Corrosion of Conformity — Albatross
How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on
The conforming loan limit through the GSE’s is currently limited to $625,000 in our area. This is down from the $729,750 temporarily allowed under the Economic Stimulus Act of 2008. Any loan larger than this amount is considered a jumbo, and jumbo loans carry a higher interest rate. The current spread on a 5/1 ARM (a method of financing I do not recommend) is only 9 basis points; however, the spread on 30-year fixed rate loans is 130 basis points. Also, jumbo loans generally have higher downpayment requirements than conforming loans. All this means that the jumbo loan market is thinner because fewer buyers have the cash for the downpayment or the income to qualify.
Since our real estate market is collapsing from the bottom up, the slice of the market starting to show stress now is the bottom of the jumbo market — $685,000 to $900,000. Homes priced to sell in this range are having a hard time finding buyers, and prices are starting to drop. Today’s featured property is a short sale priced at $775,000. It recently dropped its price $80,000 in an effort to chase the market.
My home is kind, man it pays to be blind
I want to share with you a couple of recent experiences I had that demonstrate to me the power of conformity and denial.
I have been arranging to speak at various groups active in my industry. There are a great many even in my industry that do not fully understand what is happening and why. One of these groups told me they would like to have me as a speaker, but only if I am planning to give a Pollyanna message of hope. Well, there is always hope, but the reality is not particularly positive, so I will not be speaking there any time soon. The reason is simple. They are in denial, and they want to maintain that even at the expense of seeing reality. I can not and do not live my life this way, so it is difficult for me to relate to this mentality, but I do understand their desire for denial and the reason for their enforced conformity.
I subscribe to a reporter lead service to try to generate free publicity. Yesterday, I had a phone interview with a reporter doing a story on people who cannot sell who are renting out their houses. I explained to her that those homeowners with a positive cashflow do not have a problem, but many bubble buyers cannot cover their cost of ownership with rents, and they do not have any good options. They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years). Many, if not most, of the people who try to rent it out will end up in foreclosure anyway. This reporter got upset with me because my message was not positive, and she had to spin this story in a positive light. I didn’t know what to say. All I can do it report reality. What she needed was someone from the NAR to tell her that prices will be back at the peak in two years and those who rent out their losing venture will be made whole soon. I couldn’t say that because it is not reality. Even the media is under pressure to conform to the culture of denial.
I have often wondered why our government sets up its method of reporting recessions so that it isn’t announced until it is almost over. Now that I see the powerful need for denial among the populace, I think I understand.
Asking Price: $775,000
Income Requirement: $193,750
Downpayment Needed: $155,000
Monthly Equity Burn: $6,458
Purchase Price: $985,000
Purchase Date: 7/20/2005
Address: 75 Rockport, Irvine, CA 92602
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 2,300 |
| $/Sq. Ft.: | $337 |
| Lot Size: | 6,532
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Spanish |
| Year Built: | 2000 |
| Stories: | 2 |
| Area: | Northpark |
| County: | Orange |
| MLS#: | P663716 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 34 days |
Highly upgraded house. Maple Hardwood Floors extends throughout main
floor, and stairs.Upgraded Granite kitchen counters, with a gourmet
kitchen with Cooking island. French Doors open to an ideal
Play/Courtyard fenced with a Custom Wrought Iron. Family room is open
& bright with Fireplace. Master Bdrm with 2 Balconies, Marble
Floor,Office Niche. Phantom screens on french doors.
This property was purchased on 7/20/2005 for $985,000. The owner used a $784,000 first mortgage, a $196,000 second mortgage, and a $0 downpayment.
If this sells for its asking price, and if a 6% commission is paid, First Franklin stands to lose $256,500.
This property is being offered for 21% off its 2005 purchase price.
{book}
Well I’m feelin’ left behind, Lord what a waste of time
They’re coming to get you, run on
How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on
You can call me crazy
You can call me wrong
Cause I was born a liar
Albatross fly on, fly on
My home is kind, man it pays to be blind
I promise to forget you run on
No swallowed pride, no conspiracy lined
Broken promise of the virtue, run on, Lord run on
You can call me lazy
But I know where I belong
Cause I was born a liar
Albatross, fly on, fly on
With your trust in love from your God above…
I believe the Albatross is me
You can call me lazy
You can call me wrong
Cause I was born a liar
Albatross, fly on, fly on
I should have seen the signs
Now the memories far behind
It was no big loss,
Fly on, Albatross yeah
Corrosion of Conformity — Albatro
At $775K, it’s still way too much for the average person to afford. So the way I see it we are still at the top end of the bubble. I guess it’ll take another 12 to 18 months for sellers and realtors to realize that not many people can afford these prices and we see prices drop another 15 to 20 percent. It’s just a matter of time.
And while the bottom pulls down the middle, the falling middle will further compress the bottom. The true definition of “downward spiral.” Until something fundamental shifts, we all fall down.
Could see a wave of homes listed for $624,000.
Well, since IR was right and 20% down has almost become a universal requirement, this seller’s asking of $775k less a 20% down payment of $155k, results in a mortgage of, you guessed it, $620k!
I believe the new Fannie Mae “jumbo conforming” loan limit ($625k in higher cost areas) is effective Jan 1, 2008. The current “jumbo conforming” loan limit ($729,750 in higher cost areas) expires this month.
Correction: The new “jumbo conforming” limit is effective Jan 1, 2009, not 2008.
Also, with the median sales price dropping in the MSA: LA-LB-OC in 2009. (Highest price county in MSA: OC, will be used in calculation: expected median SFR around $450K), this would drop jumbo conforming to 1.15X median, and put 2010 conforming jumbo around $525K in OC.
Just more downward pressure coming on home prices.
CM
I’m with you on the spinning done by reporters and talking heads. I’ve lived through a few recessions now and chuckle when we are told not to sell our stocks as the DJIA is going over a cliff. It’s true, you shouldn’t sell at the bottom but I’m sure as he** not going to ride it all the way. Mr. Jill and I put about 80% of our 401Ks into safe “cash” funds last fall. I couldn’t convince him to put it all in “cash” funds. As a result, instead of losing 50% of our portfolio we’ve only lost 18% or so.
If the talking heads told people they should sell (rumor has it all the “money” guys on Wall St are in cash now) the stock market would be at 1980 levels.
I don’t listen to much they have to say.
Mrs. TonyE went along with me and we put our 401Ks into the bond fund ( up 1.5% so far ) and then we borrowed as much as possible and put it in our Credit Union on 2 year CDs at 5.25%.
After taxes, we have ensured a 3% return on our 401K via those CDs. The bond fund is just threading water.
I’m a hero. 😉
Well the main stream has finally figured out the next shoe is about to drop.
“Pay option loans could swell foreclosures”
http://www.msnbc.msn.com/id/28035238/
I think I have heard that somewhere before but I just can’t remember where.
You can give a positive message, just not the one that particular audience wants to hear. The positive news in all this is that housing is on its way to becoming affordable again for normal people with normal incomes. Not only that, but the people buying those homes will be able to do it in a financially sustainable way and without making any dubious bets on the future (big salary increase, big and continuous house proce increases), such that only a real and sustained catastrophy will force them to sell or default. That is truly good news, just not for speculators, realtors or mortgage brokers.
There are other advantages too:
Your children will be able to live near you, because they too will be able to afford homes that aren’t in the Mojave Desert.
Businesses that want to move here or grow will be able to get employees more easily. When houses were at insane levels (instead of the current moderately overpriced levels), it was very difficult to get people to move to So Cal.
Lots of things will cost less, since lower wages can be paid. Commercial space will also be cheaper, so everything from groceries to insurance can be a bit cheaper. The biggest differences will be in things primarily produced locally, with a high labor input, and mostly by people who want to be homeowners. To me, that sounds like legal, medical, accounting. Given budget pressures, I think it may include a lot of government jobs. Normally, those have pretty sticky wages. However, there may be enough budget pressure to bring them down. Surely new hires will be paid less, but there won’t be that many new hires for a while.
When the media is reporting that real estate is not an investment and a purchase made for providing shelter, most likely a good time to buy.
Likewise, when we start hearing about the danger in the stock market, and the value of CDs and other insured investments, pick up some stocks.
Until then, proceed with caution and knowledge.
I believe sequentially the next big thing to hit the banks will be credit card write offs. Especially troubling is the observed acceleration from delinquent to uncollectible. We know what is going on here, without the house’s income many people can not service their revolving debt. Without home equity loans and without high credit card limits how is the American consumer going to revive the economy? Any cash that the gov injects will just flow through to debt service, not new spending. This is a problem that we simply cannot spend our way out of. The only solution is for all of us to live with less and create a culture of saving that will eventually allow us to spend again. The only way to save is to have a monthly home cost that is truly affordable. No more $350 per square foot. I pray that the incoming administration has the courage to choose the difficult over the expedient. Yes we can…live within our means if we really try and are willing to give up the credit fuelled consumerism of the last 6 years.
http://online.wsj.com/article/SB122895752803296651.html?mod=wsjcrmain
The inability to borrow and continue the Ponzi Scheme is exactly what is killing the economy right now. Transitioning from a colossal, debt-fueled Ponzi Scheme to a cash-based economy is bound to be painful, particularly with all the income being diverted to debt service. One of the main drags on consumer spending during the mid-90s in California was the overhang of debt service payments from overextended homeowners who bought into the bubble of the late 80s. Eventually incomes caught up, and the economy improved, but the recession of the early 90’s lingered for a long time due to the lack of discretionary income. We now have the same situation, only worse.
The faster movement from delinquent to uncollectible also has to do with card issuers cutting credit limits and refusing to extend more even to many good customers. Some people would just pile up more debt and default later. Others would have ultimately paid off.
A third, and very annoying factor, is that large rises in interest rates for outstanding balances have taken a lot of people from affordable debt load to unaffordable. This is partly because banks are having a hard time getting the loans they need to finance credit card balances. This isn’t a perfect analogy to adjustable rate home loans. Many people with credit card balances didn’t have a contract that said “here is how your interest rate will change in the future with LIBOR”. For credit cards, many of them can change interest rates with 30-90 days notice, for no reason at all.
And we need to take our future in our hands and when we do buy, buy American-made goods instead of stuff made in China.
Right now, today, each of us can do something to help our economy and save jobs here, if we would use the money that we do spend to help ourselves and our neighbors.
Priority 1: start saving
Priority 2: buy American
Priority 3: nag your congressional representatives
yes – my christmas presents this year include gift certificates at my neighborhood restaurants, hardware store and independent bookstore – walmart is doing OK it is your local business people that really need help in this environment. Plus all my local businesses are great members of the community and very helpful – don’t want to lose them.
I think that’s a great idea. I get really frustrated with people who act like buying locally or buying American is misguided, useless or just plain doesn’t matter. I don’t see how it can’t help. You never know if your orders or your purchases were just enough to keep someone’s job at the store or the manufacturer. Plus, the plain thought of being able to do something to help our economy, or that we can at least partly control our economic future, is psychologically very beneficial.
I’ve said for a long time that anyone priced at $750 and higher is going to be forced to re-price to $600k and lower once the $625k limits kick in.
As for the Pollyanna (AKA Kool-Aide) perspective…I’m going to re-use your late 2007 charts showing the progress of sales prices and time to some REALTARDS later this month. Last time I used it the audience scoffed at me for being too negative. It showed a 2010-2011 bottom which was TOO Optimistic. If you want Pollyanna mixed with Schadenfreud try that one on them.
The credit cards companies helped fueled this mess by sending out zero interest rates (teaser rates) to get you to switch over to their card. Once this game was started people went shopping because they could keep on switching credit cards. I know too many people who played this game. Now with rates sky high they are getting caught in the trap. People learned to live with high debt without consquences and one of the reasons why is because they felt rich in their home value. Great ponzi scheme.
Everyone should also realize that the number one marketing tool for the NAR/CAR is to change or enhance the preception of the consumer. It’s sales people, make the customer DESIRE the product at all costs!
Truth hurts. People tend to kill the messenger. Those two things spin the gears of denial.
Nice pick of a song IR. I haven’t listened to that album in too long.
I can’t wait to buy my ocean front home. Drop baby drop!
So show me the pool of families with $150,000 available for a down payment and $200,000 a year in income.
We used to have both. But not any more:-)
You have to add a third requirement: e.g. 1) Household with $150k+ in savings; 2) $200k+ income; and 3) not already mortgaging a home.
When I first moved here it seemed to me everyone had that kind of money and income matter of fact I figured they all were making 250-300 k or more to buy here. I felt totally poor owning everything I had. I once said to a real estate agent I have this much can you help me find a house she said when you find one I’ll do all the paper work and take the 6% –good luck– LOL–Now she wishes I would buy from her—
God forbid she has to work
As usual, another excellent post and certain food for thought. I’d like to share my perspective on the power of denial and it’s effects.
I tend to view the current macro behavior as analogous to substance addiction. Like alcohol or controlled substances, it’s an elevator into hell. People grew addicted to spending and debt and fell prey to the denial that it was unsustainable. I have personal experience with this behavior in my family … I lost my father to alcoholism. All during his struggle, we were hopeful that he would turn the corner and pull himself out of his personal hell. Hope springs eternal. But the healthy mental approach for us was to remain skeptical while reserving our hope. The hardest part about dealing with addiction is facing the harsh reality that it all may come to a crashing and horrible conclusion. I don’t say this lightly, believe me.
The general public understands very little about what is happening partially because the speed at which this is unraveling but also because the main sources of information are doing us the injustice of trying to put a positive spin on this. Worse, they flat out don’t care to report the facts. I’m sure somewhere along the line there is a vested interest to the powers that be that it remain so.
I think our fellow Americans are grasping at straws for any sort of good news even if it means denying the facts because we seem to collectively be incapable of facing reality. Here in So.Cal. it’s even worse because so much around us is a fantasyland born of the California mystique and Hollywood. It’s always sunny here in California … literally and figuratively. We want good news so we can return to our addictive behaviors of living large. It’s clearly hard to imagine a reality in which we will have to live within our means and not everyone can live in mansion and drive brand new European marques.
I agree with a previous poster … the positive spin is that after the pain, housing will again be affordable to the average income earner and a truly sustainable growth pattern for all asset classes will emerge. With luck people may even adopt a healthy skepticism for anything out of Wall Street and not fall prey to these calculated manipulations. That’s MY hope anyway.
“They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years).”
The owner of my house is planning to “build equity” according to the property manager. My biggest worry is being forced to move out when he decides to quit building negative equity each month.
Another thought strikes me just now …. IR posted a few days ago about how the Ponzi scheme of housing finance prematurely exhausted the queue of potential first time buyers thereby breaking the normal cycle.
The same can be said for the economy as a whole. We accelerated the pace of new car sales so now car companies can’t sell a car because the potential buyers already bought. Durable goods like major appliances are in the same boat. The pool was drained when folks rushed to re-do kitchens and upgrade the washer and dryer. We broke the normal cycle and that will, in part, contribute to the long climb out of this downturn.
In my opinion, the recovery will have to come from businesses investing in their infrastructure and the government investing in the rebuilding of our country’s infrastructure. I cannot see how consumer spending will provide the spark required because of the broken trade-up and spending cycle. This recovery will be all about job creation, a return to normal wage appreciation and a realistic and sensible paradigm on returns on investment.
Just my two cents.
You are on a roll today. Two very astute observations.
The story about your father is very sad. My condolences to you.
“The same can be said for the economy as a whole.”
I similarly wonder how many minds adept at abstract thinking were lured into the lucrative finance world during the past decade. The ponzi debt environment bloated our country’s finance system beyond the normal level, certainly drawing talent away from the relatively staid field of engineering.
Now the talk is of spending billions in upgrading the infrastructure. Are the Americans up to the task? How many bean counters will be able to trade in their abacuses for T-squares?
With all due respect, I don’t think I would want the “talent” that managed our financial system designing or building anything.
I saw this at Calculated Risk:
U.S. households pay down debts for first time
http://www.marketwatch.com/news/story/us-households-pay-down-debts/story.aspx?guid={823A97D3-ECA6-4887-A70B-9425366E7473}&dist=msr_2
“…for the first time since at least 1952”
Holy debtors prison batman!
That’s the most positive thing I’ve read all day!
Forget Love. Denial is the most powerful and destructive emotion. When you control it, nothing can fool you. Not even yourself. ; )
But the longer you are in it, the longer it will take to recover.
I wonder how many people have gone from middle class to lower class from this? Most will never recover.
Can anyone expplain to me how a short sale/foreclosure works in conjunction with a HELOC? I know several people who have purchased a house out of state (North Carolina being the most recent example) with HELOC money and then let their current house fall into foreclosure or opt for a short sale. Does the bank investigate what was purchased with the HELOC money and then force a sale of the new house, cars, etc. to make up for the outstanding loan balance? It can’t be that easy to get a free house, can it? What am I missing?
thursday, December 11. 2008
Posted by Karl Denninger at 11:31
(Page 1 of 316, totaling 632 entries) » next page
More Media LIES
Will it ever end?
“Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday. As of Sept. 30, households’ total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report”
No they didn’t.
What really happened is that households defaulted on mortgages at an increasing rate, and in all other categories of debt they are attempting to stay ahead of (what are inevitable) defaults there too by adding to credit card exposure!
Further:
Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government.
Right. The government is accelerating the train – and the mountain is clearly visible and getting closer at an increasing rate of speed.
What a load of crap.
PS: Most of this “new debt” being taken in an insane attempt to prevent the contraction in GDP that must occur will default as well. Have a look at the earlier Ticker from today; the math is what it is, whether people want it to be that way or not.
We have taken a 10% GDP drop in 2000 and turned it into a 20% one in August of 2007. Now, with the actions of the last year and change (especially the last six months) we’ve turned that into a thirty percent GDP correction that must occur (that is, an increase of 50% in SIX MONTHS!) and if we don’t stop this crap it will nearly double again by next June.
What is really GDP? Is GDP the sum $ amount or the sum of the actual goods and services produced. The best case for all the bad loans is for the dollar cost to be realistic to income and hopefull keep production, i.e., goods & service constant. That will not happen with the bailout to stabilize high price home prices and bad investments. The govt. can fool people some times to “create a stable banking system” but can fool people to spend >50% of their real income on housing and debt servicing. The rest of the US is paying for CA, FL, OH, NV and a few other states that had hype housing inflation and then defauting on housing debt. Banks and companies also played the game but renamed the debt swaps and cashed out on a percentage fee and inflated securities. The so called service actually had negative value.
This all reminds me of White Water except on a more massive scale. The people following the examples of their leaders.
I just can’t beleive all of the “Notice of Trustee Sales” in our little HB paper today. I thought the coast was different this time.
Cognative dissonance.