"The Mother of All Bailouts"

Nope. Housing prices make a whole lot of sense; completely justified. Yup. No housing bubble here.

WASHINGTON (AP) — The Bush administration insisted Sunday that Congress must move quickly to approve what one lawmaker called the "mother of all bailouts" — a $700 billion proposal to buy a mountain of bad mortgage debt in an effort to unfreeze the nation's credit markets.

However, congressional leaders said the administration's spare three-page plan must be expanded to include help for people on Main Street as well as the big Wall Street financial firms who have lost billions of dollars through their bad investment decisions.

The plan the administration has developed with support from the Fed would have the government buy up to $700 billion of the bad loans, taking them off the books of financial firms... Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the government's efforts would be the "mother of all bailouts" that could well cost $1 trillion when the cost of the government takeovers of Fannie, Freddie and AIG were included.

The whole congressional debate [on the bailout] is occurring just weeks before voters go to the polls.

And

(CBS) Treasury Secretary Henry Paulson defended the Bush administration's proposal to spend up to $700 billion to buy up bad debt of financial institutions struggling with illiquid assets (such as defaulted mortgages), saying not acting would have jeopardized the possibility of anyone getting a loan - and may have jeopardized Americans' savings and retirement funds.

Oh, and while we're at it, let's have the U.S. taxpayer bail out foreign financial institutions and governments too.

Of course, bailing out incompetence, failure, fraud, speculators, and the like (foreign or otherwise) is wrong as wrong can be. But for some reason that last quote from CBS really got to me... the one about how we have to save people's retirement accounts.

Don't get me wrong. Despite what you read on this blog, I don't like the idea of people losing their house and/or their retirement funds any more than the next gal. But come on! People gambled. People have been gambling with their retirement! That's what it means to pay obviously ridiculous prices for houses (and doing so as part of your retirement plan). That's what it means to put you retirement in the stock market (401K, mutual funds, what have you). It's gambling and no one can claim ignorance as people make a point of highlighting the risky nature of the markets even clear way back when the move to 401Ks first started and was viewed with some skepticism. The stock and bond markets (etc.) are inherently risky. It's little different than putting your entire retirement on red 99 (refer to the graphic for this post). Don't put your money into those markets if you cannot afford to lose it. That's rule numero uno in the investing world.

[Begin sarcasm]
But if we are going to bail out risk-takers who lost, then shouldn't we just bite the bullet and remove all risk from the stock market? Let's make it more like the housing market which is rigged to (almost) always go up. Let's say that it is now illegal (not just temporarily stopped) to short the market; no more puts. Let's say that you can only buy a stock as long as you are willing to only pay more than the last price paid for that stock. In fact, let's call it what it is and not call it a "market" anymore... certainly not a free and open one. Let's call it "Social Security 2.0".

I like kleptocracy*. You will like it too (not that you have any choice anymore). And besides, Paulson will make for a good king of America.

*"A kleptocracy (sometimes cleptocracy, occasionally kleptarchy) (root: klepto+kratein = rule by thieves) is a term applied to a government that extends the personal wealth and political power of government officials and the ruling class (collectively, kleptocrats) at the expense of the population.

The effects of a kleptocratic regime or government on a nation are typically adverse in regards to the faring of the state's economy, political affairs and civil rights. Kleptocracy in a government often results in a severe deficit of foreign investment prospect, and drastic weakenings in the market and exportation/importation affairs. As the kleptocracy often embezzles its money from its citizens by misusing funds derived from tax payments, or money laundering schemes, a kleptocractically structured political system can be degrading to the quality of life of the general populace. In addition, the stolen funds that kleptocrats take to their own gain is often removed from funds that were to go towards public improvements, such as the building of hospitals, schools, roads, parks and the like, bringing about yet further adverse effects on the quality of life of the citizens living under a kleptocracy."
[End sarcasm?]

Update: Mish has a convenient way for you to blast emails, all at once, to all senators with a single click of a link. Check it out.

August Results for Marin Care of DataQuick

According to DataQuick, Marin prices were down -25% year-over-year in August; 13.5% of sales in Marin were foreclosures. Sheesh! Alt-A and Prime resets haven't even started yet.

"Mortgage money for homes above the half-million-dollar mark is hard to come by right now, even for well-qualified buyers..." said John Walsh, MDA DataQuick president.

The use of so-called jumbo mortgages, until recently defined as over $417,000, has plummeted since the credit crunch hit in August 2007, making jumbo loans more expensive and harder to obtain.

The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,121 last month, down from $2,218 the previous month, and down from $3,171 a year ago. Adjusted for inflation, current payments are 18.5 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle.

Foreclosure activity is at record levels, financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages.

And if bailing out incompetence and failure right and left (at taxpayer expense) isn't enough of a show for you, well how about Paulson's latest grand scheme to set up an entity to buy all that toxic paper from the current bag holders at the lowest bidding price? Don't want to mark to market? We'll let you do it to each other! Since that cannot really be allowed to happen, because, you know, everyone has to be a winner and our rickety system cannot tolerate losses of any kind, you know there is going to be a lot of behind-the-scenes monkeying around. I can't wait.

Today is Your Day

As anticipated a couple of years back, Fannie Mae and Freddie Mac have finally failed, are getting bailed out, and we are one big step closer to nationalizing the mortgage market; from here on out, you and I will be supporting the U.S. mortgage market. Welcome to what will likely be revealed to be the (second) largest public bailout in the history of the world (this might have been bigger)!

To those of you who argued that there was no housing bubble, that it was a New Paradigm, that property prices are justified because of blah, blah, blah bogus, mythical, because-my-realtor-said-so, wishful thinking sorts of reasons: your collective work has come to fruition. Aren't you proud to have contributed to it all? Aren't you happy to have been able to ignore all common sense, logic, and data to the contrary so as to so willingly and blindly pay such a patently stupid, ridiculous price for a house? Today is your day! Celebrate.

Generations to come will remember us all as the most callous, profligate, spoiled, narcissistic, and self-entitled generation in the history of America (or maybe even all of mankind). When thinking of their ancestors, your children, your grand children, and your great grand children will look back at you in their dusty old genealogy books and photo albums with hatred and disgust for strapping them with your crushing debt.

But you will be dead; so what do you care? Right?

Update 09/09/08: Here is what Jimmy Rogers had to say about the Fannie & Freddie bailout:

"America is more communist than China is right now. You can see that this [the F&F bailout] is welfare of the rich, it is socialism for the rich... it's just bailing out financial institutions."

You can hear him yourself by watching this video.

July, 2008 Results

According to DataQuick Marin prices are down -13.2% this past July, year-over-year:


The following graphic, also from DataQuick, shows that Bay Area prices are down almost to the peak of the last, normal, housing cycle (2003-04 timeframe) from which the recent housing bubble launched prices to the stratosphere. So it seems reasonable to wager that we have much further to fall:


The SF Chronicle had this (and this) to say:

The percentage of households able to buy an entry-level residence in the state reached 48 percent during the second quarter, double the level from a year ago, according to the California Association of Realtors. The Bay Area remains the least affordable part of the state, but 32 percent of its households can now afford a first home, up from 18 percent during the second quarter of 2007, the report said.

Now is that affordability calculation based on the one using your new method (which is now invalid given that it depends on the existence of the loose lending standards which got us into this mess, almost nothing down, non-fixed rate loans; refer to item 14 in the linked-to post) or the traditional method?

Andrew LePage, an MDA DataQuick analyst, said he thinks the bottom is not imminent - and is unlikely to usher in a quick turnaround. "Recent history suggests you could be looking at at least two or three years of price stagnation," he said. "It’s looking like the bottom will feel more like a bog than something you just bounce off of."

"The bottom is not imminent"? Now there's a change of tune.

I know I should not give that hack, Leslie "over my dead body" Appleton-Young, any of my attention, but:

"People are off the sidelines, stepping in, trying to gauge the bottom of the market and feeling that, even if this isn’t quite the bottom, it’s looking great," said the group’s chief economist Leslie Appleton-Young. "They’re able to get into something they never thought was possible a year or two ago."

Sorry Leslie, at the moment those "knife catchers" are mostly in places like Napa where people are buying the discounted houses thus solidifying the new (lower) price structure:

Sonoma County’s summer home sales surge continued in July as buyers snapped up discounted properties shed by lenders and financially strapped homeowners.

And I hate to do it, but here is what the Marin IJ had to say (after weeding out their attempts at happy-talk and feel-good journalism):

In Marin, foreclosure resales were 11 percent of total sales. Valerie Castellana, an agent in Greenbrae and past president of the Marin Association of Realtors, said sellers need to be "really astute in their pricing strategy these days."

Yes, in other words sellers need to substantially lower prices if they hope to sell sooner rather than later.

Buyers remain anxious. "They want to make sure they’re not overpaying," she said. "Many of them are holding off because of that anxiety level."

Smart buyers.

He said such buyers are facing a more restricted market for home loans. "We’re in a knee-jerk reaction from where we were before," Hickman said. "The pendulum has gone back 180 degrees. It’s extremely difficult to get money right now."

I beg to differ. Lending is returning to what it was prior to the bubble and where it should be. We are not even close to where it was at the start of the last, normal, housing cycle. So the pendulum has swung only about 90 degrees; we have another 90 or so to go.

There is no way in hell anyone (other than sellers, of course) should want lending standards and practices to return to the way they were during the bubble. This is exactly the sort of false hope people like Hickman are trying to instill and is akin to the fear mongoring ("buy now or be priced out forever", etc) his industry routinely engaged in during the run-up. The fact is, Mr. and Mrs. Marin Seller, the only way bubble-level pricing can be maintained is to return to bubble-era lending practices. Of course, there are other ways to support your wishing prices, such as buyers suddenly getting a mass windfall, 300% raises, etc., but I wouldn't count on it.

Chronicle Chart

The SF Chronicle's chart of our "immune" housing market:


The important columns to look at are the percent change in sales and price/ft^2.

This is just a "flesh wound" from the subprime bullet (that wasn't even aimed at us) and the resultant disintegration in the financial markets. What will this chart look like when the real problem, Alt-A loans, etc., soon begins to blow up I wonder?

Conflicts of Interest

I saw this Glenn Beck video posted over at the Housing Panic blog (kudos). Very funny.

Takeaway message:

"If you want honest advice about your home, don't listen to the people who are trying to make a living selling them."

Lawrence Yun, Leslie Appleton-Young, David Lereah, and all you Marin six-percenters, take note.

Of course, the irony of all this is that people like me, who have spoken out against the biases and the inherent conflicts of interest in the real estate industry and who have tried to make the case that a real estate bust was likely, had to rely on data that came, for the most part, from the real estate industry (the "REIC") itself. This is sad for two reasons: 1) It indicates how much we need an unbiased, third-party source of real estate information; and 2) The "REIC's" own data, spun and massaged as it was by realtors and agents, still made the case for a real estate bust.

"Honey-poo, Why Is the Kitchen Glowing?"

Granite countertops were all the rage and the latest brain dead, "must have", keep-up-with-the-Joneses housing accouterment here in Marin (and pretty much everywhere else in bubble markets). Well, it seems that if you are shopping for a trendy Marin house you would be wise to bring your Geiger counter with you.

Thanks to a reader for sending me this link.