Till debt do us part – financial collapse foreshadows second collapse in housing. Million dollar troubles in Beverly Hills. 2 million tax filers disappear in latest tax data.
The crushing reversal of the stock market only reveals the underlying weakness of our economy. Keep in mind the public was warned that if the debt ceiling was not raised, we would essentially experience what is being experienced today. In other words politicians and political pundits have no idea what is really moving the underlying machinery of the banking system. They just take their marching orders from their Wall Street financial backers and assume all is well. The housing market especially in California is likely to experience a deeper blow in the next few years because of dynamic shifts in the composition of home sales but also the underlying wealth of those buying higher priced homes. Many of those buying up relied on favorable government loans that have phased out at the higher end but also the wealth effect is being explored as stock portfolios tank as they did in 2008. Some focus on the historically low interest rates as some kind of saving grace for the market but what use is a low rate if the entire economy is in shambles? Keep in mind that interest rates are only low because of the Federal Reserve artificially buying up over one trillion dollars in mortgage backed securities but also the panic going on all over the world. Global investors are running into Treasuries out of fear even though we just demonstrated the magnitude of our debt with our latest political charade.
2 million tax filers disappear
It is disturbing to see how deep this recession has hit. From 2008 to 2009 two million tax filers were lost in the economic chaos. This comes from recently released data from the IRS. Now for those of you who have kept pace, California has the second highest unemployment rate in the country and the underemployment rate for the state is an astonishing 23 percent. So again, what use is a low interest rate when job prospects are so poor?
California has a heavy reliance on housing and stock bubbles. During the technology bubble of the 1990s many pocket areas of the state saw wild increases in real estate values. In the 2000s much of the jump in real estate values was chalked up to mania driven delusion brought on by real estate itself. Take a look at the symbiotic relationship between stock values and California home prices:
As the stock market imploded in 2007 so did real estate values. When the stock market rebounded in 2009 so did real estate but very little. The relationship is tied but not always one-to-one as it was from 2007 to 2009. Look at 2006 where real estate values peaked while the stock market still had 18 months left before peaking. You start reaching a point where people question what is really going on. The unemployment situation is abysmal:
The current correction is magnified by the budget deficits in California. Many of the California pension programs like CalPERs heavily rely on optimistic stock valuations. The recent budget passing was based on rosy projections that have now fallen by the wayside. So what do we have as choices? Higher taxes and deeper spending cuts. As we have seen with the current debt ceiling talks the world does not deem it optimistic to balance trillion dollar deficits simply by cutting. Something has to give. Most reasonable people realize that a combination of tax hikes and spending cuts are necessary to move forward.
Even the wealthy getting hit
Many of the wealthiest in our country, especially in California derive their net worth from the stock market and not mega mansions on Mulholland Drive. So these corrections cut to the core of their balance sheet but also what they are able to afford. Take a look at this Beverly Hills home for example:
13320 MULHOLLAND DR, Beverly Hills, CA 90210
Full Baths 7
Partial Baths 0
Property Type SFR
Sq. Ft. 9,375
$/Sq. Ft. $448
Lot Size 32,230 Sq. Ft.
Year Built 1990
According to Redfin this home is located in the Beverly Hills Post Office area. This home is currently listed for sale at $4,200,000. Looking at Zillow data reveals some interesting information:
It looks like someone tried to sell this place last year in June for $6,900,000. Doesn’t seem like it happened. At a certain point, even a low interest rate is going to do very little for a home like this. People need to come up with real solid income and actually believe that the value of this home will increase. Why would someone purchase a $4 million home if they believed prices were heading south even in Beverly Hills?
This all ties in with what is likely to happen in the next downturn for California. Banks can continue to hide inventory through large amounts of shadow inventory but this will cause a drag on the real economy as it has for the past four years. This game can only go on as long as people allow the system to continue to favor the large banks at the expense of the public and economy.
It is the government that is keeping home prices unaffordable for many by bailing out the big banks. The market is screaming for cheaper priced housing so more disposable income can go to more productive sectors. Yet banks refuse to let this taxpayer bailed out cash cow go. Yet this is no capitalism folks. This is banking welfare and the fact that the market has tanked even after a debt ceiling hike only means people are starting to understand what we have here. The game is rigged but this does not mean home prices will go up. It only means the connected will find a way to land a golden parachute and jump off into another asset to game and siphon off more easy money from the economy. If that sector implodes as well, then it will be taxpayer bailouts again (that is until the public wakes up).
However we can bring this back to a more simplistic point and that is that household incomes are simply not keeping up for current home values in many areas. You pay for your mortgage, taxes, insurance, and other housing expenses from a paycheck. If people find that their paycheck is cut or lost, a mortgage suddenly becomes a heavy burden. Why else would we have some 6,000,000 properties lingering in the shadow inventory? If this setup continues we are likely to face a massive drawn out malaise similar to what Japan is facing. Banks continue to pretend all is well while the government dives deeper and deeper into debt to keep zombie banks running. Yet who wins here?
Most people are disgusted with both political parties because they realize that they only serve the financial elite in this country. The mainstream press hardly does any examination of the issues and you will never hear about the fact that according to the latest IRS data, the average household income fell by $3,500 (a drop of 6 percent) from the previous year. I’ve stopped watching the talking heads because it is pure nonsense and theatre for the most part. Simply flipping through the channels I heard “no one saw this coming” and “is it time for QE3?” Yeah, let us keep buying more mortgages with money we don’t have to save banks we don’t care about and inflating home values because somehow that has worked so well for us.