patrick.net

Treasuries at the Fed are now below $500 billion and TAF remains maxed out (which we already knew from released auction data). Doesn't look like TAF will be shutdown anytime soon as the June auctions have been announced (staying level at $150 billion -- $75 billion every two weeks). Discount window again inched up this week. Non depositories seem to be doing better as the TSLF (as well as the primary dealer credit facility) continued shrinking and should be below $100 billion by next week. As DataQuick likes to say: Indicators of market distress continue to move in different directions.

EBGuy,

did you read a recent article at BW about Fed trying to pay banks interest?

To me, this sounds like very "targeted" printing. Fed pays to banks ONLY to help maintain liquidity (at some point Fed may even "PREPAY FUTURE" interest to member banks), with money that the Fed pulls out of its ass. Ben is trying to come out more specific, "0 leakage" ways to save the banks and fuck the rest of us.

I think the correlation between US interest rates and commodities prices has fallen dramatically since the 1980s. A Vlocker style policy might only affect US internal goods like grain, and not imports like oil and metals.

I've been reading that profits for certain companies has gone up. Corn, oil etc. Maybe they are just using inflation as a scapegoat to raise prices further. Inflation three quartes of the price increase and extra profit one quarter, of the total price increase...

PermaRenter,

28% of 250k is 70k per year available for mortgage interest payments: far more than you need to carry a $1M fixed-rate IO mortgage at today's low rates. What do you mean you can't afford a house? You're qualified to purchase at $1.25M (incl. 20% down) even under the most conservative lending standards.

Pleading poverty with and income of $250k -- that's just B.S. You're not buying now because you think you'll get a better deal in a few years time. Or you're saving up for a down payment, which shouldn't take very long with that kind of income so long as you don't blow it on SUVs, plastic surgery, children, or other expensive indulgences.

On the other hand, those of us expecting heavy inflation are happy renting ~$1M of someone else's depreciating dollars while we live in a house we (sort of) "own" with no landlord or nearby renters to deal with. So what if real home values are down 40%? By the time we sell, the real value of $1M will be down at least a far...perhaps much further.

@dw. You are right, but you could do a better job of timing it. Real and nominal home prices are falling now. If the fed raises rates, nominal prices will continue to fall. If you have the means, it would then be a good time to buy in cash. A better way to play your game is to convert your down payment to swiss francs and just wait out the inflation until the fed starts raising rates. After several months of high rates breaks the back of most prospective homedebtors, you jump in with your cash offer.

Patrick,

Thank you. Your article links today were excellent (5/30/08)!

I cannot remember the last time I read something that was as well written as Richard Fischer's speech on our entitlement problem.

The Economist is great as is the Saint Luis Fed research.

Andrew Liveris at DOW is well spoken and quite correct.

Mish has found a precedent (where is Dennis?) showing Judges don't believe banks didn't know they were being "lied to."

Everyone keeps thinking we will see economic recovery in the secnd half this year. Um, no. Ballooning deificits, rising inflation, and the world's lack of desire to fund American debt will spike interst rates to comsumers as well as to the Fed government. Don Perata was interviewed yestrday where he announced a 18-22 billion dollar problem shortfall in the CA budget. He stated we run out of cash in august. In short, the ENTIRE state of CA goes the way of Vallejo if we don't sort out our spend/tax problems.

Things look as prickley now as any time in my life. We need more Fischer's to step foward and plot a course.

Some Case-Shiller math for SFO:

Index is now at 168.38. This is down 3.53% MOM for a March after a 5.04% decrease in Feb. The YOY is down 20.23%. The peak to now is down 22.89. My model of roughly 1% decrease per month for the year isn't working well if we keep seeing months like this.

I am keeping my nominal 4.5% annual increase in home prices as this is still the typical wage inlfation. I will only change that once real inlfation forces wage inflation.

Bumping my model to 1.25% per month (15% decline per year) brings us to equilibrium in Dec. of '09 which means with winter pricing and overshoot, early 2010 is now a liekly target.

However, macro effects loom large. If CA tries to balance its budget by increasing the corporate tax (causing business flight) or increasing the 9.3% bracket to a higher rate, housing will fall faster and deeper as budgets are strained bytax burden. This is certainly true at the Federal level.

The math certainly looks spooky - but there are lots of ways the data fibs.

Pleading poverty with and income of $250k — that’s just B.S.

Anyone who is wage-dependent (250K or 2.5M) is poor. Accept that.

Totally O.T.

I just bought a new car with a check from my HELOC. With the way the dollar is devaluating, I would think imports would be more expensive in the near future. The HELOC rate is around 5% (lower after tax), my loan amount is pretty small, so if the rate jumps I can probably just pay it off. The past few years bonuses have been good, and we've been putting almost all of it towards the mortgage (not very smart), so finally I say f*ck it, if you can fight them, join them.

Which car?

BTW, what do you guys think about the up-coming Hyundai Genesis? It looks like a big and safe car.

So what if real home values are down 40%? By the time we sell, the real value of $1M will be down at least a far…perhaps much further.

I presume you believe that despite a fall of 40% in house prices, wages will inflate and your salary will increase more than enough to cover the nominal loss?

If wages do not increase, it does not matter that prices for oil based/imported/transported goods inflate and "cheapen" that million bucks. Owning a big mortgage on a declining priced house along with stagnant wages is a recipe for trouble if you need to sell before the morgage is paid off.

dw,

Whether $250K p.a. income is sufficient or not depends upon the source of that $250K. If it is interest income from a giant pile of Treasuries at 1-3% and there are no other liabilities, then I would agree that it is unnecessary hand-wringing to fret over a $1.25M house. On the other hand, any employee paid that much would be foolish to count upon that income stream lasting for three decades. Job volatility is much higher these days, and the higher the wage, the fiercer the competition for those positions that yield such wages. There are some mitigating factors, however. If you are good at sales, or own a business, or have some unique niche or competitive advantage (a "moat" in Buffett-speak), or all of the above, for example. Those types of factors give you some discretionary leverage and control over your income.

The prevailing income conditions today make a 30-year financial commitment involving a 28% DTI problematic for a plurality of wage earners. A low savings rate makes it even more difficult for the statistical norm wage earner to weather temporary income disruptions. Even 12-18 month foreclosure processing timelines are not sufficient to stem the ever-rising tide of foreclosures. Which seems to indicate to me that the entire REIC has been engaged in what amounts to a giant vendor financing scheme where the vendor is fully aware of a very high default rate, but is willing to absorb that for the short-term cash flow. Where "short-term" in this case is about 3-5 years. And the "vendor" gets a bail-out from the taxpayers.

Mish has found a precedent (where is Dennis?) showing Judges don’t believe banks didn’t know they were being “lied to.”

I highly recommend the post at CR, which is where Mish picked up the story. Basically the judge threw the book at a "state income" HELOC lender who was trying to go after a couple filing Chapter 7 bankruptcy. The house had already been foreclosed (by the holder of the first) and the the judge basically told the lender "you'll get nothing and like it". Here's one of the key statements from the decision: In fact, the minimal verification required by an “income stated” loan, as established by the Guidelines, suggests that this type of loan is essentially an “asset based” loan. In other words, the Court surmises that the Bank made the loan principally in reliance on the value of the collateral: i.e., the House.

cb,

I am reading that people are still able to take out car loans at 5.5%, 48 months.

I am going off buying a new imported car too, paying back worthless USD at 5.5% over 48 months? I am in.

The Cadillac CTS looks pretty good:

http://www.iihs.org/ratings/ratingsbyseries.aspx?id=309

Perhaps GM is going better now.

OT...

The foie gras prohibition in Chicago has been repealed!!! Hopefully, California will follow suit.

http://consumerfreedom.com/pressRelease_detail.cfm/release/236

Rejoice!

Bumping my model to 1.25% per month (15% decline per year) brings us to equilibrium in Dec. of ‘09 which means with winter pricing and overshoot, early 2010 is now a liekly target.

SF Bay Area Case/Shiller Home Price Index Feb 09 futures are now trading at 131.20. This is March/April of 2002 pricing. Yikes!

However, on the credit card end, there is sign of tightening.

I have been applying for 0% APR cards since a year and half ago to delay paying off until the period expires.

The 0%APR promotions are about to expire on my current cards, so I have been applying for new cards for new purchases (balance transfer costs 3% making it a far inferior deal than new purchase). So far, I have acquired 2 new 0%APR cards with promotions well into 2009. However, the credit limits on both cards are significantly reduced.

I've always been able to get $15-20K credit on my old cards, and I don't keep more than 3 credit cards at the same time. The new cards only gave me $7-9K. There were no changes in my stated income and home ownership on the application. Well, unless the banks figure out they won't be able to make a dime on me...

Did any of you watch C-SPAN Wednesday? Mark Zandi made a presentation about housing / foreclosures to the Governors Association. He wants the government to do everything in its power to keep housing prices high - which, as a future homebuyer, I find infuriating. He applauds Fannie Mae and FHA attempt to fill the void left by the disappearance of sub-prime, Alt-A, and no down payment mortgages.

Afterwards, Pennsylvania Governor Ed Rendel had a new bad idea, one I'd never heard before. He wants legislation which would protect the credit scores of those who default on their mortgages.

So if I understand the Democratic plan correctly, the folks who lied about their income and made no downpayment, in the process bidding up housing prices to unaffordable levels, and subsequently didn't even make their monthly payments, will now have 2 options: they can stay in their house with a cram down to current market value minus 15%, or they can walk away without even getting a minor slap on the wrist such as a lower credit score.

On the other hand, responsible folks who make their payments on time will not get a cram-down, but they will get a lower credit score if they don't pay their $50 credit card bill on time.

oo,

I've also seen a sometimes infuriating resilience in the prime Fortress housing market. We're now following things very closely, as in looking to make potential lowball offers. However, we are still seeing significant multiple bid and overbid situations here. I'm talking about Menlo Park and Palo Alto. It seems like there is an endless supply of people willing to plunk down their hard earned cash for places that are still way overpriced.

I've come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don't see a real effect here for another 1-2 years.

Another one bites the dust!

http://www.fdic.gov/bank/individual/failed/first_integrity_bank.html

First integrity? LOL

Problem is, housing is in free fall. I suspect what
the Fed is trying to do is create a floor under
housing through inflation, then raise interest rates
to tamp it down.

I think Bill A hit the nail on the head, as a simple description of what's happening.

I haven't posted to the blog in a long time but it's eery how everything is falling into place.

Peter P is right that psychology is a huge factor, but I think it waxes and wanes in severity. I think more and more of today's buyers are looking longer term. The more funny money out there, the more irrational people are. Although, reading a few of the recent news items about "condo vultures" and people who are "bottom timing" and getting burned shows that the element of psychology is *always* at play regardless of market conditions.

skibum wrote:

oo,

I’ve come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don’t see a real effect here for another 1-2 years.

I agree, Skibum. I work with guys who are consultants and still clearing $100/hr after expenses. They live in SF and silicon valley. Until the money dries up that's feeding them, those locations just aren't going to see a drop, inflation and whatever else be damned.

When I was shopping for my first home interest rates where 13%!!!!! 1980s something?

When they dropped to 8 1/2% everyone went bananas, including me! the wife and I took the plunge. Being a first time home buyer FHA gave us a break and ONLY required 10% down. The money had to come from our savings account, no gifts, no loans.

They crawled up our keisters with a mag light.
$30 disputed debt had to be paid first. Man, them where the days.

Jobs were really easy to find then and pay was as good (or better after inflation) as now for many blue collar workers. Today jobs either pay crap or just aren't there for the guy w/o a degree. Jobs, gas prices, inflation are gonna keep driving the stake into housing's heart. By the time they start raising rates housing will be flat-lined already.

I need a better job, go sign this petition:

www.AmericansForJobsAndEnergy.org

Completely OT

EBGuy,

after three weeks of carrot in a row from Full Belly, now I start to comprehend what you meant by "cannot finish".

We managed to finish all our CSA veggies every week except the carrots, which are piling up quietly in a forgotten corner.

> Pleading poverty with and income of $250k — that’s just B.S.

I am not pleading poverty ...

I am very seriously considering buying a home which is not overpriced.
My view is for 750K I should able to afford a 3bed/2bath in a good school district. My house hold income is 250K but we will only count one income.
My credit score is near 800.

Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill. While Congress has granted some tax relief to people who lose their primary homes, there is no such aid for those who fall behind on payments on a getaway condo in Las Vegas, a retirement home on the Florida coast or an old house that they are renting out for income.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position, owners who thought they had found sound advice for financial security.

Two years ago, Lilia Garcia and her husband, Jesus, bought their dream house in Linden, Calif., for $535,000 and financed it in part by taking out a bigger loan backed by their previous house in nearby Stockton. They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold years in the future to help pay for college for their two children.

May 30, 2008
Lose Homes, Pay More Tax
By JONATHAN GLATER
Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill. While Congress has granted some tax relief to people who lose their primary homes, there is no such aid for those who fall behind on payments on a getaway condo in Las Vegas, a retirement home on the Florida coast or an old house that they are renting out for income.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position, owners who thought they had found sound advice for financial security.

Two years ago, Lilia Garcia and her husband, Jesus, bought their dream house in Linden, Calif., for $535,000 and financed it in part by taking out a bigger loan backed by their previous house in nearby Stockton. They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold years in the future to help pay for college for their two children.

“We wanted to make it an investment,” Ms. Garcia said. “I should’ve sold it.”

But the Garcias, who earn about $65,000 a year, fell behind on their payments after their tenant moved out and the interest rate on their mortgage rose, bringing their monthly payments on the rental home to nearly $2,700 a month, from less than $1,000. They view foreclosure as inevitable; they have not paid the mortgages on either house for months and now rent a home in Linden.

Then they discovered that they could expect a painful tax on the rental house.

Like many others, the Garcias borrowed more than their homes are now worth. The difference between the amount they borrowed and the rental home’s sale price in foreclosure will ultimately be considered taxable income as forgiven debt.

If the rental house sells for $160,000, which is about what they paid for it in 2003, they may still owe tax on $120,000 — the difference between the sale price and the $280,000 they borrowed against it over the years. That could mean a tax bill of more than $30,000.

“I just thought we would file for bankruptcy and everything would be clear. We’d start all over again,” said Ms. Garcia, who is a medical assistant in a doctor’s office in Stockton. Now she and her husband are waiting to see what price the house brings before seeking bankruptcy. “It’s bad.”

J. Scott Bovitz, a bankruptcy lawyer in Los Angeles, says the problem is widespread. “I’ve seen people not just buying properties to live in, they’re buying properties to become mini-Donald Trumps.”

Even if the condition of the economy generally improves, borrowers will face the double problem of foreclosure and then taxes, unless home prices begin to climb rapidly. And no one sees that as likely.

“My suspicion is most lawyers, even bankruptcy lawyers, aren’t focused on this issue,” said Charles Hastings, a bankruptcy lawyer in Stockton who is advising the Garcias on the tax ramifications.

Congress, deciding the tax impact was just too much for the nation’s already distressed homeowners, passed limited relief at the end of last year. Under the Mortgage Forgiveness Debt Relief Act, which is effective from Jan. 1, 2007, through Dec. 31, 2009, a homeowner does not have to pay tax on debt forgiven by a lender — if the loan is backed by the property the homeowner lives in.

The boom in real estate in recent years prompted a great many people — though no one seems to know exactly how many — to jump into the market with additional real estate. Some did so a few times, buying multiple properties with the hope of selling them for a quick profit. Several bankruptcy lawyers, who say they are busier than ever, compare the real estate frenzy of recent years to the California gold rush of the 1850s.

According to the National Association of Realtors, there are about 7.5 million vacation homes in the country, about 10 percent of the number of owner-occupied homes. According to the association, from 2002 to 2007, the number of vacation homes rose 18 percent, more than three times the growth in the number of owner-occupied homes and the growth in investor-owned units.

The financial distress wrought by ownership of second homes and investment properties is hard to quantify but significant, according to the association. It ripples through markets that have a lot of second homes as the full-time residents there find their home values falling in tandem.

While 60 percent of the foreclosures in Las Vegas last year involved properties held by nonresidents, in the first three months of this year the proportion has reversed: 60 percent involve owner-occupied houses, according to Applied Analysis, an economic and fiscal policy research firm in Nevada.

“Investors are easy in and easier out, and who’s left holding the bag are the individual homeowners,” said Jeremy Aguero, principal analyst at the company.

Buyers of second homes seem to have thought that if they did not borrow against these homes, they were wasting equity, said Cathleen C. Moran, a bankruptcy lawyer in Mountain View, Calif. “It comes from looking at your house as a piggy bank,” Ms. Moran said. People borrowed against homes without realizing that the debts would become “a bombshell that’s going to go off under you at some point,” she said.

For owners with a potential tax bill, there is one way to minimize the damage. Alan J. Fisher, a bankruptcy lawyer in Boca Raton, Fla., said that negotiating with a lender could prove beneficial. In one of his cases, he said, a lender agreed that foreclosure “fully satisfies all obligations under the loan.” With that statement, he hoped, there would be no outstanding unpaid debt reported by the bank that the Internal Revenue Service could treat as income.

But Mr. Fisher said he was not sure how the tactic would hold up in court. “I sure don’t want to be the one litigating it.”

A coworker of my wife works in financial services and is upside down in her home, owes $60K more on it than it's work, got a crazy ARM that is about to reset, and even with two very nice incomes is in trouble. This is a problem of national education. Virtually nothing of money management is taught to citizens. And our culture encourages overspending to keep up. If you lack the fancy goodies, you're a "loser". We're a nation of poseurs living above our means, where an honest living is for suckers. Even though my wife and I earn enough to bank 50% of what we take home, and will be set by the time I'm 50 y/o, I'm constantly prodded by family and others to do more with my life and earn more. A sick society is the problem. We watched a few too many episodes of dynasty in the 80's.

The Federal Trade Commission has announced a $600,000 settlement with several of the private investigators involved in a 2006 Hewlett-Packard spying case.

Four private investigators, Joseph Depante, his son Matthew Depante, Cassandra Selvage and Bryan Wagner, agreed to an injunction forbidding them from obtaining individuals' phone records without consent in addition to the financial settlement, according to the FTC announcement.

Matthew Depante and Bryan Wagner were defendants in the 2006 HP case. They allegedly obtained the personal phone records of several journalists and HP board members by "pretexting," falsely identifying themselves as the owner of a personal or cell phone and providing some personal information to the phone company to obtain the records of a particular phone number. The scandal led to the resignation of then HP Board of Directors Chairwoman Patricia Dunn.

The settlement was filed in a federal court in Florida.

The judgement comes just over a year after a judge dropped all charges against former Hewlett-Packard Co. board Chairwoman Patricia Dunn, who was accused of fraud in the boardroom spying scheme that rocked one of Silicon Valley's most respected companies.

Former HP ethics chief Kevin Hunsaker and two private investigators also avoided jail time after their lawyers entered no contest pleas to misdemeanor charges in Santa Clara County Superior Court.

All four defendants had initially been charged with felonies, including identity theft and fraud, for their roles in a scheme to unmask the source of boardroom leaks. Investigators' tactics included "pretexting," or pretending to be someone else, to obtain the calling records of directors, employees and journalists.

The original charges carried hefty fines and prison terms.

HP's investigation, which took place in 2005 and 2006, erupted into a national scandal after HP disclosed that detectives it had hired obtained the private phone records of directors, employees and journalists.

The case made a household word out of "pretexting," a shady tactic in which detectives use their targets' Social Security numbers to fool telephone companies into divulging their detailed call logs.

Dunn ordered the investigators to find the source of the leak after a board member gave company information to a reporter. But she said she didn't know the detectives would go to such extremes.

She resigned in September of 2006 at the height of the scandal.

My view is for 750K I should able to afford a 3bed/2bath in a good school district. My house hold income is 250K but we will only count one income.
My credit score is near 800.

In reality, the market does not care about your view.

Why don't you count only interest income, if you want to be so cautious?

>> In reality, the market does not care about your view.

Pointless statement ... everybody knows this.

and Peter P, please try to understand that there is NO MARKET in US. It is all manipulated.

The Federal Reserve engages in constant manipulation of the overnight funds market. They manipulate that market to keep the overnight interest rate at or near their target rate (the Federal Funds Target Rate). Aside from that our markets are driven by real trading activity - not manipulation.

Small pieces of a specific market can be manipulated for a short period of time, such as a specific stock (a classic example is a penny stock with small trading volume). There have been numerous instances of this, and there is probably some sliver of some market being manipulated at any given time. However, it is financial suicide to try to manipulate any of the larger markets for any sustainable period. And when someone does try this they lose a fortune because they must bet against the natural market to push the prices to an artificial level (up or down). When they stop their manipulation the market price goes back to normal and they are left sitting on huge paper loses.

Manipulation is generally insignificant to the broader market.

"It will not be until AFTER interest rates have been
raised substantially and then begin to reduce again
will we see another substantial increase in the value
of real estate in the US."

Not true. Home prices rise in times of rising or falling interest rates. Interest rates are a secondary factor in home price increases.

If interest rates are so important then why do home prices go up rapidly in some places while holding flat or even falling in others at the same time? The interest rates were the same but the price movement was dramatically different.

Like all markets, housing prices are driven by the relative balance between supply and demand. Currenly the supply is excessive relative to demand. It will take a while to clear the excess supply. Lower interest rates will influence this but not drive it.

When the market was rising demand was temporarily increased by many people who bought on a speculative basis. Many did not care what the interest rate would be because they believed the rising prices would more than offset the interest cost. If they thought they could cover the cash flow for a couple years before hitting the jackpot they were in.

I'd like to get some comments on long-term Bay Area trends. From my perspective many employers are starting to react to the fact that future population growth from the fortress can only go east or south. I think they see the reality that to get affordable labor they have to relocate from the fortress. Working in commercial real estate I've seen numerous examples of peninsula companies signing or looking to sign leases in the East Bay. Take for example the solar industry that appears to be a key industry in the Bay Area's future. Where do you think all these companies are setting up shop?

# skibum Says:
I’ve come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don’t see a real effect here for another 1-2 years.

I think that is pretty much understood, at least on this forum.

We let go of 18 contractors in my team in March. Only 4 of them are still in the area - the rest of them moved out to jobs outside the bay area (based on what I see from linkedIn).

PermaRenter,

>Virtually nothing of money management is taught to citizens.

Are you joking? Of course one cannot teach impressionable children that there are whole industries out there that exist mainly to fleece them of their money, and that the buyer had better beware. Teaching this would be heretic and "anti-business". There is no bigger sin in the US than being "anti-business", in case you hadn't noticed. Also, we cannot teach anyone that regulation (yes, regulation, the R-word) exists mainly to control how Wall St plays with Other People's Money. That would be Co*munism, and we all know how bad THAT is .