Today’s Housing Bubble Post – Back To Issuing Warnings

Oddly enough I find myself back in the position of warning that the housing market may be heading to a terrible crash in the near-future. The bubble mentality has not changed at all and appears to be restarting in the very places where the bubbles were the worst. This is probably because people got used to unaffordable prices and think that a drop from unaffordable to just really, really expensive is a buying opportunity. Meanwhile government and the real estate industry are trying to “reignite” the market — hoping that starting another bubble will put off the reckoning.
People still think that what we are going through a temporary “correction” and that real estate prices are going to “go back up,” that houses are “cheap” now, that they should “snap them up” before they are “priced out.” They still think real estate is the path to wealth, instead of somewhat of a burden that should only be undertaken under certain circumstances. Namely, when you plan to live there for a long, long time, and you’ll pay less (including closing costs, taxes, insurance, maintenance, possible price depreciation, etc.) than rent.
Here’s what I am talking about. Combine this,

As of March 1, investors can now buy 10 homes (up from four) with Fannie Mae-backed mortgages. That’s also stimulating demand.

With this, Some of Us Still Think They Can Get Rich Quick from the Real Estate Bubble,

… the ad offered a mouthwatering menu of claims on “How to cash in on the biggest real estate liquidation sale in our entire United States history” and “how to maximize your profit with lucrative foreclosures.”

And this:

Option ARM rates are going to be recasting soon and in increasing numbers. That’s the magic moment when people can no longer make minimum payments, when they can longer make interest-only or neg-amortization payments.
When that magic moment comes, all of those people are going to look at how high their now unaffordable mortgage payments are. Then they’ll look at how much their house is actually worth relative to how much though owe. Then, maybe, they’ll try one of the various initiatives to modify their mortgage terms. And then, quite likely, they’ll jut walk away. [. . .] as the chart tells us, hasn’t even really started yet.

recast.png

What that chart shows is that the foreclosure problem is about to get a lot worse. Two more huge waves of “resets” are coming. Many, many, many more homes are about to reach a point of unaffordability for a lot of their owners, one way or another those homes will also be for sale, on top of the huge inventory that already sits unsold, and this will drive prices down even further, which will trigger even more problems.
Here is what I am saying: As long as a house is considered an “investment” instead of a place to live for a long time we will continue to be in a world of hurt. Real estate does not always go up.
Here is why prices can’t go up any time soon: There is a huge inventory of unsold houses. The houses that were built in the last decade are too big for regular people to be able to afford to heat and cool — and energy prices are going up. The water for the lawns will cost more and more. The gas to get to the malls and any jobs that might exist (good luck) will cost more and more. The “boomers” are retiring and selling their houses. The median price in many areas is still way above affordability by a medium-income family. You won’t get sufficient “positive cash flow” over your payments from the rent you’ll receive if you are renting the house.
The psychology of this is just like the stock market bubble. Things won’t get better until the bubble mentality of “it always goes up” is shaken out of people. Like I said the other day

In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.

Unemployment in my area is 11.2% and people are “snapping up” houses that are “cheap” at $580,000 because they were at $850,000 a year or two ago. But the median income here can’t support that. It couldn’t even support $350,000 before unemployment went up.
Here’s the thing. After the stock market crash the Fed intentionally created the housing bubble to prop up the economy for a few more years. Now the consequences have arrived. If you are thinking of buying a house as an “investment” ask yourself who is going to buy it from you at a higher price, and how they are going to get that money. Will that housing demand come from a healthy job market in which people are getting raises?
Don’t bet on it.

After Stimulus — Then What?

Suppose the stimulus passes. In fact, imagine that triple or quadruple the stimulus passes. Fine. Then what?
What happens after the stimulus? Isn’t the stimulus just the next bubble — the next last gasp attempt to put off the reckoning? Isn’t it just borrowing another trillion or two to try to prop up an economic system that over and over again demonstrates that it just doesn’t work?
Of course we want to do this and do it right — infrastructure investment instead of squandering on tax cuts or military. People need to have jobs, so they can eat. And investment has a longer-term payoff.
But to what end? Suppose the stimulus magically enables things to get back to where they were. My favorite term from TV was that it is hoped it will “reignite the housing market.” Heh. So if the stimulus “works” do we continue to chew up the planet, cut all the trees, remove all the mountaintops, create vast landfills of tossed junk, and all work as near slaves to make a few vastly richer?

California Republicans Demand Mass Layoffs

This post originally appeared at Speak Out California
How do California’s Republicans think California should solve the state’s budget crisis, which results from people being laid off and losing their houses? They are demanding nothing less than mass layoffs of state employees.
Every single budget compromise that has been negotiated has been rejected by the Republicans. They say there is one, and only one, budget solution they will vote for: mass layoffs of state employees and contractors. They want the state’s teachers fired, construction employees fired, firefighters fired, DMV workers fired, medical workers fired and mass firings from the rest of the state’s departments. And when they are done with that they demand cutbacks in medical care for the elderly, disabled, blind, and everyone else.
How are they getting away with this? Why aren’t these few members of the legislature being recalled by enraged citizens? Part of the problem is the way this is being presented to those citizens by the information sources. The issue is presented as “the Legislature” and “politicians” who “won’t compromise” as if “both sides” are at fault. They report on the people who are working hard to solve the state’s problems as if they are squabbling children and the public takes away the idea that government is a distant unsavory game that should be avoided. Take this Merced Sun-Star headline, for instance: “Our View: Governor, Democrats and Republicans need to compromise.” The editorial begins,

“As California’s financial troubles intensify daily, leading Democrats continue to blame Gov. Arnold Schwarzenegger for failing to win Republican votes for a budget solution.
. . . Democrats will have to offer concessions if they want their counterparts to compromise on tax hikes. So far, Democrats have failed to make even the most reasonable of concessions to save California from insolvency.”

The editorial just misinforms the public about what is going on! Repeatedly the Democrats have compromised, giving up more and more, but the Republicans have refused to compromise in any way. They just say, “No taxes” and that is that. THIRTEEN paragraphs down, the second to last paragraph, begins,

“To be fair, Democrats in the last special session made some real concessions — agreeing to $8.1 billion in cuts to state programs — in their elusive search for a budget deal.”

Oh, really, to “be fair” they mention this, in spite of the headline and the rest of the editorial, any members of the public who are still reading can learn that the Democrats have offered BILLIONS in cuts to state programs to try to get the Republicans to move even an inch away from demanding mass layoffs.
California will remain ungovernable and will slip further into economic distress as long as a small minority is able to block budgets, and as long as the public’s sources of information continue to mislead.
Click through to Speak Out California

Sustainabilty Is The Key To The Next Economy

There is an old saying: If something is unsustainable it can’t be sustained. Our economy is starting, just starting to show us what happens when you continue unsustainable practices to their conclusion.
The day will come when instead of habitually saying, “How can I make money off of this” as things happen, they will say, “Is this really sustainable?” Unfortunately we are only at the very beginning of the kind of pain that is going to teach us as a society that this is the correct way to evaluate what appear to be opportunities.
Let me explain:
We have learned that it is a good idea to store explosives in special bunkers with thick, concrete walls. Think about how we learned that it is important to require this.
We have learned about clean, safe drinking water. Think about how we learned that this is a good practice. We have learned to build sewer systems instead of dumping bedpans into the street. Yes, we used to do that and now we don’t. Think about how we learned not to. Along the same lines we have largely learned to wash our hands after we go to the bathroom and before we eat. Think about how we learned that this is a good practice.
We have set up building codes that prevent fires and collapses from earthquakes. At least in California we have. In other parts of the country they don’t require buildings to be earthquake-safe. We do, they will. Think about why we do and they don’t but will. Think about why we have fire codes for buildings across the country.
Are you getting my drift? These are things that people didn’t know to do, but now they do know. But people seem to have to go through terrible, devastating, tragic shocks before they learn. And finally we learn, and routinize safe practices. We had been through severe economic shocks and then the Great Depression and there were some things we as a people thought we had learned. Think about how bad the depression was and the things that we set up to try to prevent it from happening again: regulations, oversight, a strengthened democracy with citizen control of public resources, strong unions to serve as a counterbalance to corporate power, high taxes on the rich and corporations so income would be more fairly redistributed and the benefits of our system shared widely — only to gradually let most of that slip away. So the control of our country’s decision-making had reverted back to the wealthy and predatory capitalism was reinstated. We, the People were harvested for every last dollar and hour of labor and when we were finally tapped out the economy had to collapse.
There is every sign that this economic collapse could be worse that any before it.
So, like I said, the day will come when people look at events and instead of saying, “How can I make money off of this” they will say, “Is this really sustainable?” But I fear that we are going to have to reach the bottom before we learn this.

THROW Them Out Don’t Bail Them Out

Everything I have read about this massive bailout proposal sounds like they’re going to try to treat the symptoms of a sick and failed system instead of the causes and instead of reforming or replacing the failed system itself. Nothing I have heard addresses the CAUSES of the problems!
I say THROW the system out and start building one that WORKS for US, don’t bail the failed, corrupt system out. A bailout just keeps in place a bad system that has bankrupted all of us in order to enrich a very, very few.
Example: The CAUSE of this was corporate corruption of our political system. The deregulation, bankruptcy bill, oil company favoritism, “free” trade agreements that caused massive trade and job deficits, cronyism, etc. happened because corporate money was used to buy the political system. SO a bailout should prohibit ANY use of corporate funds to influence the political system in ANY way. This includes giving money to organizations like Heritage Foundation, Cato, CEI, DLC and the hundreds of other corporate front groups that influence our politics and our thinking.
Example: Why bail out the very people who caused this mess? Any company receiving a dime of bailout money from the taxpayers should agree to certain terms that benefit the taxpayers. Their taxes on any profits should be doubled or tripled for ten or twenty years. Their management should not be allowed to receive pay that is above ten times the American average. They should agree to start retrofitting their companies to be carbon-neutral. I can think of a hundred other things they should have to agree to.
Example: Lots of people have run up debt and can’t pay their credit card bills because wages have not been going up, jobs are being outsourced, etc., while a few people at the very top of the system are getting vast, vast income and wealth out of the current system. SO reforming the system and imposing very high taxes of 90% or more on high incomes above, maybe $2 million, and using this money FOR THE PEOPLE should be a part of a bailout. These high taxes remove the INCENTIVE to lie, cheat and steal. They remove the reason a few people have been gaming the system. And with a 90% top tax rate hedge fund managers would STILL bring in $300 million a year. Think about that.
Example: Lots of people can’t pay their mortgages and credit card bills because of health care costs. Completely reforming the health care system to provide everyone with health care would cost VASTLY less than this trillion-dollar bailout. SO a national health care system should be ONE component of a bailout.
These are just a few ideas for approaching any bailout. I have more. ALL of us would have many, many more if we get the time to think about it. And THIS is why they are trying to force this to happen immediately – THIS WEEK. If we get a chance to take a breather and think about what we’re doing — giving them all the rest of the money the country has — we might have time to see a better way to proceed. They DON’T want that.

Republicans and Economies

Ladies and gentlemen, there was a REASON that Americans were loath to elect a Republican into the government for an entire generation after the Great Depression: They remembered.
Update – I was waiting for a comment asking me to explain what I mean, because it would make my point.
Previous generations REMEMBERED. There was nothing to add. Over time people have forgotten how Republican economics caused the depression, and how they fought every single program that helped the people at the expense of the wealthiest and the powerful corporations. (And in fact led to the prosperity that the wealthiest and corporations enjoyed since.)
But now people do not remember how concentration of wealth, corporations preying on citizens, anti-union policies, etc. LED TO the economic collapse.
The depression was ended by pro-union policies, redistributive taxes, REGULATIONS on businesses and the fuinancial sector, and an understanding that We, the People run the government, and the reason we have corporations is for OUR benefit, not just the benefit of the few.
Over time, as I said, people forgot. And here we are again.

Today’s Economy Collapse Post – “Ominous”

Rising gas, food,health care and other prices, falling housing prices and savings rates, stagnant wages and all the rest are taking their toll: Retailers Face an Ominous Holiday Sign – New York Times,

Sales of women’s clothing, a traditional pillar of the holiday shopping season, are unusually weak so far this year, according to a major credit card company, an ominous sign for the retail industry.
From high-end dresses to bargain coats, spending on women’s apparel dropped nearly 6 percent during the first half of the Christmas season, compared with the same period last year, according to MasterCard Advisors, a division of the credit card company.

But all is not yet lost, SOME are doing just fine, thank you,

Spending on luxury items is up 10.8 percent, “which isn’t bad at all,” Mr. McNamara said.

Yes, at the top things are great.
A certain commenter might want to leave a message about heads on pikes, torches and pitchforks right about now…

167,000 Jobs – Updated

167,000 Jobs Added in December, Employers Step Up Hiring in December, End 2006 on Strong Note
I seem to remember that the economy needs to add 350,000 jobs a month just to keep up with new people entering the job market. Is that right? Am I missing something? Discuss.
Update – OK I was wrong (do NOT tell my wife I said that!) and I think I found where that number stuck in my head.
According to this 2004 Economic Policy Institute snapshot 137,000 new jobs a month is required to break even with population growth and is therefore “required to keep the jobs gap from widening.”
At least back in the 90’s “357,000 is the weekly initial unemployment insurance claims number below which the unemployment rate is falling rather than rising” according to this 2003 Brad DeLong post. (Brad was speculating that it may be closer to 400,000 now.)

Who The Bush Administration Works For

China is not a currency manipulator, U.S. says

In a blow to American manufacturers and other firms feeling competition from Chinese exports, the U.S. Treasury Department said Monday that China is not a currency manipulator.

Another source, White House: China not manipulating money

“The administration’s lack of action today hurts all Americans by refusing to acknowledge the obvious – that China manipulates its currency,” said Sen. Chuck Schumer.
[ . . . ] American manufacturers believe that China has purposely kept its currency undervalued by as much as 40 percent, making Chinese goods cheaper for U.S. consumers and making American products more expensive in China.