The Great American Credit Catastrophe

The 911 of the Middle Class is the consumer credit debacle. It is the gift that keeps on giving. The reality is that the housing crisis is just one piece of this really big, ugly mess. It seems to me that our President MUST call for immediate reform and take action through executive order. Call me politically na├»ve, but we need action. Unemployment continues to hover close to 10%, and higher in badly hit areas. Interest paid by the banks on savings ranges from less than 1% to maybe 2.5% on a good day. The consumer credit card companies, though regulated now sort of, ran naked through the streets jacking up everyone’s interest rates to over 15 to 30%. Yes they have to notify the poor, irresponsible slobs now before they do things, but the banks still get to burn kerosene in the town square with no permits. And we haven’t even gotten to the health insurance yahoos that have four more years for their trickery. Oh Nelly, bar the door! It’s the Wild West again as the cattle are corralled – only this time it’s the American people being herded to ruin by the giddy-up bankers and health insurance companies, not just the mortgage guys.
People are getting sick from worry. Their backs hurt, their necks are out, and they are grinding their pearly whites. Few sleep well at night. Pharmaceutical sales are up. The banks we saved are savaging us. They are bulldozing the Middle Class under mountains of debt. People are losing their homes, divorces are up, businesses are closing, and unemployment is rampant. The consumer credit world and their FICO scores are broken. They are based on a world that no longer exists. In two short years, many consumers have watched their scores collapse under an avalanche of debt. The FICO scores were calibrated for a different time when consumer credit cards were not the only source of money available, mortgages were not under water, and unemployment was not soaring. If we are ever to unwind this situation, these algorithms must be reset. Otherwise the banks will never lend again. The Middle Class needs a do-over, just like the banks got.
Yes sir, Obama stood up against the broad sweeping foreclosure legislation, and Bank of America seized the moment halting foreclosures nationwide. But we’re all holding our breath waiting for the other shoe to fall as even Progressive strategist Mike Lux gens up the netroots to re-engage with the President and Congress. It is inconceivable that people have not taken to streets in protest over their lost pensions, and the absence of any kind of interest bearing bank account — except on consumer credit cards. In fact, this week Robert Sheer wrote brilliantly about Obama’s “No Banker Left Behind” — while every normal person has been thrown under the bank bus. How did we allow the bail-out of every financial institution, while abandoning the common folk? Why are Democrats — whether conservative, moderate or netroots – not able to channel this collective anger, rage and disappointment other than to take aim at one another? Given the data, there is no way out for the once resilient Middle Class without a do-over. Instead of “No Banker Left Behind” let us heal the Middle Class by fixing the credit industry; restricting the health care industry now, not in four years; and making those banks lend the money we gave them and not hide behind FICO scores. All of the Democrats are writing, but no one is demanding change now. The Tea Party has successfully harnessed the anger and rage, but has no plan. Frankly, they are just another distraction taking our attention away from the gravity of the problems.
Mr. President, come back to us as Mike Lux laments. We need you. We, in the Middle Class, are living this nightmare everyday of our lives. Figure it out, and get the Middle Class out from under. The numbers do not lie. This is our emergency, our call to action, our 911. Friends and neighbors are collapsing from the stress when they can ill afford it. Unemployment is not going away. Consumer debt is skyrocketing. Mr. Obama, Americans are not being frivolous and irresponsible as Dr. Summers would like you to believe. They are boxed in with no escape hatch. Consider enacting a nationwide job core like the WPA, putting the banks on real notice, corralling those nasty health insurance folks, redoing the credit industry, and loosening up cash. No one is sleeping at night. People are nervous and cannot see a future.
Please, inspire us again, show emotion, get messy, and let the wrinkles show. Mr. President raise your voice in outrage. Give us voice. Come back to us. The time is now.
This was originally published on the Huffington Post earlier today.
See the pearltree below for the references for this article.
US Economy

Today’s Housing Bubble Post — When Will Prices Stabilize?

I’m hearing a lot of talk about plans to “stabilize” or “prop up” housing prices. Plans include cutting interest rates, providing tax credits, etc. in order to “keep prices from dropping too far.”
Here is a news flash: after a speculative bubble prices always revert to the mean. You can’t stabilize prices any other way except by letting them fall until they are back where they should be again.
Housing prices will “reach a bottom” and “stabilize” when the following occur:
Prices will revert to the mean. After a speculative bubble prices always revert to the mean. This is another way of saying they go back to where they should be. When there was a bubble in tulip bulbs prices went back to where they should be, which was not much above zero. Remember “dot com” stocks? They fell to reflect the actual value of the companies. Many of those companies weren’t worth anything.
Prices will stabilize when supply does not exceed demand. Currently there is a HUGE inventory of unsold, foreclosed, newly-built, unfinished or whatever houses on the market. There are speculators still sitting on two, three and more houses. And there is another supply of people waiting for a “better time” to sell. At the same time there is almost no demand, because people understand that prices are falling, and they will lose their future if they buy a house at these inflated prices. AND lenders are starting to want to know if the buyer can pay back the loan, which means fewer loans for buying houses. (Especially if they start getting honest appraisals again!)
Prices will stabilize when the price of a house reflects the local rents people are paying. That is when it makes sense for a landlord to buy a property. when they can make money on the rent.
Prices will stabilize when the average-priced house in the area is affordable by the average-income person in the area.
Prices will fall to the point where houses are worth what they are worth when purchased for what they are meant for. This means that a psychological change has to occur and people stop thinking of a house as an “investment” or a savings account, and merely as a place to live.
A house is a place to live. That is what a house is. When everyone involved comes to understand a house as a place to live housing prices will stabilize. Part of that understanding involves understanding that people should never pay more than 25-28% of their income on housing expenses. (That’s mortgage payment, insurance and property taxes added together. In some regions you should add heating and cooling costs to that.)
The bad news is that this means prices in many areas still have a long, long way to fall. In the San Francisco Bay Area, for example, two bedroom houses in bad neighborhoods are still being offered for $500,000. This means a $100,000 down payment, and monthly payments of $2400 PLUS insurance PLUS maybe $500 a month in property taxes. This means you have to have $100,000 in the bank and an income of more than $12,000 a MONTH to be able to buy a two bedroom house in a bad neighborhood. And this means that prices have a long, long way to fall.

Today’s Housing Bubble Post — How Far Will Prices Fall?

I was driving this morning and clicking through the AM radio stations. On one station there was a “financial advice” show, with a guy talking about how to make a “236% return” by buying foreclosed houses and renting them out until prices go back up.
In case you were wondering who is buying houses right now, it’s the people who fall for this stuff.
Where will housing prices fall to? Prices will revert to the mean, and the mean is where prices were before they started going way up, plus a bit for inflation. Another way is to realize that the price of the house, if rented out, should be low enough that you have positive cash flow after all expenses, and that cash flow should be a lot better than you could get from buying bonds because of the work you are putting into it. (In my area that means house prices should be about a third what they still are.)
But before they do that they will fall a bit below the mean. Here is why. There are several factors that will pressure housing prices even when they reach the pre-bubble level.

  • Before prices can normalize people have to stop thinking that prices will go up again, and get rid of property they are “holding on to.” So at the point where they reach the normal level there will be little buying interest. In fact people will understand that buying a house can be a good path to financial ruin.

  • Everyone who wanted a house really, really had a chance to buy a house. If they didn’t buy a house when you could get money without even stating whether you had a job…
  • Next there is the huge buildup of inventory. There are many, many more houses out there than there were before the bubble.
  • There are all the housing developments built way outside of areas where people work, with the expectation that they would buy at as lower price there and when prices went up they could sell and make the down payment for a place closer to the job. Now that gas prices are up no one will want to buy these.
  • Then there is the coming rise in utility prices which means that the McMansions are going to cost too much to heat and cool.
  • The baby boomers are retiring, which means they will want to sell bigger houses and rent or buy smaller houses.

People have no idea how far prices are going to fall.

Today’s Housing Bubble Post — Home Prices Falling At Record Rate

Home prices fell at record pace in first quarter,

Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor’s/Case Shiller national home price index reported on Tuesday.
. . . Falling home prices have become the scourge of the housing market that is seeing its worst downturn since the 1930s. Home values since last year have been dropping below balances owed on many mortgages, leaving borrowers with no equity and more likely to succumb to foreclosure.

And this is before the ripple effects of recession hit. They will ripple out from this to construction, automobiles, etc. And then the resulting job cuts will ripple back to the housing market. The fallout from the housing bubble’s bursting is still only just beginning.

Today’s Housing Bubble Post — Here We Go Again!

Haven’t had enough of foreclosures and financial crises? Don’t worry, there’s more to come. This pretty much guarantees it: Fannie Mae eases down payment rules,

Fannie Mae said Friday it is easing rules on down payments on home mortgages, replacing a policy that required higher payments in markets where home prices are declining.

Today’s Housing Bubble Post — How Low?

This morning I wrote,

We’ll see a bottom when the average person can afford to buy an average house – and wants to. We are a long, long, long way from that now — and keep in mind that we’re about to see a big reduction in what the average person can afford as the recession takes hold.

CNN’s Money.com today: No brakes on housing prices8

As housing price losses extend, he said, the fall-off in demand for homes will deepen. And Schiff expects to see a national price decline of 30% – and by as much as 50% in the worst hit markets.

50%? In my area a 50% drop from the peak would bring houses down to maybe $400K. Will the average person around here be able to afford a $400K house a year from now, after a year of recession and after a tightening of loan standards? Not a chance. The price runup here saw a tripling to quadrupling of prices. And then they build thousands and thousands of houses in areas surrounding the SF Bay. So prices will have to fall by more than 50% – and the recession will have to end, and loans have to be available, and gas prices will have to fall a lot so commuters can drive to these houses – before houses will start selling again. Sorry for the bad news.
Yes, I do understand the cascading implications of that. It means that pretty much everyone who bought a house (or borrowed money on their home equity) since about 2001 – at least in this area – is going to be owing more on their mortgage than the house is worth. In many cases they will owe a LOT more. And they will decide to either be “good consumers” and sacrifice to protect the bank’s profits by making payments for 30 years on a house that is worth hundreds of thousands less than they owe (while their neighbors move in to the foreclosed house next door with payments that are less than half what they are paying), or they will make an economic decision to “walk away,” giving the house back to the bank, and make a fresh start. What do you think most people will do?

Today’s Housing Bubble Post — Prices Down 12.7% Feb. Year Over Year

It’s just getting started and home prices dropped 12.7% in February from the previous year. Home prices fall record 12.7% in past year, Case-Shiller say,

The decline in U.S. home prices quickened in February, with prices down a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. “There is no sign of a bottom in the numbers,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. Prices in 19 of the 20 cities have fallen over the past year, with prices in all 20 cities falling month-to-month for six straight months. The biggest declines were in Las Vegas and Miami, with declines of more than 20% in the past year. Prices in Charlotte, N.C., are up 1.5%.

Remember, this is before the impact of a recession on housing sales.
When will we see a “bottom?” (The point where prices stop falling.) We’re nowhere near a bottom. We’ll see a bottom when the average person can afford to buy an average house – and wants to. We are a long, long, long way from that now — and keep in mind that we’re about to see a big reduction in what the average person can afford as the recession takes hold.

Today’s Housing Bubble Post — Sales Drop To Lowest Level In 16 1/2 Years

New home sales plunge to lowest level in 16 1/2 years,

Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years.
. . . The median price of a home sold in March dropped by 13.3 percent compared with March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

This made me laugh out loud:

Some analysts said they believe the slide in sales may be close to ending although they said any rebound is likely to be slow and anemic with prices continuing to fall, possibly until this time next year.

Listen, the problems we have seen so far have come about BEFORE the economic slowdown. Think about what that means. These foreclosures and people otherwise needing to sell their houses, etc., are not the result of a stressed economy. And we’re just beginning to have a stressed economy. So we haven’t even started to see the usual problems that come from layoffs, etc. So no, I don’t think we are at a “bottom.” Sheesh.

Today’s Housing Bubble Post – Nowhere Near A Bottom

Hale "Bonddad" Stewart: The Housing Market Is Nowhere Near Bottom.
Go see his chart of housing prices, to see how far prices have yet to fall.
A house near us was offered at $800,000, after several months only one offer came in for $500,000, and they accepted it. But all I can think of is some sucker just spent $500K for a 3 bedroom house that is going to be worth about $300K next year. Another in our area, asking $750K, sold at $450K. Still way too high.

Today’s Housing Bubble Post – “Deepest decline since the Great Depression”

The bloggers were calling it a few years ago, talking about how this was a bubble, and that it would lead to a dramatic collapse. The professionals weren’t seeing it. The lenders were acting like prices alway go up. (Remember the same thinking with the stock collapse?)
And now here we are.
Housing in ‘deepest, most rapid’ decline since Great Depression,

“Housing is in its “deepest, most rapid downswing since the Great Depression,” the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.
The NAHB’s latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago. “

And this is just the beginning. Prices always revert to the mean, and the mean is going to be mean.

Today’s Housing Bubble Post – If Prices Fall Further

Do Reporters Realize that House Prices Can Fall?,

If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision’s proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss.
That’s fine, but what happens if house prices fall further? I didn’t hear this scenario mentioned in Market Place’s discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal.

Answer – if prices fall further, the taxpayers get to hand even more dollars to the banks. Republicans bail out big business and let the rest of us pay for it. Always. The branding is that Republicans are anti-government and fiscally responsible, but it’s just words. Look at what they do, not what they say. They get into office, destroy the government, destroy small businesses, and hand all of our tax dollars to their cronies. Did I leave out the part about getting rid of all oversight (regulation and law enforcement) so the big corporations can rob us blind?
Government buying bad mortgages? Great, just great.

Today’s Housing Bubble Post – New Home Sales Fall by Record Amount

Yahoo: New Home Sales Fall by Record Amount:,

Sales of new homes plunged by a record amount in 2007 while prices posted the weakest showing in 16 years, demonstrating the troubles builders are facing with a huge backlog of unsold homes.

CNN: New home sales: Biggest drop ever,

New home sales posted the biggest drop on record in 2007, according to the government’s latest look at the battered housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet more signs of weakness.
December sales came in at an annual rate of 604,000, the Census Bureau report showed, down from 634,000 in November, which was also revised lower.
The reading was well below the consensus forecast of 645,000, according to economists surveyed by Briefing.com.
. . . No bottom yet Adam York, an economist with Wachovia, said the report confirms fears that the housing market won’t bounce back anytime soon.
“We’re expecting sales to decline into at least mid-2008,” he said. “We think housing still has a long way to go.” [emphasis added.

What is there to add to that? I keep hearing that “we’re at a bottom.” I got yer bottom, right here.