Please Ignore the Inventory Behind the Curtain: Lenders and Agents now Holding Open Houses Together.

Great things come in pairs. We have Amos and Andy, Siegfried and Roy, and now Countrywide and your local real estate agent? We really have to examine why this tactic is being taken. Keep in mind that we’ve been in a hyper reality of housing for the past decade. The problem with those in the housing complex is that they are living with an inflated perspective of a reality based housing market. The market is simply adjusting to market fundamentals. Sadly, many are grasping at an industry that is entering a fierce bear market. It turns out that easy credit, human nature, and greed are powerful forces. In fact, the money movers figured out a method of tapping into one of America’s deepest primordial desires, that of owning a piece of land and property. They figured if you could monetize something with a powerful emotional component many people would pay to play no matter what. It worked.

Even before the peyote induced housing bubble, American’s as a whole had most of their store of wealth in housing. After Credit Mania™ came out like an Ultimate Fighting Championship, more and more American’s saw their home as a store of wealth and figured out that hey, what is the use of idle equity? Why not tap it out via mortgage equity withdrawals? Refinance, spend, let equity build up, and repeat the process. It was the perfect combination and allowed the American economy to avoid a prolong recession. Our savings rate went negative during this glorious housing golden era. The only problem is this “healthy” economy was fueled by easy credit and not production of new industries. With the technology bubble of the 90s, even though it went into another dimension as well, we are still left with remnants of fiber optic lines, better information technology, and this will serve our society for the better in the long run. Flipping and trading houses like baseball cards? Well once this bubble subsides not much will be left except a credit hangover.

The New Tag Team of Housing

If you haven’t read the story here is the link. What is now happening is even homes that go into contract are falling through the cracks. You only need to look at the sales contracts that fall through from the large home builders and you will get a good sense of the current housing market. In fact, many folks go home and get a nice case of buyer’s remorse. The mortgage market is tanking. Record amounts of debt. Open any newspaper and even a housing novice will realize buying right now may not be the best bet. So imagine a couple going to an open house, finding a place they like, and going home to run the numbers only to see that they will not be able to afford the place without “creative” [read speculation] financing. They turn on the television and hear about the tanking credit markets and the mortgage market fallout. They decide to wait out the market. Aside from the subprime mortgage G-men, we no longer have a secret group of people buying homes with exotic financing hoping to flip. So what if we could lend to these people before they left the open house? From the article:

"With housing prices lower in many parts of the country and still-low interest rates, we are clearly in a buyer's market," said Dan Hanson, managing director of Countrywide Home Loans. "Our hope is to make it easy for people who've been on the sidelines to go out, look at open houses, and understand their home loan options."

Housing prices that are trending lower and low interest rates do not equal a buyer’s market. We’ve already examined the selling stalemate in the current market. Sellers do not want to lower home prices because they have an inflated view of what they should be getting. In basic economics the price of a product is what the market will support. Sales are radically down because people don’t want to buy at current prices. Instead of realizing that this is the new status quo, sellers and the housing complex are trying each and every way to come up with absurd products that make no financial sense. They make sense for their commissions and keeping the butter churning, but it makes no sense for a current buyer. Why would you buy right now if you know next year prices would be cheaper? You don’t. This bubble psychology is what got us into this mortgage credit mess as well.

People saw that housing went up year-over-year and figured they had to jump in. For a few years they were right. Even a broken clock is right twice a day. Economic fundamentals didn’t push the market up but mass psychology did. Folks went into massive debt with adjustable rate mortgages simply to own a piece of the America dream. Here in California, many areas saw price gains of $100,000 year-over-year; in some cases yearly price gains were higher than annual household income. How is that supportable in the long run? Clearly it isn’t. We aren’t talking about a home in the Midwest that jumped from $100,000 to $110,000 while the area income is $42,000. We are talking about homes that jumped from $350,000 to $450,000 in one year and area incomes are approximately $50,000. I know most people in the United States have a hard time wrapping their brain around bubble areas but take a look at some of the Real Homes of Genius here in Southern California and you’ll get a better idea.

Missing the Bulls-eye

Keep in mind that Countrywide even as late as May of this year was expanding its subprime mortgage outfit and talking about 50-year loans.

Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.

With that said, let us take another look at what is being said today:

"We're pleased to assist our local real estate professionals, and we encourage buyers to work with an expert who is seasoned in helping buyers with the home purchase transaction," said Hanson.”

Seasoned? You mean with a company that was expanding their subprime unit only a few months before the current implosion? Why would anyone take a 50 year mortgage when rates are at all time lows? Is this your definition of seasoned? Well let us continue forward in the magical world of mortgage Oz:

“It has always been Countrywide's mission to provide optimal mortgage solutions for each homebuyer's needs and financial situation, and it is Countrywide's continuing commitment to help find the most appropriate mortgage solution for every qualified buyer.”

Here was the option list for the last 7 years: adjustable rate mortgage, option ARM mortgage, reverse mortgage, 2/28 mortgages, and maybe a 30 year conventional mortgage. Keep in mind that with absurd ratings of the mortgage backed securities market premiums were better on the riskier mortgages so guess what was pushed by lenders? And now these same people are the gurus of financial prudence? Scotch please! Dissecting the article you can tell someone is well groomed in the art of PR. When they say most “appropriate mortgage solution” the implication is that there is a mortgage product for you. Take this a step further and you will see that they are still trying to push people into houses while the market is entering the first stages of a bear cycle. You’ll love this:

“Through the America's Open House campaign, Countrywide hopes to encourage buyers to do their house hunting with a clear understanding of how much they can afford and what types of financing options are available to them.”

So now after 7 years theses mortgage companies think that it is important to look at your income. You can imagine how one of these sessions will go:

Buyer: “Yeah, we have an annual household income of $60,000, what do you think we can afford?”
Housing Tag Team: “Well according to my modified housing algorithm, you qualify for a $700,000 mortgage.”
Buyer: “I’ve heard that the credit markets are getting tighter and housing prices are going lower. Is this correct?”
Housing Tag Team: “Nonsense! There is never a better time to buy then right now. In fact, if you can put down 5 percent today before you walk out of this 500 square foot home, we will make you the proud owners of this place? How does that sound?”
Buyer: “I’m not sure. It sounds like we will be out of our range.”
Housing Tag Team: “Listen. If you sign right now we will throw in an additional granite countertop and 42” plasma. You don’t even need to go to the bank! That is the benefit of the Housing Tag Team (HTT).”

Housing tied at Hip to Healthy Economy

In that past decades, real estate contributed about 10 to 12 percent of all added job growth. However, in the last decade real estate related jobs are now pushing closer to 30 percent of the entire job output. So of course the economy is healthy. Real estate has been fueled by a massive credit bubble thus leading to job growth and spending. But this circular logic has a fallacy that I’m sure many of you see. If housing hits a road block and slows down, guess what happens to a large portion of our employment sector? The economy is predicated on continuous housing appreciation; not normal appreciation that tracks with inflation but debt fueled home equity line of credit type of expansion. When you pull the curtains back on your new house, make sure you send the wizard a nice tag team hello.

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Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.

You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification. Maybe that is why the United States on a personal level, has a negative savings rate. How can the government encourage people to save and be prudent when they do the complete opposite? Let us take a look at the winners with this newfound ease in lending:

Home Loans: Winner because they become cheaper

Auto Loans: Winner because payments will be lower

Credit Cards: Winner since your APR just dropped from 18 percent to 16 percent
Lenders: Winner since they are given a lifeline to do more loans

Savings Account: Losers since your interest rate is lower than inflation

Dollar: Loser as you can clearly see by the drop below the 80 support level

Pretty basic right? But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy. The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost. Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar. Many are doing short-term call options and figure they can make a profit on these pseudo bull runs. This does not help the massive majority of Americans. How is this good for our country in the long run? Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852. I will translate the key points for you into blunt language and what it means to you and our country. Take a look at this press release issued a few days ago from the House Committee on Financial Services:

· Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Translation? We are going to institutionalize subprime lending! Forget about the tried and tested 10 and 20 percent down payments of yesteryear. We are overhauling the system to remove down payments. After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars? So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios. Down payments exist for a reason. They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items. But you can have your cake and eat it too in the mortgage world! Debt is saving in this apparently brave new world.

· Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Do we really need housing counseling? I can imagine one of these sessions:

Counselor: “Can you tell me about your current situation?”
Supbrime Borrower: “Ok. Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time. I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit. When he said long time I thought he meant 10 years, not 2 years. Now my payment went from $1,250 a month to $2,200. What can I do? I barely was able to afford it even with the crazy teaser rate?”

Counselor: “Damn. Looks like you need to increase your income by adding an all America 2^nd or 3^rd job. Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance. Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax] Hey! Good news. We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”

Subprime: “Great! Because I was looking at this other home that I would like to flip…”

The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.

· Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.
Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Higher risk but qualified borrowers? Bwahaha! You couldn’t write more Orwellian language. Could it be that they are high risk because maybe they can’t afford the home? This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house. As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on. That is why we have [had] lending standards. When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books. Now we have this moral hazard where we are encouraging irresponsible lending. This doesn’t help the homeowner. This is horrible classical conditioning on a mass scale. What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government. Does this make sense?

Then the reverse mortgage portion is just classic. You can see the light bulb over these congressmen go off. “Next year is so important. Older voters are an important constituency group.” Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases. The majority don’t have adequate savings but what do they have? Over inflated home equity! How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government. Amazing planning here. Let us keep reading.

· Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

You really need to put on your doublespeak reading glasses for this one. So they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing. But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy. What we need is less legislation and more open market competition. Think about it. If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win. That means lower priced homes and more sales. Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000? But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each. Do you really think these companies compete when they know they have a locked in price? Why do you think communism failed so miserably? And the language is scary. What do they mean “fully fund construction costs” in bubble areas? They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language. This is a blank check. Make sure you contact your representatives in both houses and contact the White House to veto this. Maybe Bush will dust off the pen and use it for once.

· Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions. They are trying to seal high prices into the system as a paradigm shift. These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.

· Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

This is the one that is getting everyone worked up. How is raising loan caps going to help the family on main street USA by pushing limits over $500,000? I thought the median price was somewhere around $225,000 for most Americans? Oh! I forgot. Lenders make their most profits from overpriced bubble metro areas therefore we should ask our brothers and sisters in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed. Make no mistake. This bill is 95 percent for the housing industry. It will not help you or your family if you are facing foreclosure. They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation. Pandering at its finest. How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of $50,000 going to get help if the main problem is a pricing and income issues? Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?

Doublespeak: Helping Minorities Pad our Bottom-line

Someone once told me that getting married is easy, staying married is the hard part. During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes. The government always throws this PC statement out. The last few years these lenders have done the most damage to minorities. Guess who are the folks who are losing their homes because of subprime lending in the largest numbers? These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts. So what if 1, 2, or 3 years down the road the family drowns in their own debt service? Setting people up for failure is not the American way.

The fact that many are subprime meant they couldn’t afford homes to begin with. Simple way to avoid this mess from the start. If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down. During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their money from. To use this “we are helping minorities” line is arrogant and absurd. Why don’t they address the real reason that of massive inequities in pay for minority groups? Oh! We can’t talk about income because that is taboo. Yet they are okay with putting people into ticking time bombs. A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict. In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?” Guess what your answer would be?

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When the Housing Clock Stops Ticking: Why the Median Price is Going up While Sales are Going down.

If you haven’t noticed, Los Angeles returned to its previous median record price of $550,000 last month. Before you scratch your head in dismay, let us take a look at what is really happening. As you know, higher priced homes are still moving while lower priced homes are stagnant thus skewing the numbers. If a home doesn’t sell, it doesn’t show up in the data. Similar to taking an immensely hard mathematics course where half the class drops out, but those that remain push grades higher. When calculating the final overall class performance the statistics show the best of the best and those that stuck the course out, but what of the students that dropped out? Well as you can see from the Real Homes of Genius examples, prices are coming down. So what do we make of this seemingly contradictory information?

The Sales Cycle

This chart shows sales for Los Angeles County over the past 7 years. As I point out in the above chart, each January and February we hit a trough because of the slower selling brought on by fall and winter. This has been the case for each consecutive year since 2000 and is actually part of the normal housing cycle. But what do we have here appearing in summer of 2007? It appears that we have hit a trough 5 months early. In fact, summer sales numbers are looking more like seasonal sales numbers of winter. This chart is also telling because it shows a consistent pattern over time. Those that don’t believe in housing cycles are spinning in their chair wondering what happened this summer. Normally a strong spring and summer selling season allows for the lower numbers in the fall and winter. This will not happen this year. Unless of course we see a radical jump in sales in the next few months. This data is also a good indicator of where we are heading. Keep in mind the data reported is from sales that close after escrow. This data can lag 1 to 2 months. So what we are currently seeing in the actual finalized recorded sales is probably from July to early August. Well of course the mortgage blow out just occurred and credit standards are much tighter since then. So guess what this will do for sales at the slowest time of the year? Either way, this is a much necessary correction and that is why any housing pundits thinking we are going to have some bounce back in the next few months is simply hallucinating and not following the trend.

I’ve been getting some e-mails about timing the market. There are many ways to valuate housing prices. As we previously discussed with 3 housing valuation methods, every city in Southern California is overpriced. If you haven’t noticed the media is now using the terms “housing slump” and “credit crunch” as if they’ve been talking about it for years. Too bad even as late as January and February of this year, they were still carrying the housing banner. Using rhetoric such as “booming” and “amazing” when talking about housing. I’ve seen a few articles pointing out that housing bears have unfairly criticized the media as this New Yorker online piece. Since they link up to a few places including our site, I feel it is important to state why I have been critical of the mainstream media in the past. Clearly, they are now carrying the housing bear flag and there is no problem finding populist information outlets dissecting the housing market. My main issue was during the boom, they kept giving air time to raging housing bulls that have led us into this current market. Dean Baker’s recent study does a great job researching the entire housing bubble and also pointing out that media airtime in the past few years has not been fair and balanced. I recommend you read the entire paper as a primer to this housing bubble. But here is some of the data found regarding media citations:

Media Citations (New York Times and Washington Post) on the Housing Market, 2005-2006

Bulls	Citations
David Lereah, NAR	1796
Doug Duncan, Mortgage Bankers Association	397
David Seiders, National Association of Homebuilders	652
Total	2845

Bears	Total
Robert Schiller, Yale University	516
Edward Leamer, UCLA	88
Dean Baker, Center for Economic Policy Research	248
Total	852

*source: Dean Baker, Midsummer Meltdown August 2007

And regarding the New Yorker, I do agree with the author that many journalists are now scrambling to be first in line to disseminate housing information to the public. In fairness, the media reports what is happening yesterday, today, and tomorrow. Historian and prognosticators they are not.

Case and Point: High Priced Area and Low Priced Area

Back to the median housing price analysis, clearly housing sales have fallen off a cliff. In fact, Los Angeles County saw a 50 percent year-over-year drop in sales last month. Not exactly stellar numbers. Multiple converging factors combined to create a perfect stew of housing stagnation. For one, the credit markets are now tighter and sub-prime is now a thing of the past. Also, appreciation is now gone. So folks are deciding on holding off on buying homes especially with a sudden onslaught of negative media coverage. And something specific to California, August of 2005 saw the largest origination of adjustable rate mortgages at a whopping 70+ percent of all mortgages originated. Guess what was hot? 2/28 mortgages. And what was last month? That’s right, 2 years and now these people are facing larger payments with mortgages amortizing on different schedules. In addition, they no longer have the option of refinancing because this will push payments higher and the reason they took out these exotic loans is to squeeze into an overpriced home. Now why would they go for a higher payment even if they could? As I discussed back in July housing has hit its Minsky Moment.

Let us take at a few case examples for last month to show how higher priced areas are moving up while lower priced areas are getting hit.

Higher Priced Areas Moving Up:

Agoura Hills with a median of $975,000 is up 18.9 percent year-over-year.

Arcadia with a median of $752,000 is up 19.3 percent year-over-year.

Hermosa Beach with a median of $1,255,000 is up 15.6 percent year-over-year.

La Canada Flintridge with a median of $1,455,000 is up 7.4 percent year-over-year

Wow! The housing party is still going strong. Why look at data when all 10,000,000 folks in Los Angeles live in these areas. Let us take a look at some lower to middle priced areas:

Artesia with a median of $370,000 is down 26 percent year-over-year.

Baldwin Park with a median of $400,000 is down 11.1 percent year-over-year.

El Monte (South) - with a median of $381,00 is down 20.3 percent year-over-year.

Montebello – with a median of $535,000 is down 10,8 percent year-over-year

You clearly see the pattern and why the median price is skewed higher. For one, more sales are happening in the higher priced areas so they have a larger subset. Sales in lower areas are facing intense drops in sales and downward pricing action. Could this be because many of the past buyers bought with sub-prime loans that are no longer available? I doubt anyone in Palos Verdes would avoid buying their dream home because of a lack of sub-prime loans. An interesting thing to note is middle class neighborhoods are facing a stagnant market with prices trending down slowly but sales having a sudden stop. I expect that we will see the lower end get hammered first as it currently is and then have the middle areas tip over as well. The higher priced areas will be the last to adjust.

How low will we go?

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The Real Cost of a Picket White Fence: 3 Housing Factors to Think About; Prices set at the margin, income discrepancies, and bubble euphoria.

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:

$65,000 34.72%

$80,000 25.6%

$91,705 20.0%

$100,000 17.8%

$118,200 10%

$166,200 5%

$200,000 2.67%

$250,000 1.5%

$1,600,000 0.12%

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.