July 31, 2007

The History of the Los Angeles County Housing Bubble (2000 – 2007). Proudly a County of a Renting Majority.

Take a long and hard look at the chart above. Sometimes a picture is worth a thousand words or in this case, worth half a million. Many would be housing buyers have felt the angst of never being able to afford a home in Southern California. Anyone sitting on the sidelines for the past seven years has seen the largest historical run-up in housing and probably felt helpless at each consecutive jump in prices. “Housing has gone up 20 percent year over year,” became a monthly media sound bite embedded into the psyche of any California resident. We start out with a median price of $200,000 seven years ago and currently see median home prices of $520,000 in Los Angeles County. This double-digit year over year appreciation started in February of 2001 and didn’t end until April of 2006. That means housing never dropped below 10 percent yearly gains, (sometimes reaching gains of 26.6 percent) for 5 years and 2 months.

Even as we are facing massive meltdowns in the subprime and now prime mortgage arenas, why in the 30 mile zone world is LA housing still going up? Welcome to the world of shady statistics, exotic mortgages, and good old fashion greed.

Lies, Damned Lies, and Statistics

Los Angeles housing has always been relatively expensive in comparison to the rest of the nation. Let me define the word always. When I say always, I mean from 1970 and beyond. Similar to real estate agents saying real estate always goes up. Yet something happened in the last decade that sent housing prices in the Southland into the Al Gore stratosphere. I remember reading a book by Robert Allen called Nothing Down and thought to myself as I read it many years ago, “this sounds fantastic but this is relegated to the late night infomercial circuit with tanned gurus in Hawaiian shirts pimping real estate seminars at 2AM.” Go figure that a few years later, nothing down went mainstream. Not only was nothing down mainstream it became a staple of the housing bubble.

Lending standards took a major dose of laxatives and let out a major wave of dirty mortgages. Hence, the name “toxic” loans we now hear. At least that makes sense because these mortgage products were full of you know what. In addition, all the stats used by mortgage lenders incorporated skewed statistics and made up incomes. If you think stated income is ridiculous then you have not lived in Los Angeles. Stated income was the future baby! Why does the bank need to know how much I make? Why are they nosy and trying to dig into my business? When I say I make $500,000 I really mean it even though I have no idea where my W2s are. I’m not even sure if I work but we’ll let Wall Street worry about that. It was an implicit agreement of you sign here, and we’ll put you into this over inflated home. If people on the streets were conjuring up their incomes, what about the companies providing these people the mortgages? Well now, we are taking a deeper look at what really went on and opening the Christmas gift from hell. It turns out that Nothing Down doesn’t bode well in the mortgage game. Why is that? People will generally fight like riled up hyenas if they have skin in the game. If you had to put 20 percent down on a piece of real estate you will do all you can before having the house foreclosed. However, with zero down most folks are more than happy to walk away from their massive mortgage obligations. Heck, the lending institutions are doing this right now in their 11th hour. We all know that every large metro area is declining and facing massive jumps in foreclosures.

Wacky Median is Still Going Up

No negative housing information seems to make a dent on the resilient LA median price index. The prices keep going up. Again, the devil is in the details. Sales volume has dropped off a cliff and has been in free fall mode for over a year. Yet a home that doesn’t sell cannot be factored into the overall sales data. Therefore, what we see is homes in prime areas such as Beverly Hills, Brentwood, Santa Monica, and Palos Verdes skew prices even higher because these places are still selling. Lower priced homes aren’t selling therefore they are not included in the overall sample size. And the sales sample size is shrinking as we speak.

Then we have homeowners addicted to five years of double-digit gains unable to reconcile that they can no longer sell their home for peak prices. They feel entitled to peak prices because they say so. Can it be that housing prices were inflated by exotic mortgages and general greed? Why else would people be so eager to jump into a home that they could rent for half the price? The new paradigm of housing included double-digit appreciation until the end of time. Well the end of the time arrived in summer 2007.

Why Did Los Angeles Go Up and Other Areas Did not?

This may come as a shock to you but we have sun here in Southern California. Actually, we own the exclusive rights to it. Therefore, prospective buyers had to pay a sunshine tax to live here. Florida has sun too hence their run-up in real estate. This may seem simplistic but most metro areas in the US are now overpriced. Some are overpriced by 10 percent and some are overpriced by 50 percent. LA wasn’t the only place with a mad run-up in prices.

We also have a very mobile population. The majority of folks spend a good portion of their day on the 5, 10, 210, 405, or any other freeway you can think of. A very small portion of people see housing as a long-term investment here. The general culture does not think of buying a home, raising a family, and retiring all in one place. In fact, we have a culture where you play the Russian matryoshka doll game; you know where each little doll is nestled in a larger doll? Well people purchase homes here to trade up. Each consecutive purchase brings you a larger home with an equally larger mortgage. Each added member to the family is reason to purchase a larger car on a new lease. This is how many families operate in the Southland.

Yet the squeeze is being put on the middle-class of the state. Rising gas prices, car costs, healthcare, food, utilities, and housing all cut into the operating budget of the family. Like the couple earning $130,000 and lost their home to foreclosure, many families are realizing they are suffocating on servicing their debt. The grim fact may hit many families like a ton of bricks that they were using credit to stay afloat. Now that credit is becoming more expensive to obtain, they are realizing the true nature of their spending habits. Many families are also feeling the pinch of a declining dollar. I’m not sure if John and Susie Public are too concerned about a falling dollar or inflation. You just hear them ramble about, “damn, prices are always going up!” I’m hoping that people start asking the next question and look into the reason prices are going up. And many folks are realizing that their paycheck isn’t keeping up with the cost of living. Slowly the public is being taxed via inflation and a falling dollar. The only person running for president that I’ve heard mention anything about these economic issues is Ron Paul.

Los Angeles is a different beast. We have 88 cities in the county. We have 10,000,000+ people living in a relatively small area. There are 3,339,763 housing units. The median income for a household in the county is $42,189, and the median income for a family is $46,452. In addition, the homeownership rate is 47.9 percent. So in fact, Los Angeles County has a renting majority population. But if you want to own, we have some wonderful Real Homes of Genius eager for a new owner.

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July 30, 2007

American Home Mortgage Halts Trading Pending News: Market Cap Down $221+ Million Over the Weekend. SoCal Still in Wonderland.

According to CNN, American Home Mortgage (AHM) is another company facing issues regarding the subprime fall out:

“NEW YORK (Reuters) -- American Home Mortgage Investment Corp. shares sank on Monday after the home loan provider announced "major" writedowns, delayed a dividend and said lenders were demanding it put up more cash.

Shares of American Home were down 39 percent, falling in pre-market trading to $6.39 from Friday's close of $10.47. On Friday the shares hit their lowest level since April 2003. Trading on Monday was halted for news pending.”

The beating AHM is taking is predominantly on their announcement to delay dividends on their stock. Guess when they announced this. Late Friday! Since AHM knew that if the announcement came any earlier, it would take a beat down like any of the housing related stocks last week. So they let it fester over the weekend and as of this posting, trading has halted on further “news.” But how much market cap was lost over the weekend? We always hear that massive corrections cannot occur over night but really in terms of money, how much was lost? Well let us take a look at some details regarding the company:

American Home Mortgage

Shares Outstanding: 54.28M

Price Per Share on Friday: $10.47

Current Pre-Market Share Price: $6.39

Friday Market Cap: $568,290,000

Pre-Market Cap: $346,849,000

Down in Two Days: $221,441,000

Here’s the thing. All things real estate can go down fast and dirty. Keep in mind this is only one example of many companies. The fact of the matter here is that this company has a market cap of half a billion dollars and is rather large. The disturbing part, as highlighted by the CNN article is you have a company as of the end of March, that had $4.01 billion in “warehouse” credit lines. It is becoming apparent that the subprime contagion is spreading all across the housing sectors.

In reality companies are valued on multiple fronts including their potential earnings or cash flow. For example, say you and I own a company with $40,000 in assets. We decide that we will only have two owners (shareholders) and have two shares outstanding. Therefore each of us would have a “stock” of $20,000 in the company assuming we have $0 in liabilities. Say we expect to earn $100,000 next year in revenue. Obviously the share price of $20,000 will jump up because of the projected earning potential. But what happens should we have negative cash flow? That is what is occurring with these companies but on a larger scale. Of course this is a rudimentary explanation but many of these companies are in similar situations like home owners facing massive resets yet have negative cash flow that they didn’t expect. In addition, your underlying asset gets impacted by negative growth potential. The market is calling it liquidity issues but ultimately it boils down to being unable to pay your bills.

Issues on the Home Front

And then we have stories like this one submitted by a reader of a Ventura Country couple trying to sell their home at bubblicious prices. From the Ventura County Star:

“The Conroys might have aimed high at a time when the market is soft. The most comparable home with similar square footage in the Golf Course Villas had an asking price of $759,000 and sold for $773,500 in October, said Joe Virnig, president of Ventura County Coastal Association of Realtors. He said he believes the same pricing strategy would have been successful for the Conroys.

Doughtery thinks the weekend's event will likely expedite the sale, but not without a cost.

"I think if you want to unload a property for less than the actual value, then this is the way to go," he said.

Still, Virnig warns there must be a catch to this type of marketing tactic, and calls it a "gimmick" to get people to see the house. It's the first time he's seen such a strategy in Ventura County.

"I have trouble believing they'd honor the $594,000 price if that's all they get," he said. "I see all kinds of problems with real estate agents adopting these tactics. I'm not about to adopt it — it's fraught with risk. Until the inspection period is up, it would be difficult to be sure that you didn't end up buying a problem."

You should really examine the entire article but the fact of the matter is we have people stuck on housing bubble yesteryear prices. They are asking $849,000 when a comparable home sold last October for $773,500. Even the fact that they are "entertaining" offers above $594,000, they are still in the belief that they can yield top prices from their rhetoric. In addition, I’m not sure if they are aware, we are in full out suprime and Alt-A meltdown mode therefore limiting access to whacky LaLa land credit. So the pool of buyers is limited in comparison to October of last year. In fact, standards didn’t get tighter until Q1 of this year. So they may look at the $773,500 price and laugh at it, but they’d be lucky to even get that. And the scary part of the article is that there are many folks still looking to jump into the game. Thankfully, I’m sure many of these would be buyers are having issues getting mortgages since they probably don’t have a sufficient down payment and Wall Street is done with the creative financing game. Even in today’s absurd market, all you need is 5 to 10 percent to get top notch mortgage products and rates. Yet with our negative savings rate, this is obviously too much to ask.

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July 28, 2007

Second Quarter Housing All-Stars Recap: Subprime closes shop, Prime Loans Gone Wild, and the Future of Housing.

When Darth Vadar lured unsuspecting folks to the dark side, he was actually referring to the sinister and destructive nature of lax credit. For some reason, the business world and the mainstream media believed that this economy built on recycling credit was going to last forever. Even listening to the numerous housing shows, you would think that housing would always be the number one greatest investment on the face of the planet. Even today, as I was heading over to an appointment, I was listening to a prominent radio show on FM regarding real estate and the host is still in wonderland. One of the female co-host actually told a caller this:

“Right now is the perfect time to buy. Because even if real estate goes down, in 3 to 5 years you will have massive equity.”

I almost punched my stereo by this financially retarded advice. For one, the caller had no down payment. And another point, if real estate is going down and he comes in with little money, how is he going to have “massive equity” in the home? This was a case and point of so called real estate experts purporting short-term thinking and failing to look at the macro scope of this credit bubble. And then, I was watching a local television station this week discuss the record foreclosures here in California and they told the audience this nugget of wisdom:

“If you are having a hard time making your payment and have equity, refinance your house and get some money out. This will keep you afloat for a while longer. If this doesn’t do it, go ahead and cash advance on your credit cards to keep your mortgage payments.”

Am I really hearing and seeing this? Did I eat some kind of imported food tainted with hallucinogenic mushrooms? This “advice” is wrong on so many levels. For one, tapping out equity to keep a payment you clearly cannot afford is financial suicide. What you need to do is evaluate whether you need to sell your home or not. And tapping into credit cards as a short-term carryover loan to pay your mortgage is flat out stupid. You think these folks are going to pay the bank before they purchase food and keep their utilities on? The inflated sense of self for some of these experts makes you think that we are seeing miniature Napoleons running around.

In this article we will examine three major converging factors that bursted the housing bubble. First, we will examine the end of subprime lending. Second, we will look at the cancerous spread of horrible loans into the prime sector. Finally, as noted by last week's tremendous drop in the stock market we will examine what will happen now that the bubble has fully burst and is spilling green toxic sewage credit all over the country.

Subprime Is Out to Lunch. Forever.

We witnessed weakness in the markets with many subprime lenders closing shop. We are now out over 100+ major players in the subprime market due to horrible loans and collapsing on their own weight. As the subprime market collapsed earlier this year, the market kept on chugging along because of the belief that this damage was contained to one sector. Clearly as the quarter progressed this was not the case. And how could it be any different? The housing market stalled and folks couldn’t play the musical chair game of refinancing. This was noted in the massive drop in mortgage equity withdrawals. Like a WWE wrestler, the market needed to tap out.

In addition, we realized that Wall Street had enough of subprime loans. Principally because hedge funds realized that the underlying assets may be a tiny bit overpriced. Oh really? I’m reminded of the story of some of the large hedge funds homes being inhabited by raccoons and roaming free range hogs. I wonder if the hogs went 2/28 on the property? The problem stemmed from long distant investors buying up properties sight unseen on inflated appraisals. Now that the market is scrutinizing what the collateral was, it does not like what it sees.

Later in the quarter, we have the end of the 2/28 teaser mortgages. A mainstay of the industry during boom times. No longer are folks able to squeeze into over priced places on these ridiculous loans. In Southern California we had a peak originating month in August of 2005. Perfect timing for next month where many loans will reset and folks are no longer able to refinance into additional loans. The problem is also happening where appraisers are now seeing homes drop in price. No longer will most banks give you a HELOC simply because you have a pulse and a home in an over inflated metro area. As in the last article, foreclosures are booming to the next level. Not only that, as highlighted in detail, people making $130,000 a year are also having problems covering their monthly nut.

It is clear that subprime is now down and out. But prime was protected right? Well this leads us into the end of Q2 and the infection of the prime sector.

Prime USDA Mortgages

Countrywide announced that it has faced one of its worst quarters. Not only that, the CEO Mozilo stated that he didn’t see housing coming back until 2009. Talk about a vote of confidence. We also saw the problems at Bear Sterns with prime loans going bad in the so-called Alt-A tranches. That is, financially risky loans given out to credit worthy customers. But again, simply because you have a 750 FICO doesn’t mean you can make the payments on a $600,000 mortgage unless you have income to back up your score. The issue with the last few years is income didn’t even matter. As I discussed many months ago, a study conducted by the LA Times found that stated income borrowers over stated their income 60 percent of the time. Out of these, 50 percent overstated their income by 50 percent. This in conjunction with mortgage resets is showing who has been swimming in Huntington Beach without any trousers now that the tide is going out.

So the market got extremely spooked. That is why last week we saw almost a 5% retrenchment of the overall stock market. And not only here in the US did markets suffer, but markets in Europe as well since they decided to jump into the worldwide credit orgy. Alt-A is going to face some serious pain. At the peak in California, 73 percent of all originated loans were adjustable. Now that rates are resetting in the face of housing depreciation home owners are facing something they didn’t expect. Being stuck. Stuck like a stick in the mud. Yet you hear housing pundits sound off asinine quotes like the two mainstream folks above, and you wonder why this bubble is bursting? Somehow they feel that everyone is living in their world of perpetual credit expansion. Many of the prime banks, hedge funds, and Wall Street drank this Kool Aid for many years. But the party is now finished. Eventually the music stops and the piper needs to be paid. Last week the overall stock market, which keep in mind supposedly tracks the health of the overall US market, went down with a three hit combination. And this is in the face of good GDP numbers! But the numbers are a farce because many are realizing that the sustained growth was predicated on us buying consumption goods on credit therefore inflating the health of the economy. Doubt me? Go to Target, Wal-Mart, Trader Joes, Ralphs, or the mall and count how many folks actually pay in cash or check.

So Now what that Housing is Done?

If you don’t want to take my word for it, you can listen to Mozilo who is head honcho of the mortgage giant Countrywide. He doesn’t see this “ship” turning around until 2009. I get a kick out of housing pundits stating things like this from the same housing radio show:

“Okay. Enough of the housing bubble. The correction is over. This is a perfect time to find a good deal. You will have equity in your home. Housing always goes up. We may see a small correction but once it goes up, it will go up fast like the last few years!”

Correction? We’ve been in a decade long boom and they think two quarters is a correction? We are in for multiple years of housing being a horrible overall investment. This assumption that housing goes up massively in good times and only retracts baby steps in bad times is fundamentally wrong and is clouded by their own judgment. To quote Upton Sinclair, “It is difficult to get a man to understand something when his job depends on not understanding it.” Clearly they are seeing what they want to see because the implication would imply challenging times for them should the market go down. You can’t blame them for this faulty analysis. However, they are fundamentally wrong and demonstrate their lack of macroeconomic policy each time they open their mouths.

On Friday we were left with a taste of things to come. An announcement that Fannie Mae and Freddie Mac may face losses of $4.7 billion in the subprime market. These government sponsored entities are the white elephants in the room in our over mortgaged 3/2 stucco home. As we were too busy looking at subprime imploding and Alt-A tranches getting hammered, most mainstream folks failed to examine the cancerous growth of this credit bubble. Now it is reaching the absolute nucleus of the US housing market. These two behemoths should they face a problem have the potential of bringing down the entire market significantly. Last week we dropped almost 5 percent across all major markets because of Countrywide and a fear of credit being shut off. Just wait if issues at the two GSEs are as bad as many think.

The housing and credit bubble lasted too long. There is tremendous excess that needs to be washed out. The market is in for a long and prolonged downturn. What you need to look out for is snake oil salesmen trying to tell you that we’ve already had our correction and it is time to buy. It is comical to think that many months ago the former NAR chief David Lereah had called the bottom, multiple times. Maybe we have a differing view on what constitutes a bottom.

Do you think Fannie Mae and Freddie Mac are the next to show cracks due to this housing market?

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July 26, 2007

Housing Minsky Moment: 3 Factors. Prime Contagion, Record Foreclosures, and Publicity.

This week witnessed the final nail in the housing bubble coffin. We have reached what seems to be the Minsky moment for the housing market. Named after the US economist Hyman Minsky, the idea holds that over long periods of economic stability leverage tends to grow in predictable stages. This economic stability leads to a fertile environment sprouting trunks of easy credit access with little perceived risk. However, as the growth continues there seems to be a movement from moderate lending, risky lending, and finally outright irresponsible Ponzi like lending. With 100+ subprime lenders imploding on their own convoluted mortgages, the housing market is like a fish out of water gasping for life and clearly in the last stage of the lending cycle. The first event occurred on Tuesday when the gargantuan mortgage lender, Countrywide Financial announced dismal second quarter results. They announced that second quarter profits shrank by a third due to growing delinquencies and get this, creditworthy borrowers defaulting. The talk early in the year about subprime being contained turns out to be an absolute ruse. Now we have prime mortgage borrowers swept up in the housing slump. Yet the bigger news came from Countrywide’s CEO Mozilo, saying that he does not see housing recovering until 2009. Imagine that.

Then we have the inability of the mainstream news media to inform us regarding critical issues. Instead, we have the morning news plastered with Lohan up to her usual debauchery and athletes gone wild. As a matter of fact, while California set a new record in the foreclosure department, the mainstream media felt this only warranted a footnote at the end of the newscast. We don’t hear much about Iraq anymore. And what of the collapsing dollar? I think I hear Nero Fiddling while something burns.

In this article we’ll examine three critical factors that propelled housing into its public Minsky moment; prime contagion, record number of foreclosures, and negative publicity.

Prime Contagion

Mozilo likened the housing market to a gigantic ship needing to turn in the ocean. It will take time was his underlying point. I like to think of the housing market more like a NASA mortgage rocket with no turning back. Have you ever tried turning back a rocket-propelled vessel? His statement seems to offer some hope that housing will return even though he unloaded millions in his company stock. Maybe he forgot to mention that the ship he was referencing was the Titanic. Either way, housing is passed the shaky ground stage. I’ve shown countless examples in our Real Homes of Genius series that clearly highlights an outrageous bubble housing psychology. We also discussed a few months back the subprime implosion as credit suddenly tightened and subprime lenders started dropping like moths heading toward the light. In fact, I felt this was the watershed event and would set the tone for the summer.

Yet glorious housing bull pundits at this time championed the amazing summer rebound and the silo mentality of containing the subprime debacle. Ignoring rising inventory, $1 trillion in mortgage resets, and a stagnant market they decided to jump on the housing Pollyanna bandwagon. After all, this summer was housing's last shot to demonstrate continued bubble resilience. Unfortunately, this summer is only the beginning of a very difficult downturn in the housing market and most likely the overall economy. The market has ballooned beyond any economic model of sustainability. I discussed the pseudo $5 trillion in wealth created by this housing bubble and all credit linked to it. How much of this wealth will disappear is yet to be seen.

Yet now we are realizing that prime loans are also taking a hit. No longer is this implosion contained to one segment of the housing market. For a large part, we have this entitlement mentality of folks thinking their homes are worth more than what they truly are. Say you bought in 1997 for $200,000. Now your home is worth $600,000. This is a very typical scenario in California. You’d feel $400,000 richer simply by living in your home. And many folks had this wealth effect. In fact, they converted their homes into ATM machines and used mortgage equity withdrawals to prop the economy. Unfortunately, many folks are now realizing that some appraisals may be bubblicious in their estimates. Say this given home drops to $400,000 in a few years. Nothing is lost, in fact they are “up” $200,000 but the psychology and perceived loss does make people feel poorer. When people feel poorer, they spend less. In our economy based on 70 percent consumption, that equals a recession. Clearly, this is where we are heading. We have scheduled mortgage adjustments set for 2008 and 2009 to the tune of approximately $2 trillion:

This housing market followed no economic rules and like the Minsky moments of past, greed and irresponsible credit will once again collapse another bubble. Chalk it up to history repeating itself. Which leads us to the historical moment set in California.

Record Foreclosures

Southern California has reached a record number of foreclosures. That is correct, we are swimming in uncharted territory. Notice of defaults are quickly approaching record territory as well. To be exact we are off by 102 homes, which by the time this article is posted, we will surpass. So we can say that we have record numbers of Notice of Defaults and foreclosures. Take a look at the chart below and see if you can spot the trend in California:

The interesting tidbit of this information is NODs are turning over and going into foreclosure. If anything, you can consider the NODs as a canary in the mine; and if we are to read the data correctly we are in for some massive foreclosures. As stated by DataQuick:

Most of the loans that went into default last quarter were originated between July 2005 and August 2006. The median age was 16 months. Loan originations peaked in August 2005. The use of adjustable-rate mortgages for primary purchase home loans peaked at 77.8% in May 2005 and has since fallen.”

Now if you examine the rate reset chart in conjunction with the foreclosure data, there really isn’t anything stopping this train. Over 75 percent of loans originated in August 2005 were adjustable-rate mortgages. Given the hot product was 2/28 teaser suicide loans, what special date are we approaching? That is right, August 2007 where a massive batch of these loans will be resetting in a declining market with higher rates. So even if these folks want to refinance, they will be hit by higher rates and a larger payment.

Amazingly, these loans are also fairly new. With a median age of 16 months. Clearly the problem here is people jumping into homes they cannot afford by horrible mortgage products. In addition, the rate of default on second mortgages is also skyrocketing. This would seem obvious since missing the payment on the primary loan implies you are not paying your second. But guess what? In the midst of all this there is good news. The median price for a home keeps on going up! We won’t go into exposing the inaccuracy of using a tiny sample size of higher priced homes skewing overall market stats. We want to leave you with one piece of good housing news for the day.

Negative Publicity

This may turn out to be the only good news left for housing. The media is fickle and suffers from long-term memory loss. Even a year ago, we were reading about stories of people making thousands in real estate transactions. People were racing over like NASCAR drivers ready to become brokers and agents as reflected by the number of licenses issued by the Department of Real Estate here in California. Now, you are more likely to find negative housing information permeating the media machine. And don’t you find this odd in a state where housing is still flirting with a median price of $600,000? If the media dug deeper into this implication and did constructive journalism, it would be clear that we are in a full fledged housing bubble bursting. Why are they afraid to come out and simply admit what the data is suggesting? That housing is in for a major correction and housing prices grew on the back of irresponsible lending and greed. The key ingredients from any historical bubble are present again.

The issue is the real estate industry employs countless people, pays high amounts of money for advertising, and has many politicians bought. So of course they carry clout. But this will only get you so far. You can only fool the market for so long. It is becoming apparent that this system will collapse on its own weight. In a way we haven’t felt the ramifications of what is to come. We are only getting a sneak peak of the real housing bear market. I was looking at old LA Times articles and the positive rhetoric from housing peak to negative bubble chicken little print took about 3 to 4 years. So given this past reference, you can expect a bottom somewhere in 2009 or 2010. Employment numbers still do not accurately reflect the coming job losses we will face. Our economy was based on this bubble via credit, mortgage equity withdrawals, trading houses up like baseball cards, and a cultural neurosis on all things housing.

When do you think we will reach a housing bottom?

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July 24, 2007

Real Homes of Genius: Today we Salute you Lakewood. A Short Sale with a $100,000+ Loss.

I realize that most Real Homes of Genius are featured in lower income areas, yet sellers still command $400,000+ for a run down home in a questionable neighborhood. Call it a symptom of bubbleland hallucinations in the mental asylum of the housing bubble. The purpose of these posts is to highlight the magnitude of the housing bubble when people still doubt we even had a bubble to begin with. Moreover, these calculations should give you an idea of how to run your own analysis and figure out the value of a home with financial facts (as opposed to bubble fiction). The housing bubble is a piece of the larger global credit bubble. Homes are overpriced in practically all of Southern California; from high crime areas to posh and prime neighborhoods. Like the couple that earned $130,000 a year, drove two Mercedes, and still lost their home I want to break the stereotype that only poor people lose their homes to foreclosure. Today we’ll feature a home in a middle-income suburb of Southern California. Today we salute you Lakewood with our Real Homes of Genius Award.

This enormous 816 square foot home has 2 bedrooms and 1 large bath to entertain guest. The agent tells us that the kitchen is completely remodeled with granite countertops. Granite countertops of course, are the ultimate status symbol of home prowess. Consider it the virility of a strong homeowner. Otherwise, you are ten steps down on the housing evolution ladder. This place also has “custom paint colors” like the low riders you see jumping on hydraulics on Figueroa Avenue. Absolutely riveting. This place is so hot, it has been on the market for 6 months. Too hot to touch. But let us dig into the history of what happened here.

This home is so great, that it sold twice in one year:

Sale History

08/31/2006: $500,000

03/17/2006: $489,000

The last buyer enjoyed the place so much they decided to hand it right back to the bank in 6 months. The bank, looking at sophisticated market analysis of the area decided to put the home back on the market for $500,000. This price was arrived at by the “latest greater fool theory” of appraisal or LGFT for short. Looking at the LGFT, the bank figured they would easily recoup their money. Forget about the subprime implosion or mounting inventory, they put on their rosy colored glasses and saw the market according to them. Here is the pricing action on this great home:

Price Reduced: 04/24/07 -- $499,900 to $485,000
Price Reduced: 05/27/07 -- $485,000 to $470,000
Price Reduced: 07/11/07 -- $470,000 to $450,000
Price Reduced: 07/18/07 -- $450,000 to $400,000

After a month on the market, the bank decided to reduce the price by $14,900. This certainly would generate some interest. May goes by and still no buyers. So the bank decides to lower the price by another $15,000. What is going on the bank wonders? This isn’t the housing market of 2001-2006. The bank decides that it will wait for the fabled summer housing Easter bunny before reducing prices again. Early July and no buyers are found for this place. The bank decides to get more aggressive and drops the price by $20,000. Nothing. Now something happens at this point. Either the bank is getting nervous about “bubble bursting” talk or is desperately ready to unload the home. Only a week after the $20,000 drop the bank goes down another $50,000! Holy crap! In one week this home went from $470,000 to $400,000. Now that is what I call pricing a home to sell.

As you’ll notice from the short sale count on this site, the number is growing daily. All of a sudden, risky interest-only-no-money-down-exotic loans are unavailable to customers. Someone will have to come in with 3 to 5 percent at a minimum to buy this place. Believe it or not, this minor adjustment to the mortgage market is enough to collapse the bubble. I’m not sure what constitutes a crash but losing a $100,000+ in 6 months is pretty significant. A 20 percent drop in 6 months is definitely a bubble bursting. This is a preview of things to come since we are only in the first stages of rate resets, growing inventory, declining prices, and tighter credit. Take a look at the market demographics for Lakewood:

Average Annual Household Income: $69,279

Median Mortgage Debt: $43,631

Median Net Worth: $47,348

What does the data above tell us? For one, the median mortgage debt is low meaning a bulk of the people that currently own homes in the city bought prior to this decade long bubblemania. Somehow I doubt the previous two buyers on this place came in with 10 or 20 percent down. Next, you’ll notice household income isn’t anywhere near the amount to support $500,000 homes. Since doing a monthly balance sheet is so useful (too bad many folks didn’t spend 10 minutes doing this before signing a mortgage) we’ll run the numbers here if we were to buy this Real Homes of Genius at the current $400,000 and earned the current median income of the area. Time to bust out the financial calculator and do some housing magic!

Monthly Gross Income: $5,773

Monthly Net Income: $4,526 (filing as married couple with 2 allowances)

Monthly Home Payment (PITI) = $2,817 (5% down and market rate of 6.5% on 30 year fixed)

Monthly Auto Fuel Cost: $350 (average for 2 vehicle households)

Monthly Auto Insurance: $120

Monthly Auto Payment: $500 (assuming modest car loans)

Monthly Food Budget: $400 (moderate shopping budget)

Monthly Disposable income: $339

Keep in mind we are not factoring in cell phone costs, utilities, cable, healthcare, and pretty much anything else you pay on a monthly basis. As you can see, even with the $100,000 reduction this home will still consume 62 percent of the family’s net income. Let us do a bit more research on the rental market for this area. After looking at rental data, the median rental rate for a 2 bedroom place in the 800 to 900 square foot range in Lakewood is $1,400; or 50 percent below the full mortgage, taxes, and insurance payment on this home should we purchase it. If this home is overpriced at $400,000 what in the world were people thinking buying it at $489,000 and $500,000?

When you run the numbers, you realize we are in some other twilight dimension of housing here in California. Keep in mind this home is massively “under priced” for this area which has a median home value of $505,000 according to the latest housing reports.

Today we salute you Lakewood with our Real Homes of Genius Award.

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July 21, 2007

The Foreclosure Story: What does the Process Look Like?

We all know that foreclosures are on the rise throughout the nation. Most people realize that a foreclosure means that you will lose your home. But how does this process look like? In reality, the foreclosure process is a drawn out and lengthy ordeal. It is a gut wrenching and personal nightmare for most folks. So this article is a story about a couple. A couple who is the poster representation of the housing boom and now bust. In this article, we will examine their profession, income, and monthly budget. Amazingly, folks are very upfront when they are making lots of money but go into clandestine mode when they are having financial difficulties. Below is the couple’s profile:
Joe and Mary
Ages: 29 and 28
Professions: Joe - Senior Account Executive (lender), Mary - Real Estate Agent
Location: Orange County
Yearly Income Combined: $130,000 Gross
Net Monthly Income (After Taxes): $8,200
Automobiles: Mercedes E350 Sedan ($599/33 month Lease), GL 450 Suv Purchase ($56,000)
Monthly Auto Fuel Cost (Filling up Once Per Week): $350
Home Purchase: Costa Mesa 4/2 Home, Bought Late 2004 for $675,000
Credit Card Debt: $25,000
Monthly Food Budget (Including Dining Out): $700
So this should give you a nice snapshot of the couple. Since they were sophisticated investors in the know, they decided to jump into the home with a 2/28 loan, interest only with no money down. After all, someone making $130,000 a year can clearly sustain pretty much anything right? And as we all know, no money down was no longer simply a thing of late night infomercials but a mainstream way of buying a home. Here is the monthly budget below with the teaser rate loan (they had it for 2.75%):
2004 Budget
House Payment (PITI – at 2.75% interest only/2 years): $2,249
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $5,198
Monthly Net: $8,200
Disposable income: $3,002
Keep in mind we are not factoring in medical insurance, cell phone cost, utility bills, retirement accounts, and many other items. These are things that I am aware regarding their budget since I was privy to the information. Well, more like them showing off to me, but I made mental notes on these items as I would with a past client showing me their monthly budget. So even with that said, $3,002 a month in disposable income is a pretty nice chunk of change to pay the remaining monthly items. But again, this was a teaser 2/28 loan. Unfortunately, they didn’t factor in one of them losing their job, a rate reset, and a slumping housing market. Let us take a look at the late 2006 monthly budget:
2006 Budget
House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $7,911
Monthly Net: $8,200
Disposable income: $289
Suddenly the jump in the rate creates a crunch on the household income. Keep in mind the above still doesn’t factor in other monthly cost. In addition, this was in late 2006 before, Joe lost his Senior Account job because the company went under. They were already feeling the pinch since the housing industry was already showing signs of weakness and their income being variable with commissions, was also taking a hit. Joe jumped to another mortgage outfit but they were only able to give him $30,000 a year base plus any commissions. Of course with the tightening of the housing market business is not going so well since both of their careers are tied directly to the housing industry. Their combined income is no longer $130,000 a year but approximately $80,000 a year. So let us run the numbers again with the new household income:
2007 Budget
House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $7,911
Monthly Net: $5,804
Disposable income: $-2,107
Now we are running massive monthly budget deficits. It may come to a shock to many people that a household earning $130,000 a year actually may have financial difficulties. But looking above, you can see how easy and quickly someone can go into financial ruin. Statistically, this couple was in the top 10 percent of household incomes in the country. Yet they spent way beyond their means. California living is very expensive. You’ll also notice that being in the industry they are in, they felt that they needed symbols of affluence to keep up with the Joneses. So now that you can see that not only folks that make $14,000 a year purchasing $720,000 go into mortgage trouble, even those that are considered the most affluent also have financial problems. The next phase of this case study is the foreclosure process.

How Does Foreclosure Really Look Like?
Foreclosure has been a somewhat unheard of novel thing in California for the past decade. Any homeowner in trouble was able to put their home up for sale and it would sell quickly before the entire process ran its course. The market was so hot that it covered financial irresponsibility by letting folks off the hook. This all ended last year. Suddenly, the market is declining yet rates are still resetting. Folks are realizing that they are unable to make the payments, sell for their asking price, and losing their homes. So how did Joe and Mary lose their home? This is the next stage of the foreclosure story and a sad one.
The psychology of running massive monthly deficits is a hard one. For one, you are probably wondering about the incredibly high car cost. This is Southern California and having a new model is somewhat common practice. The worst depreciating item you can own is a vehicle. Regardless, they purchased one of the two Mercedes and after a year or so, if they decided to sell they would be selling at a loss. So after Joe lost his job, they decided to put their home up for sale knowing they would be unable to make the payments. At first, they thought that they would be able to make a nice profit on the home. This was not the case. This is how the following months looked like:
Month 1-6 – (Pre-Foreclosure)
Joe and Mary miss one payment. They have their home listed at $790,000 on the MLS. No bites. The bank sends a late notice to their home. Since they’ve been in the industry, they have seen homes sell even before landing on the MLS. They are certain that they will sell the home.
Total Monthly Payment Behind: $4,962
Late Payment: $40
Total to Cure Account: $5,002
Another month goes by and no offers. They lower the price to $775,000 to generate some interest. Nothing. They start getting a bit anxious. They get another payment from the bank but this time, they will need to make two payments. At this point, they make a conscious decision not to pay the mortgage and put in a clause for a future buyer to cure the account when they buy:
Total Monthly Payment behind: $9924
Late Payment: $40 x 2
Total to Cure Account: $10,004
At this point the bank tries to make contact with Joe and Mary. If they couldn’t pay $5,002 how are they going to pay double that? A third month comes along and they lower the home price to $750,000. Still the market is dry and silent. At this point the couple receives letters from the bank and attorney. They now start receiving formal letters:
Total Monthly Payment behind: $14,886
Late Payment: $40 x 3
Legal Fees: $75
Total to Cure Account: $15,081
Forth month comes along:
Total Monthly Payment behind: $19,848
Late Payment: $40 x 4
Legal Fees: $75 x 2
Total to Cure Account: $20,158
Fifth Month:
Total Monthly Payment behind: $24,810
Late Payment: $40 x 5
Legal Fees: $75 x 3
Total to Cure Account: $25,160
The bank issues a demand for full payment including full balance, back interest, plus late charges, and legal fees all at once. The legal notices start. Joe and Mary now have their home listed at $715,000. Still no bites. They did have some people come by but the deals didn’t materialize. Now they need $25,160 to cure the account but the bank has legally informed them that they will accept no payments except a full balance payment on their original $675,000 note. Keep in mind the bank is no place for negotiations. Can you imagine calling up your local Mercedes dealer and saying, “Hello Mercedes? Yeah, I’m not going to be able to afford the $600 this month but would you be willing to take $300 plus a free Dodger ticket?” The bank now sends a certified letter of notice of intent to foreclose. Joe and Mary realize they will not sell their home. The notice and waiting period begins. They stay in the place two more months. Now it will cost $35,000+ to bring the account current plus a full payment on the balance. Of course this will never happen given the circumstances of their finances. No payments are arranged and the house is sold at auction and of course, the bank reclaims the home as REO since they are on the sheets for $675,000.

The home is now officially REO and get this, they have it listed for $750,000! The bank is delusional. Joe and Mary now have a foreclosure on their credit record and rent a much smaller home. They managed to break the lease on the Mercedes but are on the hook for the purchased SUV. You’ll notice how things spiral out of control when you spend more than you earn. I can only imagine households with $60,000 getting into this mess. If anything, it will accelerate ten times faster. They are considering bankruptcy but the new laws are now more stringent in terms of letting people completely off the hook, especially a couple that makes nearly twice the median US income.

Hopefully this article gives you an inside look at the story of foreclosure and how it can happen to anyone. I've seen many blogs talk about foreclosures and the numbers but haven't seen a post detailing the entire process and how it impacts a home owner's bottom line. Not only that, but you should get an understanding that we are in a bubble so large, that missing one payment puts you in arrears for $10,000, or the down payment of a modest home in many states of the US. If this is what happening at stage one of the bubble, what do you see happening in the latter stages?

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July 19, 2007

Big Ben and the Ministry of the Fed: Housing Doublespeak. NovaStar Shining.

One important rule for investors is don’t chase bad money with good. NovaStar Financial is having a challenging time getting out of the doldrums even after a $150 million booster shot it received from private equity funds. Not only are analyst predicting a future price target of $4.50, much less than the current $5.96 price but the company is also planning on slashing the dividend for many investors. Keep in mind this is a company that once was trading as high as $64 a share. But home equity lines of credit and loans are much more expensive now that rates have shifted. 30 year fixed rates are still doing fine at historical lows, but financially, this was a small sliver of the pie for these subprime players. According to Reuters:

“NovaStar shares were down $1.15 to $5.96 in late-morning trade on the New York Stock Exchange after falling to as low as $5.91 earlier in the session.

As a result of the deal, FBR's Valentin said NovaStar common shareholders will see their dividend slashed to $2.67 a share from $4.21 a share. Valentin also said the $150 million injection is not enough to sustain NovaStar, a REIT, unless mortgage markets suddenly rebound."

Like other subprime lenders, which make home loans to people with weak credit, NovaStar has suffered rising defaults and has struggled to sell the loans it makes to investors. Quarterly results have suffered this year, while rivals were prompted to exit the business or forced into bankruptcy.”

This isn’t something new. I warned about the subprime implosion a few months ago including the challenges NovaStar would face. Although many pundits were echoing that $150 million dollars would keep the company solvent for a while longer, there is no way any amount of bad money would keep over inflated assets high forever. And the caveat in the above quote is “unless mortgage markets suddenly rebound.” Now do we really see that happening?

Big Ben Chimes in Again

Then we move on to Big Ben using his glorious Orwellian Doublespeak. First, Mr. Ben is frustrated that the Yuan is rising at a slow pace:

“"I share your frustration about the slow pace" of China's currency revaluation, Bernanke said in response to a question from the Senate Banking Committee following his twice-yearly Congressional testimony.”

Glad he shares the frustration of the American public. Well that can easily be remedied by raising the Fed interest rate. Of course this will pop the bubble. But why should housing pundits worry? They’ve mentioned that housing rose on its own merits without the crutch of easy credit. When asked if housing could face a hard fall, this is his response:

“"We think it remains a risk, we have an inventory problem,"

An inventory problem? Well isn’t that something! And here I was thinking that it was a pricing problem. The doublespeak gets better in this testimony. When asked about the overall state of the economy, Ben responded:

"The ongoing housing correction could prove larger than anticipated, and energy and commodity prices could continue to rise sharply" and that could "spread to other parts of the economy," said Bernanke. Therefore the "upside risks to inflation is [the Fed's] primary policy concern."

You’ll understand that political operatives love using the word “could.” Well I could make a million dollars tomorrow, or not. Well housing could correct, or not. And they keep calling it a “housing correction.” This is a bursting credit bubble! Call it what it is. All these convenient euphemisms make it seem like we are in a high school band class. So the primary concern is inflation. Excellent, at least we agree on one thing. Then what about the resounding housing inflation we have seen in the last few years? The Fed actually created this monster by lowering rates and creating excessive easy credit. This played perfectly into a society that has a very hard time saving for retirement or anything else. Not only that, it made everything you buy with credit cards easier. Even last year, it was incredibly easy to find 0 percent offers on credit card purchases. Try finding these deals now. Now they include a 3 percent transaction fee. Suddenly people can’t play the mortgage refinancing musical chairs game.

“"The most pressing issue facing the U.S. economy today is excessive and growing inequality,"
Bernanke responded by pointing to other studies that show middle class Americans are generally much better off now than they were two decades ago.

But he also said better education training programs, as well as cheaper access to health care, are some things that could be done to lessen the income gap.”

Basically you are doing better if you aren’t buying your first home, eating food, don’t get sick, and avoid going to college. Aside, from that you are doing fantastic! Amazing double speak in face of the largest housing inventory in multiple decades.

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July 17, 2007

Sales Drop Their Pants in Southern California. In More News, Median Prices Still Strong Like Arnold Schwarzenegger.

What a shock that housing median prices are still holding strong. In the land of Oz otherwise known as Southern California, June data released today shows housing prices resiliently strong with one caveat; sales are falling off a cliff! So even though Los Angeles County has a median home price of $545,000, a 4.8 percent yearly gain and Orange Country has a median home price of $645,000, a 0.4 percent yearly gain the devil is in the sales declines.

Los Angeles is down 32.5 percent in sales numbers. Orange County is down 31.6 percent. Riverside is down 47.2 percent. San Bernardino is down 50.1 percent. San Diego is down 22.6 percent. Ventura is down 27.8 percent. After each sentence I expect you to say Hoorah! Here is an excellent test of housing sentiment. In July of 2006, only one year ago we were having double digit sales drops but pundits kept hyping the yearly gains in the median income. “Sales drops mean nothing. Look at the tasty yearly median gains! Housing is hotter than a burnt tamale.”

Of course any person who studies housing markets realizes that drops in sales volume are indicators of where prices are heading. Housing is sticky on the way down. But the ironic thing is you don’t hear the housing syndicate jumping up and down for the positive median home prices just released. Why? Because business is horrible and the public is tired of being bamboozled. Just listen to the sentiment of the home builders. The summer bounce isn’t here and we are quickly approaching August. Suddenly visions of infinite double digit gains start to seem more distant. Summer 2007 is a vastly different housing market. For one, the subprime market is imploding. Imploding? Seems abstract to say it that way. How about “no more mortgages for LaLa land investments.” Aside from irresponsible lending and delusional sellers, housing is coming back to Earth from a long vacation to Uranus.

The housing syndicate wants to blame the Fed and anyone championing tighter credit. If it were up to them, we’d be purchasing $2 million dollar homes while inflation goes along at 25 percent and every new buyer ended up in a 70 year multi-generational loan. They wouldn’t care. Sustainability is a word outlawed in the subprime industry. These companies have such little reserves, that a simple credit tightening brought many companies to their knees in a few months. And this on the back of the largest housing bubble in history. They could have easily built up their cash account to weather a storm over the healthy years; but why save when you can make money hand over fist loaning out ridiculous suicide loans? Wall Street ate them up.

Well now, thanks to the transparency of information most people look at the median price and just laugh because they know it is simply absurd and a horrible indicator of the current market. Sellers are still doing baby steps trying to lower prices by $10,000 or $15,000 on a home overpriced by $200,000. So it is in today's market. The great summer standoff. I predicted this many months ago. Call it the summer housing Easter bunny and he ain’t hopping in Southern California and time is running out.

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Viva La Housing Society: Social Security, Savings and Debt, and Retirement.

John McCain has just given the US public a crash course on why debt is not a good thing. McCain raised $11.2 million this past quarter but spent most of it and has very little cash on hand. Seems rather commonplace for many Americans to spend more than they earn. Not only that, the major issues that we should be discussing such as the credit bubble, declining dollar, Social Security, and international conflicts are nowhere to be found in the mainstream political debate. Why isn’t any politician tackling any of these problems head on and discussing them? The only person I’ve heard mention “inflation” is Ron Paul, who by the way is financially better off than Mccain. Maybe basic finance does help those in politics. Either way, I think most Americans are realizing that being able to purchase something on cheap credit does not equal financial independence. On the contrary, many are realizing crippling debt is like jumping into the ocean with an albatross around your neck.

So we close off the first two quarters of the year with the fuse inching along to the dynamite box full of funky credit and Wall Street collateralized debt obligations that are so complicated, even the people that created them have no idea how to untangle them. The big bang is here and the world is realizing and watching morbidly, that we spent way beyond our means. In this article I will discuss three main issues that will impact the entire country. From young professionals starting their career to those in retirement. This credit bubble discriminated against no one. If you wanted a home equity line of credit, you were welcomed. If you wanted a no money down interest only loan, come on in. This bubble is one for the ages and we are starting to see that the public is starting to get the memo that massive credit is not a solid solution for sustainable growth.

Social Security – Shhh! Please be Quite

It has been argued that Social Security is the third rail of politics. We remember Al Gore and his lock box talk. Or Bush and his goal of privatizing Social Security. Both went down in mad Ghostrider flames. Yet the issue still looms. Even Clinton recognized the issue with Social Security but no political will was willing to attack the problem. The buck has now passed from three presidents onto another one that will inherit the problem in 2008. Every expert acknowledges that we have a looming problem with Social Security. But anytime a politician brings up the issue, it gets shot down. Typical of the housing bubble, Social Security is a ponzi scheme heading down a slow but sure road of insolvency.

For one, 44 million Americans depend on Social Security (so guess how they'll vote). Two thirds of senior citizens depend on Social Security as their main source of income. 18 percent of senior citizens rely on Social Security as their only source of income. Income that pays for food and housing cost. Keep in mind, even if you have your home paid off you will still get yearly tax bills. You will also need housing insurance and maintenance costs factored in. Why do you think many senior citizens are victims to reverse mortgage loans that are so financially egregious, you would think that you were dealing with a local bookie or turf accountant.

In 1960, there were 5.1 workers putting in money to the system for each person drawing on benefits. In 2005, the number dwindled to 3.3 workers. The projected number for 2031 is 2.1 workers for each person drawing on Social Security benefits. Why the sudden shift? Well we can thank a population boom phenomenon otherwise known as the baby boomers.

Baby boomers are considered to be folks born from 1945 – 1964. The total number of births during this time is somewhere in the ballpark of 76 million. Currently they are 20 percent of the adult population. An incredibly large number. The term is normally given to those in the age bracket of 44 to 62. The major shift will start occurring in 2008 when we start seeing baby boomers go into full retirement. The system is solvent until 2018, which at the time more will be paid out than paid into the system. By 2042 the system will be dry. So anyone in the 20 to 39 age range needs to start planning for another venue of retirement benefits since the last three presidents didn’t do squat regarding the issue.

With a high cost of living, mounting credit card debt, ridiculous college costs, and entry level salaries how is it possible for young professionals to realize the dream of their parents? Hard work and savings are paramount. But the way mom and dad did it is not going to apply to this generation since the Social Security safety net won’t be there for many and housing costs are much larger in proportion to those a generation ago.

Savings and Debt – How does it Break Down?

I’ve been clipping a few charts from the previous LA Times with fascinating data. After reading how Kobe is still up to his antics with the LA Lakers and David Beckham’s Galaxy salary is larger than many third world country’s gross domestic product, I enjoy heading over to the business section. The numbers are startling and the picture that is painted is that young folks of today consume at a high pace and save very little for retirement. It could be a generational thing where many of us are more comfortable paying with a credit card rather than cold hard cash. This debt mentality is also a contributing factor for the housing bubble. After all, a generation raised at the teat of debt is easily coerced into further spending. Large mortgages didn’t phase many young professionals. I’ve had a close friend purchase a Real Home of Genius condo with his wife for half a million dollars in a regular suburb of Orange County. The condo is slightly over 1,000 square feet and as cookie cutter as they come. Their combined income barely allows them to cover the mortgage, taxes, and association fees but they are following the lead of mom and dad. The only caveat is, mom and dad bought with 10, 15, or 20 percent down and went 30 year fixed. But the need to own a home is so psychologically ingrained that folks are willing to live on Cup-o-Noodles to pay the mortgage.

Let us take a look below at some raw numbers:

Average amount in bank accounts per household

















This first table looks at average amounts in bank accounts per household. Keep in mind that with averages, a person with $200,000 in the bank will skew the chart higher. But even with that considered, the amount of money in accounts isn’t that high. You may say, “well of course not, these people have them in 401(k)s and retirement accounts.” I’ll get to that in the next section but suffice it to say that folks aren’t really saving elsewhere.

The next chart looks at household debt from the same sample in the survey of 158,000 US households:

Average debt per household, including mortgagages

















This chart should put a major hole in many housing pundit theories of Americans being okay with large mortgage debt. The above chart includes revolving debt and mortgage debt. The highest average is in the 30 to 39 category and it tops out at $107,525. Now think about a young professional couple buying a starter home of $500,000 with 20 percent down. They’ve taken on $400,000 in debt. Or 4 times the average overall debt of those in the 30 to 39 and 40 to 49 group range.

Another scary factor is many of those hitting retirement are still in debt. As we’ve mentioned, if you are relying solely on Social Security as your main retirement income or a large part of it, $50,000 in debt is a large chunk of change.


It is pretty clear that anyone in the 20 to 39 age bracket will need to fund their own retirement and not depend on Social Security. So how are folks doing?

Percentage of households with 401(k) plans

















Well there goes the argument that the majority of people are funding their 401(k). The 20 to 29 year olds are the one’s who need to fund their 401(k) accounts most aggressively. Those in the 30 to 39 age range seem to be getting the message that Social Security will not be there for them. Is fear of no Social Security the only reason for this shift? We have another reason:

Percentage of households with pension plans

















Pension plans are going the way of the Dodo bird. Anyone under the age of 40 is most likely to be at the tail end of a generational ending of pension plans. You can see from the numbers above that only 8 percent of household in the 20 to 29 range have pension plans and 14 percent of those in the 30 to 39 age range. If anything, these charts should show you that we are not in the world of our parents.

Let us not even dive into the declining dollar, massive deficits, and the ridiculous shadow government tactics used to calculate inflation. This all ties into the housing bubble because with such a high cost of living and lack of future planning, many young professionals seem to indicate by their buying habits a “screw the future” and live a carpe diem type lifestyle. To keep up with the dream of being equally as successful as their parents, they are mortgaging their present lifestyle to meet a dream that is no longer available. They chase this dream by diving into credit and hyping the monthly payments. Yet this is unsustainable. At which point will folks in the 20 to 39 age range become furious about paying into a system that they will not benefit from? At what point will they realize that inflation numbers are cooked and demand better accounting practices?

Sometimes it seems that the media is trying to create a generation of zombies that will stay away from picking up a book and educating themselves about the true state of affairs. According to A.C. Nielsen Co., Americans watch an average of 4 hours of television a day! Mortgage ads spouting crack pot numbers. Flip this House. Extreme Home Makeover. And all the other housing related shows seem to be the number one source for where people get their housing information. In addition we get this mantra of easy monthly payments and the advent of gorilla marketing making it seem like using cash is for old folks. The credit card commercials tell you two things; the faster you spend the better and don’t be uncool and use cash. God help us if people are using the television to educate themselves regarding the credit bubble, savings, debt, and retirement.

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