty years became an international investment center and economic powerhouse despite having a population about the size of Phoenix—and a hugely diverse one at that. Those who are concerned that an army of “excess” Chinese males may soon resort to mayhem and invade our Kentucky Fried Chicken franchises, have missed the point –they already have invaded –and married our wimmins.

Perhaps we may take comfort in the knowledge that in general, folks are far less likely to blow up their own investments –let alone their own relatives. Whether Chinese investments in American real estate blow up in their faces, however, remains to be seen.


Bits Bucket For August 25, 2009

Post off-topic ideas, links and Craigslist finds here. Please visit the HBB Forum. And see the American Visionaries series from Schwarzfilm.