First Ever Global Housing Led Recession: One out of Eight American Mortgage Holders either Late or in Foreclosure on their Mortgage: 66 Percent of Mortgages Prime but what does that mean if Prime is now Defaulting at High Rates?

One of the many things I have realized during this crisis is people will flat out make things up when it comes to housing.  I’m not talking about little white lies like “sure buddy, your golf swing isn’t so bad” but Watergate style lies like “we don’t have any Alt-A or Pay Option ARMs anymore.”  I’m not sure where people are pulling their data but from the multiple sources I’m looking at, we have roughly $450 to $500 billion in Alt-A mortgages floating in our market.  And let us for argument sake, set aside those toxic mortgages.  We have a new problem hitting the market.  Prime mortgages are now imploding on a massive scale.  After all, with no job and no income it is hard to make the house payment no matter how conventional and Leave It to Beaver your mortgage looks like.

The Mortgage Bankers Association came out today stating that 12.07 percent of all mortgages were delinquent or in foreclosure.  This is the highest on record going back to 1972.  What is even more troubling is prime fixed-rate mortgages to the most creditworthy borrowers made up a substantial jump of the new foreclosures coming in at 29 percent.  One out of every eight Americans is now either late on a mortgage payment or in the foreclosure process.  That statistic is nuts.  Here is an observation from previous economic downturns.  This economic recession was largely driven by a global housing bubble fueled by easy access to the Wall Street casino.  Toxic mortgages which became a larger part of the overall market have pummeled housing prices into the ground.  This is where we are at (you are here in your mall map).  Yet in this stage of the recession, we are now seeing the double whammy of housing prices falling for more historical reasons like job losses and this is spilling over into the prime mortgage market.  That is not a good sign because the prime market is gigantic:

united-states-mortgages-banks-and-thrifts1

The above data is from the OCC and OTS Mortgage Metrics Report.  As you can see for yourself, 6.6 million in Alt-A and subprime mortgages is clearly a sign that there is still many toxic mortgages in the market.  This above data is for the combined national bank and thrift servicing portfolio and holds nearly $6.1 trillion in mortgages.  The largest part of this portfolio of course is the prime segment making up 66% of all loans.  So the rapid rise in prime defaults is extremely concerning.  Look at it this way.  Let us assume the remaining Alt-A and subprime loans implode at 25%.  That gives us 1.65 million more defaults and of course this is absurdly conservative on these toxic banana republic loans.  But what if we reach a 10 percent default rate with prime mortgages?  That will give us 2.2 million more defaults.  That is why the cracks in the prime market are going to cause deeper pain:

mortgage portfolio

The rapid change of pace is also showing that many Americans are having a tough time making their home payments.  In fact, the current rate is blasting past even data we had from the fourth quarter of 2008:

mortgage-performance

I know many of you astute readers are saying, “hey DhB, don’t we have over $10 trillion in home mortgages in the U.S.?  Why only the $6.1 trillion figure above?”  Good question.  You need to remember another portion of the mortgage market is with uncle Fannie and Freddie.  The current aggregate amount of mortgage loans in the United States comes in at $10.4 trillion.  The large portion of that is prime (which you can take that for what it is worth given we nationalized, whoops, I mean took into conservatorship the two GSEs).  And as we all know with the optimistic stress test results and the U.S. Treasury PPIP focused largely on happy day scenarios – they ran weak historical default rates on prime mortgages.  How many times do we need to say that this isn’t a historical recession?  This is a housing bubble led recession.  That is unique.  We have never had an economy pumped up by housing and collapsing because of housing on this grand of a scale.  Housing either gained or suffered as an after effect of the economy.  This time it became the economy.  And we clearly see this with the growth in debt versus stagnant wages:

household-debt

Every single recession since the 1950s saw household debt on a year over year basis decline during and after the recession.  This makes total common sense because a recession is a contraction in the economy meaning businesses are pulling back.  Not with the 2001 recession.  Alan Greenspan (Mr. $100,000 speaking fee) decided to lower the Fed funds rate to 1 percent and flooded the market with easy credit.  He also touted the virtues of adjustable rate mortgages fully knowing that the market was going the way of the Wild West.  He knew that by the time he left his post, the market would implode under another Fed chief as it did and is with Ben Bernanke.  The problem is we have reached a point of epic debt and there is no other bubble to be found.  We keep giving money to banks and they keep hoarding it:

bank-reserves

While pay Option ARMs and Alt-A loans implode left and right leaving American homeowners with no buffer, banks have a tidy buffer of nearly $1 trillion in excess reserves and every other taxpayer funded bailout you can imagine.  Many of you know that I have never advocated for the government stepping in to help homeowners in trouble especially those with toxic mortgages.  Before shedding  a tear, in the U.S. we have a fantastic rental market and there is literally nothing wrong with renting.  So the worst that happens is someone doesn’t own a home but has the utility of renting a home.  Yet my biggest issue with the current environment is those people being kicked out into the street are also paying for the taxpayer bailouts of those on Wall Street.  What is worse, what about the prudent financial class in the U.S.?  What about all those tens of millions of Americans that lived within their means, didn’t lease a Mercedes, and buy a McMansion with a toxic mortgage?  This group suffered during the bubble mania because they were priced out since they didn’t want to walk the mortgage plank but are suffering again because they are now being asked (forced) to bailout the same crony banking system that caused this mess in the first place.

There is nothing more obvious that this last decade being a Mirage Decade.  This is clearly seen in looking at the homeownership rate in the epic bubble state of California:

cahown_max_630_378

From 1984 to 1999, the homeownership rate in California never cracked the 56% mark.  At the peak in 2006 we hit 60.2 percent.  Now, we are back to 58.3 percent which puts us back to 2001 levels.  And with the 135,000 Notice of Defaults hitting in Q1 of 2009, we are definitely heading back to 1990s levels.  So we have lost a decade already in terms of homeownership.  There is no stopping this trend in the near term especially with the rise of prime mortgages going bad.  Since we are in the eye of the hurricane and markets abhor a vacuum, many people have a necessity to rush out and buy something.  That is why you are seeing some strong activity in home sales.  But keep in mind that many of these home sales are distressed with 50+ percent in Southern California being foreclosure resales.  I would estimate that a large portion of these buyers are from the prudent class that are simply throwing up their arms in the air and saying, “up, down, up, screw it!  I want to own a place for my family so I’m diving in.”  I have no problem with that.  People can do what they want with their money.  But you are not buying at the bottom.  You are simply buying because prices have dropped at an astonishing rate.  Yet we need to remember that prices shot up for 10 stinking years!  We are in year 2 of prices falling.  Do you really think this is the bottom?  Unemployment is at 11% in the state.  Maybe at the lower end is bottoming but I doubt someone with a $100,000 sitting in the bank wants to buy some of those lower end bargains.

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37 Responses to “First Ever Global Housing Led Recession: One out of Eight American Mortgage Holders either Late or in Foreclosure on their Mortgage: 66 Percent of Mortgages Prime but what does that mean if Prime is now Defaulting at High Rates?”

  • People world-wide have been deluding themselves for fifteen years. Even as this crisis became obvious, i met scores of people in the US, Asia, and Europe who assured me that everything was fine and I was an idiot. House prices, they assured me, would not drop because (pick your favorite reason). I even made a few bucks betting on whether or not we were in a recession (bets made in q1 08!).

    Now, after two years of price falls, some of them astonishing in percentage and outright terms, the market (sheeple) have still not lost hope or optimism. If it had not been for a severe curtailment in lending, the drop would have been slowed significantly by sheeple buying after each 5% drop. Instead, the market has collapsed fairly quickly, leading most people I know to tell me every month for the past two years that we are at the bottom (as opposed to telling me three years ago that RE would go up for 10% a year for the next fifty years).

    Occasionally I even run across articles which at least make an effort to call the bottom using numbers and explanations (other than “it has fallen by X% , therefore…”). Most of these lie and spin (using household income of $65k or calling a slowing fall a turnaround. Everyone, except you Doc, continues to want to believe in fairies; clap your hands quickly, everyone, if you believe in Lereah and Yun.

    Now mortgage rates are rising. We still have record inventories, not including massive shadow REO and condos. Jobless rates are heading up, up, up, with overal unemployment (real numbers) hitting 15% soon. Banks are too busy paying themselves bonuses with tax dollars to lend to deadbeats who want granite countertops.

    The bottom is a long way off. I have said it for the past two years. Call me when the national median house price is back to $125,000.

  • If this be the case, then what is the point of even paying the morggage at all?

    Better yet doesn’t this prove that the credit score has as much creddability as the SAT score does in predicting college performance? The latter we already know is a farce.

  • “One out of every eight Americans is now either late on a mortgage payment or in the foreclosure process.”

    Actually we should change that to “1 out of every 8 mortgage holders”….

    I, like many American, cannot be included in the set of mortgage holders, because of this irrational bubble market.

    Once prices correct (Obama government, listen up: google “The Law of Unintended Consequences” and “Moral Hazard” if you feel the temptation to jump in help John & Jane homeowner, you know the ones with the three 60″ LCD HDTVs and the Hummer in the driveway, even though they’re 9 months behind on their payments)

    With mortgage rates rising, unemployment skyrocketing, credit tightening, and prices plummeting, home prices will start to come back to reasonable levels.

    Fight it all you want. Resist. Deny. Complain. Protest. Petition. It won’t matter. Prices, like water, will seek their own level.

    If you bought a home in the last 8 years, you’re probably in for pain in one form or another…. increased payments, lowered value, foreclosing neighbors, etc.

    Sorry but you have to start living within your means. Home ownership is not a right. The American taxpayer is not a goddamn ATM.

  • I live in the 90277 and have seen a couple attempts to flip. 208 S Juanita Ave, 90277 was sold a month back for 650K and they put it back on the market for 739K. 911 Emerald st, 90277 was sold several months back for 431K and now is on the market for 569K.
    Anything in the 500K ~ 650K area seems to be selling with the current low rates. I have watched all this priced inventory get sold in the South Bay with in the past few months (90503, 90505, 90277, 90278)

  • Spot on, Dan. As though you and I already weren’t paying enough taxes to subsidize every idiotic special program in the world via our taxes… now we have to help the banks stay afloat and help the po’ homedebtors stay in their overpriced crapboxes and keep their SUVs and other toys they HELOCed themselves to death to buy.
    Regarding the issue of mortgage size and downpayments, I will respectfully dissent the good Doctor on one small point, which is that a small or no downpayment can be OK if and ONLY if, the mortgage is a reasonable multiple of the borrower’s income and his debt picture is otherwise OK. I would have no problem financing someone for little or no down if the payment +utilities and taxes were a no more than a third her gross income AND if she had no other debt.
    However, I don’t care how big a downpayment you make or what your income is, there is no way ever that your mortgage should be more than 2.5X your income. I am seeing high-income folks ($200K or more a year income) get slaughtered because even though they made substantial downpayments on their places, their mortgages are often 4, 5, or 6X their incomes, and their utility and tax expenses are HUGE. Worse, high-salary jobs are much harder to replace than medium-paying jobs, and there is only a tiny demographic that can afford to buy a high end house. So you have lost a job that will take you much more time to replace if even you can, and a house for which there is a much smaller market to begin with. The high end may be the last to fall but it will fall hardest, and all the $12 million mansions built in Chicago’s Lincoln Park and in the Hamptons in the past 10 years will be white elephants on the market, relics of periods of excess that happen once a century.

  • I have $100,000+ in savings, and there’s no way I’m buying a low-end, low-class property. I can wait FOREVER for the LA housing market to stabilize (after hitting bottom), because I like my apt and I know how much house I can afford. I’m in a great neighborhood, my rent is ‘cheap’ (compared to housing), and I’m socking away over $1000/month with all my excess income. Sorry NAR, but I’m not drinking the kool-aid.

  • Robert Cramer

    In the San Francisco area, the suburbs close to San Francisco are selling at a frenzied pace, IF the property is in the $500-$600K range.Feeding frenzy is caused by 1.first time home buyers 2. tax credits 3.low interest rates4.lack of inventory in this price range. Not unusual to see multiple bids on these (still).
    By next spring, should be different, as shadow inventory hits the market and unemloyment hits it’s stride.

  • Tim,

    I live nearby and have seen the same thing. I am looking at 90277, 90278 and 90254 as a possible places to call home in a year or two, once the mid to high end absorbs the Alt-A wave, unemployment, etc. I think you are witnessing some leftover animal spirits from the boom (the attempted flips).

    People in these areas can afford $500K, the mistake they are making (in my opinion) is that they are getting too little for their money. I look at it in 3 phases:

    1. People bought the houses they should have been able to afford, but ironically, paid 2-3 times as much as they should have for it (because “affordability” products doubled and tripled the principal – but the monthly payment was manageable for the time being. People only think about the monthly payment. I often hear people say now – “they bought too much house and now they are in trouble”. It’s more accurate to say that they overpaid for the house. If you make 100K and all you want is a 3 bedroom house in North Redondo, that’s not too much house. It’s that you paid $800K for a $375K house.

    2. People are being forced to qualify for $500K (rather than the million they would have been given a couple of years ago) and now finally see something come into range and they jump on it. I believe we are in this phase now in the South Bay.

    3. $500K will buy something decent in a decent neighborhood. This is the phase that I am awaiting. People will then say, “wow, you got a great deal!” This won’t be true, either. It will be a fair deal only and the first time in a decade to have the chance at a fair deal.

  • >But you are not buying at the bottom. You are simply buying because prices >have dropped at an astonishing rate. Yet we need to remember that prices >shot up for 10 stinking years! We are in year 2 of prices falling. Do you really >think this is the bottom? Unemployment is at 11% in the state. Maybe at the >lower end is bottoming but I doubt someone with a $100,000 sitting in the bank >wants to buy some of those lower end bargains.

    Thanks for articulating this point. This is what I try convincing people of who push me with “now is the time to buy! There are so many good deals right now!” I have started avoiding the subject because I’m so tired of being pushed to buy. And it was the same push during the bubble. It never ends.

  • Exactly, it’s those prime mortgages exploding that people have to worry about. We’re talking upper income people who are extremely overleveraged themselves. Imagine what will happen when America realizes it’s not just the immigrants who defaulted – home values will drop like a rock.

  • Maybe the bottom is in only when nobody wants to convince anybody anymore to buy or even wants to speak about housing. You know when housing is seen as shelter and not much more.

  • I absolutely love this website because you couldn’t be more spot on. My husband and are close to our 30s, we’ve amassed about $350K in cash (exclusive of an additional $50K in 401(k)), and we still can’t imagine plunking down our hard earned dough on a home in the $800-$900k range, which is the median price for a home in our neighborhood which has great schools and about 2-3 bedrooms not requiring extensive maintenance.

    We are absolutely livid at the amount we pay in taxes to subsidize the decisions of every idiot buyer and mortgage broker in America trying to make a quick buck. I had been fighting some very astute lawyers, economists and professors for YEARS when I move to LA telling them that, compared to Houston, this Los Angeles market was a NIGHTMARE. They kept calling me a spring chicken, wet behind the ears, who didn’t have a clue with what it meant to jump into the LA housing market.

    Now look at the state of our great California. This state is filled with a bunch of hypocritical, ill-informed, ill-advised and highly emotional residents. If I have to listen to one more hard-core liberal complain about paying the sales tax at dinner, while in the same dinner conversation also complain about the “paltry” unemployment check they receive while they are in between their reality TV jobs, I think I’m gonna hurl.

    More than a tea party is required, here.

    VOTE ‘EM ALL OUT.

  • and with the State of California, City of Los Angeles, the County, being forced now to layoff or furlough thousands of workers, these next several months, you will continue to see the deflation of home prices. A person making $100k gross annual salary, at 2.5x, should be able to afford a 30 year fixed mortgage, at $250,000, and have enough money leftover for food, savings, savings for kids colleges, and small vacations. The rest is $50,000 downpayment. By 2011-12 most homes in LA and Orange regions will be under $300,000. Charles Hugh Smith predicts on his website that this time period will be a false bottom and house prices will continue to sink and by 2015 be at shocking low levels due to this massive debt bubble unraveling. Even Suze Orman states that this market will not begin to recover until 2015! Stay tuned folks for the most massive speculative bubble explosion in world’s history.

  • Dan –

    You are missing the point. Many of these homeowners have been living within their means. Those that bought a home 8 years ago managed to pay their mortgage up until this crisis but now because of unemployment they can no longer make their payments. Even those with 6 months of savings are now facing difficulties as this recession continues for more than 15 months and no signs that it will be over soon.

    How long can a renter keep paying their rent without a job? Home ownership may not be a right but neither is rental living. If you don’t pay your landlord, you are out in the streets.

  • Robert Cramer:

    I’d be curious as to what your opinion is of the driver of this demand for $500-$600k range homes would be? Is there a boom in jobs in the Bay Area with salaries to afford the high property tax rates, insurances, mortgages and utilities, food, child care, credit card bills, auto payments and the mortgage? What growth industry would this be in?

    Hard to believe there is a ton of first time buyers with $75-$100k in savings for a down payment ready to jump into a weak market. How did they ever save up this money if they aren’t frugal and spend their money wisely, one might ask?

    Looking at Zillow, $500,000 in Mountain View or Los Altos close to El Camino Real gets you a small condo 20 years old. The price grows rapidly higher as one moves towards the hills (I-280).

    Not exactly what I would term the best of investments at this time. I doubt you could find someone to rent it at your mortgage costs.

    Is it really first time home buyers with savings believing the bottom has been hit or is very near, and they want to get in now? Low interest rates? To me, this is still high income range housing, just wondering what is driving it, even considering a lack of inventory, one still needs to have income to purchase ( I think). At least, banks used to check, the last time I made a home purchase in California through a bank.

    Because I noticed (on Zillow) my old neighborhood in Los Altos, where my brother lives in our late parents home, has taken a fall from the $2.2-$3.2 million range in 2006 (for houses like my folks purchased back in 1972 for $35,000), down to current sales of @ $1.2 mil. I think it will fall back to the $650k-$800k range for patient buyers. Let’s come back in 2011 and see.

    To me, tax credits of $8,000 don’t go too far on homes/condos/townhouses priced at half a million+. Like 10% of the downpayment.

    Future defaults here looks likely, as these homes will fall into negative equity as the economy worsens, which it will, I guarantee. I see another 20%-30% drop: there goes your down-payment/savings.

    Until I see where and how California’s economy will stop it’s free-fall, I would hesitate to jump into housing now, just my opinion. Or rather, I would low-ball my bids if I had to make a purchase. Very low.

    When the state stops giving money for school buses, and is laying-off teachers by the thousands, and is still light-years from reaching a balanced budget, I hoard my cash. REALLY cheap (compared to 2006) is coming for those that wait.

    Like you say: “By next spring” these buyers might have remorse.

  • You make a great point in saying the market went up, up, up for 10 years. As Americans we got a little spoiled in terms of property values rising beyond what we ever imagined — or ever should have imagined. If it seems too good to be true, it is. However, the market is always subject to change and this is no time to throw your hands up in the air and refuse to participate in the economy by hording dollars. It’s important to be prudent. It’s detrimental to the economy to freeze and stop the cash flow around the world.

  • And just so you don’t feel like the Lone Ranger in California: I have seen condos in my little village of Nong Hoi, Chiangmai, Thailand purchased by Brits for @ 30k for 1 bd, to 50K for 2 bds, and 100k for penthouses, spend 5k-6k to add the granite, tile, fresh paint and the like to Flip for 100K, 120k and 200k now sitting on condos, hoping against hope to break even.
    No offers. Bloody bad luck, that.

    I paid 30K in 2003, bought a few, left the renters in them, happily retired now at 53. Live in one of them, spent a few thousand to fix it up.

    I have watched a very nice new home, in a wonderful gated community of higher-income professionals, only rented for a few months since it was built in 2006, sit on the market for TWO YEARS without ONE offer, have the price drop from 6.8 million baht ($194,000) down to 4 million baht ($114,000) and not ONE offer still.

    My attorney in Chiangmai owns it. She has had to borrow from me to make a few payments. She refuses to have common sense and lower it to where it will sell, like I told her to do in 2007 when I saw the financial storm gathering. I see her losing the house soon.

    You know, us great unwashed small business LIBERALS that knew nonsense (Supply-Side, lower tax, increased defense spending insanity) when they saw it.

    BTW: If I hear one more hard-core, “conservative”, over-paid US attorney that voted for Bush and Greenspan complain about “liberals” collecting unemployment checks between their “reality tv jobs” (whatever the hell that means), I’ll hurl.

    Who’s the “economic girliemen” now?

    It was us “Liberals” warning Greenspans’ undecipherable gibberish while he created a disincentive for frugal folks to save back in 2001 with low interest rates and would lead to a bubble, and Bush’s unrelenting tax cuts for attorney-level incomes that would bankrupt our country. You know, attorneys that create nothing, invent nothing, repair nothing, ship nothing. But (over)charge you by the minute.

    But hey, who am I to criticize California and US conservatives being sucked in, again, by ACTORS.

  • I live 40 miles north of San Francisco and here the house price has been dropping at 1.5% per month for the last two years. Most of the houses in my neighborhood are underwater and still sinking. Houses are sill selling for some reason.

  • Just one comment as to the normal post recession trend of reducing mortgage balances in previous “recessions”: though I agree with DHB as to the Greenspan fueled post .com crash housing mortgage orgy (due to his reductions in short term rates – and with the bond market and Wall Street conspiring in the mortgage market – rather than the “normal” steep reduction in mortgage balances outstanding back in 2002-2004) and while it did have the effect of probably causing the current steep drop in housing values we are seeing today, I want to point out that in the 1979-1985 post recession period what the mortgages outstanding chart does not reflect was the extensive use of owner carry-back second deed of trust lending on sales due to very high interest rates at that time. To be accurate these amounts would need to be added in to be consistent with what was really happening in that period of time.

    Other than that, little to disagree with and keep up the reality.

  • I agree that nice middle class houses in N. & N.-Central Orange Co. like other areas mentioned are in the $500Ks now. (Not talking McMansions.) WE (my wife & I) are waiting for sub $400K.

    My brother in Oregon has been predicting this for years. He thinks S. Cal house prices should match the prices in Corvallis. Which means middle class houses in the $200 -$300 K range. Of course that’s assuming that there isn’t a big decline in that area too. I think he’s wrong (partly), but the Orange Co. premium probably shouldn’t be more than 2 X Corvallis (which it is now). Maybe 1.5 – 1.8 X Corvallis is reasonable?

    I remember seeing a list of real estate markets nationwide about a year or two ago where the ratio of the strength of the local economy to house prices was given. 100 was parity, and Corvallis at 115 was the lowest I could find on the list in the Western states. Some South & Midwest markets were in the 90s, but there are reasons why the West might be better compared only within itself, so that might argue that his Corvallis theory isn’t that nutsy. That way the economies of the two areas can be used to predict the bottom of the respective markets. So right now, to predict the bottom in S. Cal, you’d need to know what the bottom of the economy will look like.

    I can weather this one since I only have 4 years to go to pay off my current fixed mortgage and enough cash to do it now if I wanted to.

  • @lawyergirl

    GM scheduled to go into bankruptcy and the Dow shoots up. It’s like Calvin and Hobbes Opposite Day. Irrational thinking is now so mainstream anyone with an intelligent thought seems bizarre. You should be glad most people thought you were off-base. If they had agreed with you in that environment you would have had to rethink your position.

    The whole bubble is like the drug-cartel issue–if we weren’t buying they wouldn’t be selling; likewise, if they weren’t providing we wouldn’t be buying. Prohibition will end in this depression, as Bob Pretcher predicted. Only now, that’s starting to look like an obvious statement. Arnold’s probably got a patch in the yard among his seven parked Humvee’s…We may be thrown out of our houses and living in tent cities, but at least we’ll have government-sanctioned herbs to ease the pain.

  • Greenspan had to keep the pnac freight train rolling at all costs. Throw lending standards out the window and everyone’s a playa. Who’s got time to think about death and destruction while their house is appreciating at $200.00 per day? Well now, it seems hubris isn’t the magic elixir peddled by these miscreants after all. If I drank I’d fly to Thailand and buy Farang one.

  • Joel, it’s also detrimental to the economy and the sustainability thereof for 90% of the population to be living paycheck to paycheck, as is the case at the current time.
    It’s still worse for the individual involved. I know, for I have been in many a cash squeeze thanks to a very bad career decision, and I can personally attest that a lack a cash and a surplus of debt not only causes one to miss out on economic opportunities while paying an interest premium for absolutely everything, it also wrecks your health and causes mental distress and poor decision-making.
    How well I now know the maxim that there is no power in the world like a big wad of cash and no weakness like the lack of it. And if it isn’t good for individuals to spend up to, and way past, every dime they make, then it isn’t good for the country, as we will soon know, if we don’t already, when people of my generation try to retire in about 8 more years but have to scrounge for crud jobs because they simply don’t have the dough, and neither do their pensions or the SS fund.

  • Thomas Sowell – The Housing boom and bust
    – Review by Walter Williams

    The root of the problem lies in Washington. The Community Reinvestment Act of 1977, later given teeth during the Clinton and George W. Bush administrations, forced financial institutions to make risky mortgage loans they otherwise would not have made.

    President Clinton’s Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions. Bank loan qualification standards, in general, came under criticism as being too stringent on down payments, credit histories and income. Fannie Mae and Freddie Mac, two government-sponsored enterprises, by lowering their standards for the kinds of mortgage paper they would purchase from banks and other mortgage lenders, gave financial institutions further incentive to make risky loans.

    In 2002, the Bush administration urged Congress to enact the American Dream Down Payment Assistance Act, which subsidized down payments of homebuyers whose income was below a certain level. Mr. Bush also urged Congress to pass legislation requiring the Federal Housing Administration to make zero-down-payment loans at low interest rates to low-income Americans. Between 2005 and 2007, Fannie Mae and Freddie Mac acquired an estimated $1 trillion worth of subprime loans and guaranteed more than $2 trillion worth of mortgages. That, Mr. Sowell points out, is larger than the gross domestic product of all but four nations.

    There were many other warnings of pending collapse, but Congress and the White House, in their push for politically popular “affordable housing,” ignored them. Rep. Barney Frank, Massachusetts Democrat and now chairman of the House Committee on Financial Services, said critics “exaggerate a threat of safety” and “conjure up the possibility of serious financial losses to the Treasury, which I do not see.”

    Mr. Frank says, “We are in a worldwide crisis now because of excessive deregulation” and “mortgages made and sold in the unregulated sector led to the crisis.”

    Our financial sector is our economy’s most heavily regulated sector. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising from $725 million to $2.07 billion. I challenge anyone to come up with one thing banks can do that’s not covered by a regulation.

  • Why have folks in California intrinsically “believed” since the early 1970’s their economy and “California incomes” could “support” median housing price to median family income ratios of 4.5 – 5.5 (reaching 10+ at their peak in Orange County), while much of the rest of the country generally falls and lives within the 2.5 – 3 range of ratios? Do Californians receive “life everlasting” when they sign on the dotted line to hold a mortgage in California (and especially in Orange County)? And in regard to the comment above concerning a “California premium” vis-a-vis Corvallis, Oregon, what could possibly “justify” such a premium — much less such an incredibly large one? Do you also “agree to pay” 1.8 – 2+ times the cost of “everything else” purchased in California as well? I.e., spend $50,000 for an automobile having a list price of just $25,000 routinely? Californians have been living in a massive financial “dream world” for decades and “seemingly” got away with it — UNTIL NOW. The “supply” of “greater fools” along with their ever more exotic toxic mortgages and financial “fun and games” has finally run its course. It’s going to be an incredibly painful experience California is about to go through. You may well “lead the nation” in a new “fad” known as being in a “state in bankruptcy” and ultimately “the greater depression.”

  • take another look…consumer credit NEVER declined…the rate of increased slowed. 2 very different things. this is the first outright decline in 50 years. wow!

  • George Carlin on houses in one of his famous comedy bits:
    “Actually this is just a place for my stuff, ya know? That’s all, a little place for my stuff. That’s all I want, that’s all you need in life, is a little place for your stuff, ya know? That’s all your house is: a place to keep your stuff. If you didn’t have so much stuff, you wouldn’t need a house. You could just walk around all the time. A house is just a pile of stuff with a cover on it. You can see that when you’re taking off in an airplane. You look down, you see everybody’s got a little pile of stuff. All the little piles of stuff. And when you leave your house, you gotta lock it up. Wouldn’t want somebody to come by and take some of your stuff. They always take the good stuff.

    They never bother with that crap you’re saving. All they want is the shiny stuff. That’s what your house is, a place to keep your stuff while you go out and get…more stuff! Sometimes you gotta move, gotta get a bigger house. Why? No room for your stuff anymore. ”

    Pretty much sums it up….

  • This isn’t just a “housing bubble led recession” and in the end it will be a depression. There are many macroeconomic unsustainabilities in the US economy and government spending that are coming home to roost at the same time. The government/Fed is trying to prop the whole thing up now but the size of the problem is too big and will break the sovereign (dollar) if they don’t get out of the way. At the rate they are printing money we will have hyperinflation before too long and that will destroy what is left of our economy. Can you say Zimbabwe?

  • The housing bubble is deflating faster and faster taking more of the mortgage market with it. Subprime, Alt-A and now Prime. Housing needs to correct at all price levels until we work through this mess. No amount of spin including “green shoots” will save it. Just look at the data and the future is clear. Foreclosures are in about the 3rd inning with Alt-As and Prime coming up next.

    The Westside of Los Angeles is headed for a huge decline as buyers and loans dry up for 750K and up.
    http://www.westsideremeltdown.blogspot.com

  • Since we are all mortal, everything we have is just rented.

    It all goes back to voluntary slavery. Faceless Khazars have evolved to dominate every facet of western financial, legal, political aspects. They have no regard for us and control us through our ignorance and desires. This is just the zenith of the path we allowed to happen. We are in financial bondage through our McMansions, college loans, urban tanks, toys, sports, entertainment–none of which we can afford. We are born in debt and will die in more until we learn how the game is played. Since we as a people are growing more ignorant as we race to make more money to pay for the stuff we think we need and deserve, the bondage deepens and we realize it less.

    Can we really pay off a million dollars in debt as middle class folks? Didn’t think so.

  • It’s hard to let go the cheap money fiesta. A friend of mine who used to be a Las Vegas realtor (that should tell you something) recently completed a personal bankruptcy and 2 foreclosures. Even still, he said his credit score is over 600.
    The takeaway from this is that it is not just the cost of borrowing but the means by which we assess people’s ability to repay that is the problem. Just like the discussion about homeownership not being a right, access to other people’s money is not a right either. The cheap money fiesta has become ingrained in our culture and politics. Until we are broken of that, there will be no recovery.
    Be brave Comrades!

  • Yeah….

    That law which applied to BANKS ONLY was really the culprit! Especially since banks wrote about 10% of all mortgages over the last 10 years!

    Wallstreet greed, mortgage brokers greed and so on are all scape goats.

    It was that nasty Carter guy who caused all of our problems!

  • Great post. its really a great efforts. You have always provided some valuable information like this one. Thanks for it.

  • Randy Woodward

    I’m not sure the statement “Every single recession since the 1950s saw household debt on a year over year basis decline during and after the recession” is accurate. This is a “rate of change” graph, which shows positive changes until recently. The “rate of change” decreased after every single recession, but the actual level of household debt ALWAYS increased to some level….until….

    Since 1952, when the Fed began keeping track, household debt has NEVER EVER decreased from the previous reported quarter. The “rate of change” has decreased, as the graph in this article clearly shows, but the “level” of debt has ALWAYS increased EVERY SINGLE QUARTER. Now take a look at this “rate of change” graph from the early 1980’s to 2007. Not only was household debt increasing, again every single quarter, but it was also increasing at an increasing rate…for about 25 freaking years. Ok, so where are we now? Not only did household debt increase at a decreasing rate in 2007 and 2008, but for the VERY FIRST TIME EVER!!! the amount of hoiusehold debt has DECREASED.

    I can not think of a single more cataclysmic event going on in our economy right now, and that is household DELEVERAGING. And rest assured, if the household is deleverageing, so will corporations, states, municipailities…any borrowing entity will HAVE to delver. Except one of course and that’s the US Government. Can the US Government really “replace” all that leverage? I really don’t think so. And on top of this, household savings is at 5.1% and most likely headed north of 10%…more money out of the economy.

    Anyway, I believe THIS is the real story of our economy which is mostly ignored by mainstream media because they don’t understand it. And in the end, we “should” be delevering. We were forced to do it in the 30’s, and we are being forced to do it now. And it’s the “right” thing to do.

  • They never bother with that crap you’re saving. All they want is the shiny stuff. That’s what your house is, a place to keep your stuff while you go out and get…more stuff! Sometimes you gotta move, gotta get a bigger house. Why? No room for your stuff anymore. ”

  • Gman: Regarding your comment: “And in regard to the comment above concerning a “California premium” vis-a-vis Corvallis, Oregon, what could possibly “justify” such a premium — much less such an incredibly large one? Do you also “agree to pay” 1.8 – 2+ times the cost of “everything else” purchased in California as well?”

    My comment was that a 2+ ratio was obviously wrong, but that some sort of premium was probably justified. Now about Corvallis vs So Cal.
    I would pay 50% more for a used car that “lived” 10 years in So Cal vs one that got rained on for 10 years. Corvallis has two monster employers: OSU and HP. Anything that happens to those two hits Corvallis like a ton of bricks. Nearby Albany is the industrial burg, but Corvallis’ university dominated voters don’t like most industry to come there. So a lot of the “industry” are small engineering outfits, one of which just laid off my brother. The surrounding countryside of Benton Co. is dominated by Timber. Another great recession proof industry?

    So Cal has a milder climate and a more diversified economy. There are more foreign immigrants here; maybe a plus for Corvallis living quality if you don’t like them, but a negative for the economy. Huge amounts of undeveloped land surround Corvallis. The undeveloped land in So Cal is mostly in marginal inland areas that don’t compare to the coastal belt.

    I tried for a while to find a job there that paid no less than 50% of what I make here, and I couldn’t so I gave up. There are a lot of low paying research jobs for people with my background at the university, but I’d rather make private industry wages here at a relatively stable employer than have to live from grant to grant at the whim of some professor.

    That said, I like Corvallis and Benton Co. as an investment because it never had a big bubble in housing, and has really great summer weather when the school is out. I’m just trying to use it to gauge So Cal prices. I am very sure that parity is wrong and 2X is wrong. I’m more leaning to 1.5X but I could be wrong.

  • You may want to spend that nest egg before hyper-inflation gets here and your hard earned savings lose their value.

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