For better or worse, actual foreclosures are still elevated:

Actual recorded foreclosures show up as recorded trustee deeds went up by over 11 percent from Q1 of 2010 to Q2 of 2010.  This jump of course occurred because of a variety of reasons including a crappy economy but also the abject failure of HAMP which merely bought a few more months for many homeowners.  Notice of defaults fell by over 13 percent over the quarter.  I would only take this as good news if actual late payments on loans were also falling at this rate but they are not.  We are still near record territory for actual loans that are distressed in the state.  Then we hear about areas like Los Angeles that will now fine banks for homes that are left to disrepair.  Banks being the patron saint of taxpayer money, are now going to have even less of an incentive to file a notice of default.  Let the sucker borrower mow the lawn.  The amount of time for a foreclosure has gone to record levels because banks are simply ignoring late payers.  They are overwhelmed or simply don’t care (both are not good reasons).  So the decline in NODs is probably a bigger reflection of this trend as opposed to the actual market suddenly turning some proverbial corner.

Keep in mind that the housing market still sucks.  I’m not sure how else to put it especially for California.  Things are so bad, that people actually think 47,000+ recorded foreclosures in Q2 of 2010 is some sign of progress.  Let us put this into context for you:

In the aftermath of the last California housing bubble, the apex of recorded trustee deeds occurred in Q3 of 1996.  At that time, 15,418 foreclosures were actually recorded.  In Q2 of 2010 we actually recorded some 47,669 foreclosures.  So we are foreclosing at a rate of 3 times what was being experienced at the peak point of the last real estate crisis.  Yet this is somehow good?  For absurdity purposes, look at how low things got in Q2 of 2005 at the height of insanity.  Only 637 foreclosures were recorded during the entire quarter!  This is absolute insanity.  I mean think of how out of sync things had to be.  People always lose homes for a variety of reasons including divorce, loss of job, or medical illnesses.  Did life suddenly come to a pause in this quarter?  Actually, anyone and everyone could qualify for a loan so it is surprising that we even had 637 foreclosures.

There is still a large contingent that thinks housing is all of a sudden gearing up for housing boom 2.0.  Keep in mind that we are only tasting a tiny respite thanks to the Federal Reserve flushing over a trillion dollars down the toilet to buy mortgage backed securities and has also artificially kept the interest rate low.  Add to this the expensive and horrible policy blunder of the home buyer tax credit and the market was juiced on easy money steroids.  What more can we do?  Give homes away?  As absurd as that sounds, not really because the big gimmick is that banks need to keep homes valued at bubble levels and have home borrower suckers making their payments to keep the massive debt current.  Banks need an army of debt slaves.  So what if you stop paying on a $500,000 loan even though the home is valued at $250,000?  The bank still pretends the loan is valued at that level and this is where the gigantic gap appears:

Source:  MLS, MBA

This is where the excitement over the drop in NODs is basically hot air.  Currently on the MLS California has 137,000+ homes for sale.  This is what the public can see.  This does include some distressed properties but not many.  If we look at distressed properties including those currently in foreclosure, we find that the market has 255,000+ homes.  Some of these appear on the MLS, most clearly do not.  Yet the next column is where the sham is really happening.  Nearly 800,000 loans are 1 payment behind or even worse, already in foreclosure.  Naively some think that many of these won’t enter into foreclosure.  Actually, recent data shows otherwise.  Of loans that get behind one payment roughly 90 percent enter into foreclosure.  But let us be generous and say that only 80 percent will go into foreclosure.  We are talking about 640,000 properties here.  So much for the drop in NODs (it was a drop of roughly 11,000 from Q1 to Q2 of 2010).

I’m highly suspicious of the data because the actual real economy, you know the thing people use to pay their mortgage with, is actually still in a big mess.  California is flying off a budget cliff even though people pretend all is well.  We still have no budget for the next fiscal year and the gap of $19 billion still lingers (even as we give tax credits to those to buy homes!).  So we are in for some serious financial issues going forward.  Not much has changed.  If I saw wages increase by 50 percent in one year and all of a sudden high paying jobs were available for many unemployed Californian then maybe we can jump on the recovery bandwagon and justify high home prices.  But this is the reality:

Source:  BLS

In other words, the drop with NODs is largely based on funny math.  Banks are not moving on homes which is something that is already documented.  Extend and pretend programs also took some of these homes out of the NOD landscape.  But this is largely a distraction because the housing market is still in a giant toilet bowl.  I vividly remember talking about the massive rise in housing inventory in 2007 right before the market imploded.  People were laser focused on price and ignoring the major headwinds.  Home prices peaked at the moment we were heading for a rollercoaster price decline.  We are in a similar position today.  Ignore the data at your own peril.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

a

From the way the bill is posted, it looks like any unused funds will not rollover.  So say you are a family in the Inland Empire looking to buy a home for $200,000 and make $70,000 a year:

The tax credit is actually spread out over three years with a maximum allowance per year of $3,333.  So in the case above, it would not use the entire amount and whatever is “leftover” expires and does not rollover to the next year.  So in essence for the above, the person is getting a $2,500 incentive to buy a home.  This will of course lower tax revenues to the state for three years but apparently a $20 billion budget deficit means we can give out $10,000 tax credits like candy.  This is also similar to an option ARM in a weird way.  If you talk to a tax professional, they may recommend you adjust your withholdings and you will likely get $200 more per month in take home pay.  But what happens after year 3?  In reality, you will need to make more than $80,000 a year or more to reap the entire benefit if you are married and $60,000 if single.  If you happen to close between May 1^st and June 30^th you can also add in the federal credit to reduce your fed income taxes since the national government is flush with money as well.

For all the nuances and legal language, this is misdirected policy and a large waste of money.  This is not a good step in balancing the budget or putting our overall economy on the right track.  And on Tuesday Southern California home sale data was released and shows a market that is heavily dependent on government subsidies and investors:

The median price in all SoCal counties went up for the month yet sales are still off of their bubble highs by large amounts.  You would expect stabilizing prices with so much money being thrown into the market but the details are more troubling and show this may only be temporary.  Nearly 40 percent of homes purchased in Southern California were with FHA insured loans.  Using the $285,000 median home price that means someone looking to buy would only need $9,975 as a down payment.  And from recent data most that use FHA insured loans are going with the absolute minimum amount (this has also contributed to booming delinquencies).

Ironically even the government websites tell us a general rule we already know and that is you should not take on a mortgage that is 3 times larger than your annual household income:

The above data is based on a household income of $100,000.  As we have pointed out in certain cities this ratio is completely out of whack.  It’ll be interesting to see what happens once government programs start pulling back.

So last month, roughly 40 percent of all home purchases in SoCal were FHA insured meaning absolutely rock bottom down payments.  Another 27 percent were all cash buyers and I would imagine many are buying out in areas like the Inland Empire as investors.  Most are looking to flip and this game is getting thin because the rental market is flooded in these areas.  Investors are not looking to hold and are aiming to find a diamond in the rough, shine it up, and make some money on it quickly.  This is the bulk from what I have seen.  We do have cash flow investors in California but not many.

Looking at the typical mortgage payment we have to ask some questions however:

The typical monthly payment for those with a mortgage last month was $1,220.  This tells us a couple of things.  First, those that sell and have some equity use this to buy another place and pay down the new mortgage of the new home.  Also, recent buyers with FHA loans are paying the minimum 3.5 percent down payment but are likely buying in lower priced areas.

Right now the market is being artificially propped up like a mannequin with all the following programs:

-1.  $8,000 tax credit

-2.  Federal Reserve juicing the mortgage markets (artificially low rate)

-3.  New state tax credit (many will buy now so they can close escrow in May and June and double up the benefit between the state and federal tax credits)

-4.  Massive amount of distress sales (nearly 4 out of 10 were foreclosure resales)

The above are not signs of a healthy market.  I think many in Southern California still remember the $505,000 median price for the region so $285,000 must seem like a bargain.  But there are many factors that won’t remain for long.  Can interest rates remain this low in a market where risk is exploding?  Just look at Greece and what happened to their interest rate.  You think California is in better shape?  Just look at what is happening in L.A. right now.  They are fighting because tax revenues are extraordinarily weak.  The $200 million tax credit will run out quick.  Are we going to do this over and over in the face of a $20 billion budget deficit?  You have to remember that the state lags the general economy one or two years.  How?  Take for example property taxes on homes that are now priced at much lower levels.  In other words, we are building in lower tax revenues to adjust to the new reality and these are slower to react compared to general market sentiment.

I still look at the 12.5 percent headline unemployment rate and this gives me pause when looking at the housing market.  Even if the private sector starts hiring (this isn’t happening yet) the state and local governments are already looking to cut (or raise taxes).  We’ll have to find $200 million from somewhere else because we’ve just allocated that amount for people to buy more homes that they were probably going to buy anyway.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

a

If you haven’t already noticed, part of the budget balancing act contained earlier withholdings.  California Realtors are gearing up to fight this because many are independent contractors and get a 1099 tax form instead of the more typical W-2.  Most who get paid via the W-2 pay taxes on a rolling monthly basis.  Yet many that operate under the 1099 pay quarterly estimates of their taxes.  In many cases, this creates massive fluctuations with revenues.  But you have to love the argument coming out from Realtors:

“(OC Register) The Vote May be TODAY! Please call your Assembly member NOW!” an association “Red Alert” to members said after the measure emerged from conference committee in June. “C.A.R. OPPOSES (this) proposal to force independent contractors to make interest-free loans to the state!”

Unlike wage earners, who get taxes deducted from their paychecks, independent contractors aren’t subject to any withholdings. But contractors, who get a 1099 tax form instead of a W-2, are required to make estimated tax payments every three months.

Some state officials proposed that those paying independent contractors be required to withhold 3% of their income and send it to the state. The plan would accelerate tax payments and generate more cash for California’s coffers, they maintain.”

You have got to love this one.  Where were Realtors when brokers were giving out no money down loans and Alt-A junk to the public?  Where were Realtors when the $700 billion taxpayer bailout rescued banks?  I didn’t hear much opposition about that tax credit for home buyers which amounts to a free taxpayer subsidy to those who buy homes.  Now they are opposed to paying taxes earlier?  This isn’t even a tax hike.  This is a typical case of cognitive dissonance in action.

Some seem to think that we are already out of the woods with the July budget:

For what it is worth, the state is still issuing IOUs.  They are however ahead of schedule and are planning to phase out the program come September 4.  Even with all the massive cuts in programs and no new revenue streams the state is going to need to borrow some $10.5 billion for the fiscal year.  The chart above depicts that situation.  Without the borrowing, we would be in the red in a couple of days.  And much of the expectation is things will stay at this level:

Keep in mind that the above cuts of approximately $15 billion and the $10.5 billion in borrowing balance the budget for part of the last fiscal year and the 2009-10 year.  But the underlying basis is the worst has already occurred.  Given the current cuts, it is assured that the economy will face additional pain at least into the next fiscal year.  Many have only recently started furloughs which means less disposable income for the economy.

The current unemployment rate of 11.9 percent underscores the actual underemployment rate of 22 percent:

And people are doing what they can.  The economy has actually pushed many unemployed to seek a new avenue of income.  Game shows:

“(USA Today) Before the economy soured, Pomerantz says, few prospective contestants skewed older, college-educated and unemployed. Now its 10%, she says.

Catch 21 players can win a maximum of $50,000 – apparently enough of a draw these days to lure auditioners atypical of the “average Joes” who usually want on. Casting for a third season run of about 200 shows, “it’s absolutely clear we are seeing a lot of professionals who have lost their jobs or are looking for a way to supplement income,” says producer Scott Sternberg.”

People are simply trying to make ends meet.  And with 812,000 Californians receiving unemployment insurance, there are many simply trying to figure out how to handle the current downturn in the economy.  The unemployment insurance fund has been in the red since the start of the year:

And the loss of jobs has occurred in practically every industry:

The only two sectors that are slightly positive on a 12 month basis are education, health services and agriculture.  But even healthcare, the last place to cut is having to scale back:

“(LA Times) One of the state’s largest employers, healthcare giant Kaiser Permanente, said it would eliminate more than 1,800 positions as it struggles with drooping membership, uncertain healthcare reform and shriveling Medicare reimbursement rates.

Job reductions will occur within the next few months, the Oakland-based nonprofit said Tuesday. Many of the purged positions — just under 2% of Kaiser employees — are temporary, on-call or short-hour. Most Kaiser medical centers in California will be affected.”

The real question many should ask is what industry is going to bring us out of this recession?  Also, we are assured additional financial losses with the Alt-A and option ARM products.  There is now speculation that banks will be doing lease-back options to current owners.  That is, renting the home back to the distressed borrower at market level rents with a future purchase option.  But how many people will jump on to this program?  Are banks capable of being landlords?  I hold my own reservations here.  Remember Hope Now?  This was going to supposedly help tens of thousands and helped out a handful of people.  With about 1,000 properties going back to banks each day, they will have to decide quickly what they plan on doing.

California relied much too heavily on real estate and is now paying the price.  To assume real estate will lead us out again ignores the amount of distress property still coming down the pipeline.  2010 should offer us a better glimpse of where we are heading.  And now, we are only starting to see the impacts of the major budget cuts.  Many are just starting school.  Bigger class sizes and a public college system unable to meet the demand of the recently unemployed.  And those that can go to college, are now facing higher fees (10 percent at CSU and 9.4 percent at the UC).  Even community colleges hiked up their fees from $20 to $26.  Less money for consumption.  Cash for clunkers ends today.  At a certain point, the gimmicks start running out.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

a

It is amazing that those who have been wrong predicting the housing collapse are now the folks guiding policy.  As I discussed in the last article regarding Alt-A loans and the California Foreclosure Prevention Act, all that is being done is the state is institutionalizing option ARMs which is flat out insanity and would make anyone feel like they took crazy pills.  Why is this nuts?  The so-called modifications include freezing the interest rate, negative amortization, 40-year terms, and gimmicky teaser rates.  However, you can forget about lenders knocking down the principal balance since this will actually eat into their delusional profits (and would most likely make them explode like a piñata).

I love how some people to fit their own agenda (i.e., those in the real estate industry or deeply connected to it) have now taken it on their behalf to use our argument about the coming Alt-A tsunami for further government bailouts!  Dear readers, as I warned you back before TARP became the utter monstrosity that it is for the crony bankers, this kind of thinking will lead to more taxpayer waste.  I recently saw this argument floated but want to address it as quickly as possible:

“(LA Times) One proposal for a debt-forgiveness program was floated this month by the Milken Institute in Santa Monica. The plan, authored by institute President Michael Klowden and regional-economics director Ross DeVol, would refinance existing mortgages of underwater homeowners with new loans from the government.

Klowden and DeVol call it the “homeowner principal forgiveness vesting plan.” Here’s how it would work:

Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.”

This is a bad idea.  Since some people are misconstruing what many of us who have been warning about with the Alt-A and option ARM tsunami let me be clear about my position:

These homes should be taken back in foreclosure.  Banks must eat their losses.  If it is game over for them, so be it.  We have a healthy rental market.  People won’t be out on the streets.  To take a loan from an irresponsible gambler (aka lender) and convert it to a government loan is absolute insanity.  It is a scam.  A swindle.  I bet many of you are seething and probably have the desire to punch your monitor now that you know how this housing casino works.  But guess what?  This plan is much more of a crony bailout:

“They estimate that the cost to Treasury (and thus to taxpayers) of saving 1.5 million homes from foreclosure or abandonment with this plan would be between $75 billion and $100 billion. That assumes the government wouldn’t jeopardize the original lenders’ balance sheets by forcing them to share in the cost via haircuts on their loans.”

Oh really?!  We wouldn’t want to jeopardize all those crony banks and Wall Street right?  So let me get this straight.  The purpose of this plan is to:

(1)  Bailout lenders who made irresponsible loans?

(2)  Give over leveraged homeowners and speculators an easy way out?

(3)  Put the toxic waste onto the taxpayers’ bill?

(4)  Expect lenders to walk away with no serious repercussions?

I know many of you are against the prospect of nationalization when I tossed it out many months ago.  These kind of “plans” and additional workouts are actually going to cost us more than simply going in with a strong arm and gutting the system.  That ship alas has sailed politically so fear not.  But take a look at those banking and Wall Street stocks.  Guess who won?  It wasn’t the average American.  However, these are the consequences of allowing the corrupt banking system to guide bailout policy.  Seriously folks, here in California many people should lose their homes and become renters.  Enough with the renting stigma and the notion that everyone should own a home.  If you make your payment and are prudent then you have nothing to worry about.  Yet if you over leveraged yourself and took a HELOC to put in a pool with faux rocks and a waterfall or bought at the peak then why should the government bail you and your lender out?

Some people are making the comparison to the S&L crisis and the Home Owners’ Loan Corporations during the Great Depression.  Here are some facts about the HOLC:

-At the peak it was massive employing some 20,000 people

-HOLC received 1.9 million applications for home loans with 1 million being approved

Even with favorable terms and conditions, 20 percent of these loans failed!  With that kind of rate most banks would sink.  And by the way, the HOLC did file 200,000 foreclosure auctions and this experiment never revived mortgage lending which remained anemic for another decade.  Why?  Because the nation was in something called the Great Depression!  Our housing obsession started nearly a century ago.  If you have a weak economy chances are, you are going to see problems with housing.  The solution isn’t to give more loans to people who can’t afford them.  The solution is to focus on creating a sustainable economy with a laser focus on job creation.

By the way, as crazy as the housing market was during the Great Depression and the S&L crisis, we have never seen the amount of toxic garbage like Alt-A and subprime loans like we have in this market.  So those that use those past experiences have no reference because we have never scorched the Earth with so much toxic waste that we once called “creative financing.”

The ideas being proposed are as bad as the loans that got us here in the first place.  If you want an idea of how this is going to play out you should really examine what Japan went through with their double bubbles just like we did.  In fact, Japan has a tsunami of their own giving us a Scrooge like glimpse into our Ghost of Christmas Yet to Come if we don’t change course:

“(UK Times) A housing loan default problem is looming and likely to begin in the next few weeks. It amounts to the detonation of a ten-year time bomb that, researchers at the Tokyo Foundation say, started ticking around 1999 in the immediate aftermath of the Asian financial meltdown. This is the result of flawed government policy, whereby the state housing loan agency offered mortgages to families that they knew were unable to pay. According to the think-tank, those loans were made on the assumption that the traditional staples of Japanese corporate life – seniority-based pay increases, constantly rising bonuses and lifetime employment – would remain as fixtures.

The impending meltdown, which the Tokyo Foundation believes could affect some hundreds of thousands of households, will be focused initially on the country’s industrial heartlands, where corporate bankruptcy rates are rising. The residential zones around Toyota’s home territory of Nagoya could become ghost towns, Kazuo Ishikawa, the think-tank’s senior research fellow, said.”

Can things get any clearer?  With Americans losing some $13.87 trillion in household wealth, we have seen our own lost decade yet people keep refusing to examine the lessons of Japan.  Now Japan is seeing their own horrific policies of propping up a failed banking system.  No bank should be too big to fail.  And foreclosures are necessary to reach a bottom quicker.  The CFPA for example is merely a kicking of the can down the road policy.  Don’t you find it ironic that whenever cram-down legislation is introduced into Congress the banking industry shoots it down but once the government is involved in sucking up those toxic loans, the lenders come out of the woodwork?  Cram-downs don’t work when lenders need to eat the principal but when they use the taxpayers’ dime, then they are all for it.  The banking industry is still operating under similar terms that caused the bubble and we keep funneling money into this sector.  Are people not outraged anymore?  I remember back only in September of 2008 people were calling up their representatives and mounting quixotic battles for a few billion dollars in proposals.  Now, we are days away from the worthless public-private investment program and the public seems in a daze.

There is now an industry leaching on those in financial trouble:

“(LA Times) David Berenbaum, vice president of the National Community Reinvestment Coalition, called on newspapers to stop running ads by “for-profit racketeers who charge on average $2,900 to consumers for poor advice.” Examples he cited included counsel to not pay the mortgage or contact the service provider. HUD-approved counselors will help consumers for free.”

This is another problem with running programs like the CFPA or any government sponsored help.  You will have these shady operators pop up to scam folks and take any money left from those who really need a call that goes something like, “unfortunately, you are insolvent.  Here is what is needed to file for foreclosure.”  It is that simple financially but I know emotionally, it is difficult.  But don’t you think it will make it harder when you prolong the suffering with gimmicks and scams?  If we kept a simple message and didn’t compound this problem further, we’d have a tough couple of years but now we are risking the fiscal sanity of our country because the banking system has our government in some form of deep capture.

Think for a few minutes.  At the end of the day, someone is going to have to realize those losses on all these toxic mortgages.  The only question is who is going to take the brunt of the fall?  Many borrowers are losing their homes yet somehow, the big banking centers are still up and running and supposedly turned a first quarter profit thanks to the taxpayer bailout.

These bailouts have compounded the mess.  In fact, it has clouded sound judgment.  I think most Americans would have been even okay with say a bailout that went like, “the median home price in America is roughly $150,000.  If you have a mortgage below that, we can take a look.  Anything above that and sorry.”  Instead, we are trying to game the system to unload the gambling happy California and mega-mortgages to the rest of the country.  Need I remind you that the state has 643,000 Alt-A mortgages with an average balance of $420,000+?  Sound policy involves foreclosure but you’ll never hear that from the pundits since they have their hand too deep in the bailout cookie jar.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

a

Let us set aside the Alt-A and Pay Option ARM tsunami that will depress housing prices further late in 2009 and will hit full force in 2010.  How can state representatives miss so badly on the budget for the wealthiest state in the nation?  First, it is important to look at the state like a household balance sheet.  Let us first take a look at the last 30 years for revenues:

Source: Legislative Analyst’s Office

The first thing you will obviously notice is the incredible jump in personal income taxes during the tech era.  That bubble burst and brought income tax revenues lower.  As would logically follow, sales taxes also fell after that burst.  But do you notice something else?  Local property taxes kept on moving up during the tech bust!  In fact, starting right about the time the tech bubble burst we had a major jump in local property tax collections.  We transitioned with one bubble to another.  This is why California is in a deeper mess than other states.  For the past 20 years, we have drawn a large portion of our revenues from a bubble economy.  Now this leads us to our next chart that was presented back in January of 2009.  This chart comes from the Department of Finance and ironically is called, “How Did We Get Into This Mess” while giving us another reason why we are in the mess, overly optimistic projections:

Now if you recall, at the time we were trying to plug a $41.6 billion budget deficit.  Now if you carefully look at the chart, you will realize that the major deficit is reflected by a drop in revenues yet somehow revenues miraculously go up for the next budget.  You will also realize that expenditures do not move together with revenues.  This again is because of our dependence on personal income tax and sales tax.  What is fascinating from the chart of course is that much of the revenue produced in the last 20 years largely relied on bubble economics.  Now with the real estate bubble bursting there may be no other bubble to pick us up.  You will see that the state has had no problem spending more and more.  This is problematic in normal times but realizing you are spending money from an income stream that is built on a bubble is troubling.  Bernard Madoff made money in an elaborate Ponzi scheme in which he paid investors money with money that was coming in.  Everyone was happy until the scam was uncovered.  We are now realizing with the real estate bubble bursting that a large amount of revenues were simply a function of the bubble.

A simple way to think of this is to take into account the income of banks, mortgage brokers, or real estate agents.  Each home that sold produced a commission, fees, and higher property taxes for the state.  It was a win-win-win to infinity.  And homes were selling over and over churning fees and money for all involved:

You go from having 600,000+ sales per year in California to 300,000+ sales per year. So even in 2007 when sales drastically slowed down the state should have started adjusting to this new reality but of course it did not.  What did this translate to?  Half the work was needed.  Half the income was being produced.  Yet the state kept on spending as if nothing had changed.  Its number one source of growth for the decade housing was cut in half and it kept on going forward as if everything was the same!

37,967 homes sold in the state in April 2009.

36,215 in March

29,225 in February

29,458 in January

This puts us in a target range of 450,000 to 550,000 for the year given that spring and summer are the strongest selling months.  Yet here is the new problem.  The median price for a home sold in the state has fallen by half.  So even though sales may be moving up prices are cut in half.  This does very little for revenues especially when over half the homes that sell are foreclosure resales.

The new budget gap came only a few weeks after the $42 billion hole was patched up.  The January chart should give you a few reasons why.  Expectations where much too optimistic. In fact, in a September 2008 report the peak unemployment rate was put out at 9.4 percent for the state which would be reached in 2010.  We are up to 11 percent already.  Also, we are now blowing through the unemployment insurance fund:

We have been in the red for some time now.  Of course, the reason to this is logical.  Unemployment insurance is paid by working people and with such a high unemployment rate, less is collected while more people collect.  You would think that the state would understand basic arithmetic but that is not the case:

“(SF Gate) Starting in 2002, the Democratic-controlled state Legislature enacted benefit increases that raised the maximum weekly payment from $230 to $450 – which they were able to do by a majority vote.

But Democrats lacked the two-thirds margin to change the 1985 formula under which employers are taxed on only the first $7,000 of each employee’s wages. Schwarzenegger’s proposal calls for taxing the first $10,500 in wages.

Marc Burgat, chief policy advocate for the California Chamber of Commerce, said the shortfall is the consequence of increasing benefits without increasing funding. He said California should study how other states handle unemployment and consider tightening up “some of the broadest criteria for eligibility” of any state.”

During boom times, many economic ills are hidden simply by the flood of money.  No one goes thirsty.  For two decades, California has had the luxury of two historic bubbles with unprecedented windfalls in revenues.  The problem with unemployment insurance sinking into the red is a good litmus test of how things are done here.  We nearly doubled benefits yet collected money into the fund at the same rate.  Of course, it sounds nice to have bigger unemployment checks.  Who doesn’t want that?  But how are you going to pay for it?  Therein lies the rub.  All it took was a recession this deep to expose the semi-Ponzi scheme of the system.  So much money is going out of the fund to 853,000 Californians that we will be $17.8 billion in the hole by the end of 2010.

The voting down of the propositions was a stand many took in the state.  Yet many are now stunned of the deep cuts coming.  Most Californians have never faced such a deep economic crisis.  As I have discussed many times the only way for California to fix the situation is either gather more revenue or cut spending.  With the propositions voted down (more revenue) the only option left was to cut.

Remember the state revenue chart by the LAO above?  Last week we had a new update for revenue projections:

Welcome to a lost decade of income. We are now back into 1990s territory in regards to how much revenue the state is pulling in.  This should not be a surprise given the housing bubble was simply a bunch of smoke and mirrors fueled by toxic mortgages, many like the Alt-A and Pay Option ARM that are going to kick the mid to upper range of the housing market a few notches lower.  That is why expecting a loss decade in housing prices isn’t out of reach.  We’ve already reached that with the lower range and the mid range will be next.

The above should be reason enough to believe there will be no housing bottom for a few more years.  And many of the pundits fail to ask the next logical question.  What happens after the bottom?  Do prices shoot up again?  Do they move sideways?  I doubt we’ll see another bubble anytime soon in real estate.  And when you look at what jobs are holding up in the state the picture does not get any better:

So what we have are good bubble paying jobs disappearing while lower paying jobs take their place.  This is another reason for lower housing prices.  Who is going to buy all those over priced homes in so-called “prime” areas?  That is why in some California cities we are seeing a handful of sales while at the lower end, sales are moving along briskly.  50 to 60 percent discounts are working but not 15 to 20 percent in more prime areas.  The Alt-A and Pay Option ARM debacle will move up the food chain later this year and into 2010.

Now people are asking why doesn’t the Federal government simply step in and bailout the state?  Well for one thing, states are part of the country.  Shocker, I know.  This is like a snake eating its own tail.  Also, if California receives assistance this sets up a precedent for all other states to follow.  Either way, even if we were to receive a massive bailout this doesn’t remedy the balance sheet because those revenue streams from the bubble are long gone and will dry up after the first bailout.  Unless, someone can find another bubble to give us another decade of so-called prosperity?    

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

a