The Housing Bottom Blog - Tracking The Bay Area's Real Estate Collapse and Recovery

Blog Address Change

2009-09-08T14:06:00.001-07:00

My Blog has moved.

I am now writing for http://housingstorm.com

See you there!

Required Reading: Monday, August 3rd 2009

2009-08-03T09:06:00.001-07:00

Feral Houses – Sweet Juniper

"Shadow" inventory lurks over U.S. housing recovery – Reuters

Weekly Unemployment Claims Portend Disaster – Mish

Real Estate ‘Trade-Down’ Environment – The Big Picture

Real Estate ‘Trade-Down’ Environment – The San Francisco Chronicle

Oakland's McKinley Partners is betting that low-end foreclosed homes in eastern Contra Costa County will double in value in five years.

Investors Buying Low End Foreclosures – Calculated Risk

I know investor groups doing the same thing, and they pay cash too. As far as these numbers - good luck. The numbers only make sense at the low end, and rents are falling quickly. It is very unlikely the price will double in five years - or even ten years. As the price increases, investors will be selling properties, keeping prices down.

July Economic Summary in Graphs – Calculated Risk

Required Reading: Wednesday, July 29th 2009

2009-07-29T08:27:00.001-07:00

S.F. tower's owners will forfeit it to lender – The San Francisco Chronicle

Testimony of Keith S. Ernst, Center for Responsible Lending Before the Joint Economic Committee of the U.S. Congress

Our most recent report on subprime mortgages shows that over 1.5 million homes have
already been lost to foreclosure, and another two million families with subprime loans are currently delinquent and in danger of losing their homes in the near future.1 Projections of foreclosures on all types of mortgages during the next five years estimate 13 million defaults (over the time period 2008Q4 to 2014).2 Right now, more than one in ten homeowners is facing mortgage trouble.3 Nearly one in five homes is underwater.

Subprime mortgage companies warn on U.S. foreclosures – Reuters

A Few Comments on Housing Reports – Calculated Risk

Study: Using Home ATM Led to Most Foreclosures in SoCal – Calculated Risk

Miami Condo Glut Starts To Ease – Clusterstock

Feds Push Mortgage Companies to Modify More Loans – The New York Times

Five Things: Housing Staggers Toward a Bottom... – Minyanvillle, Kevin Depew

It's true, housing is staggering toward a bottom; but it's doing so on a treacherous path carved out between two lanes on an interstate highway.

All of our problems are solved!

2009-07-24T11:59:00.001-07:00

Genius Plan to Fix California Economy - Watch more Funny Videos

Required Reading: Friday, July 17th 2009

2009-07-17T08:23:00.001-07:00

Bank of America Posts Profit Drop, Sees Weak Economy – Bloomberg

East Bay's Watergate joins flood of foreclosures – The Contra Costa Times

Two Giants Emerge From Wall Street Ruins – The New York Times

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

Cisco cutting up to 700 jobs in San Jose – San Jose Mercury News

Housing: Sticky Prices – Calculated Risk

If housing was a perfect market, prices would have fallen rapidly to the market clearing price. However housing prices are sticky downward - as I described in 2005 post: "[R]eal estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.

This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes."

This doesn't mean prices are stuck - just sticky. Prices have been falling in most areas for three years, and will probably fall further.

And this brings us back to the DataQuick article. Just because demand is picking up a little, doesn't mean prices have bottomed. Note: Ignore the median price in the article - that is rising because of the change in mix.

Jon Stewart Takes On Goldman Sachs (finally)

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Pyramid Economy

www.thedailyshow.com

Daily Show
Full Episodes

Political Humor

Joke of the Day

Putting the 'short' back in short sale – Inman News

According to Thompson, a number of major servicers including Fannie Mae, JPMorgan Chase & Co., Citigroup Inc. and OneWest Bank Group (formerly IndyMac Bank) are putting systems in place to more easily identify which borrowers have attempted loan modification programs and failed or are well into the default process. Secondly, and this is a key point, they are going to give price certainty in the case of a short sale; the servicers will give price guidance, telling the agents a price range for the short sales.

DataQuick News: Bay Area Home Sales, Prices Rise

2009-07-17T08:08:00.001-07:00

DQ News reports Bay Area home sales and median price rise

La Jolla, CA.----Home sales in the Bay Area jumped to their highest level in almost three years, the result of improved mortgage availability and a perception among potential buyers that prices have bottomed out. The median price paid for a home increased month-to-month for the third month in a row, a real estate information service reported.

A total of 8,644 new and resale houses and condos sold across the nine-county Bay Area in June. That was up 16.1 percent from 7,447 in May and up 20.4 percent from 7,178 in June 2008, according to San Diego-based MDA DataQuick.

Home sales have increased on a year-over-year basis the last ten months. June sales have varied from a low of 7,118 in 1993 to 15,735 in 2004 in DataQuick’s statistics, which go back to 1988. Last month was 16.1 percent below the 10,306 for an average June.

“Getting mortgage financing this last year has really been an egregious process, especially for borrowers in the upper half of the market. We’re just now seeing the beginnings of more normal mortgage lending patterns. There’s still a long way to go, but it looks like the worst of the grind is over,” said John Walsh, MDA DataQuick president.

The median price paid for all new and resale houses and condos sold in the nine-county Bay Area was $352,000 last month, up 3.1 percent from $341,500 in May and down 27.4 percent from $485,000 in June 2008. It was the highest since $375,000 last October.

The current median is 47.1 percent below the $665,000 peak reached in June 2007. It hit a low of $290,000 in March this year. About half the downturn appears to be price declines, the other half is the absence of of high-end home sales in the statistics, which pulls the median down.

Financing with home loans above the old “jumbo” limit of $417,000 edged up to the highest level in almost a year. Last month 28.8 percent of all Bay Area mortgages were jumbos, the highest since 31.9 percent in August last year and well above the bottom of 17.1 percent last January. Two years ago jumbos accounted for more than 60 percent of all home purchase loans.

Required Reading: Thursday, July 16th 2009

2009-07-16T09:48:00.001-07:00

BofA: Double Secret Probation – Calculated Risk

Weekly Unemployment Claims Decline Sharply – Calculated Risk

NOTE: The seasonally adjusted weekly claims numbers are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer, and the numbers are adjusted for that pattern - but this year the companies cut back much earlier. This distortion is expected to last for another week or two.

Foreclosures in the Millions Midway through 2009 – RealtyTrac

A total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,528,364 U.S. properties in the first six months of 2009, a 9 percent increase in total properties from the previous six months and a nearly 15 percent increase in total properties from the first six months of 2008, according to the latest RealtyTrac U.S. Foreclosure Market Report. The report also shows that 1.19 percent of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of the year.

CIT Group’s ‘Capital’ Was All Talk, No Trousers: Jonathan Weil – Bloomberg

Kansas City Car Dealer Offers An AK-47 With Each New Truck Purchase – Clusterstock

Peak to Trough Case Shiller and CAR Home Price Declines – Mish

Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama's Mortgage Rescues Create ‘Confusion’ – Mish

Foreclosure prevention programs are going to continue to fail as long as home prices are sinking and unemployment is rising. Attempts to manipulate the market and/or prevent foreclosures will merely create "perverse incentives that distort the housing market".
The only real solution is time and price. Homes have to fall to the point of affordability and people have to have jobs before any house is affordable. This should be obvious but given the number of failed programs it must not be.

Study finds more millionaires in Bay Area – The San Francisco Chronicle

The World Wealth Report, produced by Merrill and market research firm Claritas, found that the number of millionaire households across the nine-county Bay Area climbed to 136,120 last year, up 10.2 percent from 123,621 in 2007.

In fact, all three regions surveyed in the Golden State (Los Angeles, San Diego and San Francisco areas) increased in wealth last year, in sharp contrast to national and global trends, said Mike Riherd, senior vice president of investments in the Walnut Creek office of Merrill.

Henry Paulson testifies that Merrill Lynch sale helped stave off 'great peril' – The Los Angeles Times

World Bank warns of deflation spiral – Telegraph, Ambrose Evans-Pritchard

"Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"

The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded.

While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks.

Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June.

DataQuick News: SoCal Sales and Prices Rise

2009-07-16T09:20:00.001-07:00

DQNews Reports Southland home sales highest since late ’06; median price up again

Southern California home sales rose in June to the highest level in 30 months as the number of deals above $500,000 continued to climb. June’s sales gain, plus another rise in the region’s median sale price, indicate buyers responded to price cuts on mid- to high-end homes and found it easier to secure financing for pricier abodes, a real estate information service reported.

A total of 23,262 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month. That was up 12.0 percent from 20,775 in May and up 29.0 percent from a revised 18,032 a year ago, according to San Diego-based MDA DataQuick.

Sales have increased year-over-year for 12 consecutive months.

June’s sales were the highest for that month since 2006, when 31,602 homes sold, but were 17.7 percent below the average June sales total since 1988, when DataQuick’s statistics begin. June sales peaked at 40,156 in 2005 and hit a low last year.

Foreclosures remained a major force in June, but their impact on the resale market eased for the third consecutive month.

Foreclosure resales – homes sold in June that had been foreclosed on in the prior 12 months – represented 45.3 percent of Southland resales last month, down from 49.7 percent in May and down from a peak 56.7 percent in February this year. Last month’s level was the lowest since foreclosure resales were 43.7 percent of resales in July 2008.

As the influence of deeply discounted foreclosures in lower-cost areas has waned in recent months, sales in higher-cost housing markets have increased and accounted for a greater share of total transactions.

Resales of single-family houses priced $500,000 and above rose to 19.6 percent of all existing houses sold in June, up from 18.0 percent in May but still down from 29.2 a year ago. The last time the $500,000-plus market made up more than 19 percent of sales was last October, when it was 19.9 percent. Sales of $500,000-plus houses dipped to as little as 13.4 percent of sales in January this year.

The recent shift toward higher-cost markets contributing more to overall sales has put upward pressure on the region’s median sale price – the point where half of the homes sold for more and half for less. The median dived sharply over the past year not just because of price depreciation but because of a shift toward an unusually large share of sales occurring in lower-cost, foreclosure-heavy areas.

I would add that part of the “shift toward higher-cost markets” is the result of two factors: 1. More and more high-end homes have been forced to dramatically slash their price to attract buyers….so, the are finally selling, but at big discounts. 2. The statistical fact is that there are far fewer low-end homes available for sale as a result of recent moratoriums. Fewer low-end sales changes the mix.

The median price paid for all new and resale houses and condos sold in the Southland last month was $265,000, up 6.4 percent from $249,000 in May but down 26.4 percent from $360,000 a year ago. It was the second consecutive month in which the median rose on a month-to-month basis. Before May’s 0.8 percent increase over April, the median hadn’t risen from one month to the next since July 2007.

Last month’s median was the highest since it was $278,000 last December, but it stood 47.5 percent below the peak $505,000 median reached in spring and summer of 2007.

“The rising median should still be viewed mainly as a sign the market’s moving back toward a more normal distribution of sales across the home price spectrum. Sales in many higher-cost neighborhoods couldn’t have gotten much lower, so this recent uptick in activity should come as no surprise. The recession and problem mortgages are fueling more high-end distress, hence more high-end ‘bargains.’ What’s missing, still, is a wide-open financing spigot for the would-be buyers of these more expensive homes,” said John Walsh, DataQuick president.

Expect Bay Area Median Home Prices to rise as well, and probably stay higher for another few months. By September or October, we should see more foreclosures on the market, combined with a less-optimistic public, and median prices will fall again.

Social Media Perspective

2009-07-15T10:58:00.001-07:00

From Dispair.com

Required Reading: Wednesday, July 15th 2009

2009-07-15T10:56:00.001-07:00

Sacramento-area rents fall for third straight quarter – The Sacramento Bee

A massive deflationary spiral that has pushed home values down by half or more from their housing boom highs is now destabilizing pricing at large apartment communities across the capital region.

The New Energy Crisis – Minyanville, James Quinn

Part-Time Workers Mask Unemployment Woes – The New York Times

It is a startling sign of the pain that the Great Recession is inflicting, and it is largely missed by the official, oft-repeated statistics on unemployment. The national unemployment rate has risen to 9.5 percent, the highest level in more than a quarter-century. Yet it still excludes all those who have given up looking for a job and those part-time workers who want to be working full time.

Rent Your Own Home – The Atlantic, Felix Salmon

Home Prices Play Big Role in Americans’ Decision to Move – WSJ, Real Time Economics Blog

This is a change from the past, when jobs were the primary economic driving factor behind state-to-state migration. The study helps explain why migration has fallen off so sharply in this recession — with the drastic fall in housing prices, many people are staying put not for work but because they are tied to a home they either cannot sell or refuse to sell at today’s prices. Some economists, including urban theorist Richard Florida, have used this slowdown in mobility to argue against government policies that subsidize home ownership — the argument being that increased home ownership hampers economic flexibility by making Americans less mobile.

Obama's Zany 'Own-To-Rent' Mortgage Plan Would Create Legal Chaos – Clusterstock, John Carney

Obama mulls rental option for some homeowners-sources – Reuters

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

Google Finally Starts it’s MLS

2009-07-15T10:48:00.001-07:00

Google has recently introduced a “real estate” subsection to it’s Google Maps product, instantly creating what will become the most popular real estate site on the web. Why? Because anyone doing a Google-search for homes for sale will be presented with Google’s in-house data as the top search results.

www.maps.google.com/realestate

Private MLS’s days are numbered.

June ForeclosureRadar Report: A Surprising Drop In CA Notice of Defaults

2009-07-14T13:30:00.001-07:00

From ForeclosureRadar:

For the third consecutive month, foreclosure sales jumped significantly as lenders come off the moratorium. Foreclosure sales increased by 24.7 percent following a 31.9 percent increase in May, and a 35 percent April increase. Notices of Trustee Sale dropped by an unexpected 28.7 percent, with the timing of the drop indicating that it was in response to the California Foreclosure Prevention Act. This law was widely believed to have little or no impact on foreclosure filings, as it exempted the majority of large lenders that operate in the state.

I’ve been talking with asset managers from different companies this week and the general feeling is that the big banks were all asked, by the Treasury/White House, to delay their foreclosure proceedings for 90 days, covering June, July, and August.

I don’t believe that the California Foreclosure Prevention Act has much to do with the drop off because other states are experiencing the same thing.

New Mortgage Disclosure Rules Will Delay Closings

2009-07-10T20:11:00.001-07:00

The Housing and Economic Recovery Act amends the Truth In Lending Act and takes effect July 30th, 2009. Wells Fargo just issued a fact sheet. Here are the most important points:

The earliest any home purchase transaction can close is 7 business days from when the homebuyer is issued their initial mortgage disclosures from their lender.
Other than a credit report fee, no other upfront fees can be collected by the lender until the day after the homebuyer receives their disclosures. Effectively, this means that the appraisal will be delayed by 2-5 days.
The homebuyer must receive a copy of their appraisal a minimum of 3 days prior to close of escrow.
Any increase of more than 0.125% in the Annual Percentage Rate from the initial Truth In Lending Disclsoure requires a revised TIL Disclosure to be issued to the homebuyer at least 3 business days before closing.

Basically, more 30-day escrows are likely to turn into 35-day escrows. Buyers need to make sure they are protected if closing runs late. Sellers need to expect unexpected delays…especially if they are trying to time the sale of their old home with the purchase of a new one.

Condo Association Bankruptcies Begin

2009-07-09T18:00:00.001-07:00

From the Daily Business Review $1 million debt sends condo association into Chapter 11

In a move an increasing number of condo associations are expected to follow, the Maison Grande in Miami Beach has filed for bankruptcy.

Facing almost $1 million in claims by unsecured creditors, a troublesome recreational lease, and at least 100 unit owners delinquent on payments of their fees, the association filed a Chapter 11 petition last month in U.S. Bankruptcy Court in Miami.

As one of the first condo association bankruptcies of the current economic crisis, “it’s definitely cutting edge,” said attorney Mark Schorr, a solo practitioner in Fort Lauderdale who represents the Maison Grande association.

…

Kaye represents a Tamarac condo association that is considering bankruptcy. With half of its 280 unit owners delinquent on their maintenance fees, the association is in the red to the tune of $50,000 per month, he said.

Kaye also represents a Palm Beach County condo association that is likely to file for bankruptcy after losing a court case against a roofing contractor.

A judgment of $130,000 could grow to more than $300,000 after attorney fees and court costs are added, he said.

“They can’t afford that, and 20 percent [of 120 unit owners] already are delinquent in paying fees,” Kaye said.

These associations, which he declined to name — and many more — are likely to file for bankruptcy protection as they run out of funding options, he said.

…

Meanwhile, unit owners in foreclosure have no incentive to pay their association fees, said Miami attorney Douglas Snyder, a solo practitioner who represents the 220-unit Greenwich condo in North Miami in its Chapter 11 bankruptcy filed in March.

Snyder said the association had been sued by service providers for non-payment of about $750,000. The court ordered the association to begin making payments “and it was bleeding them dry,” he said. “This way, they can handle everyone at the same time.”

About 20 percent of the unit owners are in foreclosure. Association president Lidia da Cunha did not reply to an e-mail seeking comment.

The financial crisis that is pushing condo associations toward bankruptcy is only going to worsen, said Martinez Molina.

The situation is rough the the HOAs, but the dire situation for the condo owners is only going to get worse. With 15% or more of the HOA dues delinquent, Fannie, Freddie, and FHA will not make loans for purchases in the complex. When future sales now need to be cash-only, low prices will plummet much-much lower.

Expect many condos to cut services, raise fees to existing payers, and for prices to plummet.

Foreclosure Moratoriums Helped 4%?

2009-07-09T12:34:00.001-07:00

HousingWire reports Foreclosure Freeze Had Little Impact: Report

Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers — and may even have made things worse, for everyone involved.

A report released recently by due diligence and surveillance specialist Clayton Holdings, Inc. highlights the early returns of various moratoria put into place by servicers ahead of the Obama administration’s Making Homes Affordable (MHA) modification and refinance programs. A number of the nation’s largest servicers had released statements earlier this year announcing their intent to suspend foreclosure sales until details of the program were released, generally until the end of March.

According to Clayton’s data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm’s analysts estimated would have otherwise had foreclosure sales completed during the “freeze” period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.

…

The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were “helped,” either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze — a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.

Servicing executives that HousingWire spoke with suggested that the real problem is negative equity, or borrowers who have seen the value of their homes drop precipitously in the most troubled housing markets. “Negative equity puts borrowers into a precarious situation,” said one servicing executive, who asked to remain anonymous. “Borrowers are over-leveraged, on homes, cars, and everything else, to begin with.”

And, of those few who were actually “helped", an alarmingly high percentage has ended up back in default. Depending on time frames and the pool of properties in the study, I’ve seen figures in the 60-75% range.

Required Reading: Wednesday, July 8th 2009

2009-07-08T05:42:00.001-07:00

L.A. County's May default rate double last year – The Los Angeles Times

May's 9.5% delinquency rate for L.A. County was up from 5% of mortgages late by 90 days or more in May 2008. First American bases its foreclosure analyses on public records.

Credit card firms try end run around new federal rules – The Los Angeles Times

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to -- you guessed it -- variable rates.

"It's completely unfair," said Linda Sherry, a spokeswoman for Consumer Action. "It's an end run around the intent of the new law."

U.S. Housing Market Is Cursed by Brain Freeze: John F. Wasik – Bloomberg

Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices. It’s like holding on to a favorite stock long after it has tanked.

Banks Reject California's IOUs – Minyanville, Andrew Jeffrey

Battle Lines Form Over "Son of Stimulus" – Mish

Tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to Go to Hell - Mish

Every one of those blood sucking banks was bailed out by taxpayers (California taxpayers too) and now will not take an IOU from the State of California for the citizens of California. This is disgusting.

If you have an IOU that the big banks will not cash, I recommend closing your accounts and putting them someplace that will. Please tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to go to hell.

Sale shows San Francisco property values in free fall – The San Francisco Business Times

A downtown San Francisco office building that sold for $400 a square foot in 2006 has traded for just $172 a square foot, a 57 percent decline that industry experts see as an important milestone in establishing new, recession-era values for financial district property.

PMI Expects Lower Housing Prices in 2011 – Housingwire

In California, Even the I.O.U’s Are Owed – The New York Times

LOS ANGELES — The only thing worse than being issued an i.o.u. rather than a check from the State of California may be not getting the i.o.u. at all — at least in time to meet the deadline of your bank.

But across California on Tuesday, many vendors who had been told they would receive the i.o.u.’s instead of actual money said they had not yet received them. And if they do not arrive soon, they may be hard to turn into cash.

Equity, Not Quality – A Re-Examination of the High-End

2009-07-06T21:43:00.001-07:00

In the beginning that this was a “subprime” problem. Marginal buyers leveraged themselves into homes they couldn’t really afford, and then lost them as payment adjusted. These were the canaries in our very deep and complex mine of global finance.

Payment changes were highlighted early on as the prime culprit. Certainly, payment shock for the least-qualified played a role in getting us where we are today, but that role may be less then previously believed.

First of all, Government-induced low rates have eliminated (for now) the impact of mass payment changes. For many, payments have actually gone down.

Second, mass payment recasting (ex: a payment change for an option-arm loan) hasn’t really started yet. We’re another year or more away.

Economists assumed that homeowners would do everything that they could to keep their homes. Policy so far has been focused on two main points:

Keep rates low to help people refinance from adjustable to fixed mortgages, reduce payment-adjustment shock, and to encourage new buyers into the market.
Modify existing loans to help people afford to keep their homes, even if it meant deferring payments or extending their loan terms.

Current Policies Have Failed

Policymakers rely on recommendations from economists. Economists rely on models. Models, apparently, believed that real estate prices could go up indefinitely, at a faster pace than incomes. Neither the economists nor the policymakers had the common sense to ask “What if these models are wrong?”

Models cannot take into account geo-political conflict, currency collapse, Iceland or Latvia, Honduras. They can’t account for declining tax revenues or mass bankruptcies. They can’t account for changing social attitudes towards luxury goods and debt. And, they didn’t expect homeowners to actually want to walk away from their homes.

In the Wall Street Journal, Stan Liebowitz presents New Evidence on the Foreclosure Crisis - Zero money down, not subprime loans, led to the mortgage meltdown.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.

What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.

To be sure, many other variables -- such as FICO scores (a measure of creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation -- are related to foreclosures. But liar loans and loans with initial teaser rates had virtually no impact on foreclosures, in spite of the dubious nature of these financial instruments.

My thoughts: I would agree for reasons discussed above that these liar/teaser loans have had little impact. However, if interested rates were not artificially manipulated lower, their impact would be much greater. For some, temporarily-low rates may only serve to delay the eventual foreclosure.

Instead, the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising (see chart nearby).

My thoughts: House prices will stop falling and unemployment will stop rising when the bulk of the foreclosures are behind us. If people feel that their homes are likely to appreciate in value, then they are more likely to stick it out.

Although the government is throwing money -- almost $2 trillion and counting -- at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted. While Federal Reserve actions have succeeded in reducing mortgage interest rates, low interest rates induce refinancings more than they do home purchases.

…

Other government policies are likely to be even less effective in reducing foreclosures. The Obama administration's "Making Homes Affordable" plan focuses on having the government help lower obligation ratios (the share of income devoted to house payments) down to 31% from levels somewhat above 38%. But my analysis finds that mortgages having such obligation ratios at closing did not later experience high foreclosure rates. This suggests that reducing these ratios is not likely to significantly improve the foreclosure problem.

Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. The suggestions being put forward by the administration and most media outlets -- more stringent regulation of subprime lenders -- would not have prevented the mortgage meltdown regardless of their merit otherwise.

My thoughts: Nothing would have prevented the housing bubble from bursting other than it not having been inflated in the first place.

Rather, stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell. A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can't just walk away.

My thoughts: Clarity of the legal process is always good. But people will still walk away because it becomes the economically prudent thing to do.

On The Edge of a Cliff?

Much has been made of the disconnect between High-End and Low-End markets, with the low-end suffering the greater percentage drops so far. Now, there is much debate over the fate of the High-End.

The disconnect is real. Here is the East San Francisco Bay, Low-End areas are off 60-70%, while some High-End areas may only be 25-30% below their peak.

Over the last 18 months or so, sales velocity has shifted. Low-End areas are booming, while High-End areas are seeing very few transactions. Price follows volume…so, in the short term at least, we can see what communities are falling and which could be beginning to stabilize.

Here are two sample charts from July’s East Bay Housing Review.

If Stan Liebowitz is correct, then the classic mortgage reset charts that have been popular on this site and many others, carry less weight moving forward.

Negative equity will induce some High-End homeowners to walk away, pushing down prices and creating greater negative equity for even more borrowers. As it becomes more common, walking away will become more socially acceptable. If that happens, then…look out below.

Mass Principal Reductions

If one is going to attempt to “solve” this problem, then it is abundantly clear that The Powers That Be must come up with a plan to reduce the principal balances owed on homes in trouble. (Of course, then just about every homeowner would suddenly find themselves distressed and needing a reduction.)

The problem we have is defining the “problem.”

Falling house prices aren’t the problem, they are the solution.

Foreclosures aren’t the problem, they are the solution.

Bankruptcies aren’t the problem, they are the solution.

Excessive debt is the problem and the only solution is to destroy it.

If The Powers That Be feel the need to regulate this debt-destruction process to make it orderly and defined…to avoid the chaos of a global financial meltdown…then this is the next logical step for them to take.

Field Check Group Update

2009-07-06T10:21:00.001-07:00

Mark Hanson discusses the disconnect between the high-end and low-end housing markets in 7-1 May CA Housing Update — Mid-to-High End Capitulate

…Here we sit again but this time with the mid-to-high end properties staring into the abyss. They (high end) have not fallen anywhere near what the low-end has mostly because high-end borrowers were given more exotic, high-leverage loan programs such as Pay Option ARMs, 5/1 interest only loans, and 100% HELOCs to live off of. Arguably they have more reserves and better jobs, which have kept them paying for the depreciating asset much longer than with Subprime borrowers. The Alt-A and Jumbo Prime borrowers simply have loans that afforded them more time. But that has all changed and defaults across this space are surging. Foreclosures are coming, but not before the market begins its slide that ultimately will take the mid-to-high end market down 50% to 70% from its peak 2007 levels.

Take a look at the high and low-end graphs from July’s Housing Review. High-end volume is way down. To this, Mark adds:

Remember, volume precedes price. Mid-to-high end sellers remain unrealistic about the values of their properties — likely because so many owe so much more than the homes are worth. But those with equity that are ok with the past 20-years of price appreciation or who know that they can steal a home in another area are accepting offers this selling season far below list prices. Others are opting for short-sales to which the banks are warming up. With rates down and prices down finally, two years of pent up demand in the mid-to-high end market is manifesting in more transactions. This is having the effect of pushing up median prices.

I would add to this that there are certainly a large number of would-be buyers (and their agents) who do actually believe that the housing bottom is near. With stocks up, a stories of multiple offers on properties, and a stimulus package about to start stimulating, many are feeling optimistic.

However, with a huge backlog of foreclosures and rapidly-rising unemployment, this will likely prove to be a false-bottom. Fading optimism could lead to a bloody second half of 2009.

Required Reading: Monday, July 6th 2009

2009-07-06T10:01:00.001-07:00

The Great American Bubble Machine – Rolling Stone, Matt Taibbi

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

UBS: ‘The disaster in Spain will continue’ – Credit Writedowns

The (mythical?) housing wealth effect – VOX

Coffee 'may reverse Alzheimer's' – BBC News

Drinking five cups of coffee a day could reverse memory problems seen in Alzheimer's disease, US scientists say.

Ryanair to make passengers stand – The Telegraph

The low-cost airline would charge passengers less on "bar stools" with seat belts around their waists.

US lurching towards 'debt explosion' with long-term interest rates on course to double – The Telegraph

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

California’s Nightmare Will Kill Obamanomics: Kevin Hassett – Bloomberg

The California morass has Democrats in Washington trembling. The reason is simple. If Obama’s health-care plan passes, then we may well end up paying for it with federal slips of paper worth less than California’s. Obama has bet everything on passing health care this year. The publicity surrounding the California debt fiasco almost assures his resounding defeat.

Another wave of foreclosures is poised to strike – The Los Angeles Times

"Absolutely," Chase Bank spokesman Tom Kelly said when asked about an impending surge in foreclosures. Since April 6, Chase has approved modifying 138,000 loans under Obama's program. But an undisclosed number of other Chase borrowers didn't meet modification eligibility, and many of those homeowners face possible foreclosure.

Separate from that group, Kelly said, Chase is proceeding to deal with an additional 80,000 borrowers in default whose foreclosure process had been voluntarily halted by the lender starting late last year.

Court Ruling Clears Path for G.M. to Restructure – The New York Times

Offices: Rising Vacancies, Falling Rents – Calculated Risk

Unemployment Rate and Part Time Employees – Calculated Risk

A Second Stimulus Plan? – Calculated Risk

High-rises on hold: What to do with empty lots? – The San Francisco Chronicle

Lobster Prices And Subprime Lending – Matrix

Basically, lobster prices have maintained a high price level for the past decade until the past year because a large portion of the catch was diverted to processing plants in Canada keeping supply of fresh lobsters restrained. These plants were mainly financed by Icelandic banks, who were ultimately driven under because of the subprime mortgage meltdown and now abundant production of lobsters are driving down the price for us.

Sound familiar?

The unemployment timebomb is quietly ticking – The Telegraph, Ambrose Evans-Pritchard

The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way. The reason why this does not "feel" like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution. Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data). Evictions are running at a terrifying pace.

A Brand-New Arbitrage Market for California's IOUs – Minyanville, Scott Reeves

“If you are receiving a California IOU and need cash immediately, please contact me,” reads a posting on Craigslist. “I may be of assistance.”

Five Things: The Eventual Upside of Risk Aversion – Minyanville, Kevin Depew

Required Reading: Thursday, July 2nd 2009

2009-07-02T07:11:00.000-07:00

Graphs: Auto Sales in June – Calculated Risk

Banks Balk at New Consumer Protection Agency – Minyanville, Andrew Jeffrey

After ignoring repeated warnings about the looming dangers of predatory subprime-mortgage lending, turning a deaf ear to consumer complaints about obscenely high credit-card fees, and generally allowing the financial industry to run amok during decades of wild profiteering and debt-fueled excess, Congress is hastily piecing together a plan to protect consumers from Wall Street.

GM Blames Bankruptcy, Trade-In Programs, Man in the Moon for Latest Miss – Mish

Any substantial increase in auto sales (if and when it comes) will probably be in clearing 2009 models at huge losses, and at the expense of 2010 sales and pricing power. Consumers want bargains, and bargains they will get.

Money Worries Kill A-List Film at Last Minute – The New York Times

In a film production office here, at least a couple of employees were still hanging around on Monday, hoping in vain to score with their troubled baseball movie “Moneyball.”

But they had swung, and missed.

Just days before shooting was to begin, Sony Pictures pulled the plug on “Moneyball,” a major film project starring Brad Pitt and being directed by Steven Soderbergh. The last-minute demise of a prestige picture is a rare spectacle in Hollywood — one that is painful, expensive and damaging to all involved. This one is estimated to have cost Sony $10 million in script development and costs like scouting locations.

Part suppliers fret over NUMMI – The Stockton Record

STOCKTON — General Motors Corp.'s decision to pull out of the New United Motor Manufacturing Inc. partnership not only endangers the employment of 4,600 assembly plant workers in Fremont, but upward of 1,200 jobs at auto parts suppliers in San Joaquin County.

S.F. has recession's 1st distressed office sale – The San Francisco Chronicle

An undisclosed U.S. private equity firm bought the $40.8 million note on 250 Montgomery St. for about half its face value, according to industry sources. The sale was about 60 percent below the previous price if improvements to the building are taken into account.

Bank of the West to move to Bishop Ranch – The San Francisco Chronicle

Bank of the West has inked easily the largest local office deal of the year, signing a lease for 240,000 square feet at Bishop Ranch that allows it to consolidate 1,600 employees now spread among seven East Bay offices.

U.S. raises home refi plan's loan-to-value ceiling to 125% – The Los Angeles Times

The new loan-to-value maximum of 125% means an eligible homeowner with a $375,000 mortgage could refi if his or her house is worth at least $300,000. But the borrower still would have to be able to afford the new loan, and income requirements are an increasing problem as unemployment soars and many workers are forced to take pay cuts.

GM Says Approval of Restructuring Is Urgent – The Washington Post

NEW YORK, July 1 -- General Motors mounted a final push for its historic restructuring plan, arguing before a federal bankruptcy judge Wednesday that the U.S. government would cut off funding -- in effect risking liquidation of the automaker -- unless it won quick approval for the turnaround proposal.

The government has "no intention to further fund this company if the sale order is not entered by July 10," said Harry Wilson, a member of the Obama administration's auto task force who oversaw the government's day-to-day dealings with GM.

California: The haves and have-nots – Felix Salmon

Deutsche Bank Sacramento Resale Market Analysis – Sacramento Real Estate Statistics

Obama sends his consumer protection plan to Congress – The Sacramento Bee

WASHINGTON – The Obama administration sent Congress a detailed plan Tuesday to create one of the most ambitious parts of the president's proposed overhaul of financial regulation, a consumer financial protection agency.

The proposal would gather consumer protection powers spread among many bank regulators and place them under a single roof.

For ordinary Americans, the most important feature is that the agency would have the sole mission of consumer protection. One lesson of the financial crisis is that the several agencies that shared that responsibility made it a lower priority than their other missions.

East Bay Housing Review July 2009

2009-07-01T13:03:00.001-07:00

Trends from the last few months continue to accelerate. Many of the escrows that closed in June were able to take advantage of sub-5% mortgage rates. This is the time of the year when home sales peak. This, coinciding with reduced inventory, has lead to a strengthening of prices.

Expect this trend to continue through the end of July, before seasonal sales volume declines in the face of rising distressed inventory this fall.

Here is a graph showing Inventory, REO, and Sales levels for the East Bay:

Here is a graph showing the same data from a sample of higher-priced communities:

Here is a graph showing the same data from a sample of lower-priced communities:

As you can see, the tale of two market continues. REOs for sale increased in some of the lower-priced communities, though, overall, the numbers continued to fall from previous months.

Here are the stats showing inventory levels from all communities:

7/1/2009	MLS Active	MLS Sold Last Month	Months Inventory
Alameda County	2881	1141	2.52
Contra Costa County	3294	1261	2.61
Alamo	132	11	12.00
Antioch	262	171	1.53
Berkeley	88	47	1.87
Blackhawk	76	6	12.67
Brentwood	196	73	2.68
Castro Valley	111	30	3.70
Clayton	51	14	3.64
Concord	220	117	1.88
Danville	227	51	4.45
Diablo	19	1	19.00
Discovery Bay	67	37	1.81
Dublin	93	46	2.02
El Cerrito	28	16	1.75
El Sobrante	31	12	2.58
Emeryville	52	8	6.50
Fremont	361	142	2.54
Hayward	343	150	2.29
Hercules	67	34	1.97
Lafayette	113	19	5.95
Livermore	205	82	2.50
Martinez	129	45	2.87
Moraga	58	11	5.27
Newark	70	31	2.26
Oakland	868	312	2.78
Oakley	148	49	3.02
Orinda	83	17	4.88
Piedmont	22	13	1.69
Pinole	33	14	2.36
Pittsburg	171	109	1.57
Pleasant Hill	69	20	3.45
Pleasanton	232	74	3.14
Richmond	294	142	2.07
Rodeo	14	10	1.40
Rossmoor	174	21	8.29
San Leandro	146	78	1.87
San Pablo	78	60	1.30
San Ramon	198	90	2.20
Union City	91	62	1.47
Walnut Creek	246	58	4.24

Here are the REO and Short Sale stats from all communities:

7/1/2009	MLS Active	SHORT SALE	REO	% Distressed
Alameda County	2881	834	444	44.36%
Contra Costa County	3294	984	532	46.02%
Alamo	132	10	4	10.61%
Antioch	262	136	79	82.06%
Berkeley	88	5	7	13.64%
Blackhawk	76	6	0	7.89%
Brentwood	196	87	39	64.29%
Castro Valley	111	16	10	23.42%
Clayton	51	12	2	27.45%
Concord	220	94	56	68.18%
Danville	227	29	5	14.98%
Diablo	19	0	0	0.00%
Discovery Bay	67	27	10	55.22%
Dublin	93	23	8	33.33%
El Cerrito	28	6	2	28.57%
El Sobrante	31	13	3	51.61%
Emeryville	52	11	5	30.77%
Fremont	361	76	25	27.98%
Hayward	343	187	75	76.38%
Hercules	67	39	20	88.06%
Lafayette	113	9	6	13.27%
Livermore	205	64	30	45.85%
Martinez	129	28	20	37.21%
Moraga	58	5	1	10.34%
Newark	70	38	13	72.86%
Oakland	868	242	205	51.50%
Oakley	148	61	50	75.00%
Orinda	83	5	2	8.43%
Piedmont	22	0	0	0.00%
Pinole	33	15	10	75.76%
Pittsburg	171	92	48	81.87%
Pleasant Hill	69	18	5	33.33%
Pleasanton	232	29	5	14.66%
Richmond	294	125	80	69.73%
Rodeo	14	9	3	85.71%
Rossmoor	174	2	2	2.30%
San Leandro	146	67	25	63.01%
San Pablo	78	33	26	75.64%
San Ramon	198	56	13	34.85%
Union City	91	48	18	72.53%
Walnut Creek	246	34	12	18.70%

Spreading Rumors: Another 90-Day Foreclosure Moratorium

2009-07-01T10:41:00.001-07:00

From the mouth of an REO asset manager at one of our biggest banks, the White House has requested that banks continue to delay foreclosures for another 90 days.

Timing would put this unofficial moratorium ending around the middle of September perhaps. If, of course it isn’t extended again.

I don’t know if this is true or not, because I can’t confirm it. I can say that most of the REO departments and servicers aren’t all that busy. And, they certainly should have been after the last official Fannie/Freddie moratorium ended March 1st.

Obama to Offer 125% Loan-to-Value Home Loans

2009-07-01T10:35:00.001-07:00

Clusterstock is reporting Obama Offers Bailout To Homeowners Deep Underwater

Obama is expanding the homeowner bailout so that underwater homeowners with a 125% LTV ratio can refi more easily through Fannie and Freddie.

Before your LTV ratio could only be 105%, because, well, as we've learned, fat loans relative to value are more likely to go bad.

As many have described it, Obama's solution to the housing crisis is: more subprime loans.

Like the original subprime loans, they're really only going to work out if home prices grow rapidly over the next few years, otherwise you're looking at the perpetuation of people living underwater in their homes.

California To Issue IOUs

2009-07-01T09:52:00.001-07:00

The Sacramento Bee Reports Governor, lawmakers blow deadline as budget hole deepens

By allowing the fiscal year to end without trimming $3.3 billion from the 2008-09 education budget, lawmakers and Schwarzenegger lost the chance to cut spending in a manner considered crucial to bridging the $24 billion deficit.

Instead, Senate Republicans, Democrats and the GOP governor remained in a political standoff over other parts of the budget, particularly how much to slash health and welfare programs.

Without the education cut, state leaders face a more difficult challenge because they must find billions in new solutions after virtually exhausting their bag of budget tricks over the past year.

Tuesday's failure to cut education spending and shift redevelopment funds expanded the deficit overnight because of the way school funding formulas are calculated.

Schwarzenegger plans to declare a new state of fiscal emergency today, launch another special session and propose additional program cuts to solve the larger deficit problem, spokesman Aaron McLear said. The new deficit number will be roughly $26.3 billion, about $2 billion higher than the governor's May budget, according to Schwarzenegger's Department of Finance.

…

Absent a significant budget deal today, state Controller John Chiang has warned he must take the next step of issuing IOUs on Thursday to vendors who do business with the state, local governments and people who are owed tax refunds. Chiang said IOUs are necessary to preserve enough cash to meet constitutionally mandated obligations to schools and state bondholders in July.

"That's as good as money sir. Those are I.O.U.s" – Lloyd Christmas

Andrew Jeffrey writes for Minyanville California Finally Runs Out of Cash

Lawmakers appear blindsided. It's almost like the state went broke all of a sudden and they haven't had time to properly prepare a solution. Not true: The state has been in and out of financial crisis for more than a decade.

…

California politicians are a woeful bunch. Despite being home to some of the most profitable and innovative companies in the world, the state is perennially short of cash. Oracle (ORCL), Google (GOOG), and Genentech (DNA) all hail from the San Francisco Bay Area, while San Diego remains a mecca for biotechnology research and is home to mobile-communications giant Qualcomm (QCOM).

The state has vast natural-resource reserves, has a booming agricultural industry, is a popular tourist destination, and has some of the most heavily trafficked ports in the world. Good weather and generally high quality of life has made California the destination for dream-seekers for more than 150 years.

Yet, despite everything it has going for it, California's political process is a complete disaster. In an attempt to allow voters to play a more direct role in governance, the state's referendum system allows citizens to collect signatures and get measures onto statewide ballots. Enough votes on election day and any Californian can see his or her whimsical dream become law.

This has created a patchwork of legislation, rules, and special interests that have hogtied what would be the seventh-largest economy, were it to be a sovereign nation.

Minyan Peter adds: “I don't profess to know how this one will resolve itself. As an interim step, California has announced that it will be meeting its obligations using script -- IOUs. I don't know how long employees and vendors are willing to work for nothing more than a promise. But I do know that it's entirely unsustainable.”

Mish has long-offered: How To Balance The California Budget - You Decide

Clusterstock begs: “Please, please, please let there be an after-market in these IOUs. We'd love to see how they're valued and how businesses will conduct exchange using them.”

What would a $100 IOU from the State of California trade for on the open market? $50? $25?

NAR: Pending Home Sales Index Rises

2009-07-01T09:06:00.001-07:00

From The National Association of Realtors Pending Home Sales Record Fourth Straight Monthly Gain

Washington, July 01, 2009

Pending home sales show a sustained uptrend, rising for four consecutive months with very favorable housing affordability and a first-time buyer tax credit boosting activity, according to the National Association of Realtors®.

The Pending Home Sales Index,¹ a forward-looking indicator based on contracts signed in May, increased 0.1 percent to 90.7 from an upwardly revised reading of 90.6 in April, and is 6.7 percent higher than May 2008 when it was 85.0. The last time there were four consecutive monthly gains was in October 2004.

Lawrence Yun, NAR chief economist, cautions that there could be delays in the number of contracts that go to closing. “Closed existing-home sales have improved but are coming in lower than expected because some contracts are delayed or falling through from the application of new appraisal rules for many transactions,” he said. “Rises in contract activity show buyers are becoming more active even as they face much more stringent loan underwriting standards. Speedy clarification of the appraisal rules could smooth a housing market recovery and support the overall economy.”

The Pending Home Sales Index in the Northeast rose 3.1 percent to 80.9 in May and is 6.8 percent above a year ago. In the Midwest the index slipped 1.3 percent to 89.2 but is 11.4 percent above May 2008. The index in the South declined 1.7 percent to 92.6 in May but is 7.9 percent higher than a year ago. In the West the index rose 2.2 percent to 96.9 and is 0.7 percent above May 2008.

…

The first-time buyer tax credit also is benefiting the market. “Strong activity by entry level buyers is helping to absorb inventory and allow some existing owners to make a trade,” Yun said.

Existing-home sales should trend up through the end of the year, with normal local market differences. “The big question is how much the appraisal issue will impact the ability of contracts to go to closing,” Yun said. “We are currently conducting a study to assess the degree to which new appraisal rules are impacting home sales.”

NAR is on a PR mission to discredit the new appraisal rules. It’s true that the new rules aren’t perfect…in fact it’s a huge mess…but there are other problems out there that are having a bigger impact (like jobs, and the fact that homes are still not affordable).

Required Reading: Wednesday, July 1st 2009

2009-07-01T08:54:00.001-07:00

Cramer: The Housing Market Bottoms TODAY – Clusterstock (Time to BUY! BUY! BUY!)

S.F. Fed chief Yellen tells inflationistas to pipe down – Naked Capitalism

Bank Woes Deepening in Europe – The New York Times

Few people outside Belgium have ever heard of KBC Bank. But the travails of this lender, based in Brussels, highlight the broader challenges Europe is facing by not having more fully confronted the deteriorating health of its financial institutions.

Since October, KBC Bank has had to seek government relief three times. In all, it has received $41.5 billion in financing and guarantees to recover from disastrous mortgage bets that its financial engineers and traders made when times were good. For a bank with a balance sheet of just $425 billion, it is an astounding sum, exceeding the bailout of the Royal Bank of Scotland.

Sterling Crisis Looms as U.K. Unraveling Points to Budget Cuts – Bloomberg

June 30 (Bloomberg) -- The state of the U.K. economy fills British financial historian Niall Ferguson with foreboding.

“The probability of a real sterling crisis is around one in three, and the probability of major tax hikes and cuts in public spending is roughly one in one,” the Harvard University professor says.

Ferguson’s concern stems from the deterioration in the U.K.’s public finances, which prompted Standard & Poor’s to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britain’s banks at 100 billion pounds ($166 billion) to 145 billion pounds and said government debts could double to almost 100 percent of gross domestic product by 2013.

"Suck on Our Yachts": Goldman Sachs Issues Non-Apology for Destroying the World Economy – Matt Taibbi

Goldman Sachs chief Lloyd Blankfein says he's sorry, then proceeds to brag about screwing us all.

Anyone else out there find himself doubled over laughing after reading Goldman, Sachs chief Lloyd Blankfein's "apology" for his bank's behavior leading up to the financial crisis? Has an act of contrition ever in history been more worthless and insincere? Even Gary Ridgway did a better job of sounding genuinely sorry at his sentencing hearing -- and he was a guy who had sex with dead prostitutes because it was cheaper than paying live ones.

Looking at Blankfein's one-sentence apology, I'm struck in particular by a couple of phrases:

While we regret that we participated in the market euphoria...

Really, Lloyd? You "participated" in the market euphoria? You didn't, I don't know, cause the market euphoria?

Home Loan Delinquencies Double on Prime Loans; Foreclosure Filings Top 300,000 3rd Straight Month – Mish

This is a damning report on the success (or lack thereof) of the mortgage foreclosure workout programs to date. Redefault rates are near 50% after Fannie/Freddie loan modifications. Of course Fannie and Freddie can grant bigger loan mods (and probably will), but taxpayers will have to eat the cost.

Private loan mods are redefaulting at a stunning 58.1% rate 12 months after modification. Can those people redeafulting can afford ANY payment? Even if they can, the incentives to walk away are enormous.

Certainly those out of a job are unlikely to be able to afford any payment, and the unemployment rate is soaring.

…

Moreover note that 67% of loans are "Prime Loans". Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008 according to the report.

Total Servicing is $6 Trillion. $4 Trillion of that is "prime". 2.9% of that is 60 days late or worse. 2.9% of $4 Trillion is $116 billion. And that ignores the problem in Alt-A and Pay Option ARMs.

Government Excited That People Are Willing To Get Paid To Buy A New Car – Clusterstock

Dennis Kneale Flips Out, Calls Bloggers "Dickweeds" – Clusterstock

Unemployment Forecast: Too Much "Hope" – Calculated Risk

June Economic Summary in Graphs – Calculated Risk

Five Things: Five Themes for 2009 Midyear Scorecard – Minyanville, Kevin Depew

Is it time for underwater homeowners to be given a get-out-of-debt-free card? – The Los Angeles Times

Government and private-lender attempts to stem the home foreclosure crisis so far have mostly focused on loan modifications or refinancing -- giving borrowers a temporary or permanent reduction in their monthly payments.

But some housing experts say the next wave of help will have to address the core problem for many homeowners: negative equity.

One graph to rule them all … – Brad Setser

More landlords take renters with bad credit – On The Block, The San Francisco Chronicle

Just for kicks, we looked on Craigslist, where there were a surprising number of bad credit apartments listed (somewhere between 50 and 70). One property manager in San Jose, for example, not only advertises "BAD CREDIT OK," but he/she also promises a "MOVE-IN BONUS." Similarly, the landlord of a three-bedroom house in Pittsburg says "Bad credit OK with good references."

Case-Shiller Update with April 2009 Data

2009-07-01T08:14:00.001-07:00

From Standard & Poors The Pace of Home Price Declines Moderate in April According to the S&P/Case-Shiller Home Price Indices

…“The pace of decline in residential real estate slowed in April,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “In addition to the 10-City and 20-City Composites, 13 of the 20 metro areas also saw improvement in their annual return compared to that of March. Furthermore, every metro area, except for Charlotte, recorded an improvement in monthly returns over March. While one month’s data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions. We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.

“The stock market bottomed in March and measures of consumer confidence have turned upward. This report shows that these better spirits are also appearing in the housing market” Mr. Blitzer commented.

Sounds like it’s all peaches and sunshine from here…

The San Francisco Area Home Price Index actually rose from 117.74 in March to 118.46 in April. Joining San Francisco with small increases were Denver, Washington DC, Atlanta, Dallas, and Seattle. Time will tell if this is a real bottom forming or simply the false bottom we’ve been talking about.

Barry Ritholtz comments at The Big Picture Case Shiller Index Falls 18%

Don’t break out the champagne, just yet.

The reduced collapse speed (another one of those famed 2nd derivatives) is primarily a function of foreclosure moratoriums. The overall trend in housing remains weak, with soft demand, excess inventory and heavily indebted consumer unlikely to effect a V-recovery.

That is before we consider the ongoing NFP job losses, which have been contributing to additional foreclosures.

And once the various government stimuli gets withdrawn — very low rates, $8,000 first-time home buyer tax credit — we can expect even these weak reports to turn south.

In a separate post, he shows an the classic Case-Shiller chart updated with projections:

No over-correction?

Required Reading: Tuesday, June 30th 2009

2009-06-30T12:47:00.001-07:00

Consumer confidence falls in June – The Associated Press

GM plans to quit Nummi plant – The San Francisco Chronicle

Bruce Kern, executive director of the East Bay Economic Development Alliance, said that in addition to its direct employees, Nummi indirectly supports 35,000 jobs with a network of transportation, warehousing and parts suppliers.

"It may take some time before the future of Nummi is determined," said Lance Tomasu, a spokesman for the Fremont management team that runs the factory and answers to both GM and Toyota.

The Suspicious Science Behind Man-Made Global Warming – Minyanville, James Anderson

If your neighbor told you he were getting a tent for his daughter’s wedding reception 2 weeks from now, and you told him not to bother, because a computer model predicted sunny weather, do you think he'd take you seriously?

Pushing on a string – MarketWatch

UK First Quarter GDP Drops 2.4%, Most Since 1958; US GDP Fell 5.5% – Mish

Chicken Farmers Have Hearts Plucked Out – Mish

Next Segment Of The Housing Market To Crash: $1+ Million McMansions – Clusterstock, Henry Blodget

Even after a 30% fall from the peak, house prices are still too high. Meanwhile, millions of homeowners are losing their jobs, consumers are still saddled with truckloads of debt, banks are still tightening credit, foreclosures and delinquencies are still soaring, mortgage-mods are a failure, there are still too many houses on the market, wages are declining, taxes are likely to go up, and the economy is likely to struggle for years.

In short, it's likely that house prices will now crash below fair value and remain below it for years. So McMansion owners sniffing at current prices and planning to "wait until the market comes back" will likely be waiting a lot longer than they think.

House Prices: The Long Tail – Calculated Risk

Freddie Mac June Investor Presentation – Calculated Risk

Jim the Realtor: More Shadows

2009-06-29T12:53:00.001-07:00

Latest Video From Jim the Realtor: More Shadow Inventory

Required Reading: Friday, June 26th 2009

2009-06-26T09:51:00.001-07:00

CRE: Office Building sold in Denver – Calculated Risk

This is an interesting transaction for several reasons:

The seller was J.P. Morgan. Need cash?

The cap rate is rumored to be in the 8.5% to 9% range.

It was an all cash deal (no financing) by a CRE REIT that stayed on the sidelines during the insanity.

The purchase price is said to be below replacement cost.

Sheila Bair Can't Sell Her House – Clusterstock

Today's Awful Income News – Clusterstock

…Just as we can't believe the financial markets, since the Fed has created so much liquidity, we're at the point where it's hard to believe the real economy, because so much of it is based on transfer payments and government spending obscuring what the private sector is able to do on its own.

Hummer: Too dirty even for the Chinese – Felix Salmon

Projected new-car sales fall 25% since last year – Sacramento Bee

New-car sales in June nationwide will be down 25.3 percent compared with June a year ago, according to Edmunds.com, the Santa Monica-based auto site.

Falloff in Port of Oakland container traffic could impact region's economy in many ways – The Contra Costa Times

During the first five months of 2009, compared with the same January-through-May period of 2008, container traffic fell 13.8 percent at the Port of Oakland.

"That is a significant decline," said Robert Bernardo, a port spokesman.

US Savings Rate Hits 6.9%, Highest In 15 Years – Mish

Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" – Mish

…The Fed is largely to blame for the housing/credit bubble by holding interest rates too low, too long. The way to control risk is to get rid of the Fed and its micro-mismanagement of interest rates, not to extend the Fed's power.

Song Parody: “Where Credit is Due”

2009-06-26T09:38:00.001-07:00

Required Reading: Thursday, June 25th 2009

2009-06-25T09:39:00.001-07:00

Appraisals – Calculated Risk

Much is being written about the complaints of the NAR (Realtors) and the NAHB (Builders) concerning the Home Valuation Code of Conduct. And the response from the Appraisal Institute….

Report: Record Credit Card Charge-offs – Calculated Risk

Not Paying the Mortgage, Yet Stuck With the Keys – The Washington Post

Foreclosure Backlog Imperils Recovery

A growing number of American homeowners are falling into financial limbo: They're badly behind on payments, but their banks have not yet foreclosed.

The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation's housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown…

California: 8 Days Away From Issuing IOUs – Clusterstock

Well, it doesn't look as though a bailout for California is forthcoming, at least not in the next week, so California will have to go it alone and deal with its own mess.

The first step:

Issuing IOUs.

Long Term Buy And Hold Is Still Bad Advice – Mish

In spite of what you hear from main stream media and self-serving advice from Wall Street, an investment philosophy of long term buy and hold is not what it's cracked up to be.
Unfortunately, many boomers headed into retirement are finding that out now, at the worst possible time. Moreover, looking ahead, I doubt the next decade is not going to be much better than the last.

JPMorgan Charges 5% on Credit-Card Balance Transfers – MIsh

The days of routinely using one credit card to pay off a balance on another have come to a close. JPMorgan is leading the way with the highest transfer fees of any of the major card companies.

Obama To Hold Job Performance Review With Every American Worker – The Onion

Obama To Hold Job Performance Review With Every American Worker

WSJ Real Time Economics: Housing Bubble and Consumer Spending – Calculated Risk

Initial Unemployment Claims Increase – Calculated Risk

Bernanke says he didn't bully BofA to buy Merrill – The Associated Press

Federal Reserve Chairman Ben Bernanke told Congress today he didn't pressure Bank of America into acquiring Merrill Lynch in a deal that ultimately cost taxpayers $20 billion.

Bernanke told a House committee investigating the matter that he did not threaten action against Bank of America's CEO Kenneth Lewis or the bank's board members if they decided to abandon the takeover.

California forecast sees 200,000 more lost jobs – The Sacramento Bee

California, which has lost 800,000 jobs in this recession, will lose 200,000 more before it ends late this year, University of the Pacific forecasters said Wednesday in Stockton.

The university’s Business Forecasting Center predicted California unemployment will peak at 12.3 percent in early 2010 and remain in double digits through the end of 2011.

Officials singled out the Central Valley for an especially hard knock from tax hikes and massive expected state and local government budget cuts.

"The state budget crisis is a dangerous aftershock to a region still reeling from the foreclosure earthquake," said forecasting center director Jeff Michael.

Warren Buffett to CNBC: U.S. Economy In "Shambles" .. No Signs of Recovery Yet – CNBC

Financial Crisis: The Complete Timeline – Clusterstock

Bernanke Was Right To Threaten Ken Lewis, Here's Why – Clusterstock

The thing is, there's no other threat to be made. They can't credibly claim they're going to deny BofA an 11th hour, Sunday-evening bailout, if they need one, since Bank of America is too big to fail. The only credible threat is that they'll sack management, and they hope that management has enough skin in the game such that they care.

The problem comes back to banks being of such a size that they're too big to fail. When they get that large, there's just no way to credibly deny them a bailout. Even if Ken Lewis wanted to play total tough guy and go down with the boat, the Fed would've been forced to intervene.

Dr. Seuss On The Economy – Mish

As amazing as this might seem, inquiring minds are reading Thidwick The Big Hearted Moose to see what advice Dr. Seuss might have for President Obama, Treasury Secretary Geithner, and Congress about the economy.

Three Real Risks to the Future of the Banks – MInyanville, Minyan Peter

While I expect many analysts will offer that the second quarter is just the beginning of the earnings recovery for banks and brokerages, let me offer 3 counter-risks:…

To Bernanke or Not to Bernanke – Minyanville, Andrew Jeffrey

…Ultimately, President Obama must decide not just whether Bernanke is the right man for the job, but whether replacing him is worth the economic -- not to mention political -- cost. According to Bloomberg, the last 4 US presidents all retained the Fed chairmen from their first terms through their second. Bernanke's 2 most likely replacements, should he not be reappointed (current White House economic advisor Larry Summers and San Francisco Federal Reserve Bank president Janet Yellen) are undoubtedly well aware of this disheartening fact.

The end of Bernanke's term might seem like it's just around the corner. But if we've learned anything from this crisis, it's that 6 months is more than enough time for the world to change in a big way.

Required Reading: Wednesday, June 24th 2009

2009-06-24T08:59:00.001-07:00

Five Things: We Have the Means; the Motive Is Missing – Minyanville, Kevin Depew

Going back to 1934, whenever the Federal Reserve has made credit available the world has accepted it. While it is true, as those anticipating hyperinflation argue, the Fed and global central banks are making record amounts of credit available, that is only one side of the credit equation...

First American CoreLogic: Housing Prices Off 10.2% – HousingWire

Housing prices across the nation on average lost a little more than 10% in April when compared to prices one year earlier, according to research from First American CoreLogic, which also said its LoanPerformance Home Price Index saw the pace of price declines slow to their lowest levels this year. Home price declines have been abating throughout the year, peaking at -11.9% during January 2009, according to the firm — the 10.2% decline posted in April represents the smallest year-over-year decline recorded this year thus far.

New Home Sales: Record Low for May – Calculated Risk

Retirees Kidnap And Torture Financial Advisor Who Lost Them Money – Clusterstock

CHART OF THE DAY: You Call This A Housing Rebound? – Clusterstock

Housing, unemployment woes leave movers shaken – The San Francisco Chronicle

Sinking home prices and a weak job market have forced normally restless Americans to stay put in an uncharacteristic shift that has, among other things, clobbered the moving industry.

"Property values have dropped so much, people can't pick up and move the way they used to," said Michael Hicks, a demographer at Ball State University in Indiana who has tracked the nationwide slowdown using data from several sources, including moving companies.

That industry data mirrors a Census Bureau report that looked at moves in 2008, said William Frey, a demographer at the Brookings Institution in Washington, D.C.

"The annual migration rate has gone way down to historic low levels," Frey said. "This includes long-distance moves and moving across town."

During the 1950s and 1960s, Frey said, as many as 20 percent of Americans moved in any given year. Mobility rates slowed to 15 percent to 16 percent during the 1990s. But in 2008, only 11.9 percent of Americans moved, he said.

Desperate Maine lobstermen cut out dealers – The Associated Press

Lobsterman Greg Turner keeps a sandwich-board sign at the end of his driveway that advertises fresh lobster for sale from his garage, an attempt to claw for a few extra dollars by reaching buyers directly.

With prices stuck on low and expected to fall further this summer, he's skirting the traditional sales route by cutting out the dealers who usually sell lobster catches to retailers, restaurants, processors and other buyers.

Prices for lobster plunged last year to levels not seen in 20 years, leading Turner and a growing number of other lobstermen to sell from the backs of pickup trucks, from garages, and even on Craigslist. By going directly to consumers, lobstermen say they can make roughly $1 more per pound than what they get from lobster dealers.

"No one wants to do it," said Turner, a longtime fisherman whose garage is a bare-bones retail operation with cold-water holding tanks, a scale and a cash register. "If the price hadn't gone into the toilet, I wouldn't have done this in the first place."

Walnut Creek realty heating up – The Contra Costa Times

Commercial realty investors — with the most recent deal coming a few days ago — have snapped up choice sites in downtown Walnut Creek. Yul Kwon, who won "Survivor: Cook Islands," this month opened a Red Mango frozen yogurt store in the city's urban core.

"Downtown Walnut Creek is one of the best retail locations in the entire Bay Area," Kwon said. "Opening a store in this economy is a frightening proposition. This recession has been hard for everyone. But downtown Walnut Creek is poised to grow when the economy rebounds."

Property investors who recently bought an array of downtown parcels also exude confidence about the region's future. But they also see an opportunity to buy promising properties on the heels of a softening of prices for commercial properties downtown.

Market watchers believe prices are down 10 percent — maybe even more — for some retail and office parcels. At the height of the market a few years ago, some downtown retail buildings sold for $500 a square foot. Some of the recent sales are more in the $400-a-square-foot range.

10-year look ahead in housing – The Contra Costa Times

There are plenty of Web sites out there that will tell you how much a home is worth right now. But now a Pleasanton-based company has launched www.smartzip.com, a free Web site designed to help investors and everyday home buyers assess the future value of homes for sale in California and Florida, two areas of the country hit hardest by the foreclosure crisis.

Millionaires' Club Shrank at Record Rate in 2008, Merrill Says – Bloomberg News

Seasonal Homes Sales Trend – The Big Picture

$800 a month in rent, or $800k to own! - Burbed

Real City of Genius: Case Study of the Middle Priced Los Angeles Housing Market. Pasadena in Focus. The Alt-A Mortgage Debacle Gearing Up. – Dr. Housing Bubble

Mortgage Bankers Slash 2009 Forecasts – Realty Check with Diana Olick

Today the Mortgage Bankers Association put out a revision in its 2009 originations forecast. A big revision. A $700 billion revision. “$84 billion of the drop is due to lower purchase originations and the rest is due to lower rate/term refinances and very low volumes in the Fannie Mae and Freddie Mac Home Affordable Refinance Program (HARP).” That’s big too.

NAR: Home Sales Continue To Rise

2009-06-23T09:06:00.001-07:00

The National Association of Realtors reports May Existing-Home Sales Continue Rising Trend

Washington, June 23, 2009

Sales of existing homes showed another gain in May, benefiting from favorable affordability conditions and a first-time buyer tax credit, according to the National Association of Realtors®. May’s increase was the first back-to-back monthly gain since September 2005.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate¹ of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.

Lawrence Yun, NAR chief economist, expected an improvement. “Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates,” he said. “First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage edged up to 4.86 percent in May from a record low 4.81 percent in April; the rate was 6.04 percent in May 2008. Last week, Freddie Mac reported the 30-year fixed at 5.38 percent; data collection began in 1971.

Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply² at the current sales pace, down from a 10.1-month supply in April.

Yun said the appraisal problem is serious. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

An NAR practitioner survey in May showed first-time buyers accounted for 29 percent of transactions, and that the number of buyers looking at homes is nearly 10 percentage points higher than a year ago. “This is the time of year when we see large increases in the number of repeat buyers, who are benefitting from sales to entry-level buyers,” Yun said. “Investors appear less active, but are more prevalent in areas with large price corrections.”

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said appraisals and the tax credit are key issues. “To maximize the potential for a housing recovery and subsequent economic recovery, we need realistic appraisals that are based on proper comparisons and done by a local specialist,” he said. “In addition, the first-time buyer tax credit should be expanded to all buyers of primary homes regardless of income. Extending the credit into 2010 would allow more time for the market to catch up with underlying demand, in part because many families with children, who normally time their purchase based on school year considerations, do not have enough time to move before the start of school in late August.

“Freeing a pent-up demand in housing will absorb inventory at a faster pace, strengthen communities and stabilize home prices earlier,” McMillan said.

The national median existing-home price³ for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.

“The decline in the distressed sales share likely results from an increase of repeat buyers in May,” Yun said. “First-time buyers are concentrated in the lower price ranges, which include most of the distressed sales.”

Single-family home sales rose 1.9 percent to a seasonally adjusted annual rate of 4.25 million in May from a pace of 4.17 million in April, but are 3.0 percent below the 4.38 million-unit level in May 2008. The median existing single-family home price was $172,900 in May, down 16.1 percent from a year ago.

Existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 units in May from 490,000 in April, but are 8.9 percent below the 571,000-unit level in May 2008. The median existing condo price⁴ was $173,800 in May, down 21.9 percent from a year earlier.

Regionally, existing-home sales in the Northeast rose 3.9 percent to an annual level of 800,000 in May, but are 10.1 percent below a year ago. The median price in the Northeast was $243,600, which is 12.5 percent below May 2008.

Existing-home sales in the Midwest jumped 9.0 percent in May to a pace of 1.09 million but are 4.4 percent below May 2008. The median price in the Midwest was $145,800, which is 10.4 percent lower than a year ago.

In the South, existing-home sales were unchanged at an annual pace of 1.74 million in May but are 8.9 percent below a year ago. The median price in the South was $157,400, down 9.9 percent from May 2008.

Existing-home sales in the West slipped 0.9 percent to an annual rate of 1.14 million in May, but are 11.8 percent higher than May 2008. The median price in the West was $197,700, down 30.6 percent from a year ago.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Ever since the implementation of the Home Valuation Code of Conduct, the National Association of Realtors has been campaigning to get it repealed…and rightly so.

It’s not often that I agree with NAR, but in this case, they are correct in their opposition. The result of the HVCC is that banks are using appraisers with less local knowledge. And now, when the appraiser makes a mistake or even if they have a simple questions, the mortgage broker and real estate agents involved cannot help them. The HVCC is doing more harm than good.

Calculated Risk has a series of excellent charts showing existing home sales…check them out.

Required Reading: Tuesday, June 23rd 2009

2009-06-23T08:55:00.001-07:00

Five Things: Jobless Turn In, Tune Out, and Drop Off as Benefits Expire – Minyanville, Kevin Depew

Last Thursday the Labor Department reported continuing claims for unemployment fell by 148,000 to 6.69 million, yet another "green shoot" for the "economy is bottoming" crowd. This was the first decline in continuing claims since early January, breaking a string of 21 consecutive increases, the final 19 of which were records. But let's look a little closer at the numbers.

Even though there was a small jump in initial applications for unemployment insurance, the decline in continuing claims was largely due to benefits exhaustion. Unemployment benefits are provided for 26 weeks, after which those claimants are dropped from the rolls. According to the New York Times, the number of recipients whose claims were exhausted was about 36% in 2007, but at the end of last month that number had risen to nearly 50%.

The bottom line is that people are not dropping off the benefits list because of new jobs, but because they are exhausting their eligibility to receive them.

Continuing Claims “Exhaustion Rate” – The Big Picture

Last week, we saw Continuing Claims decrease — proof, said the green shooters, of the imminent economic recovery.

Only, not so much:

Those of you (who can still afford the luxury of) a trusty Bloomberg will note the ‘exhaustion rate’ for jobless benefits - EXHTRATE – reveals that people are not leaving the pool of continuing unemployment claims because they are getting new jobs; Rather, they are leaving because they have exhausted their benefits.

They are now unemployed AND broke. That is hardly a green shoot . . .

TV show helps Utah boy survive night solo in woods – The Associated Press

SALT LAKE CITY – When he realized he'd been separated from his family on a weekend hike in a northern Utah forest, 9-year-old Grayson Wynne's thoughts turned to television.

Grayson watches "Man vs. Wild" on the Discovery Channel every week with his brothers and his dad. On the show, host and adventurer Bear Grylls strands himself in the wilderness and then shows viewers how to survive the sticky situations.

That's where Grayson says he learned to leave clues behind to help searchers find him.

The Big Inflationist Scare – Mish

Congress Still Working Against Housing Recovery – Minyanville, Andrew Jeffrey

Which way to Bay? Baby sea lion rescued on freeway – The Associated Press

A baby sea lion was rescued early Monday after wandering onto a busy San Francisco Bay area freeway.

Drivers on Interstate 880 started calling authorities around 5:45 a.m. to report the animal "walking" in the center divider near the Oakland Coliseum, said Peter Van Eckhardt, an officer with the California Highway Patrol.

He said the sea lion likely made it onto land from a nearby San Francisco Bay estuary and crossed the roadway in the middle of the night.

Adjustable rate mortgages threaten housing rebound – The Contra Costa Times

More Bay Area car dealers closing shop – The Contra Costa Times

Two more Bay Area auto dealerships, Dodge stores both headed by Glen Hartzheim, have closed their doors — at least temporarily.

In contrast, Hartzheim Dodge in Hayward was manned only by a security guard in the early afternoon on Monday.

Startup's prefab homes aim for zero energy bills – The San Francisco Chronicle

Zeta Communities, which is headquartered in South of Market and owns a manufacturing plant in San Leandro, is close to completing its first "zero energy" townhome in Oakland and is working with a developer on a proposed 30-unit studio apartment building in Berkeley.

The firm plans to build segments of housing units indoors and ship them to development sites for assembly.

Energy-saving features include extra-thick windows, dense insulation, efficient appliances and a monitoring system that manages temperature and ventilation and tracks electricity use. Warmth in the house is used to heat incoming air, and recovered hot wastewater helps warm shower and sink water. Solar panels generate new energy.

Obama Drastically Scales Back Goals For American After Visiting Denny’s – The Onion

Obama Drastically Scales Back Goals For America After Visiting Denny's

Curtain Rods

2009-06-22T11:16:00.001-07:00

If you’re in the mood for a feel-good story…

She spent the first day packing her belongings into boxes, crates and suitcases.

On the second day, she had the movers come and collect her things.

On the third day, she sat down for the last time at 'their' beautiful dining room table by candle-light, put on some soft background music, and feasted on a pound of shrimp, a jar of caviar, and a bottle of spring-water.

When she had finished, she went into each and every room and deposited a few half-eaten shrimp shells dipped in caviar into the hollow of the curtain rods.

She then cleaned up the kitchen and left. When the husband returned with his new girlfriend, all was bliss for the first few days. Then slowly, the house began to smell.

They tried everything; cleaning, mopping and airing the place out..

Vents were checked for dead rodents and carpets were steam cleaned. Air fresheners were hung everywhere. Exterminators were brought in to set off gas canisters, during which they had to move out for a few days and in the end they even paid to replace the expensive wool carpeting.

Nothing worked!!!

People stopped coming over to visit. Repairmen refused to work in the house. The maid quit. Finally, they could not take the stench any longer and decided to move.

A month later, even though they had cut their price in half, they could not find a buyer for their stinky house.

Word got out and eventually even the local realtors refused to return their calls.

Finally, they had to borrow a huge sum of money from the bank to purchase a new place..

The ex-wife called the man and asked how things were going.

He told her the saga of the rotting house. She listened politely and said that she missed her old home terribly and would be willing to reduce her divorce settlement in exchange for getting the house ???

Knowing his ex-wife had no idea how bad the smell was, he agreed on a price that was about 1/10th of what the house had been worth, but only if she were to sign the papers that very day.

She agreed and within the hour his lawyers delivered the paperwork. A week later the man and his girlfriend stood smiling as they watched the moving company pack everything to take to their new home ........ And to spite the ex-wife, they even took the curtain rods ....

California’s 90-Day Foreclosure Moratorium to Have Little Effect

2009-06-22T09:46:00.001-07:00

When this law came into effect on June 15th, we said that:

Most banks have already been doing this, in preparation for this new law…don’t expect this to have much of an impact in slowing down the avalanche of foreclosures that is heading this way.

All this really does is give people in foreclosure a little more time to live in their homes for free.

Now, for an update…

Sean O’Toole of ForeclosureRadar writes Expect little change from new moratorium

Bottom line - if we see any impact at all it likely won't be until August or September. But these payment based loan mods are largely better for servicers than homeowners, so I can't imagine that servicers won't at least put a program in place. We will of course keep an eye on it.

Lenders are doing just that…

Jim Wasserman reports at Home Front: Lenders winning exemptions from new Calif. foreclosure law

Seven lenders have already received immunity this week from the state's new foreclosure prevention law that went into effect Monday. Another 35 received temporary immunity while their applications are processed.

…

Lenders Approved this week: (as of Friday)
Bank of America
BAC Home Loans Servicing
Carrington Mortgage Services
CitiMortgage
EMC Mortgage
Kondaur Capital
Select Portfolio Servicing
Applied and received temporary 30-day approval:
American Home Mortgage Servicing
Beneficial California
Beneficial Financial
Capital Financial Services
Champion Mortgage
Chase Home Financing
Christian Community Credit Union
Clifford Douglas Property Assets
Fay Servicing
First California Mortgage
First Entertainment Credit Union
First Federal Bank of California
Fresno County Federal Credit Union
GMAC Mortgage
Homecomings Financial
Household Finance
HSBC Credit Center
HSBC Mortgage
HSBC Mortgage Services
HSBC Mortgage Services
JPMorgan Chase
Kinecta Federal Credit Union
Litton Loan Servicing
OneWest Bank
PennyMac Loan Services
Provident Credit Union
Residential Credit Solutions
Saxon Mortgage Services
Selene Finance
U.S. Bank National Association
Vericrest Financial
Walter Mortgage
Wells Fargo Bank

This law will have virtually no impact.

Required Reading: Monday, June 22nd 2009

2009-06-22T09:02:00.001-07:00

Don't believe the hyperinflation hype - dare to make cuts – Telegraph, Ambrose Evans-Pritchard

Flush from last year's 234pc rise in their Black Swan Fund, they are betting that quantitative easing and war-time deficits have sown the seeds of inflation reaching "10pc, 15pc, 20pc, or more". They capture the mood of the times, but are they right?

We know that the Fed's balance sheet has exploded (to $2.07 trillion), but that is only half the story. Data from the St Louis Fed shows that the "monetary multiplier" has collapsed from a decade-average of 1.6 to the depths of 0.893. The "velocity" of money has slowed to a crawl.

Starbucks to grind and brew coffee more frequently – The Los Angeles Times

Starbucks Corp. plans to start grinding and brewing coffee more frequently in U.S. stores to ensure fresh batches are always available.

Baristas will refresh each container of coffee about every 24 minutes, said Sanja Gould, a spokeswoman for Seattle-based Starbucks. As stores typically have three batches going at once, a new pot could be ready as often as every eight minutes, she said.

Foreclosure numbers don’t add up – The Atlanta Journal Constitution

What’s the right number? That’s a surprisingly difficult question to answer.

At a time when an explosion in the number of distressed mortgage loans has emerged as the most pressing economic issue in decades, there is no official government source for foreclosure statistics.

Private companies across the country tabulate statistics and produce estimates of national and local foreclosure trends. The best known among these is RealtyTrac. The California-based company, the source of the April statistics for Atlanta, has repeatedly faced questions about the accuracy of its data.

The lack of solid foreclosure information makes it difficult for policy makers to fashion solutions that make sense. Even now, Congress is debating dramatic changes to laws that govern mortgage lending without the benefit of detailed data about foreclosures.

Kung fu master cracks record 4 coconuts with finger – Breitbart News

A kung fu master has jabbed his way into the Malaysian records book after piercing four coconuts with his index finger in a little over 30 seconds, a newspaper reported on Monday.

World Bank Cuts Forecast for Developed Economies – The New York Times

The bank earlier this month said it expected a deeper global recession, forecasting a 2.9 percent contraction in gross domestic product for this year, rather than 1.7 percent, as it projected as recently as March.

More detailed forecasts released Monday showed that much of this pain will be in high-income areas like the euro zone, the United States and Japan. The bank said that it expected economies in high-income nations to contract a total of 4.2 percent this year.

It expects the U.S. economy to shrink 3 percent and the euro zone 4.5 percent, rather than the 2.4 percent and 2.7 percent it forecast in March. For Japan, the World Bank now projects contraction of as much as 6.8 percent this year — significantly higher than the 5.3 percent it forecast three months ago.

Moody’s Joins S.& P. in Warning on California Debt – The New York Times

The state of California is facing a multinotch downgrade of its debt if it fails to resolve its budget woes, Moody’s Investors Service said Friday.

The warning follows a similar one from Standard & Poor’s, which put the state on a negative credit watch earlier this week because of its dismal financial condition.

“If the legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most nonpriority payments in July,” Moody’s said. “Lack of action could result in a multinotch downgrade.”

The Housing Wealth Effect? – Calculated Risk

Here we go again on this hotly debated topic: How much do changes in house prices impact consumption?

Trucks Sit Idle; Rail Traffic Horrific – Mish

Five Things: What Really Caused the Debt Crisis – Minyanville, Kevin Depew

Reports of Economy's Recovery Have Been Greatly Exaggerated – Minyanville, John Mauldin

Ben Bernanke's career will be analyzed and written about for many years. But the one thing that's caused me the most pain is his bringing the term "green shoots" into the investment lexicon. These may be the 2 most overused and annoying words I've encountered in my investment career. Every possible sign of a recovery is described in this way.

Analysts have lately tended to interpret numbers or statistics that are "less bad" as signs of recovery. They glance back at previous recoveries and say, "Now looks like then. When such and such happens, it means that recovery is on the way. Therefore, we should buy stock (or whatever)."

…

We're on a track that looks far more like the Great Depression than the recessions of our lifetimes. To expect a normal recovery cycle -- whether it's corporate profits, lending, consumer spending, capital investment, or any other -- just isn't reasonable. This is a period that's different in so many ways. And the recovery -- and there will be one!-- will also be of a different warp and woof throughout the entire world economy.

Budget crisis forces deep cuts at Calif. schools – MyWay

Slammed by an epic housing bust and massive job losses, California faces a $24 billion budget deficit and could run out of cash by late July if Gov. Arnold Schwarzenegger and the Legislature cannot reach a budget deal.

To balance the budget, the governor has proposed closing more than 200 state parks, releasing prisoners early, selling state property, laying off state workers and cutting health care.

Under the governor's plan, K-12 schools and community colleges would lose $5.3 billion over the coming year - on top of billions of dollars in recent reductions and payment delays.

The state would spend $7,806 per K-12 student in 2009-10, almost 10 percent less than two years ago, according to the Legislative Analyst's Office.

Harvard: Housing recovery yet to emerge – The Orange County Register, Lasner On Real Estate

The U.S. housing market will rebound eventually, according to a Harvard University report. Demographics and underbuilding are conspiring to up demand and revive home prices.

But that day still is a long way off, perhaps not until sometime after 2010, the university’s Joint Center for Housing Studies said in its 2009 State of the Nation’s Housing report.

US To Trade Gold Reserves For Cash Through Cash4Gold.com – The Onion

US To Trade Gold Reserves For Cash Through Cash4Gold.com

Required Reading: Friday, June 19th 2009

2009-06-19T09:56:00.001-07:00

Michael Lewis: Obama Blew His Chance To Reform Bush Financial Policies. And, yes, Goldman Sachs Rules The World.

Obama Reform Plan Fails to Fix Whats Broken – The Big Picture, Barry Ritholtz

To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.

Some very obvious omissions from the plan include:

China Lectures Australia on Failures of Keynesianism – Mish

Senator Shelby Calls Fed's Expertise "Grossly Inflated" as Geithner Attempts to Defend the Indefensible – Mish

Like every bloated bureaucracy, the Fed wants still more power. Secretary of Treasury Tim Geithner, a former Fed Governor, is all too happy to give it to them.

California unemployment rises to 11.5% in May – The Los Angeles Times

Reporting from Sacramento -- California's unemployment rate shot up to 11.5% in May, its highest level since current record-keeping began more than three decades ago.

That's a substantial increase over a revised rate of 11.1% in April, the U.S. Department of Labor reported this morning.

The national unemployment rate for May was 9.4%.

Only four states have higher unemployment rates than California: Michigan at 14.1%, Oregon at 12.4% and Rhode Island and South Carolina, tied at 12.1%.

Good news for Bay Area home prices – The San Francisco Chronicle

Unless, of course, it's not. The data could just as easily reflect growing distress in the high-end market that is forcing more well-to-do owners to unload their homes, distorting the statistics with discounted but still relatively expensive properties and foreshadowing greater pain to come.

"If you ignore the greater reality and look only at statistics, then you could conclude that we're at least nearing market stability," said Andrew LePage, an analyst with San Diego research firm MDA DataQuick, which compiles the figures. "But given all the forces out there, the mixed signals from the data and the unknowns, it will be at least fall before there's any clarity."

Median home sale prices rise for most of Sacramento region – The Sacramento Bee

There are no “move-up” buyers – The Sacramento Bee

Embarassing Cash For Clunkers Legislation Approved By Senate – Green Sheet

Power Writes History – Minyanville, Mr. Practical

Now we are about to give the very institution, a private bank with its own shareholders and where only half its board members are appointed by the government, undefined powers. Ron Paul has nearly half of Congress willing to support a bill to audit the Fed. It can't come soon enough. We know a lot more about the operations of the CIA than we do about the operations of the Fed, whose operations that always devalue our currency.

We will rue the day that we gave this power to the Fed. The power is undefined; they have carte blanche. We should by now all realize the destruction for which the Fed is already responsible.

Ron Paul Slams Federal Reserve’s New Dictatorial Powers - Prison Planet

Nine Ways States Are Trying to Get Blood From a Stone – Minyanville

Does the Obama Plan for Reforming Wall Street Measure Up? – Robert Reich

Foreclosure "Prevention" Act Exemptions – Sacramento Real Estate Statistics

DQ NEWS: Bay Area Median Prices Rise

2009-06-18T11:56:00.001-07:00

DataQuick News reports Uptick in Bay Area home sales and median price

La Jolla, CA.----The median price paid for a Bay Area home jumped in May as more expensive homes started to sell again. The overall number of homes sold increased for the ninth month in a row, a real estate information service reported.

The median price paid for a home in the nine-county region rose to $341,500, up 12.3 percent from $304,000 in April, but down 33.9 percent from $517,000 in May 2008, according to MDA DataQuick of San Diego.

The median’s rise over April marked the second consecutive month-to-month increase. Although last month’s median was 17.8 percent higher than the current cycle’s low of $290,000 in March this year, it was still 48.6 percent below the peak $665,000 median reached in June and July of 2007.

Last month’s $37,500 jump from April was due to a small but noticeable increase in sales of homes financed with home loans for more than $417,000, commonly called “jumbo” mortgages. They accounted for 25.5 percent of the Bay Area’s home sales last month, the highest since 25.8 percent last October. Two years ago it was more than 60 percent. The presence of those high-end sales in the statistics pulled the May median up.

Sales of $800,000-plus existing single-family houses rose to 13.2 percent of all house resales last month, up from 9.8 percent in April and the highest since they were 14.8 percent of sales last October. Sales of sub-$400,000 existing houses dropped to 57.5 percent of May sales, down from 62.2 percent in April and the lowest since 56.5 percent in November.

“We expected this to happen months ago, but better late than never. Some people are going to take this as a sign that the market has bottomed out. Maybe – or maybe not. We won’t know for at least half a year,” said John Walsh, MDA DataQuick president.

“The market has been working its way through the craziness of the ‘loans-gone-wild’ activity of 2005 to 2007. We know a lot about how that is playing out. What we don’t know is how the distress from the recession will ultimately play out in the housing market. The elements are different,” he said.

A total of 7,447 new and resale houses and condos sold in the nine-county Bay Area last month. That was up 4.3 percent from 7,139 in April and up 19.8 percent from 6,216 in May 2008.

The May 2008 sales were the lowest in DataQuick’s statistics, which go back to 1988. May sales have averaged 9,881 and peaked in May 2004 at 13,567 sales.

…

Last month 42.1 percent of all homes resold in the Bay Area had been foreclosed on in the prior 12 months, down from 46.4 percent in April and the lowest since the figure was 41.6 percent last September. A year ago the percentage was 27.7 percent, while the peak was 52.0 percent this February. By county, foreclosure resales ranged last month from 7.7 percent of all resales in San Francisco to 65.1 percent in Solano.

The use of government-insured FHA loans – a common choice among first-time buyers – represented a 24.5 percent of all Bay Area purchase loans in May, down slightly from a record of 26.0 percent in April but up from 7.3 percent a year ago.

The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $1,443 last month, up from $1,281 the previous month, and down from $2,458 a year ago. Adjusted for inflation, current payments are 44.6 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 59.0 percent below the current cycle's peak in July 2007.

Indicators of market distress continue to move in different directions. Foreclosure activity is off its recent peak but remains high by historical standards, while financing with adjustable-rate mortgages is at an all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, and non-owner occupied buying activity is above-average in some markets, MDA DataQuick reported.

We knew this was coming…for additional context, read Beware the False Bottom.

I have a problem with the way that these numbers are being portrayed as percentages. The fact that jumbo purchases accounted for 25.5% of sales in May (which pulls up the median price) could mean that high-end sales increased. They did…and that is good.

However, the larger story is that low-end sales are decreasing, largely because of the reduced availability of bank-owned homes. This is the end result of 10-months of moratoria and artificially reduced foreclosures. Fewer low-end sales will change the mix and the median price.

Here are some charts from June’s East Bay Housing Review that show the changing mix.

Notice the yellow line rise…high-end Sales did increase.

Notice the yellow line falling in May and June…low-end sales are falling. Not from a lack of demand, but from a lack of supply. Note that the each month represents data collected on the first day of that month, regarding sales the prior month (the number in June represents homes sold in May, etc.)

Prices aren’t going up. The mix of homes sold has changed as a result of government intervention.

Bottom Callers are everywhere…don’t be fooled.

Danville Comp Killer: 191 La Questa Drive

2009-06-18T10:56:00.001-07:00

This is a spectacular house. Gorgeous, top-quality construction on a huge flat lot. It was built new in 2008 and is currently a short sale. According to the MLS, one offer has been submitted to the bank(s) and they are looking for additional/backup offers.

THE LOT WAS PURCHASED FOR $1,100,000 IN 2007!

List Price: $1,550,000

4 Bedrooms

3.5 Baths

4-Car Garage

4200 Square Feet

37,050 Sq Foot Lot

Built in 2008

MLS Description: One of Danville's best kept secrets! Custom Craftsman minutes from Downtown & top rated schools. Smart,understated & sophisticated! 4 car garage, amazing gourmet kitchen all on flat .87 acre lot! Car enthusiasts dream.The possibilities are ridiculous! Best of all worlds!

Sales History:

The LOT Sold in December of 2007 for $1,100,000

Recently Listed:

$2,349,000 to $1,550,000 from May 2008 to Current.

347 Days on the Market

If the agents can pull this short sale off, some Buyer is going to get an amazing house at a huge discount from peak pricing.

Danville Comp Killer: 60 Trish Court

2009-06-18T10:42:00.001-07:00

This bank-owned property just hit the market on June 10th, and just went under contract on June 17th.

List Price: $1,039,500

7 Bedrooms

5 Bathrooms

4,372 Sq. Ft.

Built in 1995

15,420 Sq. Ft. Lot

MLS Description: An amazing home offering 7 bedrooms, 5 bathrooms, gourmet kitchen with a built in refrigerator, stainless steel appliances, beautiful granite counter-tops, ceiling fans, hardwood and tile flooring, formal living areas, built in 1995, 4372 sqft of living space, huge lot of 15240 sqft.

Sales History:

$1,670,000 in August of 2005

$1,260,000 in December of 2000

$685,000 in April of 1998

Recently Listed:

$1,949,000 down to $1,699,000 between March 2008 and January 2009

ForeclosureRadar: Lenders Still Delaying Day of Reckoning

2009-06-18T09:32:00.001-07:00

ForeclosureRadar reports Despite Increases, Lenders Voluntarily Delaying 73 Percent of Scheduled Foreclosures

Discovery Bay, CA, June 16, 2009 – ForeclosureRadar (www.foreclosureradar.com), the only website that tracks every California foreclosure, and provides daily auction updates, issued its monthly California Foreclosure Report for May 2009. Foreclosures sales jumped 31.9 percent in May, following a 35 percent increase the prior month. Notices of Trustee Sale, which set the auction date and time, also rose a significant 42 percent from April, indicating that foreclosure sales are likely to continue to rise in
the weeks and months ahead. Despite these increases, and a record number of foreclosures scheduled for auction, lenders continue to voluntarily postpone the majority of foreclosure sales.

“While many complain that lenders are foreclosing too aggressively, and others claim a wave of foreclosures sales is imminent, the data actually shows that lenders are doing everything possible to delay foreclosure,” says Sean O’Toole, founder and CEO of ForeclosureRadar. “The reality is that we have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage.”

As the only service that tracks every foreclosure auction throughout the state, ForeclosureRadar is uniquely able to see not only how many foreclosures were initiated, but also the current status of those foreclosures and their ultimate outcomes, whether postponed, cancelled or sold. By the end of May we had a record 111,824 foreclosures scheduled for sale, yet just 15.9 percent were actually sold, versus
49.2 percent of scheduled foreclosures being sold a year earlier. Further, when sales peaked in July 2008 at levels 61 percent higher than those reached in May 2009, there were only 64,598 foreclosures scheduled for sale, 42.2 percent fewer than today.

Of those foreclosures currently scheduled, 40 percent are being postponed to a future date at the lenders request, and another 33 percent are being postponed based on the mutual agreement of lender and borrower, clearly demonstrating that lenders are indeed delaying foreclosure in the majority of cases on their own accord. Specifically note that lenders were under no obligation in May to offer a loan modification program, short sale, or other resolution, and that these efforts would have resulted in a cancellation of the sale rather than a postponement. May saw just 6 percent of scheduled foreclosures
cancelled, the lowest percentage of cancellations we have on record.

My Thoughts: The backlog of foreclosures continues to grow. This is more proof.

Required Reading: Thursday, June 18th 2009

2009-06-18T09:18:00.001-07:00

Report: State Personal Income Tax Cliff Diving – Calculated Risk

States in Deep Trouble Over Plunging Income Tax Revenues – Mish

20 states depending on personal incomes taxes for > 25% of total taxes were down 20% or more on collections.
This is a very grim report on state finances.

Weekly Unemployment Claims – Calculated Risk

Obama Blueprint Deepens Federal Role in Markets – The Washington Post

The White House makes its case for this approach in an 85-page white paper that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.

"While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system," the white paper says.

The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

My Thoughts: This is another power grab by The Fed…do we really need a handful of appointed (not elected) people (with no oversight or accountability) with this much power?

Obama's Blueprint for Reform Concentrates Still More Power in Hands of the Fed – Mish

Hedge Fund Instant IPO Tests the New Complacency: Jonathan Weil – Bloomberg

The near-collapse of the financial system was supposed to have reminded the world about the hazards of chasing short-term gains at the expense of long-term stability. Another lesson we keep relearning is that investors’ memories are short.

Geithner Defends Plan to Give Fed Stepped-Up Powers in Overhaul – Bloomberg. There’s a shocker.

China risks trade suicide – Telegraph, Ambrose Evans-Pritchard

Democrats push to suspend California high school exit exam – The Sacramento Bee

A California law requiring high school seniors to pass a high-stakes exit exam before receiving their diplomas is targeted for elimination, at least temporarily, because of the state's fiscal mess.

Democratic legislators are pushing the idea of lifting the mandate, arguing that it's not fair to expect schools hammered by budget cuts to meet every threshold they have in the past.

Forecast for California: gradual clearing – The Los Angeles Times

An economic recovery will begin in the second half of this year, but many Californians won't feel the benefits until 2010, forecasters from Chapman University said Wednesday.
That's because the Golden State is in its deepest and most profound recession since the Great Depression, dragged down by sluggish construction activity in both the residential and nonresidential markets.

Danville approves slimmed down budget – The San Ramon Valley Times

The Danville Town Council has approved a budget that includes cuts, though officials said the cuts aren't on par with the slashing taking place in other cities.

The vote, which came Tuesday after a number of previous meetings on the issue, was 5-0. The $25.3 million budget for 2009-10 is $1.7 million, or 6.4 percent, less than last year.

"This is the second year in a row with significantly less revenues," Town Manager Joe Calabrigo said. "While Danville is much better than other cities, the recession has really created a new paradigm for local government."

Services spared as Pleasanton OKs two-year budget – The Contra Costa Times

The city balanced its budget in part by eliminating 10 vacant positions, reducing the nonpersonnel budget by 10 percent, suspending salary adjustments for the next 12 months, not calling for additional salary adjustments for labor contracts when they come up, and suspending transfers to various funds.

"The operating budget is balanced, and that is the good news," said Nelson Fialho, Pleasanton's city manager. "The bad news is the economy is in such a fragile state that it will probably be a challenge to keep that budget balanced over the next two years."

Female Homeowners Sadder, Fatter Than Renters – Clusterstock

Researchers from Wharton have discovered that female omeowners, on average, outweighed renters by 12 pounds. Female homeowners were also carrying around more aggravation, making less time for leisure, and were less likely to spend time with friends.

Jim Chanos on CNBC: The Financial Overhaul with Probably Fail

Selling a House: A How-To Guide for Post-Bubble Times – Minyanville, Carol Kopp

You want the spoiler now? We accepted a full-price offer on the house 5 days after it went on the market. Taxes settled, costs paid off and a modest inheritance to split, as our mother had hoped and expected. It had taken about 5 months to get it ready for the market.
The strategy in a nutshell: We held an estate clearance sale to empty the house, used the proceeds to spruce up the place, and didn’t argue with our real estate agent.

SoCal Median Price Rises

2009-06-18T08:43:00.001-07:00

Expect to see the same for Northern California in the next month or two. We expected this. Beware The False Bottom!

DataQuick News reports Southland median sale price inches up for first time since ‘07

La Jolla, CA---Southern California home sales rose for the 11th consecutive month in May as sales of $500,000-plus homes started to come back. The median price paid increased slightly from the prior month for the first time since July 2007, the result of a shift in market activity where sales of deeply discounted foreclosures waned and mid- to high-end purchases rose, a real estate information service reported.

A total of 20,775 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month. That was up 1.3 percent from 20,514 in April and up 22.8 percent from 16,917 a year ago, according to San Diego-based MDA DataQuick.

Sales have increased year-over-year for 11 consecutive months.

May’s sales were the highest for that month since May 2006, when 30,303 homes sold, but were 21.2 percent below the average May sales total since 1988, when DataQuick’s statistics begin.

Foreclosure resales – homes sold in May that had been foreclosed on in the prior 12 months – accounted for 50.2 percent of all Southland resales. That was down from 53.5 percent in April and from a peak of 56.7 percent in February. May’s figure was the lowest since foreclosure resales were 50.9 percent of all resales last October.

The remarkably sharp declines in the Southland’s median sale price over the past year have been exacerbated by a shift toward an above-average number of sales occurring in lower-cost inland markets rife with discounted foreclosures. However, the number of homes lost to foreclosure declined over the winter, leaving fewer for bargain hunters to scoop up this spring. Meantime, sales have begun to rise a bit in many mid- to high-end markets, which could be due at least in part to sellers dropping their asking prices.

Last month 83 percent of the existing Southland houses sold were purchased for less than $500,000, compared with 84.8 percent in April. Conversely, sales $500,000 and above rose from 15.2 percent of sales in April to 17 percent in May. The last time the $500,000-plus market made up more than 17 percent of all sales was last October, when they were 19.9 percent of sales.

The median price paid for all new and resale houses and condos sold in the six-county Southland last month was $249,000, up 0.8 percent from $247,000 in April but down 32.7 percent from $370,000 a year ago.

JP Morgan: High-End Homes May Drop 60% By 2012

2009-06-17T11:35:00.001-07:00

Bloomberg reports ‘Millionaire Homes’ May Lose Value Until 2012

“Tighter lending standards and the lack of cheap financing for these borrowers continue to be key issues,” the New York- based analysts wrote, referring to “jumbo” mortgages. That’s after so-called interest-only and option adjustable-rate loans were a “major driver” of soaring values, they said.

The government’s moves to aid the housing market include the Federal Reserve’s mortgage-bond purchases to drive down interest rates; President Barack Obama’s “Home Affordable” loan modification and refinancing programs; and new tax credits for some first-time buyers. None of the U.S. initiatives “directly focused on helping the sales of these so-called millionaire homes,” the analysts wrote.

“Currently, we have national home prices bottoming in 2011,” they said. “However, prices for more expensive homes may not bottom out until 2012, and ultimately result in peak-to- trough declines in excess of 60 percent (compared to 40 percent nationally).”

“California is probably worse than other states, but higher-priced homes in general are going to be a problem,” Sim said in a telephone interview today.

Calculated Risk adds:

Most of the low end sales are "one and done" (the seller is a bank), and this will lead to a dearth of move up buyers. This lack of move up buyers, and tight financing will impact demand for the mid-to-high end. Although the percentage of foreclosures will be less in the high end areas than the low priced areas, the foreclosures are still coming (see Alt-A Foreclosures in Sonoma and Foreclosure Resales: Slow in High Priced Areas )

However I disagree with the JPMorgan analysts on the relative price declines. Prices increased more in percentage terms in the low priced areas of California (like the Inland Empire and Sacramento) than in the high priced coastal areas. So prices will probably fall further in percentage terms from the peak in the low priced areas.

Also, I think the price declines will occur over a longer period in the high priced areas (like the JPMorgan analysts), so the nominal price declines will be less (assuming a little inflation). But those are minor details - I agree there are further substantial price declines ahead.

Required Reading: Wednesday, June 17th 2009

2009-06-17T11:30:00.001-07:00

California, Sacramento economies stalled, Brookings study finds – The Sacramento Bee

Survey: Bay Area economy on verge of recovery – The San Francisco Chronicle (a completely different take on the same Brookings study reported in the Sacramento Bee)

Two more East Bay GM dealers closing, while others hanging on or expanding – The Contra Costa Times

Housing recovery set to begin, forecast says – The Orange County Register, Lasner on Real Estate

The lion’s share of the housing decline is behind us, the UCLA Anderson Forecast reports today.

U.S. home prices have fallen 31% from the peak and are still falling. But home prices should start rising again by late 2009 or early 2010, the forecast said.

Credit-Card Firms to Borrowers: Let's Make a Deal – Minyanville, Andrew Jeffrey

Lockheed warns of job cuts in San Jose – The Contra Costa Times

Economic Stress Index: Measuring econonomic stress by County – The Associated Press (Very cool interactive map)

Obama Sees 10% Unemployment Rate, Chides Wall Street Critics – Bloomberg

Built to Fail: Key Lessons from the Financial Crisis – Minyanville, Satyajit Das

The world used debt to accelerate its consumption. Spending that would have taken place normally over a period of many years was squeezed into a relatively short period because of the availability of cheap borrowings. Business over-invested -- misreading demand and assuming that the exaggerated growth would continue indefinitely -- creating significant over-capacity in many sectors.

The nouveau Jeffersonian trinity -- "whoever dies with the most toys wins," "shop till you drop," and "if it feels good, do it" -- has proved to be unsustainable.

Special Edition Five Things: The US Dollar – Minyanville, Kevin Depew

Every day brings yet one more story about the US dollar. Will the greenback crash? Will it lose its status as reserve currency? What is a dollar? And if we're here in the states, why do we care whether it goes up or down in value against other currencies? Let's take a look at some answers to these questions.

Homebuilders Add New Wing to Housing Crisis – Minyanville, Andrew Jeffrey

The reality -- an unfortunate one for builders and their employees -- is that for the foreseeable future, their services aren't needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.

Tiered House Prices – Calculated Risk

Obama Asks Congress for the "Power to Punish" – Mish

Obama wants to extend the powers of the Fed. Then again he wants to take some powers away from the Fed. It's hard to know what he is thinking until you boil it down to its essence. Being president is not enough, Obama wants to become the Czar of Czars with the "Power to Punish".

Large U.S. corporate bankruptcies accelerate – Reuters

“Hank’s Choice”

2009-06-17T11:05:00.001-07:00

Drew Voros writes for The Contra Costa Times Foreclosure waves fed by `Hank's Choice"

…While not matching the literal life-and-death nature of William Styron's novel, "Sophie's Choice,'' former Treasury Secretary Henry "Hank'' Paulsen made a choice, let's call it "Hank's Choice,'' last fall that is fueling foreclosures. Instead of deciding between two children, Hank had to choose between homeowners and the banking industry, in which he made his $700 million personal fortune running Wall Street's top bank, Goldman Sachs.

Days after convincing Congress and the American public to approve a record $787 billion bailout that would remove some $350 billion in toxic mortgage debt from our financial system, Hank switched gears faster than Jeff Gordon on Turn 2 of the Sonoma Speedway.

Hank called a news conference in October and said that removing toxic debt would be too difficult, that it would be better to give America's biggest banks, which had fed our financial meltdown with lax lending standards and incentive fees for low-grade borrowers, $25 billion each, no strings attached.

So began the federal government's plan to save the banking industry and hope homeowners could hang on. There would be no foreclosure prevention plans or loan modification incentives for banks, no plan to help homeowners of any stripe with a 4 percent, fixed-rate, federally issued mortgage that had been proposed. The new guy coming to the White House could take care of that, or not. It was his choice, despite the fact the money to make such programs happen was gone.

In forsaking homeowners — whether they be distressed, underwater, on time or paid off — in favor of his banking buddies, Paulsen set the current stage of worsening foreclosures, rising mortgage rates and pervasive deterioration of home values throughout America…

People are angry at Wall Street and Washington. Certainly, they were all complicit in creating the housing bubble…and they benefitted greatly from doing so. As home prices fall back to reality, banks, investors, and homeowners are suffering.

I would like to give Hank Paulsen the benefit of the doubt and believe that his intentions were good. I would like to believe that everything he said and did he honestly believed that it was in the best interests of the Country.

It’s human nature to want to blame someone else for our problems. Hank Paulsen makes an easy villain…just as Tim Geithner does now.

The truth is that the public was never told the whole truth about how bad things got, so as not to incite banks runs or riots. I can forgive Paulsen for this…he had no choice.

I do believe that Paulsen honestly believed that having a solvent banking system was more critical to a functioning economy than helping suffering homeowners. I don’t believe that he took actions that would harm his Country so he could give taxpayer money to his friends.

Maybe I’m naive.

Required Reading: Tuesday, June 16th, 2009

2009-06-16T10:30:00.001-07:00

Companies Compete for Government Cash, Not Customers – Minyanville, Andrew Jeffrey

As Washington expands its role in managing the day-to-day operations of American business, companies are increasingly turning their strategic focus to tapping federal cash and lending programs. And despite the strings often attached to government money, many are finding that Uncle Sam is the only game in town during these troubled economic times.

Perspective: Housing Bottom Nowhere in Sight – Minyanville, James Quinn

Pay No Attention To Morons Talking About "Money On The Sidelines" – Clusterstock

The stock market is obviously poised for a gigantic advance because there's a "ton of money on the sidelines." Right? All that money will soon come off "the sidelines" and "into" the market, and it will inflate the market like a gigantic hot air balloon, driving prices to the stars.

Right?

After all, that's why stock prices are low now, right? All that money has "left the market" and is "hiding on the sidelines."

Actually, no. That's just what everyone on CNBC says. Fund manager John Hussman explains what really makes stocks go up and down…

Repurpose-Driven Life – The New York Times

A recent book, “Retrofitting Suburbia,” by Ellen Dunham-Jones and June Williamson, notes that in 1986, the United States had about 15 square feet of retail space per person in shopping centers. That was already a world-leading figure, but by 2003 it had increased by a third, to 20 square feet. The next countries on the list are Canada (13 square feet per person) and Australia (6.5 square feet); the highest figure in Europe is in Sweden, with 3 square feet per person. “Retrofitting Suburbia,” as its title suggests, is concerned with projects that address problems stemming from “leapfrog”-style development — the constant expansion of new housing, and new stores, farther away from city centers. As Dunham-Jones, an associate professor of architecture at Georgia Tech, told me when we spoke recently, one of those problems is that we’ve gotten “overretailed.”

This seems more obvious in a down economy, with chains like Circuit City and Linens ’n Things closing up shop all over the country. But in truth the spread of newer and bigger stores and malls caused an awful lot of retail vacancy even during the boom years…

Higher Mortgage Rates Sap Builder Confidence – The Wall Street Journal

Calif. Aid Request Spurned By U.S. – The Washington Post

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge.

…

The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

Little relief in new foreclosure law – The Contra Costa Times

But don't expect automatic or immediate relief under the law, which was authored by state Sen. Ellen Corbett, D-San Leandro.

Lenders and loan servicers that already have a comprehensive and systematic loan modification program in place are exempt from the law. Such programs call for loans to be modified by lowering interest rates for at least five years, deferring or reducing part of the principal, or providing up to 40 years to repay the loan.

"The vast majority of them are already in compliance with some regulation or requirement, either through federal laws or voluntary efforts," said Chris George, president of San Ramon-based CMG Mortgage Services and a board member of the California Mortgage Bankers Association.

By applying for an exemption, lenders will automatically receive a 30-day stay during which state officials will determine whether the company has a proper loan modification program in place.

California Law Freezes Foreclosures, Burns Servicers – Housingwire

To qualify for exemption from the mandatory freeze, the servicer’s modification program must target California residents with the goal of a 38% housing-related debt-to-gross income ratio. The program must include some combination of the following: an interest rate reduction for at least five years, an extension of the amortization period, a deferral of some portion of the principal amount of the unpaid principal balance until maturity of the loan, a reduction of principal and/or compliance with a federally mandated loan modification program.

Housing Starts May – Calculated Risk

Credit Bailout: Issuers Slashing Card Balances – The New York Times

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

…

Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.

California Imposes 90-Day Foreclosure Moratorium

2009-06-15T12:20:00.001-07:00

From CBS News/KCBS/AP…

California imposed a 90-day moratorium on housing foreclosures under a new law that took effect Monday.

The law is expected to make lenders try harder to keep borrowers in their homes.
Loan companies must prove they tried to modify the delinquent loans before they can begin foreclosing.

If the bank does not renegotiate, the home owner still has 90 days until the bank can take the house.

That warning period, supporters of the law contend, will grant at least some people having trouble with a mortgage the opportunity to come up with other options on their own.

Supporters acknowledge the California Foreclosure Prevention Act won't stop thousands of foreclosures from eventually happening, but noted it was an important step towards a systematic review of delinquent home loans.

There have been more than 365,000 foreclosures in California since early 2007, with many more already scheduled.

"California is ground zero for foreclosures. We're getting about 80 to 90,000 foreclosure filings every month. That's one every 30 seconds, so until we start mitigating the number of foreclosures, our economic recovery is going to be hampered," said Assemblyman Ted Lieu, the Torrance Democrat who authored the bill.

The state bill passed in February is similar to the Obama administration's Making Home Affordable Program that began in March.

Both encourages lenders to cut interest rates or rewrite loans to affordable levels.

Most banks have already been doing this, in preparation for this new law…don’t expect this to have much of an impact in slowing down the avalanche of foreclosures that is heading this way.

All this really does is give people in foreclosure a little more time to live in their homes for free.

Required Reading: Monday, June 15th 2009

2009-06-15T09:38:00.001-07:00

Tehran's Streets Become a Battleground – Time Magazine

German credit crunch deepens – Telegraph, Ambrose Evans-Pritchard

A DIHK survey of German industry, to be released this week and obtained by Der Spiegel, found that over a third of all large companies are still seeing credit conditions tighten further, if they can borrow at all. Terms are now tougher than they were at the height of the global crisis over the winter.

"Financial conditions are getting worse for important sectors of the economy," said the report. It found that borrowing costs had risen for most firms even though the European Central Bank has cut its key interest rate to an historic low of 1pc.

The crucifixion of Latvia – Telegraph, Ambrose Evans-Pritchard

If the purpose of Baltic euro pegs is in part to keep Putin's Russia at bay by locking the region deeper into the EU Project, the strategic gamble has gone badly wrong. It has created a reservoir of Russian irredentism in both Latvia and Estonia that gives Moscow a pretext to intervene at any time. The Baltics are being offered to Putin on a platter.

Latvia is firing a third of its teachers. The welfare state is being dismantled. Pensions for those in work will be cut 70pc. The salaries of doctors, nurses, and police (nota bene) will be cut 20pc. Unemployment has risen from 6pc to 17pc in a year, and is still rising. Jobless benefits for most will run out in the autumn, reducing support to £40 a month. "It is time to take to the streets," said union leader Valdis Keris.

The Clock Is Ticking Away Under Latvia – A Fistful of Euros (This looks a Latvia’s meltdown as partially caused by a generation of not having enough children…interesting stuff)

Essentially, the argument we are developing is that as median ages rise beyond a certain point - 42/43 let’s say - the structural characteristics of an economy change. While younger economies - let’s say with median ages in the 35 - 39 range - are driven by large scale borrowing (on aggregate), domestic consumption surges, and, of course imports and current account deficits to match the domestic savings weaknesses. More elderly societies exhibit higher relative savings levels (Japan, Germany and Sweden would be the classic cases), can no longer rely on domestic consumption to anything like the same extent, and increasingly come to depend on export growth and lending abroad to achieve economic growth. This situation is highly unstable, as we are witnessing now in the Swedish case, since as the consumer booms in the younger societies fail, exports slump and many of the loans go bad. This is not a very satisfactory state of affairs, but it is in fact what is happening. This is the demographic transition we are all part of.

International Demand for U.S. Assets Slowed in April – Bloomberg

International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

The labor market has NOT yet signaled a turning point – Jeffrey Frankel

The length of the average work week fell to its lowest since 1964 ! The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September. Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration. If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work? If one factors in falling wages, to compute total weekly earnings, the picture looks still worse. My bottom line: the labor market does not quite yet suggest that the economy has hit bottom.

Stay the Course – The New York Times, Paul Krugman

A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.

Fed's Conundrum on Treasury Purchases – The Wall Street Journal

IMF says worst not over – Reuters

Hey New York, Here Comes The Housing Bust – Clusterstock

Credit Card Losses Spike In May – Clusterstock

Foreclosure Reality Check: 1.6 Million Foreclosure Filings with 5 Months of Data. California Notice of Defaults and Foreclosures Skyrocketing. – Dr. Housing Bubble

There is a wonderful smell of delusion in the air. As the state marches on to economic Armageddon, there is now a large portion of bottom callers jumping into the market….

Administration calls for financial system overhaul – The Associated Press

The Obama administration says it is committed to overhauling the country's financial rule book by giving the Federal Reserve increased powers to guard against the types of risks that could bring down the entire system.

All large institutions whose failure could threaten the stability of the financial system will be subjected to regulation by the Fed, administration officials said. The proposal also would create a council of regulators with broad coordination responsibility across the financial system.

…

"We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors," Geithner said during an economic conference hosted by Time Warner. "Those are things we have to change."

A tale of two markets divided by the conforming-loan limit – The Los Angeles Times

…But at the top of the housing ladder, the move-up market remains at a virtual standstill, stymied by the inability of sellers to attract buyers who can obtain financing at rates close to what first-timers are paying.

Even if the sellers manage to hook a buyer who qualifies for a mortgage under today's super-strict underwriting guidelines, the sellers are probably going to have to invest much of their profit in their next home if they hope to move on.

What we have is a tale of two markets where the dividing line is $417,000, the so-called conforming-loan limit. It's the ceiling on the loans that can be bought by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy loans from primary lenders and package them into securities for sale to investors.

CHART OF THE DAY: California's Unending Housing Problem – Clusterstock

Michael Lewis talks with CNN about the economic crisis and future of Wall Street:

6-14 The Next Foreclosure Wave – The Field Check Group, Mr. Mortgage

Five Things: From Green Shoots to Growth in 60 Seconds? – Minyanville, Kevin Depew

The $3.6 Trillion Leveraged Loan Wall of Debt – Mish

California Foreclosure Moratoriums An Exercise Of Stupidity – Mish

This bill is no more likely to work than a bill declaring poverty to be illegal or the sky to be green.
Home prices will bottom when they bottom, unemployment will bottom when it bottoms, and foreclosures will stop when they stop. Those are simple economic facts.

The 90 day extension gives anyone sitting on the edge of walking away as well as those wanting a reduction in principle an incentive to stop paying their mortgage, safe and secure in the fact they cannot be thrown out of their house for another 90 days.

This bill is pure idiocy and will not stop a single foreclosure. Instead, the bill will increase late pays and foreclosures. It's an exercise of sheer stupidity.

California seen missing budget deadline again – Reuters

Barring a miracle, California lawmakers will miss their June 15 deadline for passing a balanced budget -- a staggering challenge with the state facing a $24.3 billion shortfall amid the worst drop in state revenues since the Great Depression.

Observers of the most populous U.S. state's political scene laugh at the idea of a budget deal by Monday.

California Less Than 50 Days From Meltdown

2009-06-11T09:28:00.001-07:00

From The California State Controller’s Office: Controller Releases May Cash Flow Figures

SACRAMENTO – State Controller John Chiang today released his monthly report detailing California’s cash balance, receipts and disbursements in May and through the first 11 months of the fiscal year. In May, revenue was $827 million below the latest projections found in the Governor’s May Budget Revision.

"Without immediate solutions from the Governor and Legislature, we are less than 50 days away from a meltdown of State government. This presents a terrible threat to California’s economy and to the State’s delivery of basic public services,” said Chiang. “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great depression.”

Personal income taxes were $475 million below (-23.0%) estimates in the May Revision. Corporate taxes were down $84.4 million (-25.8%), and sales taxes fell by $109 million (-3.3%).

The Controller has met with Governor Schwarzenegger and Legislators in the past week to brief them on the State’s immediate cash problem. He also sent a letter to State leaders this morning with new cash projections – updated to reflect May actuals and final May Revision numbers from the Department of Finance – that continue to show the State exhausting all available cash by late July. The State is now projected to run $2.78 billion into the red on July 31.

The State started the fiscal year with a $1.45 billion cash deficit, which grew to $19.8 billion on May 31, 2009. That deficit is being covered by a combination of Revenue Anticipation Notes (RANs) and internal borrowing from special funds. Borrowing from special funds is expected to provide enough cash to fund State operations through the end of the fiscal year on June 30.

May 2009’s financial statement and the summary analysis can be found on the Controller’s Web site at www.sco.ca.gov.

Economist’s Free Exchange writes The trouble with California

The dual nature of the crisis has created a bit of a headache for Washington policymakers. Constraints on state budgets mean that they're unable to run countercyclical deficits in recession. The federal government can, however, and it is entirely appropriate for it to run deficits in order to fund state programs during a downturn. But Washington is understandably reluctant to save California's hide with a sufficiently large cash injection, because of the structural nature of the state's problems. Save California, it's argued, and they'll never have to come to terms with and repair their broken government. What's more, other states will be encouraged to budget irresponsibly and will require larger disbursements from the federal government next time around. Moral hazard abounds.

The response to this, on the other hand, is that California is simply too big to fail. And truthfully, it is. California is the world's eighth largest economy, and it contributes roughly an eighth of total American output (and drives much of the output in surrounding states). It's very difficult to imagine the European Union standing by and allowing a budget crisis to ravage the German economy, or the IMF doing nothing at all to assist a Russia or a Brazil as they melted down.

Were California forced to make significant cuts to its spending, the ramifications could be quite serious. School systems and universities would be endangered (which would threaten the state's long-term economic prospects). Increases in crime, homelessness, and serious poverty would encourage residents to leave. Service cuts could threaten key industries. In short, the recession could grow far more serious in the state than it already is. That would threaten recovery across the nation.

The best approach to the problem is similar to the best approach to troubled financial institutions. If it is understood that help will be forthcoming for the state or firm in question, then two things have to happen. First, procedures for when and how to intervene must be put in place. And secondly, there must be the establishment of authority to extract concessions from the party being assisted.

Mish writes: California 50 Days From Financial Meltdown

Borrowing from expected revenues is foolish anytime. When expectations have been as ridiculously optimistic as they have been for years, "foolish" is no longer the operative word. The operative word is "insane".

State Controller John Chiang says: “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great depression.”

I agree. Now when does the California legislature get the message?

Required Reading: Thursday, June 11th 2009

2009-06-11T09:07:00.001-07:00

Senate Renews Push to Expand Homebuyer Tax Credit to $15,000 – Bloomberg

June 10 (Bloomberg) -- Lawmakers are pushing to revive legislation in the Senate that would almost double an $8,000 tax credit for first-time homebuyers and expand the program to all borrowers.

Senator Johnny Isakson, a Georgia Republican, plans to introduce a bill today that increases the tax credit to $15,000 and removes income and other restrictions on who can qualify for the credit, according to his spokesman, Sheridan Watson.

The legislation, which is co-sponsored by Senate Banking Committee Chairman Christopher Dodd of Connecticut and other Democrats, would extend the homebuyer credit to multi-family properties that are used as the borrower’s primary residence. It would also eliminate income caps of $75,000 and $150,000 on individuals and couples seeking to claim the credit.

Treasuries Tumble After Auction, Russian Threat to Cut Holdings – Bloomberg

Five Things: Credit Crisis Abating... Debt Crisis Remains – Minyanville, Kevin Depew

Vultures Descend on Mortgage Market – Minyanville, Andrew Jeffrey (partially explaining why pools of distressed homes and mortgages are so hard to find)

…The distressed whole loan market remains largely frozen, as sellers hope for higher prices from buyer's backed by cheap government money. Buyers, meanwhile, remain cautious, since, despite recent "positive" datapoints coming out of the housing market, real-estate prices remain volatile in most markets.

The private market for delinquent mortgages once held the potential for a market-based solution to the country's housing woes. It was no magic bullet, to be sure. But by fostering an environment where private capital could seek out advantageous investments, housing markets would have started down the path towards true price discovery.

As it happened, however, massive government intervention into the market via TARP, the foreclosure moratorium, the PPIP, and other programs forestalled the inevitable, pushing the date of the eventual recovery years into the future.

Mortgage Rates and the Ten Year Yield – Calculated Risk

Fed survey sees signs recession is easing – The Associated Press

A Federal Reserve snapshot of economic conditions issued Wednesday found that five of the Fed's 12 regions said the "downward trend is showing signs of moderating."

In addition, "several" regions said their expectations of future business activity have improved, although they don't see a "substantial increase" through the end of the year. In the last survey, several regions simply noted signs of some stability at low levels.

Altogether the assessments of businesses on the front lines of the economy appeared to be slightly better than those they provided in the previous report issued in mid-April.

Banks Trade TARP for Bonuses, Debauchery, Jets: Jonathan Weil – Bloomberg

Lock up the booze, and hide your wallet. America’s most powerful, too-big-to-fail banks are turning in their TARP money. And you know what that means: It’s party time again on Wall Street.

Revisiting the Merrill acquisition – Reuters, Felix Salmon

California leading growth in nation's green jobs economy, study finds – The Los Angeles Times

Unemployment Claims: Record 6.8 Million Continued Claims – Calculated Risk

Retail Sales in May: Off 10.8% from May 2008 – Calculated Risk

Debt Fret: The Price of Printing Money – Minyanville, William Fleckenstein

Money-printing has bought us another round of speculation, and while we don't know what other unintended consequences will follow, it looks increasingly likely that this latest round has also "bought" a funding crisis. What it almost surely hasn't created is a self-sustaining recovery.

The 10-Year Treasury Yield Dilemma – Minyanville, James Kostohryz

In my view, this increase in long-dated yields does not signal a serious loss of faith in the credit of the US Treasury, nor does it signal any sort of serious future inflation. Rather, this increase in yield is a function of a technical supply and demand phenomenon – plain and simple.

US family stumped: How did Christmas photo get in life-size ad in Czech Republic store? – Breitbart News

Mortgage Market Remains Solidly Frozen – Mish

What now Big Ben? You've already blown over a third of your $1.25 trillion commitment and all you have to show for it is more garbage on your balance sheet and a locked up refi market.

One thing is clear, Ben Bernanke and the Fed have lost control of the mortgage market (not that the Fed was ever in control in the first place). They weren't. It was all an illusion.

Option ARMs Threaten Housing Rebound as Resets Peak – Bloomberg

OptionARM Homebuyers See Monthly Payments Go From $95 To $3,500 – Clusterstock

Foreclosure activity see-sawing – The Contra Costa Times

Nationwide, foreclosure activity increased by 18 percent on a year-to-year basis while statewide there was a 23 percent increase.

"May foreclosure activity was the third highest month on record, and marked the third straight month where the total number of foreclosure filings exceeded 300,000 - a first in the history of our report," James J. Saccacio, RealtyTrac's chief executive officer said in a statement.

Bruce Norrris, founder of The Norris Group, a Riverside-based real investment firm, expects the Bay Area to continuing seeing more foreclosures in the coming months, despite the June 15 rollout of a new state law that is intended to stem the foreclosure tide. The law requires lenders to delay foreclosure proceedings for 90 days on owner-occupied homes purchased between Jan 1. 2003, and Jan. 1, 2008, in cases where the financial institution does not offer a loan modification program to borrowers.

"I don't think it's going to be a real solution," said Norris, adding that many lenders already have loan modification programs in place. "I think in three months Northern California is going to be inundated with foreclosures," he said.

Peter Schiff on The Daily Show, Context From Mish

2009-06-10T09:29:00.001-07:00

Peter Schiff has been very correct in his predictions of economic and housing collapse over the last few years. Here is his appearance on The Daily Show with Jon Stewart:

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Peter Schiff

www.thedailyshow.com

Daily Show
Full Episodes

Political Humor

Newt Gingrich Unedited Interview

Where Schiff may be wrong is in his expectation of hyperinflation. It’s true that the Government is flooding the market with dollars, but debt (also money) is being destroyed even more quickly (deflation, not inflation). This may change at some point down the road…perhaps when the bankruptcies end…but not in the next year or two.

This is an important argument to consider when looking at real estate as a hedge against inflation. If there were inflation, especially hyperinflation, then owning anything tangible, like real estate, is a good thing. Prices, in dollars, my rise, though no real wealth would be created because dollars would be worth less.

Consider Mish’s piece Peter Schiff Was Wrong

Hyperinflation or Hyperventilation?

Schiff asks "But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? ...."

That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.

He never bothers to ask, "What if it doesn't?" The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.

Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no "real demand" for dollars, it's just deleveraging.

I agree that deleveraging is indeed happening.

But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense.

…

Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.

However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.

…

Peter Schiff was wrong about deflation.

There is no debate (at least there should not be a debate) that the US is in deflation. The conditions in the US are exactly what one would expect to see in deflation. The score is a perfect 15 out of 15. Please see Humpty Dumpty On Inflation for details.

I believe I know Schiff's rebuttal. He will talk about soaring money supply. Yes, money supply is indeed soaring, but destruction of bank balance sheets is happening faster.

Required Reading: Wednesday, June 10th 2009

2009-06-10T09:08:00.001-07:00

Foreclosure Goes Upscale – Businessweek

When will this second wave of foreclosures crest? David Crowe, chief economist of the National Association of Home Builders, doesn't see the peak coming until 2011, later than most other experts predict. Foreclosures typically top out after unemployment does, and Crowe doesn't expect that to occur until late this year. After that, Crowe says, more people will lose their homes because of upward resets on adjustable-rate mortgages. Credit Suisse says mid-2010 is the peak for scheduled resets, and resets will stay high well into 2012. While most of the subprime loans issued during the boom years have been washed out by now, there are still about half a trillion dollars' worth of option ARMs, which allow borrowers to add unpaid interest to the principal they owe. There's an even more alarming $2.5 trillion in "alt-A" loans, which are between prime and subprime and include a big chunk of the mortgages that required little or no proof of income or assets. Most of these loans were issued to people with relatively good credit who were buying more expensive homes.

The Coming Currency Crisis – Minyanville, Jeffrey Cooper

Given that the Fed was born on the cusp of 1913-1914, does that mean that this July will choreograph momentous change as well? Will the red shoots from the second half of 2008 sprout Venus Fly Traps for the bulls in July 2008? Will the steroids of stimulus strike out and the sultans of swing sell out into quarter end? Will the seeds of chaos for the dollar sown in 2008 take root a year later this July?

Homebuyers Crash Into Appraisal Roadblock – Minyanville, Andrew Jeffrey

Median home prices drop below 1989 levels in some parts of Southland – The Los Angeles Times

In parts of Southern California, the housing crash has upended a basic tenet of the American dream: that home values always increase over the long term.

Properties in several areas are selling for less than they did 20 years ago, and that's not even counting the effects of inflation.

It will take Wells Fargo longer to repay TARP – The San Francisco Chronicle

Remember when Wells Fargo & Co. had to be dragged kicking and screaming into taking TARP money, said it couldn't wait to pay back the $25 million, and Chairman Richard Kovacevich called the government's stress test asinine? The San Francisco bank sang a different tune on Tuesday when it explained why it wasn't one of the 10 major U.S. banks repaying the TARP loans.

Survey: Venture capital firms look outside U.S. – The San Francisco Chronicle

Only 17 percent of venture capitalists expect to increase their investments in the United States over the next three years, while more than half are investing in companies outside the country, according to a new survey.

Weak Hiring and the Jobless Recovery – Calculated Risk

May Jobs Report Not So Great After All – Clusterstock

Welcome to California, Home of the Highest Taxes in the Nation – Mish

Home Prices Have Hit Bottom – BusinessWeek

I’m telling you it’s true. The slump is over. Don’t believe what you read about a second wave of foreclosures coming and things getting worse. In Southern California, where I live, sales are coming back in a big way.

Treasuries Decline as Russia May Pare Holdings of U.S. Debt – Bloomberg

Commercial Real Estate: A Ticking Time Bomb for Banks? – Minyanville, Minyan Peter

Dumped mattress lands cash in trash in Israel – Breitbart News

A stash of cash landed in the trash when a woman in Israel dumped her mother's mattress not knowing it was stuffed with the equivalent of about one million dollars.

Israeli media reported that the 40-year-old woman showed up at a garbage dump in a panic on Tuesday, looking for the valuable bedding.

She had bought a new mattress for her mother and, wanting the gift to be a surprise, threw away the old one. She then found out the decades-old mattress contained her mother's life savings.

America’s Sea of Red Ink Was Years in the Making – The New York Times

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama…

Oakland Considers Bankruptcy

2009-06-09T15:50:00.001-07:00

From The San Francisco Chronicle Budget woes have Oakland mulling bankruptcy

Even though city officials would prefer to avoid a public conversation, behind closed doors the Oakland City Council has discussed filing for bankruptcy protection in the midst of a $100 million budget deficit.

…

Consider the city's cash position: Out of next year's general fund of approximately $415 million, police costs are estimated at $212 million, fire protection service $103 million and $41 million in debt service payments. That leaves about $60 million to pay for everything else, from library services to recreation centers to public works.

And that calculation doesn't include $50 million more in deferred debt service in a budget proposal presented to the council last month by Mayor Ron Dellums.

"We are in the worst recession since 1981," said UC Berkeley Professor John Ellwood, an economist who worked in the Congressional Budget Office. "This recession is a bit different in that it's being driven by the housing bubble, but as more and more people ask for property-tax reassessments, it's going to leave a huge funding gap for cities," Ellwood said.

It's already begun. Alameda County Assessor Ron Thomsen said tax assessments fell $13.6 billion in the fiscal year that will end June 30. "Our assessment roll will go down 2 percent, and we've never had a year-to-year drop ever in stats going back to 1958," he said.

Like a rock rolling downhill, those reduced property-tax revenues will be passed onto cities by a state government facing its own economic calamity created by a mammoth $24 billion budget shortfall.

That will leave Oakland, which receives about 15 percent of the county's annual property-tax revenues, in an even deeper hole. And with half of 2009 already in the rear view, the estimates on next year's property tax revenues are even lower, Thomsen added.

For the City Council, which is expected to present more budget options next week, it is the end of the line.

It is faced with three choices: drastic pay reductions across the board, including police and fire services; massive layoffs; or bankruptcy.

For context, read Judge Rules Vallejo Can Void Union Contracts

Regarding Oakland, Mish adds:

Oakland should do itself a favor and beat the rush by declaring bankruptcy now unless the unions come forth and voluntarily agree to lower benefits and stop all defined benefit plans going forward.

…

By the way, expect to see a surge of cities considering bankruptcy. In addition expect to see municipalities in Florida and Alabama to do the same. The interesting thing to watch will be how far and how fast this spreads.

Michelle Kaufmann Closes: Green and Hip is Changing

2009-06-09T15:10:00.001-07:00

The Bay Area’s Michelle Kaufmann is a pioneer in modern, green, prefab housing. She’s been recognized in countless magazines throughout the design world as a leader in the green housing movement. Her designs are sleek, modern, and gorgeous. Not only does she represent the future of home design, but her and her many copycats represented what it meant to be ultra-hip and ultra-green during the housing boom.

When money was cheap and green was glam, business boomed. But, as the economy sours, business is down. Way down. As social mood continues to evolve into a more-with-less/smaller-is-better-culture, what it means to be green and hip is changing into something more austere and homegrown.

From The Los Angeles Times Green prefab firm Michelle Kaufmann Designs is closing

Green prefab architecture firm Michelle Kaufmann Designs is calling it quits, a victim of the credit crisis and broader woes in the economy. In a letter sent over Memorial Day weekend, Kaufmann told clients the firm would close by the end of this week. She confirmed the news in a phone interview Tuesday afternoon.

Kaufmann, who worked for Frank Gehry and Michael Graves early in her career, was a pioneer in the so-called modern prefab movement of recent years. She was also one of the first architects to make a persuasive case that prefab design, which reduces construction waste and damage to building sites, among other benefits, was in a number of ways synonymous with sustainability.

After launching her own firm in Northern California in 2004, she oversaw an office that grew to include two dozen staffers, operated its own factory outside Seattle and completed more than 40 prefab houses, most of them on the West Coast. The firm developed several house templates and also offered lighting, sinks and other products on its website.

Kaufmann sold the factory last year and in November trimmed the size of her Oakland office to 17. She thought those moves would help see the firm through the recession. But two factories MKD worked with have gone out of business since then, and clients and potential clients have found it almost impossible to get financing.

"Being a small company without significant reserves, that was more head wind than we could bear," she said.

The demise (for now) of hip, green, expensive architecture represents a changing of the guard to new ways that we consider being green:

Raising chickens is a hot new trend
More families are planting gardens and growing food
Frugality has become cool – Be green not from buying “green” products, but by buying nothing at all.

The new, frugal, “green" may be best represented by the Dervaes family and their “urban homestead” in Pasadena. They live on 1/5 of an acre and produce 6,000 lbs of produce annually. They brew their own biodiesel for their car. They raise chickens, ducks, goats, and bees. Their website is www.pathtofreedom.com

Here is their mission:

Path to Freedom strives to inspire individuals to "think globally, act locally" by motivating them to live a simpler and more fulfilling life on the path to eco-stewardiship.

Our travels can never be over; it is an entire life’s journey and we have many more miles to go. However, we are proving that we can attain our goal if we advance in stages whatever the circumstances. Our hope is that by documenting our personal experiences we can offer encouragement to those who are on the same journey towards a simple, self-sufficient lifestyle.

The ultimate goal is to live as simply as possible in harmony with nature and ourselves. A back-to-basics lifestyle that will re-establish us to the land, healing the disconnection of our lives and leading to the restoration of the earth.

Part of Path to Freedom's mission is to educate individuals and families to integrate sustainable living practices and methods into their daily lives. Our focus is on: organic gardening, permaculture, solar cooking, composting and other back-to-basic, sustainable technologies and practices relating to the home environment.

Going this “green” won’t be for everyone. Yet, almost everyone can relate to a feeling of “disconnection” from the consumerism of the last decade.

High-Tech Jobs Lost

2009-06-09T09:37:00.001-07:00

George Avalos writes for The Contra Costa Times: East Bay tech jobs melting away

Hundreds of high-tech job losses this year alone are becoming a grim new challenge for a wobbly East Bay economy that's attempting to stabilize itself.

So far in 2009, employers have shed just under 1,850 jobs in the technology or telecommunications sector, according to information culled from state and regional agencies.

To be sure, technology and telecommunications job losses might not boast as much notoriety as the employment devastation unleashed by the implosion of the banking, mortgage and automotive industries. But tech and telecom cutbacks have also jolted the East Bay in a significant way.

It's possible the jobs lost in the current tech downturn won't be resurrected, even when the economy rebounds, warned David Coursey, an industry analyst and blogger with PC World.

"The number of tech jobs goes up, goes down, and goes up again, but each peak is lower than the previous one," Coursey said.

The heyday of the tech industry in terms of jobs was during the Internet bubble of the late 1990s. That bubble evaporated after investors grew impatient when numerous online startups failed to produce profits — and also displayed no evidence they could ever get in the black.

"We hit a maximum number of tech jobs during the dot-com boom," Coursey said. "We might never reach that level of employment again.”

Required Reading: Tuesday, June 9th, 2009

2009-06-09T09:23:00.001-07:00

California Budget Recalled: The $24.3 Billion Budget Deficit. Missed Economic Projections and Financially Betting on a Recovery that Never Showed Up. 20 Years of Bubbles. From Tech to Real Estate. – Dr Housing Bubble

Nobel Winner Krugman Sees U.S. Recession Ending Soon – Bloomberg

June 8 (Bloomberg) -- The U.S. economy probably will emerge from the recession by September, Nobel Prize-winning economist Paul Krugman said.

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in a lecture today at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

Five Things: Predicting the Recession's End – Minyanville, Kevin Depew

It's true -- people see what they want to see. A headline writer approaching the market from an optimistic perch can't be faulted for swooping in and locking onto the "recession's end" theme anymore than a grizzled veteran with ink-stained hands can be faulted if she chose the "Krugman Predicts Lost Decade for US" theme.

Supreme Court Delays Sale of Chrysler to Fiat – The New York Times

The Economy Is Still at the Brink – The New York Times

The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. At another fund-raising event, for Senator Harry Reid, President Obama said: “We didn’t ask for the challenges that we face. But we are determined to answer the call to meet those challenges, to cast aside the old arguments and overcome the stubborn divisions and move forward as one people and one nation .... It will take time but I promise you, I promise you, I’ll always tell you the truth about the challenges we face.”

Keeping that statement in mind — as well as an abiding faith in the importance of properly functioning capital markets — we have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world….

With median home price at $420,000 in April, have we hit bottom? – The Santa Cruz Sentinal

A Brief History of Credit Disasters – The Big Picture, Barry Ritholtz

10 big banks get OK to repay $68 billion in bailout money – The Los Angeles Times

Some owners who used homes to buoy finances are sinking – The Los Angeles Times

In better economic times, Santa Clarita mortgage broker Fred Arnold relied on a home equity line of credit if his cash flow was uneven and he needed to cover payroll.

But when home sales crumbled last fall, there was no such backstop for the business. His home was still worth more than the mortgage, but his bank was retrenching and had shut down the credit line. So Arnold sold his house, used some of the proceeds to keep his business afloat and bought a smaller home.

Florida commercial fisherman hooks live, unstable missile in Gulf waters – Breitbart News

Authorities in Florida say a commercial fisherman reeled in a live missile in the Gulf of Mexico and kept it on his boat for 10 days.

The sheriff's office in Pinellas County says the boat's captain, Rodney Soloman, hooked the air-to-air guided missile 80 kilometres off the Panhandle town of Panama City.

The U.S. air force and navy use Gulf waters off the Panhandle for weapons training.

CEO forgot to tell wife about pay cut – Reuters

British Airways Plc Chief Executive Willie Walsh is showing solidarity with his staff in planning to work without pay next month as part of cost cuts, but the move may not have gone down so well with his wife…

The Commercial Real Estate Shoe Has Dropped

2009-06-08T10:53:00.001-07:00

There is a terrific article in The Contra Costa Times: Real estate woes not solely residential

A vast auto dealership is empty in Oakland, visible from the freeway. In Pittsburg, a big housing development looms over a downtown street, unfinished and vacant. Hotels in Brentwood and Oakland are isolated behind cyclone fences. A mammoth residential development is idle next to the Caldecott Tunnel.

These troubled projects all are mute testimony to a financial malaise that first sickened the housing market and has now infected a broader part of the wheezing regional economy.

During a half-year period stretching from October through the end of March, mortgages totaling $784 million have slumped into default for dozens of commercial or development properties, including some huge residential subdivisions, in the East Bay.

"The commercial real estate shoe has dropped, and it is sitting on the ground crying," said Christopher Thornberg, partner and economist with Beacon Economics. "This is a huge problem."

This new downturn is also a significant challenge for the economy generally. Undeveloped or partially built projects stalled by foreclosures or bankruptcy can weaken economic growth in a community. Existing projects that are in default can fail to attract retailers or new businesses to a city. Buildings that are delayed in getting off the ground because of financial woes portend fewer construction jobs.

Bottom line: The recession that began with sales of individual houses, then spread to banks, retailers and automakers, now has commercial real estate in its grip. This relapse for the economy has arrived just when the fallen residential sector has begun to stagger off the ground.

…

An array of East Bay projects are involved. Retail, office, hotel, mixed-use and land projects and other kinds of commercial or development sites went into default during that half-year period.

Oakland, Fremont, Concord, Walnut Creek, Brentwood, Hayward, Pittsburg, Livermore, San Ramon, San Leandro, Richmond, El Cerrito, Martinez, El Sobrante, Orinda, Bay Point, Bethel Island, Clayton, Castro Valley, and Union City were hit by these delinquencies.

Some are high-profile:

Southland Mall in Hayward couldn't pay off an $81 million mortgage that matured and its owner has declared bankruptcy.

The 1,600-acre Wilder development, a huge subdivision of luxury homes and public uses in Orinda, is in a $180 million default.

Delta Coves, a Bethel Island project expected to be a new Discovery Bay, is stalled by a $55 million default.

Multiple residential-retail mixed-use developments languish in downtown Oakland, hit by defaults totaling $140 million.

Part of the Park N Shop center in Concord was hit by a $12.8 million default.

The Sheraton Pleasanton Hotel suffered a $12.2 million default.
…

Retail and office buildings could be hit the hardest.

"You have a lot of concerns with retail because of the shopping centers that were put up in places like east Contra Costa and San Joaquin County," said William Nork, a senior vice president with Cornish & Carey, a commercial real estate company.

"With office buildings, you see more vacancies and falling rents," Nork said.The worsening woes for commercial property can adversely affect communities that were expecting completion of a key development.

My Thoughts: It makes perfect sense…during the boom, office and retail space were overbuilt. Now that the economy is pushing the marginal tenants out of business, vacancy is skyrocketing and rents are collapsing. I recently read about the construction of the Twin Towers in New York City. Hundreds of thousands of un-needed square feet of commercial rental space were thrust on the market, depressing rents and property values for a decade.

…

The commercial development woes could imperil already shaky banks, warned Michael Yoshikami, president of Walnut Creek-based YCMNET Advisors, an investment firm.

"We are just beginning to see the impact of the problem on bank balance sheets because of commercial property delinquencies," Yoshikami said. "Banks will face rising commercial defaults."

The solvency of some banks may be jeopardized by commercial failures.

"It is going to be a mess for bank balance sheets," Thornberg said.

Numerous commercial mortgages will mature in 2010, 2011, and 2012, which presents new problems, said Hans Lapping, an attorney and shareholder with the Walnut Creek office of law firm Miller Starr Regalia.

"No one anticipated the credit market would collapse," Lapping said. "You have a tremendous amount of debt that people will not be able to refinance."

…

Yet the commercial property slump can benefit companies that hunger for lower rents. Opportunities may emerge for investors, said Bruce Ring, a principal with law firm Morgan Miller Blair and an attorney with the Walnut Creek realty practice.

"A lot of money that was lined up to buy residential is starting to look at income-producing commercial properties," Ring said. "They are looking at apartment buildings and retail properties with creditworthy tenants."

My Thoughts: If this is the beginning of the commercial real estate downturn, it would certainly seem premature for investors to be buying…especially if rents are trending downward.

Required Reading: Monday, June 9th

2009-06-08T09:55:00.001-07:00

Jobs and the Unemployment Rate – Calculated Risk

The Psychology of Short Sales by Tanta, April 2008 – Calculated Risk

Consumer Bankruptcy Filings up Sharply – Calculated Risk

Beer run on a lawn mower leads to OUI charge – Breitbart News

VASSALBORO, Maine (AP) - A Maine man has been charged with operating under the influence after he and a friend made a beer run on a riding lawn mower.

Police say 51-year-old Danforth Ross of Vassalboro was charged May 29.

Trooper Joe Chretien had been flagged down by several motorists warning of a wayward mower and made the arrest after Ross and his friend emerged from a variety store with two cases of beer.

The depression quietly deepens – Telegraph, Ambrose Evans-Pritchard

The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).

Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.

This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap. It is Angela Merkel who plays with fire.

Real estate woes not solely residential – The Contra Costa Times

A vast auto dealership is empty in Oakland, visible from the freeway. In Pittsburg, a big housing development looms over a downtown street, unfinished and vacant. Hotels in Brentwood and Oakland are isolated behind cyclone fences. A mammoth residential development is idle next to the Caldecott Tunnel.

These troubled projects all are mute testimony to a financial malaise that first sickened the housing market and has now infected a broader part of the wheezing regional economy.

During a half-year period stretching from October through the end of March, mortgages totaling $784 million have slumped into default for dozens of commercial or development properties, including some huge residential subdivisions, in the East Bay.

"The commercial real estate shoe has dropped, and it is sitting on the ground crying," said Christopher Thornberg, partner and economist with Beacon Economics. "This is a huge problem."

Interactive: California budget balancer - The Los Angeles Times

CHART OF THE DAY: House Prices Are Getting Reasonable Again - Clusterstock

The Five Waves Of The Housing Collapse – Clusterstock

Oregonians vs. Californians – Willamettelive

I didn't know Oregonians hated Californians. I didn't know I would get a cold snarl from the worker at the poorly lit DMV on South Liberty when I handed in my California I.D. I didn't know the pastor of a prominent local church would poke fun at potential supporters moving north into his community in lieu of cheaper housing. And most of all, I didn't know Salem was such a great city.

So Many Square Feet, So Few People – 100K House

So, seeing this wide range, the question remains . . . how much space do we need? Has the increase in sfpp seen a correlating increase in the quality of life? Are we three times more comfortable than we were in 1950? Are we three times happier? Could we, perhaps, manage to live in slightly smaller spaces than those with which we have become accustomed, particularly if it proves to have a positive impact on our environment, traffic congestion and other quality of life issues?

Five Things: "Real" Economic Data and Market Separation – Minyanville, Kevin Depew

The End of Ponzi Prosperity – Minyanville, Satyajit Das

Consumption, rather than investment, drove growth, particularly in the developed world. Debt-fueled consumption became the norm. In the new economy, there were three kinds of people -- the haves, the have-nots, and the have-not-paid-for-what-they-haves.

Robert Shiller: Why Home Prices May Keep Falling

2009-06-08T09:50:00.001-07:00

From The New York Times, Why Home Prices May Keep Falling

HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.

Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.

But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.

There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.

Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.

On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.

All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.

For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic “regime change” — a shift big enough to make people change their thinking.

But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market.

Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.

Required Reading: Friday, June 5th

2009-06-05T14:22:00.001-07:00

Fed Still Walking Tightrope Between Inflation and Deflation – Minyanville, Minyan Peter

Earlier this spring, Washington played the role of cheerleader, shouting that the worst was behind us, the dollar was looking strong, there were "green shoots," and deflation was a concern they were prepared to fight with whatever tools necessary.
With the rate of economic decline slowing, rates backing up, the weaker dollar, and higher commodity prices, Washington rhetoric must now move the other direction.

How Long Can Commercial Real Estate Remain Irrational – Minyanville, Fil Zucchi

UK Government On Brink Of Collapse – Clusterstock

Chase Mortgage Ad From 2005 Is Funny And Scary (JPM) – Clusterstock

6-5 Beware Real Estate False Bottoms – The Field Check Group, Mark Hanson

Bottom Line: Headlines are about to get wild, as the age of false bottoms in real estate is upon us.

Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate – Calculated Risk

Mish Speaks at Google – Calculated Risk

Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4% – Mish

The official unemployment rate is 9.4% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.4%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.
Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.
Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Regardless of whether you think these are depression level statistics, unemployment is high and rising. Moreover, the "adverse scenario" in the Fed's stress test was unemployment at 10.3% at the end of 2010.

I stated many months ago we are going to be close to 10% by August and close to 11% by the end of 2009. It seems I was an optimist. We might hit 10% by June or July.

23-year-old rancher from impoverished area of South Dakota claims $232.1 million Powerball jackpot – Breitbart News

Chet Brokaw, THE ASSOCIATED PRESS PIERRE, S.D. - A 23-year-old rancher whose family has fallen behind in their taxes and recently had a mobile home repossessed has claimed a US$232.1 million Powerball jackpot.

Neal Wanless, who lives on his family's ranch near Mission, South Dakota, bought the winning ticket in the nearby town of Winner late last month.

He was there on a trip to buy livestock feed.

He will take home $88.5 million in a lump sum payment after taxes are deducted.

Wanless says his family has been helped by their community and that he "intends to repay that help many times over."

He said in a statement issued Friday that he plans to continue ranching, albeit on a larger ranch.

He says he recently told his horse, Eleanor, that "It'd be nice if we go for a longer ride than usual on a bigger ranch of our own."

Low Interest Rates May Not Be Coming Back

2009-06-04T10:45:00.001-07:00

The Wall Street Journal reports Low Mortgage Rates Are Going, Going… Looking to refinance? If you haven't locked in, you may already be too late.

If you're looking for a new 30-year mortgage, last week's events from the financial markets carry a very simple message: Get 'em cheap while you still can.

Rates on conforming 30-year loans jumped dramatically in just a few days, ending the week at an average of 5.27% according to Bankrate.com. That's still OK by historic standards, but it's a jump from the levels seen just a few weeks ago, when you could get loans at 4.75% or below.

The underlying cause isn't hard to find. Rising government debts, and burgeoning hopes of an economic recovery, are pushing up long-term interest rates on government debt. The yield on the 10-Year Treasury, which was barely 2% near the end of last year, surged to 3.67% late last week before settling back slightly. And that, in turn, pushes up rates on other long-term loans.

What does this mean for you?

This surge in mortgage rates, if it continues, is ominous news all around. It's bad for those trying to refinance an existing mortgage, those looking to buy a new home, and those looking to sell their home. It may also be bad for the stock market, and maybe even for the dollar, too. More on that later.

For those trying to refinance: If you hadn't locked in the rate already, you are probably out of luck. You may be stuck with higher rates.

…

Why is this dangerous for the stock market? The rally in recent months depends on the economy stabilizing, and then recovering. There have been some hopeful signs in recent months. But of course the consumer has benefited from at least two big doses of financial adrenaline this winter: Refinancing gains and cheaper fuel. Both put extra money in their pockets. Both now appear to be over.

It is two months since Federal Reserve chairman Ben Bernanke unveiled plans to print money to buy up Treasury bonds. The aim was to keep long-term rates down. He will have to step up the process. The federal government may also wade back into the market for mortgage backed securities with a similar strategy. The U.S. Mint will have to move to a triple shift to print all the money.

Alas, there is only so far this can succeed. Treasury bonds are IOUs of the federal government. But so are dollar bills. Ultimately the bond market may notice that Uncle Sam is only paying off his IOUs with more IOUs. Gamblers who do this tend to find their markers start trading at a discount. When it does, neither is likely to command a premium.

Andrew Jeffrey writes for Minyanville Keepin' It Real Estate: The Fed Loses the Mortgage-Rate Battle?

…And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation's housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can't grow with mortgage rates this "high," and that the Fed is derailing the recovery by letting rates move up.

To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.

As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn't remain mired in its current malaise. This means more printing press activity, more "quantitative" easing, and more social-welfare programs packaged as "progressive" economic policy.

Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.

Links 06/04/2009

2009-06-04T09:45:00.001-07:00

Contra Costa braces for deeper budget cuts in core programs – The Contra Costa Times

Latvian debt crisis shakes Eastern Europe – Telegraph, Ambrose Evans-Pritchard

Unemployment Claims: 621 Thousand – Calculated Risk

Mortgage rates rise – MarketWatch

CHICAGO (MarketWatch) -- Average rates on the 30-year fixed-rate mortgage hit a 25-week high after jumping more than a third of a percentage point this week, according to Freddie Mac's weekly survey of conforming mortgage rates, released on Thursday.

The 30-year fixed-rate mortgage averaged 5.29% for the week ending June 4, up from last week's 4.91% average. The mortgage averaged 6.09% a year ago.

Many U.S. Retailers’ Sales Miss Expectations – Reuters

While there have been early signs of stabilization such as improving consumer confidence, issues such as unemployment and the troubled housing market have led many Americans to take on a thriftier attitude.

Upscale department stores posted some of the steepest drops in sales at stores open at least a year, or same-store sales.

"The high end continues to struggle, those in the discretionary spend segment are really continuing to get clocked," said Ken Perkins, president of Retail Metrics.

Brown resignation rumours hit pound – The Financial Times

GM bankruptcy will be felt by sports teams, media as ad spending diminishes – The Los Angeles Times

Bernanke: Start work now to curb budget deficit – The Associated Press

Bernanke acknowledged that Congress and the administration face "formidable near-term challenges" that must be addressed as they take steps to stabilize the financial system, reduce home foreclosures and spur banks to lend more freely. The success of these efforts will be crucial to turning the economy around.

However, he cautioned: "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

Group lists eco-friendly businesses – The San Francisco Chronicle

Feds Bringing Back No Money Down Mortgages – Clusterstock

"Preposterous Prices" For Luxury Condos In Philadelphia – Mish

Alabama County Seeks SEC Help in Bond Crisis as Suit Looms – Bloomberg

June 4 (Bloomberg) -- Jefferson County, Alabama, asked the U.S. Securities and Exchange Commission to help it escape bond deals that have left the county struggling to avoid bankruptcy for more than a year.

The appeal follows the disclosure by JPMorgan Chase & Co. that it may be sued by the SEC for its work on bond and interest-rate swap sales for Jefferson County’s sewer system. The financings converted more than $3 billion of the debt to floating-rate bonds, which became costly when the crisis on Wall Street sent interest costs soaring last year.

'Nation of Savers' Will Hurt Recovery, Fed Official Says – Mortgage News Daily

"As people come to grips with the fact that their finances are more uncertain than they had ever thought they would be, they are not likely to resume spending at the pace they once did," she said. “We should not expect consumer spending to return to the 70 percent share of GDP that it posted just before the recession began.”

The Eastern European Domino? – Minyanville, Todd Harrison

Make or Break for the Market – Minyanville, Todd Harrison (S&P 950 resistance)

Five Things: After Bearishness, the Fallout – Minyanville, Kevin Depew

Pre-Altared: More Used Wedding Gowns Go Back on Market – The Wall Street Journal

Now, the combined forces of the Web and the recession are bringing many of those dresses out again. As online venues for selling dresses proliferate, wedding planners and other specialists say that they're seeing more brides selling their dresses.

NYC Turns Luxury Units Into Shelters For Homeless – CBS News

The condos couldn't attract buyers in the current housing market. Now they're filling a need for some of the city's "unprecedented" number of homeless families, according to a report in The Daily News.

The apartments in Crown Heights were supposed to sell for $250,000 to $350,000. The amenities include granite countertops, terraces, marble bathrooms and walk-in closets.

Developer Avi Shriki says he had to come up with a Plan B "when the market went south." He signed a 10-year contract with the Bushwick Economic Development Group to turn the building into a shelter.

Eminem: I was in on Bruno gag – The Sun

Em appeared to be outraged by the Austrian fashion reporter antics, storming out of the ceremony seconds after his face came within inches of Bruno's dangling "kugelsack".

However, as Slim Shady admits, he planned the whole thing with SACHA BARON COHEN and was mighty pleased with the result.

He added: "Sacha called me when we were in Europe and he had an idea to do something outrageous at the Movie Awards.

"I'm a big fan of his work so I agreed to get involved with the gag.

Misleading Headline: Pending home sales at 8-year high

2009-06-03T16:18:00.001-07:00

The headline in today’s Contra Costa Times Business Section reads: Pending home sales at 8-year high

Really? There are more homes pending sale than there have been for 8 years?

No.

The first paragraph clears up the confusion.

The number of U.S. homebuyers who agreed to buy a previously occupied home took the largest monthly jump in nearly eight years in April, but there are still plenty of danger signs for the U.S. housing market.

Here is the actual press release and data: Pending Home Sales Index Rises

Our Wallet is Empty

2009-06-03T09:26:00.001-07:00

From the Sacramento Bee: Schwarzenegger: 'Our wallet is empty'

Declaring that "California's day of reckoning is here," Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a rare mid-year joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

"People come up to me all the time, pleading 'governor, please don't cut my program,'" he said. "They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice.

"Our wallet is empty. Our bank is closed. Our credit is dried up."

…

The short-term problem faced by lawmakers is closing the budget gap in time for state officials to go the private investment markets and borrow billions of dollars to get the state through the first months of the fiscal year that starts July 1.

State Controller John Chiang has warned that without such loans, the state's coffers will run dry by the end of July. Chiang said last week that as a practical matter, the budget must be patched up by mid-June in order to give officials time to borrow the money.

Chiang reiterated his warning after the governor's speech, saying whatever plan lawmakers and Schwarzenegger come up with has to be viewed as "credible" by Wall Street.

"I think the governor was trying to light a fire and provide some inspiration," the controller said. "He's offered some specific solutions to help us get to resolving some of the issues."

Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; cutting pay for most state workers and laying off others; closing 80 percent of the state's parks, and wiping out or paring back on health and social service programs for California's neediest residents.

The Sacramento Business Journal adds: Wells Fargo CEO says California in 'financial ruin'

Wells Fargo CEO John Stumpf said Thursday that California’s large budget deficit means state services will have to be cut.

“The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

…

The state of California is struggling with a growing budget deficit after tax and financial measures failed at the ballot box this month. Earlier this year, the state delayed tax refunds and other payments due to what State Controller John Chiang called a “cash crisis not seen since the Great Depression.”

The state recently asked the federal government for assistance in guaranteeing California’s short-term borrowings, fearing that it could not raise the money standing on its own credit.

…

“This one feels different,” Stumpf said. “It feels different in the respect that the whole world is in recession.”

What does all of this mean for real estate? Expect higher taxes, reduced services, and more cities to go the way of Vallejo. Economic recovery is fighting an uphill battle.

Should Tim Geithner do a short sale?

2009-06-03T09:02:00.001-07:00

The Associated Press reports Geithner faces sluggish market, rents out NY home

After reducing the price on his house in a tony New York City suburb to less than he paid for it, Geithner still couldn't sell and recently rented it out instead, according to real estate agents familiar with the deal.

Geithner put his five-bedroom Tudor near leafy Larchmont on the market for $1.635 million in February, after heading to Washington for his job as the nation's top economic official.

A few weeks after the asking price was dropped to $1.575 million, the home was rented for $7,500 a month on May 21, said the agents, Scott Stiefvater of Stiefvater Real Estate and Debbie Meiliken of Keller Williams Realty New York.

Neither was directly involved in the rental; the name of the broker and agency that arranged it were not immediately available.

Although $7,500 might seem like a lot of rent, it probably falls a bit short of the monthly mortgage payments on the Geithners' two loans totaling $1.25 million, plus $27,000 a year in property taxes.

Treasury Department representatives didn't immediately return calls about Geithner's home Monday and Tuesday. He was in Beijing for talks with Chinese leaders.

Records show Geithner and his wife, Carole Sonnenfeld Geithner, paid $1.602 million for the home in 2004.

At least he’s putting his money where his mouth is. He really must believe that things will get better.

Links 06/03/2009

2009-06-03T08:56:00.001-07:00

ADP Shows Private Employment Decreased 532,000 in May – Calculated Risk

GM bankruptcy forever linked to Harlem dealership – Reuters

Before GM filed its historic bankruptcy on Monday, Chevrolet-Saturn of Harlem made its own Chapter 11 filing. The dealership's move gave the automaker legal access to its preferred bankruptcy court in Manhattan.

Normally a Detroit-based company such as GM would file in Michigan or Delaware, where it is incorporated. The only way for it to file in New York would be through a subsidiary that did most of its business in New York or was incorporated in the state.

Court papers appear to describe a car dealer that sold significantly more corporate bonds than Camaros, running up $40 billion of debts and obligations to unions.

Promised Help Is Elusive for Some Homeowners – The New York Times

Yes, she was teetering toward delinquency. She was among millions of homeowners rapidly sliding toward danger for whom the Obama administration had devised an aid program — some already in foreclosure proceedings, others headed that way as they ran out of means to make their payments. But unlike those in imminent peril of losing their homes, Ms. Ulery had never missed a payment.

“I don’t know who this bailout is helping,” she said. “We’ve given these banks all this money and they’re not doing what they say they’re doing. Something’s not working right. They keep saying they’re doing all this, but we don’t see it down here at this level.”

Job Openings vs Unemployed – The Big Picture

Jim Rogers: S&P Could Go To 50,000 – Clusterstock

Privacy study shows Google’s eyes are everywhere – The San Francisco Business Times

Health Insurers Balk at Some Changes – The New York Times

But so far, the industry has made no such promises about another segment of the health insurance market, one responsible for many people being uninsured in the first place: the market for small employers. By some estimates, about half of the nation’s uninsured are people who are self-employed or work for a small business.

In other words, policy analysts and others say, unless the insurance industry is willing to give some of the same ground to small businesses that they have ceded to individual policy holders, a big part of what is wrong with the nation’s health care system may not get fixed.

Pending Home Sales: Watch The Birdie! – The Market Ticker, Karl Denniger

Case-Shiller and CAR Housing Declines Since Peak - May Report – Mish

S.F. budget cuts 1,600 jobs, trims services – The San Francisco Chronicle

State's unemployment fund short by billions – The San Francisco Chronicle

In 2009 and 2010, the state expects to pay out $29 billion in benefits. It will collect just $11 billion. Counting the small positive balance that was in the fund at the end of 2008, the result is a $17.8 billion deficit at the end of 2010.

GM: The Road to Hell Is Paved with Good Incentives – Minyanville, Minyan Peter

And, at least to me, here's where incentives put the final nail in the car coffin. Rather than reassessing its basic business model, the US automobile industry went for the ultimate incentive: short-term leasing. And not just normal leasing, but 2- to 3-year leases with inflated residual value assumptions. As a result, cars went from being an investment to being disposable.

At that point, GM and others had completely mortgaged their future - taking on not just consumer credit risk, but doubling down with residual risk. Now GM worried not only about the profit & loss impact of new-car prices, but used-car prices as well.

The Time for Bearishness Has Passed – Minyanville, Kevin Depew

Recently I took some heat from people who demanded to know how I could claim we are in the middle of a deflationary debt unwind while at the same time saying I want to add exposure to stocks just below 800, given a 10-plus year time horizon.

Let's pause for a moment and consider where we are: The S&P 500 closed below 900 on a weekly basis just 56 times over the past decade. That's 520 weekly closes. Fifty-six below 900. All told there were 28 closes below 900 in the 2001-2002 period, and 28 recently. There have only been five weekly closes below 800 over the past decade, each one occurring this year.

Here's the thing. I agree there is a some probability we trade below 600, a lesser probability we overshoot and trade in a range of 400-500. But going down, and staying down, are not the same thing.

Analysis: The Fed's Currency Collapse Gambit – Minyanville

This won’t hurt a bit.

That, at least, was the assurance offered by the Fed in a working paper that recently turned-up on its website. According to the authors of Currency Crashes in Industrial Countries: Much Ado About Nothing?, we’re all far too uppity about the value of our currency. Indeed, the paper concludes that “crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.”

That’s right - your central bank just juxtaposed the words "crash" and "good." In so doing, they've eradicated any scintilla of doubt we might have had that the Fed was willing to risk currency collapse. As I've long argued, when confronted with the Hobson’s choice between allowing rates to rise or the currency to fall -- in order to lure creditors to buy more of our increasingly dubious claims -- the Fed was sure to opt for the latter. So sure, in fact, that gold began pricing in this outcome the moment Ben Bernanke put it on the table back in mid-2003.

Frugality turns fashionable as recession hits the wealthy – The Los Angeles Times

Months before financial markets collapsed in fall 2008, boutique proprietor Lee-Lee Sprenger noticed that her usually free-spending customers were flinching at $900 price tags on sweaters fresh from Italy. Sales at Mélange on Montana Avenue in Santa Monica have been sinking ever since.

"We're barely making it here on Montana," she said. "Most of the businesses have had a 60% drop in sales."

Saying Goodbye to Your Stuff – The Wall Street Journal

Jim Cramer Calls The Housing Bottom

2009-06-02T17:12:00.001-07:00

Greg: Hello?

Cramer: Did you see the Pending Home Sales numbers today? This is THE BOTTOM!

Greg: Really? Are you sure?

Cramer: Absolutely. This is patently obvious.

Greg: So, what do we do now?

Cramer: I am frantically trying to buy properties right now. I will literally buy a building in the next 10 days because of these numbers.

Greg: Gosh Jim…the situation seems awfully complicated…what makes you so sure?

Cramer: If you combinate the affordability with interest rates and then add in the $8,000, you are gonna crush the inventory.

Greg: If you what?

Cramer: This number is definitive. And buy Bank of America.

Greg: What about negative equity? Aren’t you worried that more people are going to walk away from their homes?

Cramer: If you think your house is going to continue to depreciate, you have to walk away…it’s a good economic decision.

Greg: Wait…so why is this the bottom?

Cramer: You don’t know how to do fractions.

Greg: Good luck with all of this Jim…I hope it all works out for you.

Cramer: Hey, Greg, aren’t you going to start buying some property out there in San Francisco?

Greg: Can’t, Jim. I lost all my money after you recommended that I buy General Motors. That stock was supposed to go to $80!!!

Pending Home Sales Index Rises

2009-06-02T09:36:00.001-07:00

From The National Association of Realtors Pending Home Sales Up for Three Months in a Row

WASHINGTON, June 02, 2009

Record low mortgage interest rates boosted pending home sales for the third consecutive month, with some benefit now from the first-time buyer tax credit, according to the National Association of Realtors^®.

The Pending Home Sales Index,¹ a forward-looking indicator based on contracts signed in April, rose 6.7 percent to 90.3 from a reading of 84.6 in March, and is 3.2 percent above April 2008 when it was 87.5.

Lawrence Yun, NAR chief economist, said buyers are responding to very favorable market conditions. “Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market,” he said. “Since first-time buyers must finalize their purchase by November 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers.”

The Pending Home Sales Index in the Northeast shot up 32.6 percent to 78.9 in April and is 0.8 percent above a year ago. In the Midwest the index rose 9.8 percent to 90.4 and is 11.1 percent above April 2008. The index in the South slipped 0.2 percent to 93.0 in April but is 3.5 percent higher than a year ago. In the West the index rose 1.8 percent to 94.8 but is 2.9 percent below April 2008.

…

Yun cautions that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. “In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons,” he said. “Mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment.”

The total number of existing-home sales is expected to improve but with dramatic local market variation in the timing of recovery. “The market has already bottomed in some areas, but this is an unusual housing cycle with some areas improving rapidly while others languish or decline,” Yun said.

Links 06/02/2009

2009-06-02T09:26:00.001-07:00

Starbucks Pushing Landlords for 25% Cut in Cafe Rents – Bloomberg

Geithner insists Chinese dollar assets are safe – The Telegraph

In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."

The comment provoked loud laughter from the audience of students.

State's unemployment fund short by billions – The San Francisco Chronicle

GM's Inglorious Conclusion – Mish

The first critical issue is fairness. And by that measure bondholders were robbed. The next critical issue is the taxpayer investment of $50 billion into GM that will never be repaid.

Mortgage Meltdown, More Pain To Come – Mish

Cocaine Dealers Demand To Be Paid In Gold – Clusterstock

Hyperventilating Over Hyperinflation – Clusterstock

Niall Ferguson: Paul Krugman Is Wrong, U.S. Borrowing Will Be Devastating – Clusterstock

How Much Cash Do You Really Need to Buy a House? – Irvine Housing Blog

California Eyes Statewide Mortgage Reform – Housingwire

The legislation, if enacted, will create a fiduciary duty standard for mortgage brokers, eliminate compensation incentives that encourage the steering of borrower into risky loans, and establish regulations on prepayment penalties. The overall goal is to eliminate subprime lending, a leading cause of the state’s foreclosure woes.

The Future of Manufacturing, GM, and American Workers – Robert Reich

Dollar Torn Apart By Bears – Minyanville, Mish

House of Sand – Minyanville, Mr. Practical

When you borrow money to invest in non-productive assets, you get short-term gain at the expense of long-term loss. The crowding-out effect will make sure that we don't have capital to invest when we really need it to invest in real production.

Foreclosures: No End in Sight – The New York Times

With joblessness rising, lower monthly payments could quickly become unaffordable for many Americans. In a recent report, researchers at the Federal Reserve Bank of Boston argued that unemployment is driving foreclosures and to make a difference, anti-foreclosure policy should focus on helping unemployed homeowners. The report suggests a temporary program of loans or grants to help them pay their mortgages while they look for another job.

Just When You Thought It Was Over – Minyanville, Kevin Depew

Today I ran across a well respected strategist calling an end to the credit crisis. It's not an arbitrary market call, it's rooted in what the credit market itself is saying; namely, after reaching deeply depressed levels, credit buyers are returning to the market even as debt continues to be destroyed, replaced by equity issuance in a massive ongoing balance sheet restructuring.

I agree. But, as I've maintained all along, this is a debt crisis, not a credit crisis. And even as debt is being destroyed on a massive scale, the root of the crisis - a decade spent over-leveraging our households, businesses and government - must be fully unwound.

What we are seeing is the cyclical recognition that the market will survive. The structural point of recognition and adjustment lies ahead. Just when we thought it was over, it was really only beginning.

Commercial Real Estate — the Economy's Anvil – Time Magazine

Richard Parkus, an analyst at Deutsche Bank, said he thought two-thirds of all commercial real estate loans due in the next few years — hundreds of billions of dollars' worth — could go bust. Jeffrey DeBoer, president of trade group the Real Estate Roundtable, fretted that problems in the lending business could cost the nation thousands more construction and real estate jobs. Next up, Congressman Jerrold Nadler of New York expressed worry that the country was headed for a lost decade of economic stagnation.