Saturday, July 23, 2011

Pssst; Wanna Buy a Cheap House?

The housing market is the last economic driver in this country.

Why? Because it is the only one they cannot ship offshore (although I am sure plans are in the works for Mexican house builders to ship completed sections north).

And why is that a problem?

Housing has not hit bottom yet, and may not for 3-5 more years.

Housing will soon only have the value that cash money can buy, as lenders will not lend long term on a depreciating asset, will they?

And housing is still depreciating; a fall that will only accelerate when the Federal money from Freddie and Fannie dries up completely.

And the bank owned homes will be the first to fall. A house to the owner is not an asset to be liquidated; it has a value as shelter that creates it's primary value. When the cost of that shelter becomes more than its worth, it becomes a drag on the budget, but never should it be considered an asset.

But the bank has to liquify the asset; they deal in liquidity, not in real estate.

And when the banks own a sizable percentage of the real estate, that liquidation will be costly to home values.

It was the idea of the last ten years to make your home an asset to be liquidated.

Re-fi and take the cash, right? Home Equity lines to pay for the trip to Disney World or pay off the credit cards that were run up at The Gap and Target; turn your Home into CASH.

And then interest rates rise a little, and housing values fall a little, and now your cash cow has dried up. Instead of being able to take another 10k out of your home to pay off the Visa, the bank is calling in your credit limit.

And so the bust began. To many leaks in the credit dike, and not enough fingers. Everybody who was strung out at the end of their credit line went bust.

Which was apparently quite a sizable percentage of the country.

If you have ever seen video of a sinkhole beginning and developing, that is the exact way the housing values are progressing. The houses that seemed safe at first are now starring down the abyss, and the guy next door is planning on taking a hit as well.

Home value is about two things; what someone will pay, and what someone will lend. A bank doesn't care what you are paying for the place; they will tell you what they will lend. if you can make up the difference, then everybody goes home happy. When you can't...

And values fall again.

You want to know when housing has hit bottom?

When the banks stop sitting on piles of liquidity, and start investing in mortgages.

Without Fannie and Freddie (READ: US Taxpayer) to bail them out.

Sunday, July 17, 2011

What Does The FUTURE Hold?

Saying we are screwed doesn't cover the half of it.

This crash should have happened in the 1960's, but was avoided by the Federal Government borrowing money and giving it away, as well as military and space race spending. That money went not just to Federal spending, but state, county and municipal grants to allow those entities, which, in most cases by law must have balanced budgets, to spend with a reckless abandon as well.

When it comes to employment in this country have you ever wonder where all of the jobs are? Right now we are looking at between 9% and 20% unemployment, based on whose figures you quote.

But between 1975 and 2005 how many women entered the workforce? The creation of the two income family also meant the creation of 25% more jobs than were available in the 1960's.

Where were almost all of these jobs created? Government. In 1975 1 person in 10 worked for a government at some level. Today it is closer to 1 in 4.

And government is paying for these jobs with taxes and borrowed money.

In one way I feel sorry for Obama. This crisis has been in the making for 70 years. The standard of living we have enjoyed has, for at least the last 50 years, been a product of government borrowing. And the hot potato that has been passed from administration to administration has now burned Obama's hands.

Well, I'd like to say tough S*%#.

But Obama isn't going to suffer; we are. Until this country can bring the cost of its labor into line with its worth, comparative to the rest of the world, we are not going to come out of this hole.

Wages are already stagnating and dropping. New hires are earning less than what similar positions were paid a year ago, and folks are happy to accept these lower amounts.

Housing prices are still dropping. Talk about a vicious cycle; Lenders aren't lending money on homes because the value of those homes still has not bottomed out, and housing prices are still falling because of the tight lending market. And lenders are slowing foreclosures because they already have massive portfolios of homes, some of which have not been marketed yet because to do so will only depress the market further.

The Feds have to stop borrowing.

But once they do, where will the money come from to pay for local civic improvements, wages for the multiple useless federal entities, or even pay the Social Security benefits seniors have earned?

And once those jobs dry up, what happens to the economy? As a libertarian I am waiting for the day I can celebrate the end of the EPA, the Department of Energy or the Department of Education. Right now would be a good time for ending the EPA; we need the freedom to create jobs that would allow and it would be a way to cut the federal budget.

Except we now have 18,000 more people out of work, defaulting on credit cards and mortgages and collecting unemployment and probably food stamps.

And that is just one example. What about the Department of Education (5,000 employees), or the Department of Energy (110,000 employees); want to see those folks added to the unemployment rolls?


And no.

We didn't get into this hole overnight. It took 70 years of incremental expansion of government to get where we are. And God help us it will take at least 30 years to resolve the mess.

And it ain't gonna be pretty.

Freddie Mac and Fannie Mae need to be severely restricted. They can become a lender of last resort, limited to maybe a guarantor of loans similar to what a VA loan is for veterans, and only if there is a surplus in the federal budget.

That will probably collapse the housing market further. But until housing finds it's bottom, the economy is not going to recover. And adding to the federal debt is just artificially creating a bottom. Government money distorts any market it is in.

The minimum wage needs to rescinded. Even if housing finds a bottom, unless wages are similarly returned to market rates without an artificial floor, jobs cannot return to this country.

Life is going to suck for quite a while.

I'm not looking forward to it.

but I am preparing for it just the same.