Let us first take a look at the California balance sheet:

Nearly 50 percent of the revenue for the state comes from personal income tax.  Another 34 percent comes from sales taxes.  Over 84 percent of all revenue comes from sources that are affected heavily by economic downturns.  Those in Sacramento have decided to simply ignore the problem until we reach another situation where we are printing IOUs.  Yet even with the current cuts in spending we are still over historical trends:

The above chart shows how the total budget exploded during the boom times.  With the bubble, there were billions in profits that should have never been there.  You had high school graduates pushing Alt-A and option ARMs receiving commissions of $10,000 to $20,000 for falsifying documents on a loan that ultimately will implode.  The state enjoyed collecting those high tax revenues and turned a blind eye to the practice.  Plus, many of these people blew all their money and the state then collected more money on sales taxes.  Each home that sold had a new higher appraisal.  How many industries do you think really had no chance of viability without the housing bubble?  We are now finding out.

California has boosted its sales tax in the past year to bridge the gap.  Has this helped?  Of course not.  California already has one of the highest state sales taxes in the country:

We have one of the highest sales taxes and also, one of the highest personal income tax burdens.  Los Angeles has a sales tax of 9.75 percent.  This is stunning.  I had to buy some household goods a few weeks ago and couldn’t believe the $50 in sales tax being paid out.  That $50 could have been spent at a meal at a restaurant.

People then ask if employment gains didn’t plug the $60 billion in budget gaps, then what did?  Taxes and cuts:

$30 billion of the budget was fixed with cuts, $12 billion in taxes, and $8 billion with Federal Stimulus.  If you think this has fixed the problem, it has not.  The above proposal came out in July and we are already off with the current estimate:

This is the latest report that came out in October and reflects revenue for the state up to September 30^th.  So where did the biggest falls come from?  Personal income taxes and sales taxes.  Last year in September, the state collected $5.5 billion in personal income taxes.  This year, that number is $3.9 billion.  Keep in mind that in September of 2008 things were already bad.  The housing bubble had already popped and unemployment was already high.  Yet what you see above is a state that is having a tough time collecting revenues from typical income streams.

The California housing market still has much more pain to face based on the above.  The above data is merely a proxy for the real economy.  California revenues are declining because unemployment is high and people are being more cautious with their money.  Another good indicator is estimated tax payments.  The wealthiest Californians pay a large portion of personal income taxes to the state.  Unlike most people, they do not pay the state via withholdings.  It comes from estimated taxes:

Look at it this way, if your best client is suddenly not buying as much of your goods, would you be worried?  Of course.  Many of these people make money from the stock market and ironically, unlike many average Californians, have enough losses in 2008 to carry over for a few years with creative accounting.  But more importantly in terms of home buying, unemployment and underemployment is at 23 percent:

Someone that is unemployed is not paying personal income taxes.  Someone that is unemployed does not have the same disposable income as someone with a job.  There goes your personal income tax and sales tax.  Your two biggest income streams are still near the bottom.  In addition, people have seen their pay cut.  Take for example someone that was used to selling $600,000 homes and receiving a commission on that. Now, they might need to sell three $200,000 homes for the same amount.  Bottom line is a large part of the above revenue stream was temporary and is never coming back.  The U.S. Treasury and Federal Reserve are trying to revive parts of the housing bubble with the $8,000 tax credit (a 4 year old got a credit and millions of dollars are under fraud investigation), Fed buying GSE MBS to buy down mortgage rates, and allowing banks to do whatever they wish with the foreclosure process.  Yet prices are not booming back.  Have sales increased?  Yes.  But the question is how sustainable is this path without the real economy?  Those arguing for a bottom are so one sighted about their analysis that they miss all of the above!  The state is still showing symptoms of a patient in intensive care.  Revenues are falling not because the economy is healthy, but because it is poor.  Yet the current solution to the problem is flood the housing market with money?  Two years and nothing yet.  Who is really being helped here?

And spare us the notion that everyone is making $250,000 a year (by the way, that is what you would need to safely buy the once median price home of $600,000).  In fact, this warrants putting a chart together:

So if this is the income distribution, how in the world did the median home price in the state approach the $600,000 mark?  When you can make things up on mortgages like Alt-A loans and option ARMs, you can leverage yourself to whatever your heart desires.  If income is being made up, then there is no restraint on the bubble. The only restraint is how much the criminal mortgage broker is willing to put on the gross income line.

California’s Future?

A recent survey shows that people are planning on spending less this holiday season.  This does not bode well for the sales tax California depends on.  And even though the stock market is up, like we have mentioned, many wealthy individuals have creative accountants that can game the system so the state shouldn’t expect a 60 percent bounce in revenues from this group even though the market has gone up this much.  Why?  Because job hiring is still missing on the radar screen.

Some are viewing housing as the proxy to a recovery.  They see sales stabilizing and moving up and prices pulling back from the cliff and all of a sudden project this data onto the overall economy.  Yet they fail to realize the incredible subsidies that are floating in the housing market.  The $8,000 tax credit, historically low interest rates brought on by the Fed, a glut of low priced homes, investors desiring to be the next Rich Dad, and this notion that housing gave us the go-go 2000s so it will also lead us out.  That is the problem.  This obsession with housing.  Why not give tax credits for job creation?  Or what about lowering interest rates on SBA loans so people can start businesses?  Of course, the housing shills only care about and focus on housing with their one track mind.
They fail to see that housing will not lead us out of this recession.  It has to come from other industries.  California has a fleet of delusional realtors and brokers just itching to get back to 2005.  They fail to see that 23 percent of people are unemployed and underemployed or that the state is back in a billion dollar budget deficit.  Rome is burning but they continue to play on their housing fiddle.

We will be dealing with another budget deficit soon.  This is in the cards.  And it is only a matter of time that the federal government raises taxes.  This is inevitable.  You can’t run trillion dollar deficits and expect the U.S. dollar to remain strong.  So we know where this is heading.  So much money spent on the banks and housing.  What a waste.  We could have spent the money on targeted job creation and housing would have fixed itself on its own.  Instead, we have handed out approximately $13 trillion to the banks and Wall Street through giveaways and backstops.

You still believe that what is good for Wall Street and Banks is good for the average American?  Well the data above shows us it is certainly not good for California.

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It is disturbing that there is a significant school of economic thought out there that somehow jobs do not matter.  This line of reasoning is baffling.  In many ways, this is similar to the collective deep capture that occurred during the housing bubble that somehow prices were justified even in the face of rampant fraud and mass delusion.  They don’t call it mania for nothing.  Take for example the wonderfully unstable budget of the biggest state of our country, California.

Only last week, State Controller John Chiang announced that the state is falling behind $1.1 billion in receipts from a budget only enacted three months ago.  Keep in mind the estimates made only a few months ago were conservative by California standards yet somehow money isn’t coming in.  This is occurring at the same time that the state has hiked taxes and is also front loading tax collections earlier.  To the obvious person on the street, you cannot tax someone without a job.  Well, that isn’t necessarily true because you can tax them on items they buy (in some counties like L.A. that rate is near 10 percent).

We are now 21 months into this recession.  Job growth is no where on the horizon.  It would appear that people are waiting for some ambiguous industry to emerge out of the ashes like some financial Phoenix.  Will it be the green sector of our economy?  Yet even in that optimistic scenario, does that sector have enough to make up for the 8 million jobs lost in this recession and the growing demands from a larger work force?  If we examine eras like the 1920s in Florida and their real estate bubble, prices did not come back for years.  So if you factor in the 1920s coupled with the Great Depression of the 1930s, things didn’t turn around for nearly two decades.  California and Florida are coming off unsustainable highs.  What does this mean?  Let us go back to the State Controller report.  What that translates to in the real economy is less money coming in to the government.  And that means either more tax hikes or more spending cuts.

Let us take a look at a sign of economic vitality.  U.S. Exports:

Source:  Federal Reserve

Does that chart look like a recovery to you?  Keep in mind the above chart factors in every imaginable bailout and trillions funneled into the financial sector.  Yet exports haven’t moved.  Before we can talk about housing rebounding and moving upwards shouldn’t we talk about the real economy first?

In this article we are going to examine 10 charts from housing to auto sales that show not much has changed at the core of the economy.

Chart 1 – Auto Sales

As it turns out, cash for clunkers was merely a way to frontload auto sales.  After seeing a spike in August sales the September number fell back to the year long trend.  As one colleague told me, we helped stimulate the foreign auto maker market since most of the cars bought were non-domestic in brand.  Talk about a horrible strategy.  Given that we now own GM and Chrysler making the U.S. government auto CEO, why would you want to reward your competitor?  Seems like our politicians don’t think things through because a one month boost came with an expensive price tag.

And is this even the right way to go?  Again, non-domestic auto makers make up a big part of our economy even though many provide jobs outside the U.S.  I’m all for open trade.  But why is the American taxpayer subsidizing this?  As we had speculated back when the cash for clunkers program was announced, this was a big gimmick like Hope Now and other policies that have yielded poor results in action.

Chart 2 – Housing Starts

This chart should tell you the big story regarding home building.  Sure, single family building is up a bit but wouldn’t you expect that with trillions being funneled into this industry?  But look at the chart closely.  Notice the multiple housing starts?  Still at record lows.  Why?  Because the market is saturated with inventory!  So trying to spur more building when we are seeing some 300,000 distress actions on homes hitting the market each month just doesn’t make sense.  If anything, it will prolong this housing slump.

Housing starts have fallen so hard that we have to go back to the Great Depression to find another similar trend.  It would seem that those calling bottom somehow believe that we are heading back to those 2005 and 2006 points.  We are not.  In their mind, everything is boom and bust.  No middle ground is allowed.  Let us assume we are back on normal ground.  Then what?  Why rush to buy a home now?  If we are back on normal footing then housing should reflect employment conditions.  After all, most Americans pay their mortgage from wages.  So until employment and wages move up, there is little rush to purchase a home right now and later charts will highlight why.

Chart 3 – Single Family Home Sales

The stabilization with home sales is largely due to the big amount of distress sales going for rock bottom prices.  Couple this with the Federal Reserve buying agency debt and keeping mortgage rates at historical lows and home buying conditions seem prime.  Add fuel to the flame with an extremely expensive $8,000 tax credit and sales go up.  It is simple.  Just like cash for clunkers.  Yet what happens when you remove that tax credit?  Cash for clunkers gives us a crude look at what will happen.

And look at new home sales.  They are off their lows but nothing remotely close to their peak days.  So this chart ties in with the previous chart because all the action is in the existing home market.  No need to build homes when people are buying and selling already made homes.  So much for those construction jobs.

Chart 4 – 30 Year Mortgage Rates

If you look at the chart above you can thank the Federal Reserve and U.S. Treasury.  What you don’t see is the parallel destruction of the U.S. dollar for these cheap mortgage rates.  There is no free lunch.  Mortgage rates are near historical lows.  Rates hovering at 5 percent don’t even mesh with historical standards.  Over the past 40 years the average 30 year fixed rate has averaged 9 percent.  That is, if we even revert to the mean rates will double meaning the amount people pay on a monthly basis will explode.
With Alt-A and option ARM loans not even eligible for these rates, how does this help distressed owners?  It doesn’t.  The market is artificially being juiced with trillions of dollars and at some point, something has to give.  The Fed is betting the economy will miraculously find some other bubble (i.e., technology, real estate, ?) and will expand again.  Yet we may be out of bubbles for the short term.

Chart 5 – Personal Savings Rate

Americans started saving at a pace not seen in decades.  Yet the cash for clunkers program and the home buying tax credit once again got people out and buying.  But is this sustainable?  It is too early to tell.  The recent dip is because of these last two programs.  The next phase will be the holiday shopping season.  Many retailers depend on the November and December months for a large chunk of sales.  We will soon find out how tapped out the average American is.  Last year, people went out shopping like crazy even though economic indicators were equally poor.

Yet over this year, credit card companies have been yanking lines in light of higher default rates.  Without the plastic, will Americans shop till they drop this Christmas?

Chart 6 – Hours Worked

The work week has gotten shorter.  So short, that it is the lowest it has been in record keeping history dating back to the 1960s.  The average American work week is now down to 33 hours.  Keep in mind this is for the employed.  If we look at the under utilization rate (includes fully unemployed and those working part-time for economic reasons) the U-6 rate is up to 17 percent.  The above chart reflects those but also those who supposedly have full-time jobs.

What is occurring is overtime is being cut and furloughs are being implemented like the 200,000 state workers of California that are now earning less.  Earning less means less money to spend.  The state is learning this lesson quickly.  Jobs absolutely matter.  The problem is Wall Street has captured our political process and convinced many that if Wall Street is happy, somehow little crumbs will trickle over onto Main Street and all will be well.  So far, politicians have given everything the bankers have requested and nothing has changed on the streets of America.  How is TARP working out?

Chart 7 – Household Debt Burden

Even as debt is being destroyed through foreclosures and bankruptcies, many households are still in record amounts of debt.  Why?  Because losing jobs and less pay reflect a new reality even though the system is washing out old obligations.  Debt is not wealth as many are now realizing.

This above chart may show why the American consumer is reluctant to go out and spend without getting massive incentives like cash for clunkers and home buying tax credits.  Are we now going to give Americans a $1,000 holiday shopping voucher?  Some in the retail sector have asked for similar goodies.  Make no mistake that the crony bankers will ask for anything to fluff their own profits.

Chart 8 – Household Debt Service

Now the above is a fascinating chart.  What we see is a trend of less financial obligations for renting households.  Rents have been falling across the country.  This only makes sense since people are earning less.  However, the financial debt obligation of homeowners is still near peak levels.  Same amount of debt on a home that has seen equity evaporate.

Many people are now unable to qualify to buy a home and that is okay.  We need to remember that during the bubble anyone with the desire to own was given that opportunity.  Alt-A and option ARM products were the mortgage of choice for many.  We are dealing with the repercussions of those decisions even today.  In fact, we have yet to deal with them since 2010 to 2012 will bring many of these home loans to roost.

Chart 9 – S&P 500 Double Bubble

The above is perfect chart of the double bubble we have experienced in the last decade.  It is interesting to see the recent trend as if a triple bubble is in store.  The market is trending as if we will have a V shaped recovery.  As we have seen with all the data above, if anything the cliff diving has stopped but this does not equate to a booming recovery.  We are betting on another bubble even in light of no job growth and also trillions in bad loans coming due soon including commercial real estate.
The market price/earnings ratio is still high.  It believes that 2010 will somehow bring back a 2005 year.  But digging beyond the debt, 2005 wasn’t a stellar year.  The only reason it looked stellar was the mania in housing and absurd financial sector profits.  The financial sector profits are back with taxpayer money but the boom in construction is nowhere to be found.  Unemployment is also officially nearing 10 percent.
Chart 10 – Health Care Employment

Maybe the next bubble is in healthcare?  This chart tells you the story of an aging population that doesn’t make much anymore since it has outsourced a gigantic portion of its manufacturing base.  Many younger workers are looking at boomers who lived up the 1960s and 70s, got serious in the 1980s and 90s and now are expected to shoulder the burden of their entitlements all the while understanding that they will not have those benefits when they retire.  If anything, just look at the ages of those on Wall Street.  The young brokers were merely fodder in the recent downturn as we saw these young Gordon Gekkos walking out of places like Lehman Brothers brown box in hand with desk goodies and a sad look on their face.  Yet their bosses made out with millions in bonuses.  So much for company loyalty.

Healthcare costs are growing and so is this part of our economy.  With many boomers retiring in the next few years, an inordinate amount of stress will be put on our system.  Younger generations are not having gigantic families anymore.  So there are fewer people paying into the system for an enormous size of our population who will now start collecting.  Social Security is minimal with average payments around $1,000 to $1,300 a month.

Yet younger workers are looking at this and also seeing these workers with pensions of $4,000 to $6,000 per month (and higher) and are now told to put their money into the 401k casino and hope it makes out because Social Security will be a shell for them when their time comes.  Many have lost thousands in this recent crash that was the deepest since the Great Depression.

I doubt healthcare will be the next boom.  This is a cost to our economy that is only set to go higher as people retire.  What is the boom going to be in?  Viagra?  With annual sales of over a billion, maybe this is the boost the economy needs.  I mean is this what it now boils down to?  We need to get back to making things.  The economy for much too long depended on youngsters in front of Bloomberg terminals punching in keys and trading billions of dollars as if it were the new version of Halo.  Then the “real economy” was largely based on everyone dressed up in a suit pretending they were the next HGTV flip this house expert and trading homes like baseball cards.  It was so easy.  Paper pushing and house flipping.  Heck, at least in the technology bubble we were left with some great companies.  What are we left with after this housing boom?  Gigantic McMansions for families that don’t even plan on having that many kids.
Until jobs start showing up, any talk of a rebounding housing market is moot especially with this entire artificial stimulus still bouncing around the economy.  And collapsing tax revenues are not a good sign.  I don’t buy the jobless recovery argument and the government tends to agree.  If all is well, why is the U.S. government and Fed buying $1.25 trillion in agency debt to lower mortgage rates, putting in place an $8,000 tax credit, boosting car sales with gimmicks, encouraging risky low money down loans with FHA insured products, and extending unemployment insurance to a record 92 weeks in states like California?  Do these things sounds like policies of a booming economy?

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One issue rarely talked about is how the weak dollar is going to impact foreigners buying real estate.  For the most part, I’m not sure how much of an impact this will have on residential real estate.  With commercial real estate we may see a good amount of buying if the dollar continues to get pounded.  Yet it is important to look at what currencies make up the U.S. dollar index:

Source:  Akmos

By far the largest weighted currency is the Euro.  Yet many of the countries within the basket that make up the U.S. dollar index are facing their own demons.  That is why I am hesitant to think the dollar will simply fly off a cliff while every other currency goes up and foreigners suddenly get an urge to buy up every Real Home of Genius on every corner of America.

What is fascinating is how connected the U.S. dollar and stock market have become.  I was unable to find charts that overlay the S&P 500 and the U.S. dollar index so I matched them up to give you a clear perspective of what is occurring:

As the chart above highlights, the dollar had been falling hard for all of 2007.  When the market peaked late in 2007, both the dollar and stock market fell in the U.S.  This was the brief period of decoupling or belief in this misguided notion.  This lasted until the dollar bottomed out at 70 in early 2008.  But after that, the world re-coupled and the U.S. dollar soared up until the March 2009 stock market low.  For this period, the stock market was tanking but the U.S dollar was going up.  To twist your mind further, since the March low the stock market has moved lockstep in opposite directions from the dollar.  It is a near perfect match!

Unfortunately the U.S. Treasury and Federal Reserve are doing everything they can to damage the dollar.  In fact, the only reason real estate isn’t correcting faster is because of the artificial money being pumped into the system.  Forget about jobs (26 million Americans are unemployed or underemployed).  Ignore manufacturing:

Right now the market is one giant easy money casino.  In fact, saving money is now on par to stuffing it into your mattress.  For example, let me tell you about U.S. Saving I-Bonds.  I’ve bought a few of these in the past as additional diversification to my investment portfolio.  The idea with I-bonds is they will keep up with inflation and pay a fixed rate.  Well over time, that fixed rate has slowly disappeared:

Okay, well at least we have the compounded inflation rate right?

That’s right!  The CPI had deflation.  So for the first time ever the I-bonds are now paying the awesome rate of 0.00%.  Bwahahaha!  The U.S. Treasury issues these products.  If they really wanted Americans to save they could up the fixed rate.  Instead, they cut the amount of these you can buy to $5,000 a year from the previous $30,000 a year and then make the rate so unattractive that putting money in your shoes seems like a wise investment move.  Get the hint?  They don’t want you to save.  They want you to blow every penny you have on cars, homes, and every other consumer hamster gimmick you can think of.  Only problem, the consumer hamster is reaching retirement and is loaded up with Prozac and Red Bull and is about to collapse.

I would show you the big bank savings rate but suffice it to say they are offering basically 0 percent.  However, banks are now making good dough on the difference between what they borrow and what they lend even with historically low mortgage rates:

Thanks to the trillions in taxpayer subsidies, banks are able to borrow for virtually zero and lend out at much higher rates.  So any rate above zero is a gain.  And since banks can now be picky regarding customers, they are experiencing some crazy yields.  If you want an idea why banks made enormous profits this decade just look at the Fed funds rate.  Yet this is now all coming at a cost.  The U.S. dollar has lost over 40 percent of its value since 2002.  How this will play out in housing will be interesting to see.
The U.S. Treasury and Federal Reserve seem to want an outcome that does the following:

a.  Slowly devalues the dollar

b.  Encourages home buying and selling putting a floor on prices

c.  Reviving the financial and real estate industries

d.  Back to happy days

I doubt that is going to happen.  So much focus has been devoted for 21 months since the recession started on the banking industry bailouts that I think the Fed and U.S. government have forgotten that you need good paying jobs to make a sustainable economy.  It is interesting to follow the rhetoric of Fed officials about pulling stimulus out of the market.  They claim success but for who?  Sure banks and their profits are back up but has the economy fundamentally corrected?  It just shows you how out of touch they are with those on the ground.

With commercial real estate and Alt-A and option ARMs coming on stage in 2010 in a big way, I still think we haven’t seen the end of this recession.  Technically we may be out of it already but that is because of the massive stimulus juice.  We are assured a double-dip with the trillions in bad debt still on the books.  If you travel the country you will find some strip malls that are simply empty.  Some newly build CRE has never been occupied.  Will it ever?  Those loses are still coming forward.

One of the many unintended consequences of the U.S. Treasury and Federal Reserve is falling rents created by the $8,000 tax credit, rising unemployment, and problems with CRE.  For example, many failed condo conversion projects are simply going back to being apartments thus adding inventory to the already saturated market.  Also, many people are consolidating households to make ends meet.  Given that owner’s equivalent of rent is the biggest component in the CPI, we may see additional pressure on the downside here.  In other words, the needed inflation won’t show up in the data.  Let us watch this closely because the reporting agencies might try to play fast and loose with the data here.

With lower rents there is less incentive to buy in today’s market.  You need to remember that over 40 years of data shows us an average 30 year mortgage rate of 9 percent or nearly twice as high as the current rate.  You might be able to buy that home at the low rate with massive tax credits but what happens when you sell in 3, 5, or 7 years?  You think the Fed can keep rates this low with the coming baby boomers drawing like crazy on Social Security, Medicare, and other entitlements?  Just saying, but zero percent seems awfully low for all that risk.

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