California tax credit half used in one month, distress inventory down but non-payment up, effective homeownership rate of Los Angeles County 38.5 percent compared to 50.5 percent headline rate.
Something is profoundly amiss when the proponents of economic growth are going back to the housing bubble to somehow stimulate the economy once again. The source of the problem, that of purchasing assets with massive amounts of leverage, is not the way out of this economic mess. Banks are holding onto to trillions of dollars of underwater assets and would like to take a “see no evil†approach to investing. If you have any doubt about the fragility of the recovery just look at what occurred on the stock market on Friday. We had over 400,000 jobs added (sure they were mostly temporary Census jobs) and the market was punished. Why? Because just like the mortgage market, the employment market is largely being supported by the government.
The California housing market is weaker than it appears on the surface. Now that the larger measures of support are being pulled back, we are starting to see cracks appear once again. For example, half of the FTB first time home buyer tax credit is already used up:
Source:Â FTB
What many fail to realize regarding the tax credit is that it applies to California state taxes only. Given the median home price of a California home sold last month is $255,000 it is likely that the tax basis for most is not going to eat up the entire benefit in the calendar year. Either way, people are eating this up costing the state $200 million (for both the first time buyer and new home credits) yet we have a near $20 billion state budget deficit that we need to fix in the next few months. Bad economic ideas never stopped politicians pandering to interest groups.
Sales in the state are up but nothing close to their peak levels:
Normally spring and summer are the strong months and we have pulled demand forward in a major way. The Federal tax credit was the big pull but also the Federal Reserve forcing mortgage rates lower with over a trillion dollars in mortgage backed securities purchased. Yet that campaign is largely over. Pumping debt into the economy is unsustainable as we are now finding out through the contagion spreading through Europe. Sinking more money into a banking system with a balance sheet like Swiss cheese is going to yield very little impact on the real economy. Here in California the headline unemployment rate is still at 12.6 percent (the peak) meaning the underemployment rate is over 23 percent. There is no way of interpreting this as good for the overall housing market.
There was an interesting study by the Federal Reserve Bank of New York showing the effective homeownership rate in the country. What is the real homeownership rate if we exclude all those with negative equity?
The real homeownership rate nationwide is under 62 percent. This is much lower than the headline figures. The importance of this is to show that a large part of our population that we consider to be homeowners are nothing more than renters with no flexibility of moving or selling (short of strategically defaulting which is now becoming a popular option). If we look at the effective homeownership rate for Los Angeles County the data is ominous:
The current headline homeownership rate for Los Angeles County is 50.5 percent. But in reality, only 35.8 percent can be considered homeowners in L.A. The rest are renting and a large number are “homeowners†but really have real estate that is underwater. When I see data like this it highlights the massive disconnect in the market. California has many counties that are largely underwater. For example in San Francisco the headline homeownership rate is 58.3 percent while the effective rate is 43.4 percent. We go from majority owner counties to largely renter and underwater homeowner counties. This distinction is incredibly important.
As we expected the second wave is coming forward and MLS inventory is growing:
In the last five days another 1,000 properties were added to the MLS for Southern California. At a certain point as much as banks would love to lag and drag this entire process, they must deal with the properties. The Alt-A and option ARM products still fester on the bank balance sheet. It is incredible that even though banks saw this coming with plenty of warning, they decided to ignore the problem opting to let the taxpayer deal with the repercussions of their toxic portfolios. So banks have shifted to focusing on their investment units to turn profits while their commercial lending for homes and credit cards is largely a charade. Over 95 percent of the mortgage market is government backed. If that is the case, then why not fund a national banking system that deals the mortgages out directly? After all, we already own Fannie Mae and Freddie Mac so why in the world do we need the too big to fail banks to filter these loans out? When I brought this up in the past someone stated we need their expertise in lending. Ha! These are the same banks that were giving folks with $30,000 incomes $500,000 option ARM junk. We can do without their so-called expertise.
As is expected the kabuki theatre continues with distress properties:
The mortgage rat is moving through the belly of the banking python and we now see bank owned homes growing. A good portion now makes it to the MLS for public view but many do not. You might see a drop in pre-foreclosures but I look at this data as a skeptic. Why? How can it be that non-payment (30+ days late) is near record levels yet notice of defaults are falling? It really is simple. Banks are not even starting the foreclosure process and the mainstream media has finally caught on to this. So of course this might appear as an improvement but this is like being happy that you have 3 good tires and ignoring the 1 tire that has fifty nails in it.
If you want to sum up the current strategy it is banking denial. Trillions of dollars down the drain and this is where we stand. But you didn’t think that TARP and other nonsense bailouts were to help you? It should be no surprise that the market is as fragile as ever as the predators continue the massive raid on public finances. Nothing has changed since the government has been in a deep capture from Wall Street. The worst crisis since the Great Depression and all we have to show is a nicer looking credit card bill? Break up the too big to fail banks. Bring back Glass-Steagall. And time to deal with reality instead of ignoring the challenges at hand. Something tells me that the state government is going to employ the banking method of simply pretending problems don’t exist.
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30 Responses to “California tax credit half used in one month, distress inventory down but non-payment up, effective homeownership rate of Los Angeles County 38.5 percent compared to 50.5 percent headline rate.”
My wife and I make nearly $200k/year. We have almost $400k in liquid funds. But we’d still never buy in LA in the current market because all we’d get for a logical price would be a crappy 3/2 on a pint-sized lot in an awful school district for our kids. And yet people want to believe so badly that this is sustainable, that we’re going to come out of this with endless house price appreciation. Some “homeowners” are starting to realize that the party’s over and are defaulting. Once that dawns on the majority the banks will run out of options and it’s anyone’s guess how low the overshoot will go.
Hey Doc,
Wish you’d run for President. You are right on here.
I’d just like to add that with regard to the unemployment rates here in California, I don’t believe that they’ve included those of us whose benefits have run out. I can’t even get a job at Home Depot…probably over-qualified.
Also, I can tell you that while the government is trying to help homeowners and investors, banks (Wells Fargo in particular, but probably others) are telling homeowners that the investor of their mortgage does not participate in the HAMP program, then modifying them into crappy loans (an extention of an Alt-A and the homeowner is still grossly under water) in house so they can put the loans in the name of the bank, then selling those interest-only loans off to the government! Let’s not forget that most homeoners also invested in their homes…we invested $70,000, which is a lot of money for a median household.
Okay, so here we have a mortgage that was paid for by investors, the investors lost out due to disregard for underwriting, the pool is no longer reporting, the bank never turned over the Note to the pool, therefore they can claim it in a non-judicial state as their own (and put a clause in the modification agreement that the homeoner cannot have any claims or disputes against the original Note or Deed), and now their going to sell more toxic assets over to the government? How many times can a bank be paid on a mortgage? How will the government ever know that they are doing this if the bank is claiming these mortgages as their own?
I sense more trouble for taxpayers and the government with the banks now ripping off the government too. The government and taxpayers will be out the money they paying the banks for more toxic assets…and they’ll be out more money when these loans default again in 7 years or less.
Yikes! I think the government should go into the bank’s Cayman Island and Swiss bank accounts, get that money back and give it back to investors and homeowners.
I’m only glad my wife and I have not yet bought a house. The popular zeitgeist is one of delusional confidence that things aren’t that bad thanks to constant ‘happy talk’ from the media and political class, 99 weeks of unemployment, food stamps and low mortgage interest. But what happens going forward? Unfortunately most people suffer from that human frailty of trying to block out the unpleasantness reality and thus make it worse by ignoring it.
The governor’s race, which will pit Whitman against Brown will be a clear choice for voters.
Brown= Continue as is. Pro state employee unions. Continue $100,000. a year pensions.
Whitman= Change. Bring state employees unions under control.
The result of this race will set the tone for Calif. for the next decade.
Fasten your seatbelts, should be very interesting.
Values doomed to drop. Perhaps taking the rest of us down with them. All to save 6 banks and a failed ideology.
I am registered Republican (no primary action in Orange if you are independent or Democrat), but I don’t think either of the major Republican candidates will be able to do anything in light of the hammerlock the Democrats have on the legislature. Our state is full of pocket boroughs and rotten boroughs. (Look up British parliamentary history for those two terms.) Pocket boroughs are set up by Gerrymandering people who are dependent on the party in power into more districts so that they are in the party’s “pocket”. Rotten boroughs have fewer actual voters than other districts. In old England, they were towns that had declined, but retained their seats. In California, they are districts where most of the people are either children, or non-voting aliens. It is absolutely impossible to overcome this without some kind of revolutionary action, so the state is doomed to at best a Mexican standoff.
Referendums generally pass on hot button issues, and a few special interest issues where enough money from one side and feeble opposition lead to a favorable result. So I wouldn’t count on a referendum doing anything other than robbing Peter to pay Paul. We are blessed with great natural resources and an economy that continues to perform even with horrible Government. A 20 % unemployment/underemployment rate means 80% employment. I am doing OK myself, and I don’t see any economic problems in my immediate future. I am currently waiting for a big drop in RE prices so I can move up to a nicer place with no risk. If it doesn’t happen? Not a problem.
What makes you think that Meg Whitman will be any better for the state than Brown? As an elected official and businessman, I can personally tell you that she is delusional if she thinks she can come in and clean house. There is a gigantic difference between running eBay and running the state. One is a dictatorship and the other involves compromise, and things run more slowly. If you want a valid comparison, there is a big difference between being on a Hollywood set and running the state.
If anything, I want someone who has been there before, knows how government works, can compromise, and a person whose last term in government ran a budget surplus (look it up). Electing Whitman will bring 4 more years of gridlock, guaranteed.
Besides, the problem in the state is structural (2/3 vote required for budget, tax increases and tax DECREASES, Commercial prop 13 loopholes) and not personnel, so not even Superman himself will change things unless we revamp the state constitution. One legislator with a personal agenda, doesn’t matter if they are Republican or Democrat, can hold up an entire state on a vote with a 2/3 majority required.
CA is about to go into emergency mode. The big question is Will the federal govt bailout CA? Warren Buffett thinks so, I so do I. Laying off govt employees would crater what’s left of the economy. Wont be allowed to happen. But this will scare the bejesus out of people. And conservative behavior will go up a notch. Housing debt will not be wanted.
I wouldn’t exactly be cheering for Whitman. We have seen what that philosophy of unfettered deregulation has bought to the economy. While pensions are high-it is free trade with no rules, no regulations, no care about what happens in the future that has brought us to our knees.
The guys who made all the bad decisions still get million dollar bonuses and meanwhile the rest are trying to make scapegoats of teachers and police as the cause of this big mess.
We are still the biggest market in the world. maybe it is time to act like it-put import taxes-both on actual goods or jobs that can be done in other countries. Then we will see how many companies want to offshore. They only care about the bottom line and don’t care if the country goes down the tubes-they will just move on to another country.
“Something tells me that the state government is going to employ the banking method of simply pretending problems don’t exist.”
I’m sure I read somewhere that Washington (think Pelosi) has decided they’re not going to even deal with something like a pesky budget this year.
Time and tide wait for no man. The beast is on us. That big RE drop everyone is hoping for will probably be here this fall instead of 2012. But this could get very disorderly. Look at Texas, mid 80’s when oil fell through the floor and speculators we’re holding the bag. That ushered in the S&L crisis, which was incidentally smaller than the IndyMac bailout alone in inflation-adjusted dollars. Better finish the soup because the next course is coming quickly. Hope you’re hungry…but that doesn’t mean we’re done. We still have demographic fallout, recasts, resets (Libor is on the move).
We also borrowed all the money in the world in short term debt that we have to roll over. We’re a year into Babyboomers retiring. Each one is SS, Med, a pension and a paycheck to the person that replaces them…Nothing got fixed. There are approaching 2 Quadrillion Dollars in derivatives out there. Something like 250,000 for every man woman child and investment banker(non-human). I’m afraid we’re stuck on this train until it runs out of track.
@caboy
Despite all the talk about free-trade and protectionism, I heard a good piece last week. It’s not free trade if one side gets all the trade and the other side gets all the closed factories, mills, and lost homes. We have to balance this somehow, or indeed, all will be lost.
The foxes indeed rule the henhouse and are eating all our nest eggs and the hens. We gotta do something. Planet of the Alt-Apes doesn’t have a happy ending…
Doc,
Indeed what would be so bad about realizing that the end of Glass-Steagall was a dumb-ass mistake. Instead of rewriting it as a worthless 3000-page list of suggestions, just rescind the decision to rescind Glass. We don’t have to worry about the effect on Bear Stearns or Leahman, do we. Citibank is trying to get back to the way we were. Conservative means making changes after careful evaluation. This was a crony cram through congress that has had devestating ramifications. Sure, it will be tough to fix it, but if we did, maybe they wouldn’t be so quick to trash it again the next time.
Paying teachers average salary of $70,430. in CA.(per NEA) for barely 9 months work, teaching a class of 19, is not sustainable in this economy.
Class sizes must go up, salaries should be cut 20% (there are lots of new teachers who would be thrilled to make $55K a year), and retirement age should be raised to 65, like the slobs who pay their inflated salaries.
The City of Alameda, CA just got a federal grant to hire 6 policemen.
The cost- $233,000. PER policeman.
Obama will HAVE to bail out CA-
He has already lost Florida this time, due to the bungled mess of how he handled the oil spill.
If he looses Calif., too, in 2012, he can not win the re-election.
Is it just me, or does it seem that the banks are allowing the white folks to sit in their ready-for-repo homes without paying a dime in rent while they are chasing out the minorities as fast as they can? Can’t the fair housing laws prevent this unfair practice from occuring?
I canot stop to be amazed how scary the crises in Europe seams to be in America. Latest spook – Hingary , even smaller than Greece , which in turn is only 1% of eurozone economy. Ya very scary! But why the markets in Europe dropped much much less than Dow in friday!? Ha-ha-ha! Ya very sacary Hungary! Ha-ha-ha!
Dirk Quade- Yes, it is just you.
I live in a large California city that is about 35% black, 40% hispanic, 15% asian, and 10% white.
I see no difference in any area, or how groups are treated.
Wait. You define a “homeowner” as someone who is not underwater on their mortgage? Sooooo……..someone who owes many many thousands of dollars on their mortgage, but can sell their house and walk away with a little money in their pocket after transaction costs is an “owner”?
um, OK.
“Whitman= Change. Bring state employees unions under control.
The result of this race will set the tone for Calif. for the next decade”
~
lol. Arnold said all the same things.
~
Nathan Explosion for governor.
“Is it just me, or does it seem that the banks are allowing the white folks to sit in their ready-for-repo homes without paying a dime in rent while they are chasing out the minorities as fast as they can? ”
~
It’s just you.
“There are lots of new teachers who would be thrilled to make $55K a year.”
Really? Two incomes of 55k a year will leave you a renter for life in L.A.. Plus much teaching is pretty horrible work. I mean yes I think there are people that would teach in the more elite public schools for 55k a year. Teaching a bunch of motivated kids all competing for college admissions for 9 months a year isn’t bad at all, in fact might be quite rewarding. But why anyone would teach in ghetto public schools where most of the kids don’t want to be there, and vandalize your car when it’s in the parking lot, for that low a salary, I have no idea.
@da di
You don’t suppose the media is being disingenuous. I thought they were a pure vessel of truth poured on us with benevlolence and valor…my mistake. Fair and balanced, by golly.
The doctor is on a roll with this post btw.
—
“Over 95 percent of the mortgage market is government backed. If that is the case, then why not fund a national banking system that deals the mortgages out directly?”
–
Amen. It’s not that I want a nationalized mortgage banking system, ideally I want a market of small banks (that are never allowed to grow to big to fail), that actually hold the loans they make. But if we are going to have a nationalized mortgage banking system then I want the real thing, not this crony capitalism nonsense. At least then there is a chance we might see some benefit to all this taxpayer backing.
—
“The worst crisis since the Great Depression and all we have to show is a nicer looking credit card bill?”
–
LOL. Yes I noticed that, the credit card statements look much nicer. Whoop de doo. Your government at work.
—
I could so campaign for the Dr for President!! I don’t know his position on most issues, but I’d take his directness and honesty and real practical solutions a thousand times over the speaking out of both sides of his mealy mouth, sold out to the corporate interests, President we have today.
@Dirk Quade
I think the only color that matter anymore is green. It’s not like the bank comes to the house to meet the owrners. You’re not even a number any more–your just in a group of numbers and the tranche you are in is handled in one way or another. The CDS’s pay off when the CDO tranche failed, so the faster they foreclosed in 2007 the faster they cashed in their AAA CDS. Now they have too many properties and can’t ingest them fast enough, have to mark against their books, etc. It’s just a giant game of hide-the-hotdog and most will have a burnt weenie when it’s over.
If all things were otherwise equal, I’m sure there would be that added fun of discrimination, because this was committed by evil persons, so why would you expect them to have integrity in one are and not in another.
$55,000. salary for a teacher is not the top pay.
Average pay in Calif. in $70,430.,
Top pay in some districts is $105,000., before stipends for coaching, and overtime pay for reviewing school books in the summer.
@JRS – I don’t know where you work, but $55K a year is doing pretty good for anyone in this day and age. $110K a year family income is quite a bit more than my wife and I make in the private sector working high-paced, high-pressure, sucky desk jobs with demanding bosses and long hours.
It’s not to say that you aren’t right that $110K isn’t enough in California. It’s not enough. But teachers have it good. Period.
@Tax to death
Do you even realize what you are saying? The allocated amount $233K/cop is the ACTUAL cost to have a single police officer patrolling the streets. It is NOT his or her salary. It is 1) salary, 2) benefits (life insurance, health insurance, etc), 3) training, 4) supplies (guns, bullets, patrol car, bullet proof vest, etc), and 5) facilities (telephone line and desk). If you were any kind of business person you would know that it costs (at a minimum) twice what an employee’s salary is to hire a full time employee in retail. So to hire a specially trained police officer is going to cost more.
@Emma
That cost is ridiculous. You could arm 2-300 private citizens for the same amount of money. We’re in this financial crisis precisely because we demand government services – more cops, more prisons, more medicare – and then whine when the bill comes due.
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