by Jim Willie, CB. Editor, Hat Trick Letter | January 6, 2010
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The year 2008 bore my mark as the year the system broke. A public article addressed the issues, laid out before the breakdown occurred in September of that year. The consequences for the many failures, the desperate nationalizations, the hasty scrambles to put financial sewage under USGovt ownership, the realization of TARP as a vast slush fund for illegitimate bank rescues, the official monetization plans put forth to prevent bond implosions, and much more occurred in the year 2009 as a recognized aftermath. Here we are in 2010 and the threats must again be laid out. A prelude was offered in an mid-December article entitled "Full Circle of Govt Debt Default" (CLICK HERE) where a global sovereign debt ruin in vicious circle was displayed the sequence that started in the Untied States and will end in the Untied States. Rather than make specific forecasts of extreme events, a list is presented much like a smorgasbord. The odds are 100:1 in favor at least one extreme event occurring in this current calendar year in my view. The odds are very high in favor of several events taking place this year. The key here is that a great many extremely damaging and highly disruptive events loom like giant gathering storm clouds that meet, complete with lightning displays. More terrestrial types might consider that a great many land mine explosives lie in the wide pathways ahead. At least a few extreme craters will be formed. A few financial edifices will be toppled. Great changes come, especially to the global power structures. This time around, the stakes are bigger, and entire nations will face debt failure and national realignment. The ripple effects will reshape the global financial system.
The blind, the deficient, and the compromised fail to fully appreciate and detect the meaning of the Dubai debt default or the Iceland financial failure. They actually believe these busts have been dealt with by the very strength of the capitalist system. These default failures signify a continuation of the credit market crisis that never went away. Instead, accounting fraud was legalized. Instead, bloated bank toxic balance sheets were permitted. Instead, sovereign debt finance by monetary expansion was endorsed, i.e. monetization. Instead, stock equity sales to the nitwits incapable of reading balance sheets was widespread. Instead, broader statistical gimmickry of economic data was installed. Not a single meaningful reform has taken place on US soil, which guarantees the continuation of the credit crisis is assured. No substantial reduction of US home loan balance sheets. No return of US manufacturing. No liquidation of dead US banks. No removal of Goldman Sachs from control of the USDept Treasury. No disclosure of US Federal Reserve disbursements of over $1 trillion. No steps to restore the Glass Steagall Act to create firewalls between the financial sectors. No effort to prosecute for $trillion bond fraud. No initiative to bring to light the deep criminal lace to Fannie Mae and AIG, now protected under USGovt aegis. No attempt to rein in military spending and endless wars. No movement to create a monetary system with a currency other than the current debt denominated $20 bill coupons. Instead, with much greater force, enthusiasm, and recklessness, the financial system hurtled deeper into the Weimar chambers of commerce. Worse, most steps simply apply greater doses of precisely what caused the problems with debt overload and excessive monetary expansion. Worse doubly, most reforms grant even more power to those responsible for the breakdowns and fraud perpetration. The Untied States is being recognized internationally as a rogue nation moving headlong toward communism, run by powerful syndicates, whose most prominent foreign policy is explained by military hardware.
There is no shred of the capitalist structural makeup remotely evident outside of Asia. We see cronyism systems in the West, but worse, we see syndicate systems with alleged cords of criminality. The discredit of the central bank franchise system is barely noticed by the mainstream, which applauds the printing press monetary operators without recognition of the repeat of Weimar chapters. Just today, the New York Times formally posed the question of how the US Federal Reserve can prevent the next asset bubble when it missed the last one. It actually misses all asset bubbles, creates them all, and denies the existence of each during formation. The signature signals of a failed central bank is a lasting 0% rate and heavy monetization, called euphemistically Quantitative Easing so as to make economist failure sound like some wondrous medical prescription in high falluting nomenclature. How about the US Financial Reform being called Economicus Moribundus and the vast printing of money in monetary policy being called Whisky Delugius?
Let's review a rather lengthy list of potential events. These are not wild raving pronouncements. Each has some critical mass of likelihood. Each event is presented like an ugly perverse budding shoot on the charred landscape, easily representing an element of the Paradigm Shift. The global shift is almost totally missed by the American leaders, the press networks, and the people. My interpretation is that they live inside the US Dome of Perception, and hardly ever pay attention to matters pertaining to the USDollar. They instead regard it as a constant factor, quite erroneously. The list to follow includes matters often considered sacred, due to the sanctity and inertness of sovereign governments and their debt. The event closest to the Untied States is the dreadful dismemberment of Mexico, which is Greece on steroids and cocaine with the temperature turned up and the violence turned up, where the law enforcement and military have both been compromised and infiltrated. It is a tight race between the US and Mexico as to which nation is more overrun by crime syndicates. The difference is the US has white collar crime, while Mexico violent crime.
The following events are presented as potential disasters looming, spanning the full spectrum, each with triggers in numerous arenas. These are potential disasters, not presented as forecasts, but rather as a list to beware for nasty highly disruptive eruptions. They are loaded with a geopolitical streak, in keeping with Paradigm Shift that signifies a powerful set of changes in altered power. The one common trait all the following potential events have is that they are systemic game change agents. The globe will be reshaped by each and every event that comes to pass. They are not listed in any order of likelihood, since they are all very much at risk of occurrence, and integrally interconnected to a frightening degree. Each would heap tremendous damage, disruption, and devastation, upon occurrence. One should note that if one or two events occur, then others might occur with domino effect from the chain reaction of chaos and opportunity. Note for instance, how the Dubai default resulted in Greek Govt debt downgrade, with no connection except possibly some ancient Greek statues in marble lined parlors in Dubai edifices. The ripple effects will be felt for a full year, just like Lehman, Fannie Mae, and AIG in the United States, just like Northern Rock, Royal Bank of Scotland, and Lloyds in England. The triggers have been ignited, and constant fallout comes. The process never stopped, only the perception that it had stopped. The process can only stop when liquidation and reform occur. Neither is remotely evident.
Use the following scale for grading risk and effect. The likelihood of the event happening will be shown as a percentage, with 0% the lowest and 100% a certainty. The impact for each and every stated event would indeed be huge, extreme, and dangerous. Many different sources have provided lists of extreme events for the new current year, a tradition. Much lies in common for those who choose to think ahead, instead of employing the common practice of putting a new less credible layer of deception on the current landscape. The best among all the sources seen in my view has been the Business Insider. Thanks to my own circle of colleagues and confidants, who provided at least a couple of events listed.
EXTREME WARNINGS FOR EXTREME TIMES
Saudi Royals fall: The Saudi Arabian royal family would lose government control to the Islamic Fundamentalists and is replaced. Scores of old royals escape loaded with hundreds of billion$ in assets, conjuring up memories of the Shah of Iran. Disruptions and instability spread across the entire Persian Gulf. A clampdown of fundamentalist groups in other Gulf nations invites backlash. Occupation forces in Iraq face renewed resistance. (chance: 20%)
China gains full naval military capability: The Chinese Military would attain aircraft carrier force with three carrier groups. In expert circles they call it blue water capability. With this potential, including long range strike potential, the balance of power in Asia is altered. Pressures are put as a result toward changed alliances in key nations considered loyal to the West. Certain strategic points gain attention, as focus is trained on the Mallacan Straits, the Panama Canal, the Suez Canal, the Bosporus Straits, the access routes to the Bering Sea, Australia, and South America. (chance: 30%)
Russian cuts off natural gas to Eastern Europe: Russia would enter a deep dispute with Eastern European nations, in particular Ukraine, and cuts off the flow of natural gas. Disputes center on return to the Russian fold from the independent factions encouraged by the Untied States motivated by the many Color Revolutions. Caught in the middle, at the end of the distribution lines, is Central Europe, whose ties forged by Germany to Russia remain healthy and strong. Russia later forges an alliance with Central Europe that results in some stability, as it becomes clear that Russia has come of age as a peacemaker with further ramifications in time. (chance: 50%)
Greece defaults on its debt: Great problems would result for the parent European Union, sure to fracture. Germany lets it go, does not cover the Greek debt, but employs plausible deniability on minimal offered assistance. A chain reaction begins, to reach the other vulnerable nations. Portugal, Italy, and Spain teeter upon the event, soon to suffer their own defaults, none aided. Even France suffers the ignominy of default, but is aided by Germany in the end, unlike the PIGS nations. The crux of the matter is refinance rollover of debt, which fails. The non-German EuroBonds then rise in yields, enough to force a split in the Euro currency to form the Nordic Core Euro. Default nations revert to their old former currencies and suffer massive devaluations. (chance: 80%)
Mexico fails as a state: The conditions in Mexico would become fully recognized and openly discussed. Two factors are front & center. The rise of the drug cartels in their control of the nation in numerous aspects is already global news. The unexpected net import of crude oil that ruins the nation's federal finances is not yet global news. The former has been understood, but the loss of oil exports takes the region by total surprise. Hyper-inflation then hits Mexico, which prints money to alleviate the federal budget shortfall. Chaos results on numerous levels. Supply disruption hits the US southern refineries. (chance: 70%)
Credit crisis relapse hits the US banks: The Untied States would suffer a relapse into a second round of bank failures, debt defaults, institutional liquidations, corporate deaths, and market disruptions. The proximal cause is the spread and continuation of the property decline, home foreclosures, and commercial defaults. Numerous bank analysts continue to harp on commercial mortgage loss risk after a 40% price decline, so far covered up by phony accounting rules. Impaired assets sit as bank assets. A trigger is the USFed removal from mortgage bond support, coupled with a powerful second downwave in housing prices from Option ARMortgages. A solution is put forth for wide USGovt purchase of housing inventory and the official advent of Fannie Mae as landlord. The supply chain is disrupted in extreme ways, as commercial paper grinds to a halt, and a deeper recession takes root. (chance: 40%)
The US supply chain suddenly suffers disruptions: The economic supply chain would be crippled by its two primary points of vulnerability. The finance credit lines are tied to wounded commercial paper markets. The actual tangible output supply comes from industries that struggle in credit flow, unstable prices, burdensome regulations, worker shortages, and constricted metal supply. Certain trucking firms have already shut down. Gasoline refineries are below their 1990 capacity. Mexican oil supply is soon to end. The lack of trained skilled experienced workers is chronic. (chance: 40%)
Fannie Mae is revealed as a slush fund, toxic bond haven, and object of grand criminal fraud coverup: Leaks would lead to calls for further Congressional investigations of mortgage bond fraud and past presidential pilferage. At the same time, various alerts would be given that the USGovt is harboring a black hole certain to cost over $2 trillion in additional bailouts, maybe up to $4 trillion. The prospect of wide USGovt home ownership from default sparks research reports and great scrunity, even clamor by younger members of Congress. The unlimited credit line to back USAgency debt securities has opened the door to a nasty effect on perception of USTreasury debt, as global perception of the actual USGovt debt ramps up 50%. Discussion of default rises. (chance: 40%)
The real 911 story comes out: The full seamy story would be revealed with many participants named. No further comment except that nation then would become deeply divided in reaction, and international isolation would result. The beneficiaries become the object of scrunity, criticism, and investigation. Attention turns to the swine flu vaccination and global Cap & Trade green taxes, each of which faces the harsh eye of investigation in Europe. (chance: 20%)
Iran is attacked: Great controversy would result from the direct attack of its nuclear facilities and other targets. Controversy would stir from scattered unconfirmed reports of involvement by various nations. Retaliation by Russia and China, long promised, then comes in hidden ways not fully understood. In the aftermath, the banks in the Mideast region are subjected to great scrutiny by several global players, especially one US ally nation. (chance: 10%)
Japan suffers a financial & economic crisis: A recession would take grip, spreading to its financial markets. Reduced export trade eliminated the trade surplus long ago. The Japanese Govt Bond then jumps higher by 2% or 3% in bond yield. The rising Yen currency consequently runs up 20% to 30% from the reverse of the Yen Carry Trade. Their export trade grinds to a near halt, and major conglomerate banks announce insolvency. Then China steps in. (chance: 40%)
UKGovt suffers a debt downgrade: The United Kingdom would be the first major industrialized nation to lose its high credit rating. The UKGilt bond yields then rise above 6% without pause. The threat of sovereign debt default is debated. The British Pound currency falls, which perversely aids the USDollar. Shock waves extend to the Wall Street financial center. Later, scrutiny comes to the USTreasury for its own downgrade and default risk. (chance: 50%)
Talk swirls for eliminating some central banks: Debate would focus on the central bank role as cause for asset bubbles, and extensions to the faulty nature of money itself. Analysts would cite money free from anchors of asset backing. However, awareness rises of the impracticality of central bank elimination, since debt liquidation and cleared decks cannot occur without global depression. In the background is rampant discussion of syndicate involvement and the risks of retaliation by the secretive banker organizations. (chance: 10%)
China faces a degree of chaos: Falling export trade, faltering bank reserves, empty commercial buildings, rising unemployment, idle factories, stalled construction projects, and restive population would contribute to a national crisis that struggles to be told amidst press controls. Armed with a $2500 billion war chest of reserves, China begins to convert assets into tangible rescues, aid, and welfare. The Chinese crisis then ignites a global sale of USTreasurys. As an offshoot to the chaos, the colonization of America then begins, as China cashes in on its USAgency Mortgage Bonds. It exploits it cut deal of Eminent Domain conversion of bonds into property. (chance: 20%)
Food prices soar in the US: The divergence between official crop forecasts would clash with the reality of crop failures and profound shortages this summer. Being the greatest food production source, the US crisis spreads globally. The deCarbonnel threat is realized, as foreign nations sell US$-based assets in order to finance food supply purchases. China enters the fray as a buyer of distressed farm property, amidst accusations of carpetbagger. (chance: 80%)
JPMorgan is object of persistent rumors of gigantic credit derivative losses: The slowly rising USTreasury Bond long-term yield would cause deep painful losses to JPMorgan. Their abuse of Interest Rate Swap contracts becomes a topic of debate. The monetization of USTreasurys becomes a topic of debate. The ability for the USGovt to control its deficits and auxiliary (hidden) losses becomes a topic of debate. Even bond fraud within JPM hallowed halls becomes a topic of debate. To cover the losses, monetary inflation grows out of control, and a USDollar decline ensues, taking the DX dollar index below the 70 level. (chance: 40%)
London metals exchange shuts down: The venerable London Bullion Market Assn would close, unable to fulfill gold orders. The varied stories continue regarding unorthodox practices from the London metals exchange in the month of December, like redemption of gold contracts in cash, like outsized demands for gold delivery mainly by Chinese entities but increasingly by the Swiss, like satisfaction of gold contracts with Street Tracks GLD shares, and much more. Scrutiny with assays upon high volume delivery have been standard since the tungsten gold story emerged, an indirect confirmation often ignored. The supply chain with intermediaries suddenly halts, as they too have no gold bullion to supply the LBMA. Companies shut down. Lawsuits result. Prosecutions begin. Midlevel officials are arrested. Some turn state's evidence. The gold price enters a state of extreme confusion, with vast discrepancies between paper gold price and physical gold price. (chance: 70%)
GOLD & SILVER START A NEW YEAR
Like after a stormy night, the new year has arrived much like a new market with fresh perspectives. The end of tax loss selling, accompanied by tax gain offsets, has come. The beneficial effect is equally shared between gold and silver, although the percentage gain from the recent reversals this week is larger for silver. Not shown in the two graphs is the upward jump in today's prices. They extended gains, with gold reaching the 1135 level, and silver reaching the 18.1 level. The most important factors to keep in clear focus are why gold is rising in a powerful upward trend in the first place. They have not changed. There is no end in government spending, from the Untied States, the UK, Europe, and Japan. There is no meaningful reform of any kind, surely no remedy unless one considers padding banker balance sheets with taxpayer funds as pre-requisite for remedy. There is only a rampant rabid race to grow the money supply, to produce federal deficits, to expand the central bank balance sheets. The real adjusted cost of money is negative after price inflation. The 0% official rates have become fixtures, as central banks look increasingly incompetent in justifying their continuation.
Notice the sharp reversals since the new January month began. Long-term moving averages remain in the uptrend, despite the orchestrated December correction. Investment demand is skyrocketing, a story barely told in the Western press. The wide band for the silver price hints of a strong price rise toward the 20 level on the next upswing. It has already begun. The tumultuous 2010 year, identified by at least a few key critical events listed above, will send the gold & silver prices soaring. Those who believe the hype in the previous month by the mainstream biased press will regret not climbing aboard. This will be the year of magnificent crises that change the face of the global financial structures. Debt will be dumped like a broken Vegas gambler. Paper money will be discarded like yesterday's newspaper. With the crude oil price at almost $83 per barrel, where are the Deflation Knuckleheads now? They led some gold investors to exit before the push from $900 to $1200. They remain legends only to the image in their own mirrors. The crude oil price might actually come down somewhat in the coming month or two, from scads of vessels loaded and sitting at sea. But gold & silver are set to continue a powerful upward thrust in price, as the perversion of money has become a desperate broad global pursuit. Most major currencies face serious debasement. This is a great opportunity to join the Precious Metals Locomotive after a pit stop. Targets are gold at $1375 and silver at $22.25 per ounce.
Copyright © 2010 Jim Willie, CB
Sunday, January 10, 2010
Wednesday, January 6, 2010
Housing Bubble still exists, second leg down to come in March 2010
FROM: http://www.doctorhousingbubble.com/
Januay 6, 2010
The housing market in many areas in California is still in a solid bubble. Yes, in a speculative bubble. In the last report we looked at shadow inventory for Los Angeles County in great detail. This generated a lot of questions and hopefully shined more light on what really is going on in the housing market. People in manias have hard times judging things correctly. First, even if nationally home prices might be correcting to more reasonable levels, even in hard hit areas like the Inland Empire, many counties like Los Angeles and Orange are incredibly overpriced. In short, they are still in a bubble. Now this might seem stunning given that the median California home has fallen in price by 50 percent. But keep in mind the fall was not evenly distributed.
It helps to put the numbers in perspective:
Los Angeles County Peak Price: $550,000 May of 2007 (DataQuick)
Los Angeles County Current Price: $329,000 November of 2009 (drop of 40%)
Orange County Peak Price: $645,000 June of 2007
Orange County Current Price: $436,500 (drop of 32%)
Yet as we showed in our last report, most of the drop has occurred for two primary reasons:
[1] The bulk of home sales have come from lower priced homes thus skewing the median price lower
[2] Higher end areas have large numbers of shadow inventory because homes are not moving as fast (aka the volume of buyers is low)
Now when the MLS lists about 19,400 homes for Los Angeles County yet in total close to 100,000 properties are either on the MLS, have a notice of default filed, are scheduled for auction, or are bank owned you know something is sketchy. Plus, we have additional properties that are 90+ days late that just don’t show up anywhere. The fact of the matter is that prices are too expensive in many areas regardless of government intervention. All the government is doing is prolonging the inevitable correction while propping up the failed banking sector. Keep in mind the California unemployment rate is 12.3 percent and if we include underemployment, it goes up to 22 percent. Have people forgotten how households actually pay for the mortgage? You pay from actual income yet somehow this is all lost in the hustle of bailouts.
Today we are going to look at a zip code in Burbank to really deconstruct what is going on. Today we salute you Burbank with our Real Homes of Genius Award.
Burbank California
Let us examine the 91501 zip code of Burbank. This is one of those areas with nice homes that many professionals are looking at but prices still seem to reflect a bubble. Now many real estate agents are now buying the argument that the government has saved the housing market. Really? Let us look at the real data for this zip code in Burbank:
In the latest month of data five homes sold for this zip code. The MLS has 31 homes listed. A little over 6 months of data. On the surface this seems healthy. But look at the shadow data. 130 homes are here. Now one of the big concerns in the last report was how many homes are double counted. Not much. The 91501 has 3 foreclosures listed publicly of the 14 REOs. That is a tiny number. So in total we have 161 properties listed minus the 3 double counts (1.8 percent of the pool) and we have over 31 months of housing inventory if we use shadow inventory figures. Plus, how many homes in this area are 90+ days late with no notice of default filed? But you are skeptical. Fine. Let us run an example. In fact, let us run a fresh example (just listed on 1/5/2010):
Given the e-mails I get from readers, this is probably a sample of the most sought after “starter home” for people that read Real Homes of Genius. They’re looking for a prime city with the cache that’ll make them feel like they’ve made it. It is the same fuel that led many to over leverage but this time, you actually have to have the income to back up your bet and not go gangbusters with an Alt-A or option ARM product to leverage yourself into disaster. Yet prime mortgage defaults are now soaring because the fact that you can buy something doesn’t mean that you can afford it or that employment is still hemorrhaging.
The above home is one example of why we still have much correcting to do in many markets. This is a 4 bedrooms and 2 baths home that is listed at 3,219 square feet. A rather large sized home for a starter but a good structure for working professionals. This home is banked owned but the history of what occurred shows us that delaying the inevitable doesn’t delay a meeting with financial reality:
Let us walk through what happened here. The home was purchased in August of 2007 for $905,000. Amazing and thoughtful Countrywide thought it would be prudent to make the first and second mortgage on this property:
First Mortgage: $614,500
Second Mortgage: $200,000
Total: $814,500
So it looks like these buyers actually came in with 10 percent down ($90,500) if I’m working the numbers out correctly. So even in August of 2007 right when the market was in full implosion Countrywide decided to make a loan at peak value on a property that was “valued” at almost one million with only 10 percent down. Is it any wonder why many Alt-A loans are simply exploding on the balance sheet of banks?
So the home is now purchased. Less than one year in, the borrower is already having problems. The notice of default was filed on September of 2008:
09/04/2008: NOD Filed for $26,461
Now this is what people forget about mega California mortgages. If you miss a payment on say a home in practically any other state, you fall behind $1,000 or so a month. So after the NOD if it is filed after 3 months, you may owe somewhere around $3,000 to $4,000 depending on late fees and penalties. Catching up on that is doable. Try catching up to $26,461 when you are already struggling.
So if the NOD was filed in September of 2008, this probably means the borrowers started missing full payments back in June or July of 2008. Now here is where the process drags out and shadow inventory builds. So the NOD is put on the place in 09/2008 and the first auction is scheduled in January of 2009. Then, it looks like another auction is placed in March of 2009. When is the home finally taken over? By October of 2009. Now do you think this borrower was making payments all that time? Yet the process isn’t complete. Only on Tuesday of this week was the home listed! So let us recap the time it took from first missed payment to MLS listing:
June/July of 2008 first missed payment to January 5, 2010 MLS (18 to 19 month process)
And what is the current listing price?
List Price: $699,900
So the bank is simply writing off that second mortgage completely and hoping to recoup on the first. These kind of cases simply point to a major drawn out housing market for the state. When we consider all the option ARMs and Alt-A loans, many people are going to face similar problems.
It is troubling to see so many people eager to jump on any home even if they have to spend every hard earned penny they have saved during the bubble times (they assume the bubble has fully burst). They somehow think the market has already bottomed. It has not.
Now you might say, people in this zip code of Burbank must be making tons of money. Let us take a look:
It would take over 12 times the median annual income of this zip code to purchase this home! That is flat out bubble land to the next dimension. I mean run the numbers. Let us assume you go with an FHA insured loan with 3.5 percent down:
Down Payment: $24,365
The family looking to buy this home will need an income of $200,000 which doesn’t seem to be reflected from the income tax data pulled for this zip code. Let us run the net income numbers for someone not living in the area:
So even assuming a family with a $200,000 household income wants to buy this home, nearly 50 percent of their net pay is going to their housing payment. That is nuts! Plus, the median household income for the area is not even close to $200,000 but $56,000. This is why California is still largely facing major pocket bubbles in areas like Burbank, Culver City, and Pasadena to name a few.
Incomes do matter by the way. And one thing people forget is that over 40 years, the average 30 year fixed mortgage hovered around 9 percent. You want to run the numbers at 9 percent?
Let us assume you buy this home. In a few years, rates go up to 9 percent. A family looking to buy this home at the current price, no price adjustment, will now need an income of $263,000! And keep in mind mortgage rates can’t go any lower. The Federal Reserve has now gambled the entire security of our nation’s well being. They have purchased some $1.25 trillion in mortgage backed securities since no one else in their right mind would buy these toxic products. That game is going to end badly and rates will go up once that hits as is typical in any high risk investment. When? Who really knows but making a bet on California housing right now is a major gamble. If you feel the need to gamble go to Vegas and satisfy your need. At least there your odds in some games are close to fifty-fifty. In California housing, it is hard to see how you’ll win in many cases.
Januay 6, 2010
The housing market in many areas in California is still in a solid bubble. Yes, in a speculative bubble. In the last report we looked at shadow inventory for Los Angeles County in great detail. This generated a lot of questions and hopefully shined more light on what really is going on in the housing market. People in manias have hard times judging things correctly. First, even if nationally home prices might be correcting to more reasonable levels, even in hard hit areas like the Inland Empire, many counties like Los Angeles and Orange are incredibly overpriced. In short, they are still in a bubble. Now this might seem stunning given that the median California home has fallen in price by 50 percent. But keep in mind the fall was not evenly distributed.
It helps to put the numbers in perspective:
Los Angeles County Peak Price: $550,000 May of 2007 (DataQuick)
Los Angeles County Current Price: $329,000 November of 2009 (drop of 40%)
Orange County Peak Price: $645,000 June of 2007
Orange County Current Price: $436,500 (drop of 32%)
Yet as we showed in our last report, most of the drop has occurred for two primary reasons:
[1] The bulk of home sales have come from lower priced homes thus skewing the median price lower
[2] Higher end areas have large numbers of shadow inventory because homes are not moving as fast (aka the volume of buyers is low)
Now when the MLS lists about 19,400 homes for Los Angeles County yet in total close to 100,000 properties are either on the MLS, have a notice of default filed, are scheduled for auction, or are bank owned you know something is sketchy. Plus, we have additional properties that are 90+ days late that just don’t show up anywhere. The fact of the matter is that prices are too expensive in many areas regardless of government intervention. All the government is doing is prolonging the inevitable correction while propping up the failed banking sector. Keep in mind the California unemployment rate is 12.3 percent and if we include underemployment, it goes up to 22 percent. Have people forgotten how households actually pay for the mortgage? You pay from actual income yet somehow this is all lost in the hustle of bailouts.
Today we are going to look at a zip code in Burbank to really deconstruct what is going on. Today we salute you Burbank with our Real Homes of Genius Award.
Burbank California
Let us examine the 91501 zip code of Burbank. This is one of those areas with nice homes that many professionals are looking at but prices still seem to reflect a bubble. Now many real estate agents are now buying the argument that the government has saved the housing market. Really? Let us look at the real data for this zip code in Burbank:
In the latest month of data five homes sold for this zip code. The MLS has 31 homes listed. A little over 6 months of data. On the surface this seems healthy. But look at the shadow data. 130 homes are here. Now one of the big concerns in the last report was how many homes are double counted. Not much. The 91501 has 3 foreclosures listed publicly of the 14 REOs. That is a tiny number. So in total we have 161 properties listed minus the 3 double counts (1.8 percent of the pool) and we have over 31 months of housing inventory if we use shadow inventory figures. Plus, how many homes in this area are 90+ days late with no notice of default filed? But you are skeptical. Fine. Let us run an example. In fact, let us run a fresh example (just listed on 1/5/2010):
Given the e-mails I get from readers, this is probably a sample of the most sought after “starter home” for people that read Real Homes of Genius. They’re looking for a prime city with the cache that’ll make them feel like they’ve made it. It is the same fuel that led many to over leverage but this time, you actually have to have the income to back up your bet and not go gangbusters with an Alt-A or option ARM product to leverage yourself into disaster. Yet prime mortgage defaults are now soaring because the fact that you can buy something doesn’t mean that you can afford it or that employment is still hemorrhaging.
The above home is one example of why we still have much correcting to do in many markets. This is a 4 bedrooms and 2 baths home that is listed at 3,219 square feet. A rather large sized home for a starter but a good structure for working professionals. This home is banked owned but the history of what occurred shows us that delaying the inevitable doesn’t delay a meeting with financial reality:
Let us walk through what happened here. The home was purchased in August of 2007 for $905,000. Amazing and thoughtful Countrywide thought it would be prudent to make the first and second mortgage on this property:
First Mortgage: $614,500
Second Mortgage: $200,000
Total: $814,500
So it looks like these buyers actually came in with 10 percent down ($90,500) if I’m working the numbers out correctly. So even in August of 2007 right when the market was in full implosion Countrywide decided to make a loan at peak value on a property that was “valued” at almost one million with only 10 percent down. Is it any wonder why many Alt-A loans are simply exploding on the balance sheet of banks?
So the home is now purchased. Less than one year in, the borrower is already having problems. The notice of default was filed on September of 2008:
09/04/2008: NOD Filed for $26,461
Now this is what people forget about mega California mortgages. If you miss a payment on say a home in practically any other state, you fall behind $1,000 or so a month. So after the NOD if it is filed after 3 months, you may owe somewhere around $3,000 to $4,000 depending on late fees and penalties. Catching up on that is doable. Try catching up to $26,461 when you are already struggling.
So if the NOD was filed in September of 2008, this probably means the borrowers started missing full payments back in June or July of 2008. Now here is where the process drags out and shadow inventory builds. So the NOD is put on the place in 09/2008 and the first auction is scheduled in January of 2009. Then, it looks like another auction is placed in March of 2009. When is the home finally taken over? By October of 2009. Now do you think this borrower was making payments all that time? Yet the process isn’t complete. Only on Tuesday of this week was the home listed! So let us recap the time it took from first missed payment to MLS listing:
June/July of 2008 first missed payment to January 5, 2010 MLS (18 to 19 month process)
And what is the current listing price?
List Price: $699,900
So the bank is simply writing off that second mortgage completely and hoping to recoup on the first. These kind of cases simply point to a major drawn out housing market for the state. When we consider all the option ARMs and Alt-A loans, many people are going to face similar problems.
It is troubling to see so many people eager to jump on any home even if they have to spend every hard earned penny they have saved during the bubble times (they assume the bubble has fully burst). They somehow think the market has already bottomed. It has not.
Now you might say, people in this zip code of Burbank must be making tons of money. Let us take a look:
It would take over 12 times the median annual income of this zip code to purchase this home! That is flat out bubble land to the next dimension. I mean run the numbers. Let us assume you go with an FHA insured loan with 3.5 percent down:
Down Payment: $24,365
The family looking to buy this home will need an income of $200,000 which doesn’t seem to be reflected from the income tax data pulled for this zip code. Let us run the net income numbers for someone not living in the area:
So even assuming a family with a $200,000 household income wants to buy this home, nearly 50 percent of their net pay is going to their housing payment. That is nuts! Plus, the median household income for the area is not even close to $200,000 but $56,000. This is why California is still largely facing major pocket bubbles in areas like Burbank, Culver City, and Pasadena to name a few.
Incomes do matter by the way. And one thing people forget is that over 40 years, the average 30 year fixed mortgage hovered around 9 percent. You want to run the numbers at 9 percent?
Let us assume you buy this home. In a few years, rates go up to 9 percent. A family looking to buy this home at the current price, no price adjustment, will now need an income of $263,000! And keep in mind mortgage rates can’t go any lower. The Federal Reserve has now gambled the entire security of our nation’s well being. They have purchased some $1.25 trillion in mortgage backed securities since no one else in their right mind would buy these toxic products. That game is going to end badly and rates will go up once that hits as is typical in any high risk investment. When? Who really knows but making a bet on California housing right now is a major gamble. If you feel the need to gamble go to Vegas and satisfy your need. At least there your odds in some games are close to fifty-fifty. In California housing, it is hard to see how you’ll win in many cases.
Tuesday, January 5, 2010
Ben Pavone, California Lawyer Refuses to Pay Bank of America Credit Card, Threatens to Sue
Ben Pavone told Bank of America in a letter last week that he refuses to pay off his credit card debt until the bank lowers his interest rate. And, he added, if they try to ruin his credit, he'll sue 'em.
"They've got to have some kind of obligation to not totally extort the public," said Pavone.
The San Diego, Calif. attorney is angry about two things: his interest rate, which has gone up to 27.99 percent, and his credit limit, which has gone down to just above his balance. "I'm sure I'm going to be hit with penalties," he said.
Pavone said he got "squeezed for cash" and asked Bank of America to raise his credit limit in October. The bank responded with a two-page letter. The first page declined the request; the second told him his limit would be reduced from $32,100 to $30,400. Bank of America cited "economic trends" in both decisions.
"I consider your action an anticipatory repudiation of the contract and am treating you as in breach," he wrote in a Dec. 31 letter to the bank. "I am therefore not paying the money that is currently due on January 3, 2010 out of protest."
Pavone said he got the protest idea from Ann Minch, the Red Bluff, Calif. woman who launched a "debtors' revolt" via YouTube in September. Minch won imitators and also a reduced interest rate on her own card. Pavone, Minch et al are all asking the same question: Why is it fair for bailed-out banks to reward themselves with bonuses and at the same time to soak taxpayers who've done nothing wrong?
"For the record, I have a perfect payment history and I have a nearly perfect payment record on my credit," Pavone's letter continued. "I have no doubt that you will mark my credit in light of this default, but if you do, I will sue you. I am eager to argue to a court that your interest rates are unfair within the meaning of various state and federal statutes, and anxious to point out that you 'had' to cut my credit limit from $32,000 down to $30,000 at the same time you were borrowing billions from the federal government and paid your executive bonuses in full."
The letter concludes by asking the bank to reduce his rate to 10.99 percent, after noting that it would probably cost less to reduce the rate than to have to fight the suit.
Story continues below
Bank of America does not comment about individual customers. Regarding credit limits, a spokeswoman wrote, "In general, we monitor accounts for risk and may adjust customers' lines up or down as appropriate based on the risk profile and performance with us."
Ed Mierzwinski, program director for consumer advocacy group U.S. Public Interest Research Group, told HuffPost that Pavone's got the right idea -- it would be easier for the bank to cut a deal with Pavone than to deal with him in court, which is a distinct possibility since the bank abandoned mandatory arbitration in the fall.
"The banks respond to the squeaky wheel," wrote Mierzwinski in an email. "ANY consumer who complains has a better chance than those who do not."
As for the legal theory of Pavone's possible lawsuit, consumer law experts say he just might have a case. Pavone said a possible suit would allege unconscionability. When jacking up interest rates, credit card lenders typically provide notice and an opportunity for cardholders to refuse the higher rate and settle their accounts at the current rate -- nothing unconscionable about that. But maybe Bank of America breached good faith by reducing the limit to a level that would likely incur fees and damage Pavone's credit report.
"Banks have done really well figuring out ways to screw people without making themselves legally liable," said Ira Rheingold, director of the National Association of Consumer Advocates. "I think [the limit reduction] is another example of Bank of America's venality. Whether or not it's a successful lawsuit, I don't know. Whether I think it ought to be challenged -- absolutely."
Lawsuits against big banks are not totally unwinnable. In November a federal judge refused to dismiss a class-action claim against Chase filed by customers who said the bank acted in bad faith when it raised minimum monthly payments from 2 percent to 5 percent on fixed-rate cardholders.
"They've got to have some kind of obligation to not totally extort the public," said Pavone.
The San Diego, Calif. attorney is angry about two things: his interest rate, which has gone up to 27.99 percent, and his credit limit, which has gone down to just above his balance. "I'm sure I'm going to be hit with penalties," he said.
Pavone said he got "squeezed for cash" and asked Bank of America to raise his credit limit in October. The bank responded with a two-page letter. The first page declined the request; the second told him his limit would be reduced from $32,100 to $30,400. Bank of America cited "economic trends" in both decisions.
"I consider your action an anticipatory repudiation of the contract and am treating you as in breach," he wrote in a Dec. 31 letter to the bank. "I am therefore not paying the money that is currently due on January 3, 2010 out of protest."
Pavone said he got the protest idea from Ann Minch, the Red Bluff, Calif. woman who launched a "debtors' revolt" via YouTube in September. Minch won imitators and also a reduced interest rate on her own card. Pavone, Minch et al are all asking the same question: Why is it fair for bailed-out banks to reward themselves with bonuses and at the same time to soak taxpayers who've done nothing wrong?
"For the record, I have a perfect payment history and I have a nearly perfect payment record on my credit," Pavone's letter continued. "I have no doubt that you will mark my credit in light of this default, but if you do, I will sue you. I am eager to argue to a court that your interest rates are unfair within the meaning of various state and federal statutes, and anxious to point out that you 'had' to cut my credit limit from $32,000 down to $30,000 at the same time you were borrowing billions from the federal government and paid your executive bonuses in full."
The letter concludes by asking the bank to reduce his rate to 10.99 percent, after noting that it would probably cost less to reduce the rate than to have to fight the suit.
Story continues below
Bank of America does not comment about individual customers. Regarding credit limits, a spokeswoman wrote, "In general, we monitor accounts for risk and may adjust customers' lines up or down as appropriate based on the risk profile and performance with us."
Ed Mierzwinski, program director for consumer advocacy group U.S. Public Interest Research Group, told HuffPost that Pavone's got the right idea -- it would be easier for the bank to cut a deal with Pavone than to deal with him in court, which is a distinct possibility since the bank abandoned mandatory arbitration in the fall.
"The banks respond to the squeaky wheel," wrote Mierzwinski in an email. "ANY consumer who complains has a better chance than those who do not."
As for the legal theory of Pavone's possible lawsuit, consumer law experts say he just might have a case. Pavone said a possible suit would allege unconscionability. When jacking up interest rates, credit card lenders typically provide notice and an opportunity for cardholders to refuse the higher rate and settle their accounts at the current rate -- nothing unconscionable about that. But maybe Bank of America breached good faith by reducing the limit to a level that would likely incur fees and damage Pavone's credit report.
"Banks have done really well figuring out ways to screw people without making themselves legally liable," said Ira Rheingold, director of the National Association of Consumer Advocates. "I think [the limit reduction] is another example of Bank of America's venality. Whether or not it's a successful lawsuit, I don't know. Whether I think it ought to be challenged -- absolutely."
Lawsuits against big banks are not totally unwinnable. In November a federal judge refused to dismiss a class-action claim against Chase filed by customers who said the bank acted in bad faith when it raised minimum monthly payments from 2 percent to 5 percent on fixed-rate cardholders.
Buying a home is a lousy investment: Fed Economist, Karen Pence
By Jon Hilsenrath
Before the housing bust, Americans tended to think their homes were their best and most important investments –- a view promoted by Washington policy makers who made home ownership a top priority. Karen Pence, who runs the Federal Reserve’s household and real estate finance research group, argues at the American Economic Association’s meetings this week that homes are actually a terrible investment.
Putting aside the fact that home prices have fallen dramatically, she says several factors make homes a lousy investments:
It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.
Maybe Washington policy makers shouldn’t work so hard to promote ownership with mortgage interest deductions and other federal subsidies to homeowners. Ms. Pence has been a Washington renter for many years. Ironically, though, she says she’s considering buying a house herself. The reason: Her husband wants a dog and wants to start gardening. That means moving out of the apartment.
Before the housing bust, Americans tended to think their homes were their best and most important investments –- a view promoted by Washington policy makers who made home ownership a top priority. Karen Pence, who runs the Federal Reserve’s household and real estate finance research group, argues at the American Economic Association’s meetings this week that homes are actually a terrible investment.
Putting aside the fact that home prices have fallen dramatically, she says several factors make homes a lousy investments:
It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.
Maybe Washington policy makers shouldn’t work so hard to promote ownership with mortgage interest deductions and other federal subsidies to homeowners. Ms. Pence has been a Washington renter for many years. Ironically, though, she says she’s considering buying a house herself. The reason: Her husband wants a dog and wants to start gardening. That means moving out of the apartment.
Sunday, January 3, 2010
5 times more housing inventory than publicly disclosed.
Unlocking the Foreclosure Box – The Most Comprehensive Shadow Inventory Housing Analysis for Los Angeles County. Examining 269 Zip Codes and Finding 100,000 Shadow Properties while Public Views 19,000.
For the full story including great charts go to: http://www.doctorhousingbubble.com/foreclosure-box-the-most-comprehensive-shadow-inventory-housing-analysis-for-los-angeles-county-examining-269-zip-codes-and-finding-100000-shadow-properties-while-public-views-1900/#comment-43776
One resolution I had coming into 2010 was getting a better number for the shadow inventory in Southern California. It is rather clear that shadow inventory is a real factor in the current market but how big is this inventory? Can we really get an accurate figure for a large area like Los Angeles County? Well this is something I set out to do. The trouble with the current numbers is they are derived from a variety of sources. First, you need to pull MLS data for each of the 269 zip codes in Los Angeles County. This is the largest county in California with approximately 9,700,000 people living here. It provides an excellent cross section of all the ills California housing is currently experiencing. If we can get a handle on the actual shadow inventory for this area we can put together a better picture of the housing market for 2010.
The California housing market for 2010 is going to deal with the heavy flow of Alt-A and option ARM products hitting in conjunction with prime mortgages that are no longer able to remain current in this troubled economy. Let us first define shadow inventory at least how we perceive it. Some narrowly define shadow inventory as REO properties that are not on the MLS. This definition is wrong and too limited because it misses the bigger piece of the pie. That piece includes homes scheduled for auction and homes with a notice of default filed (NOD) that have yet to make it onto the MLS. Some argue that these homes are not shadow inventory because there is a chance they will become current and have no need of being on the MLS for sale. This is misguided because only 3 to 5 percent of these mortgages will be cured so the bulk will eventually end up as foreclosures and will get on the MLS at some point. This is what we can measure. Yet I would also argue that there is another layer of homes that are currently 90+ days late that have no NOD filed and these are also part of the shadow inventory.
I painstakingly over a few days pulled data on all 269 zip codes for Los Angeles County to get a better picture of what is really going on. Data was pulled from a variety of sources including the MLS, foreclosure filings, and DataQuick to name a few. Putting this together gives us a fascinating picture:
Here is the real story. The purple column is the MLS viewable data by the public. According to this data L.A. County as of the start of 2010 has approximately 19,400 homes. In November 6,257 homes sold in the county. This gives us some 3 months of inventory (a healthy amount). Yet that is probably where the normalcy ends. Let us go through each column. First, we have more homes in pre-foreclosure than the entire MLS data. These are homes that now have a notice of default filed. Next, we have homes that have an auction scheduled. These homes are deeper in the foreclosure process. This number is enormous and by itself is almost twice the size of the MLS data. Next, we have bank owned homes that is usually what some look at when they define shadow inventory. It becomes clear why some like to skew the data. Banks are lagging and when you only look at REOs, then it doesn’t look so bad. Yet this assumption falsely sits with the notion that the NOD and auction column are somehow going to miraculously cure with some programs like HAMP. Yet the data on HAMP is proving otherwise with roughly 4 percent of trial modifications becoming permanent. Add the shadow data columns up and you get a hidden inventory that is nearly 3 times the MLS data. The difference is 3 months of inventory versus nearly 14 months of inventory.
What does this mean? There is a tremendous amount of property in distress. Until this calms down the market is going to remain highly volatile. I also wanted to look at which zip codes had the largest number of shadow inventory in relation to the MLS data. As you would expect, more troubled areas have a larger number of shadow inventory but you’ll be surprised how many zip codes have more shadow inventory than MLS data:
Now this data is fascinating. Let us dig around the data to help explain what is going on. First, you’ll notice that the top 10 shadow inventory zip codes all fall around $300,000 except for one area. This would be expected since many of these areas are the most troubled. Let us use one of the examples above with Pacoima. Pacoima on the MLS has 118 properties listed. In the latest month of data 62 homes sold. So to the public, this looks like a city with less than 2 months of inventory, a very healthy market. Yet if we add up the shadow data a very different picture emerges:
NOD (318) + Auction (630) + REO (148) = 1,096 shadow inventory properties
Add in the shadow data with the MLS data and you go from below 2 months of inventory to a whopping 19.5 months of inventory. This is why this is so crucial. It is the difference in a relatively healthy market and a very unhealthy one.
As I mentioned before, I pulled data on all 269 zip codes in Los Angeles County. I wanted to get a better sense how disbursed shadow inventory really was. Some want to paint a picture that only poor areas are subject to large amounts of hidden inventory. That is not the case:
Out of 269 zip codes only 26 zip codes had less shadow inventory than what was appearing on the MLS. 206 zip codes actually have shadow inventory that is twice the size of the publicly viewable MLS data. Even more troubling 75 zip codes have shadow inventory that is five times the MLS data. This data is compelling enough to make you pause because what is being presented is not the entire picture.
Let us get a better picture of L.A. County by pulling up demographic information:
In L.A. County 1.178 million homes have a mortgage. Over 350,000 have no mortgage. Of those with a mortgage over 400,000 are underwater. This shows us a market that is in high distress. Simply looking at the MLS data and going by what the banks are telling us is really giving you a distorted picture of reality. The market is saturated with distress inventory to the point of overflowing the above charts. Over 90,000 homes with a mortgage are now 90+ days late. And here is where we jump even deeper into the rabbit hole. Of active distress properties (NOD + scheduled auction) we get roughly 60,000 homes. We’ll leave out the nearly 9,000 REOs since these are now fully categorized as “foreclosed” and are owned by the bank. So you have another 30,000 homes in L.A. County that are 90+ days late but have no notice of default filed. What is going on here? It could be that it is still early in the process. But what is more likely is that banks are simply stalling out the process. Unfortunately we do not have access to this data since this is where banks keep their Enron style accounting statements.
If you add the entire potential data:
90+ days late but not NOD + NOD filed + Auction Scheduled + REO = Approximately 100,000 homes
Los Angeles County has roughly 100,000 homes as part of the shadow inventory. This is an enormous number given that the MLS only lists 19,400 homes. In other words, the potential pool of properties in the county is five times as large as the public is currently seeing. And these are properties that are in distress. At the very minimum this is a borrower that has missed three mortgage payments. The likelihood of future foreclosure is extremely high. How many of these homes are Alt-A or option ARM connected? Hard to say but we can easily estimate that the vast majority of the shadow inventory that is also part of the Alt-A and option ARM circle is virtually assured to default.
Some areas seem to have very little shadow inventory but it is in the area where the fewest people live:
Now as you will notice the median price of all these areas is solidly above the $1 million mark. But even here, you’ll notice the large amount of inventory. A place like Beverly Hills with the iconic 90210 zip code has over 28 months of inventory if we also include the shadow data. But this isn’t uncommon in high priced areas.
Now it would be cumbersome to show all 269 zip codes here but given that I have covered Culver City, Pasadena, and Santa Monica in the past I’m sure many of you would like to see that data:
The same patterns play out in these areas. Factoring in the shadow inventory the data takes a different shape. There are many factors that are going to determine where housing will head in 2010 but the above is rather clear. Shadow inventory is large in L.A. County and I would imagine an analysis of many other counties would yield similar results.
Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated
For the full story including great charts go to: http://www.doctorhousingbubble.com/foreclosure-box-the-most-comprehensive-shadow-inventory-housing-analysis-for-los-angeles-county-examining-269-zip-codes-and-finding-100000-shadow-properties-while-public-views-1900/#comment-43776
One resolution I had coming into 2010 was getting a better number for the shadow inventory in Southern California. It is rather clear that shadow inventory is a real factor in the current market but how big is this inventory? Can we really get an accurate figure for a large area like Los Angeles County? Well this is something I set out to do. The trouble with the current numbers is they are derived from a variety of sources. First, you need to pull MLS data for each of the 269 zip codes in Los Angeles County. This is the largest county in California with approximately 9,700,000 people living here. It provides an excellent cross section of all the ills California housing is currently experiencing. If we can get a handle on the actual shadow inventory for this area we can put together a better picture of the housing market for 2010.
The California housing market for 2010 is going to deal with the heavy flow of Alt-A and option ARM products hitting in conjunction with prime mortgages that are no longer able to remain current in this troubled economy. Let us first define shadow inventory at least how we perceive it. Some narrowly define shadow inventory as REO properties that are not on the MLS. This definition is wrong and too limited because it misses the bigger piece of the pie. That piece includes homes scheduled for auction and homes with a notice of default filed (NOD) that have yet to make it onto the MLS. Some argue that these homes are not shadow inventory because there is a chance they will become current and have no need of being on the MLS for sale. This is misguided because only 3 to 5 percent of these mortgages will be cured so the bulk will eventually end up as foreclosures and will get on the MLS at some point. This is what we can measure. Yet I would also argue that there is another layer of homes that are currently 90+ days late that have no NOD filed and these are also part of the shadow inventory.
I painstakingly over a few days pulled data on all 269 zip codes for Los Angeles County to get a better picture of what is really going on. Data was pulled from a variety of sources including the MLS, foreclosure filings, and DataQuick to name a few. Putting this together gives us a fascinating picture:
Here is the real story. The purple column is the MLS viewable data by the public. According to this data L.A. County as of the start of 2010 has approximately 19,400 homes. In November 6,257 homes sold in the county. This gives us some 3 months of inventory (a healthy amount). Yet that is probably where the normalcy ends. Let us go through each column. First, we have more homes in pre-foreclosure than the entire MLS data. These are homes that now have a notice of default filed. Next, we have homes that have an auction scheduled. These homes are deeper in the foreclosure process. This number is enormous and by itself is almost twice the size of the MLS data. Next, we have bank owned homes that is usually what some look at when they define shadow inventory. It becomes clear why some like to skew the data. Banks are lagging and when you only look at REOs, then it doesn’t look so bad. Yet this assumption falsely sits with the notion that the NOD and auction column are somehow going to miraculously cure with some programs like HAMP. Yet the data on HAMP is proving otherwise with roughly 4 percent of trial modifications becoming permanent. Add the shadow data columns up and you get a hidden inventory that is nearly 3 times the MLS data. The difference is 3 months of inventory versus nearly 14 months of inventory.
What does this mean? There is a tremendous amount of property in distress. Until this calms down the market is going to remain highly volatile. I also wanted to look at which zip codes had the largest number of shadow inventory in relation to the MLS data. As you would expect, more troubled areas have a larger number of shadow inventory but you’ll be surprised how many zip codes have more shadow inventory than MLS data:
Now this data is fascinating. Let us dig around the data to help explain what is going on. First, you’ll notice that the top 10 shadow inventory zip codes all fall around $300,000 except for one area. This would be expected since many of these areas are the most troubled. Let us use one of the examples above with Pacoima. Pacoima on the MLS has 118 properties listed. In the latest month of data 62 homes sold. So to the public, this looks like a city with less than 2 months of inventory, a very healthy market. Yet if we add up the shadow data a very different picture emerges:
NOD (318) + Auction (630) + REO (148) = 1,096 shadow inventory properties
Add in the shadow data with the MLS data and you go from below 2 months of inventory to a whopping 19.5 months of inventory. This is why this is so crucial. It is the difference in a relatively healthy market and a very unhealthy one.
As I mentioned before, I pulled data on all 269 zip codes in Los Angeles County. I wanted to get a better sense how disbursed shadow inventory really was. Some want to paint a picture that only poor areas are subject to large amounts of hidden inventory. That is not the case:
Out of 269 zip codes only 26 zip codes had less shadow inventory than what was appearing on the MLS. 206 zip codes actually have shadow inventory that is twice the size of the publicly viewable MLS data. Even more troubling 75 zip codes have shadow inventory that is five times the MLS data. This data is compelling enough to make you pause because what is being presented is not the entire picture.
Let us get a better picture of L.A. County by pulling up demographic information:
In L.A. County 1.178 million homes have a mortgage. Over 350,000 have no mortgage. Of those with a mortgage over 400,000 are underwater. This shows us a market that is in high distress. Simply looking at the MLS data and going by what the banks are telling us is really giving you a distorted picture of reality. The market is saturated with distress inventory to the point of overflowing the above charts. Over 90,000 homes with a mortgage are now 90+ days late. And here is where we jump even deeper into the rabbit hole. Of active distress properties (NOD + scheduled auction) we get roughly 60,000 homes. We’ll leave out the nearly 9,000 REOs since these are now fully categorized as “foreclosed” and are owned by the bank. So you have another 30,000 homes in L.A. County that are 90+ days late but have no notice of default filed. What is going on here? It could be that it is still early in the process. But what is more likely is that banks are simply stalling out the process. Unfortunately we do not have access to this data since this is where banks keep their Enron style accounting statements.
If you add the entire potential data:
90+ days late but not NOD + NOD filed + Auction Scheduled + REO = Approximately 100,000 homes
Los Angeles County has roughly 100,000 homes as part of the shadow inventory. This is an enormous number given that the MLS only lists 19,400 homes. In other words, the potential pool of properties in the county is five times as large as the public is currently seeing. And these are properties that are in distress. At the very minimum this is a borrower that has missed three mortgage payments. The likelihood of future foreclosure is extremely high. How many of these homes are Alt-A or option ARM connected? Hard to say but we can easily estimate that the vast majority of the shadow inventory that is also part of the Alt-A and option ARM circle is virtually assured to default.
Some areas seem to have very little shadow inventory but it is in the area where the fewest people live:
Now as you will notice the median price of all these areas is solidly above the $1 million mark. But even here, you’ll notice the large amount of inventory. A place like Beverly Hills with the iconic 90210 zip code has over 28 months of inventory if we also include the shadow data. But this isn’t uncommon in high priced areas.
Now it would be cumbersome to show all 269 zip codes here but given that I have covered Culver City, Pasadena, and Santa Monica in the past I’m sure many of you would like to see that data:
The same patterns play out in these areas. Factoring in the shadow inventory the data takes a different shape. There are many factors that are going to determine where housing will head in 2010 but the above is rather clear. Shadow inventory is large in L.A. County and I would imagine an analysis of many other counties would yield similar results.
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Saturday, January 2, 2010
Noam Chomski about American style militarism
C-J
I believe that Noam Chomski is a first rate intellectual, but he is basically an anarchist with tenure at MIT and he doesn't have to work. Nevertheless, he has interesting concepts that need to be publicly aired.
C-J
I believe that Noam Chomski is a first rate intellectual, but he is basically an anarchist with tenure at MIT and he doesn't have to work. Nevertheless, he has interesting concepts that need to be publicly aired.
C-J
“Smart Power” and “Bear Traps” in the Hindu Kush
By M.K. Bhadrakumar (India)
January 01, 2010 "SCF" -- The US President Barack Obama threw down the gauntlet at the regional powers with his latest Afghan strategy. The constructive ambiguity in his strategy falls in the Kissingerian tradition of negotiating tactic. In a climate of deeply polarized political opinion, he is free to advance matters of vital US interests, while retaining the prerogative to revisit unresolved questions at a date of his choice.
This leaves major regional powers – Pakistan, Iran, India, China and Russia – in some quandary. Obama taunted them to respond within 58 days when they assemble for the London conference on “Afghanisation” on January 28. That’s a tough call.
To be sure, the regional powers are placed at a disadvantage as their internecine tensions preclude scope of a regional initiative materializing. Obama’s strategy is all that is left, therefore, on the table. Pakistan and India are locked in adversarial embrace and that creates much geopolitical space for the US. No doubt, the US military presence seriously destabilized Pakistan. The latest anti-Shi’ite serial terrorist strikes in Karachi testify that in the name of the Taliban, all sorts of forces are operating inside Pakistan – ranging from the CIA to the Blackwater security firm to Wahhabi elements. Pakistan faces a stark choice – fall in line with the US geo-strategy and earn American goodwill, or face the consequences of recalcitrance.
As for the India, Washington holds out the comfort line that Obama is bent on “stabilizing” Pakistan. Washington’s noble endeavour of cleansing Pakistan of militancy pleases Delhi although there is some ennui. At any rate, Delhi is raring to contribute to the “Afghanisation” of the war. Being a natural ally, there is no choice but to cooperate with Washington’s entreaties. On top of it all, there is the larger preoccupation of “catching up” with China’s surge, which modulates the Indian mind at all hours.
Iran presents a case by itself. The US has succeeded in shaking the foundations of Iran-Russia strategic understanding, which was a historic legacy of Evgeniy Primakov’s astute diplomacy with his Iranian counterpart Ali Akbar Velayati to bring the bloody Tajik civil war to an end. The erosion of Russia-Iran understanding enables Washington to make the brazen attempt at “regime change” in Tehran. The geopolitics of the Greater Middle East hangs in the balance. Of course, Tehran withstood ferocious US assaults in the past and the revolutionary heritage is far from dissipated. Also, China’s continued support impacts on the co-relation of forces.
China’s role is immensely important also with regard to the efficacy of the US policy toward Pakistan. The US ability to “pressure” China is limited and hence Washington’s smart overture for a Sino-American joint venture in South Asia. But China remained reticent, keeping in mind the “big picture” of the security inter-linkages of Xinjiang with Central Asia, Afghanistan and Pakistan.
America keenly wanted China to wet its toes in the fight against al-Qaeda and Taliban but the latter knew a military involvement could prove to be a dangerous gambit. Pakistan presents itself as a showcase of the “collateral damage” of the US-led war. China, which was an accomplice of the Americans in the great Afghan jihad of the 1980s against the Soviet Union, would also know that the US has incredible methods of “synergizing” militant Islam – and, in the present case, Xinjiang’s stability is involved.
The US is conscious that China (and Russia) does not share its predicament of being in the crosshairs of the Islamists operating in the Hindu Kush. While it got bogged down in a security quagmire, China wisely focused on commerce. Life can be cruel at times. As the doughty scholar on Xinjiang, Frederick Starr told the New York Times, “We [US] do the heavy lifting. And they [China] pick the fruit”.
Thus, in a startling show of “smart power”, the US has presented Taiwan with an invitation to render “non-military” assistance to Afghanistan. It is an invitation that Taipei cannot spurn, as it comes alongside a huge US arms package and in the downstream it holds out the tantalising prospect that Taipei may look a rising star. Arguably, Washington is cocking a snook at Beijing for its refusal to cooperate with Obama’s Afghan (or Iranian) strategy by muddying the waters in the Taiwan Straits.
Russia’s position is equally delicate. Obama’s war is helpful for Russia to the extent that it may arrest the march of Islamism into the heart of Central Asia. Russia has provided supply routes for the NATO countries. Conceivably, Russia regards cooperation in Afghanistan to be helpful for the “reset” of its US ties. Now comes the testy part. Like with China, Washington wants Moscow to wet its toes in the Afghan war. It wants Moscow to supply weapons and to dispatch military advisors to train Afghan armed forces.
However, the fact remains that although the overall atmosphere of ties with the US has improved, the reset as such remains hostage to a range of issues – missile defence, NATO expansion, Moscow’s acquiescence with the containment strategy toward Iran, etc. Meanwhile, in bits and pieces, what emerges is also that far from lapsing into an isolationist policy, the US is searching for a robust geopolitical engagement in the post-Soviet space in Central Asia.
In effect, Washington wants Moscow to help consolidate the US military presence in Afghanistan, which would pave the way for an expansion of American influence in the Greater Middle East, including Central Asia. Unsurprisingly, Russia seems to face a dilemma somewhat similar to China’s but then, Russia-US engagement has a far more complicated history. Obama’s emphasis on “Afghanisation” is welcome. But the medium and long-term US intentions remain obscure. All evidence points toward a long-term – even open-ended – US military presence in Afghanistan. Any lingering doubt was dispelled when in front of the crème de la crème of the American Right, gathered under the canopy of the Heritage Foundation in Washington, DC, Senator McCain openly vowed to be Obama’s “ally in this effort”.
McCain is an indefatigable warrior who leaps out of Zbigniew Brzezinski’s Eurasian chessboard. McCain saw three great virtues in Obama’s Afghan strategy. First, Obama affirmed a “counterinsurgency” (as against “counterterrorist”) strategy, which was what the Pentagon passionately sought. Second, “large numbers of US combat troops will likely remain in Afghanistan long after July 2011”. Three, following from the above, the US will remain the “only actor in the region with the strength and the stake” to “check and counter” external influences that are “unhealthy” and to ensure on a long-term footing that Afghanistan ceases to be “a field of regional competition and proxy battles”.
McCain summed up with total clarity of mind that “our [US’s] regional strategy must turn military gains [in Afghanistan] into diplomatic leverage outside the country”.
In fact, the US strategy of widening the gyre of the Afghan strategy to draw in the Central Asian states, is steadily gaining momentum. A study conducted recently by the influential Center of Strategic and International Studies in Washington titled “The Northern Distribution Network and the Modern Silk Road” (co-authored by Starr) proposes the coalescing of Central Asia with the AfPak as the crucial underpinning of the entire US geo-strategy towards Greater Middle East, Russia and China.
As diplomats from the regional capitals warily trudge toward the London conference on “Afghanisation”, there will be a lot on their mind. Is “Afghanisation” a genuinely collective effort under UN leadership? Or is it a mere “bear trap” under a new rubric? There hangs a tale. The chilling reality is that Taliban, too, will be watching – having made clear it will look back in anger at foreign powers that associate with the US’s intervention in the three-decade old fratricidal war.
Copyright Strategic Culture Foundation
January 01, 2010 "SCF" -- The US President Barack Obama threw down the gauntlet at the regional powers with his latest Afghan strategy. The constructive ambiguity in his strategy falls in the Kissingerian tradition of negotiating tactic. In a climate of deeply polarized political opinion, he is free to advance matters of vital US interests, while retaining the prerogative to revisit unresolved questions at a date of his choice.
This leaves major regional powers – Pakistan, Iran, India, China and Russia – in some quandary. Obama taunted them to respond within 58 days when they assemble for the London conference on “Afghanisation” on January 28. That’s a tough call.
To be sure, the regional powers are placed at a disadvantage as their internecine tensions preclude scope of a regional initiative materializing. Obama’s strategy is all that is left, therefore, on the table. Pakistan and India are locked in adversarial embrace and that creates much geopolitical space for the US. No doubt, the US military presence seriously destabilized Pakistan. The latest anti-Shi’ite serial terrorist strikes in Karachi testify that in the name of the Taliban, all sorts of forces are operating inside Pakistan – ranging from the CIA to the Blackwater security firm to Wahhabi elements. Pakistan faces a stark choice – fall in line with the US geo-strategy and earn American goodwill, or face the consequences of recalcitrance.
As for the India, Washington holds out the comfort line that Obama is bent on “stabilizing” Pakistan. Washington’s noble endeavour of cleansing Pakistan of militancy pleases Delhi although there is some ennui. At any rate, Delhi is raring to contribute to the “Afghanisation” of the war. Being a natural ally, there is no choice but to cooperate with Washington’s entreaties. On top of it all, there is the larger preoccupation of “catching up” with China’s surge, which modulates the Indian mind at all hours.
Iran presents a case by itself. The US has succeeded in shaking the foundations of Iran-Russia strategic understanding, which was a historic legacy of Evgeniy Primakov’s astute diplomacy with his Iranian counterpart Ali Akbar Velayati to bring the bloody Tajik civil war to an end. The erosion of Russia-Iran understanding enables Washington to make the brazen attempt at “regime change” in Tehran. The geopolitics of the Greater Middle East hangs in the balance. Of course, Tehran withstood ferocious US assaults in the past and the revolutionary heritage is far from dissipated. Also, China’s continued support impacts on the co-relation of forces.
China’s role is immensely important also with regard to the efficacy of the US policy toward Pakistan. The US ability to “pressure” China is limited and hence Washington’s smart overture for a Sino-American joint venture in South Asia. But China remained reticent, keeping in mind the “big picture” of the security inter-linkages of Xinjiang with Central Asia, Afghanistan and Pakistan.
America keenly wanted China to wet its toes in the fight against al-Qaeda and Taliban but the latter knew a military involvement could prove to be a dangerous gambit. Pakistan presents itself as a showcase of the “collateral damage” of the US-led war. China, which was an accomplice of the Americans in the great Afghan jihad of the 1980s against the Soviet Union, would also know that the US has incredible methods of “synergizing” militant Islam – and, in the present case, Xinjiang’s stability is involved.
The US is conscious that China (and Russia) does not share its predicament of being in the crosshairs of the Islamists operating in the Hindu Kush. While it got bogged down in a security quagmire, China wisely focused on commerce. Life can be cruel at times. As the doughty scholar on Xinjiang, Frederick Starr told the New York Times, “We [US] do the heavy lifting. And they [China] pick the fruit”.
Thus, in a startling show of “smart power”, the US has presented Taiwan with an invitation to render “non-military” assistance to Afghanistan. It is an invitation that Taipei cannot spurn, as it comes alongside a huge US arms package and in the downstream it holds out the tantalising prospect that Taipei may look a rising star. Arguably, Washington is cocking a snook at Beijing for its refusal to cooperate with Obama’s Afghan (or Iranian) strategy by muddying the waters in the Taiwan Straits.
Russia’s position is equally delicate. Obama’s war is helpful for Russia to the extent that it may arrest the march of Islamism into the heart of Central Asia. Russia has provided supply routes for the NATO countries. Conceivably, Russia regards cooperation in Afghanistan to be helpful for the “reset” of its US ties. Now comes the testy part. Like with China, Washington wants Moscow to wet its toes in the Afghan war. It wants Moscow to supply weapons and to dispatch military advisors to train Afghan armed forces.
However, the fact remains that although the overall atmosphere of ties with the US has improved, the reset as such remains hostage to a range of issues – missile defence, NATO expansion, Moscow’s acquiescence with the containment strategy toward Iran, etc. Meanwhile, in bits and pieces, what emerges is also that far from lapsing into an isolationist policy, the US is searching for a robust geopolitical engagement in the post-Soviet space in Central Asia.
In effect, Washington wants Moscow to help consolidate the US military presence in Afghanistan, which would pave the way for an expansion of American influence in the Greater Middle East, including Central Asia. Unsurprisingly, Russia seems to face a dilemma somewhat similar to China’s but then, Russia-US engagement has a far more complicated history. Obama’s emphasis on “Afghanisation” is welcome. But the medium and long-term US intentions remain obscure. All evidence points toward a long-term – even open-ended – US military presence in Afghanistan. Any lingering doubt was dispelled when in front of the crème de la crème of the American Right, gathered under the canopy of the Heritage Foundation in Washington, DC, Senator McCain openly vowed to be Obama’s “ally in this effort”.
McCain is an indefatigable warrior who leaps out of Zbigniew Brzezinski’s Eurasian chessboard. McCain saw three great virtues in Obama’s Afghan strategy. First, Obama affirmed a “counterinsurgency” (as against “counterterrorist”) strategy, which was what the Pentagon passionately sought. Second, “large numbers of US combat troops will likely remain in Afghanistan long after July 2011”. Three, following from the above, the US will remain the “only actor in the region with the strength and the stake” to “check and counter” external influences that are “unhealthy” and to ensure on a long-term footing that Afghanistan ceases to be “a field of regional competition and proxy battles”.
McCain summed up with total clarity of mind that “our [US’s] regional strategy must turn military gains [in Afghanistan] into diplomatic leverage outside the country”.
In fact, the US strategy of widening the gyre of the Afghan strategy to draw in the Central Asian states, is steadily gaining momentum. A study conducted recently by the influential Center of Strategic and International Studies in Washington titled “The Northern Distribution Network and the Modern Silk Road” (co-authored by Starr) proposes the coalescing of Central Asia with the AfPak as the crucial underpinning of the entire US geo-strategy towards Greater Middle East, Russia and China.
As diplomats from the regional capitals warily trudge toward the London conference on “Afghanisation”, there will be a lot on their mind. Is “Afghanisation” a genuinely collective effort under UN leadership? Or is it a mere “bear trap” under a new rubric? There hangs a tale. The chilling reality is that Taliban, too, will be watching – having made clear it will look back in anger at foreign powers that associate with the US’s intervention in the three-decade old fratricidal war.
Copyright Strategic Culture Foundation
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