The banking system has captured our government and frustration is boiling over. Yet those in the housing and banking industry seem complacent and even self congratulatory that we “have avoided Great Depression 2.0.” Really? Now we’re taking advice from the same group of cronies that led the economy off the financial cliff. And the most troubling thing is we are at the height of unemployment even though the headline rate seems to have steadied out. California’s unemployment rate still continues to move upward hitting 12.5 percent. Yet all is well in delusional banking world since their idea of a solution is simply not foreclosing. What is even worse, these banking crooks are now offering fire sale deals to other banks and hedge fund investors! I’ve contacted a few banks about short sales and in many cases, preference is being given to “all cash” investors. Glad those bailouts are supporting the crony banking system.
One of the most troubling trends is the belief that all is well because banks aren’t foreclosing on homes or the fact that there is no second wave. Really? Let us look at nationwide foreclosure filings shall we?
Who needs a second wave when the first wave is still in place? Some in the housing industry seem to be patting their back that there won’t be a second wave of foreclosures (even though it is still high) and base this on the mounting distress inventory with Alt-A and option ARMs but no actual foreclosure filing. The wave is hitting as people stop paying their mortgage. Take for example option ARMs. Nearly 50 percent of all outstanding option ARMs are at least 30 days late. In other words, the borrower isn’t paying the mortgage! Yet in some form of twisted abracadabra housing logic, this is avoiding the wave because banks are ignoring the problem. The wave was the distress. Foreclosures are still on the market. The bank balance sheet is still loaded with mortgage junk. But just because banks are putting their hands over their eyes doesn’t mean the issue was avoided. In fact, it is corrupt to the core and the way they acknowledge this is absolutely stunning. The fact that we have no solid financial reform after 2 years of major crisis is incredible. Banks simply ignoring missed payments while taking trillions demonstrates what has become of our financial system and their idea of dealing with the problem.
Take for example HAMP:
“(Huffington Post) As of the end of January there were over 116,000 permanent modifications and over 67,000 permanent modifications pending final approval,” Geithner wrote in his letter, which the panel received last week. “This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of total modifications who have completed the trial modification and are at a point in the process where they are able to convert to permanent.”
HAMP has been an absolute failure. Yet HAMP is symptomatic of the bigger issue. Banks were able to raid the entire U.S. Treasury and Federal Reserve for $13 trillion in backstops and bailouts, with no questions asked but then start talking about moral hazard when it comes to HAMP:
“Kucinich was pessimistic about the ability of any program that doesn’t involve principal reductions to help floundering homeowners. “Instead, we’re going to stay on this slow path to default, foreclosure and personal bankruptcy,” Kucinich said. “And our economy is going to continue to suffer.”
He added: “It’s funny that moral hazard is a concept when it comes to Main Street but not to Wall Street,” a reference to the massive bank bailouts.
More than 2.8 million homes were lost to foreclosure last year, according to data provider RealtyTrac. The firm expects a record three million foreclosures this year.”
I’ve talked with colleagues who are Republicans and Democrats and both are absolutely appalled by what is going on with Wall Street and the housing industry. They have transformed our economy into one giant casino and houses are now life sized Monopoly tokens that are traded on the New York Stock Exchange with no regard to local economies. Moral hazard applies to the masses yet those rules don’t apply to the plutocracy that sits on Wall Street. While the stock market soars from the March low by a stunning 68%, job creation is nowhere to be found:
Where are the jobs? Last month they blamed the snow and now next month, we can expect a big boost because of Census hiring. That is great that we have thousands working at $16 or $17 an hour with no benefits but then what? Are we going to do the Census every month? Most Americans realize that things aren’t as rosy as Wall Street is leading on. And California is certainly not doing any better:
California Doing a Housing Industry on the Budget
“SACRAMENTO, Calif.—Gov. Arnold Schwarzenegger said Tuesday that he vetoed the largest piece of legislation in a package of budget bills because it did not take immediate steps to cut spending.
Democratic lawmakers said the bill would have shaved $2.1 billion from the $20 billion shortfall projected for California’s budget through June 2011. So far, the Legislature and governor have agreed to just $200 million in spending cuts.
“It’s extremely important that we immediately jump into action and make midyear cuts,” Schwarzenegger told reporters on Tuesday. “We’re spending, right now, $600 million a month more than we’re taking in. It’s irresponsible.”
This came out on Tuesday by the way. We still have a $20 billion shortfall and are spending $600 million a month more than what is being brought in. So what does that mean? It means more cuts or higher taxes. How is this good for housing? More importantly, how is this good for the state economy? If we look at the unadjusted unemployment rate California is up to 13.2 percent unemployment (headline). We are seeing 23 percent underemployment. This is something none of us have seen in the modern era. Yet those in the banking and housing industry are claiming mission accomplished just because banks aren’t moving on foreclosures. This is their ultimate solution. Because that is all they have. This suspension of belief is their idea of avoiding the second wave. Humor them and take this out to the logical conclusion.
Many Californians are underemployed as we have highlighted. Those that are employed, can expect tighter wages and higher taxes thus cutting into their disposable income. So how does this create higher home prices? Even if banks “trickle” out inventory once that inventory hits the market it confronts the economic realities people have to live by. That is why when we show examples of short sales they are selling at deep cuts. Home prices have to reflect local area incomes and what people can afford. Unless we plan on bringing back toxic waste mortgage sludge like Alt-A and option ARMs, people can only buy what their income can support.
If things are so fantastic in the housing market for California, I’m sure builders are out there in mass right?
Not exactly. Because there is a glut of housing on the market. And more importantly, that second wave of housing is sitting on the banks balance sheet. So they won’t be making construction loans when they realize just how much inventory is really out there. Just look at the above chart. Building permits and construction jobs are at the trough. No visible turn around. And take a look at notice of defaults and foreclosures:
The only reason the foreclosure number has fallen was because of HAMP (which as we now know is a failure meaning more short sales or foreclosures will hit the market soon because many on trial mods will not make it to permanent modification status). Whether it is a flood or just a steady trickle, this will happen. And these homes sell for lower prices thus pushing area prices lower. This is the next round for mid to upper tier markets. They have bought some time but it is running out. Eventually there will have to be some realization of local economic factors.
I was curious to see what industries were adding jobs:
Who will be buying the homes in 2010? More importantly, why would people be overpaying for homes? The above chart shows no real improvement in the real economy. In fact, all the banking industry is doing is stalling the inevitable but at the same time sucking the taxpayer dry. With the $13 trillion in bailouts and backstops we could have had enough to pay off every single residential mortgage in the United States and taken everyone to Disneyland. Instead, we are financing the crony banking system full throttle robbery of the American people.
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■Real Homes of Genius: Costa Mesa Shadow Inventory. MLS has 172 Listings while Distress Properties Register at 489. 3 Bedroom Million Dollar Home in Costa Mesa?
■Foreclosures and Negative Equity – Why Financial Bailout Programs Fail in California. Income, Budget Problems, and Underwater Mortgages.
■California Budget Revisited: The Budget Cuts trickling into the Real Economy. Unemployment, Finance, Housing, Revenues, and Taxes. Game Show Employment and Realtors Say no to Paying Taxes Early.
■California Budget Solution – Ignore It. $3 Billion Financial Gap by December. State Budget Deficit Already in the Billions. Tax Revenues Collapse and Unemployment and Underemployment at 23 Percent.
■Banking Solution to Financial Crisis is to Ignore Distress Inventory – California had 1,200 Foreclosure Filings Per Day in 2009 – The California Real Estate Foreclosure Machine. Countrywide Financial, WaMu, and Wells Fargo top Foreclosure List in Q4 of 2009.
On Friday the California Employment Development Department released preliminary figures on California unemployment. As it turns out, the unemployment problem ran deeper in 2009 than many had initially thought. The current unemployment rate is 12.5 percent which means the underemployment rate for the state is probably closer to 23 percent. Mix that in with Alt-A and option ARM loans floating out in the market and you can understand why there are still problems in the California housing market. The unemployment report is in sharp contrast to what is going on in Wall Street. The stock market rallied even though we have yet to add one net job since the recession started.
The California budget is mired with systemic problems and many state and local government are going to be battling with cuts over the next couple of years even if the economy starts recovering. If we actually look at unadjusted unemployment figures, the unemployment rate for Los Angeles County and California is a stunning 13.2 percent:
Source: EDD
Very few of us have ever seen an unemployment rate this high for the region. And we are starting to see some aggressive price cutting from banks in some select mid-tier markets to reflect this lower wage economy. It is hard to tell what is going on internally on the balance sheet of many banks but it isn’t good.
Today we’ll look at what I would consider a mid-tier city in Los Angeles County that is starting to see some aggressive price cuts. Today we salute you La Mirada with our Real Homes of Genius Award.
Half Off From 2006
La Mirada like many cities in Los Angeles County saw a massive jump in housing prices. When prices were out of reach in other locations La Mirada was considered a good middle class place to buy a modest home. This seemed to be enough to justify massive increases in prices. The median price peak was reached late in the spring of 2007:
June 2007: $555,000 (median La Mirada home price)
In that month, 40 homes were sold in the city. Today the stats look a bit different:
January 2010: $380,000 (median La Mirada home price)
In January 25 homes sold. Now, much of this of course has to do with it being winter but a 31 percent price cut in less than three years is significant. Yet prices are still too high given the household demographics. We’ll get into that in a minute. First let us examine the home above in better detail.
The above home is a 4 bedrooms and 1 bath home. It is listed at 1,312 square feet and was built in 1953. When I go into the history of California housing this was one of those massive building boom times. This home was purchased near the peak back in 2006. This home was financed with toxic mortgages up to the very common 100 percent mark:
Let us run the numbers. The home was purchased for $514,000 with an 80/20 setup:
1st mortgage: $411,200 (80%)
2nd mortgage: $102,800 (20%)
Now I know some of you are stunned about this but this was very common in California. In fact, those toxic option ARMs were being handed out like Pez candy. The notice of default was filed back in December of 2008, then in March of 2009 the NTS was filed. It took another nine months from that point for this home to go into bank owned status. The home hit the MLS on 1/19/2010.
But here is where I’m noticing some reality based pricing. Back even a few months ago, you would see bank owned homes hit the market at outrageous prices and banks simply sat back and did nothing. On some areas and some homes, pricing seems to be aggressive on the downside. Take a look at this place:
Price Reduced: 03/03/10 — $284,900 to $259,900
A 50 percent haircut from the 2006 peak price. Before you jump up and down this is exactly what we’ve been talking about. It seems like in some markets banks are being more realistic with their pricing. And they should be. Take a look at the household demographics for the city:
So let us run the FHA insured loan numbers here since at the current price, it clearly meets the criteria (4 out of 10 homes sold in SoCal were FHA backed last month).
3.5% down payment: $9,096
The median household family bringing $61,000 is taking home roughly $3,900 net per month. So roughly 43 percent of net pay is going to the home payment. Does this make sense? It would seem a bit high but it is certainly more in line than other areas and certainly far from the bubble peak. And this is now the next phase and I expect to see more of this going forward. We went from areas in the Inland Empire seeing big haircuts, to lower priced L.A. County areas, and now we are seeing certain mid-tier cities cut prices aggressively. In my book, a 50 percent cut is significant.
Should you rush out and buy a home? No. If the numbers work and you find a home you like, go for it. Yet the reality is, if L.A. County has a headline unemployment rate of 13.2 percent then the unemployment and underemployment rate is closer to 24 percent. In other words, 1 out of 4 people in L.A. County are either out of work or working part-time for economic reasons. Does that really sound like a healthy market? Frankly, many people are focusing on their career and employment and are putting aside the Wall Street and real estate industry obsession with housing as the center of the universe. Without solid employment, home prices will still go lower. And keep in mind the current household income figures are based on 2008 Census figures and we won’t have more up to date data until September of 2010. In other words, the income data is much worse than it appears.
And about that shadow inventory? Let us take a quick look. The MLS currently lists the following for La Mirada:
Non-distress: 45
Short Sales: 28
Foreclosures: 13
And this is what is lurking on the bank balance sheet:
Pre-foreclosure (NOD): 124
Scheduled for Auction: 188
Bank Owned: 39
Some had a question about double counting but these are all unique properties, nothing is double counted in the above data except for the 13 MLS foreclosures from the 39 bank owned properties. 86 properties on the MLS and 351 properties in distress. This above home is one of those “trickle” down homes that is supposedly going to make the market better because we won’t see a flood. A 50 percent price cut sure doesn’t seem like prices are going to boom as some in the housing industry would like you to believe and even with a drip strategy for the shadow inventory, prices will still come down to reflect economic reality. And why would it matter how properties are released onto the market? The distress is as plain as day. Just look at the above stats. People with a NOD, auction scheduled, and losing their homes are not in a stellar financial position. People now have to go with government backed mortgages and even though these are easy to get, they are based on verifying income. And with 13.2 percent of L.A. unemployed that is proving to be a challenge in itself.
Today we salute you La Mirada with our Real Homes of Genius Award.
Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.
■California Doing a Rendition of the Housing Industry on the Budget – $20 Billion Budget Deficit and Massive Amount of Distress Inventory. How Banks Raided the U.S. Treasury with the aid of the Federal Reserve and have Damaged Housing Further.
■65% of Southern Californians are Delusional. No wait, 65% Jump in Southern California Home Sales. No wait, 38% Record Median Price Drop. No wait, 50% of all sales are from foreclosures. Housing and Foreclosure Voodoo Headlines.
■Real Homes of Genius: $80,000 off in San Fernando for 865 Square Feet of Joy!
■Real Homes of Genius: Today We Salute you Huntington Park. Tweedledum and Tweedledee of housing. $500,000 Homes in Wonderland.
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.
