This time is different for real estate – lower foreclosures yet home prices still moving lower or remaining stagnant. Psychology shifting and new trends emerging.

There is a subtle change happening in the housing market and I believe this is par for the course on how the second correction will transpire.  Take for example data on Southern California and the mix of foreclosures.  Back in November of 2008 the median sales price was $285,000 for the region and foreclosure re-sales made up 54 percent of all sales.  Fast forward to last month and you find a psychological shift occurring.  The median price for June 2011 was $285,000, the same as it was back in November of 2008, but foreclosure re-sales made up 33 percent of all sales.  What does this mean?  It means sellers are slowly adjusting to reality that lower prices are the name of the game.  The drop in foreclosure re-sales is a good sign but what it also means is that delusional home owners looking for bubble prices are quickly getting a wakeup call.  I think psychologically it is hard to go from feast to famine rather than the other way around.  As a bear investor I’m wired to prepare for tougher seasons while many bulls are looking for any sign that another housing bubble is around the corner.  I’m not sure if real estate especially in states with bubbles still going on will be a good investment in the current decade simply because I have found very little evidence of household incomes increasing.  Don’t hold your breath that the media will do any thorough coverage on the stagnant household income trend over the last decade.

Nationwide foreclosures

nationwide foreclosure activity

Without a doubt the number of new foreclosure filings has fallen for a variety of reasons.  First, we have the turtle like movement and stalling behavior of banks and the shadow inventory. This is largely the biggest reason.  However, this also ties in with the fact that we have been in this mess for well over four years (real estate prices peaked 5 years ago).  So banks are slowly leaking out inventory and given half a decade, of course the pipeline will slowly deflate.  You also have very little “new” inventory coming online over that time:

housing starts

So the situation is such where lower home prices are the name of the game and banks are slowly trying to leak inventory out without the market really noticing anything significant.  So far real estate is following a very similar pattern to what happened in Japan.  This is not to say we are replaying the exact unfolding of events but the similarities come from the same types of behaviors; central bank easing, zombie banks, stagnant incomes, etc.  So even by looking at the charts above you have foreclosures trending lower while housing starts remained at historically low levels.  The Federal Reserve is hoping inflation fixes this over the longer run but that we shall see.  A comment was made on this balancing act:

Jason Emery

“Either by accident or design, the Fed is pulling off a remarkable balancing act. On the deflation side of the see saw you have falling housing prices, and other money/equity destroying enterprises like foreclosures, bankruptcies, etc.

On the inflation side you have ferocious money printing by the Fed, and monster sized budget deficits by the Congress.

Congress says they want a balanced budget, which would mean cutting federal spending by $1.5 trillion over the next 12 months, which would be a 10% decline in our GDP (from $15 trillion down to $13.5 trillion). Obviously, this is just posturing, since a cut of one third that size would push this recession were in into a deflationary crash, like 1929.

None of them have the slightest clue what to do, other than to keep playing this balancing act. Got gold and silver, lol?”

I’m appreciative of the smart conversation and commenters on this blog.  I think Jason has a good assessment on this situation.  The Fed is trying to inflate our way out of the debt and so far most of the money destruction has occurred on household balance sheets while preferential treatment has been given to the banks.  The inflation is coming from Manhattan but it is hard to see household inflation getting out of control in the sense of housing prices because mortgage payments have to be paid from some sort of income source that in theory is perpetual for 30 years.

If you want to see an area that has seen income destruction connected to housing values look at Detroit:

case shiller detroit

Detroit home values are heading back to levels last seen in 1990!  I’m sure you will find homes that go even beyond that.  Why is that?  First, you have a shrinking employment base (i.e., less income) so it shouldn’t be a surprise that home prices have tanked.  Now every area has its own story.  Los Angeles as measured by the Case-Shiller Index also includes Orange County.  Overall the trend is still lower for this region as well:

case shiller los angeles

Home prices are now back to the early 2000s.  I think that certain markets in California still have a way to go before hitting a nominal bottom.  Some harder hit areas like the Inland Empire may be closer to bottoms based on income to price ratios but many areas eerily resemble micro-bubbles.  A lot of this drive is psychological in nature but psychology is not going to make your paycheck increase.  The Secret is not going to magically wash away our government debt.  It might make you feel better, which is good, but math has little sympathy for reckless spending.  Many people understand this regional difference well: 

EnZo MiMo

“Actually, peeps in So-Cal (and Manhattan, NYC) have been very, very sad, for a long, long time, BUT… they’re trapped in the “hype-the-lemon-matrix”, and thus have to PRETEND they’re happy. i.e. they’ve sacrificed so much $$ to be in what they were told/sold as being the “Center of Chic/Center of Duh Universe”, that even when reality prybars their backdoor and steals their Sharper Image shyt, they can’t admit they “bought a lemon”. Similar to Jaguar owners during the decades when that marque was stylish-looking caca.”

This comment reminds me of the person I saw hauling out numerous dirty Hefty bags of aluminum and plastic right out of their Lexus SUV.  This wasn’t just someone being conscientious about the environment but someone needing a few extra bucks.  Instead of selling the car, they rather hoard cans and plastic just to make the gas guzzler monthly payment.  Seriously, if you are that serious about the environment you might want to ease off on the 10 mile per gallon SUV.  On an evolutionary perspective this is similar to crossing the desert in layers of custom animal skins instead of dropping them because you think you look cool.  Many people in California would rather eat cat food than give up their mega-debt-stucco-box-zip-code-happy property or send in the keys to their luxury vehicle with satellite radio.  You might have a negative net worth but those 300 radio stations sure make up for it.

Even though foreclosure activity has fallen in California it is interesting to see that the bulk of foreclosures are still coming from the bubble heyday:

foreclosure by mortgage amount

This is a very telling chart that is accurate to this week.  Just look at the activity over the $400,000 loan balance figure.  You have a large number of people unable to carry those intricate looking animal skins.  At a certain point it does become about financial survival and that is why I attribute the median price staying low while foreclosure activity decreases.  Many people in California are slowly waking up to the fact that we do in fact live in an economic desert.  A commenter summed up the pricing situation nicely:


“Pricing is justified by carrying capacity which is in turn limited by wages.

If this fact were recognized, we would be in an entirely different economic landscape right now. Only by throwing caution to the wind and ignoring the tenets of proper risk management did prices grow so completely out of control.

The corollary is that the pricing correction should necessarily reflect wages. The problem is, middle class wages have been stagnant for 20-30 years. Realistically, they have been outpaced by inflation. So where my parents’ generation was looking at house purchases of $25,000-75,000 on $20,000-40,000 of wages, my generation is currently looking at $350,000-500,000 on $50,000-100,000.

At the height of the bubble, here in OC, the median wages were around $62,000 per year while the median house price reached $640,000. The salary necessary to purchase the median house according to the aggressive side of traditional guidelines (20% down, no more than 1/3 gross income for payments) was achieved by approximately 1.5% of the population.

Even now, with the “fire sale” prices on housing, historical indices such as Case Shiller show us that prices are still 5-7x annual household wages. Historically speaking, this is pretty close to the ceiling against which prices would peak. So while the numbers might be working out to accommodate sales, there is nowhere to go but down.”

This brings up many key points.  Many baby boomers now looking to sell out have to realize they are selling to a “poorer” generation.  Many are coming out with student loan debt levels that already rival that of a mortgage.  Given that many of the older generation run the money fountains (i.e., bank CEOs, politicians, the Ben Bernank) the focus is on protecting the problems of their generation.  Yet this narrow focus has only provided basically low mortgage rates and a false mantra that “real estate always goes up” but we now have many people waking up to this nonsense.  We no longer live in a cheap fuel world.  Younger generations may prefer mobility instead of the white picket fence dream which is rare to begin with in landlocked Southern California.  Since we have shrunken the blue collar middle class the only way to a life beyond subsistence is to go to college; and left with the option of a heavy mortgage or student loans I believe many will elect to go to school first (even as inflated as that bubble is right now in higher education).

No one ever said solving this problem would be easy.  Yet the reality that home prices are not going up in spite of lower foreclosures tells us that many sellers are simply waking up to the fact that indeed things are different this time.

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67 Responses to “This time is different for real estate – lower foreclosures yet home prices still moving lower or remaining stagnant. Psychology shifting and new trends emerging.”

  • What happens to a home, when it is under Prop 13, and the homeowner dies and leaves the home to their children? Does the Prop 13 go with the house to the children, or is it assessed at a new, higher rate, along with higher property taxes?

    • Is the home in a trust? My mom recently died and left my brother and I her rental property. It was held in a trust, thus protected from tax assessment.

    • You fill out paperwork that allows transfer from a parent to a child. Under Prop 13 rules, the death of a real property owner is consider to cause a “change in ownership” that must be reported to the county assessor’s office. Form BOE-58-AH called “claim for reassessment exclustion for transfer between a parent and child” is completed so the property tax values stay the same. The probate lawyer will send it to you.

      • Is this Prop 13 transfer a one time only deal? I know plenty of “working class” people here in the South Bay who more than won the lottery by purchasing in prime Manhattan, Hermosa, Redondo location way back when. Please don’t tell me their kids and grandkids will someday be inheriting these properties and paying 1970s property taxes. Somethings in life just aren’t fair…

    • @ Polo
      No the immediate family members get to carry the existing tax which is relgulated through other propositions.

    • Talk to an atty, they will fill out the paperwork and file it with the county. Property taxes do go up a bit naturally, but you won’t be reassessed at the current value. Thank goodness! My dad bought our property in 1963 for a song (less than $50,000) and it was recently valued between $1.6 to $2.1M. It’s rental prop. and we are under market for our rents in the area. We have no plans of selling, neither my brother or I would want to take the proceeds and buy another property, so we are just planning to hold on to it. Neither of us has children to pass it down to either.

    • Readers and commenters here really need a lesson on prop 13. Most assumptions made are way outta whack. Prop 13 LIMITS the amount PER year tax can be RAISED. The damn tax gets RAISED every year. And if you improve your place, it gets re-assessed too. My parents bought their current home in 1986. They pay almost exactly what I pay, and I bought in 1995. sure Bubblemainics pay more than I do, but i pay more than twice what i paid in 1995, thanks to that annual increase…and yes you can have your place re-assesd downward, you just have to ask.

      • wheresthebeef

        Surfaddict, doesn’t prop 13 limit tax increases by 2% per year. That’s a pittance for people who bought 30+ years ago in prime locations. Housing prices have probably went up by a factor of 5 in that time for those locations.

        When you say improvements to a house will be reassesed at current values. That’s true for major remodels where permits are pulled. However, there are hundreds of things you can do to improve a house where permits will not need to be pulled…landscaping, new driveway, new garage door, finished garage, new windows, new doors, new roof, new HVAC, new floors, paint, and kitchen/bathroom remodels within reason.

        I say prop 13 still sucks for new buyers, it has greatly benefitted the boomers and corporations. And prop 13 is a major reason people will stay in their house until they die; thus, limiting supply in certain areas and only fueling price increases.

      • Wrong on one count. You can remodel all you want and the tax predators at the county CANNOT raise your taxes. This has been litigated. If you add square footage even in a tiny amount, all bets are off. They can and will raise your taxes to the present market value.

    • Under prop 13 a house won’t be reassesed if title is transferred to the original owner’s child, whether by sale or inheiritance. Thus, the child will pay the same property tax that the deceased parent would have payed.

  • People without jobs can’t afford homes, in fact most will have a hard time renting.

    The “new” normal in Kali, they just don’t know it….YET.

    Got silver?

  • Oh my!!! Dr. HB, you’re gonna love this. They’re finally catching up to you…

    Link: FHA May Be Next in Line for Huge Bailout
    The nationwide decline in house prices has created a vacuum in the U.S. mortgage market. Private financing for home loans has all but dried up and the U.S. government is now guaranteeing almost every new mortgage. Fannie Mae and Freddie Mac have received most of the media’s attention, but policy makers need to focus on the third leg of the housing- support stool: the Federal Housing Administration.

    The FHA has some major accounting problems. Left unaddressed, they could spook the markets, lead the FHA to seek a federal cash infusion and further enrage taxpayers. These outcomes can be avoided — but only if policy makers are more transparent about the risks involved in guaranteeing mortgages.

    The FHA provides private lenders with a 100 percent guarantee against defaults on home mortgages that meet certain underwriting criteria, such as a minimum down payment and credit score. Traditionally, the FHA has served first-time homebuyers and low- to moderate-income families who pay an insurance premium for this loan guarantee.

    As private-financing options have disappeared, the role of the FHA has grown. Its market share has increased to about 30 percent today from 3-4 percent in 2007.

  • Hey Doc.

    Bubble alive and well in Hawaii. Sigh. On southern Cal, I believe it is being floated by government spending at many levels. Don’t know how long the big aerospace defense parasite can keep going. It is an easy target to reduce. Hawaii as well on these.

    You look at entitlement spending as spending that does nothing to increase the enterprise value of the country. Military spending, after a certain level is the same thing. We are currently burning way too much there and it has been a buffer for Los Angeles and San Diego. Never mind that business could relocate and be much much cheaper.. say Vegas/Florida/Alabama… Still I’m hearing rumblings of more layoffs, stretch outs and scale backs on many programs.

    Combine that with the mismanagement of Jerry Brown. Guy is a total public union kiss ass. Going to need to roll back spending if revenues tank…. Oh, and releasing prisoners and cutting back police. While dragging in all the lovely non-english speaking Mexican’s.

    I think the meltdown in Cali will be epic. How long till the Mexican plague goes home on it’s own? They can go back to dragging down space B.

    Japan tried various efforts to reform the bubble. Didn’t work and then tried 20 years of stimulus. What happened? Crushing debt levels.

    We are headed the same way. Of course socialism will save us! Go Obama go! Will be exciting if he manages to finally put this country under.

    • I’m sorry mr. fadouche, but you are perplexingly contradictory. Mr. free-market capitalism, the UNREGULATED system has failed us. Humans, especially politicians, are not as altruistic as you think. Your racism undermines any shred of credibility you could potentially have. The name of the game here, is scapegoat. You are dazed at the mess which has been caused by the same fundamental beliefs you hold, instead of looking internally, you look outside for scapegoats. Nice job.

    • Yikes, listen to Glenn Beck much?? For someone who talks about the Hawaii bubble you sure seem to think you understand SoCal much. Odd, even with dragging all those Mexicans in, it looks like Arizona is in much worse shape than SoCal. (And you do realize that the comparative drain on government dollars occur in red states more than blue states?). But, go ahead, keep on talking about socialism. Under your definition, Reagan (multiple debt ceiling raises, more government spend, high tax rates) could be construed as a socialist…

    • This is an important point. Keep in mind that military spending is about $700-800 Billion per year. More importantly, it’s about twice what it was before George Bush took office.

      Or, in otherwords, if we were to cut back military spending to normal levels (of about half of where it is now), the results to the military related industries would be devastating. One recent report put it at around 1 Million jobs being lost, easily.

      This should give you an idea of how housing in So. Cal. is being propped up.

      • Ah yes Questor…memories of the early 90’s when Aerospace bolted outta Orange County. real estate indeed tanked, but the commute got easier. Is there any Aerospace left in OC???

      • The Coming Global Instability, Part I ~ Charles Hugh Smith from Of Two Minds

        1) What was once considered “impossible” has been normalized to the point that truly unprecedented imbalances are now accepted as “normal.” But the normalcy is illusory….

        4) Conventional economics is also incapable of grasping the profound consequences of disruptive technologies that are creatively destroying the old foundations of centralized economies and replacing them with decentralized models of much greater efficiency. These new technologies are resistant to controls imposed by concentrations of power such as central banks and governments. Centralization—what I call the “factory” model—reaped enormous gains in the industrialization era; now centralization is increasingly counter-productive, as coordinated monetary manipulations have destabilized the global economy.

        Industries that were once mainstays of the economy have been destroyed by irresistibly efficient Internet, communications and digital technologies: long-distance telephony, travel agencies, musical recordings, print media and retailing, to name a few. Next to be disrupted: education, healthcare, finance and government, precisely those industries widely considered immune to creative destruction.

        The status quo economic model is dead, and short of global conflict (which they’re attempting), there is nothing that will save defense jobs through 2013-2014.

        The math doesn’t allow it (revenue collapse).

      • Policy Changes Under Two Presidents

        The previous link wasn’t made correctly… click this one.

    • When you’re in a hole….KEEP DIGGING!

  • I loved that you mentioned “The Secret.” I always thought that was a bunch of hooey. Yeah, you manifest your destiny, you drew it to yourself. Like a child in the middle east manifested a bomb falling on him.

    If anything, I’d be depressed if I listened to Oprah and bought into “The Secret.” I guess they brought about thier own foreclosure or unemployment or loss in equity.

    Where are the “secret” people now?

  • Using all residents median income as an indicator of housing price levels is rarely a good or accurate predictor of those values, in built up urban areas. First, if you want to use income as some general indicator, you need to try to discern the median of HOMEOWNER income, excluding renters (sizeable numbers of renters in Orange County). Next, the income approaches fail to reflect the problem of unemployment (9.2% orange county), underemployment, by concentrating on median income of those who are working. If you insist on using income as one metric, among many, it is always better to exclude the top 3% from the equation as well, as their incomes are often mismeasured by standardized methodology, and many have wealth (and buy for cash). The exclusion of the top 3% of income households is matched in computing the metrics, by excluding the most outrageously priced and unusual homes. If you look at the total employment and number of an area’s 50-75% employed households, that is far more accurate. Orange County still is a powerhouse of upper income employment in its homeowner class. Ultimately, it is still an issue in the present and potential Homeowner Class, of perception of future inflation (the strongest motivator to buy) and home units available to the size of that market. One can argue that investor classes who buy and rent homes, need to be added and reflected in this computation, they will always cut rents in less advantageous times, to keep occupancy and lower or stable rents affect the marginally important potential new homebuyers decisions to rent or buy in the next year. In Orange County, and most other cities, one needs a factor of supply to compare to househould totals who are homeowners or might be, for houses/condos not in the usual market, that includes seasonals, retirees and those who can’t trade up, flippers, renovators, developers (and they know to buy into a price bubble and run from a collapse–mostly). The FED and the banks continue inflation annual, 2-3% target inflation unabated quite purposely, exactly to keep the very large group of mid income households on the margin of deciding to rent or homeown, motivated to seek inflation shelter and thus borrow from those banks and live in homes or condos and not apartments. When the group seeking homes is 1000 and moves down to 900, and number of units is 1000, the price is going to come down. When the group swells to 950, prices will stabilize, and at 1000, skyrocket and investors will pile in (see Vancouver BC and Hong Kong). In Las Vegas, the investors (whose median income is not easily discernible) matter more now than homeowners or their median income.
    Two other factors not to be ignored: racial mix (or none) of a neighborhood; and the fed’s keeping rates low to enhance the bubble/borrowing from them, and frustrate those investors who seek returns to keep apace with inflation, and turn to renting homes (inflation shelter and tax shelter together). In conclusion, though, using “all incomes” is not a good or predictive metric.

    • Excellent post! This is a cogent reminded of the complexity that is involved in using household income numbers to predict appropriate real estate values.

      But one thing still nags me, and that is the discrepency between the cost of renting vs. owning in West LA and the beach cities versus other parts of California. California’s inland cities have a “PE” (house price divided by annual rents) of 10-15 whereas a house in malibu has a PE of 23 (our house which easily sells for 1.6mm in todays market just rented out for $5900 monthly). I base the former figure off of a house that a family member just sold in Santa Maria, CA for 228K and which would rent out for about 1900 a month- I can see why one would buy in that scenario.

      Now, in the stock market, a higher PE either means (1) just over priced, or (2) higher growth expectations. But I just don’t see market rents rising at a massive rate in Mailbu vs. elsewhere.

      This “PE” disparity seems rampant accross the Westside. How would high homeowner household incomes, alone, explain this? Wouldnt the high income homowner be theoretically inclined to rent the same house he lives in becasue of the cost disparaty between renting and home ownership on the westside? There must be some other factor at play for so many wealthy people to be making the descion to own – perhaps something having to do with 1031 exchanges and avoiding taxes?

    • Agree that homeowner income is key to affordability, but I don’t think that makes housing prices work in this area. Let’s assume median homeowner brings in $150k a year, that still doesn’t cover the $629,000 median list price for Orange County (cited by Redfin).

      Maybe only the top 25% of incomes own mortgages in OC or something like that. After all, how many physical houses are there in OC vs households? I think the answer lies in the data, but I haven’t seen anyone publish this information. If we had that, we could probably keep a better watch on the price drops, and know when we’re getting close to the bottom.

      • Eric the Red:

        “Agree that homeowner income is key to affordability, but I don’t think that makes housing prices work in this area. Let’s assume median homeowner brings in $150k a year, that still doesn’t cover the $629,000 median list price for Orange County (cited by Redfin).”

        This is what I thought too. If I were to marry my gf, our income would approach that amount. Yet we are looking at places in the range of $350-450K IMO to be in a normal affordability range(with 20% down).

        I posted this on the Redfin board and was soundly blasted. Apparently according to private realtors(ie, not REdfdin’s realtors), I should be able to afford MUCH more due to low interest rates. Furthermore, my assessment that I ought not spend more than 33% of my take home on a hortgage is miserably incorrect. At least according to said realtors.

        Aparently a great number of people think its just fine and well to put 50-60% of ones take home income on a mortgage payment.

        No I’m not joking. These were actual responses

  • In Ca., ABAG and MTC (two governmental bodies) are trying to pass legislation that would virtually ban the building of single family homes in many counties. Their vision is that we all want to live in high density, high rise apts.
    If this legislation passes, prices of existing single family homes will skyrocket over the next 10 years.

  • Nice DHB reader cameos.

    • LOL… I’m semi-famous. Being only an occasional visitor to So-Cal and NYC, I experience both in a “time-lapse snapshot” manner, and maintain the clarity of an outside-looking-in perspective, albeit with obvious limitations.

      Luckily I have family and friends in both locales, who feedback the same kind of scoop to me on my area–Ft. Laud/Hollywood(FL)/Miami. I welcome feedback and impressions from all who live in or visit So-Fla.

      So much of Dr. HB’s macro-analysis maps well onto So-Fla… only instead of a Military-Industrial/Aerospace-Complex (MIC), we have a Biomedical-Industrial-(SickCare)-Complex (aka The “BiMiC”), with a thick topping of cruise-ship tourism and illegal drugs. =:O

  • In 2008 I snatched up the home I’m in with cash, cheap, the home had been vacant 400 days. I’ve had my eye on a home down the street, a BofA property, vacant over 900 days. Maybe a little longer and BofA will let me take it of their hands.

  • —–This comment reminds me of the person I saw hauling out numerous dirty Hefty bags of aluminum and plastic right out of their Lexus SUV. This wasn’t just someone being conscientious about the environment but someone needing a few extra bucks.—-

    Heh. This reminds me of something my husband saw recently: a very nice home in an upper middle class neighborhood, with a “For Sale” sign in front and a Mercedes Benz SUV in the driveway…with a Papa John’s Pizza light on top. Oh boy!

  • That’s great, now they want to reduce people to living in high rise zoos, because they have robbed their ability to buy a house. And they say it is based on “green trends”. What a bunch of BS. They figure it’s the only way left to squeeze people on housing, now that apartment living is all people can afford. Unfortunately, few can afford housing prices anymore where the are jobs left. Gov’t and it’s periphery have become the employer of last resort, until the next round of cuts. Private enterprise has certainly left the country, in regards to providing U.S. citizens with jobs. Thank god for the “Global Economy” !!!

    With fewer and fewer good jobs, the writing is on the wall for owning real estate.

  • Please stop blaming capitalism on our problems. If we had a capitalist system I don’t think we would have had a housing bubble to begin with and if we did the speculators would have ended up broke or in jail or both.

    If your are going to a “fractional reserve” banking system then you must have rules in place that make the speculators responsible for their losses.

    Before 1913 there was no income tax and no “Federal Reserve Bank” and the US was able to live within its means.

    • “If we had a capitalist system…?” Where have you been? This my friend, is the problem, capitalist greed run rampant. Prepare for the new robber barons!

      • I completely agree. Businesses had 8 years to show how great deregulation was supposed to work. They had their chance and blew it. I’m not all for adding alot of red tape, but SOME tape is necessary.

        Banks promised they wouldn’t do it again, therefore no regulation is required. Feh! Let Banks be put on probation–like any other criminal. When they can operate for, oh, twenty years! without showing any trouble, let’s try deregulating again.

    • Constman: Sadly, history says the opposite. Purely Capitalistic systems have always led to disasters in this Country, since the rise of Corporations. You might want to look back at all the bubbles we’ve had over the past 150 years.

      Claiming otherwise has no basis in reality. It is simply wishful religious thinking which cannot be backed up by either logic or history.

      What you’re proposing is to try the same thing over again, and this time expect a different outcome. Which is, by the way, the definition of madness.

      Capitalism can be used to great advantage. But unregulated “free market” Capitalism cannot, except for a limited few and their lackies.

      • Whoa – let’s be very clear here that this wasn’t all “business’ fault”. Government worked real hard to make this happen and encourage this mess both the housing bubble and massive leverage inside banks – my view is that this was a coordinated effort to fight off deflation post-tech bubble and instead they blew up housing, the consumer’s(70% GDP) largest most leveraged asset.

        I will also say that the government has functioned as an enabler by constantly bailing out these organizations and facilitating a ridiculous speculative equity market allowing for inept management, inept board, and uncaring equity owners convinced that prices would always go up despite black box models and no transparency (when did ‘off balance sheet become acceptable’?).

        Realize I’m not in favor of zero-regulation on systemically important and essential functions but there are few industries more highly regulated than banking and mortgage – government oversight is not the panacea most believe it is. From what I’ve seen in this world, most businesses are half-assed at best and government is a whole ‘nother step down in idiocy. I don’t have a solution but be careful not to exclude the blame from government – they have played a massive and deliberate role in this.

      • @Slim: I have to respectfully disagree. It is primarily business’ fault. It was business, via corporate “lobbying” which has bribed both politicians and regulators. The concept is called “Regulatory Capture” and is going on today in all aspects of government which impact business. From the mandated chemical washed beef that you eat, to putting the small business person or farmer out of business (or turning them into a debt slave).

        Take that one step higher, and understand that businesses simply do not operate without the financial industry and banks in particular. It is the banks which are pulling the strings here, with business as their proxies.

        So much so, that some Physicists actually studied the connections, with their findings submitted to the premier Physics publication, Phys. Rev.. Physicists are superb at establishing connections between things; that’s what their profession is all about. In the case of finance, they found that nearly all of the wealth was controlled by an incredibly small number of companies (financial and banks). It was about two dozen companies, all told, controlling a very well established “backbone” of business.

        So, yes, the problem lays squarely at the door of business, and banks in particular.

  • The reason we are having less foreclosures is that banks are becoming more agressive at approving short sales. The banks net more money with a short sale than a foreclosure. Approximately 50% of the housing inventory in California are short sales, and most of them get approved and sell before going to foreclosure

    • actually, short sales accounted for just under 18% of all sales in so cal last month. At it’s peak it was around 20~22%. To say that half the inventory are short sales and most are getting approved would be false.

      If anything, a few colleagues and I have been shopping around in LA, and banks hardly let any short sales through, despite offering at listed price. I’ve had a few realtor friends feed me some info that banks were more willing to let go of the short sale out in riverside county and some parts of OC, but may areas in LA/OC are still resistant to short sale transactions being completed.

  • I think there is definitely a shift in psychology.

    Boomers, which were a competitive bunch, are underestimating the psychology of the GenX’ers and Millennials.

    The mistake the Boomer homesellers are making is that subsequent generations are thinking like they did and are just as competitive against one another.
    Not so, imo.

    Different times, different circumstances, different ways of arriving at a conclusion, different age demographics, different knowledge base (the internet), different salaries and student loan debt.


    • This is an interesting observation; thank you. I would agree. It’s like the young ones of today aren’t getting the same “piece of the pie” that their parents got, and are consequently questioning the myths that they were brought up on (E.g. go to college, get a job, buy a house and use that for wealth).

      It’s also the same promise of a “piece of the pie”, the American dream, which has sucked so many into the housing market. And continues to do so to this day.

      The problem is that all Ponzi schemes implode when there are no more suckers, or cash, to bring into the system.

      Personally though, I’m of the opinion that the problem is much, much bigger. What we’re witnessing is not just the implosion of a Ponzi scheme. What we’re seeing is an overall systemic collapse of all of the systems that we’ve come to depend on, world wide.

      This is harder to see; and is similar to a fish trying to see the water that its swimming in and breathing. But if you take a look at the big headlines over the years you can connect the dots. From the Gulf of Mexico Oil disaster (which still has people dying terrible deaths, and is only reported on in their local papers), to Katrina and the current financial crisis. And that’s just in the U.S..

      That’s a radical notion for many, I’m sure. But I can highlight the exact same behaviour and observations in the Fall of Rome, by authors of that time.

      I’m just glad I’m not in debt right now owning a house.

    • As a GenX-er, I often feel like Boomers have ruined whatever resource I want to consume in the 10-20 years before I get there. Let it be education, retirement, healthcare, sex, music, investing, good government, you name it. I end up postponing buy-in as long as possible to let the insanity clear, but rarely can I really afford to wait for it to be totally gone. I didn’t buy a house until I was a few months shy of 40. I wanted to have kids. You can’t wait forever for that. I needed the space. So I bought in 2010. I don’t look at my house as an investment.

      In the end, I think all this is going to come back and bite them HARD in the ass on retirement — not because the younger (my iPad curiously wants to substitute “gouged” there:) generations are full of vitriol — but mostly because the Boomers seem to have gone through life with a scortched earth policy, not investing to the degree they should. There is the obvious problem of inadequate retirement savings. That might have been covered by social security, but they also didn’t have enough children to make ends meet on payroll taxes.

      I hope we start making long term investments again in infrastructure, science and education. Alas, I observe that as my child is preparing to enter kindergarten, our local public school strongly requests a $600 donation per year per child to make ends meet. This didn’t happen when I was a kid. It seems the locusts are still at work.

      I’ll pay, of course, that and my inflated property taxes courtesy of Prop 13.

      • You are naive if you are handing over $600 to the school principal or to the PTA. Wait until your child is assigned to a classroom, and then ask your child’s teacher what she would like to have for her classroom. Otherwise, you may be sending the principal and her favorites on some kind of worthless “education” junket to Tahiti. The public schools LIE about how much in tax money goes to the school system, because they leave out bond issues, pension payments, etc.

        The public schools get plenty of tax money. They are shameless to hit parents up for more. My children were in public school for two years and it was horrible. Every art project consisted of gluing stuff to a paper plate, every science lesson was based on garbage recycling/saving the earth, etc., along with huge amounts of time wasted on having a party every Friday afternoon to reward good behavior, and weekly visits from the police to promote their anti-drug message.

        Save your $600 and plan to transfer your child to a private/parochial school no later than 5th grade. If your local high school is decent, you can transfer them back to public school at that point, but be very careful about 5th through 8th grade. Those are the years that kids “lock in” their beliefs and attitudes toward just about everything in life, and a huge, alienating junior high school completely messes up a lot of kids.

    • Very true. Furthermore, think of the kids born 15 years ago (1995/6). Many of them are growing up in households that are under tremendous financial stress because they are trying to hang on to a house they can’t afford. These kids are going to hit adulthood with a very jaundiced view of The American Dream. I think that they may be like the kids who grew up in the Depression — laughably cheap: “use it up, wear it out, do without.” Kids who lose the family home during childhood and have to move to worse housing in a worse school district will grow up to be very cautious about The Easy Payment Plan. They will consider it better to have a small house in a modest neighborhood that you can definitely afford, than a McMansion with granite countertops that will leave you lying away at night.

      My cousins who grew up in California wouldn’t consider living anyplace else, but their own children are proving more open-minded about moving to places with better schools and cheaper housing. If California can’t offer good jobs and reasonably affordable housing for the average middle-class young couple, then it will continue to lose that demographic. At some point, a great climate just isn’t enough, and the Inland Empire doesn’t have a great climate to start with.

      • But those kids will cherrypick for blame an anonymous construct, an “older generation,” just as this GenX commenter did. Rather than blaming their parents, who as Laura notes who made poor individual financial decisions based on whimsy rather than fundamentals/numbers.

        I’ve been watching the GOP is foment intergenerational conflict of that sort as a way to attract younger people. It’s one of the scariest things I see unfolding.

  • Speaking of Detroit, BofA is now knocking down the foreclosed shacks they are carrying on the books ( probably at par ). Creative destruction and a tax break for the banks. Viva la community Reinvestment Act !!

  • @IndyLew

    You make a good point about the core “powerhouse” buyers and their enclave market. However, as mentioned above, a great of these jobs envolve federal money and we know where that is going, especially defense. You also mention Hong Kong and Vancouver, BC. You could not have selected any more atypical places on earth. Hong Kong is a very small island and it is fed by a place called China, enough said. Vancouver is in the same situation and fed by the conveyour belt. Wait until the bubble in China implodes and it is the biggest bubble of all time.

    @ Rick

    There is reason the groups you mention are backing higher denisity. The sprawl plan is going to be a ghost town when gas is $8 a gallon. So, unless your single family home is within walking distance of work and shopping, forget it long term. Southern California is built on cheap gas and defense spending.

    • If gas hits $8 per gallon, you’ve got bigger problems. Ships, trucks and airplanes all run on oil. All transportation costs suddenly go thru the roof leading to massive inflation on consumer goods. A short commute won’t help w/ that.

      Besides, Prius hits 50 mpg. With today’s tech. Tomorrow’s tech will probably be even better.

  • Rapa nui all over again? Just saw a documentary call 180 south, oh to say that less is more is to have never been poor. Those two acre Temecula homes with working wells might be the call, you can grow anything there and chickens are cheap. Upton Sinclair decribed a sad America. Odd he might have been at the 50 yard line in a familiar cycle? Read the Jungle and see our future? Sure hope not.

  • News media reports have hyped the housing crash WAY out of proportion. There’s never been a better time to buy! Affordability is at an all-time high, and the market is great! Why wouldn’t a savvy young couple want to take advantage of these incredibly low interest rates? Get in before these low, low prices start going back up!

  • Watch out for the fake out from the banks and the foreclosure stats. BoA and Wells have said they will be switching their short sale to foreclosure ratio from 1:3 to 3:1 (down to 3 short sales to one foreclosure). It will make the foreclosure stats for 2011 look much improved, the banks do not have to pay the foreclosure and auction fees, it will keep them from taking ownership (so they do not have to pay the property taxes), they do not have to maintain the vacant homes and the homeowner gets to stay in their house till it sells. What a deal. Everyone wins, except the people who trust the statistics and believe the RE market is going to turn around any time soon.

    • Astute observation, Dennis. The key word, though is “sales.” Many have given up on chasing short sales because of the broken (even corrupt) process. As banks make this shift your report on, they’ll change their mindset from waiting out the rough patch in the RE market to actively selling. Those with sufficient credit and down payment may now have a chance to grab a deal or win against an all-cash investor.

  • another thing to consider is that the dollar has devalue so much that many outsiders from other countries are snatching up real estate with their euros effectively costing one third or more cheaper on top of the lower prices we currently have

  • Thomas (from EU)

    Dollar is cheap compared to euros, but US is not an interesting place to buy a house, you have Homeland Security and more or less paranoid government. And the prices in interesting areas are very high in euros.

    On the other hand Euro area has deep financial problems too, housing bubble is bursting and some governments have lended money like madmen. Greece, Portugal and Spain are the worst but others aren’t innocent either: Cheap money encourages to lend and then it’s time to suck the lenders dry by raising the interests enormously: Banks make enormous profits and taxpayers are left with a dry bone.

    European Central Bank works in many way similarly than the FED: Steal from taxpayers and give it to the big banks. No limits, no control, no responsibility.

  • Unregulated capitalism is what we see in Somalia. The other extreme was what happened in the Soviet Union. There has to be a middle and we seemed to straddle it quite well after the Great depression.

  • questor:
    What is better than capitalism? Socialism? Communism? Capitalism just means a little guy can buy stock in a large enterprise. Sounds like freedom and opportunity to me. If a corporation does bad stuff, like I don’t know, promotes a socialistic politician, then don’t invest in it…and watch its stock-price plummet. We don’t have a free market, we have crony, corrupt humans fiddling with the free market. Most of them are politicians you voted for. Capitalism has nothing to do with evil, elite, humans screwing you over. Sure they use whatever means they can, which is oftentimes a corporation, an executive, or politician. But put blame where it is not on “capitalism”

    • Capitalism cannot be capitalism if it compromises its core values to support moral principles. It’s biased, and unfortunately, if it’s not government cronies ruining the economic model, it’s the corporate puppeteers driving those corporate cronies to do likewise.

      They say guns don’t kill people, but that people do. But guns certainly do attract a lot of evil men. Likewise, it would also be true to say capitalism and its mechanisms of power are attractive to evil men as well.

    • I really don’t believe that many politicians at the federal level are evil. They may be wrong or stupid or certainly narcissistic, but not evil. However, I’ve recently come to believe that some of them might not be patriots.

    • @surfaddict:

      What is better, indeed? I think that’s one of the key questions of our time, and it’s critically important to find an answer.

      One of the problems with all of the “*isms” is that they are all pre-21st century philosophies which have all had serious problems with their implementations. If they are reimplemented as before, we will have similar, if not the same, results. As I mentioned above, expecting a different result is the definition of madness.

      In short, we need to move past the classic implementations of the “*isms”, if we’re to make progress.

      Compounding the problem is the current state of our social sciences, especially economics. All of these fields basically use the same approach as the ancient Greeks did 2500 years ago, when they created the first recorded approach to understanding the world. Here it is, over two thousand years later, and we haven’t made much progress.

      I have my own suspicions as to what the solutions may be, which I base upon observed behaviour. However, I could be wrong, and it’s highly likely that they are incomplete.

      I don’t know what the answer is. But I do know that we really need to first ask the question before we can find an answer. And I think we need to examine what has worked, what has failed, and why, before we can expect a better solution. Plus, we all need to work together to discover it. That is where the answer to your question lies.

  • Trying to make sense of the financial situation in the US and Europe is difficult.
    There are differences but many similarities. When one thinks about the various nations and their debts, one has to conclude that we are in the middle of a giant balance act, globally coordinated. Will it get through to the other side without crashing?

    About a decade ago Argentina tanked, as people know. The bankers stood to lose a lot of money there and approached the government, pleading for help. They were basically given slack and wiggle room, and told to “hang in there and earn your way out of the mess”. It goes without saying that the people with fewer resources and those highly indebted, are the ones that suffered the most.

    I get the impression that this time a similar approach is being used, in the US and Europe: “Let’s throw money at it and control the speed of the contraction, trying to avoid a catastrophic crash”. Hence, the controlled short sales and hidden inventories.
    Again, those less able financially and the indebted are the ones most hit. Recent news say that there is an average of 160 repossessions in Spain. During the last two years about 300 000 persons were kicked out of their residence. That is quite a lot, for a nation of that size.

    What is different now is the global nature of the process. Hence, the needed coordination. An example, recently President Obama’s pressed the Prime Minister of Spain Zapatero, over economic reforms.

    As far as Defense, people should pay attention to the spending excesses. For that, it takes an educated, involved electorate. But do not knock it too much. We should not forget that a good Defense is needed. Where will the next threat come from? What about making sure that the access to gas and oil is open? Iraq and Afghanistan are about that, with the added purpose of keeping a close eye on future threats.

    As the Doc keeps saying, there are places that even now are in bubbles. Not only in SoCal but in many other parts of the world. (Paris, a good example. Moscow, another.) They tend to be places were the gazillionires of the world want to have a spot. But that only goes so far and the overall picture is one o downward pressure on real estate prices.

    As a commenter in this blog says “stay debt-free, folks!” … if possible.

  • ….is a daily average of 160 repossessions in Spain….
    [Missed the time scale.]

  • Oddly nice to see the falling stripes on the famous DHB Nationwide Foreclosure Filings rainbow.

    But one must suspect that there are many mortgages limping along, not in foreclosure, owing to the banks’ taste for shadow mechanisms to distort the data. I suspect that 2011 gold stripe would be a lot higher if there weren’t a whole lot of hidden shadow inventory–houses being occupied by people not making their mortgage payments.

    Anybody have numbers to inform or navigate my speculation?

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