Economic Stimulus?

Will Home Prices Go Up Cause They Always Have

2010-06-05T08:19:00.001-07:00

I hear the argument real estate will now rise because in the long term it has always risen. Now I know prices just don’t rise, just because, there are fundamental reason why that is the case.

During the US bubble it is easy to see one of the largest contributors to home price appreciation was loose lending standards. The loose lending standards meant more money chased a scarce good pushing up prices.

There were also additional fundamental reasons why home prices rose. The economic foundation of the country must be set up to support higher home prices. I think it is best to look at two time periods in the post war. The 1945 to 1981 and 1982 to 2006.

During the first time period the US was a net exporter of goods and services gaining wealth from the rest of the world. The population was young and received few government services. While there was a high marginal federal tax rate there were many deductions leaving the US with a fairly low tax burden. State tax rates were much lower and states like NJ and CT did not even have income taxes.

During the 1982 to 2006 the US became a net importer of goods. Factories across the Midwest closed down as the nation chose to import the goods. Where did the income come from to push up home prices? This is an easy question to answer: the US borrowed the money. Prior to 1982 most people in the country did not have credit card, car loans were not 72 months, and 20% down payments were needed to purchase a home. This all changed during this time period. In the finals stages as the country and individuals ran out of money the government guaranteed the loans as long as there was a home attached to it.

The states that benefitted the most from the change in the US economy were Cal, FL AZ, NV, NY, and NJ. In the NJ and NY region the financial services industry grew in order to help foreign creditors invest in the US. Paul Volker noted financial services contribution to GDP increased from 2% to 6%. The Sand States benefitted as former factory workers flooded to warm weather states and much of the borrowing from the rest of the world was transferred through NY and NJ then invested in homes and hotels in the Sand States.

How does the current state of the economy compare to the previous two periods that allowed for home price appreciation. It appears quite different:

· Consumer credit is declining

· Tax rates are rising

· The population is aging and the young are being asked to support their seniors

· Foreign creditors appear unwilling to lend unless there is a government guarantee

· Regulations being placed on the financial services industry may reduce employment opportunities in the NY and NJ region

The current foundation seems quite different than the economy of the previous 60 years. Prices could rise but it seems unlikely unless there are larger government subsidies or a hyperinflation. Sadly the hyperinflation does not seem out of the realm of possibilities when the policies of Obama, Geithner, and Bernanke are considered.

Mortgage executive = toilet cleaner

2010-01-25T17:01:00.000-08:00

http://online.wsj.com/article/SB20001424052748703405704575015482366919468.html

The same day, former Senderra executive Todd Knight scrambled to add more franchisees to his company that cleans retail stores and day-care centers. His new areas of expertise include stripping and waxing, restroom supplies and construction cleanup. Mr. Knight, 45, says he makes about $180,000 a year, half his peak earnings during a 15-year mortgage career.

"I drive a pickup truck that says 'cleaning' on the side," says Mr. Knight, who left Senderra as its subprime business was slowing. "There were several months where I said: 'I'm cleaning toilets. I used to run 120 people in sales. What have I done here?'

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At long last we know the skills we know where the skills of subprime mortgage employees are valuable. I guess after making enough crap they now need to clean it up.

Judge Judy and the Credit Bubble

2010-01-18T16:14:00.001-08:00

So I watched Judge Judy and the two cases she presided over were:

*One person suing cause they cosigned for a friend's breast enhancement

*One person suing cause their ex girlfriend did not pay back the $4,000 personal loan so she could qualify for a bigger loan on a Mercedes Benz

In case #1 the 20 something girl already had a daughter, was living at home, worked in a coffee shop, and did not have good enough credit to qualify for the plastic surgery loan. Amazingly she did not make one payment on the loan her former friend consigned upon.

In case #2 the boyfriend who makes $24K/year saved $4,000 while not paying his mortgage prior to foreclosure. He then lent it to his 22 year old waitress girlfriend the money so she could qualify for a larger loan on a Mercedes. Amazingly she did not pay him back.

So when you here all the stories about the banks not lending money. Both of these loans were made in 2009. Would you have lent these people money?

Whose getting foreclosed now

2010-01-18T10:50:00.001-08:00

http://hoboken411.com/archives/30508

Glatt’s campaign manager said Wednesday that the house is not Glatt’s, but her mother’s. Campaign Manager Kathy Stack said, “She was helping her parents. This is a remodification of a loan with the bank. What happened is what has happened to 900,000 families across the country. She was helping her mother with a remodification of the loan.” – Hoboken Reporter

Actually Kathy, that’s not quite true. Her mother Elizabeth may live there, but she does not own the house and has not legally owned it for many years, if at all. Elizabeth Glatt’s name is not on the deed nor is it on the $999,900.00 cash mortgage taken out on the house. Elizabeth is a tenant, not an owner. At the time of the loan origination and the missed mortgage payment that triggered the foreclosure, public records show the home was owned by Kimberly Glatt, her husband Jay B. Yacker and sister Stephanie Glatt.

• 12/13/2005: Ownership of 910 CPT transfers from Stephanie Glatt alone to Stephanie and Kimberly Glatt, and Jay Yacker for $1

• 6/1/2006: Kimberly and Stephanie Glatt executed a note securing the sum of $999,900.00. To secure the payment of the note, the Glatt sisters and Yacker executed a mortgage they all signed to secure.

• 10/1/2008: HSBC says the Glatts and Yacker failed to make a payment due on this date and all payments due thereafter, making the loan in default since on or about 11/1/2008.

• 2/04/2009: a deed change is recorded by Hudson County removing Kimberly Glatt and Jay Yacker from the deed, and restoring Stephanie Glatt as sole owner for the sum of $1. Oddly, the deed is dated 1/03/08 but isn’t recorded legally for over a year. Regardless, Kim Glatt and Jay Yacker continue to be responsible for the $999,900.00 mortgage, which doesn’t change despite the $1 deed transaction.

•

Glatt’s husband, Jay Yacker, further explained that the house was sold over a year ago by Glatt’s parents to her sister Stephanie. The parents and Stephanie continued to live in the house. But after Hoboken’s large tax increase, they were unable to make the payments for a few months, and the bank automatically began foreclosure proceedings because they were behind. — HR

Anyone familiar with the Glatt family’s Hoboken assets and wealth would also find it laughable to hear someone claim that they could not possibly muster the cash to pay the tax increase on the family homestead. This is a group that includes a dentist of long standing in town and a Judge who just bought a $3 million 3-bedroom condo on the 21st floor of the W Hotel. They may also have a bridge to sell you. Yacker continues:

Kim Glatt had co-signed for the loan, Yacker said. So she and Stephanie are in court trying to work out how to make the payments back to the bank. Yacker said that once the bank starts foreclosure proceedings, they won’t accept retroactive payments until the situation is worked out legally. Yacker said that they are “a month or two away” from working the situation out, and that the house will be saved. — HR

“There are thousands of Hoboken residents who are working hard every day to make ends meet during these difficult times. They can know with absolute certainty that I can relate to their problems.”

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Ms Glatt please let me remind you that in order to sell such a BS story you need to be in congress. Running for mayor of Hoboken does not excuse such behavior. My two favorite parts of the fable are:

*The multiple non arm length sales, clearly there was no goal of avoiding taxes or trying an end run around the bank.

*That the typical resident will understand the difficulties of owning multiple million dollar homes. I know it is tough for me. LOL

Mortgage Modifications for New Cars

2010-01-18T10:28:00.000-08:00

http://money.cnn.com/2009/12/28/news/economy/loan_modifications_credit_history/index.htm

Jason Axelrod learned that the hard way.

Axelrod, a municipal employee who lives outside Chicago, entered a trial mortgage modification program this spring.

He had not fallen behind in his mortgage, but he was finding it harder to make ends meet after his overtime was cut and his property taxesskyrocketed. Told it would not hurt his coveted 750 score, Axelrod secured a $565 reduction in his monthly payments.

And to his horror, his credit score has plummeted to 644.

"It's completely destroyed my credit," said Axelrod. "If I had known it would affect my score, I would have never entered the program."

Axelrod is already feeling the impact of his lower credit score. He ordered a new car this summer, believing it would come with a lower monthly payment.
It arrived in mid-December.

But because of his newly blemished credit background, his two credit unions turned him down for a car loan. His dealership told him the best he could get is a 12% rate, a hefty hike from the 4.7% he was paying before.

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Lets review, based on a reduction in income Mr Axelrod needed to get a loan modification. Mr Axelrod noticed that after not meeting his originally contracted debt obligation his credit score fell. Why should that affect his score, clearly a new lender would not be interested in knowing Mr Axelrod could not meet his previous obligations, LOL.

Lastly Mr Axelrod is upset because it is hurting his ability to buy a new car. To be fair, he claims it is to reduce his monthly payment. Of course, this neglects the fact that what is lower than a new car payment is no car payment at all. Thats right if Mr Axelrod were to have paid all of his contractual obligations on time he would soon have no car payment and be better off.

This is also another case of why this blog is called Economic Stimulus? as the government pays lenders to give better terms to debtors like Mr Axelrod, savers are helping finance his new car purchase. Is that the America way?

Moral Hazard

2009-11-01T18:06:00.000-08:00

http://money.cnn.com/news/newsfeeds/articles/reuters/MTFH20297_2009-11-01_23-02-05_N01395156.htm

DETROIT (Reuters) - U.S. factory workers at Ford Motor Co overwhelmingly rejected proposed concessions it has said it needs to stay competitive, while union workers in Canada Sunday accepted cuts aimed at retaining jobs.

Why would they ever vote in favor of *giant gasp* a pay freeze. If the company goes BK Obama will negotiate so that ownership of the company is handed over to them.

There were also other comments on how the union was concerned Ford would have "skilled work" done by new hires. Is it really that skilled if it is only identified that way by a contract and anyone off the street can do it?

Pro Sports Stadiums

2009-10-25T09:54:00.000-07:00

http://www.latimes.com/sports/la-sp-nfl-farmer23-2009oct23,0,2970914.column

Gov. Arnold Schwarzenegger signed legislation that will make it easier to build a 75,000-seat football stadium in the city of Industry, by exempting the venue from state environmental laws.

While that doesn't guarantee that the stadium will actually be built -- it's up to an NFL owner to pony up the cash for that -- it does remove the biggest hurdle by far in the entitlement process. The governor's rationale for doing something so dramatic -- in one of the most environmentally sensitive states, no less -- is he's been promised the project will create more than 18,000 jobs. That would be a huge boost to the local economy.

Now, if the Industry stadium creates 18,000 jobs -- a number many experts think is inflated -- and stadium deals in San Diego and the Bay Area create 36,000 more, maybe it's the NFL that winds up solving California's fiscal crisis.

Who wouldn't cheer that?

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Interesting article in the LA Times that confirms the point on what industries the government has selected for success. A few points:

*Cal environmental laws often do not protect the environment but allow labor unions to protest projects prior to the developers meeting their salary demands.

*Job growth now comes from temporary construction projects that have limited employment benefits when completed (no national long term employment benefit if a team relocates)

*Interesting that the governor exempts a pro sports stadium but not other projects that could create long term employment benefits, this should clarify why I said the government favors pro sports and not manufacturing.

No Not Auto

2009-10-25T09:37:00.000-07:00

I have heard a few people tell me in response to the industries I selected as government choice I forgot auto. Auto was a recipient of, "Cash for Clunkers" and well as the GM and Chrysler bailout.

A closer inspection shows those actions are not the same as choosing those industries for success and growth. Hyundai who produces most of their cars offshore was one of the biggest beneficiaries of "Cash for Clunkers". The GM bailout allowed GM to close the only manufacturing plant in the most populous state in the country. The Chrysler bailout handed ownership to the UAW and management to Fiat. Fiat now wants to imports cars that get sold in Dodge dealerships.

Lastly, except for some Southeastern states, most states have decided an auto plant is too dangerous for the environment.

In conclusion, The auto industry has not been selected by the government for success.

Employment and Oversupply

2009-10-25T09:25:00.000-07:00

Economists are puzzled as to why job growth has slowed, citing everything from higher health care costs, to higher productivity, to Chinese currency manipulation.

"The answer is, we don't know," said Tim Bartik, a liberal economist with the Upjohn Institute for Employment Research in Michigan who is proposing a tax credit for employers who hire new workers

Is negative job creation really that puzzling? If stimulus is targeted at oversupplied industries, the best case scenario is jobs do not fall in those industries. The best example is all the "Stimulus" focused on housing. Housing employment has remained flat, overall jobs are down, and housing vacancy rates continue to grow.

Other examples including providing more, "Stimulus" to state and local government. In NJ, the state population has been flat this decade but state government employment has grown. What are all those additional state employees producing?

So in the end if the government spends a few trillion more you can get positive GDP, but please do not be surprised by lower employment.

CIT versus Goldman Sachs

2009-10-20T17:52:00.001-07:00

During the 2008 "Financial Crisis" the media reported the banking system needed to be saved because it was the cardiovascular system of the economy. I think it is interesting to see what is happening to two different banks:

CIT, makes loans to small businesses and many franchisees. They did receive TARP but is not really making loans anymore and is likely headed for bankruptcy. This is the cardiovascular system to small businesses. (BTW I think the country has enough Subway Sub shops, but these loans directly create jobs)

GS, trades stocks, promotes IPOs, and helps fund private equity companies. For example, a private equity company will buy an established company like Outback Steakhouse then try and sell it to another PE company or plan an IPO for a profit. These PE actions create a lot of profit for the banking class but do not create incremental jobs throughout the country (Outback already existed).

CIT got some funding but GS received over $20B directly and indirectly from the government.

If you are a realtor in the Hamptons GS certainly is the cardiovascular system, but if you own a strip mall in Missouri you need CIT. Based on this it is interesting to see which "necessity" received the most government support. Is it a surprise to see unemployment increasing when you review government actions?

Government Desires

2009-10-20T17:39:00.000-07:00

Thinking about what we produce in America, made me realize the nation produces what the government wants the nation to produce. The five industries that receive huge subsidies and are (were) the nation's growing industries are:

-Investment banking

-Professional Sports (Division 1-A college is professional in my book)

-Agriculture

-Housing

-Health Care

Just to list some of the subsidies these industries receive:

-Guaranteed loans from the Federal Reserve

-Professional Sports (When is the last time you heard of an unsubsidized stadium)

-Agriculture (Bob Dole said a farmer can double their income by installing a second mailbox)

-Housing, probably not enough room to list them all, but here are a few: deductions, FNM, FRE, FHA, Federal Reserve Purchases, Tax credits, etc

-Health Care, I read between Medicare, Medicaid, VA, and government employees it is over 50% of all health care spending in the country

The problem is now that all of those industries are oversupplied the government is trying to create demand for their products.

How long can the government choose what the nation creates and create the demand for those products?

Summation

2009-09-13T14:24:00.000-07:00

Just to sum up the last three posts.

There were three people who claim they did nothing wrong while removing the equivalent of a six figure income annually from their So Cal homes. These six figure jobs supported many consumption oriented jobs this decade.

Now the economy no longer has these equity jobs or the retail jobs they created, what will drive the Cal recovery?

Know your motivator

2009-09-13T14:13:00.000-07:00

http://money.cnn.com/galleries/2009/real_estate/0901/gallery.tough_workouts/5.html

____________________________________________

Ron Nash is not someone who's shy about pushing to get what he wants; he's a motivational speaker, headhunter and author of "How to Find Your Dream Job; Even in a Recession."

The lender offered an extremely low rate, 2.8%, which sounded great. The problem was the value of his property has dropped from $840,000 to about $620,000 and the lender would do nothing to reduce the mortgage balance. Nash believed he would be upside-down on his mortgage, owing more than the house was worth, for years.

____________________________________________

CNN has multiple posts on this motivational speaker. They also have a few incorrect facts. The home in question was purchased in 2000 for $398K and then refinanced until Mr Nash owed $840K. Even without adjusting for if this home had been purchased and paid for the "traditional' way, Mr Nash still removed approximately $60K post tax per year from this home. Once again this is equivalent to adding a pre tax six figure job to his family income. I doubt his motivational speaking pays $100K annually.

Mr Nash comes off as a wonderful guy. He continuously borrowed money from his home and then went to the press and claimed it was unacceptable that he should need to pay back the money at a 2.8% APR.

Luxury Market Victims

2009-09-13T13:47:00.000-07:00

http://money.cnn.com/2009/08/07/real_estate/expensive_homes_miss_recovery.fortune/index.htm?postversion=2009080714

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One five-bedroom bungalow by the beach has been hanging over her, at $1.2 million, since January. The owners, who bought the house as a second home, aren't willing to lower the price, but they need to sell it to pay off debt borrowed against it during the boom. In the meantime, they're renting the place out to their own children.

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Well at least in this article the owners admit they borrowed against the home during the boom.

The home was bought Dec 1998 for $725K it is currently listed at the amount needed to pay off accumulated debt, $1.175MM. If the home was purchased with 20% down on a fixed amortizing loan and not refinanced the owners would currently owe about $485K. This means each year for 10 years the owners removed $65,000 post tax dollars from their home versus "traditional" mortgage paydown actions.

In other words just another owner in So Cal that added another $100K pre tax income to their household prior to the boom. How many $100K jobs are there in So Cal? How is the Cal economy going to recover?

Equity Victims?

2009-09-07T18:07:00.000-07:00

In July, A Fortiori, who could not be reached after several attempts, informed the Kempffs that they would not receive a loan modification. A OneWest Bank spokesperson said the Kempffs didn't qualify for a loan modification because the amount they owed on their first mortgage was more than $729,750.

The unpaid amount on the Kempffs' loan is $786,802.59, short of qualifying for a modification by about $60,000.

On the date of auction, Lois Kempff approached the auctioneer with proof of bankruptcy and her property's auction was postponed until Sept. 21. Had the auction proceeded, the beginning bid for their home would have been $433,000. They originally bought their home for $430,000 and estimate that it's now worth about $550,000.

http://www.ocregister.com/articles/kempff-lois-kempffs-2554460-juergen-home

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This is a story about a family that claims they are victims. These victims extracted $350,000 out of their house in six short years from 2002 to 2008. It might actually have only been five years, it is tough to determine from the article. In six years these "victims" extracted $60,000 post tax dollars per year. That is also approximately equal $100,000 pre tax dollars per year. In other words, their home was the third income earner in their household. In fact, their home may have been the primary income earner in the household.

For those who believe economic recovery is just around the corner in Cal consider how many of these income earners need to be added back in to grow the economy.

The other key point is seeing they are not eligible for refinance cause they needed more than the max conforming limit. Fannie and Freddie may be wards of the state, but it is good to see it has not stopped them from making loans that cannot be repaid.

Rant of the day

2009-08-30T07:56:00.000-07:00

If the government needs to bail out homeowners and banks that participated in cash out refi's should the wealth that is withdrawn be treated as income?

Government Salary Freeze

2009-08-28T16:05:00.000-07:00

As the country struggles with the "Great Recession" private sector employees continue to get at best the same salary year over year. Many more private sector employees have taken pay cuts or worse yet, lost their job.

Which brings us to Nevada. The July unemployment rate in Las Vegas was 13.1%. If ever there was a city, county, and state where people are suffering economically, it is Las Vegas, Clark county, and Nevada. Lets take a look to see if government employees are enduring the same hardships.

http://www.lvrj.com/news/52538297.html

The firefighters gave up a cost-of-living increase in the current budget year, but other city unions only agreed to a reduction in that increase. The COLA savings is about $1.5 million.

The new firefighters contract also obligates the city to pay more toward employees’ retirement contributions and health care costs, which leads to an increase of $1.75 million.

In the 2009 budget, firefighter personnel costs were $102.7 million. In 2010, those costs will be $107.2 million, according to a city presentation, an increase of 4.4 percent.

Without the changes in the new contract, those costs would be about 5.3 percent higher, or $108.1 million, according to the presentation.

According to the article the firefighters did give up their cost of living increase in exchange for an even larger payment to their retirement fund. In short, in a city with declining population that is being ravaged by a recession personnel costs still increased 4.4%.

Next time you hear about cuts to the departments are cuts to services, just remember a true salary freeze would protect 4.4% of all services.

Bernanke and the end of the Great Depression

2009-08-26T04:03:00.001-07:00

Congratulations to Ben Bernanke on being reappointed.

Listening to CNBC I was led to believe this a great thing because, "Bernanke is an expert of the Great Depression". Lets just say I am disappointed this "expert" was not able to foresee the "Great Recession". Remember subprime was "contained" several years back.

The other news is Bernanke and others (Krugman) continue to worry about a W shaped recession and a repeat of 1937. In order not to repeat 1937 it is believe that monetary policy must remain loose and there needs to be more fiscal stimulus. Interesting these students do not remember what ended the Great Depression. What ended the Great Depression was WWII. While no one recommends a war to end the recession lets think about what occurred because of WWII. WWII was one of the greatest production and savings events in the history of the country. The saving was due to rationing, but regardless there was savings.

The cures floated for the "Great Recession" have been quite the opposite. The first was the $1,200 stimulus checks under George Bush. Obama followed this with a smaller check in 2009. Bernanke continues to buy up ABS. There was cash for clunkers and there are first time home buyer credits. The FHA and Ginnie Mae continue to lower credit standards. In other words the proposed cure for the Great Recession is government sponsored debt and spending. The opposite of the cure of the Great Depression, production and savings.

Perhaps in order to end the Great Recession we need new Blue Laws not government sponsored debt.

Born on the 23rd of August

2009-08-22T12:06:00.000-07:00

I have been reading multiple blogs on economics and real estate for a while, sometimes even posting comments. I have decided to share my opinions.

I do not have any financial or career goals associated with starting this blog, but rather I am just hoping someone will want to read what I write. I guess thinking anyone will want to read what I write is rather egotistical, but at this point I am joining the crowd.

Speaking of joining the crowd that is basically the impetus behind me starting this blog. In particular the mob mentality that has taken over almost any asset available in the US. These assets include real estate, commodities, and equities. I continue to be dumbfounded that in a country has one of the lowest savings rate in the world that "investors" continue to believe that we are moments away from an economic recovery that will increase prices of houses and commodities to levels that can never be afforded. In short, if anyone believes if you do not buy now you never will be able to should ask themselves, "If no one can pay the higher price, will that higher price ever exist or persist?"