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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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How many houses did we overbuild?
Long-term trend is 1% annual population growth and 1% annual household formation. This is demonstrated by 105 million households in the 2000 census and 115 million households in the 2010 census.
Now, the “experts” say that we actually need 1.2 million housing units a year to replace aging existing stock, plus houses lost to floods, fires or other natural disaster.
Simple look at the numbers we can see that in the bubble years we built an average of 2 million houses a year for 5 years. Simple math says this is 4 million too many houses.
Well, a quick look at the census shows that in 2000 there were 115 million housing units for 105 million households and in 2010 there were 132 million housing units and 115 million households. This increased vacancy rate would imply more like 6 or 7 million too many houses.
So, was all that flipping (buying an old beater house, painting it and replacing the kitchen cupboards with IKEA press-board) preventing the “retirement” of the existing stock? Did we really need fewer than 1.2 million houses?
Now, let’s look at the late 90s construction numbers. Well, we averaged 1.4 million a year for the ’90s, so were there already 2 million too many houses back in 2000?
Are there really 8 million too many houses?
Yesterday, Housing is Cratering asserted that there were 25 million too many houses. Well, based on census’s numbers that there are 132 million houses and 115 million households, I don’t see how it could possibly be more than 17 million… unless we say there are too many households… what? Great grandma needs to move in with her grand kids?
After we figure out how many excess houses we have, I guess we can have an argument about how long it would take to work that off now that we are building 750K houses a year, and seem to be back on track to adding 1 million households a year… at least for 10-15 more years until the boomers start dieing off in huge numbers.
There are 25 million excess empty houses. At current demand(which is at 15 year lows), it would take 6 years to liquidate inventory if building stopped completely.
As long as those empty homes are kept off the market, then housing prices can keep “improving.” But I wonder about who owns those 25M empty homes and how much money they are losing in the opportunity cost of renting them out, collecting debt, maintenance or physical depreciation…it must add up to a large fortune! Does the fact that a loss is never acknowledged somehow make it go away, or is it more like Enron, where the day losses come to light is the day the company goes up in smoke?
I guess time will tell.
But I wonder about who owns those 25M empty homes and how much money they are losing in the opportunity cost of renting them out
I suspect eventually we’ll own them all, we just won’t be allowed to live in them.
It really chafes me that American taxpayers are being charged maintenance costs on homes that nobody lives in.
Wouldn’t it make a lot more sense to privatize this government-owned REO at prices the market will bear, in order to take the burden of maintenance and upkeep off the back of the U.S. taxpayer and provide some young families with affordable living space? I’d think Romney and Ryan would snap up ready-made campaign issues like this, but so far, all I pick up in the airwaves from their camp is radio silence.
There are lots of examples in this bubble of things that would make our country stronger but we can’t do them because the wrong people would lose money.
Again, where does your 25 million number come from???????
Census says 115 million households and 132 million housing units. Even assuming a possibility of 0% vacancy rate, that is only 17 million too many houses.
What DATA supports the assertion that there are 25 million empty houses?
You have to support the assertions before an argument can be considered cogent.
25 MILLION excess empty housing units isn’t an “assertion”. It’s a fact.
What is the source of that “fact”?
Or, are you one of those political types that believes that just saying something enough times magically makes it a fact?
Pimp,
It’s been cited many times here yet you continue to act as if it hasn’t.
Or are you going to turn over a new leaf, stop lying to the public about housing and admit your complicity and role in this?
We’ll be waiting anxiously for your answer.
25 or 17…that’s still a buttload of houses.
17 million is not a real number either as a 0% vacancy is no more realistic than a 0% unemployment rate.
The point of this post was to try to figure out the real number.
8 million? 9 million? 5 million?
And, what is the real number of houses we need? 1 million or 1.2 million? If we are building 700K houses a year, how long will it take to “work off the excess”. To have ANY discussion on this, we need to have a pretty good idea of what the excess is.
Why would we “need” anymore houses when we spent 15 years building 25 million excess empty houses?
We spent 16 years building 25 million houses. That is not the same as 25 million excess, empty houses.
When 25 million houses are empty, they’re the same. One and the same.
Your charade fools no one.
I wonder how many of those empty houses are uninhabitable Detroit like cr@pshacks. Also of interest is their distribution. Lots of empty houses in SoCal’s “inland empire”, but in say, Huntington Beach, not so much.
There is no doubt that there is a surplus of houses nationwide, but what is the real number?
25 million.
“The point of this post was to try to figure out the real number.
8 million? 9 million? 5 million?”
All that matters in bubble terms is that house PRICES are still too expensive when you compare those PRICES to local median family incomes.
“Why would we “need” anymore houses when we spent 15 years building 25 million excess empty houses?”
Whatever the number of excess number of homes, there’s also the issues of location and types of houses. Some may be poor candidates for occupancy due to an excess of housing for that location or issues about the house (design, size, etc.) that make it less optimal for a given location given changing conditions.
Other locations may be better candidates for additional housing of certain types regardless of a surplus elsewhere.
For example, locally, there’s the high-rise (13 or 14 stories) condo building (one condo per floor) on the northwest corner of Balboa Park that was built during the bubble and has never been occupied. That’s a small number of units across which to cover the long-term maintenance costs aside from initial pricing considerations. I don’t know if or when it will be occupied.
Otherwise, I continue to see a number of smaller infill type developments that are moving along. Aside from potential pricing issues, these mostly look more viable over time and seem appropriate. This is happening at a slow, but steady pace. You can find other places in the same general area where lots were cleared during the bubble of sufficient size for these types of development, but where no construction has occurred yet. It’s nothing at all like the frenzied pace of building during the bubble.
Your numbers are idiotic.
You assert 25 million, claim it is a fact, then refuse to source the data.
Then, you say that at current demand, if we stopped building, it would take 6 years to fill those empty houses….
WTF?
Normal demographic trend is 1 million households a year. If there were 25 million empty houses, that would be 25 years, not 6.
The “17 year low” in household creation was 2010 where we were more like 350K. 2011 we were closer to demographic trend of 1 million. But, using your 17 year low, 350K household formation, and 25 million empty houses, then it would be 71 years, not 6….
Someone needs a lesson in basic research and elementary math.
You can’t just keep saying 25 million, and 6 years, and have it magically be true, unless you are a politician.
Unbeliever! May the bubble gods smite ye!
You’re a liar Darrell….. and a housing pimp.
“it would take 6 years to liquidate inventory…”
Six years for those houses to change hands. That doesn’t always make inventory go away. A lot of those transactions will be buy one/sell one. We will need 25 million new families to make the inventory go away.
But until he can source the data, the 25 million number is not real…..
Hell, I could say there are 150 million empty houses, and at current demand it would take 3 years to fill them all. Would people suddenly start quoting my 150 million empty houses number?
‘But until he can source the data, the 25 million number is not real….”
That’s attorney speak. Scientists know the real number is out there, whether sourced or not. Not sure whether 25M is accurate, but I know for certain the shadow inventory, including rent-free owners who will be foreclosed in the next few years plus the number of homes owned by the geriatric set who will soon downsize from family size to retirement size housing, is much larger than reported.
Shadow inventory is not the same as excess housing stock.
An empty home is excess housing stock.
A home that a family is living in it, hasn’t paid the mortgage for 2 years and is awaiting foreclosure is shadow inventory, but not excess housing stock.
Pimp,
25 million empty houses are what they are.
That’s right Blue.
The idea that 25 million excess empty houses are going to disappear in 6 years is a stretch.
There are not 25 million empty houses. It is more like 17 million empty houses, if you trust the census. And, 0 empty houses is never going to happen… so the “excess empty houses” is more like 7-10 million… maybe.
And yeah, building 750K houses a year, those 10 million empty houses are not going to just disappear. Assuming we continue a demographic trend 1 million new households a year, plus 100-200K replacement rate, then it we’d be absorbing half a million houses a year and it would take 20 years to absorb the 10 million excess houses.
You should try cogent arguments. They are much more effective than pulling crap out of your arse.
There are 25 MILLION excess empty houses.
You should try being truthful with the public. Your history of pimping housing lies has long since been established here.
“There are not 25 million empty houses.”
What DATA supports the assertion that there aren’t 25 million empty houses?
“There are not 25 million empty houses. It is more like 17 million empty houses, if you trust the census. And, 0 empty houses is never going to happen… so the “excess empty houses” is more like 7-10 million… maybe.”
Is the end of this discussion going to be that we should all bend over and agree that a 1500sf stucco starter home in Phoenix is worth 300k even though median incomes for Maricopa county are around 50k?
CIBT: US Census 2010
nickpapageorgio:
Because we have less than a 100% ownership rate, the household with median income does not buy the median priced home.
Also, not every home is up for sale every day. In other words, there are households that have very little income, but still own their home (my parents for instance, and my in-laws).
Both of these combined mean that the “median household should be able to buy the median priced home” is a fundamentally flawed perspective.
Keep slingin that crack rock
OOOOOHHHHHHHHHHHH
I see where the 25 million houses over 15 years comes from…
It is the TOTAL number of houses built between 1993 and 2008 (16 years)
United states housing starts by year.
http://www.nahb.org/generic.aspx?sectionID=130&genericContentID=554
2008 905,500
2007 1,355,000
2006 1,800,900
2005 2,068,300
2004 1,955,800
2003 1,847,700
2002 1,704,900
2001 1,602,700
2000 1,568,700
1999 1,640,900
1998 1,616,900
1997 1,474,000
1996 1,476,800
1995 1,354,100
1994 1,457,000
1993 1,287,600
Total: 25,116,800
So, there are 25 million excess empty houses IF we didn’t need ANY new houses in the 16 years of 1993-2008.
25 MILLION and rising. And as 70 million boomers continue to die off, another 35 MILLION additional housing units will be vacated.
Yes, because the kids of today are not going to form a single new household over the next 30 years to replace the Boomers.
If you define EVERY house built and EVERY house where the residents die as “excess, empty”, because there has not been a single new household formed in the last 20 years… okay. then yeah, I guess there are 25 million excess, empty houses.
Darrell my dear liar…… An empty house is defined as an empty house. And there are 25 MILLION of them out there…. and growing.
I’m not sure you can use 2000 to 2010 as “long term trend” years. For a huge chunk of that we had too much household formation (22 year olds buying McMansions when they should have been movign into apartments with their buddies, parents buying condos for kids in college, second houses for people who weren’t wealthy enough to really support them, etc.) and for another chunk of it we have, perhaps, had too little (kids with no jobs moving back home, though that may be a long term trend if the jobs available keep being ones that don’t support household formation and student loans).
Are you assuming those cancel each other out? Is that a reasonable assumption?
The 1 million households is based on sustained population increase of 1% per year. 1.5 million more births than deaths, 1 million legal immigrants, half a million illegal.
20 years ago it was more like 2.5 million annual population gain, and at 2.7 people per household….
All the underlying demographics say that 1 million annual household formation is a sustainable “normal” rate… at least for another 15-20 years until the great Baby Boomer die off starts.
“Now, the “experts” say that we actually need 1.2 million housing units a year to replace aging existing stock, plus houses lost to floods, fires or other natural disaster.”
I would be interesting to know, of the large number of houses being held off the market, how many of those are decaying at an unaturally accelerated rate?
On the flip side, expect the number of new builds to go up any time there is even a glimmer of hope of recovery. There are a lot of builders out there just itching to start cranking out houses.
“There are a lot of builders out there just itching to start cranking out houses.”
They’re already building Al. Why? Because they can easily compete with existing housing stock because resale housing prices are grossly inflated.
“They’re already building Al. Why? Because they can easily compete with existing housing stock because resale housing prices are grossly inflated.”
Now this I agree with.
With 10 million too many houses, and household formation getting back close to the demographic supported 1 million new households a year, there is no reason that we should be building 750K new houses a year, other than our refusal to allow existing home prices to fall below new home construction cost.
Building 750K houses a year means it will take 30-40 years to absorb the existing excess housing supply rather than the 10 years it would take if we were not building any new houses…. since there are 2.7 trillion excess, empty houses i this country.
Who cares whether a liar like you agrees?
The fact remains that contractors will continue to undercut resale housing prices until resale prices roll back to early 1990’s levels.
And worse yet, there are 25 MILLION additional empty housing units to be liquidated.
“…there is no reason that we should be building 750K new houses a year…”
At the peak there were 2 million properties being built, which suggests there is plenty of idle building capacity out there. That 750k per year could go up a lot if the PTB keep creating false market signals that so many desperately want to believe.
“…and household formation getting back close to the demographic supported 1 million new households a year,…”
Er…how do you form a household with no job, no money, and a mountain of student debt on your plate?
Is this what the internet has become?????
Back in the bubble I was telling everyone that it was an insane bubble. At the peak here in Phoenix, I was telling everyone that would listen that housing prices here would fall 40-50% or more.
I start a post asserting that we way overbuilt housing and used actual data to ask if the number of excess houses is 4 million, 6 million, 8 million, 9 million??? More?
And, because I request that someone asserting 25 million provide a source for that number, I get this…
“Pimp,
It’s been cited many times here yet you continue to act as if it hasn’t.
Or are you going to turn over a new leaf, stop lying to the public about housing and admit your complicity and role in this?
We’ll be waiting anxiously for your answer.”
Here is my answer. You sir, are an butt head.
I am not a housing pimp, and I played no role “in this”.
Source the 25 million empty housing figure, or I will continue to use data to show how the actual number is most likely, much smaller than that. Still crazy, stupid high, but less than 25 million.
Use data?
You use lies to misrepresent the truth about housing.
Why are you lying about housing?
We built 25 million houses between 1993 and 2008 (16 years). Are you saying that not a single new household was formed in those 16 years, not a single house was burned down or otherwise destroyed?
Are you saying there aren’t 25 MILLION excess empty housing units in the US today?
If you are, you’re lying.
I am saying that the TOTAL number of houses build between 1993 and 2008 is 25 million.
If there are 25 million excess, empty houses in the USA, then we must have gone 16 years without creating a single new household or having a single housing unit torn down, burn down, or otherwise destroyed.
Total houses built over 16 years does not equal the number of excess, empty houses.
“Total houses built over 16 years does not equal the number of excess, empty houses.”
Pimp,
It is you making that assertion, not me.
Carry on with your lies. They’re mildly amusing.
What lies? What are some of the lies I have use to misrepresent housing?
All my lies that townhouses in Phoenix are now selling for 60+% off peak?
That I’m buying a 1000 sqft townhouse for $49.9K, that sold at the peak for $132K? (that is 62% off peak for those unable to do the math themselves.)
Well, the peak sell is public record:
http://www.zillow.com/homedetails/3325-W-Tangerine-Ln-Phoenix-AZ-85051/7752259_zpid/
My purchase is not yet public record, but I’ll be sure to post it when it hits.
Was there a bubble? Oh yeah.
Has the bubble popped? In some markets, yes. Others, no.
Is housing going to fall further? Nationally? Probably. In Phoenix? Maybe, but with units selling for 71x rent and 2x the income of target market…. probably not.
Please document even one of my lies on the housing market.
Who cares what inflated price you paid for some depreciating junk in the desert????
Your losses are just mounting.
Lot’s of homes were built way out from were the work is , Apple Valley, Victorville in CA, Johnson ranch in AZ, etc.
I think they may just get torn down especially if transportation costs go way up.
but there is a shortgage of homes were there is wealth and good jobs.
I see this dicotomy in living standards as a trend that will go on for quite some time.
Invest in fence companies that make high walls and iron gates.
Or the jobs will move to where wages can be lower because housing is cheaper.
I’d be skeptical of a lot of jobs chasing low cost housing. Production jobs are expensive to move. Retail jobs need people already there. And all jobs need support from other businesses. Industrial parks are popular for a reason.
Government might move some activity.
Government already has activity all over the place. Just try and move a big gov faclity out of a Congressman’s district and see what happens. Or move it out in the boonies where they will have to pay to widen roads to handle the new traffic. Stuff can move around a bit (see Walter Reed moving a few miles up the road to Bethesda Naval Medical Center or my office moving a few Metro stops further along one of the subway lines), but it can’t move that much
Or the jobs will move to where wages can be lower because housing is cheaper.”
Maybe depends on the job I think High Tech seems to pay the same no matter where you are located.
Low tech like a Amazon Sorting facility yes I can see that.
Or PCB manufacturer because of hazardous materials.
Headquarters will stay in high end areas they don’t care about high costs as much as prestige.
And when the jobs arrive, house prices will rise accordingly.
Want to buy stock? Try remodeling companies and materials. There’s a lot of fixer uppin to do. In the houses around here I was amazed at the number of 70’s kitchen, original windows, bad electric, and other fixes. Then again, that was in my price range. I’m sure there were some nice movie-in condition things for $100K more.
These guys suggest vacant housing is around 18-19 million out of around 133 million total units. That’s about 14% vacancy. I think the normal rate is around 10%.
http://www.economagic.com/em-cgi/data.exe/cenHVS/table08c02
So… 5-6 million excess?
Darrell, I did the math on this a bit ago. A number of the “empty homes” will always be there (vacation homes, while one home is being renovated, the family lives elsewhere, etc., so there should always be some homes that are not filled with households). For my vernacular, a “home” equals a housing unit, apartment or single family, rental, or owner occupied.
The lowest the empty vacant home rate has been since 1965 was ~8%. More “normal” starting in about the mid-80’s was about 11%, so I think I pegged the “excess” number at between 6% of the housing stock and 3% of the housing stock, or about between 4 million and 8 million excess homes.
The problem is that these excess homes are not spread evenly. Variable population growth and difficulty in building made it so that even though some places built far too many homes, other places built too few.
I did the math yesterday for California. In the 90’s, California added 4 million in population, but only built 1 million new housing units. By all reasonable math, there was a housing shortage going into 2000, which was a source of upward pressure on housing prices in California. Even if you assume we were in balance in 2000, there is California’s baseline…no excess going into 2000.
The AVERAGE number of homes built per year going back to the 60’s for the entire country was something like 1.5 million homes. It is estimated that approximately 400k would be needed to replace old structures. With household formation at between 1 and 1.2 million per year, I think a number of 1.5 million homes needed to be built per annum is a reasonable guess.
California is about 12% of the US as a whole, and from 2000 to 2010 grew at nearly the same pace as the US as a whole (if not a hair faster), so we needed about 180k homes per year being built just to keep up.
We only exceeded that number 3 years in California (http://www.cbia.org/go/cbia/?LinkServID=FE5ED931-F09E-44C7-96836630388F21F7&showMeta=0). During those three years, the excess over the 180k per year was about 80k in total. However, for the first two years of the decade, we built 150k homes (a 60k shortage for those two years). During the last 3 years, we have been building less than 100k (much less than 100k per year, in a couple of cases less than 50k per year).
The problem in California is that governing bodies won’t allow development close to the jobs, so people get pushed farther and farther away from the job base, traffic is terrible. The homes that ARE built, are built in the wrong places. We started to see jobs creep out to meet the people (satellite offices connected to the home base) during “good” years, but that trend was pretty weak, and even if stronger, would take time.
To get a sense of where the excess homes are in the country, the 2010 census is the best source. For a simple quiz on the bubble states:
California in 2010 had 12.6 million households and 13.7 million housing units, for a vacancy rate of 8%.
Florida had 7.4 million households and 9 million housing units, for a vacancy rate of 17.8%.
Arizona had 2.4 million households and 2.8 million housing units, for a vacancy rate of 14.3%.
Nevada had 1 million households, and 1.17 million housing units, for a vacancy rate of 14.5%.
Where did the true overbuilding occur?
The ultimate source of the data is the Census from 2010. Here are the web pages:
http://www.census.gov/prod/cen2010/briefs/c2010br-14.pdf
Page 10; and
http://www.indexmundi.com/facts/united-states/quick-facts/all-states/housing-units#map
And for extra credit Darrell, I’ll let you do the math on number of people per household in those states. This is A POTENTIAL indicator of where there is pent up demand for housing (shadow supply of households).
This is not the only indicator of hiding demand, but A POTENTIAL indicator.
Adult kids living at home drive this number higher.
“pent up demand for housing”
Pent up demand for housing huh? Your lies and pimping just gets more inflated……. like housing.
The truth is housing demand is at 15 year lows and falling.
Why are you lying about it?
Is the real economy in worse shape than headline indicators suggest? Check out the graph in the report posted below, for example:
Tracking the economy and GDP through trash
Peter Macdiarmid/Getty Images
A truck empties its load of waste at the Shelford Landfill, Recycling & Composting Centre.
Interview by Kai Ryssdal
Marketplace for Thursday, August 16, 2012
Kai Ryssdal: Sure, there were some economic numbers out this morning. First-time claims for unemployment benefits: Meh. And housing starts: Also meh.
But how ’bout this? Trash. Garbage. Waste. Refuse. Therein, my friends, lies the economic truth. It came to me in a chart I saw online the other day — railroad carloads of trash, as correlated to GDP. And the correlation is pretty close, too.
…
LOL, good one!
It looks like the Fed Stim programs after 2008 generated an extraordinary amount of trash.
Would U.S. housing policy be any different if R&R turned it around and managed to get themselves elected?
Romney and Ryan both say they want housing market to “hit bottom”
By Jon Ralston
Tuesday, Aug. 14, 2012 | 10:57 a.m.
Mitt Romney and Paul Ryan used remarkably similar verbiage to describe their approach to the crippled housing market, with each suggesting in separate interviews almost a year apart that the market should be allowed to “hit bottom.”
Ryan made his remarks first on Charlie Rose’s program in 2010 and Romney followed with those now-infamous words to the Las Vegas Review Journal last year. Play the Ryan clip back to back with the Romney clip and you will notice the similarities.
…
If they piddle out the bank owned properties how long do you think it will take to unload all the inventory?
Can you imagine trying to keep books at fannie and freddie?
They are still coming in faster than they are going out…. If that continues, well… then it will take a very long time.
Where do you get that data for REO Darrell?
Foreclosure Radar shows CA and AZ shrinking the total REO, and the Fannie quarterly credit report shows that of the bubble states, their inventory of REO is only growing in FL (also shrinking in CA and AZ).
Comment by Name That Liar!
2012-08-17 04:34:56
Good morning and welcome to another episode of Name That Liar!
Contestant #1 Butters, come on down!
Go on and Name That Liar! Mr. Butters.
Is the Eurozone debt crisis over, or is this merely the eye of the storm?
Meanwhile, enjoy watching your stock market investments go up in value as the dollar goes down the drain.
Aug. 17, 2012, 5:38 a.m. EDT
Get ready for more ‘Grexit’ speculation
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Markets are enjoying a summer lull, but German Chancellor Angela Merkel’s domestic political worries and a dire Greek economy may soon reignite speculation Greece will be forced to exit the shared currency sooner rather than later.
While economists debate whether a Greek exit — or “Grexit” — would ultimately be a good thing for both Greece and the euro zone’s remaining 16 members, uncertainty and the prospect for chaos are more likely to trigger another round of turmoil across global markets in the short run, strategists said.
…
The trade imbalances have not gone away. Therefore, the debt crisis has not gone away. Europe is on vacation.
“Is the Eurozone debt crisis over….”
Apparently, they have more debt than when it became a crisis.
I was thinking about something yesterday. In the past 70 years or less, has any major government corruption been prosecuted or reformed? I’m talking about big stuff, not 10 guys embezzling funds.
For instance; the GSE’s. They were finished in 2004. And they should have been riding high in profits as they had a govt subsidy in borrowing rates. At one point criminal investigation was opened. And here we are, 8 years later and they go on like none of that ever happened. Nobody goes to jail. no one is sued, and they make most of the loans now.
Wall Street has been a den of snakes for many decades and it is widely known. The Federal Reserve bungles policy and oversight of lending, yet is given more power.
These are just a few examples. One more is the military industrial complex. Eisenhower warned us about them, how long ago? And they are more powerful and corrupt than ever.
I suppose it’s best to define corruption. Something like, when special interests use state power and monies to enrich themselves at the expense of the public and/or the economy.
“And here we are, 8 years later and they go on like none of that ever happened. Nobody goes to jail. no one is sued, and they make most of the loans now.”
I can still remember how upset I was when I was a kid, learning about what a ‘crook’ Richard Nixon was.
Now that I am older and more cynical, I tend to think he was more the victim of a political witch hunt, which explains why history treated him badly.
What is the other option Ben?
Shut down the GSAs in 2004? No housing bubble? No price appreciation allowing private sector debt creation? No new private sector money creation to fund our trade imbalances, so government would have been running $1T+ deficits for the last 12 years instead of just the last 4-5 years?
Certainly you would not suggest attacking and reversing the trade imbalances that make the new money creation necessary. So, if not a housing bubble, how would you have suggested that we create the new money/debt needed to make out trade imbalance plagued economy function?
‘attacking and reversing the trade imbalances’
You don’t know what I think about that and it’s beside the point. 2004 was before the peak in most house prices. How could the GSE’s be wiped out then? It’s obvious there was some serious funny business going on. These corporations had their own designated regulator, and nothing was reformed or punished.
Back to my question; what major episode of corruption has been cleaned up? You might say the S&L’s were one example. But they really crashed and burned and the govt just sold everything off. A bunch of people did go to jail. But some of us at the time noticed it was mostly oil state (and Arizonan) hillbillies. The most connected S&L crooks got off. Remember the lavish parties with politicians? The big donations? Even the speaker of the house was involved.
What would have happened had a major source of mortgage funds been removed from the market in 2004?
You still think of the bubble as a bad thing. The bubble made a TON of money for a very few people, which is the purpose of the economy. The housing bubble provided the new debt/money that our economy needs to function. Without the housing bubble, government would have had to generate that new money instead of the private sector.
The housing bubble was a good thing, when viewed from the “proper” point of view.
Or, if you are one of those silly people that would place the long-term interest of the masses over the short-term interest of the elite few, then you should view all of this as a symptom of the underlying root cause, the imbalances.
Ignoring the fraud at the GSEs was a necessary evil to allow a fundamentally flawed economy to continue to function for a few more years.
‘a necessary evil to allow a fundamentally flawed economy to continue to function for a few more years’
I’m done talking to you.
Darrell is a liar and a housing pimp.
Extend and pretend.
Pimp is pumping or getting pumped, in which case we will get more social excrement.
“Darrell is a liar and a housing pimp.”
Yeah, that is some serious bubble jive, we finally get to the truth.
“Ignoring the fraud at the GSEs was a necessary evil to allow a fundamentally flawed economy to continue to function for a few more years.”
So it was preferable to greatly increase the number and magnitude of economic distortions in the interim?
Addressing those issues then would have kept a lot of people out of a lot of pain. But a few people wouldn’t have gotten stupendously wealthy on the later pain and suffering of many others, would they?
One more is the military industrial complex. Eisenhower warned us about them, how long ago? And they are more powerful and corrupt than ever ??
Yes they are….Possibly so powerful there is not much we can do about it…Our politicians “rail” on countries who have dictatorships or military rule…How are we any different ?? Is it because we are more civilized in a police state that just arrests and incarcerates some rather than just executing them ?? More humane maybe, but no less corrupt….
Being evil isn’t illegal. Only doing something illegal is illegal. And you have to be able to prove it beyond a reasonable doubt, sometimes including the state of mind of the people involved.
We are a nation without a religion, therefore a nation without a basis for judging good vs bad. Without a reference point for what is right, there is no foundation for just law.
Without religion? More than half of us believe in creationism. I’d like to just call it stupidity, but it’s religion.
I go to church sometimes. I have been to various different ones. In my limited experience, very few of those who actually go to church believe their creed enough to let it influence their daily decisions.
Answering “yes” to a survey question does not take any sacrifice.
Skye, what does religion have to do with the ability to discern what is just and what is not? Are you suggesting that the areligious are incapable of ethical behavior because they have no foundational concept of “good” or “bad” or “right”?
And that the laws of societies not based on some sort of religion are by definition unjust?
Because that’s absurd.
Fraud is illegal, though.
I guess so long as Megabanks can hire attorneys capable of proving that it’s just plain evil, not fraud, they can continue to skirt justice.
Now you’re getting it.
You misspelled “gettin’.”
The principle that’s being violated is that tax money - other people’s money - should only be used for public goods, not the profit of some favored sector. In this case, the financial sector.
There’s no hurry to break up the TBTF institutions because it provides a plausible mechanism by which to enrich themselves and their friends. TBTF institutions make lots of money by privatizing profits and socializing losses.
It seems to me that if government largesse is the source of profit for these industries, then the people working in those industries, from CEOs to cold callers should be put on the government payroll and brought onto the government pay schedule. I think it would save money and reduce the unfairness of the system.
This November will be a referendum on whether this current financial model should be allowed to continue.
“This November will be a referendum on whether this current financial model should be allowed to continue.”
How do you figure? Both parties are products of and funded by the same financial industrial complex.
If there’s a large turnover in Congress, they’ll understand in an immediate way, that the public is not satisfied with their approach to the economy.
The Gods, Guns, Gays voters aren’t contested voters and vote monolithically on their various single issues. I don’t think there’s a lot of shifting in those ranks. If a tide sweeps out the stalls of Congress, it would likely be a result of economic dissatisfaction.
But… the system, with its massive reliance on legalized bribery remains. This will quickly corrupt the new people. But hopefully, that system can begin to change with a tide sweeping out Congress.
Tide sweeping out congress… ha.
We’re lucky of 10% of the incumbents that are running for reelection actually lose. I bet it will be much lower than that this year.
It seems to me that if government largesse is the source of profit for these industries, then the people working in those industries, from CEOs to cold callers should be put on the government payroll
What are you, some kind of commie?
If our current laws are not strong enough or to ambigious ,than they should be changed to be able to prosecute easier . There was no Political will to prosecute these clowns because the Government would have a lot of egg on their face for how they failed to regulate and looked like they were in bed with the Culprits .
It appears that they just cut deals or fines that do not reflect the
real damage that was done ,and nobody has fear of going to jail .
When government gets in bed with Big Business ,than they don’t want to ruffle up their Political supporters and lobbyist either .
Of course good lawyers could of made good cases for fraud ,or breach of duty ,or fraud with the marketing of securities ,or breach of duty to underwrite loans proper ,or general BAD FAITH in business , or unjust enrichment or ill gotten gain or wrongful transfer of title , or bribing public officials or even a mass scheme to enrich the Bankers /Investment firms at the expense of the public ,or fraudulent lending practice without proper controls .
When I watched the Bank CEO’s grilled by Congress they said things like ,’Everybody else was doing it “,’We didn’t see it coming .” and absurd stuff like that .
They just busted Big Pharma for all kind of crimes and they were fined a low amount and nobody went to jail . In the case of Pharma people die when wrong things are done ,so that is really unacceptable .
I do think the problem has become the realtionship between
Government and big business being in conflict of interest at this point .The Pharma Industry funds the FDA in part ,so that regulatory agency isn’t going to ruffle BIG PHARMA .
If Government is suppose to be the party that renders Justice ,than they can’t have conflict of interest in serving that vital role for
protection of the public .
Also increasingly BIG CORPORATIONS are getting their way with getting laws passed that they aren’t sueable . For instance the
Pharma Business isn’t sueable regarding vaccines and Goverment has to pay damages if harm is done by vaccines ,rather than the Pharma Company .Employment law is going the way of them not being touchable and other areas of law are going the way of them being untouchable for their real damage .
These bums in Congress are the lawmakers ( at least if they aren’t challenged by the Supreme Court by a case filed ).
So ,there is a concerted effort in the last 2 decades for BIG BUSINESS to set it up that the Government pays for damages ,rather than the actual Corporations that do the crimes .
I have said it over and over that Government is the pawn of BIG BUSINESS increasingly ,which ends up transfering the damage or the loss to the tax payers ,that is actually created by Private industry .
For instance ,why should tax payers pay the welfare costs that are a direct result of BIG BUSINESS doing something objectionable .
Companies aren’t paying enough ,so Government has to chip in with food stamps if a person makes to little .
There has been a big shift in the last few decades for costs to shift to Government ,for what BIg Business should pay for ,in other words . In the medical business they want government to pay for
the uninsured ,and the seniors ,but Big Business gets the gravy and pawns off the risk and higher costs to government ( or the tax payer ) . Medical Business gets to charge outragous prices ( 50% more than other Western Countries ) and government has to figure out how they are going to fund costs that aren’t sustainable to support gouging or price fixing .
Government gets to insure all the high risk loans ,or the school debt ,but these entities get the gravy .
Anyway ,I can go on and on with examples of how costs were shifted to Government by BIG BUSINESS . And on top of everything else they want more and more tax breaks ,while they take the money flow out of America .
We use to bust monopolies and break them up ,but now we give them the power to influence elections, bribe Politicians and obstruct Justice .
It’s not government corruption, but we have a pretty nice run of insider trading prosecutions going on right now.
“…has any major government corruption been prosecuted or reformed….”
The CIA, post-Nixon.
Suffering from Political Overload???
What is your favorite car? Given $40,000 of play money, what would you buy?
And if it was a cheaper car, what would you do with the money you saved.
I would pick this
http://www.roadandtrack.com/tests/drives/2013-ford-mustang-gt
If I had any extra money I’d spend it on some accessories for the car and a new Trek mountain bike.
Political overload?
We would buy a used Subaru or Volvo and cover it with COEXIST stickers and spend the rest of the money to move to Boulder and pay at least 50% more for the same rental where we live in Denver.
I have a soft spot for Mustangs…I had a nice 85 SVO as my first car. I wouldn’t mind one as a toy, but I prefer AWD and 4 doors. I assume that only new cars are an option for you, and you don’t mind being traction limited and rear seat limited. If all that’s true, then a Mustang GT sounds good.
No rules, just wanted to see what anyone would say.
For example, I would suppose that AZ Slim would want a Prius, but maybe she just wants a motorized bicycle.
Goon squad wants to plaster his used car with Coexist stickers, which is interesting since I can see him/her with long hair, holes in the jeans and maybe a peace sticker as well.
Polly, probably a high end BMW or Mercedes and she would pay the extra money herself.
It’s Friday and I thought it might be interesting.
Goon squad wants to plaster his used car with Coexist stickers,
He doesn’t.
I am patiently waiting for my father to buy his next car so I can pay very little (expecting around $4000, but it could be a lot less) for his 9 year old, meticulously maintained Honda Civic with over 100K miles on it. I’m still driving a ‘97 Taurus with plenty of nasty body dings (some my fault, some not) and no air conditioning. I paid $4500 for it wholesale in 2001.
Why on earth would you think I have any desire for BMW or a Mercedes? I can’t think of anything I would avoid more unless it was an truck, a big SUV or a sports car.
I had no reason to think that, just trying to have a little fun this Friday.
Some of us spend a lot of time here and we have these conceptions of who we all are. I would like a Mustang Gt some day as I would like to reward Ford for doing the right thing, but in reality I have an old 72 Chevy Pickup (that my ex called a POS) and which I would have a lot of trouble parting ways with it.
So, now we know how you roll. Have a nice weekend.
I love 72 Chevy pickups. Learned to drive in one.
Carl,
Yeah, me too. I love them and I learned to drive in one.
Mine has 56,000 original miles, matching #s, 350, 4 x 4, with AC, long bed. Its a project because the prior owner was a hunter and he painted it in camo. Ugh, but that camo paint job scared everyone else away.
Wow 56k. I don’t know how many miles my dad’s has…not sure if the odometer still works. It was one of the mustard yellow ones. 3/4 ton 4wd 350 automatic. When I was in high school he put a 396 in it for fun…that was so much fun we put a fairly high revving 427 in it. Kind of silly for a 4wd but a ton of fun for a high school kid to troll for stock muscle cars in.
mine is mustard yellow too. Only bad thing about the truck.
Used Maserati Spyder Cambiocorsa.
Is the housing Bubble over yet, or is it only the fifth inning or so?
Aug. 17, 2012, 11:24 a.m. EDT
Where to put money as you whistle past Wall Street
Ghost of Crisis Past haunts investors five years after credit crunch trigger
By Polya Lesova, MarketWatch
People stand next to windows at Lehman Brothers headquarters in New York in September 2008. Lehman filed for bankruptcy that month, becoming a high-profile casualty of the global credit crisis.
NEW YORK (MarketWatch) — It was a shot that hurt around the world.
In August 2007, France’s biggest bank froze withdrawals from three of its investment funds, blaming the “complete evaporation” of liquidity in certain parts of the U.S. securitization market. BNP Paribas couldn’t fairly value the mortgage-backed securities its funds held, because there were no buyers for the assets.
BNP’s announcement spooked financial markets. A major international bank acknowledging problems with subprime mortgages opened a fissure that by September 2008 had developed into the worst financial crisis since the Great Depression.
Five years later, the U.S. has come a long way. The economy is expanding, the housing market is recovering and the financial sector is much healthier.
But the ghosts of 2007 and 2008 still haunt the markets. The banking and housing sectors are both stronger, to be sure, but are vulnerable to market shocks and headline risk. Meanwhile, after suffering through two bear markets in the past 12 years, individual investors have lightened up on stocks in favor of bonds.
…
Is the housing Bubble over yet, or is it only the fifth inning or so?
over
I expect new bubbles though as the FED Bank runs the economy hot for maximum growth. Meaning they encourge money velocity
and frown on saving or hoarding.
Bernake will fight deflation to the edge of dollar collaspe. How else can the US pay its debt ?
Is the housing Bubble over yet ??
Housing is just one necessary product….Food & water is another…All around you, we see higher prices in the things we must have…Oil is another example…
We had a S & L Bubble…Then we had a Dot-Com bubble….Then we had a Housing Bubble….The latest bubble that we find ourselves in now is a interest rate Bubble and, when it pops the fallout from it will be widespread across many product categories…
Keep a bubble inflated, inflate the price of other necessities…life is a tradeoff…
The problem is going to arise when some states are ready for the Fed to raise rates to stop another housing bubble from forming (some non-judicial states), and other states will still be working through their foreclosure mess (generally judicial states).
The housing bubble is not over in all markets. Some markets in the USA have crashed, other have yet to feel the big crash.
I the rest of the world, it is just barely past peak. In China you have 700 sqft condos selling for 70x median household income (in the USA we consider 3x to be the rule of thumb for fundamental value). In India’s big cities condos are selling for $300K, but the target audience is making $10K a year or less. In some Canadian cities, where income are $40K a year, you can’t buy a house for under $1 million.
No, the housing bubble is not over in all cities.
In the rest of the world, it is just barely past peak.
There won’t be a peak in Rio de Janeiro. It is not the same here as other places in that we have the beach and mountains and there is no more space to build in the desirable sections.
Also with all the oil being found offshore and the Olympics and World Cup coming, too many Brazilians want to live here. All of these factors have come together forming a different type of economic model than other areas. If you buy now, you’re going to make a lot of money here.
LOL.
IT’S DIFFERENT THERE…. which is a sure sign that it is no different there.
IT’S DIFFERENT THERE….
lol……one of 5-6 cliches there
Very funny , Rio. But have you heard anyone talk about buying in Rio and “you will be able to pay for it by renting to Olympics/World Cup tourists” when they come? I know that people do talk that way in some of the lower cost countries that end up hosting Olympics. Has it been brought up in conversations? I suppose the locations of the venues have been established, so it isn’t too early for people to try it.
I watch RE very closely in Moorpark Ca every POS is selling and for almost 100K more than it did 8 months ago.
WTF ?
WTF ?
WT Pmt….There is your answer….
“The housing bubble is not over in all markets.”
Cases in point:
Don’t Buy: These 7 Cities Are Renters’ Markets
Business InsiderBy Mamta Badkar | Business Insider – 7 hours ago
Despite record low mortgage rates and an apparent bottoming in home prices, Americans have increasingly opted to rent than buy their homes as the economic recovery remains anemic and uncertain.
We drew on Zillow’s newest metric – the breakeven horizon – to identify 7 housing markets where it’s better to rent a home than buy one.
The breakeven horizon refers to the number of years after which buying a home is more “financially advantageous” than renting one. So, with a longer breakeven horizon it makes more sense to rent.
Unlike the price-to-rent ratio this metric includes a whole range of possible costs including mortgage payments, property taxes, utilities costs etc.
Note: The list is drawn for the 30 largest metro areas. Median list and rent price are for June 2012.
1. San Diego, California
Breakeven horizon: 3.6 years
Price-to-rent ratio: 14.0
Median list price: $369,000
Median rent price: $1,750
2. Seattle, Washington
Breakeven horizon: 4.0 years
Price-to-rent ratio: 13.4
Median list price: $290,000
Median rent price: $1,270
3. Boston, Massachusetts
Breakeven horizon: 4.3 years
Price-to-rent ratio: 13.4
Median list price: $347,900
Median rent price: $2,000
4. Los Angeles, California
Breakeven horizon: 4.3 years
Price-to-rent ratio: 14.2
Median list price: $399,000
Median rent price: $1,850
5. New York, New York
Breakeven horizon: 5.1 years
Price-to-rent ratio: 12.8
Median list price: $389,000
Median rent price: $2,600
6. San Francisco, California
Breakeven horizon: 5.9 years
Price-to-rent ratio: 16.0
Median list price: $519,000
Median rent price: $1,960
7. San Jose, California
Breakeven horizon: 8.3 years
Price-to-rent ratio: 18.9
Median list price: $590,000
Median rent price: $2,050
To continue our discussion yesterday about the gutting of the middle-class, the US trade imbalance, free-trade and globalism, here is a great article from Zerohedge: 22 stats show how the free trade policies are killing the american worker
A couple of highlights:
* The Chinese undervalue their currency by about 40 percent in order to gain a critical advantage over foreign competitors. This means that many Chinese companies are able to absolutely thrive while their competition in the United States goes out of business.
* a Jeep Grand Cherokee that costs $27,490 in the United States costs about $85,000 in China thanks to all the tariffs.
* When NAFTA was passed in 1993, the United States had a trade surplus with Mexico of 1.6 billion dollars. In 2010, we had a trade deficit with Mexico of 61.6 billion dollars.
* The United States has a trade imbalance that is more than 7 times larger than any other nation on earth has.
Turns out China using tariffs to protect it’s domestic industry is fine, but the US doing the same is not. Free trade is bunk. Fair and balanced trade is what is needed, but that would require Politicians and Corporate Executives to have some sense of Nationalism…
Minus petrolium imports, we are still a net exporter, right?
Balance of Payments:
http://en.wikipedia.org/wiki/Balance_of_payments
List of countries by current account balance:
http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance
This is not sustainable.
7 million barrels a day = 2.5 billion a year at $100 a barrel = $250B a year compared to our $600B annual trade imbalance.
If we could cut oil imports by 10%, we could cut the trade deficit to $575B…
Darn those facts.
(By the way, Bronco. I’m doing this much more often than I used to just because it seems to anger you so much. I’m enjoying it, so, please, keep up the irate responses.)
yea, i figured.
The basic problem with the theoretical free trade model is that there’s a perverse incentive to try and protect your markets while trying to pressure other countries to keep theirs free. That’s the way a player in the free trade model wins.
The response is, well, we’ll use sanctions against any country that protects its markets. Well, you can do that against smaller countries. But against Russia? China? Japan? Good luck. And if you f–k with them, they’re going to f–k back.
And what happens with sanctions? You start warping the market. “I’ll give you this much aid if you stop doing business with the target country. Or I’ll slap a tariff on your goods if you don’t.”
Multiply that times a thousand and you wind up back in a warped, non-free, centrally planned system again.
Having a thriving export market is a Good Thing. Being a mercantilist sink for other countries’ goods and service is a Bad Thing.
This is why trade should be balanced by putting a tariff on money leaving the country. You want to move a call center to India? No problem. Just don’t pay them with money that comes from USA customers. Buy some Nebraska corn or Arizona beef and ship that to India to pay the employees with.
The trade partners can’t respond in kind as no money flows the other direction. If they put tariffs on what you import into them, than the tariff on money moving just goes up until we have balanced trade.
I think our exporters will still suffer. Boing, CAT, Deere, Pharmas, Mediacal devices, etc. Also our software companies, too.
We get the same sort of apocalyptic talk when discussing trying to create fair and balanced trade, that we get when discussing trying to reform and regulate the financial system.
The basic problem with the theoretical free trade model is that there’s a perverse incentive to try and protect your markets while trying to pressure other countries to keep theirs free. That’s the way a player in the free trade model wins.
Try to protect?
China does a great job of protecting its markets. Want to sell cars in China? Well pilgrim, you’re gonna have to make them there, with a Chinese partner too (who will steal your IP).
Business as usual over at F&F, or payback for the FHFA standoff?
And who will manage their REO portfolios when and if the GSEs are ultimately wound down?
ft dot com
August 17, 2012 6:07 pm
Fannie and Freddie to pay out all profits
By Robin Harding in Washington
Fannie Mae and Freddie Mac will pay all of their earnings to the taxpayer as part of a package of measures to wind down the troubled mortgage finance agencies more rapidly.
The US Treasury said that it was changing its deal with the agencies so they would transfer their full profits – whatever they might be – rather than paying a fixed 10 per cent dividend on government-owned preference shares.
The changes will prevent Fannie and Freddie from rebuilding their capital base and hence taking a larger role in the mortgage market. They also eliminate a perverse situation whereby the two agencies sometimes had to borrow more money from the Treasury to pay the preference dividend back to it.
After 2012, the two agencies will no longer be able to draw unlimited support from the Treasury, so the change eliminates the possibility that they may default on the 10 per cent dividend or that it may drain their resources to pay other debts.
“With today’s announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” said Michael Stegman, counsellor for housing finance policy at the Treasury.
The second quarter of 2012 was the first since the bailouts of 2008 in which Fannie Mae and Freddie Mac earned enough to pay the preference dividend without borrowing more from the Treasury.
Fannie Mae made net income of $5.1bn in the second quarter, allowing it rebuild a positive net worth of $2.8bn. Its cumulative borrowing from the Treasury now amounts to $116bn.
Both mortgage agencies suffered heavy losses during the financial crisis and are now effectively owned by the taxpayer after the Treasury bailed them out. Both US political parties want to reduce the role of taxpayers in the mortgage market although the final shape of a housing finance reform remains unclear.
As part of the announced changes, the Treasury will require the two agencies to reduce their investment portfolios of mortgages more rapidly, selling them down at a rate of 15 per cent a year instead of 10 per cent.
The financial industry welcomed the move as a step towards tidying up the Treasury’s holdings in Fannie Mae and Freddie Mac.
“ABA applauds the Treasury’s steps to more quickly wind down Fannie Mae and Freddie Mac in a responsible way,” said Frank Keating, president of the American Bankers Association.
…
“Fannie Mae made net income of $5.1bn in the second quarter, allowing it rebuild a positive net worth of $2.8bn. Its cumulative borrowing from the Treasury now amounts to $116bn.”
Is this supposed to mean that it has $2.8bn more than it owes treasury? Is that with reasonable accounting assumptions or make believe ones? You couldn’t get close to $116bn even if the accounting assumptions are real if they actually tried to liquidate right now, but is it really technically solvent?
Proposed weekend topic: Buy now, pay never payment schemes.
P.S. Having inspired articles in the Financial Times of London and the New York Times, I think it is fair to say at this point that our school district is famous.
And we produced Adam Lambert…
High & Low Finance
Schools Pass Debt to the Next Generation
Sam Hodgson
The Poway school district borrowed $105 million in 2011, but won’t pay anything until 2033.
By FLOYD NORRIS
Published: August 16, 2012
The deleveraging of America is well under way, as individuals and companies recover from the excess borrowing that helped to produce the boom and left many people vulnerable when the bust arrived. Household debt is down nearly $900 billion over the last four years, partly from repayments and partly from defaults.
During the crazy times, homeowners could get mortgages that allowed them to pay less than the full amount of interest being charged, with the rest added to the principal. Commercial property owners generally paid the full amount of interest, but did not have to repay any principal until the loan matured in five or 10 years. For both homes and commercial properties, lenders were willing to rely on extremely optimistic appraisals.
For property buyers, those days are gone,
But for some borrowers, it is still possible to borrow now and pay nothing for decades.
There is a furor in California because the Poway Unified School District, in San Diego County, borrowed money last year on terms that even Countrywide would have laughed at during the boom. It will not pay a dime of interest or principal for more than two decades. Only then will it begin to service the bonds.
…
Everyone is going the Poway.
I used to suggest from time-to-time that you look into getting a teaching gig out here. Now that the future of the school district is chained to the financial equivalent of a time bomb, I’m not so sure that is a good idea.
I’ve met Merrilee Boyack. If she says this is a deal with the Devil, then it most likely really is.
I can’t help but wonder if EEEEEVIL Goldman Sachs is somehow involved. If anyone has the details of who on Wall Street is behind this subprime school bond scheme, please post!
High cost of school bond shocks Poway Unified
Repayment under financing plan will be 9 times the principal
Poway Unified Superintendent John Collins (center) chats with students at Abraxas High School in 2008. The high school was renovated and upgraded in recent years using Proposition C bond funds. — Charlie Neuman
Written by Ashly McGlone
8:40 p.m., Aug. 16, 2012
Updated 12:05 p.m. , Aug. 17, 2012
POWAY — Residents of the Poway Unified School District are dealing with a bad case of sticker shock after realizing a $105 million bond deal struck by school officials last year left them on the hook for nearly $1 billion.
Last August, district officials obtained $105 million for school construction with the promise to repay investors more than nine times the principal under long-term financing known as capital appreciation bonds, or CABs.
Under the deal, the district does not pay anything on the bond for 20 years as interest compounds, and repays the bonds in the 20 years after. The final payment will be made in 2051, reaching the maximum 40-year term permitted for bond repayment under state law.
Officials made the move based on the assumption that recent slumping real estate values in the district will grow over the next two decades and beyond. They say the bond gives them immediate use of the funds and that interest rates should work in their favor over the long haul.
The bond program was first reported by Michigan blogger Joel Thurtell in May and then last week by the news website Voice of San Diego.
Michigan banned CABs in 1994 following a series of reports by Thurtell, then a writer for the Detroit Free Press, documenting how Michigan school debt had risen from $2 billion in 1988, when the state’s first CAB was issued, to $4 billion.
While Poway Unified is not the only district in the county or state to utilize the financing, details of the $981 million repayment are creating waves of mistrust in the community.
Clariece Tally, whose child graduated from the district, alleges there was a “legitimate effort to hide” the financing, which she likened to a subprime mortgage loan.
“This financing was done with zero disclosure,” said Tally, a legal secretary. “When you do a bond and it’s on the backs of the taxpayers, there is an expectation on the taxpayers that repayment will be 3 to 4 times. This is 9 to 1.”
Poway City Councilwoman Merrilee Boyack sent an email to several people calling the bond financing a Ponzi scheme and a “deal with the devil.”
“We were all kept in the dark while they signed bonds mortgaging our future, our children’s future, and our grandchildren’s future,” she wrote.
…