Granite and stainless—that is all buyer’s want when they walk into a kitchen—wall to wall stainless steel appliances and thousands of pounds of granite will make Betty 1st-time Homebuyer have a freekin’ orgasm when she walks into the kitchen.  Toss some of that granite in the bathroom and you don’t need to turn on the hot water to steam up the mirrors.

In the deflationary U.S. real estate market, that started in the end of 2006 or the beginning of 2007 (depending which coast you live on), we are experiencing the start of the 2nd great price drop cycle.  As soon as the ‘no skin in the game’ $8000 tax-credit expires, we should see full fledged double-digit housing deflation return.  The only question now, with talk of extending (the illusion of reality), is when part deux of this nasty home price crash will start.

Congress, the Mortgage Banker’s Association and our ever so wise world of Realtors are all calling for an immediate extension of the $8000 1st time homebuyer tax-credit pronto! Some new plans even call for more easily available tax-credit (up to $15,000) money, less restrictions on income, property type and qualifications.  While no is out there saying the truth—‘Them houses prices gunna be in some deep, deep shit when dat tax credit done gone and expire an dem broke people can’t get no home no more for free!’ There has been a scream from all ends of the market to keep the party going and keep prices infltaled!

A good article came out last week, written by the WSJ, that states the tax-credit has raised prices of lower end properties by 5% in the last year. http://blogs.wsj.com/developments/2009/10/24/uncle-sam-adds-5-to-prices-of-homes-goldman-says/ This article also mentions bidding wars for 1st timers— There really is nothing like a real estate novice getting crammed into paying more than full price during a deflationary cycle, forced to pay higher commissions and forced to waive repairs!

My realtor friends have all said the same thing for the last 6 months—1st timer homes are getting 100-105% of asking price, sight unseen, and many occasions on the 1st day of the listing.  The only caveat in all of this hoopla—The buyers are all writing in clauses that allow them to ‘walk-away’ from the deal if the home fails to close before the $8000 tax-credit deadline, Nov 30th. In essence, the now powerful 1st time homebuyer is saying, ‘If it ain’t free we don’t want it.’  How will these 1st-timers afford to upgrade to granite if they have to pay a down payment?

I spoke to two Northern Colorado realtors this week that said supply is already rising in the number of recently listed 1st- timer homes, as homes that are not under contract now are seen as having little chance of closing before the credit expires.  This trend should continue.

I find it AMAZING that people are willing to make a $100,000 – 200,000 decision bet based on getting the $8000 tax-credit refunded. This is NO REASON to buy a home.  I hope these buyers have read their lease agreements mortgages and noticed that this is a 30-year commitment, you can’t ‘choose a different house’ next year because you don’t like the school or auto repair shop across the street, and NO ONE is coming to fix the dryer when the heat stops working.

In reading a lil’ about the tax-credit I uncovered this point:

 FROM IRS.GOV. If, within 36 months of the date of purchase, the property is no longer used as the taxpayer’s principal residence, the taxpayer is required to repay the credit. Repayment of the full amount of the credit is due at that time the income tax return for the year the home ceased to be the ta

This means xpayer’s principal residence is due. The full amount of the credit is reflected as additional tax on that year’s tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit. (05/06/09).

that if someone tries to sell, has to sell or decides to use the home as a rental in the next 3 years, the $8,000 credit IKEA bonus money has to be paid back in that same tax year. While I hope most buyers do not intend to move out in 36 months, I know some will. If this is the case, these buyers are required to pay Uncle Sam back the Full Monty of the credit.  I can only assume that buyers that are not going to buy a house without a free 8K have this money set aside if they are out of the house in 3 years. 

The tax credit is in some big heat right now, as fraud has been front and center– http://online.wsj.com/article/SB125599683058895389.html. In one instance a 4-year-old claimed the credit!  That is my kinda kid—he is probably the only smart one out there.  At least he can move-on with his life at age 34 with a house paid in full.

While all this is old news, the news of the unknown future is how far will home prices fall when the tax-credit is gone? The Wall-Street journal article above says home prices will fall up to 10% by mid 2010—that’s only 8 months out. The Mortgage Banker’s Association says a drop of 10% alone in 2010, and other sources I have read see an additional 3-30% drop from the values we are at currently.

No one sees prices going up next year, while some are optimistic prices will remain flat.  The Case-Shiller report has homes at the 2003 price levels. 

I am still wondering why everyone buying a 1st timer house this year, only and specifically for the tax-credit, is wearing the ‘I’m with Stupid’ T-shirt’. I understand that there are some bargains in real estate right now, and many people are not buying a 1st timer shanty but instead a 10 or 15 year residence, but the crazy Bigfoot on Steroids buzz of 1st-timer’s rushing in to buy low end real estate at over market prices is very scary!  If the average home does depreciate 10% next year, and we see the caffeine buzz wear off in the tune of an additional 5% crash in the 1st timer market, many $8000 richer 1st timers could be sitting 15% under the 2009 purchase price.

FYI—this is a cool $30,000 in lost equity on a $200,000 home.

When homes do start to appreciate again (see: ‘When/if jobs come back’) we should return to the days of normalcy in the market—1-2% gains in real estate prices. 

HISTORY LESSON:  Homes do not appreciate at 20% a year– this was only during the ‘Great Greenspan Housing Boom’ that ended in 2006.  Houses are not going to go up like this again for a long time (see the term, Score, as a unit of time). 

For those 2009 buyers that took a home at these intervention-inflated values (and I don’t mean the crappy purchase appraised value) there could honestly be 7-10 years before those buyers are in a position to sell their home, pay all costs associated with selling the home (realtors make a lot of money in all markets) and break even—or walk away ‘not’ owing money to sell. Looking at the future scenario, most of these buyers should wait a year, pay a higher rate and get no $8000 credit, but be in a much smarter equity position going foreword.  Or just maybe, say Phucket Thailand, and wait 5 years and see what really happens.  Being 20% underwater on your motgage is shitty. 

So here we are—at the crossroads of the tax-credit expiring. Congress knows that the housing market will tank when the interventions are gone.  They probably know the market will tank even if the interventions are continued.

Regardless, I’m 100% sure that there will be some sort of an extension to the tax credit. The USA Tax-payer by means of the Fab Fed is currently fully invested in the mortgage market with ownership of the goverment’s bad kids Fannie and Freddie, ownership of the Monster Bank super 4-some, and very proud owners of $1.25 trillion in RMBS (this means we also own the GNMA securities and the FHA).  They are being lobbied heavily from home builders and realtors, and the governement can’t take the press (votes and stock prices people) of a housing market that falls off a cliff when they are trying to push a massive health care reform.

We will continue to hear about the fear of inflation, when the real fear for housing is deflation.  But deflation isn’t so bad (as long as you have cash).  Wasn’t the ‘real’ American dream to own a house with a white picket fence?  I think it was.  As the deflation lingers like a bad fart in the housing market for a long long time, it’s O.K. to wait—it only means you dream house gets less and less expensive to buy with each passing day.

 But maybe I’m wrong—maybe historical the averages of wages (flat for 11 years now while home prices are up dramatically) and rent prices (still 20-25% under home price multiples) that have dictated, for the last 75 years, where home values are normalized and affordable in relation, are all just a load of bull.

Maybe mortgage rates go to 2%.   Maybe your sick grandfather really can live without that silly life-support.  Maybe the Deacon at the church really can turn water into wine… Maybe.

Maybe I’m stupid… And maybe the 2010 real estate intervention will allow a $25K allowance over 5 years to buy a house, or maybe the U.S.A government will throw in a new Chevy (we own them too you know) or a shiny new Escalade to fill the new house garage, or maybe they will throw in 10,000 shares of Fannie Mae or AIG if you buy a condo in Florida.  Maybe it makes sense to buy something that the government has to give money away with to convince people to purchase it.  Maybe Aliens from the imaginary planet Glorg will come and all buy 20 houses in shitty neighborhoods at 120% of the asking price to stimulate demand and prop up prices.

Maybe the tax-credit has nothing to do with the real estate market recovering and it was just a really expensive fluke!

All I know is that someone is hanging around with stupid…

A house is always a good investment

In the movie Crash, Academy Award winner in 2004, the lives of many unrelated people are intermingled to piece together a story.  It is one of those touching movies of life, love, devotion, pain, suffering, bad cops, pretty people in un-pretty people roles and togetherness.  The movie shows just how small the world can be.  

I have recently had some conversations with friends in the real Crash—the real estate crash.  Here are there stories.  I wonder if their lives will ever cross?

Story #1—Sunny ‘Dead’ Condos in slumping Florida.  This home will NEVER be worth it’s high price during the boom… ever!

My good friend lives in the condo capital of Florida.  This Florida city is one of the nation’s highest foreclosure hotspots, with a ‘Bigfoot on Steroids’ 10.7% of all homes in the city involved in some stage of the foreclosure process (as of Oct  2009).  This city was also the #1 condo-conversion area from 2002-2006.  It is estimated that more condos sold in this area in this 5 year period than the previous 30 years.   In a condo-conversion, they take a shitty old building from the 1950’s – 1980’s, pull up the shag carpet and replace with low grade hardwood floors, put in new trendy light fixtures, place some ‘dramatic’ granite and stainless in the kitchen, throw in a plasma TV and then sell the unit for a 250% profit.  I would estimate that in this city, from 2002-2006, over 1,000,000 similar conversion units were sold at top dollar. 

My buddy purchased his pad for about $175,000 in 2005.  In 2006 it was appraised for $230,000.  Not a bad buy eh?  Wrong.  This city’s unemployment rate is now at 11.5%.  In addition to this, the Census bureau has this sunny Florida city as the #3 mortgage fraud area, closely trailing behind other Florida ‘dead’ condo supervilles Fort Meyer’s and Miami. 

How the times have changed.  In this city, the ‘average’ condo price fell from $111,200 in August of 2008 to $49,900 in August of 2009—a 55% drop in price.  In today’s real estate reality, the glut of ‘dead’ condos has reach a number that would be considered an epidemic if they were dead bodies from a goat/rabbit/cheetah/donkey flu.  According to my friend, his neighbors (and many others in the building I am sure) have not paid on their mortgage for over a year and have not even heard from the bank—not a call or a letter.  It is what it is for the borrower and the bank I suppose, as the bank has a vested interest to just act like there is no problem and keep the bad loan on their performing books opposed to accept and announce the loss.  He believes they still owe about $180K on their unit.  They still live there, throw parties and pay the HOA!  Screw the mortgage, but the HOA is important!  He said that another unit has been listed on the market for an ‘organic’ sale for about 2 years at $130K with no interest what-so-ever.  The only sales traffic in the building is from short-sale vultures that are buying gutted units for $40K in cash, making them livable and then renting them out for $900 a month. 

My buddy pays $1800 a month on his unit, which includes an HOA ‘special-assessment’ for a roof that was never actually replaced (though it was sold to him with assurance that it had been) by the fix-n-flop developer.  Rents are currently at $900 in his building.  The number of foreclosures and short sales also makes the building ‘un-lendable’ in today’s mortgage reality—the foreclosure numbers are too high, the renters in relation to owners are too high and there way to determine value. 

It will take 50 years and years of double-digit inflation (real and wage inflation) for him to ever be close to even on this home.  I would guess that his condo will never be worth what it once was… and it may never be worth $100,000… or $80,000.  With years of supply on the market, higher rates not to far off and NO lending programs for this project, $40,000 may indeed me the high water mark for 2009.  That would mean that there is still room to go lower in 2010 and beyond. 

CRASH:  This is the real estate reality…  The bottom is not even close to being hit in Florida…  

#2—No REO’s for the Flipper today– but there will be more than he can handle in the near future!

Another good buddy of mine is a real estate investor.  He buys bank owned homes and either flips them or rents them out.  In my opinion he does good work.  He buys ‘smart’ properties in up and coming areas and creates a livable home for new tenants.  Recently he did a duplex in a hot area and it was done very well and sold quickly.  He also has fixed up some lower-end condos and owns a handful of rentals. 

I spoke to him this weekend and he said there is ‘nothing available’ for him to buy.  Huh?  I thought bank owned and foreclosed homes were all over the place.  This is not the case.  He said that the banks are not selling their bank owned homes, and are instead just sitting on the vacant inventory. 

Is this a sign of the shadow inventory that everyone talks about?  Yes it is! 

There is a swollen inventory of 7 million homes in the “shadow inventory” – more than 15 months worth at the current rate of sales, according to a recent article in Barrons. These are homes that are headed for foreclosure – mortgages that are at least 60 days overdue, of which nearly 10% haven’t made a payment in two years.

The shadow inventory is in addition to the real inventory of 3.6 million unsold homes, more than an 8 month supply.  Another 300,000 homes are added to the shadow inventory each month. Unfortunately, programs like Making Home Affordable, which has generated more than 630,000 loan modifications so far, can’t make a dent in this shadow inventory.

BTW, my buddy is not is CA, FL, NV or AZ. 

If holding back homes from foreclosure is the new normal for banks to keep losses off the books then I’m guessing these banks will be holding back a cubic shit-ton of homes until at least 2010.  Why would banks do this?  Probably because of 2 reasons—(1) The Monster Bank Super 4-Some can’t show anymore real loan losses in 2009 (stock prices people) and they can’t sell all these homes even if they wanted to– no one will buy them (and you can’t finance many of them due to condition)!, (2) The government will bail them out… eventually.  The U.S. taxpayer now ‘owns’ 80% off all mortgages between Fannie, Freddie and FHA.  All the fiat eggs ARE in one basket.  The banks know this—the Monster Bank Super 4-Some now services 85% of all 2008-2009 government loans.  Many of these banks still owe the government billions of fiat eggs themselves. 

The banks also know that there is no way the government can let the housing market fail when the government is fully invested in the mortgage market AND the banking industry.  The banks know that the 2010’s housing interventions (yes, plural) will be equivalent to the White House’s kitchen sink being thrown at the housing market… and this may be the magic bullet needed to unload these shadow properties at a price that doesn’t cripple the banks balance sheets (stock prices people). 

What will these interventions be?  $15K cash credits to buy any home for any buyer?  No appraisal refinancing?  No income loans?  No money down loans?  We’ve done this before and the results were not so good… 

No one knows the total number of the shadow inventory in housing that hasn’t been released by the banks (though Amherst’s report estimated it at 7,000,000 units– see graph below).  When these depressed homes hit, they will compete for the sales of orgainc listings.  This will drive prices down further and force people to lower their price to compete.  Some will not be able to sell and will just give up and walk away… thus creating another REO that will be sold at a reduced price.  It’s a nasty cycle. 

Shadow Inventory at 7 million Units

CRASH:

  This is the real estate reality… More equity stripping REO’s are out there even though you don’t see them.  

#3—Fraud Fraud Fraud and Bad information :  Bad home appraisal does nothing to help the homeowner.

Another friend of mine owns a home in a neighborhood in my city of Denver.  The neighborhood he lives in was the #1 foreclosure area in 2007 and 2008.  It was an area that was ravished by subprime loans to low income Hispanics that ultimately went sour.  Home prices in his ‘hood’ dropped 35% – 50% from the 2005 peak during that time.  It is one of those neighborhoods that has graffiti on all the homes, boarded windows on many of the homes, and a fair amount of lowered Ford Escorts and Explorers in the driveways.  

He bought his home for $170K in 2005.  

I tried to do a refinance for him in May of this year with no success.  I spoke to four appraisers, all of whom told me it was a ‘stretch’ (in appraiser talk this means NOT REAL VALUE, but it can be done) to appraise the property for $150,000, and that the home was most likely worth closer to 130-140K.  We were unable to do the loan due to value restrictions. 

I spoke to him just last week and he told me that he got his home refinanced, and that someone appraised the house for $180,000.  I was baffled.  When I pulled info up at my office the next day there was no support for this value what-so-ever.  The highest comparable sale within two miles was $150,000 and the home five houses down had just sold for $120,000 organically.  In addition to this, the majority of sales in his immediate area were short sales that were going for $50-70K and resold within 90 days for $100-110K.  I’m guessing that the majority of these homes are 1^st time home buyers who are getting free down payments and have no ‘skin in the game’ if the market continues to fall.  If anything, the house was worth less than when we spoke in May.

 What does this loan do for my buddy?  I suppose it is a good thing to get him out of his old 80/20 purchase loan to avoid any rate adjustments, but in all reality this new mortgage is terrible for him.  He will most likely be ‘stuck’ in that house for a long time, as the mortgage on his house will make it impossible for him to sell.  If he rents the home he will be forced into paying a large chunk of the mortgage on his own (No one pays 150% of going rents because you need to cover your mortgage).  He also most likely rolled more costs into his new loan and started over on a 30 year tem again, essentially wiping out any payments he made towards the principle balance. 

I wonder how many more loans there are like this being done—writing people new mortgages that are essentially 120% – 150%  of the value of the home, though disguised from the bank because the appraiser ‘stole’ a comparable sale from a neighborhood across the tracks that is 30-50% higher in value.  It may be sunshine and cookies for the homeowner when they see the appraisal, but in the real estate reality, they would be very disappointed to know they would have to bring $30K+ to closing to sell their home… and this is if the home doesn’t drop in value any further.  

NOTE:  His friend was with us when he told me about his refinance.  His friend is buying a similar house a block away from my buddy’s for $65K on a short sale and he plans on selling it for $110K after its flipped.  To that I just said, “Wow…”

CRASH:  This is the real estate reality… People are not willing to accept the true value of there homes… 

Lastly, please read real estate Perma-Bear Diana Olick’s piece on Las Vegas real estate–  http://www.cnbc.com/id/33310096.  It is a feeding frenzy of people buying at 20% of the former value of these homes.  Does this signal a bottom?  No it doesn’t.  It just shows that people like a ‘deal’ on a home.  If you buy a house for $50K that sold for $200K in 2006, and you can sell the house on a fix-n-flip for $100K, that still means the value of the home is down 50%… and that is not recovery—that is a housing depression. 

Rick

I was reading about the stanky gorilla funk that housing is in the other day.  The article I was reading was written by a real estate professional (a ‘buy now or die homeless’ realtor for sure) and it criticized writers for commenting on the previous post he had written which claimed that real estate market was tuning the corner and prices were about to skyrocket back to 2006 levels.  Almost all the people who commented on his article had the same conclusion—they would rather stab themselves in the eyes with scissors than buy a house in this market.  The author claimed the readers were ‘chasing the bottom’ in real estate by not buying in today’s ‘exceptional’ market.  

In essence, this person was telling someone like me that I’m stupid to make a prediction as bold as, “The housing market will fall an additional 25-40% from its current levels depending on where you live.  This is due to a generation of big baby boom spenders who now have to sell their homes at inflated levels to save for retirement, the complete collapse of ‘manipulated’ mortgage credit and the inevitable un-affordability vacuum that will occur when lending rates skyrocket” 

There I said it… Now put on your New Balance kicks and feel free to go chase that real estate bottom… I dare you!  

The big problem with the chasing the bottom analogy in real estate is that it doesn’t really correlate back to the rest of the financial world.  People DO chase the bottom in the stock market, but like I have stated before, comparing stocks to real estate is like comparing the toxicity in meth amphetamines to the total number of seedless watermelons that are sold at the Green River Utah Melon Days—no real reason for comparison as they are NOT even close to the same ‘investment.’  Real estate moves VERY slow.  Stocks can move rapidly and infrequently.  If someone failed to buy a house in March of 2009 and opted to buy in July of 2009, there would be little movement in the prices of the homes for sale (thought the inventory may be different– more foreclosures to choose from!), but if they had used the same timing method in stocks this year they would have missed out on a 40% rally in the stock markets.     

Real Estate is a liability, not an asset.  It is a thing you buy—like a boat or crotch less panties, and it requires maintenance—like a lawnmower or a teenager.  I’m holding in my hands RIGHT NOW a copy of a Truth and Lending document for a loan (on a house people).  The loan is a 30 year mortgage at a 5.00% fixed rate.  The amount financed is:  $176,217.00.  The ‘finance charge’ (sweet sweet interest) is $178,915.00.  This makes the total loan (liability) payment $355,132.00.  Yes that’s right, even at a 5.00% interest rate, the total amount paid back to the Monster Bank Super 4-some will be more than double the amount being borrowed.  What an AWESOME asset.  You should go buy 7 right now!   

But here is the kicker.  Real Estate has been a good investment in the last 75 years, before the bubble.  The idea was that buying one of these assets depreciating hodgepodges of materials is the answer to wealth, happiness, good sex, better eyesight, a skinnier waistline, tons of new friends in the cul-de-sac and retirement.  While this may have been the case in the past (see real estate from 1950 up until 2000ish), it does not hold any truth in the aftermath of the super bubble of all bubbles? 

Peak Consumer Credit (that event no one wants to talk about) happened in 2006.  That was the year that a one-armed midget terrorist, from the former Soviet Union, with no ID or residency, could buy a house, sight unseen, without any money down, any job or any credit history.  Surprisingly this is the same year that houses STOPPED appreciating like their roofs were built out of gold.  It was also the year that the Baby Boomers started to hit an average of 50-60 years of age.  

If we look at the last big housing bubble to burst it was in Japan.  The peak of the Japanese (asset bubble) economy was in 1989—ironically the SAME time that the largest number of their population reached their 50’s and 60’s.  Japan’s baby boom happened about 20 years before the US baby boom.  If you look at the chart, Japan’s housing market has never recovered to anything that resembles the peak, and their real estate market was the WORST investment you could have made in the late 80’s and early 90’s.  The U.S. real estate bubble is no different that Japan’s real estate bubble crash– Both bubbles marked a period of time when populations were reaching the END of their spending cycles.  It took 15 years for Japan’s real estate market to bottom out—for the average buyer, that means that they were forced to either (1) stay put in their overpriced house or (2) give the house back to the bank.  And with the way mortgage amoritization works, the Japanese buyer in 1991 may still be underwater on the loan today in relation to the value of the home—And they have already paid on the property for over 15 years.  Will Japan’s home prices EVER recover their bubble peak prices?  Probably not.  But the U.S.A. is different, right? 

What goes up...

Japanese house prices lost almost half their value during the 15 year slide… This, along with the rest of Japan’s money printing methods (Not much different than the stimulus shimulus we are doing the United States RIGHT NOW) was just the start to a painful deflationary spiral—of which they are still currently in. 

While there are MANY flaws in the U.S. real estate market right now, I will pick apart the issue I see being the real whack-a-doo problem with any possible price stabilization or price appreciation for years to come.    

It’s not (100%) a low interest rate problem…   

I have never met anyone that thinks the real estate gains from 2000-2006 were justified.  And while every year Realtors will tell you ‘It’s the best time to buy pay me a commission for showing you a closet,’ the reality is that the real estate market must fall a dramatic amount from its current levels to normalize in relation to affordability and income levels.  And while massive government interventions are in place to ‘stabilize’ the market, these programs are temporary—like putting a band-aid on a gaping flesh wound from being hit with a crowbar to the neck.  When the smoke clears from the ‘year of interventions’, the slide to the dark real estate abyss will continue until homes are in line with incomes (I’m not even touching of supply and demand on this piece.  That is a whole different problem).   

From 2000 to 2006 the ‘average’ US home jumped a ‘Bigfoot on Steroids’ amount from $122,000 to $239,000.  A ‘slight’ increase in price.  No biggie right?  I mean for the previous 75 years before 2000 the house hadn’t increased that much in a 6 year period.  At the same time, the average 30 year fixed rate mortgage fell from 8.25% in 2000 to a low of 5.25% (though it was at 6.25% in June of 2006).  Hmmm.  That’s kinda funny isn’t it?  Rates go down and houses… go… up? 

Well duh!  Affordability happens when rates are low.

Lower rates = more house you can afford = houses go up in value?  

I’m confused:  Low rates = houses go up in value?

What happens when rates go up?  

Let’s look at 2 scenarios– #1) $1000 principle and interest (P&I) payment at 7.5% mortgage, and #2) $1000 P&I payment at 5.5% mortgage.  Both 30 year terms.    

Then let’s see just how much this ‘buys’ someone.  (Escrows are not taken into account) 

At 7.5% you can finance $143,150 for a $1000 payment.  

At 5.5% you can finance $176,200 for a $1000 payment.  

Not too shabby—that’s about $33,000 more that someone can afford with a drop in rates.     

In the same time period we saw mortgage rates fall and housing climb, incomes are FLAT—no money growth.  Nada.  Actually, from 1998 to 2008 incomes fell (Mr. Deflation alert). This means there is no WAGE inflation, the evil little devil that created home price increases in the 70’s.  Still, home prices are up dramatically in this time period.  While it may look like it, the housing boom WAS NOT 100% due to a low interest rate problem. 

If you give a mouse a cookie, he’ll ask for a No Doc, 100% CLTV option-arm loan that has a minimum payment equal to less than the interest due. That or a glass of milk—really depends on the mouse’s needs at the moment.

 It’s a low interest rate, interst payment manipulation and loose credit problem…   

If you have NO restrictions on income, what is the MAXIMUM amount that you can lend to someone?  $200,000?  $400,000?  $1,000,000?  If you answered YES to this question, you are correct.   

If you CAN lend someone $1,000,000 without any proven income, how much are they willing to ‘pay’ for a house?  Again, the answer is YES.  

And how much WILL that person borrow if the CAN borrower $1,000,000 if you have NO restrictions and NO down payment required?  The Sky is the limit!  

Loose credit guidelines and payment manipulations are the #1 joint culprits behind the housing bubble.  THERE IS NO OTHER REASON THAT HOUSES INCREASED OTHER THAN AVALIBILITY OF CREDIT.  When you lend someone money for FREE they will take the money.  

Personal opinion:  I am 100% convinced that the U.S. consumer would drive housing prices up another 100% RIGHT NOW if they had access to SAME credit they had from 2000 to 2006—no questions asked.  Houses were the cash-out bank and the backbone of spending that filled in the gaps of a decade of flat income growth.  US conumers NEED more money to fuel the economy and they are not getting it from their jobs…

Let’s look at 3 more scenario’s using the same $1000 payment. 

#1) A fixed rate at 5.5%.  #2) An interest-only payment ARM at 4.5%. #3) a pick-a-payment Option-ARM loan with a 1% minimum payment.  How much can you buy? 

At 5.5% fixed you can buy $176,200 for a $1000 payment 

At 4.5% interest-only you can buy $267,000 for a $1000 payment (+$99,800) 

At 1.0% Option-Arm you can buy $312,000 for a $1000 payment (+$135,800) 

Oh boy—something just hit the fan… yep, it smells like fresh shit.  So, from 2000-2006 when these funny money loan products were available, a person who had not seen $1 in income growth could finance a home that is 44% higher for the SAME payment?  Huh?  Prices jumped in price because people thought they were actually buying more home.  Instead, these borrowers were financing more interest (and in most cases NO principle) and paying only a portion of the actual payment at the time the loan was written.  There is nothing normal about the interest-only or Option-ARM loans when you use the minimum payments to qualify debt ratios.  Neither loan is ‘good’ for the buyer, as the payments rise exponentially when it is time to pay back the principle amount due.  

Concerned American Consumer:  Wait a darn minute!  That is ridiculous.  I just don’t understand how this works.  

Answer:  It doesn’t.  Housing bubble price increases, like any bubble, are temporary.  The interest-only loan’s payment will balloon to $1485 when the ARM period is over (after 5 years if the rate stays at 4.5%) and the Option Arm will ‘reset’ to a payment of $2300 (estimate at 7% with a ballooned balance of $235,000).  These credit programs are GONE FOREVER (or at least until people ‘forget’ how bad the market reacted to them).  As you can see, the price increases have nothing to do with the actual interest rate, but with the way the interest payments are manipulated to the consumer.  

Concerned American Consumer:  Holy crap!  Those payments are WAY TO HIGH for me to pay.  I can only afford the $1000 that I signed up for.  

Answer:  Pray for another government intervention!  That’s all the hope you can have right now.  There is NO credit program to help you. 

Speaking of the $1000 original payment, here is option #4)

What the government is trying to use to ‘Fix’ the housing market—a 4.5% fixed rate!  

At 4.5% fixed you can buy $197,500 for a $1000 payment… 

Option #4 is after your 20% down payment (about $40,000 on $200,000)… no more free ride on this train.     

Not to shabby, but not a fix.  The problem with the government’s super fix it is that the program is TEMPORARY.  You cannot sustain interest rates at 4.5% for a long period of time… it just can’t be done without massive currency devaluation and inflation.  So, in the not so distant future—POOF—mortgage rates will be back up (how high who knows).  There is NO WAY that one or two years of low rates can expunge 6 years of the  loosest lending standards in history, years of credit induced 17% annualized increases in home values and the complete destruction of the loan market (aside from government lending).  Sorry—can’t be done—not even with a few 12% inflation pills.  No sunshine and cookies.

Anyone else interested? No...

As you can see… all the agency (mortgage) debt is being bought by the Feds.  When the Feds pull the plug on this $1.25 trillion experiment,  in March of 2010, there will be no support for low interest rates.  While rates will not reach 15% for mortgages in 2010, they will not be able to sustain 4.5%-5.5% prices either.  I’d guess you can finance somewhere in the middle.  And at 8.5% you can finance $130,050 for a $1000 payment– which is $67,450 less than at 4.5%.  Boo! The vacuum of un-afordability will suck value out of home prices– you can only stretch those flat incomes so far when you can’t manipulate the interest payments on the loan.   

So, go buy a house this weekend!.  Get in a bidding war and pay 10% over the asking price.  Waive the inspection so you can fix the furnace on your own!  Finance the home of your dreams TODAY —it has to be a good time to buy, right?  Rates are low and prices have dropped.  

But remember, low rates didn’t 100% create the housing boom (thought they were a catalyst).  The real gunpowder to the flame was the availability of cheap and unregulated credit and the way it was presented to the borrower to boost the (percieved) value of the home.  Those days are over partner.  

When rates rise the media will tell you that affordability has returned due to falling home prices?  Really?  In 2006 you could finance $312,000 for $1000.  Now you can’t even finance $200,000 for the same payment.  I’d say that adorability is down, but reality has returned—reality that home prices are dropping, credit is hard to get and real estate is no longer an investment but a ‘thing’ you buy—like a boat or crotch less panties—and it is going to take money and maintenance to keep and maintain.    

It’s all just bubbles—and when bubbles pop they don’t re-inflate to the levels where they peaked.  Don’t believe it… look at the NASDAQ in the early 2000’s, the Nikkei in 1990, baseball cards, beanie babies, tulips, and oil prices in 2008… all bubbles and none of them a fraction of their zenith peaks.  If someone tells you something is a good deal because it is 30% less than it was at the peak, this doesn’t mean it is a good deal now—it just means that it was a really bad deal at the peak.    

Bear on real estate market?  Yes I am! I think I’ll continue to chase the bottom.  I’d rather chase the bottom with vengeance and buy on the rebound than meet you here in 2009, at the artificial 2^nd top.    

Rick

What's that smell...

As if the housing market wasn’t already beaten down from the Sinking Equity Torpedo, the government is going to bring in its newest weapon to ‘cure’ the devastated housing market (and no it’s not a 12% inflation pill).  It’s time to give back some of this rotten housing burden to the banks.  Sadly though, what is meant to stop the bleeding is only going to make this market messier and more problematic.  

Residential mortgage lending has gotten so crazy whack funky in the last year that you could consider it comical.  Last week alone we saw a new and improved APR calculator to avoid super-crazy high cost loans (although no one has been writing regular crazy high cost loans since 2006), the announcement that Fannie Mae is going to a 620 minimum credit score (up from 580) and the announcement that certain lenders will stop doing loans on manufactured homes, condos, high-rise condos, townhouses, swamp land, former geo-thermal hot spots, any land within 500 miles of California, former boxing champs mansion homes, homes near a Church’s Chicken, anything near a church or a race track and puppy mills.  I support not lending to puppy mills—that is just bad business in my book. 

Of course this is an exaggeration to make a point, but these changes (other than those in italics) were all released in one week—not a quarter or a month, but a week.  The face of lending is changing rapidly as GAP Mortgage is almost 100% in full-swing.  The B.S. you hear from the well dressed CNBC stock analyst on housing should only be listened to only after chugging a half gallon of grape Gordan’s vodka—you have to be trashed to believe the trash they are spewing about recovery.  Sadly, you will sober up the next day and the market will still be in disarray. 

 Speaking of Humor:

Q:  What do you call a borrower looking to finance a home at 70% loan to value, fully documented (W-2) income from an engineering firm for the last 10 years, $150,000 of liquid cash reserves in the bank, one recent credit card late, a second credit card that has a high balance, no mortgage late payments for the last ten years and a 616 FICO score?

A:  A turn-down!     

Ha ha ha!  Oh man—that is killing me—my stomach is all tied up!  A 616 FICO score and he wants a loan—what a loser!  To think he can borrower money with that dog poo credit!  Oh my god that is hilarious.  

Q:  What do you call a 23 year-old recent college grad, who is a  1^st time home buyer with no real credit other than being an authorized signer on daddy’s AMEX, who has a service job (yes that means waiter) at a TGIFriday’s, a borrowed (though never to be paid back) down-payment, who is raising his payments 200% to be a homeowner instead of a renter, with a new home loan that is equal to over 97% of the price of the home and a 670 FICO score?  

A:  A homeowner!  Tell them what he’s won!  $8000 in a tax credit from the government for buying a house depreciating asset!   Way to go Donny! 

 What is not funny about the two ‘jokes’ is that they are not jokes—both of these situations are real—they are happening RIGHT NOW in a loan office somewhere in the U.S.  Somewhere a kid is buying a house that will soon become a negative-equity burden, and somewhere else a burdened homeowner is finding out their house bank is no longer a working asset—even at 70% loan to value, this person now has to SELL the house (see: Expensive in the dictionary) to make any of the equity work for him. 

Remember, the rate of return on equity is zero.   

FHA IS THE ONLY GAME IN TOWN.  The 1^st time homebuyer listed above is taking out an FHA loan at 96.5% Loan to Value.  They can use a borrowed down payment and can have questionable income.  Why?  Because the bank is cool with this crappy, soon to be foreclosed home loan because the FHA is 100% guaranteeing the lender the whole loan loss if the loan goes bad.  Essentially there is no risk for either the homeowner or the servicing lender.  The homeowner is putting no ‘real’ money down—remember they get $8000 in a cash refund from the government.  The lender is putting no money out when (not if, when) the loan goes sour.  The only person screwed is the FHA… But wait!  The FHA has an insurance program—The insurace program costs FHA borrowers money monthly (monthly mortgage insurance) and at the time of the loan origination (up from mortgage insurance) in a lump sum!  Unfortunately, the FHA’s leverage ratio of 50 to 1 (Bear Stearns was at 33 to 1 when they were shut down) has that whole insurance program in jeopardy.    So who will catch the falling knife? 

ENTER FHA 2.0– FHA reform is here… With FHA loans now supporting the entire high LTV market, and jumping to over 23% of all loans (up from 6% 3 years ago) the new Sumprime slime IS the FHA.  But that is about to change… but will is save the housing market?

Starting January 1^st, 2010, the monster bank super 4-some (Wells, Bank of America, Citi, JP Morgan/Chase) will have to have some ‘skin in the game’ when they write FHA loans.  No one knows for sure what percentage of the loan loss they will have to take and what FHA will cover, but the traditional 100% dumping ground known as the FHA is about to change.  With the FHA raising the capital reserve bank requirements to $1,000,000 in ‘liquid’ assets, the ‘little guy’ lender that has been keeping his reserve requirements met by claiming his copy makers and cubicles is pretty Phucket Thailand with FHA 2.0.  Essentially, FHA 2.0 is moving the risk and requirements from the FHA to the monster banks.  The monster bank super 4-some already services over 60% of the FHA securitization portfolio (Pre September numbers), meaning that if they are buying over half of the loans written, there is a good chance (I’ll take ’It’s Going to Happen for $1000 Alex’) that at some time in the life of the loan it will be owned by one of these monster banks.  Therefore, the monster banks will manipulate the FHA guidelines to only write FHA loans they want to buy and service.  When the banks have to start taking losses on these loans, the banks are going to start constricting credit further and further to limit their exposure to the losses.  The banks cannot take any exposure to losses right now, so even a minimal 5% or 10% exposure to the losses will mean MASSIVE changes to the FHA guidelines.     

But the Broker is back!?  The big buzz from FHA 2.0 is that any broker (licensed, unlicensed, terrorist or patriot) can now write FHA loans and sell them to a licensed FHA Mortgagee.  I have to call shenanigans on this theory too.  There is no chance in hell that the monster bank super 4-some is going to be letting any basement broker send loans to their now exposed bank when the banks have to shell out fiat dollars to pay for the future loan losses.  If anything just the opposite will happen.  I see it unfolding like this: 

A mortgage broker walks into Wells Fargo with 10 ready for submission FHA loans after Jan 1, 2010.

“Howdy.  Name’s Nicky Broker.  I got me 10 loans here for submission to you for that FHA program…” 

The Wells Employee will look at Nicky and say,

 “Well Nicky Broker, I hope you have read the new requirements Wells Fargo set for FHA broker loans.  None of these files are going to work.” 

Nicky will take the paper and read aloud: 

“Rule 1:  No brokered loans unless broker has submitted 10 closed files in the last 6 months.  Rule 2:  All loans for the last 6 months, if closed by a broker, are not to be used for broker review.  Rule 3:  Any broker file must be held for 6 months before closing.  Rule 4:  Any file that has been submitted, by a broker, for over 3 months will be set on fire or closed internally without notification.  Rule 5:  Broker CLTV maxed at 12%, condos at 11.5% (CLTV reduced by 1% if broker is indeed a broker).  Rule 6:  Any broker is required to also be an employee of Wells Fargo.  Rule 7:  If broker is an employee of Wells Fargo they are not allowed to broker loans.”  Nicky will get irate.  “Fine, I’ll just take my business to Citi or Bank of America or Chase!” 

The Wells employee will point to the bottom of the paper. 

“Fine print broker.  It says that ‘this form also applies to broker submissions to Bank of America, Chase and Citi… and most likely any other lender that you take you loans to.’  Good luck in your new career.”  

The Broker is back?  I’d say just the opposite—the broker is out of the game for the foreseeable future.  There will be monster broker shops for a few months—maybe a year or so, but with audited financials, $1,000,000 in capital reserves and exposure to loan losses, it will only take a few sour tomatoes to ruin the broker’s whole bushel.  

But FHA’s real ‘Bigfoot on steroids’ problem is their limited down payment– at only 3.5%.  The borrower then takes a full 1.5% in mortgage insurance premium that is added to the top of the loan (this is called packing, when it is added to the base loan amount).  Therefore, the final product for the borrower is over 97% loan to value.  FHA loans written over the last 2 years are seeing default rates in the double digits.  Couple this with double digit housing price losses (Case-Shiller shows about a 13% drop from July o8 to July 09) from the same time period and you see the real enemy—  A fresh batch of spiked negative equity punch.  If someone buys a $100,000 house and loses 10% a year for the 1^st two years, the house is going to be worth $81,000.  The FHA loan will still have a balance of $94,000.   On a $200,000 house, this house is worth $162,000 in 2 years and the loan balance is still $191,000!  You are better off financing a Range Rover!  

Personal Question to YOU:  How can FHA offer a 3.5% down payment program when the home is losing 13% a year?  Fuzzy math, and not a very good investment from my perspective…  

To add fuel to the negative equity punch, we’ve just boosted the number of first time homebuyers by giving away free money in the form of a $8000 tax credit, and we’ve done it during the most deflationary home market since the great depression.  It is estimated that 80% of these buyers used high LTV FHA-backed mortgages.  Should we be surprised?  At $225,000 these buyers are eligible to get back EVERY DOLLAR OF THE DOWN PAYMENT from the tax credit.  We can only hope that the housing market doesn’t tank another 25% in the next few years.  What will happen when the $8000 of free money is all dried up, the new homeowners have to fix a $3500 furnace because they ARE the landlords now– but they are house poor because it was such a good deal to buy a house which trippled their rent payment… They want to ‘pull some cash out’ for the home repairs AND then they realize they are 25 thousand fiat dollars upside down on their biggest investment debt?  I will let you draw your own conclusions, which I’m sure will rhyme with Boar Snow-zer or Tort Snail.  

There is an answer to all of this of course—the banks have to get back into the game of actually writing and holding mortgages.  They can’t rely on FHA to hold their hands any longer.  FHA 2.0 will create tighter guidelines, higher FICO restrictions and most likely a higher minimum down payment (though they claim this will NEVER happen– tell that to Wells Fargo when they are on the hook for 30% of the loss).  This is all good in the hood from the loss perspective for the banks, but these changes will crush any housing recovery (especially when the $8,000 tax credit is gone).  FHA 2.0 will lead to reform FHA 2.1 and FHA 2.2, but none of these will work to address negative equity, which is the real driver in loan losses.  

The U.S. government is currently ‘on the hook’ for 80% of home loans (with Fannie Mae and Freddie Mac and FHA).  This is a multi trillion dollar gamble by the government, betting blindly that houses will re-inflate to bubble peak prices.  All this with no credit/ lending programs available from the banks, a 10% (and rising) unemployment rate, the death of the baby boomer buying binge and deflationary wages for the last decade. 

This is a recipe for disaster.

It's time to get off the Negative Equity Toll-Way

The Black Eyed Pea’s have a song out—Boom Boom Pow.  It is one of those catchy songs that you hear on the radio and think to yourself, ‘What a catchy song.’  After you have heard the song a few times, you realize that despite the catchy beat, Boom Boom Pow is really a dumb song. 

Here is an example of one of the verses in the song— 

I like that boom boom pow
Them chickens jackin’ my style             – Huh?
They tryna copy my swagger               – My problem also.
I’m on that next shit now                     – Which I am guessing is good?
I’m so 3008                         – in the future there is much Pow
You so 2000 and late                          – That is a ‘dis’ people. 
I got that boom boom boom        --  I’m glad you have some Boom
That future boom boom boom   – A much better version of Boom.
Let me get it now                         – ‘It’ being Boom or Pow?  

This song just doesn’t make any sense, yet it still gets tons of airtime.  This song is nothing more than nonsensical ramblings.

I am noticing the same nonsensical ramblings lately when I see or hear ANYTHING related to the housing market.  Most of the Boom Boom Pow nonsense is in the advice given to people when they ask ‘professionals’ what to do about their negative equity situation—all the questions are the same—‘Should I keep my home that is underwater by X amount?’  If this was X amount of credit card debt the answer would be simple– Bankruptcy or debt restructuring.  For some reason the answers from the world’s most trusted financial advisors about negative equity are all just a load of Boom Boom Pow—What is being told to people in terms of advice just doesn’t make any financial sense.  

Here is a fresh example from Dr. Don who writes for Bankrate.com.  This article was on the financail porn site cnbc.com also.  I have nothing against Dr. Don, and to be honest I have never read anything other than this piece.  So, it is possible that he was smoking somthing funny when he wrote this latest Q and A column. 

http://www.bankrate.com/finance/mortgages/mortgage-payment-not-wasted-money.aspx 

In this situation the borrowers bought a home in AZ in 2006 for $286K that is now worth 170K.  They want to know if they should keep paying the $1700 to finance the upside-down, Bigfoot on steroids sized debt burden.  They really want to know what they should do with the home—keep it or let that paper mansion go into forclosey.  Part of Dr. Don’s answer is below—He must feel like his swagger is being jacked by chickens, because all he tells these people is a bunch of Boom Boom Pow.

Dear Dr. Don,
My wife and I purchased a home in 2006 for $286,000. We have an 80/15/5 mortgage on a 10/1 adjustable-rate mortgage. Due to the home price collapse in Phoenix, our home is worth about $170,000 and we are paying a $1,700 mortgage payment every month for a home that just doesn’t seem worth it. We can make our payments, but there isn’t much left over at the end of the month to do anything else.

We plan on moving to another state in five or so years and I just don’t know what to do. Should we try a short sale and just rent until we decide to move, or stick it out and see what happens? I just can’t imagine even breaking even on the house when we move in five years. And meanwhile I am throwing $1,700 away every month. Please help.

My assessment of this situation:  I wish I knew the borrower’s age and if they have kidos.  I am seeing this sort of situation daily in the lending world and most of the people are Baby Boomers that have $0 in retirement who are supposed to retire in 5-7 years.  As for what I can see from the information provided, they are/were most likely Prime credit borrowers, as the 80/15/5 loan means they actually brought 5% ($14,300) to the table to buy the house.  They used an 80% mortgage for the 1^st loan ($228,800) and the remaining balance due was put onto a 2^nd mortgage ($42,900).  The fact that they have an ARM is no big deal, except it may be interest only.  I would suspect they owe about $265,000 on the home right now.  In other words, if the house is actually worth $170,000, they have spent $75,500 (3 years of payments plus the down payment) to lose $95,000 in home value.  Awesome!  They are essentially financing debt.  The home is no longer as asset.  I can not speak for these particular borrowers, but I would also guess they planned on selling the home in 2014ish for X dollars.  X dollars = a hell of a lot more than $170K, so in addition to this home NOT being an asset, their ’financial plan’ is totally screwed too.  The ‘moving to a different state in 5 years’ is probably a result of crappy real estate in AZ too, not an actual planned move.  I know my answer to these people, which I will tell you below, but 1^st here is what the ‘professional’ said:

Dr. Don: I take a fairly conservative position, where you are the one investing in real estate and the lender is investing in you. That point of view says if you can afford to make the mortgage payment, you’re ethically bound to continue making the payments (BOOM BOOM POW). Investments don’t always pan out — just ask most stock investors. They took the hit when their portfolio values declined over the past two years, so why shouldn’t you (BOOM BOOM POW)?

Huh?  I have always wanted to know why anyone would lump houses and stocks into the loose term ‘investment.’  First and foremost, the family didn’t ‘invest.’  They bought a place to live—if it were an investment they would have let if go by this point (see Florida real estate).  The lender also doesn’t give a crap about these people.  To the lender they are just a loan number on a spreadsheet.  The head of the monster bank (Bank of America I am almost certain—this situation smells like Coutrywide) would wipe his ass with these people’s wedding license before he would ever consider them essential to the bank’s existence.  The bank is probably just as confused on why the people are paying on the house as the people who wrote this letter.  The bank is just happy the people are willing to send in $1700 a month to finance the negative $95K in upside-down equity.  And my biggest question to Dr. Don on this ‘advice’ paragraph is in reference to this line:   Investments don’t always pan out — just ask most stock investors. They took the hit when their portfolio values declined over the past two years, so why shouldn’t you?  Because I am a nice person Dr. Don!  It should be noted that this line is not advice what-so-ever.  Dr. Don doesn’t know what these people may have made in the stock market in the past two years.  They might have made 300% returns on their stocks, but they need advice on their real estate.  When a stock purchase goes poorly you can just sell it and wipe you hands clean. You may lose some cash, but that’s it—you can just diversify your stocks, play poker or bet against the line on the Broncos this year—all good options to earn back some of your stock losses.  When you lose a home you lose the roof over your head and your family’s stability.  In this case, by keeping the home, the homeowners are also hemorrhaging away money that should be going into savings.  Real estate is expensive to own and sell (6% of 170K equals $10,200.  6% of $265K is $15,900), and it is not liquid—you have to work to unload it.  Real estate and stocks are as similar as 3-D filmed Chinese midget pornography and hand-made turquoise jewelry—they are not even in the same category.

Dr Don:  You’re not throwing away $1,700 a month (BOOM BOOM POW). The mortgage payment is buying you shelter (BOOM BOOM POW). You should be concerned about the difference between the all-in cost of owning a home versus the all-in cost of renting plus the loss of your investment and the potential black mark on your credit history. How much money is too much of a cost to bear in maintaining your good credit? There’s not one right answer, just an answer that’s right for you (BOOM BOOM POW). 

Boom Boom Pow!  I calling shenanigans on this WHOLE paragraph from Dr. Don—the $1700 is buying shelter is the most stupid thing I have ever heard.  If the house next door sells for $170K, that would equate to roughly $700 a month in cheaper shelter payments.  Is your shelter ‘better’ shelter?  Is it ‘better’ enough to justify a 42% payment increase?  No.  If you took the shelter savings of $700 a month, this equates to over $8000 a year—a sum of fiat dollars that would probably come in handy for someone who mentioned they don’t have much left after the bills come due.  Renting is out also—if they rent the home out they will be upside down on rent by $700 a month—no one is going to rent their home for a 42% premium in rent either.  The last line makes no sense at all–There’s not one right answer, just an answer that’s right for you.  He should have just held down the shift key and pressed all the numbers– ! @ # $ % ^ & * ( ).  This string of characters is as helpful as the last line.   

HERE IS MY ADVICE:  You, Mr. AZ homeowner, are throwing real, earned and after taxed money down a hole and lighting it on fire.  Your house will NOT be worth anything close to your balances in 5 years.  The right answer is to stop paying the mortgage right now—put the house on the market and tell the bank that you will not be making any more payments and that you are going to try and short sell the home.  Don’t send in another payment– it is a WASTE of money.  The monster bank won’t even talk to you until you have missed a mortgage payment anyway– why you ask?  You are still on the ‘Still Paying’ spreadsheet.  You won’t get a call from the Mumbai call center until they move you to the ‘Missed a Payment’ spreadsheet– that is how important YOU are to the monster bank.  If it sells, good for you and good for the bank.  If not, your hopes and dreams go into foreclosure—good for you and bad for the bank.  The home will go to foreclosure auction and probably sell for $150K– maybe less.  You are going to feel like a bag of recycled urine for a month.  People will treat you like crap, but deep down they will be envious that you had the balls move on in your life.  This feeling of worthlessness will pass when you see your bank statement.  Your credit is going to be just as hosed by a short sale as a foreclosure.  Who cares.  You can live and rent for $700 less (maybe more as the market slides during your foreclosure/short-sale).  You may lose avaliable credit from your credit cards, but what are you going to need credit for in the immediate future.  Go find a home in the same neighborhood with different colored shutters and rent for $1000 a month.  Bad credit WON’T stop you from shopping at your favorite supermarket, being able to spend time with family or make your favorite sports team turn on their biggest fan.  Bad credit WILL get you out from under almost $100,000 in debt and save you over $8000 a year in real, earned money.  You have 5 years now to save cash and clean up your credit.  And what the hell– go splurge if you want and go buy a shiny new Escalade—you aren’t going to be paying the mortgage for a few months and afterwards you are going to $700 a month richer.  Do your spluging before you miss that 1st house payment though. 

Uncle Sam will be so torn!  They will be foreclosing on the house, but they will have $700 a month more to pump into the economy!

What is the breaking point for this family before they take my advice over Dr. Dons?  Is it the house dropping to $150K?  $130K.  It shouldn’t matter for this family.  Both numbers are MUCH more likely that seeing $265K in the next five years.  

‘Experts’ and ‘Professional’s’ will try to threaten the fear of ‘bad credit’ and the fatal ‘loss of investment’ (this home is not an investment by any means) for almost anyone in our people’s situation– but it’s all Boom Boom Pow.  The fact of the matter is that these experts and professionals can’t just tell their clients to let the house go—That is against their ethical and professional beliefs– and quite honestly the ‘norm’ for the last 50 years.  These professionals and expert answers are no different than a Dr. telling a terminally ill patient to rest and spend time with loved ones while he/she lives out their last days.  The Dr. knows at this point it doesn’t matter and could tell the patient to visit some prostitutes and get really trashed, but the Dr. has ethics and professional beliefs too.  I know the Dr. wouldn’t recommend buying real estate right now!  Dr.’s go to jail when they try to push patients into (financial )suicide. 

So, don’t believe the Hype—Gap Mortgage is in full swing–the housing market sucks right now and it’s not getting better anytime soon unless banks forgive massive amounts of principle and rework payments to reflect the reality of the market. 

If you don’t believe me call a realtor—they will give you more BOOM BOOM POW than you know what to do with.

Rick

PS– No chickens jacked any swagger in the writing of this blog.

"I'm here for your Earth Goods."

Across the prairie lands of the Great Plains and through the tired industrial cities of the Midwest, people are shouting.  In the depressed real estate markets of Sacramento CA and Phoenix AZ, people are cheering.  In the vacant office buildings of Manhattan and the closed down auto production plants of suburban USA they are all celebrating and screaming, “The Aliens are coming!  They are coming to save the economy!”   

Alien 1:  (After arriving on Earth):  “Wow.  That took forever.  Freekin’ galactic HOV lanes on the Milky Way super highway my ass!  I’ve gotten to Mars faster on my Troboc Flyer.” 

Alien 2:  (Looking very disappointed):  “One more outburst like that and I’ll turn this saucer around and take us back to Glorg and you can just deal with the Kopobers.” 

Alien 1:  “But I hate Kopobers!  Anything but the Kopobers!” 

Alien 2:  (Patting Alien 1 on the back):  “Now now… let’s enjoy ourselves here on Earth.  We brought all this Earth  money to stimulate this poor Earth economy, so let’s find a Wal-Mart and then hit the Gap.” 

Alien 1:  (Counting out thousands of Earth dollars):  “This is just what the U.S. needs right now—Aliens to save the day.  My first purchase will be 500 Escalade trucks!” 

Alien 2:  (Speaking to you):  “This may not be what you expected out of Green Growth, but at least it makes more sense than that ridiculous Jobless Recovery.” 

So, the Aliens are coming.  They will fly in their shiny silver flying saucers and land at the mega-malls and strip malls of the world.  With their 12 eyes and 9 arms, the big green headed extra-terrestrials will claw at Tommy Bahama shirts, Whirlpool dishwashers, Lucky Brand Jeans, Oakley sunshades, U.S. branded tires, HP computers and Motorola headsets.  Why?  Because Aliens don’t have that stuff on Glorg—Duh!.  They are a superior race, but they just don’t have all this good stuff we have on Earth—and they heard it was on sale.  Put one and one together and you get the drift. 

They will consume all the world’s goods.  Instead of ‘Take me to your leader,’ they will say ‘Take me to your manager,’ when a coupon they are trying to use is not validated.  And after they have shopped all their tired little Alien arms can shop, they will just distribute the extra monies in mail boxes so that humans can finish the shopping bonanza.  It does take 11 human years to travel from Glorg to Earth you know.  They won’t be back anytime soon, so they have to leave the cash behind.  

The way I look at it, the only way we are going to see any sustainable (meaning non stimulus shimulus) growth is the Aliens.  After the Aliens have consumed all the Earth goods with all the Earth dollars, we will have to go back and make more Earth stuff.  Supply and demand!  It will rue the day… the day after the Aliens save the day! 

Did I mention the Aliens will also pay off the deficit and create a surplus for Social Security?  If I failed to mention that, they will be doing that also.  They will also pay off all your debts and turn the housing market and job markets around… with Alien magical powers!  Right before they leave the Earth, they will change the dynamics of the way the world works and this will create 15 million U.S. high-paying jobs immediately!  How?  Beats the hell outa me!  They are Aliens for god’s sake!   They can do whatever they hell they want.

Although it sounds awesome, I really don’t believe in the Alien recovery.  

I must say though, that the idea that Earth-money-spending Aliens, who require a surplus of our excess goods, coming to the Earth, spending Earth money, which drives growth, does makes a hell of a lot more sense than the idea of a ‘jobless recovery.’ 

Why no ‘jobless recovery?’  Because we are in the middle of a deflationary income cycle that is not stopping anytime soon, and we can not ‘borrow’ future prosperity any longer.  This free-fall of wage growth will soon leak over to the rest of the consumer world – Think Best Buy, Sony and Home Depot.  With sinking wages, 9.7% unemployment and no real industries to lift us back to the ‘good ole’ days of credit and leverage, we have to have consumer prices and asset prices fall back to reflect the consumer’s ability to buy.  What economists are really hoping for is a jobless, wage deflationary and no credit based recovery—and if that is what the brightest minds on Wall Street are expecting, then I say bring on the Aliens!  We have a much better chance of having Aliens travel 500 light years from an imaginary planet named Glorg, to spend Earth dollars for goods that don’t exist in their world, then we do on having a jobless, wage deflationary and no credit based recovery.  

If we look at income growth over the last 10 years from the Census’s annual report http://economix.blogs.nytimes.com/2009/09/10/a-decade-with-no-income-gain/ , we will see that there has been none.  That’s right—10 years and we have not had inflation adjusted income growth of even $1.  Actually, 2008 annual household income was reported at $50,303.  In 1998 inflation adjusted income was $51,295.  A drop of about 2% over that time period.  Boo.  This is the first time in 4 decades that income has dropped over an entire freekin’ decade.  In the same amount of time, the ‘stuff’ we buy has risen dramatically.  Gas prices have risen 47% from $1.25 in 1998 to $2.65 in 2009.  Median home prices have risen 71% from $149,900 in July 1998 to $210,100 in July 2009 .  

Income in the same period fell a little less than 2%.  

Concerned American Consumer:  “Just wait a darn minute!  How can prices jump so dramatically but incomes stay so constant?” 

Credit.  Say it with me now, real slow… Credit… Sweet Sweet Credit—  Credit was the lifeblood of the bubble decade that kept asset prices artificially inflated in ALL asset classes.   The buy-now-pay-later days are waning, but we are going to pay for all this borrowing, just not pay it back.  Credit is going bye bye now… so what does that do for prices?   

If you read a little diddy about consumer credit earlier this month, you would see that consumer credit dropped a ‘Bigfoot on steroids’ $21.6 billion in July.  That is the largest drop EVER on record. (http://www.nytimes.com/2009/09/09/business/economy/09econ.html).  While your financial advisor will smile and tell you not to worry, this is a startling statistic and one that needs to be looked at further.  While it is true that consumers stopped ‘borrowing,’ it need to be noted that banks stopped lending—in a massive way.  Credit card reform has created a rush to raise rates and chop credit lines for consumer credit cards, and at the same time declining real estate values are stopping home sales and refinance activity, as the Sinking Equity Torpedo takes back the ‘house is my bank’ stream of income that artificially propped up household spending and home prices.  People are unable to borrow—they are not trying to borrow less.  What we are seeing RIGHT NOW is the start of a massive drop in consumer credit and consumer borrowing that is going to lead to anemic consumer spending for the next decade.  This lack of spending and borrowing will result in lower wages and lower prices as businesses try to figure out how to make money in the jobless, wage deflationary and no credit based recovery.  When the smoke clears, I wouldn’t be surprised to see home prices bottoming at about $149,900 and gas to sit under $2 a gallon.  Without credit and wage growth there is no spending or price increases.  The 1998 to 2009 price increases were not due to ‘regular inflation based’ pricing models.  They were due to the fact that a one-legged pirate boy (Arrrrrr…) could borrower 100% of the original price of his house and car, and he was also allowed to leverage the pirate ship.  Many people did this. 

Many people then bought MORE real estate and stocks with said borrowed money…  We know what happened to real estate… hmmmm.  I wonder what is going to happen to the price of stocks.  

Teddy makes no jobs O.K.

And lastly jobs.  The big question everyone is asking now is:  “Where does the job growth come from?”   

The CNN Answer:  Green jobs.

My Answer:  Only if Green means magic green Aliens that hire us all to make spaceships to ship the Earth goods back to Glorg.    

It would be great if alternative energy could create 15 million jobs over the next 10 years.  It would also be nice if alternative energy could create 1 million jobs over the next 10 years.  Either way that would be growth, but to think that we can sustain an economy that is 100% based on fossil fuels by just flipping the green switch is ridiculous.  Going green will take time, money and many headaches.  While green sustainable energy is a goal, it is not a reality.  What is a reality right now is 9.7% unemployment and no real prospects of growth.  Tech bubble jobs were/are self-fulfilling, as they create ‘technology’ that makes the person obsolete.  The real estate bubble created jobs for a short time, but with falling home prices, home construction down, ever tightening lending standards, constricted mortgage credit and the growth of the internet, the number of jobs in the real estate market will not grow, but instead will fall.  Health Care jobs will grow, but the growth in one industry cannot sustain the massive amounts of unemployed.  There is growth in food service and low wage jobs, but we can’t rely on a world of Baristas and 7-11 employees to drive future growth.  To make matters worse, Baby Boomers have to stay in the work force longer now due to retirement goals being crushed. 

WWII got us out of the Great Depression… Not Alien spending.  A massive industrial shift and military hiring was required to get us out of the last big funk.     

So, as the market analysts cheer Goldman Sachs numbers and show you charts on the S&P having an ‘upside breakout party,’ remember that Aliens are not real.  If the Aliens are not coming to save the economy that means we have to do it on our own…  

I’m not a religious man, 

but pray for flying saucers tonight.

In a sick demented way, Beanies could help explain the bubble that was created in real estate in the late 90′s through 2006.

The idea behind the Beanie was simple—create a product that is desirable that anyone can buy, but that will gain in value because people ‘perceive’ the product to be worth more due to the demand—sound like the 1100 sq foot Kay-bee home that sold in Escondido CA for $500,000 in 2006? It should. With Beanies, all you had to do was be at the right place at the right time. TY, the Beanie producer, created a stir by releasing small numbers of the toys and distributing them at small stores instead of chain stores.  So anyone, at any time, could be ‘lucky’ enough to get their hands on one of the prized bears, rabbits, horeses or snakes. And with the rise of the internet, you could sell the babies with ease, to collectors across the world at a premium. At it’s highest point, a Beanie Baby sold on Ebay for $24,000…

Can’t you see the similarities with the Real Estate bubble. When credit became loose (Jenna jamison Loose from 03-07), all you had to do to get a home loan was have a pulse and a valid ID— 21 year-old kids were getting $300,000 home loans because the had high credit scores, regardless that the only credit they had was being an authorized signer on daddy’s Amex. People that drove garbage trucks were all of a sudden ‘Sanitation Entrepreneurs’ with incomes stated in the high six figures.

And Why?

Because Americans have been told for decades that a home is the best investment you can make! I remember my dad, smoking a Marboro, with his flannel shirt and wavy mustache, telling me that whatever I do, buy home and you will one day be rich. We have had the idea engrained in our minds that you buy a home and you automatically make equity—the imaginary wealth that somehow happens overnight when you belong to the homeowner club (sadly there are no Member’s Only jackets). And it worked! Loose credit, easy commisions and a bunch of inventory pushed people into home buying from 2002-2007. When greed tookover because rates stayed rock-bottom Greenspan/Greenback low and loans got easier to get than phone numbers at a singles mixer, people’s attitude went from the idea of buying and owning a home, to the idea of turning a quick profit… and this is bad.

You see, as we take a trip down memory lane, when someone bought a home in the past (let’s take the 70’s and 80’s) the bank made you pay a higher rate to borrower the money, and you had to put some ‘skin in the game,’ with a down-payment. This forced people to ‘hunker-down’ and stay in the house in fear of losing their down payment if they sold or stopped making payments. Housing also was rising at the rate of inflation… So, while the owner paid down the principle and gained an inflation adjusted gain in value, there was equity created. This is how the miracle of home ownership is supposed to work.  Supply and demand principles, along with affordability is subpossed to be dictating the price of the property– Not easy credit and low borrower costs.

While Beanies were being bought and sold for a quick profit with no real reasoning behind it, real estate found a similar cycle. When everyone can get a mortgage, regardless of credit or cash, the allure of owning the home will wane. When people look at the home as a bank and expect a home to double in price in 2 years, the glow of being a homeowner is gone—now you are an investor. And what does an investor do when an investment goes wrong? They dump the investment and look for other avenues. Sadly, the run-up in prices in many markets was due to this, and Bob and Sally Homeowner got stuck in the middle, holding a $700,000 mortgage on home that is now worth $550,000.  A similar fate was drawn on the Beanie Baby collector that spent hundreds, maybe thousands of dollars buying up stuffed chickens and cats, selling what he/she could on Ebay in hopes of huge profits. Both our homebuyer and our Beanie investor can do is hope that the market turns. I think the Beanie Baby collector has a better chance of getting back their investment—you see, a person can buy a $4.00 toy these days, but unless you win the lottery, getting financing on the $700,000 house will take an act of god, or a HUGE W-2 wage salary, perfect credit, cash reserves in the bank and a 20% down payment at a higher interest rate… so that you have some ‘skin in the game.’ You see the lender will want you to ‘Hunker-down’ and stay in the home in fear that you will lose your down payment if you sell or stop making payments. And while you pay down principle, and the market slowly recovers to the point where the home gains an inflation based value, the magic of equity will be created!

While Beanies Crashed in 1999 (makes you wonder if all that googly-eye stuffed bear money found it’s way into real estate) you can still buy these culture spawn icons @ most stores– I believe the price is up to $4.99 now.

And like Beanie Babies, people will again start buying homes… hopefully as a place to live and raise a family, not as a 12 month get-rich-quick investment.

Oh the circle of life… and the bubble is complete!

Consumer:  “Wow!  Low Mortgage Rates!  Mr. Banker I’d like my 4.5% please.”

Mr. Banker:  “No Problem…. But there are some NEW guidelines… and you don’t qualify.”

Consumer:  “Why?”

Mr. Banker:  “We don’t lend to white people.” 

It’s that time of year again in the world of mortgages—refi round 2.  During most years in the last decade, mortgage rates find their highs in the summer—the same time that the 10 year Treasury bond peaks.  When September comes around it is time to hit the pavement again and drum up some sweet sweet refi business. 

But this year is different.  People WANT to refinance, but the banks don’t want to lend to anyone.  This year the banks don’t lend to white people.  They also don’t want to lend to black, Asians, people that have eating disorders, married people, single people, pet owners, sex offenders, sex industry workers, bank employees, ugly people, the super rich or white people. 

Wave after wave of ‘less bad’ data has sent stocks on a tear since the March 9^th lows.  And even as we enter the ‘jobless recovery (I’m calling B.S.),’ no one seems to know how we are recovering, or why stock market gains equal recovery.  It’s a good thing that the banks are helping this ‘no real recovery unless you watch CNN’ phenomenon by not lending!  Not lending, according the monster bank super 4-some (Citi, Wells, Bank of America and Chase), is the road to recovery for the consumer based economy of the United States.  I’m sure you will soon see signs on banks that read:  ‘We have so much money.  None of it is for lending though, but feel free to come in for a free toaster when you open up a no-longer-free checking account.”  Or:  “Rates are Historically Low.  Guidelines are Historically High.  You have a better chance winning Powerball than getting any of this cheap coin sucka!’ 

In the last 6 months in the mortgage business we have experienced a complete loss of loan products and now we are seeing the squeeze on the credit and Loan-to-Value guideline side.  This tightening of mortgage credit is happening VERY FAST and does not seem to be letting up anytime soon.  The future of lending is not very bright, and it is going to squeeze the consumer into a worse situation than 9.7% unemployment.  It is going to be the fall that breaks the recovery and sends us into a scary place that hasn’t been seen in 80 years:  The Consumer Ain’t-No-Credit Crunch is the last step in the process to completely break the economy.  I see the most dangerous side of it in the mortgage/ housing market.  

I think it is very apparent that Obama’s housing bailout was a load of manure.  There is a pathetic response for the modification program (I have heard that only 12% of applicants are getting help), virtually no participation in the 125% refi program (no banks will support it) and no stop to the sinking equity torpedo that has created massive hemorrhaging foreclosure numbers across the whole United States.  What makes it worse is that the big polka dotted, pot-smoking pink elephant in the room, the Mortgage Backed Securities purchasing program– which has kept mortgage rates historically (and artificially) low and spurred panic buying (the fear you will never see something at such a low price again), is headed to an end. 

Banks in the last year have constricted credit so tight that they are going to single handedly create the next wave of the Great Recession:  The Consumer Ain’t-No-Credit Crunch.  Credit crunches that effect businesses and banks are terrible for business, but when you pull the cord on the consumer, you are pulling away any chance of propping back up the economy. 

Just this last week we had FICO score restrictions raised on our government loan products.  While this seems like a plausible thing to do, government-backed loans DON’T HAVE FICO RESTRICTIONS.  That is how HUD has wanted them to be structured—for the last 80 some years.  In the past, FHA loans were set-up to suit the masses.  They required lower income and supported higher LTVs.  They created a financing stream away from the traditional bank loans and allowed people to get into a home.  In the fine print, FHA loans can be written without a FICO score.  Banks have superseded HUD and started to restrict these guidelines if they are going to service the loan (remember it is still government backed if it goes bad).  This government take-a-way has wiped out countless numbers of homeowners looking to take on lower rates.  Today FHA loans are the only game in town for many borrowers.  But that is changing rapidly.  Soon there will be no game in town.    

Memory lane:  Banks got really greedy on the whole housing orgy from 2001 to 2006 and got burned pretty bad on their portfolios of no-doc garbage loans, stated income jobless guy loans, and got really corn-holed on the ‘pick-a-payment’ negative amortizing Option-Arms.  And you know what…. BANKS don’t have their own loans anymore.  Nope.  The monster bank super 4-some doesn’t write loans that they will hold.  Nope, they write those puppies and dump them onto the books of the government GSE’s Fannie Mae and Freddie Mac before the ink is dried from the closing. 

And now they are even taking the FHA option away from borrowers who really need help or homes.  The next step for the banks is to just stop lending, horde the cash and brace for the next wave of losses that is coming at full force.  Money in, but no money out.  

In the very near future in a cul-de-sac that you may or may not live in, the Consumer Ain’t-No-Credit Crunch is about to begin.  It will be slow at 1^st.  Let’s say a white guy with an ARM loan, an Arab with a higher rate loan and a real life Pirate with an Option Arm walk into a bank.  They are all homeowners with loans.  All of our contestants (yes contestants, because getting approved for a mortgage is like winning a prize) are blue collar types— a machinist, a city worker and a Pirate.  They make working wages and are required to work 100% of their days to make ends meet.  All three of these contestants are going through tough times.  One person has decreased wages due to furloughs while another had to take a new job because his factory closed down.  The pirate has been on a streak of not finding any good booty.  While none of these contestants has missed any mortgage loan payments, their credit may not be perfect—maybe a late pay here or there and some maxed out credit cards.  Maybe their house has gone down in value or they are not showing any real income to the IRS due to deductions and pirate plundering expenses.  

Banker:  ‘Sorry white guy.  Your credit is not high enough to do the refinance.  I could have done your loan 2 months ago, but now the bank raised the government FHA requirements and we can’t.  That is what the bank said.  So you are screwed.’

White Guy:  ‘I really need some help.  A refinance could lower my monthly payments and help me get back on track.  Isn’t there anything you can do?’

Banker:  ‘Look here.’  The banker shows him a paper that is 10% black and 90% white and reads Guidelines on the top. ‘You are in the white.  These are the guidelines—they are black and white.  We don’t lend to anyone that falls onto the white side of the paper.”

White Guy:  ‘That’s ridiculous!  Those guidelines are very restrictive.  I thought the government was trying to help people like me keep our homes!’

Banker:  ‘Whatever man.  Like I said, you are on the white side of the paper.’

White Guy:  “But I may lose my home.”

Banker:  ‘Dude!  We don’t lend to white people!’ 

Throughout the day, the banker turns down the Arab for his house dropping in value, regardless of his excellent credit and documented income.  The banker also turns down the Pirate.  

Pirate:  ‘Arrrrrrrrrrrr ya gimme a loan?’

Banker:  ‘Sorry Pirate.  You have excellent credit and your house is worth way more than you owe, but you have no documented income, so the answer is no. 

Pirate:  ‘But I brought me treasure of gold coins with me.  They are worth more than this bank.’

Banker:  ‘Whatever Pirate, do you really think a bank cares that your net worth exceeds the value of the house 10 times over?  We need to see that on tax paperwork.  Real cash reserves are worthless now.  Now leave—you smell like a dying fish’

Pirate:  ‘Arrrrr… I made love to a mermaid earlier today.’

Banker:  ‘That would explain it… Now get out!’ 

Perplexed, the 3 contestants all leave with the same outcome:  Turned down.  One had not-bad, but not-perfect credit.  One found out his house is worth as much as a postage stamp and the other is being punished for being a Pirate.  

All three of the contestants would have benefited from lower interest rates.  With that option being removed, what are they supposed to do? 

The Consumer Ain’t-No-credit crunch was caused by the banks and will most likely end with the banks.  By simply creating these loose loans in the first part of this decade, there is a very necessary need to have some exit-strategy loans to get people out of these loans before they are lost to foreclosure!  Adjustable rate loans, Option Arm loans and stated income loans may have been stupid to write, but the only think stupider that writing them is to not allow people who are willing to pay to get out of them before they implode and swallow the borrower. 

Banks may think that Americans will hold up their end of the bargain and just pay when the payments sky rocket or the borrower’s have a change in lifestyle (9.7% unemployment anyone…), but that is just paid stupidity.  I may also think that it is O.K to take a loaf of bread when I have no money, but it is not.  People are NOT going to pay on these loans when they are told they cannot refinance them. 

Why won’t they pay?

#1) They can’t.  If the borrower cannot lower payments and they have a restricted cash-flow, they cannot pay the mortgage.  Wages are dropping as unemployment rises.  When we enter full on deflation they will fall further.  Catching up with the rising costs of taxes and insurance will be impossible—and stupid (see #3).

#2) Modification is not helping.  I hear horror stories from people all the time.  They are told to miss mortgage payments and then the house is too late to save and the lender acts like they had no clue what was going on.  Also, the premise of modification is asinine—Extend terms (40 years), lower rates for a short period of time (5 years) and collateralize any fees or slow pay onto the back end of the loan (ballooned balance).  Hello?  This is a subprime ARM in different clothing.  If you said there was a 3 year hard prepay I’d scream, ‘Duck! Duck!.’   If it looks like a duck and sounds like a duck, it’s a subprime ARM. 

#3) Houses are not gaining value.  If someone has the option of taking a 4.5% loan, they may not care that the home is leveraged at 135% (and soon to the 150%).  I can only imagine the conversation at the dinner table when they are turned down due to their home being worth near nothing, “Oh well.  Let’s sell the stainless steel appliances, the copper pipe and cherry cabinets and get us a nice shiny new Escalade!  Screw this house and this 6.5% mortgage.  We’s joinin’ the Joneses and lettin’ her go into foreclosey!”  By not allowing someone to refinance to lower rates, they are that much closer to just saying Phuket Thailand!  Foreclosure is a nasty bug and it only depresses the rest of the neighborhood further into declining prices.  When a house is no longer an asset you are simply financing debt.

#4) There is no real support for the housing market.  The government knows the housing market is screwed and the last year’s attempt to prop it up is showing little ease in the decline of prices or number of foreclosures.  Pretty soon the Feds and the government will need to decide weather or not it is worth pumping more money into a dying housing market.  If they take the ‘Let it crash and burn and build up from the ashes’ approach—no more MBS purchase and no more tax credits—rates will scream higher and unimaginable negative equity damage will fall upon the housing market.  If they keep money in these programs (remember the MBS rate program costs a cool $1.25 trillion), they risk seeing a massive pullback from US based treasuries as other countries raise rates and offer sexier premiums to buy debt.  Either result is crappy. 

#5) Jobs.  No job = no money.  No money = no Escalades, trips to the Gap, plane tickets, bungee jumping adventure weekends, wine country benders… and no jobs = no house purchases. 

Deep Personal Thoughts:  Why would you buy a house when you don’t know if you are going to have a job?  Even Better Personal Insight:  Why in your right mind would you put ANY money down on something that is going to depreciate 25% and cost you a full 6% of its value to sell?  Answer:   Someone has to catch the falling knife I suppose… 

So it begins… the Consumer Ain’t-No-Credit Crunch.  

Banks will soon be telling you to go screw yourself. 

You will ask why?  They will tell you—“It’s black and white! ’

‘Banks don’t lend to white people.’ 

Rick

I’m not scared of Mr. Bernanke’s ability to lead, but his lack of ability to see into the future…

I was a 10 year old in 1989.

1989 was a very good year for Denver Broncos football.

In 1989, John Elway led the Denver Broncos to the AFC Championship game vs. the Cleveland Browns. In that game alone Elway was a master of his craft—passing for 385 yards and 3 Touch Downs. He led the Broncos to a solid 37-21 win over the Browns and paved the way to Super Bowl XXIV. Elway threw a 70, 39 and 5 yard TD pass in the game, no interceptions and connected the pigskin to 8 different receivers. In addition to his ability to shred the Brown’s defense, Elway found time to rush for 39 yards—one a 25 yarder to keep a scoring drive alive. In interviews after the game the media placed him on a pedestal. The QB’s goofy and toothy smile was plastered on news channels and TV sports broadcasts with headlines in the local papers that read ‘Elway Showed Doubters He Still Has What it takes.’ Elway was placed up with the likes of world leaders and gods—for that moment in history John Elway was Zeus. He was the king.

If you are scratching your head and trying to find this game in your mental memory bank, you won’t. You won’t find this game because the Denver Broncos went into the Superbowl two weeks later and got destroyed by the San Francisco 49ers. The word ‘destroyed’ is used lightly—in all actuality they were pummeled, crushed, contorted, bashed, gutted, ripped from limb to limb, bamboozled, scorched, humiliated, left for dead, punished and defecated on in four quarters of what did not even resemble football. The score was 55-10, the worst loss in Superbowl history. Elway was crushed in this game, only throwing for 108 yards and two interceptions. He looked like he had never played QB before and was booed and cursed during the 2^nd half of the game. The former god QB was beat like a rented mule in that game, eventually replaced by back-up Gary Kubiak. The Denver Broncos were not remembered as the AFC champions, but instead were looked at as the laughing stock of the NFL. Their poor performance, mostly that of John Elway, would fill the stat books for years. For Elway and the Denver Broncos it was a dark day.

1989 was a year to be forgotten for Denver Broncos football.

I see the same think happening in the economy today that I saw at the end of the 1989 Broncos season. Ben Bernanke is currently held to such a high standard that he can do no wrong.  At this time in history, Ben Bernanke’s ability to rapidly shift US financial policy makes him more powerful than the president of the United States. He has more power to move the financial markets than an atomic bomb hitting L.A. Investors follow his policies and actions like a cult of believers that see these policies as being powerful enough to shape the future growth of the US economy like the rivers that formed the Grand Canyon. Ben Bernanke is Zeus. He is the king.

What frightens me most about the current rave behind King Zeus Bernanke is that there is still no proof that he has done anything right.  While the media would have you believe that we are only days away from 50′s style social prosperity, the world is still reeling from the losses of the false recovery of the 2001 recession. The U.S. is still suffering a massive correction in the real estate and credit markets, deepening job losses, stimulus-only based growth, unprecedented government debt loads, and cost-cutting measures (not top line growth models) from companies to keep stock prices up. Bernanke’s recent policies on monetary printing, which include wave after wave of stimulus and continued low interest rates have not improved the economy– they have simply propped up a debt bubble.  These Keynesian lightning bolt stimulus theories of monetary expansion cannot be supported indefinitely!

But still, the unknowing minds of the American public look at the stock market and see a quick rise from the March bottom—they see the economy turning. They take advantage of stimulus programs like cash for clunkers– they see the economy is turning. They see low mortgage rate commercials during Oprah and hear about rising real estate sales– they see the economy is turning. What the American public fails to see is King Zeus Bernanke ready to pull back the lighting bolt stimulus from the economy. What they don’t see is the inevitable crash of the spending boom and the evaporation of the credit markets—the 10 years of payback, bank failures, continued real estate declines, stock values depressing to levels not seen in decades, unprecedented inflation fears followed by deflation years, the complete loss of confidence in the government and the Fed, and a slow, pathetic, lifeless economy for years to come… What they don’t see is the future. What they don’t anticipate is their future.

At least the American public shares that last part with King Bernanke.

Up until the Superbowl beating, the 1989 Broncos season was a storybook fantasy of near perfection. The team didn’t win all 16 games, but they did win the division. Up until the Superbowl everything was sunshine and cookies for Broncos fans. Owner Pat Bowlen even told the Denver public two weeks before the game that his team would win, “We’re Going to win it!” His confidence poured out as certainty only weeks before his team would be crushed.

2009 is a great year for Ben Bernanke.

2009, for the time being, has been as a good year for King Zeus Ben Bernanke and the Fab Fed. His late 2008 work on curing financial calamity seemed flawless and concrete. He worked like a magician, parading his magic wand, pulling US dollar shaped rabbits out of his hat while he cured the financial landscape—in one swoop he filled the bank’s balance sheets with fat lighting bolt sums of cash injections and mitigated the bankruptcy and take-overs of financial juggernaughts Merril Lynch, Bear Stearns, AIG and Lehmann Brothers. He drove overnight lending rates down to zero and made aloof comments about the economy and the timeliness of his policies.  It was pure Bernanke– running the printing presses at full force!

What is happening now is the false 2009 stimulus recovery has grabbed the minds of the American public, stock investors, congressional leaders, businesses and the media. Everyone is ready for more 0% financed Escalade trucks and 20% yearly real estate increases—that is what we learned from the Greenspan recession recovery and that is what we expect from the Bernanke recession recovery. King Zeus Bernanke himself is hinting that he believes that the Kool-Aid is safe to drink, and that he has actually saved the world. But the 800lb pink elephants in the room (yes there are more than one at this point) have not been addressed—our debt level is much higher than 2008 when we entered the recession and is anticipated to rise exponentially in the coming years. We cannot continue to print money and take on debt to sustain economic growth. Financial stimulus cannot be financial policy.

Economies like the current US Banana Republic, that are in such a debt-heavy,  massively over-leveraged position, are primed and ready to enter deflation and experience very slow growth while the debt bubble is unwound.   If you don’t believe it– call Japan.  America is no better off than 12 months ago or 12 years ago—instead, the debt-burdened house of cards that has propped us up for the last 12 years has been glued together using printed fiat dollars and Fed brand stimulus glue—but the house of cards is taking on more weight from added debt daily and the glue that has held the foundation from crumbling (sweet sweet stimulus) is about to be stripped away.

King Zeus Bernanke’s percieved power will be short lived.

The great King Bernanke is not ready for the deleveraging that will happen in his immediate future. He, along with the media and the stock market, are anticipating a 2010 with uncontrollable inflation from massive cash injections and a rise in the monetary supply. Because of this inflation fear, King Bernanke will raise rates and slow the printing presses. This would seem to be the right thing to do, but there is no inflation. There is no inflation because the excess dollars that have been printed are not actually entering the money supply. Instead, these massive truckloads of fiat dollars are sitting on the big banks balance sheets– remember these dirty banks?– the same usual suspects that were bankrupt and broke last August so we gave them our grandkid’s future earnings to stay afloat and lend.  They took the money, but they are NOT lending.  The big banks are currently holding over 800 billion dollars of depository reserves—more than any time in US banking history (see chart).

The banks will not be lending this money anytime soon for shiny new Escalades, start-up business loans or home equity (ha ha) cash-out. These banks are not stupid. The banks, I am sure, have forecasts and see the tsunami waves of losses from loans, credit cards, mortgages and commercial real estate that will be hitting the balance-sheet shores soon (say that 5 times real fast). The banks can’t lend the stimulus lightning bolt cash injections when they know they will need that cash to write down these ‘Bigfoot on steroids sized’ losses over the next few years (or decade). If the banks lend this stimulus money then the banks will be insolvent when the losses hit. They will have no cash left when the depositors freak out and demand five gallon buckets of cash and close their accounts. Insolvent banks create bank panics. Bank panics create more constraints on the money supply and a complete loss of confidence in the US financial system. Which outcome is worse? No bank lending due to stimulus hoarding or full scale economy busting bank panics?—for king Bernanke, this is a toss up, but neither option is a good one. It should also be noted that neither option leads to inflation.

When King Zeus Bernanke raises rates with vengeance (think zero% to 6% very fast) to fight an imaginary inflation monster it will create an inflation scare in stocks—creating a short term rise in stock prices. People will think he saved the world again! But the only thing raising rates will do with such a weak economy will be to constrict money supply further and depress the already near non-existant velocity of money.  This deflationary move will drive the economy into a prolonged time of stagnant growth, recession after recession and continued job losses and credit constriction. Stocks will retreat to levels not seen in decades.   When Deflation shows up to the party, introduces himself and starts to hit on all the women, everyone will try to make him leave.  Just when we’ve all had just about enough of Mr. Deflation, he will turn on us and shout in his raspy voice,  “Back off America– I’m going to be here for a while, whether you like it or not.” I’m sure Mr. Deflation has a raspy voice, and probably a sinister laugh aslo. Deflation be the new norm—the idea of inflation will be gone.  All of King Bernanke’s inflation medicine will be worthless. 

King Zeus Bernanke will most likely try to juice the economy with more stimulus, regardless that Mr. Deflation is now out to party.  Bernanke will do all he knows– inject the system with more lightning bolt stimulus and low rates, but it will be too late. Instead, the deleveraging and Mr. Deflation will take fold, sucking the spending and lending out of the economy like a black hole.  The result will be peeling away years of unsustainable credit growth and stripping value off stocks prices and US wealth. King Zeus Bernanke will try throwing the kitchen sink at the problem, but the problem he is trying to fix will not be done by throwing lighting bolts of stimulus at the problem. When inflation is gone and deflation shows up, the money hoarding from the banks gets more pronounced and the blood of economy– the consumer– becomes a super saver opposed to a super spender.  King Bernake’s rule will be over.

It will take too long for King Bernanke to realize that his future problem will be Mr. Deflation and not inflation.  He will not see the credit constriction and deleveraging becasue he is too focused on keeping the debt bubble alive—all the printing presses in the world can not stop the imminent collapse of a multi decade credit boom.

2009 will be a forgotten year for Ben Bernanke.

In the 4^th quarter, when QB John Elway was pulled from the Super Bowl, he had time to reflect on the game and the season. While he could have thought about the great win over the Browns in the championship game, I am certain that he only thought about what he could have done different in the Superbowl.

King Bernanke will be in the situation in the near future. No one will remember him propping up the ‘house of cards’ in 2009… Instead they will call for his head when his policies fail in 2010-2012 and Americans suffer the greatest loss of wealth since the Great Depression.

But is there light at the end of the tunnel? John Elway recovered and won two Superbowls later in his career and joined the Pro Football Hall of Fame.

It’s a shame that Bernanke can’t throw a football.

August 14^th 2009 

If 2006 was a Rap Video for America and the housing market—Big mansion house, pimped-out Escalade with spinners in the driveway, dollar billz falling from the golden chandelier, Rottweiler with diamond-crusted collars, bing bling necklaces and Dom Champagne, then 2010 is a country song—People losing their houses, can’t find a job, car being repossessed and the dog running away (dog has nothing to do with the economy, just a bad coincidence). 

TODAY’S CAST

The part of the Housing Bull will be played by the media.  All quotes will be taken from news articles and placed in the context they were written. 

The Part of the Housing Bear will be played by me.  All ideas, run on sentences and opinions have been derived by me.  I also take credit for any ‘far reaching’ conclusions, poor punctuation and over the top comparisons.  

The Part of the Naive American Homeowner will be played by the Naive American Homeowner.  

ACT 1:  Rising Sales Numbers  

Reference: http://www.usatoday.com/money/economy/housing/2009-08-12-higher-prices-homes_N.htm 

Housing Bull: — We’re seeing a growing percentage of metropolitan areas (with home sales) up over the year, which is impressive,” says Joel Naroff, with Naroff Economic Advisors. “We’re seeing growing strength in a variety of areas across the country.”  “This data suggests that the recovery is broadening,” says Lawrence Yun, chief economist with NAR. “Low interest rates and the tax credit (for first-time home buyers) are beginning to pull buyers back into the market.” 

Housing Bear:  Too bad the prices of homes are turning steeper and faster to the downside.  The Sinking Equity Torpedo that has already skimmed trillions of dollars of wealth out of American’s equity for retirement is gaining more steam—the implosion of the American Dream (home ownership) is falling faster and faster (in value) each month—fueled by a dangerously poisonous market of equity stripping foreclosures, credit-tightening lenders who are getting more and more afraid to lend and baby-boomer sellers who are forced to stay-put, opposed to buying up.  Who cares if sales are picking up when prices are dropping?  

Naïve American Homeowner:  If sales numbers are rising we have to be recovering!   

Housing Bear:  The housing market recovery is about PRICE STABILIZATION and has NOTHING to do with sales numbers.     

ACT 2:  Foreclosures are coming to get YOUR neighborhood Reference: http://www.sltrib.com/ci_13047478

Housing Bull:  “This might be a historically good opportunity to buy a home in Utah,” Kelly Matthews, an economist from Wells Fargo told the Utah Association of Appraisers summer symposium Wednesday in Salt Lake City. He said average home prices in Salt Lake County fell to $278,472 in the fourth quarter 2008 from $286,250 in the fourth quarter 2007. Although average prices at the end of 2008 are still higher than the average of $198,394 in 2004, homes are about as affordable as they were five years ago, Kelly said.  (further down in article) Matthews pointed to those who “need” a home or have a growing family as good candidates for a purchase. 

Housing Bear:  I used this article from Utah because Utah is one of the NEW faces of the foreclosure nation…  I’m also talking to you Midwest!  Ya, ya, we all know that the majority of these foreclosures are happening in CA, NV, AZ and FL—the sunshine tax states where values jumped 150% in three years.  But that trend is starting to find its way to the rest of the market.  I’m talking about the Minnesotas, Utahs and Oregons of the new foreclosure nation—all had year-over-year foreclosure increases of over 90%.  The Sinking Equity Torpedo is starting to show its ugly heads in states that weren’t the ‘usual suspects’ of the housing boom.  This only makes sense.  

The numbers don’t show a decrease of inventory OR a slow-down of the number of foreclosures entering the market.  Actually, the number of homes in the U.S. entering foreclosure market jumped 7% since June and 38% from this time last year.  These numbers show just the opposite of a recovery.  Increasing foreclosures in states like Minnesota are not a result of rampant speculation.  They are a result of Tom and Jane Middle class getting laid off and being 20% underwater on their home bank.  The torpedo is starting to grow stronger.  It is only a matter of time before it engulfs the whole U.S.A in a red highlighter of increased foreclosure activity.  You can run, you can hide, you can install new granite kitchens and upgraded bathrooms but you can’t stop the freefall of negative equity that is on its way to get you—you do have one recourse:  Enter Foreclosure—if you can’t beat um, join um.  

Naïve American Homeowner:  I sure do feel bad for all the rest of the people facing these crazy housing decline problems.  My neighborhood is immune to foreclosures and price declines.    

Housing Bear: If you don’t believe this because of your amazing granite kitchen, stainless steel appliances and hardwoods, look down your street—do the real estate signs line your neighbor’s homes like American flags on the 4^th of July?  Do the signs say ‘BANK OWNED’ or ‘SELLER MOTIVATED?’  If you said yes, go grab a drink—it’s time to face reality.  Your home is depreciating.  Each month that you stroke your $2000 check, your home is losing value, and maybe even more than the payment you are making to the mortgage company.  This freefall of home values will not stop until short sales and foreclosures exit the market.  Unfortunately, more and more enter the market each day.  The Sinking Equity Torpedo will keep shredding the value off your home until ‘organic’ sales return to the housing market. 

ACT 3: Bye Bye ‘Buying-Up.’   

Reference: http://searchchicago.suntimes.com/homes/1683500,first_time_buyers-cover26.article 

Housing Bear:  The way housing works is like climbing a latter.  Step one is buying anything—a crappy 1 bedroom scary studio in an area where they sell crack on the street corner.  The idea is that you buy this home in a transitioning neighborhood to sell it the future.  You use the equity you make to by the 2^nd house—a 2 bedroom home in a cute area with parks and Starbucks.  After time, you sell that one and buy the big old suburban family home with 4 bedrooms, a big basement for the kids and a large backyard.  Lastly, you sell the suburban home and use the equity for the down payment for the family McMansion.  This is what is called Buying-up in housing.  Buying-up is as important to housing as neurosurgeons are to brain surgery and wheels are to a bike.  Without buying up, there is no market. 

Housing Bull:  On the $8,000 1^st time homebuyer tax credit. We were hoping for that domino effect — that first-time buyers would jump in to get inventory sold, so that those sellers could become step-up (buying-up) buyers,” said Mike Drews, president-elect of the Downers Grove-based Mainstreet Organization of Realtors. 

Naïve American Homeowner:  We are going to hunker-down right now opposed to selling the house.  When the market recovers (to 2006 levels) we will sell.  

Housing Bear:  When this market recovers stops declining at double digit rates you will still not be able to sell (unless you short sell the home).  No one is buying up.  It isn’t because they don’t want to—we are American’s—we always WANT to buy something bigger and better, but we can’t right now.  The problem is that the market has fallen off a cliff.  Home values are down an average of over 25% since 2006 and over 33% of the sales of homes are short sales or foreclosures.  Homes under $250,000 account for almost ALL home sales.  This doesn’t bode well for the person that bought the big old $400,000 suburban home in 2004 and needs to buy-up to the $750,000 McMansion.  It also doesn’t bode well for the 2 bedroom homebuyer near the parks and Starbucks that bought in 2005—both buyers are underwater by 10-15% right now… and if they DID pull cash out in 05 or 06 that’s a different underwater all together.  

There are major breaks in the ladder of housing right now, and unfortunately without Buying-up you are not going to see any traction in anything other than the scary studio market (And when the $8000 credit dries up that market may also).  Unless there is some magic pill (12% inflation?) there is no reason for homes to appreciate.  

 If interest rates rise (they have to soon) that will create a whole new wave to the depressed housing market.  Higher rates mean more monthly payments.  If American’s can’t afford their debts at 5% mortgages then how can they be expected to support them at 6% or 7% mortgages?  They can’t.  The Sinking Equity Torpedo will continue to rip value out of housing until homes are returned to affordable levels.  Until then the home will have to be the home—no more ‘New Every 2’ Escalade purchases or Greek cruise vacations with that home equity.  No more selling a house every year and pocketing triple digit gains.  No more homes in the ghetto selling for 200% more that they were only 10 months previous.  No more good times.  

So when will the recovery be for housing?  

It won’t be anytime soon.  

Rick