The Ground Is Shifting Constantly In California
The Appeal Democrat reports from California. “It was standing room-only at a Behind on House Payments workshop in Marysville that reviewed ‘cash for keys,’ the hope hotline and ‘all those things going on behind the curtain’ when homeowners face foreclosure. Lincoln resident Lexie Karsch, and her husband, Pete, who have three daughters, worked for builders before the housing boom ended and owe $4,500 after falling three months’ behind on mortgage payments. ‘Everybody sounds so confused,’ she said of people who deal with her about the loan.”
“Karsch said she’ll follow up on workshop advice that includes trying again if the first effort to modify loans and lower housing payments isn’t successful.”
“A homeowner in the Edgewater development in Linda, who asked not to be identified, said after the event that she and her husband face possible foreclosure on the house they bought for $348,000 in 2005. The couple had their house on the market for a year but no buyers came forward. Other comparable sales in the area have brought between $179,000 to $200,000 for houses, the woman said. Their lender wouldn’t work with the couple in Linda until they were in default on mortgage payments, the woman said.”
“A Loma Rica resident who attended the workshop said she was surprised to see neighbors there. She said a March 9 trustee sale looms on the home and five acres she bought in 2006 for $489,000 — and whose loan terms she seeks to modify.”
“Difficulty reaching and dealing with lenders was a common workshop theme — as were changing regulations involving loans, foreclosure and government assistance. ‘The ground is shifting constantly,’ said Lee Pliscou, directing attorney at the Marysville office of the nonprofit California Rural Legal Assistance.”
The San Gabriel Valley News. “California’s housing market has weathered a sobering downturn in recent years, and figures released Thursday show how far things have fallen. In January, the state’s median home price for an existing single-family home topped out at $254,350. That was off 9.5 percent from the previous month but down a whopping 40.5 percent from a year earlier, according to the California Association of Realtors.”
“Locally, Rowland Heights showed the biggest year-over-year decline, with its January median home price falling 42.9 percent to $374,000. Other big declines included Pomona (-41 percent), El Monte (-40 percent), Pasadena (-35.9 percent) and La Puente (-35.4 percent).”
“With favorable home prices and historically low mortgage rates, affordability in the California housing market is now at its highest since the start of the decade. And that is a good thing, according to Tom Adams, owner of Century 21 Adams & Barnes in Monrovia and Glendora. ‘The flipside to everything you hear on the news is that all of these opportunities have opened up,’ he said. ‘I have someone who is buying a home for $450,000, and two years ago that home was $700,000.’”
The San Francisco Chronicle. “President Obama has grabbed what the real estate industry considers the third rail of tax reform: mortgage-interest deductions. Among the many tax increases on the affluent laid out in his budget proposal Thursday was a plan to reduce the itemized deduction rate for families with incomes over $250,000 to 28 percent, down from 33 or 35 percent.”
“The National Association of Realtors quickly responded with a strongly worded letter to the president, arguing the change could ‘trigger yet another crisis in home values…Mary Trupo, the Realtor group’s public issues director, said the impact would be particularly widespread in expensive housing markets like the Bay Area, where a large portion of home buyers are well-to-do.”
“The California Association of Realtors ‘will vigorously fight this provision in the halls of Congress,’ said James Liptak, president of the Los Angeles trade group, in a prepared statement.”
“Christopher Thornberg, principal at Los Angeles research firm Beacon Economics, said the reduced deductions could slightly weigh down home prices, by 2 to 3 percent, but only on higher-priced properties that have been less affected by the housing downturn. ‘It’s like I’m standing in the middle of a forest fire and they say, ‘Don’t light that match,’ he said, noting prices across the state are already down more than 40 percent.”
The Ventura County Star. “If you’re planning to buy a home in the coming months, state lawmakers and residential developers hope you consider a newly constructed home. To sweeten the deal, if you buy one between this Sunday and March 1, 2010, you could get up to a $10,000 tax credit from the state. And if the purchase is before Dec. 1, you may be able to pair it with the $8,000 federal tax credit in President Obama’s stimulus package, provided you’re a first-time buyer and meet other requirements.”
“The state program is capped at $100 million, meaning about 10,000 buyers could secure the $10,000 credits. The program potentially could be over within the first few months. It helps that there is some impetus to take advantage of the credit early. ‘It puts urgency into the system,’ said Layne Marceau, president of the Northern California division of Shea Homes.”
“The sale of 10,000 homes with the tax credit would put a 15 to 20 percent dent in what home builders were planning for this year, Marceau said, citing 66,000 new home starts last year. Clearing inventory from the market could spur more construction and drive the economy, he said.”
“Mark Schniepp, director of the California Economic Forecast in Goleta…said the tax credit would act more as an incentive to get those already interested in buying to consider a new home over an existing home, but he questioned whether it would be enough to push someone who is undecided into the market. That’s because $10,000 still isn’t a lot on a home that costs $300,000 or $400,000. It may drive sales in lower-priced parts of the state more than higher-priced areas like Ventura County, Schniepp said.”
“He believes lower interest rates would provide a bigger boost in sales because it would produce more savings over the long run. ‘This in combination with lower rates would provide a pretty important stimulus,’ Schniepp said. ‘Without the lower rates, which we really need, I don’t know how much of a big lift this is going to provide.’”
The Press Enterprise. “Some analysts said they think the programs could create some excitement and provide a financial boost for some homebuyers. But they contend the help is too little to turn around the housing market or replace the hundreds of thousands of jobs the state has lost in homebuilding and related sectors. ‘The magnitude of the problem is so great that this is not going to solve it,’ said Chapman University economist Esmael Adibi.”
“Chris Thornberg, an economist with Los Angeles-based Beacon Economics, complained that the state tax credit ‘will bail out homebuilders who built homes no one wanted.’ Thornberg and other economists said before the homebuilding industry can regain its health, the first priority is to sweep away the flood of foreclosed properties that are selling at distress prices.”
“Local Building Industry Association officials say there is a limit to how much good the tax credits will do. Frank Williams, chief executive of the association’s Baldy View chapter, which includes San Bernardino County, said the programs are ‘well meaning but not near enough.’”
“He said the federal credit needs to be twice as large and not a credit but cash that a buyer could use as a down payment. Also, he called the state program ‘window dressing’ that probably will run out of money within six months.”
The Union Tribune. “Rising job losses at retail stores, construction companies and movie studios helped push California’s unemployment rate above the 10 percent mark last month for the first time in 26 years, according to data released yesterday. ‘We started the downturn bad. It turned worse. Now it’s gotten ugly. And unfortunately, employment is the last thing that improves in a recession,’ said Esmael Adibi, economist with Chapman University in Orange.”
“Over the past year, construction firms in California shed 130,800 jobs, or 15.5 percent of their work force. Real estate and financial firms lost 48,200 workers, or 5.5 percent of their work force. Adibi blamed the housing sector. ‘We were disproportionately exposed to the construction sector and the mortgage industry,’ Adibi said. ‘When you see that these sectors are losing jobs as much as 15 percent per year, you can see how this could affect us.’”
“In addition to cuts from company payrolls, the jobless included a large spike in nonsalaried workers, such as independent contractors, freelance construction crews and cleaning workers. ‘A lot of the self-employed people were very exposed to the housing troubles, such as independent real estate agents or home-repair workers,’ Adibi said. ‘Some of them may have tried to survive through the new year and then decided that things just weren’t getting better.’”
“Jerry Nickelsburg, economist with the UCLA Anderson Forecast, said that other than the high unemployment rate, there are few parallels between the recession of the 1980s and the current decline…The current downturn, Nickelsburg said, has been driven by the crisis in the financial system. ‘We’re really in uncharted waters here,’ he said. ‘I don’t see anything on the horizon that will lower unemployment this year. It will probably go higher before it goes lower.’”
The LA Daily News. “For the first time since 1993, the unemployment rate hit 10.5 percent in Los Angeles County in January as thousands of workers lost jobs in nearly all occupations in the economic downturn. The increase from 9.2 percent in December represents a record one-month jump in the number of unemployed people in the county. ‘There are huge problems,’ said Stuart Waldman, president of a San Fernando Valley business group. ‘I can’t tell you how many people I know who don’t have a job right now. Business is scared.’”
“Meanwhile, the unemployment rate in California hit 10.1 percent, up from 8.7 percent in December, the largest one-month jump since the California Employment Development Department began tracking the data in its current form in 1976 — and probably the largest ever. ‘It’s the largest jump in history,’ EDD spokesman Patrick Joyce said. ‘Employment peaked in December of 2007. And it’s basically been going down ever since.’”
“Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast, said he believes the county is still in the middle of a contraction. ‘Although there are signs in the housing market that the adjustments that needed to be made have been made, the fly in the ointment is foreclosures, and that means the housing market is not going to stabilize until the labor markets do,’ Nickelsburg said.”
“Federal regulators identified significant problems with IndyMac Bancorp but failed to take action to avert its collapse - a collapse that cost the Federal Deposit Insurance Corp. $10.7 billion, according to a report released this week. An audit report, released Thursday by the Treasury Department’s inspector general, says the Office of Thrift Supervision identified a host of problems and risks with the Pasadena-based mortgage lender, including the quantity and poor quality of nontraditional mortgage products.”
“But the OTS ‘did not take aggressive action to stop those practices from continuing to proliferate,’ the report says. As many of the bank’s Alt-A loans began to reset at higher interest rates, the defaults began ramping up and the bank’s stock plummeted.”
“Sven Arndt, a professor of economics at Claremont McKenna College, said the results of the audit report on IndyMac aren’t surprising. ‘Lending had became increasingly casual and there was a huge amount of laxity as far as risk assessment,’ he said. ‘And supervisory agencies were aware of that. They thought all this stuff would work itself out.’”
The Marin Independent Journal. “Mill Valley-based Redwood Trust Friday announced a loss of $116 million, or $3.46 per share, for the fourth quarter of 2008. The fourth-quarter loss was slightly greater than the $110 million loss Redwood officials predicted earlier this year when the company raised $284 million with a public stock offering. Redwood plans to use the public offering cash to buy residential mortgage-backed securities at what it considers to be deeply discounted prices.”
“In a letter to shareholders, George Bull, Redwood’s chief executive, wrote, ‘While we were not surprised by the downturn, we underestimated the extraordinary level and complexity of the financial risks that market participants had taken, the extreme level of leverage employed, and the degree to which the fates of most financial institutions and markets were intertwined.’”
‘Bull added, ‘With the clarity of hindsight, we were too early with some of the investments we made in the first half of 2008, although we believe these investments will ultimately yield acceptable returns.’”
The Monterey County Herald. “A Nevada County peace officer-turned-real estate broker suspected of bilking hundreds of investors out of $20 million was arrested by local authorities Thursday morning. Inspectors from the Santa Cruz County District Attorney’s Office arrested Thomas John Hastert, 53, at his daughter’s Westside home around 10:30 a.m., according to County Jail records. He is being held on a $540,000 arrest warrant.”
‘Hastert is a hard-money real estate broker who ‘brazenly deceived’ 123 investors and borrowers in six counties, embezzled fees and filed false paperwork, the Attorney General’s Office reported.”
“Hastert allegedly brokered more than 270 hard-money loans in Nevada, Sacramento, Sutter, Butte, Placer and Yolo counties between September 2004 and September 2007 for real estate development projects. Hard-money loans typically provide high returns for private investors and are secured through collateral such as real estate, according to the Attorney General’s Office. The scheme collapsed when many of the loans, which were not properly backed with property, failed, the Attorney General’s Office reported.”
“Hastert, who had been a sheriff’s deputy in Los Angeles and Nevada counties before he got a law degree and went into real estate, was arrested without incident.”
“The numbers are grim in the Monterey County housing market. More than 5,200 homes are in or near foreclosure since October, and median home prices have dropped by nearly 50 percent since 2007. Credit scores of 750 or more and down payments up to 30 percent are now required to buy a home, leaving many out of the market. Home building permits are down by more than half, and new residential construction is nearly nonexistent.”
“But there is some hope, according to the 2009 Annual Housing Report presented to the Board of Supervisors. That’s because the report…suggests that newly available federal and state funding can do plenty to help boost homeownership and the rental market, keep people in their homes and improve living conditions.”
“County Housing and Redevelopment Agency director Jim Cook acknowledged the huge challenge facing the county’s housing market, but he expressed some optimism. ‘It would be easy to say the problem is so big that we’re spinning our wheels,’ he said. ‘But I believe we can bring the resources to the table to complement state and federal efforts to help address the problems.’”
The Neighborhood Stabilization Program, which is supposed to receive federal and state stimulus funding…takes aim at buying, fixing up and reselling foreclosed homes to low- and moderate-income homebuyers, and the county is expecting about $2.1 million in funding for the effort. ‘The fact is for the first time in years, home prices are within reach and we can help people bridge the credit gap,’ Cook said. ‘For the first time in years, the stars are lining up.’”
“County housing officials are also backing a so-called “soft landing” initiative aimed at providing temporary housing for people displaced by more aggressive code enforcement efforts, which Cook indicated is partly in response to an increase of illegal housing and overcrowding as a result of a tightening housing market. Also Tuesday, the supervisors reviewed a schedule for budget talks aimed at addressing a shortfall that could reach $100 million by the end of fiscal year 2010-11 without significant cutbacks.”
The Milpitas Post. “City officials last week loosened legal restrictions regarding nearly 70 unsold housing units within KB Home’s Terra Serena community on South Abel Street. Milpitas City Council, convening as the city’s redevelopment agency, unanimously voted Feb. 17 to adopt a resolution authorizing the city manager to execute amendments to affordable housing agreements at Terra Serena’s 683-unit complex, which completed construction in September.”
“‘We’re taking restrictions off (the affordable housing units) due to the bad economy,’ Milpitas Principal Housing Planner Felix Reliford said.”
“Milpitas requires 15 percent of all residential units in the redevelopment project area to be off price: 6 percent for very-low income households and 9 percent for low- and moderate-income households. Reliford said by having the city remove restrictions normally placed on affordable housing units such as those regarding resale of those units, they may be easier to sell. The amendments would also allow the developer to lower the selling prices of many one- and two-bedroom condo units at Terra Serena.”
“‘We’re dropping the prices to attract more buyers,’ he added.”
“The current housing market and stricter lending requirements have created ‘unforeseen challenges in finding qualified buyers for these affordable units,’ according to a city report. Those challenges have left 67 of the 85 affordable condo units on the east side of Terra Serena unsold.”
“According to Relfiord, the reduction of housing prices resulted in market prices being similar to minimum sales prices for affordable units.”
‘This situation provided little or no incentive for buyers to purchase the off-price units, which come with 45-year resale restrictions that limit equity growth. ‘People ask themselves ‘Why get tied up for 45 years when you can get a market rate (unit) with no restrictions?’ Reliford said.”
“He added that over the last two and half years city staffers and KB Home have advertised on five different occasions (June 2006 to November 2008) to attract homebuyers for the purchase of the affordable units. He said approximately 580 applications were reviewed after the first four rounds of advertising. He claimed the scope of advertising these units was increased last November to include the entire Bay Area in regional newspapers.”
“‘For the entire Bay Area, we got only nine applications,’ Reliford said.”
‘Although there are signs in the housing market that the adjustments that needed to be made have been made, the fly in the ointment is foreclosures, and that means the housing market is not going to stabilize until the labor markets do,’ Nickelsburg said.’
I was listening to the GDP numbers on the radio yesterday as I drove around from one foreclosed house to another. It does seem that people like Nickelsburg are starting to see the light, even if it’s taking a sledgehammer of reality to cause it. The problem we face, IMO, is the structure of the economy in a post-bubble world. Building more houses right now, at these prices levels is absolutely counter-productive.
…mortgage interest deductions…
I have always thought that mortage interest
deductions should be eliminated altogether.
I believe that they are just yet another subsidy that
artificially keeps R/E prices high and creates make
work for tax accountants and CPA’s.
I am sure 100’s of millions of dollars could be saved
every year just by eliminating the need to shuffle
all that useless paperwork..
It is a subsidy. However, I thought it was one way to provide an incentive for stability. As we have seen, things become increasingly difficult in a boom-and-bust economy. One year the schools are over-crowded. By the time you build more schools to serve the students, the number of kids in the schools has started to decline. I could multiply the examples, all which suggest communities are easier to manage and live in if there is stability.
Alas, the “financialization” of every aspect of life (an example of Habermas’ idea of systems thinking over-taking the lifeworld) transformed the mortgage interest deduction into just another element in the financial instrument of real estate, which made it more of a warping factor in people’s calculations than a mild incentive for putting down roots since you live there anyway.
At least, that’s how it seems to me. If true, the more fundamental need is not to get rid of the deduction. We need to get rid of the idea that houses are financial investments. Of course, in the present context ending the home interest deduction (or at least limiting its reach) may play a part in establishing that more fundamentally important truth.
IAT
Dang, haven’t heard a Habermas reference since grad school. You are a smarty pants!
Where is Pelosi’s district? oh yeah, San francisco. The chances of that provision staying in the budget bill are ZERO.
Need to know the actual district, and what proportion of people in the district have paid-off houses. With prop 13, I’d imagine most such houses will be bequeathed, not sold. If so, then Pelosi couldn’t care less about the home mortgage interest deduction for her direct constituents, for they may be long past profiting from it.
IAT
The people who inherit the house will sell it, yo.
Don’t count on it. This is a watered down version of something the President has been talking about since fairly early in the campaign - turning the home mortgage interest deduction into a credit so people with lower marginal rates get the same percentage of benefit as people with higher marginal rates. I think the original idea was to make it a credit at 20% of interest paid. Most important, the fact that it is already less than he originally described, means it is could be pre-negotiated with congressional leadership. It also could be that the other version was too expensive, so I can’t be sure, but having congressional buy in already is a possibility.
I researched the history of the mortgage-interest deduction last year for Patrick net. Amazingly enough there never was any legislative intent to “stimulate” home sales.
Back around 1920 (I forget the exact date), soon after the 16th Amendment was ratified, ALL interest payments were made deductable. The reason: at that time generally only businesses borrowed money and paid interest, so any interest payments were presumed to be a lawful “business expense” and therefore deductable. Don’t forget that prior to the 1930’s home purchase mortgages were somewhat rare.
The interest deduction later was whittled away until only the home mortgage interest was left. Lack of political will prevented getting rid of it.
Interesting. I recall a big phase-out of deductions for interest under Reagan, which affected me because of student loans I needed to take but covered lots of credit types. Just about time it’s my turn, they take away the deduction. AARGH! Looks like it’s happening again, the curse of the boomers — take and take, then change the rules so you can take some more. Oh well, ending the HID (home interest deduction) will likely lower prices a bit, so, not so bad after all.
However, DennisN, I didn’t realize the history connected all interest payments. Thanks for the info.
IAT
I’m also in favor of getting rid of the deduction, but for a different reason that I haven’t seen mentioned yet. The deduction is used as tool by RE agents to obscure and help confuse people into somehow thinking a 500K house is going to cost them less then a 2K a month rental. “But think about the deductions you will get to take”, and all the other garbage they spew (incorrectly most of the time) about housing, it would be better if people could just compare one price with another price. It costs me 2K a month to rent, buying this house will cost me 4K a month, that doesn’t make sense.
Many a buy has had their defenses weakened (or broken) by the “but think about what you’ll save on taxes!” argument.
The fact of the matter is that with the STD deduction as high as it is, most people don’t really benefit that much from the the MTG interest deduction anyway. And, more annoying, those that do see significant benefit are all much higher income, with 1M dollar loans and 400K in income; then you can start to really see some savings.
The “normal” buyer? They see a very small reduction in taxes, not enough to even consider (imho). It’s just not that big a deal to someone with a 100-200K loan, they aren’t going to pay enough interest/taxes to make up a hill of beans on a tax return when you have to give up the STD deduction to get it.
I’m not so much for higher taxes as I am against giving the RE agents more tools to confuse people. Buying a home should be a REALLY simple decision. Take the loan, add in taxes and insurance, and compare that to your rent. Even that’s overly complicated, but it would be a BIG improvement from having the public try to figure out how to back out the STD deduction and figure out compound interest to determine if/how much the MTG interest deduction helps them. This is the same public that couldn’t figure out that 10X median income to median home price wasn’t sustainable. I have very little faith in their ability (or a RE agents ability/willingness to help) to figure out something as complex as the tax code surrounding RE.
Realtors say a lot more than “oh think of the deduction.” I’ve seen many ads for condos which promise a $300K condo for $1499/month. Which makes it look like it’s cheaper than rent. But in the fine print, that $1499 is for a three-year I/O, leaves out the HOA, and INCLUDES the interest reduction right in it. Not exactly truth in advertising.
A lot of the for-sale housing booklets spend a page on standard PITI charts, and there are dozens of calculators online which do exactly the same. There’s not much excuse for buyers not making that simple comparison themselves.
I’ve probably mentioned before that the mortgage interest deduction supports the exorbitant interest I charge to buyers of single lots in mobile-home resort parks. The comical thing is that they’re quite impressed with the mortgage interest deduction EVEN IF they don’t itemize deductions.
In principle I hate the mortgage interest deduction, but I also hate perpetual tax changes that employ an ever-growing army of tax-preparers.
I hope this goes through. Honestly, I’d like to see the entire HMD go away. And I thought that the HMD went in during the late 1930’s under FDR to appease his house industry buddies? Was that incorrect?
As for interest on student loans, I got to take a deduction on my Mass. taxes. I think there was also some deduction in the Federal (but not a credit).
If you want to talk about giveaways, when my mother was at college, her roommate was going to school for free because her father had gone deep into hock to buy a second house. When she left college, he sold it. If this is one of the things Reagan took away, I can say he did at least one good thing.
This was late 70’s, so recall that many people felt high interest rate home loans were okay because inflation was higher … the whole scenario sounds a lot like nhz’s discussion of what is going on in the Netherlands now. Once in a bad downturn, they may be facing a massive cut to these freebies as well as the welfare state. I can’t imagine the psychology being so different.
Hmm, I was thinking of the creation of Fannie and Freddie, which of course made a big difference.
There was a relatively in-depth discussion of this topic on Bill Maher’s show last night… of all places. I recommend watching the re-run.
I saw some of that, they put up Shiller’s graph and everything. And, from what I hear, the DEA is no longer going to enforce MJ laws in Cali? That was just wonderful news all the way around, the media is starting to understand and talk about the housing psychosis, and the suffering around pot and the criminal system may soon be over (at least in Cali).
And, before the insults start, I haven’t smoked MJ in years. Doesn’t mean that I think others should be put in jail and have their lives ruined for something that is more benign then just about any other legal drugs we have out there.
I have no problem with dumping the mortgage interest deduction, but what I do have a problem with is that my total tax burden is over 50%. This is not a free country anymore, this is tax slavery.
I might add that, while I don’t necessarily agree with the deduction, millions of people rely on it to order their finances and make decisions, and I think it’s BS that the gov’t can just arbitrarily change the rules, reminds me of their banning of short selling on a whim. It’s impossible to invest when the rules change daily, no wonder no one wants to invest in anything anymore.
“It’s impossible to invest when the rules change daily”
Bingo!
How —-ed Are We? Bill Maher Presents Case-Schiller Graph
youtube hooks you up
You have to check out the opening monologue with its spoof of Bank of America, too.
And I was surprised at how well Gavin Newsome came off. And that PJ O’Rourke has quite the Midwestern accent. Rather decent panel for once.
**Blog ate first attempt**
I’m also in favor of getting rid of the deduction, but for a different reason that I haven’t seen mentioned yet. The deduction is used as tool by RE agents to obscure and help confuse people into somehow thinking a 500K house is going to cost them less then a 2K a month rental. “But think about the deductions you will get to take”, and all the other garbage they spew (incorrectly most of the time) about housing, it would be better if people could just compare one price with another price. It costs me 2K a month to rent, buying this house will cost me 4K a month, that doesn’t make sense.
Many a buy has had their defenses weakened (or broken) by the “but think about what you’ll save on taxes!” argument.
The fact of the matter is that with the STD deduction as high as it is, most people don’t really benefit that much from the the MTG interest deduction anyway. And, more annoying, those that do see significant benefit are all much higher income, with 1M dollar loans and 400K in income; then you can start to really see some savings.
The “normal” buyer? They see a very small reduction in taxes, not enough to even consider (imho). It’s just not that big a deal to someone with a 100-200K loan, they aren’t going to pay enough interest/taxes to make up a hill of beans on a tax return when you have to give up the STD deduction to get it.
I’m not so much for higher taxes as I am against giving the RE agents more tools to confuse people. Buying a home should be a REALLY simple decision. Take the loan, add in taxes and insurance, and compare that to your rent. Even that’s overly complicated, but it would be a BIG improvement from having the public try to figure out how to back out the STD deduction and figure out compound interest to determine if/how much the MTG interest deduction helps them. This is the same public that couldn’t figure out that 10X median income to median home price wasn’t sustainable. I have very little faith in their ability (or a RE agents ability/willingness to help) to figure out something as complex as the tax code surrounding RE.
I too think the mortgage interest deduction should be reconsidered, but I have a different reason. The mortgage interest deduction at present leads a taxpayer to judge any other investment return in a more preferable light when comparing the return against paying down the principal on his home mortgage.
A simple example would be that on a mortgage at 6%, the “return” from paying down principal is comparable to a 9% return on share dividends or bank interest, given a 33% bite for taxes. If you do away with the mortgage interest deduction than they are the same.
The result is that in other countries (I live in Australia) where mortgage interest on a principal residence is non tax deductible, the highest return and safest “investment” a homeowner can make is paying down his loan as quickly as possible. I suspect the result is that homeowners have much more equity in their homes than in other tax climates.
Another excellent point. The MTG interest deduction certain discourages paying off your loan early, or paying off your MTG before other loans.
Yup.
I too take the mortgage tax deduction but am all for higher taxes on people making over 250k per year. I don’t mind having less money if that money goes toward better public schools,health care for poor people, and investments in alternative energy like solar and wind power. We’ve got to change our ways and will be glad to participate in Obama’s plan. He is lifting us from the bottom up and thats where we need to be. Finally!
‘For the entire Bay Area, we got only nine applications,’ Reliford said.
Translation:
Everbody who wants a condo already has a condo. Therefore, prices have plenty of room to keep falling.
And most of those people who have a condo, now realize they didn’t really want one.
Therefore, prices will keep falling, even after they’ve run out of room.
Condos are a niche product, always have been, probably always will be. You’re not looking for a typical buyer; and there’s just not that much demand for them in most of the country (NYC being a major exception).
Not just NYC–Manhattan. Living in a flat just isn’t appealing for most Americans who have actual money to buy a property. Sure, renting an apt is cheap and easy, but if you’re going to buy, it’s best to have some land, and there isn’t exactly a shortage of land in the USA… our density is far below that of Europe.
Condos were built because land prices had done a moonshot and it was the only way to make the “deal” pencil out. No-one stopped to ask if there were actual buyers for these closet condos at wishing prices.
who needs these azzholes
California Employment Development Department began tracking the data in its current form in 1976
“Hastert, who had been a sheriff’s deputy in Los Angeles and Nevada counties before he got a law degree and went into real estate, was arrested without incident
Deputy, then lawyer and then RE broker. He should have been Tasered at least 3 times upon arrest …just on general principle and then TASERED again inches from DEATH, for the remaining, if any, of the stolen principal
If you check his record at www dot calsb dot org, you will find he has a record of disciplinary actions against him. He was suspended in August 2008 for failing to pay child/family support.
Wow DennisN…you are pretty darmed thorough
Forget all the Tasers Boyz..this criminal, thug and hoodlum only needs to be “Hanged, Drawn and Quartered”…Twice
You don’t need to be thorough. All state bars have websites where you can look up the dirt - if any - on bar members.
Actually the most fun of the monthly CA bar newspaper is the section at the back on discipline. That’s where the dirty laundry is published on crooks who get themselves disbarred. The stories are most entertaining.
One of the faculty at the law school I attended went nuts and murdered his wife. Look up “Kenneth Donney” on that CA bar website to see what happened to him.
So he was a deadbeat dad on top of all this mess?
Yup…he gives a whole new meaning to the question of… “where do we find such men?”
where do we find such men ??
The scarier part is we gave him a badge and a gun…
..and made him an “Officer of the Court” to boot
“The people always have some champion whom they set over them and nurse into greatness. This and no other is the root from which a tyrant springs; when he first appears he is a protector.” –Plato
According to the economic data that is out there, home prices in Orange County, Ca. should be around $200.000 but if you check Zillow they still are in $500.000 , at least in Huntington Beach and Fountain Valley, that are so called middle class cities… If anybody could help me to understand it please…
Prices are sticky on the way down. Banks use comps, not economic fundamentals to determine the price on a house. If people could only get the price that is supported by economic fundamentals, they wouldn’t sell at all because they can’t bring that much money to the closing. Banks aren’t allowing short sales either because they don’t have the authority under the servicing agreement or because they would rapidly go under if the real value of the loans was made known. Foreclosures are completely backed up and aren’t included in comps by Zillow.
It isn’t the whole picture, but it is a good chunk of it.
Thank you polly, it is still hard form me to comprehend that when Dow is around 7000, 10% unemployment, and somebody out there will be able to pay $500.000 to by a house… in a community that seems to me ordinary middle class area ( maybe with mid $50000. a year income). To buy a house in the $500.000.00 range you have to have at least 150000.00 a year income at least( if not more) with 20% down payment. Are there that many people left in U.S. with that much income? Maybe Chinese are buying those houses?…
Yeah, because Chinese people have more money than Americans, not.
Yes, it seems roles are going to change in few decades. China will have science and service oriented economy and U.S. will turn to be what China is today… that is the result of globalization and the result of the “best” education system that we have today…
Whatever. Do you have any evidence of this trend occuring, or a mechanism for it that holds water?
First I work in one of the school districts and very well familiar with future of “no child left behind” … second you currently are a witness who are buying U.S. debt in trillion $$$… you still want to know about the “mechanism”? Read some of the inputs in HBB for last 4 year, read articles about General Motors, Bank of America. and how America became Socialist Country only in one year…
We need to move in a more socialist direction. But in a way that benefits those on the lower part of the scale. National health care, better schools and investments in upgrading our dilapidated infrastructue. This will create jobs and will lift us from the bottom. We have seen what unrestricted free market capitalism has gotten us. Here.
China has some work to do to become a leader in science, even though they have a lot of US-trained scientists. It will take time because it goes against the established academic culture there. A number of Chinese nationals (working in US, Hong Kong, etc) have gotten caught up in academic scandals, faking data.
India, however, they are prepping to give the US one mammoth run for their money!
But who cares, Europe has recovered fully from WWII. Their science education already kicks ours down a flight of stairs and then throws a few petri dishes of e. Coli after it.
Melvin, can you point to some of this unrestricted free market capitalism for me? Last I checked, the most fundamental price in a capitalist system was being price fixed by our Feeral Reserve. When the government fixes prices, such as mandating interest rates below the real inflation rate, it causes all kinds of unintentended consequences and crazyness and brings us to where we are now. Here.
I make more than that and I’d never consider buying a $500K home.
I have LESS than $150K/yr income but would certainly consider buying $500K house…because I might have $500K that is sitting around doing almost nothing. What would STOP me from buying the $500K house is that its price is likely to fall more in a year than the amount it would cost me to be a tenant in the same sort of house. I agree the price of the house cannot stabilize until the usual Homedebtor route available to the typical earner gives him or her the possibility of paying off the mortgage in one lifetime of work.
Best news I’ve heard yet. In NZ, banks are still lending to anyone with 10% down or even less.
Many people should not be in the market to buy houses.
Requirements that buyers have credit scores of 750+ and 30 percent down payments are likely keeping many sellers out of the market, as the number of well qualified buyers who fit the above description and are also willing to buy at 2005 prices with 30 percent down has to be vanishingly small, making it futile for sellers hoping to sell at 2005 prices to find a buyer.
“It does seem that people like Nickelsburg are starting to see the light, even if it’s taking a sledgehammer of reality to cause it.”
One thing I’m wondering is, will it take a sledgehammer in New York, or will what has already happened elsewhere accelerate the adjustment here?
Remember there were months, perhaps years after the peak when people could have sold to knifecatchers had they been willing to cut their profit, and months or years more when the banks held the REOs because they didn’t want to admit the losses. All ended up with bigger losses than they had to have.
So in NY, will people and their banks say “sell at market” and get those short sales done? Here is an indicator things have changed.
http://www.nytimes.com/2009/03/01/realestate/01walk.html?ref=realestate
“The real estate market in Manhattan has become so unnerving to buyers that some are forfeiting six-figure deposits rather than close on deals they have made.”
“Real estate agents representing buyers of at least three other multimillion-dollar properties also report clients who knowingly left deposits of more than $1 million or hundreds of thousands of dollars on the table.”
“In each case, the buyers had signed their contracts before the financial meltdown last fall, but decided in recent months that because values in the luxury real estate market have dropped 20 to 40 percent, it no longer made sense to go through with their deals.”
I don’t know what the actual sales records say (although I DO know that a deceased in-law’s condo in Bayside took a while to sell last year, but did eventually sell, before the Dow crash), but I think we’re seeing evidence that the psychology in NYC has changed swiftly and changed hard.
I think it’s about access to information. NYC knew that the nationwide market was soft, and that theirs was softening as well, but they thought they were immune. Then they weren’t immune, and everyone is now convinced the sky is falling (and for them, it is, so that’s rational).
From where I sit here in rural Florida, even though the timbers are rotting and the window glass has cracked, a lot of people seem to think that the house is sound. Oh, this is just a little set back, we’ll be back to normal soon. I think people realize there’s a recession and that cutbacks are occurring, yet the notion that RE is returning to its real value (not its propped-up-by-funny-munny value) is slow to dawn on people.
For example, with the Rodney Long Bailout Program, I’ve heard many people angry that the city spent $165k it didn’t have on a dilapidated property. What I haven’t heard, and I have a hard time getting people to see, is that the intrinsic value of the property (in terms of what it rents for–it’s commercial property) is much, MUCH less than $165k. (In fact, the value to the city is exactly ZERO, as they indicated that they would have to renovate to the tune of $200k or simply tear it down.)
“In addition to cuts from company payrolls, the jobless included a large spike in nonsalaried workers, such as independent contractors, freelance construction crews and cleaning workers. ‘A lot of the self-employed people were very exposed to the housing troubles, such as independent real estate agents or home-repair workers,’ Adibi said. ‘Some of them may have tried to survive through the new year and then decided that things just weren’t getting better.’”
It’s not clear to me what Adibi is talking about here. Self-employed people do not show up in the unemployment numbers because they are not eligible to collect. So if they gave up, what jobless numbers do they show up in?
I wondered that too. Maybe if they actually go to the Job Service and actually file as someone looking for work? I did that here in 1989, though people always said they never really found people work, but with some persistence I did find my way to my current employer.
“He said the federal credit needs to be twice as large and not a credit but cash that a buyer could use as a down payment.
In other words, this shill from the Builder’s Association wants to return to the good ol’ days of No Money Down.
Sorry suckers, 10-20% cash down no piggy backs is exactly what this economy needs.
oxide, that was exactly my reaction to the Builder’s Assn suggestion. He is right in supposing that having the govt make the down payment could’ve been the best hope for stabilizing prices on their precarious high plateau…but now that prices started to slide, neither buyers nor lenders are stupid enough to fall for these gimmicks. I predict the federal credit will not move much merchandise, and that even “down payment assistance” would not do much to prop prices up. Because the slide did start in a completely lax lending environment.
“In January, the state’s median home price for an existing single-family home topped out at $254,350. That was off 9.5 percent from the previous month but down a whopping 40.5 percent from a year earlier, according to the California Association of Realtors.”
A one month decline of 9.5 percent occurs at an annualized rate of
((1-9.5/100)^12-1)*100 = -69.8 percent. It appears the California home price crash is accelerating into the capitulation phase.
It’s getting damned close to your original prediction of 50% off. Creepy.
That is kind of a dumb prediction. There should be nothing surprising about a market in which prices inflated by over 100 percent within a short time span for no fundamental reason retracing by 50 percent within a comparable period. In fact, at this point, I will be quite surprised if the off-peak decline is contained to 50 percent, as almost everything about the entire global economy at the moment seems to be far worse than anyone expected.
Professor Bear,
Really? The global economy is worse than anyone expected? It is not yet as bad as I expected. It is not yet as bad as some on HBB expected — remember, some here have been stockpiling weapons and ammo for quite some time. You must be talkin’ about the expectations published in the MSM, self-serving statements of paid shills, and the clueless (who may still be expecting some kind of magic from the PTB).
Using the HBB as a data source, it seems the trolls said prices could not fall. I think most here predicted over-correction on the downside, which, as you note, would mean a more than 50% drop from the peak. Multiple others predicted a drop much larger than 50%, and anticipated the possible breakdown of society, with rising scarcity. A few made predictions somewhere between these two possibilities.
Note: except for the trolls, most every prediction is worse than the current gloabl situation.
IAT
For clarification, when I say “far worse than anyone expected,” I am not referring to those who post here, but rather to the dog crap served up by the MSM and the “experts” they repeatedly consult.
Hey PB:
I think we said “50% off, adjusted for inflation”. Then Neil upped it to 60, and we said yes. Well, maybe we’re still right, since inflation is negative now.
Now that prices in some places are closing in or or past 50 percent off, unemployment is climbing steeply and headline stock market indexes are back to 1997 levels, I believe it is time to revisit those predictions and consider upping them. For an analogy, if someone who had a life expectancy at birth of 80 years survives to age 80, then his updated life expectancy is no longer 80, but some age greater than 80. Similarly, areas where prices are off by 50 percent should be expected to see considerably greater declines. Price dynamics are much closer to a martingale than to a deterministically predictable replicate of the last downturn (which is how the MSM always tries to frame them).
True, but that’s not quite the right analogy, and therein lies great risk.
What is true is that the price dynamics behave more like a martingale.
What is a bad analogy is life expectancy. People cannot die younger than their current age, so predictions can only go in one direction — older. If someone is 81, you know they will not die at age 80, and if age 80 was your life expectancy for them, you must revise it for it is already wrong.
This is not true of prices, for prices can both rise and fall (or even stay stagnant — but people cannot have a constant age). Thus, even though prices have fallen by, say, 20%, and you predicted a 30% fall, your prediction, if it was based on a solid analysis, is worth retaining, and certainly is not certainly wrong.
So, unlike in the case of life expectancy, updating one’s predicted fall from peak because one is entering the middle of the “bad economic conditions,” especially if the expectation of bad economic conditions were the basis of the original prediction, is risky, because it may lead one to keep worsening one’s prediction past the point of usefulness on the mistaken notion one has not fully factored in the unfolding bad economic conditions. This is risky because, eventually, prices will stop falling, and may even start to rise. Further, predicting on the basis of short-term conditions, often in the heat of emotion (usually fear or hubris) is what the MSM and most sheeple will do, which is why they provide a very nice reverse indicator of matters.
IAT
IAT –
I agree my analogy is imperfect, as the direction of bias in using life expectancy at birth to measure revised life expectancy as one ages is one-way (like real estate circa 2005, life expectancy always goes up as one ages). However, given the environment we are in right now, I claim my analogy is not a bad one. Surely real estate prices are eventually mean reverting relative to incomes and rents, but for the time being, even though they have dropped a lot, prices are no where near equilibrium (at least where we live).
Your comments lead me to suspect that you are strong in maths but not so much in certain economic concepts (like the fundamentals of the household owner-occupied housing purchase budget constraint). But I apologize if I missed your point.
Wow, PB,
I am greatly offended, and everyone here should be, too. I mean, what do you mean, suggesting I am not strong on economic fundamentals? I’ll have you know that I got my economics training at Ben Jones U, in the HBB department. Best training around!
IAT
“Chris Thornberg, an economist with Los Angeles-based Beacon Economics, complained that the state tax credit ‘will bail out homebuilders who built homes no one wanted.’ Thornberg and other economists said before the homebuilding industry can regain its health, the first priority is to sweep away the flood of foreclosed properties that are selling at distress prices.”
How does Chris suggest we should sweep away the flood of foreclosed properties? Would a bulldozer be best, or should we all pray for tornadoes to hit the vacant McMansion tract home developments?
I like your humor here, but perhaps what Chris T is saying is that state incentives should not specifically favor the building of more new housing.
“‘We started the downturn bad. It turned worse. Now it’s gotten ugly. And unfortunately, employment is the last thing that improves in a recession,’ said Esmael Adibi, economist with Chapman University in Orange.”
WRONG! Check your facts, Esmael. The graph on the front page of the SD Union-Tribune today speaks volumes. In the last recession, California unemployment peaked at 9.3 percent in January 1993, then slowly tapered for the next eight years through a trough of 4.7 percent in February 2001. But California housing kept dropping in value for maybe three years thereafter. Just because employment has started to decline does not mean there is suddenly a bevy of prospective buyers with a sizable downpayment in hand who are eager to jump in to a post-crash real estate market.
PB,
Apparently this guy has yet to grasp that there’s no more Insta Credit for anyone who suddenly becomes employed in a position that provides the required 3X income.
Too bad for him. Those without jobs now and for the next 2-3 years will subsequently spend additional years saving money for those 20% downpayments once they have landed new positions.
Now, maybe if the median home prices nationwide dropped to $75K…
“Now, maybe if the median home prices nationwide dropped to $75K…”
Probably closer to $125k, or 2.5x the median income, IMHO.
That would depend on whether the average household has the needed $25K in cash to cover the down payment required.
I doubt that strongly. A great many people are servicing debt.
Also, it would take several years for the average household (making $50K) to save $25K in cash. If the average household saves $500 monthly (and good luck with that), it’d take 4 years to save $25K for a down payment for a $125K house.
Q: What happens if median income drops from 50K to 30K…
A: Median nationwide house price of $75K
Points taken. Thanks!
I’m sure the economic situation will improve real soon here in California, now that our income, sales and car taxes are going up. Here in LA, thanks to our governor and our esteemed Mayor Villaraigosa, our sales tax will be 9.75% starting in another month or so. And don’t forget Obama’s tax hikes and the deductions he’s taking away from us. Our household income is over 250K so I’m figuring all this will cost me well over 10K. Yeah, things are looking up every day.
I’m glad they’re taking away whatever deductions you may have. I’ve never gotten any, so why should you? I’ve always hated that I am made to pay for other people’s kids and houses.
Yeah, but you’re a duck. How much money could you possibly make?
residuals from aflac commercials add up
I pay 50% in taxes. When this socialism thing gets further under way, nasty envious types like you will be hurting much more than the people you despise. Let’s get it on.
BS. I paid $83k in taxes last time.
And that didn’t come to 50%. If you’re getting deductions, then there’s no way you paid 50% in taxes. You have always been full of it, “Comrade”.
+ Quack ole wise duck.
My husband is a professional, so taxes come right off his check. I was including all taxes, not just federal. California takes another 10%. It’s a lot of money and it’s inexcusable.
And by the way, my real estate investing doesn’t take up all my time, I’d actually like to get a part-time job to stay busy, but can’t if I’m paying taxes at my husband’s top bracket plus state taxes. What would be the point.
You can’t get a job because your hubby told you he was in the top tax bracket? Nothing you write makes sense.
Wow, LAG, if you pay 50% in taxes, should we really call you an investor? I thought all the successful investors knew how to work the angles, or paid someone who knew how to work the angles, so they never paid high taxes, and certainly not 50%. Although the obvious question is are you exagerrating for effect (a dubious act of questionable integrity), too unknowing to lower your taxes, or too cheap to pay someone to help you lower your taxes, I am resisting the urge to ask in the interests of decorum.
IAT
My husband is a professional, as I said, and we are not entitled to use many deductions that other people use because we are considered “too wealthy”. I cannot use my expenses on the rental properties as deductions against his income. His top tax rate will now be 39.6 percent, plus like 10% California, and that’s not including property, sales, gas, and car taxes. Thank you.
“…and we are not entitled to use many deductions that other people use…”
DINKs, huh? You need to squeeze-out a couple a puppies, deductions ‘ya know.
lagirl -
If by top rate you were referring to federal tax rate then I think you are off by 4.6%. In 2008 35.0% was the highest marginal tax rate - tax rate on any additional dollar you make. The average tax rate should be quite a bit less thanks to the fact that “only” income greater then $357,700 is taxed at 35% and etc. (I wouldn’t be complaining if I was making that much
)
Also, when the government is talking about raising/lowering taxes they mainly refer to federal taxes excluding medicare, social security, unemployment and state tax.
I make over 250, and I’m a professional in LA. No way do I pay 50% in taxes. Probably more like 35% all in. I have a wife and one child, no mortgage deduction. I think a lot of people like to scream that they are ‘PAYING 50%,’ but they are not looking at the data.
Everyone says they wouldn’t complain, if they were making that much. I don’t make that much, but I’m honest enough to acknowledge that no matter how much I make, it would irk me to give over 50 % to the gov’t.
I make 600K, and pay about 35%. I am incorporated in Nevada, and save the 10% California state tax, which would put me at 45% had I not created a shell corporation.
No. You. Don’t. The top marginal fed tax rate is 35% for that income over about $350K. If you are making more than $250K and less than $350K, your effective tax rate is about 27% fed (plus, what, 9.3% for CA?), not counting any deductions. Math is hard.
Thank Bush, sooner or later someone has to pay for that cr@p he put on our tab.
.
That “someone” that’s going to end up paying for all the crap on the gubmint credit card is going to be the CHINESE.
They were dumb enough to buy 2 Trillion of 10-year US Bonds (the largest ponzi scheme of them all) at 2%.
Think bond values will tank when interest rates rise as a result of them not buying any more of our debt?
Do the Chinese really think that some day we will be able to pay them back? With today’s dollar value? Guess they are the fools after all.
Obama just put all that crap times FOUR on the tab in just 2 months.
So, thanks, Democrats.
Your welcome. At least the money is going to something decent. Health Care, Education, Energy. Jobs.
Really?
Here in Colorado Springs, there’s a single district that shuttering eight schools - 5 of which are elementary.
So much for federal tax money going to help “education.”
I should move to Washington DC and teach there. It would disgust me to no end - plus I hate hot, humid weather - but it’s where the bulk of “Education” monies will be spent.
Have any leads in DC, Polly? In a former life, I was a publicist. I know how to play the game.
“I’m sure the economic situation will improve real soon here in California, now that our income, sales and car taxes are going up.”
I would guess that the CA budget in it’s current incarnation:
1) Doesn’t last more than 8 weeks before reduced revenue projection force a renegotiation.
2) Is sufficiently confiscatory as to cause a significant uptick in black market and tax evasion activity, thus further intensifying the deficit.. (My wife wants me to register our cars in Idaho, for example.)
3) result in a substantial exodus of tax payers from CA. to states with lower taxes.
I know I am considering jumping ship.
Sure. Register your cars in Idaho since paying an extra $10 registration fees is certainly going to bust your bank. And while you’re at it, just move to Idaho and get off the CA freeways. You “no tax and spend” types are a bunch of free lunch cry babies. If you want to see what not paying taxes looks like, go to Mexico.
I didn’t say I was going to do it, but I can tell you that I’ll put my next set of tires on in Idaho this summer and save around 4% in sales tax by doing so. BTW, my registrations overall will increase by more than $500 this year. I should be grateful to the legislature for allowing me to keep some of my money, they being superior intellects and all…
Boo hoo. you’re complaining about 10K on a 250K income? That is chump change. Just think, you bought yourself a share in some ordnance dropped on Iraq.
It’s about time rich folks paid their fair share. they’ve been getting away with much this past decade. Looks like they won’t be able to afford some of the luxuries you read about . 50k-200k watches, fur coats, expensive 2nd and 3rd and 4th and 5th homes, ridiculous vacations. I for one am sick of the conspicuous consumption of the Wall streeters with their million dollar plus bonuses. Their cavalier purchases of 1,000 dollar bottles of wine and 200 dollar glasses of brandy. Its disgusting to see the wealth of our nation squandered on these material things when there is so much need out there. and it never seems to be enough, it never seems to fill the void.
How many yachts can you ski behind?
IAT
“and it never seems to be enough, it never seems to fill the void.”
Funny, I’ve seen the same thing said about various causes, under heading of “slippery slope.”
Melvin -
How come people such as yourself never bitch about excessive Hollywood and media salaries (the latter paid in part with TARP money via GE Capital)? Or lawyers? Or college professors and administrators?
How come elitist leftist types don’t willingly and vocally state that they are being paid way too much? Why don’t they return the money they make?
The thing that disgusts me about the TARP, various super-low interest loan programs to banks and the Obama stimulus package plans to use public monies to prop up home prices is that all of these various publicly funded measures have the adverse consequence of preventing Mr Market from wiping out flippers and specuvestors who dumbly bought single family housing during the bubble runup. One of the key factors pushing prices into the stratosphere was dumb money crowding out families with kids from what would have traditionally been single family, owner-occupied housing. I am happy my real-estate-investor-turned-landlord is willing to pay for taking care of the yard, my kid’s schooling, and access to the nearby recreational facility in exchange for our modest rent check, but it still irritates me that Uncle Sam may be inadvertently helping to make whole the specuvestors whose dumb bets contributed to the bubble price blowout.
Bull the bagholder…
‘Bull added, ‘With the clarity of hindsight, we were too early with some of the investments we made in the first half of 2008, although we believe these investments will ultimately yield acceptable returns.’”
Lessons from the telecoms bubble (1)
Crash course
Feb 26th 2009
From The Economist print edition
What can banks learn from the clean-up after the telecoms crash of 1997-2003?
BEFORE banks, the last global industry to commit collective suicide was telecoms during the boom and bust of 1997-2003. The parallel is imperfect—banks are uniquely vulnerable to runs and have a special role in the economy. Reflecting this, only a few telecoms companies received state bail-outs. But in a narrower corporate sense, the meltdown rivalled that of the banks. From peak to trough the industry lost $2.8 trillion of market value, compared with the $4.6 trillion banks have shed (see chart). Just like banks, telecoms had imperial bosses, kamikaze deals and incomprehensible jargon—if collateralised-debt obligations troubled you, try gigabit Ethernet routers. In telecoms leading firms were reduced to indebted objects of ridicule. The consequences were bankruptcies, huge job losses, fraud, trashed reputations and, eventually, a clean-up.
By these standards, banks remain in a fantasy world. They are largely still run by the same people, they have a piecemeal approach to cutting leverage, and their goal, beyond firefighting, is to tinker with their portfolios, removing areas of egregious excess. If the telecoms industry is anything to go by, this gradualism will fail. A management cull is both inevitable and desirable—only a handful of telecoms bosses clung on and prospered, Ivan Seidenberg of Verizon being one example. Firms, like Vodafone, that took an evolutionary approach to replacing the old guard regretted it, with rows souring the boardroom for years. Complacency can kill even the biggest firms. The two leading telecoms firms of the 1990s, AT&T (since bought by SBC, which took its name) and British Telecom, were more or less dismantled by investors tired of their flawed cultures and incoherent empires. Bank conglomerates like Citigroup should take note.
Har de har, won’t this be fun!
But I take offense to the idea that telecoms did not get subsidies. They got plenty in the mid-1990’s, but squandered the money and had to come back for more handouts when the cable companies started eating their lunch.
How soon until the fire sales begin?
Defaults drag down prospects for builders
Efforts to reduce costs not paying down debt
By Mike Freeman
Union-Tribune Staff Writer
2:00 a.m. March 1, 2009
As San Diego’s housing downturn drags into a fourth year, homeowners and home builders are increasingly having the same problem: keeping up with their mortgages.
In the past six months, a series of builders has defaulted on loans or lost property to foreclosure. Loans taken out to construct neighborhoods or buy land are coming due after years of slower-than-expected sales, leaving builders with many empty lots and not enough cash flow.
…
“We’re at a point where banks are coming down harder,” said Peter Dennehy, a senior vice president for real estate consultant Sullivan Group in San Diego. “I don’t think there is anybody who is big enough or protected enough with what is going on. Every builder is in trouble to some extent.”
A year ago, banks might have been willing to push out dates on loans to builders in the hope of a rally in the housing market. Now, they’re under pressure from regulators to clean up their problem loans.
Meanwhile, faced with competition from low-priced foreclosure homes, local builders have virtually shut down production. That cuts their costs, but it doesn’t generate cash to pay down debt.
San Diego County and its 18 cities issued permits for 88 dwelling units in January, a monthly record low since the Construction Industry Research Board began tracking the data in 1967. The year-over-year decline was 72.2 percent.
Builders typically set aside an interest reserve to cover loan payments while developing a project. With slumping new-home sales, many have burned through their reserve before completing the work, real estate experts say. So now they’re forced to deal with lenders.
I just love how the banks and builders were in a mutual state of denial “yes, let’s just extend that interest-only loan…”
I think they both need some therapy. Let’s start with some JT’s which I have nicknamed “due in full” and “mark to market”. *evil grin*
Given price plunges in San Diego, I was considering moving there. I’ve been to the area numerous times and always felt a sense of belonging. But lately, I’m starting to think I don’t care how cheap housing gets, CA is in such cluster**** mode right now, it’s too scary.
“… Thornberg and other economists said before the homebuilding industry can regain its health, the first priority is to sweep away the flood of foreclosed properties that are selling at distress prices.”..
Distress prices as compared to what ? Baloney … they are not selling at distress prices compared to historic prices… only compared to hyper-inflated bubble prices… more misleading MSM hogwash..
There are heroes that walk amongst us at every turn in every community. The price we will have to pay in the next few years will be dear, the times are tough but if we help each other out and look out for the next guy we’ll get through this. I wish for the Coopers a quick recovery and much luck.
In this morning NY Times
Forced From Executive Pay to Hourly Wage
http://www.nytimes.com/2009/03/01/us/01survival.html?_r=1&hp
The conclusion of the article reads,
““There is no shame,” said Mrs. Macias-Cooper, who grew teary during an interview at their home. “I am very proud of my husband that he will go to any lengths, do whatever it takes, to keep his family afloat, if it means mopping floors, cleaning urinals.”
The Coopers seem like real go-getters. I liked the story about Ellis, too. He kept going and going, even if it meant taking less pay.
However, I think this kind of illustrates that there’s a great element of luck in getting this high-ranking, high-paying jobs, and when your luck runs out, you are not really “worth” whatever it was you were being paid. There are simply too many people out there who are similarly qualified for such jobs. Of course, this raises the question of just why these positions are so highly compensated to begin with.
I agree with you. what comes to mind is baseball players getting these enormous contracts. I love the game but the salaries have gotten out of hand. I mean 30 million dollars for a second baseman on a 4 year contract is just too much. That’s part of the reason I don’t go to see the pros anymore. Its watching a bunch of multi millionaires out there. Much more satisfying to see a minor league game or a little league game or college game these days.
The income bubble is popping. You’d think that folks maying the big bucks would have a ton of money saved, but apparently not. Most of us rabble have been living modestly (but well compared to 99% of the world) on less than 100K incomes. I guess when nobody can be bothered to wash their own cars, clean their own homes, cut their own lawns, paint their own nails, than living on less $$ is a huge sacrifice.