Skewed Distributions

As I've been rather busy of late and frankly there is not much else that needs to be said vis-à-vis the housing bubble my rate of postings has slowed and will probably on average remain slow.

But I did find this posting (the July 29, 2006 entry) over at the Charles Hugh Smith Blog worth highlighting as it does a pretty good job of explaining something that I've previously referred to but never went into any detail to explain because I thought it was fairly self-evident from the Marin data that I've already posted (e.g., this); anyone with a basic understanding of statistics and the bell-curve probably already realized this. It explains how the median sales price of a housing market as a whole can go up while the sales price of individual houses comes down. At this point in time (the transition from an insane seller's market to a buyer's market [only the future will tell how insane the buyer's market gets]) the median sales price is more a measure of the mixture of houses that sell than a measure of individual value.

Whenever I have a (real estate) question I cannot get answered, I turn to Bob [Casagrand, realtor].

So I asked him, Why is the median rising, when each individual home is selling for less? Actually, most San Diego homes are back at 2004 prices.

Bob told me that the under $400K buyer is squeezed out due to rising prices and higher interest rates. The high end is holding up a little better, because the ripple effect has not yet made it to the high end, and the low end has weakened MORE than the high end.

Last year, the +$1million home was 8.5% of sales. This year it is 10%. This is skewing UP the distribution of homes sold, raising the median, although each home, including the high end homes, are selling for 10-15% less today than last year.

We are selling proportionally MORE of the expensive homes, and the median tells us only about the MIX of homes sold.

It does not tell us about the value of each home. The $1.1 mil house was worth $1.5 mil in 2004, so it has also gone down in value.

If you want to know how each house has held up, you have to use the Case-Shiller index, or the OFHEO housing price index. Both track the SAME house over time, giving us the change in valuation of each house instead of the change in the MIX of homes sold.

This effect can easily be seen in the recent Marin data where we get such absurd (as in 'ridiculously incongruous') appreciation rates for houses in Tiburon/Belvedere (+42%), Mill Valley (+26%), or Bolinas (+229%) even while prices are reversing. It takes 6-8 months for a change in interest rates to begin affecting the market and those effects first show up in the lower priced houses.

"When the Wind Blows Hard Enough, Even Turkeys Fly" or "Temporary Religions of Convenience"

I found this to be a most excellent summary of the psychology underlying asset bubbles in general and the housing bubble in particular.

The tech stock bubble was psychologically supported by a repeat of the mass delusion of an economic New Era. The very same term was used four times in the 20th century to explain a temporary suspension of well understood principles of market pricing: in the US in the 1920s, in the US in the 1960s, in Japan in the 1980s, and in the US in the 1990s. Each New Era period ended with a repudiation of the New Era idea that a fundamental change had occurred in the way the economy and markets operate, thus explaining the enduring elevated securities prices. Why re-cycle the old New Era concept? The old New Era tale apparently works over and over again, and will no doubt work again some day.

Mass belief in the New Era myth was supported by the media, elected officials, venture capitalists, and every other institution and organization that benefited. The deluded masses got some crumbs off the New Era cake as well; the apparent free and zero risk money flowing their way as the stock market rose was surely the result of their investment acumen. And why shouldn't they partake in the benefits of the New Era that the experts in the press, and honorable and credible representatives of the US financial system's institutional representatives such as Abbey Joseph Cohen, and even the head of the US central bank, Alan Greenspan, proclaimed as the real deal. Of course, what made the illusion of a New Era possible, and pushed the value of the stock of now bankrupt pets.com to absurd levels, was a hurricane of money, first supplied by the Fed, later by the markets themselves as money was recycled via the public markets back through venture capital and back out through new IPOs. When the wind blows hard enough, even turkeys fly.

...an asset bubble is supported by an underlying belief system, a kind of temporary religion of convenience that evolves during bubbles to explain, as in John Ciardi's children's poem, "Why the sky is green, why trees are blue/Why kittens caw, and crows mew." Faith allowed millions to suspend disbelief and put large amounts of money at risk. When a market is imbued with a misperception of risk, investors begin to lose the ability to distinguish between gambling and investing. The New Era religion even spreads to the Fed itself, in the form of the usual assertions that the masses of investors know best, even when they are in the grips of a mass delusion.

The mirage of low risk is further enhanced by the observation of market participants that speculative bubbles, even when acknowledged as such, can collapse with little consequence. The reason is that the Fed has as its primary mission to rescue the markets to prevent a knock-off collapse of the real-economy. Market participants see that the Fed has apparently succeeded at this mission over and over. It's human nature to continue to engage in risky behaviors that are repeatedly survived, whether it's free diving that results in 100 deaths per 5,000 divers per year, or investing in assets that one fully expects will certainly get pumped back up again by Keynesian monetary and fiscal policy.

Asset bubbles collapse in increments. Starting in 1999, Fed rate hikes started to lower the wind speed and a few turkeys fell to the ground. Along with bankruptcies and layoffs, as I predicted in my Bankrate.com article, revelations of fraud -- fraud is a standard feature of all asset bubbles, including the real estate bubble -- started to chip away at investor confidence and undermine bubble mass psychology, causing many to start to lose their faith. In the atmosphere of lingering greed but growing doubt that happens at the end of an asset bubble, what economists refer to as a random exogenous event occurs that gets the inevitable panic selling started.

As in the case of all bubbles, belief in its foundations is for a while self-fulfilling. Real estate is a good example. The believers' valuation process is tautological: the value of housing is rising because prices are rising, attracting more money, causing prices to rise further.

Confess the Truth Week: NAR

Confess the Truth week wouldn't be complete without the NAR's contribution:

For the first time in more than a decade, home prices could start to fall around the country in coming months, the National Association of Realtors said yesterday [July 25, 2006]. David Lereah, NAR's chief economist, said he expects prices to start "deteriorating"...

The new figures provide deeper evidence that the nation's housing market is undergoing a jarring transition from a seller's to a buyer's market.

"Affordability has probably hit a record low," said Robert Kleinhenz, CAR deputy chief economist.

Ron Peltier, CEO of HomeServices of America, added, "There is a delayed reaction on the part of sellers to accept the new reality."

Others in this series: CAR says 'soft-landing' is too mild, Countrywide CEO says he hasn't seen a so-called 'soft-landing' in 53 years.

Marin Flippers in Trouble

Maybe I should start a "Marin Flippers In Trouble" blog like this one. Anyway, here are two choice Marin losers:

Soft-Landing? What Soft-Landing?

I thought Leslie Appleton-Young's (C.A.R. chief economist) quote from the other day (about how the phrase "soft landing" is way too mild and she has to come up with something better to describe the future of California's housing market) was the best it was going to get vis-à-vis admissions of error. But then Countrywide's CEO came up with a better one:

"I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out," Countrywide Chief Executive Officer Angelo Mozilo said on a Tuesday conference call. "I have to prepare the company for the worst that can happen."

What is this? Confess the Truth week or what?

CAR Numbers

The California Association of Realtors has their numbers out for June, 2006. I guess one of those houses in Tiburon and Mill Valley were real whoppers LOL:

You can find the state's "Market Trends" report here.

So let me get this straight: 12 or so months ago the sales prices were on average about where they are now, rates were only a little more favorable, and selling was brisk, people were overbidding, the sky was the limit. Today rates are still historically low and yet sellers are struggling to sell and price reductions are commonplace -- the number of SFRs in Marin listed as "price reduced" (according to ZipRealty) crossed the 40% mark today for the first time (it's at 40.2% actually). How long before it goes to 50%? Just trying to keep things in perspective.

So much for hoping that Spring, the strongest selling season, would save us.

The March of Folly*

Eons ago a college history professor of mine repeatedly said that people won't so much as lift a finger to fix a problem until it becomes a crisis and then only if it affects them personally. Sadly, it's so true. Global warming must be the ultimate case in point -- we've been warned about its dire consequences since at least the mid-70s (the earliest that I can remember first hearing such warnings) and nothing but squat has been done about it and here we find ourselves damn close to if not past the "point of no return" (do a Google search).

Well, this housing bubble and debt-financed lifestyle is the same sort of deal (but to a lesser extent of course; I mean, the Great Trashing of the Planet has to take precedence).

Here are the comments of Rick Wolff, Professor of Economics at the University of Massachusetts at Amherst, for your reading pleasure.

*Shamelessly taken from the book by the same title by Barbara W. Tuchman.

Appraisers Petition and Appraisal Fraud

I found this Appraisers Petition (perma-linked at right) mentioned over at Ben's blog and thought it needed more exposure:

"The ASC's mission is to ensure that real estate appraisers, who perform appraisals in real estate transactions that could expose the United States government to financial loss, are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics." From the ASC website.

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

• the withholding of business if we refuse to inflate values,
• the withholding of business if we refuse to guarantee a predetermined value,
• the withholding of business if we refuse to ignore deficiencies in the property,
• refusing to pay for an appraisal that does not give them what they want,
• black listing honest appraisers in order to use "rubber stamp" appraisers, etc.

We request that action be taken to hold the lenders responsible for this type of violation and provide for a penalty on any person or business who engages in the practice of pressuring appraisers to do dishonest appraisals that do not provide for independent judgment. We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.

This petition is just in time as the Wall Street Journal brings appraisal fraud, and all that it means to both buyers and sellers, front and center of the reading public's awareness:

As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: Inflated appraisals of home values. Critics have long warned that many appraisals are unrealistically high. That’s partly because generous appraisals help loan officers and mortgage brokers, who often choose the appraiser, complete more deals.

Prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.

For sellers, that can mean being forced to drop their asking prices. Some people hoping to refinance may be unable to lock in new loan terms. Lenders and mortgage investors, too, could take a hit if it turns out the collateral backing their loans is worth less than expected.

Dubious appraisals are a risk for the hundreds of thousands of people who in the past few years have bought homes with little or no down payment, or used almost all of their home equity to finance home improvements or other types of spending. ‘Now it’s pay-the-piper time for people, and they’re finding out they don’t have the value in the house they thought they had,’ says John Taylor, president of a Washington-based nonprofit.

Crisis? What Crisis?

The Bay Area, and most of California, has a real crisis on its hands. When are we going to get over our arrogance, our pride, our snobbery, and our attitude of "it's someone else's problem" and effectively deal with it?

"I have several friends relocating out of the Bay Area. I had considered Texas or Florida but the insurance rates and property taxes made them unaffordable. I have one friend who moved to North Carolina and he really likes it there. So that will likely be an area that I will investigate. I plan on staying in the Bay Area one more year. I am in a rent controlled area and my rent is fairly cheap so I can ride things out for now. I have completely given up on purchasing any property in the Bay Area. The houses here are disgusting and old. Prices could get cut in half and I still would not even consider purchasing any of this old junk. California, a once beautiful and sought after place to live, has become nothing but a Detroit except with better weather. The standard of living is so low here, I often cannot even fathom how individuals live. Most likely, check by check with no savings to speak of. It is both ridiculous and sad. Salaries have not kept pace with high energy costs and housing rises. In my opinion, 10 years from now, this area will be a shell of its former self."

And then there is this video (WMV, contains some "old" footage); it's only going to get worse. Why did all these people get adjustable rate mortgages when interest rates were at an all time low? For most people (e.g., not the self-employed with unpredictable income arrival) ARMs only make sense when interest rates are high and the borrower believes that rates will go down sooner rather than later. The answer is, of course, that it is the only way most people can afford to buy a house in California.

Again, this is a crisis. When are we going to start effectively dealing with it? Why isn't there a state-wide conversation about this?

Flippers in Trouble

For those of you who were either sleeping through the housing bubble busts of the past, too young to remember previous housing bubble busts, or just too brain-washed to believe that housing bubbles do bust, then check out this blog which documents housing flippers of today who are losing or have lost money.

The Ghost Housing Market

If you didn't see this post over at Mish's blog, then I invite you to check it out. Some of it does not apply very strongly to Marin, but much of it does. You be the judge. (The most applicable parts are in the latter 2/3 IMO.)

Summer "Heat"?

I noted previously that the Marin Market Heat Index hit an all-time low of 0.52 a few days ago. The realtor who is the keeper of this index made an interesting point that confirms some of the data compiled on this blog: namely that like other bubble markets that are cooling in California, Marin's inventory is very high (+70%) compared to normal for this time of year.

Why have so many houses been coming on the market here in "God's country" where 'everyone wants to live'? Is it just that some sellers have heard a distant rumor about a possible housing bubble (or was that a souffle? It's so hard to keep the real estate industry's euphemisms straight) and so are testing the market and won't seriously entertain offers? Have more people than normal become fed-up with Marin and decided to bail all at once? Is it maybe because there has been a lot of speculative buying in Marin and we are seeing some of that speculative inventory come on the market?

The Marin Market HEAT Index reached a record low reading of 0.52 on July 17. This is the lowest Marin Market HEAT Index reading for the county since the inception of the Index in 2002. By hovering between 0.52 and 0.56 for the past ten days, the Index is mirroring the undeniable realities of our current Buyers Market environment.

Record cool readings for the County—you would expect the number of home sales to be dropping like a heavy anchor, right? A close look at the Marin HEAT Index data reveals that the volume of sales closed in the last three months has actually been remarkably stable, declining only fractionally. So, as counter-intuitive as it seems, sales volume is not a factor in the cooling of the market.

What has changed about the Marin market is the flood of active listings. Active listings are up more than 70% during the past three months. So, while the number of buyers has stayed relatively stable, the number of sellers has soared.

To be clear:

1. The overall Marin market is very cool;
2. The volume and pace of home purchases is virtually unchanged in the three months since the highest 2006 MMHI reading three months ago; and
3. The listing inventory has grown hugely in this same short period of time.

Take a look at the Closes and Listings numbers comparing April 15, which had the highest HEAT Index number so far in 2006 (0.96), to July 17 which had the lowest Index (0.52). Nothing more is necessary to understand the reason for the cooling off in the market:

Market Activity	April 15 (Warmest)	July 17 (Coolest)
30-Day Closes	236	235
Active Listings	619	1,067

That's the interesting and informative part. The only point that I take exception to is the description of today's market as a "buyer's market". As explained in a previous post, this market is best described as a "procrastinator's market"...patience will be rewarded.

The rest of his discussion is a pathetic round-about plea-based argument asking people to buy. His reasons for not buying seem to have been selectively taken from this blog. I guess he is either honoring this blog or disparaging it in a round-about way. Sigh, I'm sure it's the latter. I guess he wasn't too happy with the email I sent him complaining about his back-peddling statements in his last "Discussion & Analysis" about how the Heat Index is a "relative concept" and the Index is not as bad here as it is in Sonoma and other points north. Needless to say, I'm not expecting a reply.

So now would be a good time for some data.

The first chart shows the number of SFRs on the market at various points in time according to ZipRealty. (For both this and the next graph I determined the number of SFR by searching for all houses of any size and with any amenities falling within the asking price range of $100,000 and $10,000,000.)

Note: The reason for that long, downward sloping straight line in the chart is simply because I had stopped collecting the data during that time span; I got so bored with data that was not changing (flat) that I stopped recording it and only resumed once I noticed that something interesting was starting.

The second chart is one you have seen before but updated to be current -- the number of SFRs showing "price reduced". As you can see, we "kissed" the 40% mark and then backed off from it.


Now, after you have read all that, check out this brilliant post over at the Southern California Bubble Crash blog. The same thing could be said about Marin and in fact I may repeat that analysis for Marin (or better yet, how about a reader make the post?).

It's over 100 degrees in Mill Valley today and so I'm off to the pool to cool off.

CAR: This Landing Will Be About as Soft as an 800 lb. Elephant Falling Off a Cliff

After proclaiming that we Californians have attained housing nirvana, Leslie Appleton-Young, chief economist of the California Association of Realtors, is now at a "loss for words" as to how best to describe the future of the housing market in California. Apparently the term "soft landing" is just too mild for her. As you will read in the quoted material, we will know how she is going to describe the future of the housing market when she 'gets her new term'. But until then, here's a suggestion for you Leslie: "hard landing". And if her about-face gets her in trouble? No worries as the CAR saw it all coming and have prepared their defenses.

The next thing you know David Lereah is going to come out and explain why this bubble is not a bubble or a balloon or a ship or any of the other feel-good euphemisms he is known for. What's the world coming to?

There's a lot of insightful and entertaining commentary about all this over at the Ben Jones blog.

Some choice quotes:

Leslie Appleton-Young is at a loss for words.

The chief economist of the California Assn. of Realtors has stopped using the term "soft landing" to describe the state's real estate market, saying she no longer feels comfortable with that mild label.

"Maybe we need something new. That's all I'm prepared to say," Appleton-Young said.

The shift in language comes as debate over the real estate market is intensifying. The long-awaited drop-off is happening, but there's little agreement about how brutal the landing will be.

Federal Reserve Chairman Ben S. Bernanke said in congressional testimony Thursday that the national housing downturn so far appears orderly.

For real estate optimists, the phrase "soft landing" conveyed the soothing notion that the run-up in values over the last few years would be permanent. It wasn't a bubble, it was a new plateau.

"I'm sorry I ever made that comment [that the market was headed for a 'soft landing']," she said Thursday. "When I get my new term, I'll let you know."

The media, you see, are masters of denial as this video makes plain.

God Bless the Town of Novato

Why does the town of Novato get disparaged so much by the rest of Marin?

It's no secret that it happens. Be honest, you know that it does. It doesn't happen in the mainstream media. It's only amongst ourselves in private, at parties and other social gatherings, where, when the topic of Marin towns comes up, the negative comments are made and noses are pointed skyward with a haughty sniff.

Is it because working folk live there in greater abundance? Although affordability has reached crisis levels all across the Bay Area, Novato should be praised for doing what it can to house Marin's workforce which, as has been pointed out elsewhere on this blog, has been shamefully offloaded to other counties for the most part.

Is it because Novato allows convenient shopping to be built (e.g., Costco, Target, etc.) whereas the rest of Marin does not? How many south Marin residents do you think shop at these stores? Probably quite a few.

Is it because Novato actually builds housing? What can I say? God bless Novato for allowing new houses to be built.

I think it is nothing more than elitist Marin snobbery and prejudice against a town that has a sense of independence, pragmatism, and vision. Such animosity betrays a shallow, insecure, and inward-looking nature that harbors a deep-seated fear of change.

Share your thoughts if you'd like.

Roger Wiegand Commentary

Listen to Roger Wiegand's comments about housing (tanks) and rate hikes (pause for elections, then probably resume). This clip takes about 20 minutes to complete.

June, 2006 Results According to DataQuick

DataQuick has their June, 2006 results out for the Bay Area. It looks like my prediction about June being a strong "up" month for Marin was too optimistic.

A Request to Christopher Thornberg

A UCLA economist said the combination of rapidly falling home sales and diminishing home-price appreciation is the behavior of "a classic bubble." He predicts home-price appreciation will flatten out, and there might not be true appreciation again until 2011.

"The soft-landing people are full of nonsense," said Christopher Thornberg, senior economist at UCLA. "This is a classic bubble. And unit sales are falling faster than in past bubbles."

"We are in the middle of this decline. If we are lucky, prices will go flat. But we are not going to have prices fall like the stock market. You won't see declines of 10 percent or 15 percent per year. What will happen is that prices will flatten out," he said, adding that there might not be housing appreciation until 2011.

Next year will be critical from the standpoint of how the consumer will react to not having "a house cash machine" that can be tapped for spending thanks to rapidly appreciating value.

"A major pullback in consumer spending could get ugly very quickly," he said.

Source.

Granted that it is often said that economists seem to have a knack for getting things arse-backwards wrong. I am, however, nevertheless confused by the above quotes by Christopher Thornberg.

On the one hand he implies a bust:

• all signs point to "a classic bubble"
• "the soft-landing people are full of nonsense"
• "there might not be housing appreciation until 2011"
• "if we are lucky, prices will go flat"

And on the other hand he implies everything will be peachy:

• "we are not going to have prices fall like the stock market. You won't see declines of 10 percent or 15 percent per year"
• "what will happen is that prices will flatten out"

So he is simultaneously implying that prices will decline and prices will go flat. Nowhere does he suggest prices will actually increase before 2011. Now maybe he is hiding his true bearish predictions behind inflation-based qualifications (i.e., prices can go nominally flat but in real terms they will decline) but I think this guy is too good for that. I think he is just talking out of both sides of his mouth.

Christopher Thornberg: People are desperately in need of the unfiltered, uncensored, unspun truth or at least a best-guess. This blogger formally asks you to stop CYA and say what you really mean. Stop taking your lead from Alan Greenspan.

Interest-Only Mortgage Reset Map

Here is a map of the frequency of interest-only loans that were initiated in 2003 and that are about to reset. Yes, Marin is in one of those high density black sections. Thanks to the reader who sent this in.

What Sort of Realtor BS Is This?

Ok, check this out. Here is a realtor who is claiming that 'it is never a good time to hold off buying a house' because their market is weakening, buyers are "holding off", and so realtors are having trouble selling people's houses.

So let me get this straight as I am a person of very little brain...when the market was going up it was "Buy now or be priced out of the market forever". Ok, got it; fear is a strong motivator and fearmongoring is worthy of a realtor. And now that markets are just starting to come down (which casts some doubt upon the first assertion) the mantra is "It's never been a better time to buy". So in other words, it's always a good time to buy a house. Do I have that right Mr. Realtor-man?

What sort of BS is this?

Whose interests exactly are such realtors serving? Yours, the buyer's? Or theirs, the realtor's commission? Duh.

The Marin Market Heat Index is now at an all time low of 0.52. And yes, I know that Vision RE practically soiled their collective pants when their estimate of June's median and average prices went up. That move should not come as a surprise because:

a) the majority of sales were in the priciest of Marin's markets (e.g., Tiburon, Sausalito, Kentfield) (and what's up with that 500% increase in YOY sales in Greenbrae -- so only 1.2 houses sold in June of 2005? If it was a typo, what other typos are there in their data? Hmm...)

and

b) if you look at the chart of DataQuick's data, Marin's appreciation rate has been bouncing around like a superball in an ever shrinking room and if the pattern holds true then you would expect June to be an up month. So not too surprising.

All that this means is that the market is like what Michael Shedlock says in his post for today -- it's a "procrastinator's market", not a buyer's market. The people who will do well are those who know to wait it out. If anything, it is currently a "fence-sitter's market"...the impulsive people who have been itching to buy a house and who jump in thinking it's the bottom when they see a small drop in prices. Hence, the superball-bouncing-inside-of-a-shrinking-room analogy.

When all of the impulsive fence-sitters have been shaken out, who is left to buy? The only people left are the folks who had the intelligence, the common sense, and the intestinal fortitude to wait this thing out to buy their home to live in at a reasonable price.

The realtors are just scared. They are scared of people like you who know to wait.

Anyway, then that realtor goes on to say that you have to buy now because interest rates are only going up. Hold on, wait just a minute. Why should rising interest rates convince you to buy now? As interest rates go up, the amount of monthly mortgage that you can afford just went down (assuming, of course, that your income has not gone up appreciably). That means, all things being equal, prices have to adjust down to compensate (albeit with a time delay which is some sort of proportionality function based on seller stubbornness/hubris and the amount of BS that realtors can make sellers swallow). And, as we all know, in today's market folk psychology all that matters to people is the monthly nut, not the total loan amount. Here is one good reason why the total loan amount should matter to you: property tax. The lower the purchase price, the less you have to pay in property tax year after year after year. Furthermore, the longer you wait as prices come down, the more you can save, the greater your potential downpayment, and ultimately the smaller your loan. Additionally, the higher the interest rate, the greater the likelihood that you will be able to easily refinance that loan down to a more palatable interest rate. It's a win-win situation for buyer's who can restrain their impulsiveness and buy when sanity has returned to the market.

Oh, you don't think Marin's market has gone insane? Then check this out.

Two Great Myths of California Housing

I am glad that some of the assumptions of the past are being re-examined; maybe the main-stream media will catch on too. It's about time that our cherished NIMBY beliefs are exposed for the lies that they are. It's all about money (in particular, property values), not preserving the environment or anything else.

The California housing crisis is built on two Great Myths. Both cherished. Both false. And both are stopping hundreds of thousands of Californians from ever owning their own homes in the least affordable housing market in America.

Myth #1: New Housing Does Not Pay For Itself

The first Great Myth is that new housing does not pay for itself. We hear this chanted at every public hearing for every new home in California. New homes increase the demand for police, fire, parks, animal shelters, boat docks, public art, historical societies, schools, roads and everything else, the mantra goes. Thus it is only ‘‘fair” that new residents should pay for these extra services with extra taxes.

That is why government-related fees and expenses often exceed $100,000 per new home in California.

But these armchair economists forget new homeowners already pay new taxes – higher taxes – than existing residents. Their property taxes, for one, are often several times higher than their neighbors. That, of course, is a loophole from Proposition 13 that guarantees the longer you live in a house, the smaller share of property taxes you will pay.

New residents also pay more in sales, gas and other taxes because they buy more items for their new homes. Not because they use more services. They use fewer. So much for fairness.

New housing is a cash cow for state and local government. But local government is piggish in spending it.

In high-growth Riverside County, property taxes to the county government increased by more than $300 million this year. Yet county officials have no answers when they are asked why less than 5 percent of that new money is going to build new roads to relieve the worst congestion in California.

But they definitely love imposing higher fees on new homes, as if there is no limit. As if record high fees have no effect on record high prices.

They actually say that. And this belief is turning the California housing crises into a full-blown disaster.

In San Diego, fewer than 9 percent of the families can afford the price of an average home. The rest of the state is equally bleak. High fees are pricing people out of the market. Out of the state.

Myth #2: New Homes Cause Growth

But lots of public officials don’t really care about that because of the second Great Myth of Housing: New homes cause growth. Not the other way around. New homes are for people who move here from out of state. And don’t forget its Great Corollary: Stop the new homes – and we can stop the growth.

But the facts ruin that story.

Last year in California, we had one of the lower population increases in years. Even so, most of last year’s increase came from the place it has for the last decade: The maternity ward.

More than 65 percent of the new residents in California are from the increase in births over deaths. The remaining 35 percent are from immigration, legal and otherwise.

Last year 29,000 more people moved out of California than moved in from other states. In Southern California, 150,000 more residents moved out of state than moved here from other parts of the country, largely replaced by foreign immigration, legal and otherwise.

California residents are leaving in record numbers, mostly because they cannot afford the housing.

Media repeat the myth; and no-growth activists worship it like a holy relic to stop new housing wherever they can.

For promoting these myths, councilmen get promoted; planners get prizes; reports get plaudits. And first-time home buyers get a one-way ticket to Oklahoma, wondering why they cannot buy a home where they were born and raised, but no longer welcome.

That's right. You children of California are no longer welcome here. California is just for the financially savvy, successful, rich. You losers who cannot afford a house on your lower six-figure salary are just, well, losers and should go somewhere else where you can find a house you can afford. How often have I heard that said on this and other blogs?

(For those new to this blog, that last paragraph was intentionally sarcastic and most definitely does not represent the opinion of the blogger.)

Yikes!

Ah, meds are wonderful! But keep that Zombiestra away from me; Prozac is good enough. LOL!

I am surprised by the flood of email by people who depend in some measure on this blog; I had no idea. I seem to have unintentionally stumbled on to responsibility and I'm not sure what to do about it.

People, there are better housing bubble blogs out there (go look at the listing in the right-hand column of this blog). And so I think the following email quotes are a little misguided...flattering to be sure, but misguided all the same:

• "Yours is the only rational, intelligent voice coming out of Marin. How rare it is for someone to be able to step out side of a place like marin and see it as it is objectiveoly."
  
• "You are the only real voice for Marin."
• "It is rare to find such a high caliber, quality site that is factual, logical and informative. You have the ability to inspire debate in some and provide valuable information to the rest of us who know that this real estate market is total insanity. Also, I would miss the humor links greatly."
• "I wanted to comment that I love your blog, it's one of the few I read. I've not given up on your meaningful, insightful and wonderful comments on this insane housung market."

For some folks it seems that even their mental well-being is somehow yoked to this blog if not just to know that they are not alone in thinking this housing market is insane but also to help offset deep depression and even avoid marital discord (sorry, but I won't quote some of the stuff I was sent on this topic as it is way too personal even though it would be totally anonymous). I don't know how to respond to that other than to say 'yep, you are not alone, I assure you'. You are right, the housing market is broken and has been allowed to grow out of control to preposterous levels and I'd even go so far as to say irresponsible levels. (Check out this Marin POS.) All the self-justifications and rationalizations by real estate professionals to the contrary are nothing more than a sick attempt to justify the absurdity of it all and to try and keep it going for as long as absolutely possible as most of them have a financial stake in seeing it continue no matter how disastrous the eventual outcome may be.

Other people who wrote in are clearly using this blog as a means to make money from real estate; mostly from the collapse I'd wager; trying to time the bottom. Although I cannot prohibit you from visiting this site, I can say that you are not entirely welcome here unless you are here to reconsider your ways. I've made the argument before on this blog that houses are places to live in, to raise families in, the building blocks of community, etc., not get-rich-quick investments or a source of funding for some lavish retirement, or shouldn't be, and I assure you that that topic will be revisited here again in the future.

So I seem to have inadvertently acquired an elusive, eclectic entourage and a responsibility to boot. LOL! Ok, "Uncle!", comments are turned back on.

As this turned into something of a rant, I feel obliged to reward your tolerance with this (of dubious credibility, I must admit) -- The Mortgage Broker Association of Responsible Lending. Sounds good, huh? If it is legitimate (and I hope that it is), then it is rather encouraging:

The Mortgage Broker Association for Responsible Lending (MBARL) is a trade association that represents the real estate finance industry, an industry that employs more than 400,000 professionals throughout the country.

By investigating the pros and cons of certain loan programs for both the prime and sub prime markets we are an advocacy group protecting consumers and the loan industry by outlandish and counter productive loan programs. Sometimes these loan programs are highly marketed to minorities, seniors and low income individuals, which to our organization is highly frowned upon.

The MBARL applauds our sister associations and their efforts to their causes. The MBARL believe that we do have a similar cause, to better strengthen the mortgage industry as a whole. The MBARL believes that many of the problems in the mortgage industry stem from the structure of the loan programs themselves.

From their "Mission Statement":

The Mortgage Broker Association for Responsible Lending’s mission is to promote better loan programs from banks and lenders to better serve the community. Currently this will be accomplished though meeting and communicating with regulatory boards and bank representatives to end the practice of stated income loans. We see stated income loans as an open invitation to commit fraud, and we believe that these types of loans must stop now!

From their "Facts" page (note the part at the end specific to the Bay Area):

Data Collected by the Mortgage Brokers Association for Responsible Lending

1. 37.2% of non-agency mortgage backed securities were no document loans in 2005.ⁱ
2. 49.3% of ARMS with interest only features originated in 2004 lacked full documentation.ⁱⁱ
3. As of September 2005, Adjustable rate Mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the subprime sector.ⁱⁱⁱ
4. In 2006 97.5% of borrowers are likely to face a payment shock of at least 25% and 75% of borrowers could face a shock of 50% or more.^iv These changes neglect additional shocks that would result from the repayment of principal because of current interest only payments!
5. Payments will increase on 41% of the outstanding subprime loans in 2006 alone.^v
6. As of March 22, 2006 53.1% of interest only ARMS had a prepayment penalty.^vi
7. 70% of borrowers with Option ARMs (Arms that allow negative amortization) are currently making minimum payments.^vii
8. In 2004 $600 BILLION of consumers' spending power was from borrowing against home values. That is double the value of President Bush's tax cuts, as estimated by Brooking Institution scholar Peter Orzag.^viii
9. 2^nd homes accounted for 14% of new mortgages in 2004; in 2000 it was only 7%. Mr. Greenspan said that the fact that someone can sell a 2nd home without moving, "suggests that speculative activity may have had a greater role in generating the recent increases than it customarily has had in the past."^ix
10. Residential housing now makes up 16 percent, or $1.9 trillion, of the gross domestic product and is the economy's largest single sector, slightly bigger than the industries and services that supply health care.^x
11. In 2005 the FBI convicted only 170 people nationally for mortgage fraud. In 2004 that number was 172 people. According to the FBI the hot spots for Mortgage Fraud activity in 2004 (per capita) were: California, Nevada, Utah, Arizona, Colorado, Missouri, Illinois, Maryland, Georgia, and Florida.^xi
12. In the San Francisco Bay Area alone, almost 75% of mortgage loans taken out last year (2005) allowed borrowers to delay the payment of principle. Negatively amortized loans jumped to 29% of the Bay Area mortgage market from less than 10% in 2004.^xii
13. The following chart shows the percentage of Bay Area loans that were interest only or Option ARMs (know as negative amortization).^xiii

    Year	Interest Only	Option Arm
    2005	42.6%	29.1%
    2004	43.7%	9.6%
    2003	20.3%	0.8%
    2002	12.0%	1.7%
    2001	2.9%	1.6%

---

ⁱ What else is new? ARMs Dominate Subprime Mix, INSIDE B&C LENDING (Bethesda, MD), Jan. 20, 2006, at 4.

ⁱⁱ Observed by The Center for Responsible Lending.

ⁱⁱⁱ 2006 Global Structured Finance Outlook: Economic and Sector-by-Sector Analysis, FITICH RATINGS CREDIT POLICY (New York, N.Y), Jan. 17, 2006 at 12.

^iv http://www.federalreserve.gov/SECRS/2006/May/20060516/OP-1246/OP-1246_37_1.pdf, page 10, June 15th, 2006.

^v http://www.federalreserve.gov/SECRS/2006/May/20060516/OP-1246/OP-1246_37_1.pdf, page 10, June 15th, 2006."

^vi Study through The Center for Responsible Lending (CRL), which analyzed Loan performance data on March 22, 2006

^vii Ruth Simon, A trendy mortgage falls from favor - Demand for option ARMs, which helped fuel boom, wanes amid rising rates, growing risk, THE WALL STREET JOURNAL, November 29, 2005, at D1.

^viii Greg Ip, Greenspan warns of reliance on housing loans, THE WALL STREET JOURNAL, September 27, 2005, at A1.

^ix Greg Ip, Greenspan warns of reliance on housing loans, THE WALL STREET JOURNAL, September 27, 2005, at A1.

^xDavid Leonhardt, Boom in Jobs, Not Just Houses, as Real Estate Drives Economy, THE NEW YORK TIMES, July 9, 2005

^xi http://www.fbi.gov/pressrel/pressrel05/quickflip121405.htm, June 26th, 2006."

^xii Kathleen Pender, Mortgage options explode, SAN FRANCISCO CHRONICLE, April 13, 2006

^xiii Kathleen Pender, Mortgage options explode, SAN FRANCISCO CHRONICLE, April 13, 2006

Realtor Bubble

David, over at the Bubble Meter blog, put together this most excellent graph. Please visit his blog and read the discussion.

Deflation is More Likely than Hyperinflation

The depressive side of my bipolar personality kicked in with full force recently and I was certain that I was going to let this blog (and the others) die and not post anymore. Well, I still feel that way but that part of my brain that wants to get important info out to anyone who is receptive to it kicked in despite my overwhelming sense of apathy and despondency and so I have to make this post even though I know no one cares and would rather look the other way and see what they want to see.

Also, just so you know, plotting the minutia of Marin housing data is wearing thin so I am going to try to move to an every-other-month schedule, if that.

Oh, and I've turned off comments for now because only like 0.1% of the people who read this blog actually bother to leave any comments and I'm tired of moderating what few are made. You can still email me (just remove the no-spam stuff that I added to the address).

* * *

Some people seem to think that hyperinflation is a guaranteed eventuality for our economy. Here is a discussion of points made by Robert Prechter that argue for deflation, especially asset deflation, and why hyperinflation is very unlikely:

"The problem today is that not some individuals or corporations or governments, but the entire system is saturated with credit. Worse, much of that credit is propping up other credit, and this nth-generation credit is propping up the financial markets. When the financial markets go down, IOUs will come due. Conversely, when IOUs come due, markets will go down. People who must finance debt to maintain their standard of living will soon be selling everything and anything to stay afloat. When people on the edge are strapped, they will sell their investments to pay the interest on their debts. If they won't do it themselves, their creditors will do it for them. Banks are already repossessing homes at a furious pace. In Georgia, April foreclosures were up 300% from April 2005. This is only the beginning. . .

. . .Pundits tell us "We are in a hyperinflation, like 1920s Germany." No, we are not. In the early 1920s, the Allies told Germany to pay reparations that Germany couldn't afford. It found a practical solution in printing marks. The inflation of the past 73 years in not primarily currency inflation, but credit inflation. Credit can implode in a deflationary depression; currency cannot. Once currency is printed, it's out there for good. Some people argue that the Fed will print currency at a hyperinflationary rate, but that's a guess at best, and so far all we have seen is the same old game of facilitating credit. . . After it is obvious that credit stimulation has failed, hyperinflation may be a "last resort," but I stress the word may. In the 1930's it was no resort at all; the Fed opted to stay healthy instead. So before hyperinflation even might become a threat, you should be able to get wealthy betting on the downside. Even if you don't wish to speculate in that direction, you can get wealthy simply by maintaining your money and then employing it at the bottom."

These are the theories, basically similar in nature, from the people who make their living thinking about such things. Of course, you don't have to take their word just because they're "experts." Does it make sense to you?

The common hyperinflationary wisdom seems to be that the Fed will simply be able to "print" money to avoid a deflation. This is the idea that Bernanke so ineloquently expressed, landing him the chief job at the Fed and giving him the nickname "Printing Press". Yet Prechter raises a subtle, but very important point - the Fed does not print money per se, it issues credit, and there is a big difference. Credit can simply disappear, while currency that has been printed cannot. All the analysts quoted above assume that people/entities will liquidate assets to raise cash in order to service their debts. (Prechter notes that if they won't do it their creditors will do it for them!) But others will simply walk away from their debts. This, too, is deflationary. One man's debt is his counter party (usually the bank)'s asset, so if he defaults, suddenly the bank has fewer assets and merits a lower stock price. The stock of the bank, is of course, someone else's asset, and thus begins the game of what Greenspan called "cascading cross defaults." There is little question that cascading cross defaults are deflationary -- assets plunge in price and the stock of cash rises quickly because people desire to be liquid.

One thing that is clear, the cost of money - i.e the cost of borrowing, or the cost of credit - is going up, in the form of interest rates. John Mauldin makes an excellent case for the Fed not being done with raising rates, even though everyone seems to think they are. As the cost of money goes up, demand decreases. Decreases in demand lead to a slowing economy. A slowing economy leads to people out of work, who can't service their debts, leading to defaults. Then we get to the point that the three analysts above are talking about above . . .

"Biggest Crook in Marin County" Wanted To Be An Appraiser

I just thought this was interesting. I wonder if it is really different this time in Marin:

Nancy Isles Nation reports in the Marin Independent Journal, our local newspaper, that a man convicted of embezzlement whilst the owner of San Rafael based Woodson Co, a mortgage guaranty company, is seeking to have himself declared “rehabilitated in order to gain a Real Estate Appraisers licence.

In his quest to clear his name Michael Woodson, the one-time investment whiz asked a San Francisco judge to postpone a hearing so that he may respond to objections filed by the Marin District Attorney’s Office. In opposing the certification of Woodson’s rehabilitation, District Attorney Ed Berberian said many residents of Marin were victimized. Woodson served time in Marin County jail and later in a State Prison for violating the terms of his probation.

“Many thousands, if not millions, of dollars were diverted by his activities,” Berberian said. “We don’t see, based on the way he presented his request, that he shows any signs of real rehabilitation.”

Woodson yesterday said accusations made by the district attorney are false. “They really want to shame me again,” Woodson said. “I don’t get it. The case is 22 years old, everybody has gotten their money back, I’m living in the community - they are making me out to be the biggest crook in Marin County.”

Woodson was a high-profile investment adviser with political connections in the White House, who declared his Woodson Co. bankrupt in 1984. Some 2,000 investors had pumped $70 million into the company before it collapsed, and Woodson was charged with 867 counts of fraud and embezzlement.

Prosecutors charged that, as the company faltered, Woodson padded the stated value of property and siphoned new investors’ money to pay earlier investors. Woodson admitted he shifted money from one investor group to another but said he did so only in hopes of selling the company and paying everyone off.

Foreclosures Sold Back to Lender Are Up

Here is an article that discusses how to properly interpret foreclosure statistics in order to determine whether foreclosure activity is due to economic conditions. (I sure wish I knew which Northern California county the graph is for.)

If you are watching foreclosure news for clues on the housing market and economy, there are three key things you need to know. While foreclosure activity is rising it remains at historically low levels. Foreclosure statistics can be misleading as a housing market health and economic indicator because there is a base rate of foreclosure that has little to do with the economy or the housing market. Finally, the foreclosure information we really need to make economic assessments isn’t available.

On the first point, RealtyTrac, DataQuick and others have reported a 28% year over year increase in foreclosures for Q1 2006. While this is a significant up-tick, foreclosures are still low. DataQuick which has been tracking foreclosures since 1992 says that California foreclosures, for example, peaked in Q1 1996 at 59,897. In Q1 2006 there were 18,668, less than 1/3 of the peak. These data taken alone support the popular press notion of a “soft landing” for housing, as this level of foreclosure can easily be sustained without itself causing much impact on the market.

The problem with using these numbers alone to measure the state of the real estate market is that most reported foreclosure numbers only represent the first step in the foreclosure process, not the actual number of properties that are foreclosed on, that is, sold at auction. Only around 5% of homes that start the foreclosure process end up foreclosed on. The rest resolve it other ways.

A relatively easy method is to separate homes purchased by 3rd parties (typically indicates sufficient equity to profitably resell) and those that receive no bid and go back to the lender (insufficient equity to resell).

For example, look at the following chart for a county in northern California:


[Regarding the graph, above] While the number of Notices of Default is clearly trending up, it remains low and un-alarming by historical standards. Same for the total number of properties sold at auction. However, the number of properties sold back to the lender (due to lack of equity) far surpassed those sold to 3rd parties for the first time in four years in April 2006. I believe this to be a far more telling leading indicator than any other foreclosure statistic, yet it is presently unavailable from the current foreclosure data sources.

Note: Based on my reading of the article, the abscissa in the above graph should be labeled as "year" not "month".

Central Banking, the Depreciation of Self-Worth, and Decivilization

I greatly enjoyed this essay by Eric Englund. Maybe you will too. Here are the first three paragraphs:

As J.G. Hulsmann stated in his seminal essay The Cultural and Spiritual Legacy of Fiat Inflation: “The government’s fiat makes inflation perennial, and as a result we observe the formation of inflation-specific institutions and habits. Thus fiat inflation leaves a characteristic cultural and spiritual stain on human society.” It is, therefore, crucial for people to awaken to the fact that the manipulation of money and credit, on the part of central bankers, is tantamount to manipulating the minds and hearts of human beings—a matter also covered in a jointly-written essay. Right behind owning one’s own body, the second most personal asset an individual owns is the fruit of one’s own labor—with such fruit typically taking the form of money; which is exchanged for food, clothing, transportation, shelter, etc. Accordingly, with the common yardstick here being money, a person’s self-worth, in part, can be measured by earnings power, accumulated savings, and personal net worth.

With central banks, however, continuously perpetrating the immoral and fraudulent act of fiat inflation, money perniciously loses value over time. When such an important and profoundly intimate self-measuring tool (money) loses its stability, people tend to lose their moral bearings and social decay ensues. And, correspondingly, state power increases—for awhile at least—as the populace becomes evermore dependent on state bureaucrats for guidance. To be sure, this seems quite abstract. Hence, it is my objective to bring you tangible examples as to how fiat inflation, as wrought by central bankers, has had a deeply personal impact on people and is a key factor behind the gradual decivilization process engulfing humanity.

An appropriate place to begin pertains to the impulsive and adolescent financial behavior so commonly displayed by American adults. Since the bursting of the NASDAQ bubble in 2000, the Federal Reserve has gone on a fiat-money-and-credit-creation bender. In turn, the masses have imbibed this easy credit and are drunk with confidence that they are on the road to riches. Just look how effortless it has been to purchase McMansions and expensive cars in order to convey that you are in the game, you are a player, and that you are on your way to Easy Street. Houses, after all, will only increase in value and make us all wealthy in the long run—this mindset will change once it is recognized that the housing bubble has burst. The most seductive aspect of this game is that one does not have to delay gratification by saving. Most certainly, by today’s standards, saving reflects a lack of financial acumen and certainly isn’t much fun. No. In order to reveal financial wisdom, one must maximize the use of leverage and minimize the size of a down-payment. Consequently, borrowing hundreds of thousands of dollars, to purchase a dream home and two luxury automobiles, defines financial sophistication in the United States. Borrowing, indeed, has become a virtue whilst saving has become a vice.

The New Californian Socioeconomic Class of the Future?

So you are one of the gazillions of Californians who REFIed, HELOCed, etc. and so you are drowning in debt but hey, it's "all good" because you can still make the payments as long as that job holds out, or your significant other's job holds out, you stay healthy, no family emergency arises, etc., etc., etc. So you think to yourself in the unlikely event that if worse comes to worse you get foreclosed on you can just hand over the keys and walk away. Right? Isn't that what folks did in the past? Isn't this such a great country where you can take on tons of debt and not worry about having to really pay it back? (Damn! Where's my credit card?) Well, think again. Here in California we may be looking at a future where there is a new socioeconomic class: the indentured housing-debt serf.

Homeowners behind in their mortgage payments after hocking the house to pay for a major remodel or a new boat or car may be in for a rude awakening. If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.

A foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner’s home and the value of the loan. ‘This is going to become a hot topic,’ predicts Bradford L. Hall, managing director of Hall & Co., CPAs in Irvine.”

Some homeowners with little of their own money in their homes may think they will do what strapped homeowners in the ’90s did: turn over the keys to their lender if things get really bad and walk away.

But Hall and other financial experts warn that things may be different this time because so many people have refinanced. The difference is the recourse loan. In California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower’s assets once they obtain a court judgment. ‘They can literally go after everything you have,’ Hall says.

Price Reductions in Marin County as of July 8, 2006

Currently, 37.4% of all houses* on the market in Marin County are advertising "price reduced" according to ZipRealty.com. Keep in mind that these houses have not yet sold.

I didn't think we would break out of the 35% range. How long do you think until we reach 40%? 50%?

Below is a graph showing the proportion of the price reductions by percent range (e.g., the proportion showing a 1-2% price reduction, the proportion showing a 3-5% price reduction, etc.) for the same group of houses represented in the previous graph:

In the above graph it can be seen that the majority of Marin SFR sellers have reduced their asking prices by about 5%. Clearly, Marin sellers are still in denial (or maybe pre-anger phase, refer to this) and are pricing based on last year's market.

You know, it took me a lot of time to do this analysis. I should not have had to do this at all. Given all the money that people pay to realtors in commissions for whatever it is they do for us, realtors should be providing less attitude and spin and more of this sort of information IMHO.

*By "all houses" I mean that I searched ZipRealty for all SFR houses of any size and any number of bathrooms and bedrooms, etc. within the asking price range of $100,000 to $10,000,000, inclusive.

The "Soft Landing" Myth

I still don't really know what is meant by a "soft landing" other than it sounds a lot better than a "hard landing" or a "crash landing". But if this is even a little accurate it seems that the odds of a "soft landing" (whatever it may be) are small:

The hope of investors that the economy will gently ease into a soft landing is based more on myth than reality. Although the vast majority of economists and strategists are forecasting a soft landing rather than a recession, the fact is that soft landings have rarely happened in the past 50 years, and the consensus of economists has never accurately forecast a single recession. In addition every recession has been preceded by a bear market.

Over the last 50 years the Fed has made three or more consecutive tightening moves 11 times including the current period. Of the prior 10 times, 8 have led to recessions and 9 to bear markets. The only true soft landing occurred following the tightening series of 1994, and, of course, this is the template that analysts like to use as a comparison to the current period. The only other instance where the economy did not fall into recession following a series of tightenings was in 1966, which was a close call. In that instance, however, the Dow plunged by 27%, hardly a soft landing for investors in the market.

Significantly, in 9 of the 10 tightening periods the spread between the long-term Treasury rate and the t-bill yield narrowed to under 50 basis points. Once again, the exception was 1994, the one instance that was not followed by a bear market or recession. Therefore, in all 9 instances where the Fed tightened and the yield spread dropped below 50 basis points, a bear market followed—and 8 times a recession occurred as well. In the current period the Fed has hiked rates 17 straight times and the rate spread between long treasuries and t-bills has dropped below 50 basis points.

It seems that before every recession economists and strategists ignore the strong evidence to the contrary and trot out the “soft landing” thesis as if this has been the norm. Hoping for a soft landing and pause in Fed rate hikes, investors are now cheering any indication of economic weakness. Judging by history, however, a soft landing appears to be merely the short window that occurs between the peak of an economic expansion and the subsequent recession. We see no reason why the outcome should be any different this time around. The current economic expansion is already one of the longer ones on record and is looking long in the tooth. If anything, other forward-looking indicators such as high energy prices, a weakening housing picture and global monetary tightening make an oncoming recession and bear market even more probable. While anything is possible in both the market and the economy, it seems to us that the odds against a soft landing are extremely steep.

Another Financial Dodo on the Path to Extinction?

It looks like we will soon be able to say goodbye to so-called "piggyback loans". Piggyback loans, like most of the other "exotic" loan types, were created, so it was claimed by the lending industry, to make housing more "affordable". Well, we all know these loan products only made houses less affordable over time and put many people at greater financial risk. Anyway, if these types of loans go the way of the Dodo then even fewer people will be able to "buy" their dream Marin POS at today's prices. To the extent that people used to save money for a down payment, these loan types are one of the reasons why the US savings rate is negative. Don't be a Dodo.

Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country, so-called ‘piggyback’ programs.

As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s, has upped the ante for lenders who seek to fund piggyback deals through capital market financings. The move is likely to raise interest rates and fees for some homebuyers this summer, mortgage experts say, and could reduce the volume and availability of piggyback programs overall.

The reason for the change is that an exhaustive study of the performance of piggyback loans found them anywhere from 43 percent to 50 percent more likely to go into default than comparable stand-alone first-lien purchase transactions.

Piggyback plans were developed as a creative response to soaring home prices and borrowers’ desires to stretch their down-payment cash. According to a study, piggybacks quadrupled their market share between 2001 and 2004. In a sample of loans in California markets the percentage of piggybacks exceeded 60 percent in some cases.

If you were hoping to make a windfall on your house, then you have to 'sell now before it's too late'. If you are a buyer, then it behooves you to wait as the deals will only get better and better. That implies a deadlocked market which is pretty much what we have now in Marin. So maybe the market is rational after all.

"Sausalito By The Bay" Needs to Get Their Facts Straight

I just discovered this reference to my blog in the Sausalito By The Bay blog:

Are You an Emotionally Manipulated

Housing-Debt-Serf?” in this land of costly homes?

That’s the question asked in the funny video on YouTube, featured on the blog Marin Real Estate Bubble, run by some anonymous person yet reaping 4,763 “views” since it was started last July.

See some photos and wry commentary about “Marin’s insanely over-priced housing market at the companion blog, Marin POS.

To give you a sense of the tone of this blog, the current photo of a home has this caption, ” I Thought Versailles Was in France or Something?

While Marin home prices are on your mind, you might as well visit here and see the graph on prices.

I would just like to take this opportunity to relieve Kare Anderson (author of the Sausalito By The Bay blog) of her technical ineptitude and say that the Marin Real Estate Bubble blog has well over 200,000 views and nearly 1,000 unique (non-repeat) visitors per day since being registered with SiteMeter (I registered a few months after starting this blog and so the true numbers are almost certainly larger). Not much I admit but for a small, insignificant county like ours and the fact that I make almost no attempt to promote this blog myself, it's not too bad (my hope was and still is that readers who value this blog will promote it for me; idealistic I know).

But I appreciate the mention all the same. Thanks, Kare.

Oh, and assuming that post of yours is representative of your writing ability let me also take this opportunity to say that for an "emmy-winning former NBC & WSJ reporter, publisher of Say it Better ezine, author of SmartPartnering & LikeABILITY & speaker" your writing skills leave much to be desired. For my part, I make some effort on this blog to write well (not perfectly mind you, just well) and use punctuation correctly as I believe that one's writing reflects on the individual and I don't want to inadvertently encourage the ever declining writing skills of our youth by writing poorly myself. You should take your pseudonym (i.e., "sayitbetterkare") as sound advice.

Is Cheney Betting on a Collapsing Housing Bubble?

According to this, Dick Cheney is betting a very significant portion of his wealth on a weakening dollar and a plunging housing market along with all that they entail:

In theory, you can tell what a person expects from how he invests. The theory hasn't been applied to important public officials much before. Kiplinger's Personal Finance applied it to the Cheneys' financial disclosure statement and printed the analysis under the provocative headline, "Cheneys betting on bad news?"

The bad news would be of two kinds: A higher rate of inflation and a lower value for the dollar.

If you add up the money in just the accounts Kiplinger's considered, he [Cheney] has between $23 million and $65 million invested. From its analysis. Kiplinger's figured that the Cheneys' total assets could be as much as $94.5 million.

Kiplinger's got the inflation hint from the Cheneys' stakes in a fund that specializes in short-term municipal bonds, a tax-exempt money market fund and an inflation-protected securities fund. The first two hold up if interest rates rise with inflation. The third is protected against inflation. The disclosure statement provides ranges for the investments, so Kiplinger's could tell only that the Cheneys have between $10 million and $25 million in the municipal bonds, between $1 million and $5 million in the money market and between $2 million and $10 million in the inflation-protected securities.

The hint about a loss of value of the dollar comes from their $10 million to $25 million in a foreign, mainly European, bond fund.

There is a caveat here. The vice president turned his money over to outside managers. Kiplinger's quotes Mr. Cheney's lawyer saying the vice president has "nothing to do" with his money.

You have to wonder, though. It's customary for top officials to put their money where they don't have day-to-day control of it. For some jobs, that's the law. Still, who could keep his lips locked if he knew something his money manager could cash in on? The hands-off approach is a fig leaf that the public demands, but a strong breeze will blow the leaf away.

For a more reactionary interpretation of all this, click here.

She's Gonna Pop

The Northern New Jersey Real Estate Bubble blog has the goods on this Wall Street Journal article:

WSJ: How is the housing market?

Mr. Heebner [a manager of the CGM Realty Fund]: A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we're going to see a major [retrenchment] in hot markets in California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.

WSJ: What has you so concerned?

Mr. Heebner: I'm worried that more people will default on their mortgages. Risky mortgages such as interest-only and pay-option adjustable-rate mortgages require no principal amortization and in some cases payment of only a fraction of the interest due, have been widely used in the last two years. Some people got 100% financing for their homes. It made the tech bubble look like a picnic. When housing is going up rapidly and you can buy far more than your income can support, some people are eager to make big profits by extending themselves financially.

As housing prices fall more people will be under water, and these people are just going to walk away from their homes. They are going to say, 'I'm outta here.' You're going to see increasing foreclosures over the next several years. As [home] prices come down, it will create a difficult environment for home builders.

Remember, approximately 70-80% of all recent home loans in the Bay Area were some form of ARM.

And if you "owners" out there are having trouble keeping up with your payments, and since many of you can no longer afford to have children anyway, you can always take this route:

Cortney Henderson is one of the faces of America's housing affordability crisis. She never could have qualified for a mortgage here — where the median home price is $607,000 — had she not had the $27,000 she made as an egg donor...

Henderson's story points up the extremes to which some Americans are now willing to go to buy a home in some of the most overheated markets.

Come to Marin, It's Not as Bad Here

As you can see in the above graphic, the Marin Market Heat Index is at or near an all time low. Never before has Marin real estate been so out of favor, at least according to this index. Even the realtor who publishes this index says the "reading hit 0.58 on June 26, the lowest reading since the Index began in 2002".

And it's still at 0.58.

Unfortunately, instead of discussing the likely down-side consequences for the Marin real estate market, instead of warning potential buyers about the near-term (1 - 5 years) future market conditions, the best this realtor can do is say 'well, at least it is not as bad here'. Denial, pure and simple:

Heat in the real estate market is a somewhat relative concept. Everyone agrees that the real estate market in general has cooled significantly in recent months. That has certainly been true for Marin where the Market HEAT Index reading hit 0.58 on June 26, the lowest reading since the Index began in 2002. Remember, 0.80—1.25 means a balanced market, so 0.58 is squarely in a Buyers Market area.

But since market heat is relative, we can take a look at a county near here to see what the HEAT Index is there. Would it surprise you to learn that on June 30 the HEAT Index rating for Sonoma County was 0.40 and that the Napa County index was even lower? This is significantly lower than the rating for Marin. Even in times of slower, cooler markets, real estate activities in Marin maintain at higher, healthier levels.

• Marin County--0.62 [should be 0.58]
• Napa County--0.38
• Sonoma County--0.40
• Solano County--0.38
• Mendocino County--0.32

Furthermore, this realtor is hedging his statements by stating "Remember, 0.80—1.25 means a balanced market..." So what? We are a long way from a "balanced market". The scale is as follows:

According to this Index, Marin is in a solid and unprecedented "buyer's market". But frankly, IMO it's not a "buyer's market" until the excesses wrought by this housing bubble have completely blown away.

It is not in the least bit surprising that areas that are further from the nearest major employment center (i.e., San Francisco) are suffering more than those closer to the major employment center. Furthermore, Napa, Sonoma, and Mendocino counties are popular vacation/second house locations. I've said it before on this blog, as have many others, that vacation houses are the first to go and that the collapse of the bubble will work its way inward -- towards the employment centers. So far, the pattern of results are confirming that prediction (but faster than I would have thought).