After drinking water out of the bailout fire hydrant, I think most people are scrambling to get an idea of what is happening. An issue placed on the back burner by many politicians is suddenly garnering massive media playtime. Amazingly, Americans in a large percentage are against any bailout talks or consideration. The nationwide MSNBC and a local station KTLA ran unscientific polls asking the questions, “do you support a government bailout for the mortgage industry?” The answer was a resounding NO. In fact, from a brief review of these polls 95 percent of Americans are against any form of corporate welfare. They realize that deep down this is only a ploy for the government to subsidize maverick hedge funds, Wall Street circus acts, renegade brokers, and Vegas inspired buyer gambling. They want you to believe that they are doing it for the person on the street. How are they going to help out expensive counties such as Los Angeles where the median home price is $547,000? And what about those that have been foreclosed or are being foreclosed on? Don't they deserve a retroactive bailout? Come to think of it, why don't they give me money I invested in tech stocks back in 1999 that was wiped out since these companies had P/E ratios higher than Barry Bonds' batting average. Or the money I lost in Vegas two months ago on blackjack (I suspect that the dealer was a former hedge fund manager since he asked if I wanted margin and wanted to flip a home in Henderson). A decade of conspicuous housing consumption has left the nation hanging on a thread looking for more bubbles to fuel their credit addiction. What other highflying act will allow American consumers, a large part of the economy, to continue their spending marathon? We’ve already seen that mortgage equity withdrawals had a lot to do with bolstering the economy over the past years. Unfortunately you can’t tap into your home equity line of credit if you are swimming underwater Jacque Cousteau style. See, like any Ponzi Scheme, those that get in early do well on the backs of those that come in late. And like any good Ponzi Scheme those coming in at the end are left holding the manure filled bag of worthless mortgage backed securities; it turns out a 600 square foot Real Home of Genius isn’t really worth $500,000.
Then we have the fear mongering by the politicians and the media. The new line that I’m hearing dished out is “well you wouldn’t want your entire neighborhood full of foreclosures eh?” Instead of drop kicking my monitor Jackie Chan style at this completely stupid and moronic assertion, I will show you that at any given time, only a very small percentage of all housing units are up for sale. So why all the brouhaha? Because housing prices are set at the margin; meaning, homes are priced by the units that are currently sitting on the market. And the fact of the matter is we’ve been operating on a one-trick pony economy where housing has kept us out of any recession and has provided the fuel to keep this SUV of spending going forward. But now that housing is depreciating we are realizing that yes, this economy is based on housing. Otherwise, who really cares that housing prices are trending downward? If we are such a diverse economy this one tiny sector shouldn’t mean so much; but it does because of the massive credit bubble we are living in.
So today we will examine 3 new factors that you should keep in the back of your mind since I have a feeling this housing mess won’t go away anytime soon. First, home prices are set at the margin so we will examine the actual numbers. Since politicians and the media like churning information and creating a fear cycle we will carefully look at housing supply in relation to units being sold. And again, anyone following this housing bubble isn’t surprised. In fact, it was predicted here a very long time ago. You may be saying, “but I feel safe because daddy Bernanke is here to save the day, he saw this coming.” Let us take a trip down memory lane:
"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Ben Bernanke Quote to Congress' Joint Economic Committee. March 2007
“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” Bernanke said in May 2007.
“In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.” –August 31 Ben Bernanke
Wrong, wrong, and now you get it. Even the last statement is misleading because how did we go from “fundamental factors” being okay in May to “weakness in housing” in August? So given that the Fed Chairman didn’t see this coming even as early as May of this year, do you have confidence that these other yahoo politicians have the right policy decision in mind? We can discuss other policy mistakes regarding the current administration but that would require much more than this housing blog.
The second factor we will look at is income discrepancies. Current home prices are not in line with current family incomes. Unless you think making $14,000 and buying a $720,000 home is perfectly fine and makes economic sense. Finally we will examine the current market panic. Bubbles burst in typical fashion (see Manias, Panics, and Crashes) and this credit bubble will pop in the same way. We can pull the Band-Aid off fast or continue the absurd policies and allow for more guerilla mortgage products to enter the market.
Prices set at the margins
At any given point in time there is only a small fraction of homes on the market for sale. Drive down any street of the 88 cities in Los Angeles and you will see homes for sale, but not many. Unless you are driving in some home builder subdivision in Arizona or a condo high-rise in Florida, the majority of this country isn’t selling each and every single home on the block. But the media now has this fear mongering idea that if the market corrects, every person is going to be bumming cigarettes under the San Gabriel River. So instead of their verbal attacks on the public let us take a look at the actual numbers for Southern California:
*Data Source: Census.gov
There are approximately 6,000,000 housing units in Southern California. Keep in mind this includes apartments, rentals, and owner occupied homes. Now how many homes are for sale as of today in SoCal? How about 139,689 or to make it more tangible, only 2.33 percent of all available housing units in the area. Doesn’t seem like the entire neighborhood is going to hell in a hand basket as the media would like us to believe. And keep in mind that we are seeing record foreclosures and inventory here in Southern California and as of today, we are still only seeing 2.33 percent of all available units on the market for sale. See, not everyone bought into this housing bubble. Some people decided to rent. As I’ve pointed out the majority of households in Los Angeles County rent. Some people decided that they would rather save their money and wait the market out. Some are simply going to rent because they unfortunately cannot afford a home. This idea that everyone should own their home is dangerous and has also led us into this mortgage market debacle. If you are unable to buy a home without a shady zero down mortgage maybe you should wait until you can buy a home with more conventional financing. Others, bought before this entire bubble game started. So they are still sitting pretty on equity and have no plans of selling. There are also approximately 20 percent of people in Los Angeles that own their homes outright; many of these people are retired or nearing retirement and have no vision of flipping their homes. So the battle comes down to those that want to buy and those that want to sell right now. It looks like more and more people are wanting to sell and less and less people want to buy (or at least buy at current market prices). And why would you buy right now with prices decreasing each and every day? In addition, the prospect of you flipping and turning a profit now is as likely as finding Michael Vick at a PETA fundraiser as an honorary member.
Show me the Income!
Again the media likes to believe that everyone is earning $300,000 so a $547,000 median home price isn’t so far fetched. I’ve discussed this affluent façade in a previous article but let us take a quick look at income statistics for this country:
Household income (overall percent of US households over):
Income Percent of Households over:
So what does this tell us? In order for a family to comfortably afford a median priced home in Los Angeles County they would need to make $200,000. As you can see from the above data, only 2.67% of all households make this much. And I doubt any family making $200,000 will want to buy a Real Home of Genius as they would probably prefer to rent in a better neighborhood and invest the massive difference they are saving from buying a home. Are there tax benefits to owning? Of course. Many housing pundits want to use some voodoo economics to make you think spending $1 so you can get two quarters back is smart math. If you really need a tax break buy a rental property in a non-bubble city; you’ll get cash-flow, the benefit of owning real estate, and the feeling of owning a home if that is something that you desperately need. With all this talk, isn’t it fascinating that the media doesn’t state the obvious? That homes are massively overpriced! Incomes cannot support current prices without using mythical fantasy world exotic mortgages that seem to be a thing of yesteryear. 2/28 mortgages, option ARMS, negative amortization, stated (liar) income loans, and all variations of these dubious mortgages will come under the congressional microscope in months to come, just watch.
Smoking the Housing Bubble Peace Pipe
We’ve been living in a housing obsessed society. In fact, I’ll be happy in a few years where you will be able to go to a party and not have to listen to some wannabe Trump talk about his recent flip in the Valley and how he pocketed $50,000. The hardest part listening to this hogwash is knowing that they are part of this speculation bust that we are now seeing; deep down anyone that has a basic idea of finance and economics knew that this couldn’t go on forever. And here it stops in Q3 of 2007. In fact, I haven’t heard much of this talk in the last year. Yet in this housing bubble decade we have seen the media eat up the housing game and carry the party line. Take a look at some of the shows that have made the air in recent years:
Discovery Home's "Flip That House"
A&E's "Flip This House,"
HGTV's "Bought and Sold,"
Bravo's "Flipping Out"
TLC's "Real Estate Pros."
And the list goes on. Everyone suddenly had housing religion. But the good thing about bubbles is after the pop, slowly the talk dissipates. Remember the technology bubble? For years this was all the talk and anything with a dot com was worth putting your entire retirement funds into. How much talk have we had about these once high flying companies after 2001? Not much. I think by 2009 we’ll be more concerned about cleaning up the mess of 2 back-to-back bubbles, that is if we don’t see another bubble after this one. And yes, housing is very different from stocks. But what do you think funded this game? Mortgage backed securities. Where did these MBS trade? Hopefully you realize that not everything is linear but following the interconnectedness of this credit bubble you can understand why we are truly in an epic once in a lifetime housing bubble.
Do you think politicians and the media are handling this housing bubble burst correctly?
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