Wednesday, December 17, 2008

CNN Misses the Mark Again

What else is new? CNN finally recognized that there are some responsible people out there and did an article about them. Unfortunately, their take on things is that its not fair. Move on. That’s it. The poor, dumb, fools who took the short cut still get their bailout. They even got an econ professor from Mr. Potatohead State to chime in with some line of BS about hot we have to bail out the fools to save everyone else. As it is there are only a couple economists I trust these days, and Dr. Jellobrain from Mr. Potatohead State is not on the short list. Dr. Jellobrain and the rest of the CNN article failed to even consider any negative side effects of supporting the current price level. That’s fine, this link will be here for a long time, you'll be able to write CNN and Dr. Jellobrain to tell them how short sighted and self serving they were in December 2008.

Friday, December 12, 2008

I Told You So...

I don't draw a lot of comfort about being right on about something as bad as the current housing and credit crisis. However, I do believe that you can only save one group of people, the home owners who put themselves at risk with their bad bet on a risky loan or the people who are waiting on the sidelines because they saw that same bad bet for what it is. That said, I believe that in this situation, the prudent deserve their chance to flourish, as this country is designed to function.

That said, Bloomeberg and other news agencies are reporting that there will be another wave of loan foreclosures in 2009 after a lull late this year. Lull, that’s their word today. I was predicting this back in March. If you look at the chart in that posting, we are not much past the tip of the iceberg, 2010 isn't going to be good nor will 2011. Anyone forecasting a revival in real estate prior to 2012 is fooling themselves and trying to pull the wool over your eyes too. I am not sure that 2012 is the turn around point, but I am certain that the rebound will not come before then.

I also believe that any meddling that Congress, the President or President elect commit to in the real estate markets will only put off recovery even further. Its now widely understood that certain spending programs contributed to the length of the Great Depression. The catalyst for coming out of the Great Depression was World War II. I am not advocating war, but I am making a case against bailing out the individuals who put their homes at risk. Staggeringly low interest rates, 0%, contributed to Japan's lost decade after their housing crash in the 80s. Hard choices have to be made by our elected officials on Washington DC. I am not sure that there are many, or perhaps any, who are up to the task. The current Congressional leadership is certainly not up to the task. I see people who are blind to past lessons and are pushed to foolish actions because they are afraid to be perceived as doing nothing, but the fact of the matter is that by doing nothing and allowing the roughly 10% of the population who are at risk to go down with their bad bet is the only way to get back to equilibrium.

A third of the population of this country rents its home. Not all of them are would be home owners, but I am betting that there are more people who are frozen out of the market and will be frozen out of the market, than there are people at risk of losing their homes, if current price levels are maintained. Incomes are still not rising to meet costs of living if you want to own a home, regardless of where you live. Sure there are some markets that are legitimately holding their value or even going up, but they are the exception, not the rule. Even on the worst days on the NYSE, some stock some where sets its all time high.

In short people, wake up and smell the coffee, bailing out the individuals from their bad gamble is not going to turn things around. It will probably make things worse. So there you have, December 12th 2008, I am saying Congress, and people like FDIC chairperson Sheila Bair will make things worse if they continue to meddle with markets that can only be fixed by allowing them to naturally return to equilibrium.

Friday, December 05, 2008

Panic at the Fed?

I believe that the Fed & Treasury do not think they can keep the banking system afloat by either buying/guaranteeing the bad paper or offering cash infusions to the banks. There is no other good reason to be propping up home prices, which I think will contribute to a catastrophic round of inflation as cost of living indices readjust to the artificial housing prices and lack of creative finance options.

I think that this is a sign of panic on Bernake's part. They are willing to forsake the future for the current. I think they can wrap their heads around the consequences of massive banking failures. I believe that they think they can reign in the resulting inflation with higher, Paul Volker style interest rate hikes. If you don't own a home, you’re being sold down the river by both the current Fed and the incoming President.

Home prices are still dramatically out of sync with respect to personal incomes, costs of renting and historical norms. Even today, after 2 years of declines we are still close to double prices from 10 years ago. That’s twice the normal growth rate for home prices. Home prices used to be 2-4 times household incomes, now that number is more like 7-10 times household incomes. This correction is likely only half way though, at best. There are still 2-3 more years of ARM resets due. Plenty of them will be or have been refinanced, but the numbers are still remarkable. Look at the chart at the bottom of the blog linked below. 2010-11 still shows a lot of ARMs resetting. Right now and well into 2009, we are in a trough. Unfortunately the people who took the short cut are going to have bear the burden of their mistake. Bailing them out is foolish. There was no bailout for people who lost massive net worth’s when the dot com and telecom bubbles burst.

Allowing people to tap into their retirement is not a solution to this problem. First off, it probably will not be sufficient to stem the tide of foreclosures. Second, all that does is put off the inevitable. If you let people deplete their retirement to save their house, you are simply going to have to deal with them when they reach retirement age without sufficient savings.

People need to get over the idea that everyone is "entitled" to own a home. The CRA inflated the idea of the American Dream and now Congress is driving a stake through the heart of the American Dream.

Pay me now or pay me later. It's cheaper to pay now.

In looking at the current situation, home prices continue to be dramatically out of sync with personal incomes. Without the exotic loan products, people making a typical entry level salary, say $40k couldn't afford a 200k house. And 200k homes are not really available if you live in a major metro area. That average home price needs to come closer to $150k for entry level housing to be available. Keeping people in their over priced, ill financed homes will not get prices to where they need to be with respect to personal incomes. Similarly, it’s not practical to expect personal incomes to grow by 20% nor is it healthy.

So the question stands, who takes the sharp stick in the eye? The person who is over extended or the person who has not had the opportunity to make that same mistake.

Thursday, December 04, 2008

Even the NY Times Likes My Stuff

I posted this comment to an article on the New York Times and even the editor liked it.
The US auto industry has a giant sucking chest wound from a Desert Eagle .50 cal and the UAW offered up concessions that are roughly equivilent to the free sample of Breathe Right nasal strips which comes with the small box of bandaids.

I wonder how Gettelfinger was able to keep a straight face during his press conference.

Wednesday, December 03, 2008

A New Hero Emerges

If it ticks you off to see your neighbors, in their over priced and ill financed homes, getting a free ride from the mortgage bankers, someone is fighting your fight. William Frey is not going to stand by and let it happen. As I have said before, you can't just modify the terms of loan agreements when you no longer own the loan. William Frey owns a lot of them and that is why he is suing the authors of the 2005 Bankruptcy Reform Act Bank of America of their proposed plan to restructure 400,000 loans that were made to completely unworthy home buyers.

When asked about the lawsuit, Bank of America played dumb, kind of like when they agreed to buy Countrywide, the originator of those loans. I'll bet there is some serious buyers remorse related to that purchase. If you think you over paid for that big screen that the wife yells at you about? I'll bet Bank of America has it ten times as bad.

Like most hero's Frey has his flaws. He thinks you and I, the tax payers should have to pick up tab, another half trillion dollars, on these bad bonds. I can't say that I am a fan of that course of action, but as I continue to beat my drum here at The Last Good Idea, I will repeat my mantra. Support the banks, everyone benefits. Only our idiot, fool neighbors benefits from bailing out the individuals.

So, like the old saying ... the enemy of my enemy is my friend. So while Mr. Frey seeks to put off bailing out the individual morons who bought too much house and continues to wave his ink pen sword at the likes of Representatives Barney Frank, Maxine Waters, etc. I will call Mr. Frey our hero today. Especially since he has given Barney Frank another opportunity to make himself look like an ass. He can't really help it, it’s his nature. Barney Frank asked Mr. Frey to discuss alternatives, but quickly withdrew the invitation. I am sure he knew he was standing on the wrong ground.