The Housing Bubble

Sacramento Suspected Mortgage Fraud Update: Dec. 5, 2006

Background: Five houses sold on one street in the Estates at Lincoln Crossing, using 100% acquisition financing, each priced at $200,000 over comparable sales. It appears the buyers have achieved nearly $1 million in cash out acquisition financing. Ben has a photo of the vacant subdivision on this very blog at http://thehousingbubbleblog.com/js_slideshow/#29

Update: Several fellow bloggers made excellent suggestions about how to effectively expose this problem, end this practice and get the perpetrators prosecuted. The two best suggestions are: 1) contact the lenders directly and 2) get the mainstream media involved. Both strategies are paying off very well. Strangely, the hardest part seems to be getting some law enforcement agencies on board.

First Franklin Mortgage has responded to the e-mail notice of fraud and has agreed to review their loan. New Century, with two loans, has been non-responsive, as have Long Beach (owned by Washington Mutual) and Alliance Bancorp. I have followed up again with these last three, copying their e-mails to law enforcement. I will follow up with the lenders again in a couple of days, probably by calling their main offices to speak with their in-house counsels.

The best news is that the Sacramento Bee is opening an investigation. My e-mail to the reporter, in his words, “…is about the 5th indicator in the last six weeks or so that something is going on here…..”. Needless to say, this has stoked my internal fires for justice and I am spoon-feeding the reporter critical information he may have no idea exists.

And where do the various components of our valiant government agencies fall in line?

The California State Appraisers Office sent me a nice letter saying there is not enough evidence and they are declining to investigate! Hello? Five appraisals were completed, each possibly exceeding the market value by $200,000 and 40%. They have requested that I provide copies of the actual appraisals! Idiots. The director said 8 of every10 complaints he deals with are from loan officers complaining the appraisals are TOO LOW!! There must be a joke in here somewhere.

The FBI seems to be somewhat dysfunctional, too. They are unbelievably dense about the problem and keep asking me “Now how much money did you lose?” I again explain in simple terms: “If I witnessed a murder, I would not be dead, but I would still want to report it.” I am going to visit their office in person next week with reams of evidence to supplement what I already sent them. I plan to look the Special Agent (very special at that) right in the eyeballs to make sure her headlights are actually lit.

The Placer County District Attorney is the most responsive of all the law enforcement agencies. I called them and they immediately set me up with the local police and have provided me a framework in which to delineate these crimes to the DA. I think they are going to be fun to work with and seem to be intent on nailing these criminals.

I am taking a break from the action for a few days as I must focus on my real work and my home life. The wheels of justice are set in motion…..slow motion, but motion none the less. And they will pick up momentum soon, creating a crushing velocity of mass to squash these cockroaches of crime. The subject properties are going nowhere and neither are the homebuilders and most of the other participating sellers, who all have assets in place. The criminals and the cash is another matter…. but any continued perpetration of this $hit will stop here and now.

I will leave you with this final beautiful thought: In a few weeks Ben is going to post some edited news from the Sacramento Bee delineating massive mortgage fraud totaling millions of dollars in the Sacramento valley. The genesis of that story will be right here, on his very own site. That is cutting edge, full circle, information age stuff. It is sweet and exciting!

Paladin
Wire Paladin, San Francisco

During the week I don’t get to read all the threads on this blog. I did not see any postings yesterday about the conversation that took place on Squawk Box about the housing bust and the Baby Boomers. This happened on Monday morning. A study has shown that 89% of all Baby Boomers want to stay in their same area when they retire. The implication being made was that this would hurt the 2nd home market.

This morning on Squawk Box they were defending Toll Brothers and trying to call a bottom for the home builders. Toll announced that 2007 profits will fall by 62% but somehow there is a bottom. Robert Toll said so. But they also mentioned the meltdown in the subprime market. CNBC makes me want to get sick most of the time but once in a while they slip a comment past the goalie that really hurts the REIC. One person on Squawk did try to say the coming lower interest rates should really help builders. WTF?

That is the East Coast update for those of you that are still sleeping at 3:30 PST. It must be tough following the markets on the West Coast. You have to get up so early to hear so much of this stuff.

And here’s another view of the homies saying they’re topping out.

homebuilders
No Bargains in Homebuilders
By Richard Suttmeier
RealMoney.com Contributor
12/5/2006 7:24 AM EST
It was a cruel summer for the homebuilding sector, but it has enjoyed a solid rebound this fall. However, if you’re tempted to get back into these stocks, give it a second thought. If you own them now, consider exiting positions on the current strength.

In a similar vein, U.S. regional banks provide funding for residential construction and development. Their exposures to these loans are increasing while construction is slowing — a less-than-ideal environment for new investments in the sector.

Next year, watch for homebuilders to slide below their July lows, as they get pushed down by the popping of the real estate and housing bubbles. Meanwhile, balance sheets at financial institutions will become even more stretched, leading to a correction for regional bank stocks.

As you can see in the table below, the fundamentals for the homebuilders are showing no signs of stabilizing, assigned sell and hold ratings by ValuEngine. Fair values are well below the 52-week lows, except for D.R. Horton (DHI) .

The Home-builders
Company Name 30-Nov Close Rating (-UV)/OV By Fair Value MOM 5-Wk MMA 52-Wk Low 200-WK SMAs Value Levels Pivots Risky Levels
Beazer Homes
(BZH) $45.66 SELL 64.3% $27.79 RM $43.14 $35.96 $43.08 31.88 M 45.33 A 56.69 S
Centex
(CTX) $55.34 HOLD 32.7% $41.69 RM $52.85 $42.90 $51.86 41.89 M 52.95 A 61.24 A
DR Horton (DHI) $26.64 HOLD 33.9% $19.90 RM $24.40 $19.52 $25.11 17.18 M 25.29 A 30.83 A
KB Homes (KBH) $51.69 HOLD 55.1% $33.32 RM $47.16 $37.89 $47.08 32.82 M 49.83 A 59.59 A
Lennar
(LEN) $52.50 HOLD 64.0% $32.02 RM $48.50 $38.66 $48.15 38.45 M 43.51 A 57.35 A
Pulte Homes (PHM) $33.74 SELL 57.6% $21.41 RM $31.56 $26.02 $29.30 26.43 M 28.60 A 34.88 A
Toll Brothers (TOL) $32.20 SELL 90.7% $16.88 RM $29.61 $22.22 $27.47 25.59 A 29.99 A 37.83 S
Source Key: MOM, momentum; OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; F, flat; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot. Source: RightSide.com

According to ValuEngine, the homebuilders are 33.9% to 90.7% overvalued. So why the rebound? Positive technicals! The weekly chart profiles show rising momentum, and my annual pivots, which failed to hold on the way down into July, are influencing the homebuilders. Annual pivots have been providing magnets since those July lows, but these levels will change in January. The negative fundamentals will eventually trump the positive technicals.

Take a look at the Philadelphia Stock Exchange Housing Sector Index, or HGX:

Source: Reuters

This index is above its 200-day simple moving average of 224.95 for the first time since April 26. If I’m correct, the weakening fundamentals will trump the technicals, and the homebuilders will resume their declines in 2007.

Financials Look Vulnerable

Quarterly data from the Federal Deposit Insurance Corp., or FDIC, show that financial institutions have increased real-estate exposure. At the end of the third quarter, there were 8,743 FDIC-insured institutions, and only 7% were publicly traded companies. Net income peaked in the second quarter, as net interest margins declined to a 17-year low.

Lending for residential and commercial construction is on the rise, as demand for new homes declines. Non-current loans are also on the rise, while the deposit share of funding has fallen to an all-time low. Here are some year-over-year comparisons for the third quarter, according to the FDIC:

Residential construction and development loans are up 29.5% to $542 billion (That’s a 5.3% rise sequentially).

Sales of new homes are down 33%.

Financial institutions show reserves for losses are down 1.8%.

Loans and leases that are 30 to 89 days past due are up 17.5%.

Non-current loans and leases are up 7.8%.

So far this year, the financial sector has withstood three quarters of balance-sheet stress related to the real-estate market and the bursting of the housing bubble.

Housing starts crashed 14.6% in October, while building permits are down to levels not seen since 1997. Today, there is a six-month supply of new homes on the market, while the pipeline size of new construction continues to rise.

The National Association of Home Builders tried to put a positive spin on a 33 reading for its Housing Market Index, which was up 2 points in November. Given that a reading below 50 is considered “poor,” the light at the end of the tunnel as described by the NAHB could be that of an oncoming freight train.

Since the fourth quarter of 2005, the FDIC has been compiling risk-based ratios. It compiles ratios of residential construction loans vs. risk-based capital, and readings above 100% are viewed with caution.

According to third-quarter data, out of slightly more than 600 publicly traded financial institutions, 270 of them have residential construction and residential loans with risk-to-capital ratios above 100%, of which 105 are above 200%. If you include total real estate construction (residential plus multi-family and commercial), there are 351 institutions with risk to capital ratios above 300%, of which 111 are above 500%.

Back in 1991, when residential construction loans peaked at $160 billion, 13% became non-current loans on the balance sheets of U.S. banks. This time, the impact of increased supply and reduced demand for new homes could make the unwinding of unfinished projects a major economic issue for the finance sector for years, not quarters.

The America’s Community Bankers Index, or ACBQ, is a market-weighted index of more than 500 community banks, and its graph suggests that a topping-out pattern is in the making.

From Raleigh, NC
Cloudy forecast for local housing market
Unsold homes will linger, builders told

Weakness in the Triangle housing market probably will continue through the middle of next year, the region’s builders were told Monday. Although builders are beginning to cut back on housing starts, tempered demand will take six months to reduce a large inventory of unsold homes, said Bernard Helm, president of Market Opportunity Research Enterprises, a Rocky Mount company that tracks Triangle residential sales trends.

“We will see some real, negative numbers in both new and resale home transactions, as they compare to a year ago, during the next six months,” Helm told members of home builder associations for Wake, Durham, Orange and Chatham counties.

“We now have to wait for the market to find a way to absorb the excesses and imbalances, a large resale inventory and a fairly large new home inventory, in a market short on buyers,” Helm said. “I expect growth later in 2007, but not much.”

http://tinyurl.com/yb55hh

Back during the summer months, John Hussman would note in his weekly comments that recessions risks were growing, but not necessarily imminent.

It’s now fair to say that his opinion has changed:

Goldilocks’ Wake-Up Call

Also, his Housing Starts method of predicting recession has now completely rolled over. The only time this indicator failed was in 1987.

Does this show the Toll brothers selling millions of dollars worth of shares in the past year:
http://finance.yahoo.com/q/it?s=TOL
And these graphs clearly show that things are not bottoming:
http://www.safehaven.com/article-6329.htm

And this guy has the nerve to say we have hit bottom?

What Conundrum? Its Radioactive Dark Matter.

http://wallstreetexaminer.com/blogs/winter/?p=152#more-152

Are there any tech guys here that can fabricate a mock up e-version of David Liareah? Like an e-punching bag and post it at the top of this page. And provide an assorment of weapons to take out our frustations on the little basturd. Ya know….. click the shot gun to blast, a knife to stab, a hand to rip balls off, etc etc.

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Late payments on high-risk loans jump
This year is on track to be one of the worst ever for subprime loans, with 80,000 borrowers behind on payments, newspaper report says.
December 5 2006: 7:14 AM EST

NEW YORK (Reuters) — Late payments on subprime loans have surged, The Wall Street Journal reported on its Web site on Tuesday, and while economists don’t expect major harm, a continued rise could hurt investors in mortgage-backed securities.

http://money.cnn.com/2006/12/05/news/economy/loans.reut/index.htm?postversion=2006120507

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This guy got $1.5M in credit cards to finance his real estate operations.

http://www.fatwallet.com/forums/messageview.php?start=0&catid=52&threadid=662972

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Big mergers, big rally
Major gauges surge, with S&P 500 hitting new six-year high, as investors welcome deals and falling oil and shrug off Pfizer.

By Alexandra Twin, CNNMoney.com senior writer
December 4 2006: 5:17 PM EST

NEW YORK (CNNMoney.com) — Stocks surged Monday, sending the the S&P 500 to a fresh six-year high, as investors welcomed a slew of merger news and a slump in oil prices.

The broader Standard & Poor’s 500 (up 12.41 to 1,409.12, Charts) index climbed about 0.9 percent, closing at its highest point since Nov. 7, 2000.

I’ll give this guy props for being clever…

http://www.chicagotribune.com/classified/realestate/realestate/chi-0612030418dec03,0,4182845.column?coll=chi-classifiedrealestate-hed

new day same question
anyone have numbers on wealth loss from stock crash 2000 and a 20% house price crash ?
seems a fair assumption at this point

“Inflationary Pressures From Wages Lower Than Expected”
http://www.cnbc.com/id/16042046

Weren’t we just barraged with a raft of garbage by an unnamed elected official that “wages are way up” and “workers are benefitting from this roaring economy”?

Hmmm… lets see…. it was headlined 90 days before the election…. right about when fuel prices began dropping….

Had Enough?

Check out today’s WSJ front page right article. Hopefully Ben or someone else can supply the electronic link, as I am limited on typing time.

Would anyone who has read and posted here for more than a month call this long-anticipated unraveling “unexpectedly rapid?”
————————————————————————————————–
More Borrowers With Risky Loans Are Falling Behind

Subprime Mortgages Surged As Housing Market Soared; Now, Delinquencies Mount

By Ruth Simon and James R. Hagerty

Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace.

The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors worldwide in the $10 trillion U.S. mortgage market. The pain is most apparent in subprime mortgages, though there are signs it is is spreading to other parts of the mortgage market.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems, high debt relative to income or other factors. Lenders typically charge them higher interest rates — as much as four percentage points more than more-credit-worthy borrowers pay — one reason subprime mortgages are among the most profitable segments of the industry.

Casey read this you loser:

Guilt is admitted in mortgage fraud
From Times Staff and Wire Reports
December 5, 2006

A Newport Beach man pleaded guilty Monday to fraudulently obtaining mortgage loans resulting in more than $2.7 million in losses to the federal government and commercial lenders.

In a plea agreement, Lorenzo Espinoza, 39, admitted engaging in a scheme from April 1995 to May 2001 to defraud the Department of Housing and Urban Development and several commercial lenders by using “straw buyers” to arrange fraudulent mortgage loans. The loans went into default, leaving lenders and the Federal Housing Administration holding properties worth less than the amount funded in the mortgages.

At his sentencing March 12, Espinoza faces up to 26 years in prison

The housing slump claims more victims

The rising number of bad loans in the U.S. squeezed HSBC Holdings’ revenue growth in the third quarter. HSBC — Britain’s worst-performing bank stock — said last month that delinquent U.S. loans had jumped by 16 percent because of an increase in bankruptcies and the weak housing market. “There is little in this statement that will calm fears of a slowdown” in the global economy, said fund manager Colin Morton of Rensburg Sheppards. (Bloomberg) Luxury-home builder Toll Brothers said its profit could fall by 62 percent next year, although it hopes some markets have fallen as low as they will go in the current slump. (MarketWatch.com)

Home prices fall in Hawaii.

http://starbulletin.com/2006/12/05/news/story01.html
http://honoluluadvertiser.com/apps/pbcs.dll/article?AID=/20061205/BUSINESS04/612050341/1071/BUSINESS

new real estate development coming
http://news.yahoo.com/s/ap/20061205/ap_on_sc/nasa_moon

BREAKING NEWS ISM services index stronger than expected, October factory orders fall more than anticipated. More soon.
http://money.cnn.com/

How strange that the good and the bad always seem to come out together.

Here’s a fun thing to do for those of you contemplating going to a real estate “auction”, typically the last ditch effort to get out from under by house builders that knew more about drywall than anything else…

Sit @ the front and look back @ the shills, or in all probability, the auctioneer will take bids from a couple of flies on the wall, as the auction is proceding.

If you are feeling your oats as this is going on and the auctioneer plays like he or she has bids, when nobody is bidding, feel free to stand up and say “there is nobody bidding here, this is a scam”

Nice little monkey wrench to compete with their deceit.

For Florida followers: MGIC has raised its PMI rates for Florida adding an additional 1% to the PMI for loans over 80% LTV on all new refi’s or purchases.

Somebody get a 20# trout ready:

http://tinyurl.com/yhjr2m

Washington Mutual in Sacramento is laying off 65 loan processing workers. I bet they hire them all back in the Spring when we have the Spring rebound and everything gets corrected.

An interesting link on some unfinished homes in Arizona’s Pinal county. . .

http://www.azcentral.com/business/articles/1205biz-turnerdunn1205.html

Trump dismisses talk of realty bubble (In Dubai)

http://www.gulfnews.com/business/Real_Estate_Property/10087240.html

Dubai: Donald Trump Jr, the son of American real estate tycoon Donald Trump, has dismissed talk of a bubble in Dubai’s property market.

Speaking with Gulf News on the sidelines of Dubai’s Cityscape property exhibition, Trump said a cyclical lull will hit the market where the velocity of sales drops and weak developers are weeded out.

But he said Dubai’s tax free status, its political stability and the freedom given to developers to design innovative projects will sustain investor interest.

“If you say there will be a correction long enough, eventually you’ll be right because everything is cyclical. Dubai will never always grow at 25 per cent per year,” he said.

“I’m expecting the market to re-centre, which will probably happen in two or three years, but it will affect different properties in different ways.”

“The nature of real estate is that people who were able to weather the bad times will always do well.”

In Dubai to inspect progress on the Dh2.2 billion Palm Trump International Hotel and Tower (expected to be complete in 2009) on the trunk of Palm Jumeirah, Trump said his family’s future investments will be focused on the UAE and Dubai, rather than emerging markets such as Saudi Arabia.

Ha….Just got a call from a realtor (DC Metro Area)…she wanted to let me know that the market is really picking up and that I should try to buy now, before things really pick up in the Spring. Anyone see any signs of things picking up? I see the exact opposite….

Sorta off topic, but a VERY good read for those expecting the worse in the housing & credit bubble collapse.

http://energybulletin.net/23259.html

I’m sorry. I just had to post this link for the viewers.

Having problems selling your over priced POS since last winter??? No problem! MS paint yourself in some grass and a driveway! Shazam! Like a brand new listing.

http://www.org.interealty.com/PropSearch/PropertyDetail.asp?Code=&ML=408205&AgentID=

Great Article in Barron’s this past week.

http://bigpicture.typepad.com/comments/2006/12/is_the_housing_.html

From the Wolfsblog.

Interesting post regarding inflation (10%)

and funny business at the
treasury:

But I though all the Baby Boomers were going to buy a second or third home in Hawaii? PS: Notice that “experts predict a soft landing”!

http://starbulletin.com/2006/12/05/news/story01.html
“Home price climb finally over
The median declines for the first time since the boom, but experts predict a soft landing

This time last year, real estate watchers were scratching their heads wondering just how high the market could go.

Now the most popular question is, “How low can it go?”

Not sure if anyone posted the report from the American Enterprise Institute about housing led recessions, Housing and American Recessions

“A weak housing sector has accompanied every American recession since 1965, but not every episode of housing weakness has accompanied a recession. An annual drop in the growth rate of residential investment (a good measure of homebuilding activity) of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965. (In 1967 and in 1995, declines in residential investment occurred without a recession.) A significant drop in residential investment therefore appears to be a necessary condition, but not a sufficient condition, for a U.S. recession.”

“Housing slowdowns tend to lead recessions rather than result from them. During the second quarter of 2006, fixed residential investment fell at an 11.1 percent annual rate, followed by a 17.4 percent rate of decline in the third quarter. The intensity of the fall in U.S. residential investment during the middle two quarters of 2006 is approaching potential recession territory.”

“Still, the chances of a recession in 2007 caused by housing weakness are probably only about one in two. Understanding how recessions result from a weaker housing sector helps to determine the odds of an upcoming recession.

Weakness in the U.S. housing sector poses the sternest test of the self-stabilizing capacity of the U.S. economy. That is the case because residential construction, although it is not a large part of the economy, can be volatile. Housing construction is like investment insofar as product must be built ahead of demand, which means that a slowdown in the demand for housing can create sharp disruptions in the housing construction industry. Because residential real estate is the major asset of most households, changes in its value can affect spending on all items. To begin with, spending on housing is tied to spending on home improvement and furnishings, so an abrupt slowdown in home building and home purchases spills over with extra intensity into those sectors of the economy.”

“Between 2000 and 2006, the value of U.S. real estate rose by about $10 trillion to a total of $22 trillion. Over the last year alone, the value of real estate on household balance sheets rose by $2 trillion. The total value of real estate at $22 trillion constitutes nearly 40 percent of household net worth. Consequently, changes in the value of housing can have substantial effects on household wealth and, in turn, can affect consumption.

Broadly speaking, if the current housing downturn were to take house prices back to their values of mid-2005, representing a drop of about $2 trillion or 10 percent of the current value of the housing stock, households would feel worse off and probably would consume less. The best estimates of the impact of housing wealth on consumption suggest that a 10 percent decline in the value of housing wealth would reduce consumption by about 0.6 percent. That, in turn, would translate to a drag of about 0.4 percentage points on overall GDP growth. The estimates of the impact of housing wealth on consumption are naturally subject to some error, but it is reasonable to assume that the impact on GDP growth from a loss of $2 trillion in housing wealth would range from, say, 0.3 percentage points to 0.5 percentage points.”

“Perhaps a more compelling reason for the recent slowdown in housing has been waning affordability. The cost of a typical home relative to disposable income per capita has gone from about 100 percent in 2000 to nearly about 140 percent today. This puts much of the housing stock out of reach for many households, despite the accommodating financing that has been available from the mortgage industry. As potential buyers hold back for lower prices, inventories of new and existing homes begin to rise and prices start to fall.”

“The last point to remember about housing and Ameri-can recessions is that no two cycles are ever the same.”

“Inflation at current levels presents the Fed with a dilemma. If it moves aggressively enough by cutting rates to revive growth promptly, than the U.S. economy would exit the current slowdown with core inflation well above the “comfort zone.” In view of that possible outcome, it is difficult to escape the conclusion that the economy needs to grow at a below-trend rate for several quarters in order to bring inflation down gradually. The Fed needs a weaker housing sector, but it cannot be too weak or recession will result.

No one ever said that avoiding recession after a housing bubble would be easy. It is not.”

http://www.mortgagenewsdaily.com/1252006_Homebuying_Marriage.asp

The article covers problems which many unmarried partners, whether romantically involved or not, are suddenly discovering about their “investment.”

An article from the American Prospect by Dean Baker:

The Housing Crash Recession of 2007
By Dean Baker
t r u t h o u t | Columnist

Tuesday 05 December 2006

As we approach the end of 2006, the economy’s prospects for next year appear more gloomy with each new piece of economic data. And, just like President Bush in his assessment of the situation in Iraq, the economic forecasters are gradually revising their forecasts downward, as it no longer appears credible to present the rosy pictures that they had been trying to sell.

The trouble began early in the year, when the housing boom that was supposed to continue forever turned into a housing bust. The rate of house price appreciation didn’t just slow, as most economists predicted, nor did prices simply flatten in accordance with their revised predictions. House prices began to fall. Nationwide, house prices are now down between 1 percent and 2 percent from their levels at the same point in 2005. (The decline is between 4 percent and 5 percent, if we adjust for inflation.) The price declines in some of the most over-valued areas, like Washington, DC, and parts of Florida and California, have been considerably sharper.

In fact, the price declines are even larger than is shown in the data, because sellers now routinely make payments that are not captured in the contracted price, such as picking up some of the buyer’s closing costs or making repairs to the house before the sale. Such practices were unheard of a year ago.

When the downturn in the housing market could no longer be denied, the economic forecasters assured us that the rest of the economy would remain strong. They noted the strength in non-residential construction, strong investment in equipment and software, and of course the resilience of consumers.

This picture is not panning out well either. The non-residential sector experienced a short boom earlier in the year. This should not have been a surprise. The housing boom pulled resources (workers and construction materials) away from the non-residential sector. In some of the areas with the most over-heated housing markets, it wasn’t possible to get the workers needed to build stores, offices or other non-residential structures. This meant that when demand in the residential sector eased, resources could switch to meet the pent-up demand in the non-residential sector.

But, it was predictable that this boom would be short-lived. The residential sector is twice as large as the non-residential sector. And there just is not that much pent-up demand. There was serious overbuilding in the office and retail sectors in the late-90s boom, and the continued decline in manufacturing means demand for factory construction is limited. According to the most recent data, construction in the non-residential sector was already falling off by the end of the third quarter.

The boom in equipment and software investment also seems to have disappeared. The latest numbers in this sector have been negative also, suggesting that investment will be at best a very small positive in the economy in the next year.

This leaves us with our resilient consumer. The economic forecasters assure us that strong job growth, coupled with healthy wage growth and falling gas prices, will give consumers the money they need to keep spending.

Well this story does not look very good either. Job growth has actually been slowing over the course of the year, with the private sector adding less than 100,000 jobs on average for the last two months. Falling gas prices are a positive, but since no one had expected gas prices to soar to $3 a gallon, the fact that prices have fallen back to last year’s levels does not give consumers that much of a boost. Finally, we are looking at modest real wage growth (at 1 percent annually), but this is not extraordinary and not enough to provide a very large boost to demand.

The more important part of the story for consumers is that they are losing the ability to borrow against their homes. Last year, consumers pulled more than $800 billion in equity out of their homes. Many people bought their homes with little or no money down, and then borrowed against their equity as quickly as their house price rose. Now that house prices have turned down, they have no further equity against which to borrow. This means that these consumers have no choice but to curtail their consumption.

The evidence for this falloff is spreading by the day. Projections of weak holiday sales and slumping car sales top the list. Throw in the reports of rapidly rising rates of mortgage delinquencies and defaults and you get a clear picture of rapidly growing distress.

Of course, with all sources of demand showing weakness, job growth will slump further, and we’ll get our classic downward spiral: declining employment, falling income, falling consumption, and then further job loss. The story is not pretty, but unfortunately there is no way to prevent it. This downturn will be especially painful because it is associated with a crash of the housing bubble. This means both that many people will lose their life’s savings and also that the recession is likely to be longer lasting than most.

The picture would not have been so dire if economists had been better able to do their job. Unfortunately, economic forecasters seem more interested in happy talk than economic analysis. Not one of the “Blue-Chip 50″ forecasters saw the 2001 recession coming. The record seems no better this time around.

Unfortunately, no one ever holds the forecasters accountable. Even though they all missed the last recession, and just about all of them will have missed this recession, the same group will probably still be around to miss the next recession. Some workers, like dishwashers and custodians, teachers and truck drivers, have to meet performance standards. Economic forecasters apparently just have to show up to collect their paychecks.

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Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.

Need some help here.
I have some friends who are just dying to find a way to make money in real estate right now. They have had several hair brained ideas over the last year, none of which have worked. Their latest idea (or scam) is that they are going to do loans with another friend of theirs who is either a broker or loan officer, I’m not sure. Any way they are going to do loans for their customers every 3-6 mos and split the points and rebate with the customer. Each time they refi the same borrower, the borrower skips a payment and they say the money they split with the borrower should almost cover the rest of the payments until they refi again. They called this “reloading” I explained to them how wrong this is on so many different levels but they just see big bucks. I remember reading about this practice months ago on this blog. I seem to recall the broker mentioned in the article was in deep doo-doo for what he was doing. I can’t remember if he was in trouble with the banks or if it is illegal. Does anyone else recall?? I would love to give them some hard evidence that their participation in a scam like this can end very very badly for them.

Bread and Circus.
http://www.whale.to/b/bread_q.html

Hmmm… can this be happening?

Interesting article about the LA Auto Show with references to slowing car sales due to the housing bubble.
http://www.msnbc.msn.com/id/15918559/wid/6448213/