“Public opinion is a permeating influence, and it exacts obedience to itself; it requires us to think other men's thoughts, to speak other men's words, to follow other men's habits.”
As spring enters its final days and May kisses us goodbye, the air smells of summer. The warmth of the sun caressing your face, the smell of salt at the beach, and sellers getting ready for the Battle of Housing Waterloo. The moment of truth has arrived. Will housing show continued resilience and live eternally in the Garden of Eden? Or will the housing bears be vindicated as inventory numbers begin to pile on top of one another like an Ultimate Fighting Championship? When I say housing will soar I am using this term like Stephen Colbert and referring to housing soaring like the Hindenburg. Let me give you another three reasons why all of us are jumping into this hydrogen powered housing bonanza only to come down in a fiery mess.
#1 – California does not Follow National Trends
We often hear George W. Bush talk about the incredible homeownership rate of this country. 70% of the nation’s households own their home. Aside from the fact that this was created by firing off the canons of credit onto the battleship of homeowners via mortgages, then yes we did increase the homeownership rate. However this trend didn’t make it west enough to reach California. As you can see from the above graph, only 57% of households in California own their homes; a far cry from the 70% touted by the nation. In addition, when we hear the rhetoric regarding lack of housing and “no more land” pundits, we must point out that we are in desperate need of affordable housing and I’m not talking about Real Homes of Genius homes. We need high density housing in urban areas to support the growing number of immigrant families and working class citizens. From looking at Census data we see that the middle class is leaving California in droves. Now why would folks want to leave the Garden of Eden?
Nice graph we got here. Again we see that California does not follow national housing trends. So all this talk about housing bottoming out we are hearing from the NAR, it is directed more on a national scale. And as so many housing pundits are apt to tell us, real estate is local. With that said, California is in a bubble so magnificent that David Copperfield would have a hard time figuring it out. The data above stops out near the peak of housing which was summer of 2005. Now the question is, will folks be able to restrain their spending when the economy tightens up? From previous recession data, the answer is a resilient no because of the Duesenberry Effect.
California is also different because people are less likely to use a down payment:
You would think that in a state with stratospheric high housing prices people would have incomes to match. In the past, housing in normal economic cycles would follow with income; that is if we had a recession housing would go down. In good times, housing would boom. You can take a look at the below chart and look at national housing figures to reconcile that this is true:
How dependent are we on housing for our economic stability?
#2 – Strange Bedfellows – Housing and Housing Employment
In past decades, real estate comprised approximately 10% of all employee additions. A hefty sum. However, since 2000 real estate has contributed to a whooping 29% of all employee additions. So with that said, what will happen when the demand for housing falls as it is right now? More importantly, what will housing builders build when the demand for housing is decreasing? And now, that we are seeing massive drops in mortgage equity withdrawals, what will Home Depot and Lowe’s do when home owners find out that they no longer can get a HELOC at 7%? We’ve already seen what happens to mortgage brokers in the subprime industry now that Wall Street has gorged itself full on mortgage backed securities.
#3 – I’ve Got Credit Coming out of my Ears!
Since income didn’t drive this housing bubble what did? Ask Mr. Alan Greenspan. Last time we saw a flood like this Noah was building an ark; but no ark will save us from this massive river of credit liquidity. No dam can stop this oncoming onslaught of credit payments. Many people will drown simply on the interest of their credit orgy. This will affect the entire economy. We’ve all heard of the concept of six degrees of separation; well in housing only one degree separates us from the cascading wave of credit resets.
As you can see from the above, this year alone $1 trillion in mortgages will reset. This will be the case many years to come. We’ve only hit the first wave this year and we are already seeing the fractures of this mess; folks earning minimum wage jumping into almost a million dollars in debt. That sounds like a problem to me. If you are netting $3,000 and your home payment is $4,000, something in my gut tells me this will not last forever. But we are great savers right? I mean we have enough saved up to weather this storm…right?
Well unless the Fed drops rates again we are in for some serious hurt. Yet at this point, the Fed can drop rates to 0% and housing will still be overpriced. You can put lipstick on a pig but it is still a pig. The subprime debacle influences the entire housing environment because it adds inventory in a market already flooded with homes. In addition, each REO is a motivated seller. And motivated sellers are willing to drop prices unlike our delusional homeowners thinking 2005 prices are still here and their 500 square foot box is worth $329,000.
The Garden of Eden is a beautiful mystical place that lives in the primordial consciousness of our society. It is a place we all envision as perfect. Even though many sellers are living in this Eden, no one has told them that Eden was built via a no-doc negative amortization mortgage set to reset very soon. Maybe we can use the apple tree as collateral for a second?
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