San Diego Housing Bubble News and Analysis

From the Financial Times: China to lose ally against US trade hawks Myron Brilliant, senior vice-president for international affairs, who has previously helped to protect Beijing from hawkish trade policies, told the Financial Times: “I don’t think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill].”
...
Mr Brilliant said corporate America’s attitude had changed in response to a range of “industrial policies” pursued by Beijing, including the undervaluation of the renminbi, which made it harder for US companies to do business and compete with China.
excerpted with permissionMr Brilliant has long supported China, including lobbying for China to join the WTO.

And China keeps pushing back - from the WaPo: China's commerce minister: U.S. has the most to lose in a trade war China's commerce minister warned the United States on Sunday that if it launches a "trade war" against China by levying punitive tariffs on Chinese imports, the United States will suffer the most.
...
"You're not going to get 1.3 billion Chinese to change by insulting them," [Commerce Minister Chen Deming] said. "Could it be related to upcoming elections? I don't know. Because economically, it makes no sense."
...
"[Obama] wants exports to double in five years, but I don't know whom he is going to sell them to." This is heating up prior to April 15th release of the Treasury report on worldwide currencies that might name China a "currency manipulator".

Here’s a look at news and reports that will shape the housing discussion this coming week:

• Monday: Altera’s O.C. inventory stats hint how hearty spring selling is starting.
• Tuesday: Strength of national housing recovery will be detailed in Realtor report.
• Wednesday: Are builders awakening from slump? Watch new-home sales figures!
• Thursday: Jobs drive housing, so keep your eye on national jobless-claim trends out this day.
• Friday: DataQuick gives up first glimpse into March O.C. homebuyong trends. Will price weakness continue?

How will spring's homebuying season go?

• Strong
• Eh!
• Weak

View Results

Food for thought:

How will spring’s homebuying season go? is a post from: Lansner on Real Estate

Via an e-mail from someone who has worked at the SEC. Note that the reason for the mention of the Department of Justice is that the SEC cannot bring criminal cases on its own, but has to secure the cooperation of the DoJ.

The SEC-DoJ relationship is not entirely functional, but I suspect that the hangup is likely to be on the SEC Enforcement side. Enforcement only takes a limited number of cases due to limited resources, and as such tends to favor cases that are relatively clear-cut, where it has a good chance of winning. Enforcement may shy away from difficult cases (or settle quickly out of court), unless the Commission makes a specific issue a priority.

But difficulty is not the only factor; another major consideration is whether a similar case has been pursued in the past. Novel cases are considered to be more high-risk, and Enforcement will generally be less likely to take them up unless they are very solid cases, or, again, a high priority from the Commission level.

When Compliance works on referrals to Enforcement, it typically tries to make the case as clearly and as strongly as it can; and ideally, refer to another (successful) case where there are common aspects. When Enforcement receives a referral from Compliance that deals with a range of novel issues, they may be interested in taking the case, but may press Compliance re: what the specific violations are, what evidence it has for them, etc. Similarly, for outside tips and complaints, the issue may be passed off to Compliance to gather further information before Enforcement picks it up and presses charges.

As for Lehman, it is relevant that it would theoretically be a different kind of case than many that have been brought in the past. Especially for criminal convictions, the issue is putting together a case that will convince a jury, which for complex financial issues is a high bar to get over (they were able to do it with Enron, but there were charges–which may have some merit–that it had been “tried in the media” before it ever hit the courtroom.)

Yves here. Note how perverse this is. Sarbanes-Oxley was created to prevent a repeat of Enron abuses and other big corporate accounting frauds that were appallingly common in the dot-bomb era. But the SEC is loath to prosecute….because no criminal cases have yet been brought under Sarbox. So what good is passing new laws if the enforcers are unwilling to use them?

It would seem that the only way to get what would seem to be a straightforward case brought, give the extent of discovery already done by Valukas, is to bring pressure on the SEC and the Obama administration generally. Given the amount of press on the Lehman report, that might not be much of a stretch.

Something for a Sunday - in the weekly look ahead post I forgot to mention that the Department of Transportation (DOT) will release the vehicle miles driven report for January this week.

In early 2008 there was sharp drop in U.S. vehicle miles driven and that was one of the key signs of demand destruction for oil that led me to predict oil prices would decline sharply in the 2nd half of 2008.

First a look at oil prices ...

Click on graph for larger image in new window.

This graph shows the daily Cushing, OK WTI Spot Price FOB from the Energy Information Administration (EIA).

With oil prices hoovering around $80 per barrel, I've started looking for possible signs of demand destruction again (see: Oil Prices Push Above $81 per Barrel). Of course there are other factors - like China - but vehicle miles is something to watch in the U.S.

The second graph shows monthly oil prices and vehicle miles (month over the same month of the previous year with a 3 month centered average).

Although vehicle miles driven are noisy month to month, it appear that miles driven responds to spikes in oil prices.

For December 2009 - the last month of data - the DOT reported that miles driven were unchanged compared to December 2008 after increasing in 5 of the 6 pervious months. This slow down in miles driven could be because of the sluggish recovery, or it could be because oil prices are starting to impact miles driven.

Confused about Twitter? sOCial sunday has your man! Kevin Sablan is the leader of the Register’s web task force and blogs independently about hyperlinks on Almighty Link.

Four years ago today, Twitter’s Jack Dorsey sent the first tweet ever. An examination of other posts from that day suggests that Jack’s message was a generic tweet automatically sent by “twtter.” The first messages sent by eight other “Twitter creators” parroted Dorsey’s message: Biz Stone, Noah Glass, @crystal, @jeremy, Tony Stubblebine, Adam Rugel, Evan Williams and Dom Sagolla.

Here are a few more interesting tweets from Twitter’s first day.

Biz Stone introduced food talk to Twitter only 26 minutes after the first tweet ever.

One of the first people Don Sagolla followed was his wife Meredith.

One of the first things that Dorsey and Stone tweeted about was “inviting coworkers” and “getting my odeo folks on this deal.

If Twitter’s birthday has piqued your interest, here is a small reading list for you.

• For more about Twitter’s origins, read Don Sagolla’s How Twitter was born.
• For a visual history of Twitter, take a look at Manolith’s The story (so far) of Twitter.
• If you think Twitter is all about “sammiches,” please see Lifehacker’s six ways you should be using Twitter.
• Last year, Time.com explained how Twitter will change the way we live.
• Don Sagolla wrote a song for his wife, and you can still hear it on Odeo, the company that gave birth to Twitter.

First tweets ever were identical, probably automated is a post from: Lansner on Real Estate

Last week I was at a Economics Bloggers Forum in Kansas City sponsored by the Kauffman foundation.

Paul Kedrosky at Infectious Greed, Mark Thoma at Economist View, Former President of the Dallas Fed Bob McTeer , Michael Mandel, former chief economist for BusinessWeek, Bryan Caplan at the Library of Economics and Liberty Blog and a group of about 20 others were at the conference.

I gave my views on the unemployment rate and most thought I was too pessimistic. Bryan Caplan proposed a bet and you can find it here: Unemployment Bet: Mish vs. Bryan Caplan.
On the fiscal crisis panel, Mish predicted high unemployment for the next ten years. This provoked a lot of heat but little light. Over dinner, though, Mish and I hammered out the following bet:

If the official initially reported U.S. monthly unemployment rate falls below 8.0% for any month between now and June, 2015, I win $100. Otherwise, Mish wins $100.

Mish based his pessimism on the implausibility of rapid job growth in construction and other key sectors. I saw this as misleading "near" reasoning - and took the "far" road instead. My position: During the last big recession in the Eighties, the unemployment rate fell about 1 percentage-point per year after the peak. So while full recovery is indeed about five years away, it would be very surprising if unemployment stayed at 8% or more for three years, much less five. Where will the new jobs appear? If I knew that, I'd probably be investing in them instead of blogging about my bets!I highly doubt the employment growth in the 80's is the correct model, nor is the recovery following the 2001 recession.

The latter had the benefit of a housing boom followed by a commercial real estate boom, neither of which is coming. In the 80's there was still a transition from one parent working households to two parent working households and that transition enormously increased the credit buying power of households. Given that the consumer is 70% of the economy and given the 90's had an internet boom creating amazing numbers of jobs, such comparisons are prone to huge errors.

Let's not forget that interest rates fell from 18% to zero and that the Fed is zero-bound constrained now.

It is also crucial to take into consideration attitude changes and demographics. The pendulum swung as far as it could go to risk taking and consumption. The pendulum has now just started to swing back towards saving.

Look at the rampant overcapacity. Do we need more Wal-Marts, Pizza Huts, nail salons, Home Depots, Lowes, etc., etc.? I suggest not. While firing pressure may abate, beyond inventory rebuilding and a flattening economy, there is little room for hiring unless some technological revolution occurs.

Finally, I think a double dip recession is highly likely, and the redistribution efforts of the Obama administration will damper job creation for years to come. Small businesses, have extra incentive to not hire, and banks are lending responsibly for the first time in decades.

What Can Go Wrong and Right?

There is always a chance that some new technological revolution will happen to undermine my pessimistic scenario. Certainly a development in clean energy could create a massive number of jobs. There is also a chance of an advancement in the medical field that would do the same.

I am sure something good will eventually happen, it always does, but I doubt it will be that soon or even if it does happen soon, that it will create huge jobs in the United States as opposed to elsewhere.

Finally, there is a chance that Congress goes completely ape with jobs programs. However, fiscal conservatives like Chris Christie are taking governorships. Christie's efforts are long term beneficial of course, but short term it will take jobs out of the public sector.

Moreover, there is little appetite now for more stimulus programs, and it is a near certainty that the next Congress will be more conservative, with an outside chance Republicans re-take the House. Again, this is long-term beneficial, but the short-term pain for a couple of years could be immense.

One wild card in this mess is free trade. If free trade advocates win the day, that would create jobs. However, it is far more likely an all out trade war with China develops in light of increasing calls to label China a currency manipulator. Please see Pressure Increasing on China to Revalue Yuan; What Can Go Wrong? for details.

An actual war as opposed to a trade war is certainly another wild-card. War in the Mid-east could easily disrupt the supply of oil and have lasting negative effects. Then again, peace could break out. That would help create jobs.

Simplistically, Europe has had high structural unemployment for decades, Obama's socialistic policies are taking us down the same path, there is rampant overcapacity everywhere, and government interference and higher taxes will not create lasting jobs.

Barring the wild cards of technological breakthroughs, global peace, and expanded free trade, there is no reason to believe unemployment will follow models nearly every economist expects.

Implications being what they are, this is not a bet I really care to win.

Downloadable Spreadsheet

In case you missed it I have a spreadsheet you can download and graph your own projections.

Please see ...

• Mish Unemployment Projections Through 2020
• Mapping Unemployment - You Make The Call

The top link contains my base assumptions about demographics etc., as well as the spreadsheet. The second link contains some "what if" by John Mauldin and I.

I will revise that sheet and make it on a quarter by quarter basis because I have some Fed and Moody's projections on that basis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

After all the commotion over the health care bill winds down, the financial market reform bill will probably take center stage next in Washington and this seems to be a pretty good summary of where things now stand.
From the Tom Toles collection at the Washington Post.

There will be two key housing reports released this week (existing home sales on Tuesday and new home sales on Wednesday) and plenty of Fed speeches ...

On Monday, the Chicago Fed will release the February Chicago Fed National Activity Index at 8:30 AM ET. Activity in February was probably sluggish. Also on Monday, Treasury Secretary Tim Geithner will speak at the American Enterprise Institute (4:30 PM ET), and Atlanta Fed President Dennis Lockhart will speak in the evening in Florida.

Probably early this week, the Moody's/REAL Commercial Property Price Indices (CPPI) for January will be released. This is a repeat sales price index for Commercial Real Estate (CRE).

On Tuesday, Existing Home sales for February will be released by the National Association of Realtors (NAR) at 10 AM ET. Expectations are for a slight decrease in sales to a 5 million Seasonally Adjusted Annual Rate (SAAR). I’ll take the under. The Census Bureau will also release the Mass Layoffs report for February on Tuesday.

Also on Tuesday the FHFA House Price Index for January will be released (this has been ignored recently), the Richmond Fed Survey (March) at 10 AM ET, and San Francisco Fed President Janet Yellen will speak at 3:35 PM ET. It is widely reported that Yellen will be nominated to be the next Fed Vice Chairman.

On Wednesday the American Institute of Architects’ February Architecture Billings Index will be released - a leading indicator for Commercial Real Estate (CRE). This has been showing significant weakness for some time.

Also on Wednesday, the New Home sales report from the Census Bureau will be released at 10 AM ET. The consensus is for some increase from the record low set in January (309 thousand SAAR), but the number will still be very low. Sales have averaged 370 thousand (SAAR) over the last 12 months, and February will be well below that level.

Also on Wednesday, the weekly MBA mortgage purchase applications index will be released (7 AM ET) and the Durable Goods report for February at 10 AM ET.

There will be more Fed speak on Wednesday: the FOMC’s lone dissenter, Kansas Fed President Thomas Hoenig, speaks at 10:45 AM ET, and outgoing Fed Vice Chairman Donald Kohn speaks at 8 PM ET.

On Thursday, the closely watched initial weekly unemployment claims will be released. Also the Census Bureau will released the Regional and State Employment and Unemployment for February at 10 AM ET.
Cleveland Fed President Sandra Pianalto speaks at 9 AM ET, and Fed Chairman Ben Bernanke testifies before the House Financial Services Committee at 10 AM ET.

On Friday the 3rd estimate of Q4 GDP released (any change will be minor), and the Reuter's/University of Michigan's Consumer sentiment index for March will be released at 9:55 AM ET (consensus is for a slight increase to 73 from 72.5).

Also on Friday the FDIC will probably close several more banks. I think this is the week for Puerto Rico!

And a summary of last week ...

Housing Starts decline in February

Click on graph for larger image in new window.

Total housing starts were at 575 thousand (SAAR) in February, down 5.9% from the revised January rate, and up 20% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for nine months.

Single-family starts were at 499 thousand (SAAR) in February, down 0.6% from the revised January rate, and 40% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for nine months.

NAHB Builder Confidence declines in March

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) was at 15 in March. This is a decrease from 17 in February.

The record low was 8 set in January 2009. This is very low - and this is what I've expected - a long period of builder depression.

Industrial Production, Capacity Utilization increase slightly in February

From the Fed: "Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January. ... Capacity utilization for total industry moved up 0.2 percentage point to 72.7 percent, a rate 7.9 percentage points below its average from 1972 to 2009."

This graph shows Capacity Utilization. This series is up 6.5% from the record low set in June (the series starts in 1967).

Capacity utilization at 72.7% is still far below normal - and far below the the pre-recession levels of 80.5% in November 2007.

First American CoreLogic: House Prices Decline 1.9% in January

The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...

From LoanPerformance: "On a month-over-month basis, the national average home price index decline accelerated, falling by 1.9 percent in January 2010 compared to 0.8 percent in December 2009, indicating the housing market still remains weak."

This graph shows the national LoanPerformance data since 1976. January 2000 = 100.

The index is off 0.7% over the last year, and off 29% from the peak.

The index has declined for five consecutive months.

Housing: Price-to-Rent Ratio

Here is an update on the price-to-rent ratio using the First Amercican CoreLogic house price index and the Owners' Equivalent Rent (OER) from the BLS.

This graph shows the price to rent ratio (January 2000 = 1.0).

This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Also, OER declined slightly again in February. The price index has declined 6 of the last 8 months, although most of the declines have been very small. With rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.

Other Economic Stories ...

From Carolyn Said at the San Francisco Chronicle: Short sale tax shortchanges ex-homeowners

From Diana Olick at CNBC: Loans Going Bad Faster Than the Fixes

Countdown: Fed MBS Purchase Program 99.2% Complete

From Dow Jones: FDIC Seeks Buyers for Three Puerto Rican Banks

From the Fed: FOMC Statement: Economic Activity "Continued to strengthen"

From housing economist Tom Lawler REO: Agencies vs. Private Label

From the Federal Home Loan Bank of San Francisco: Statement Regarding PLRMBS Litigation

Looking Ahead: 2011 Social Security Cost of Living Adjustment

Unofficial Problem Bank List increases to 653

AND a video from Steven Russolillo at Dow Jones (posted at the WSJ): Financial Blogs Grow Up

Best wishes to all.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

From Sewell Chan and Keith Bradsher at the NY Times: I.M.F. Warns Wealthiest Nations About Their Debt The global economic crisis has left “deep scars” in the fiscal balances of the world’s advanced economies, which should begin to rein in spending next year as the recovery continues, the No.2 official at the International Monetary Fund said Sunday.
...
For the United States, “a higher public savings rate will be required to ensure long-term fiscal sustainability,” Mr. Lipsky said.
...
“Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery,” Mr. Lipsky said. ... While it makes sense for the world’s largest economies to continue stimulus spending through the end of this year, “fiscal consolidation should begin in 2011, if the recovery occurs at the projected pace,” Mr. Lipsky said. The U.S. deficit can be separated into 1) a cyclical deficit that will start to decline automatically when the economy begins to recover, and 2) a structural deficit that will be very difficult to resolve. But we need a recovery first, and then we can discuss deficit reduction.

Mr. Lipsky also discussed the need for rebalancing the world economy, although he didn't criticize China's currency manipulation (he was speaking in China).

The Bubble Bursts

When a bubble in a financial market pops, it does not explode in spectacular fashion like a soap bubble; it is more comparable to a breached levee which releases water slowly at first. [1] Once the financial levee is ruptured, the equity reservoir loses money at increasing rates. It washes away the imagined wealth of homeowners who bought late in the rally or used home equity lines of credit to fuel consumer spending until the reservoir is nearly empty and the torrent turns to a trickle. Ultimately, the causes of failure are examined, the financial levee is repaired, and the reservoir again holds value, but not until the dreams and equity of many homeowners are washed away.

Denial runs deep in the financial markets. The vast majority of participants either wants or needs prices to steadily increase. Any facts or opinions that run counter to the idea of ever increasing prices must be quelled in order to prevent a catastrophic collapse of prices due to panic selling. One of the more glaring examples of this phenomenon was the slow leak of information regarding the debacle in the housing market. In February and March of 2007 as the subprime lending implosion became front page news, market bulls were presented with a major public relations problem. It was imperative for the bulls to convince buyers the damage from subprime lending was “contained” and would not “spill over” into other borrower categories and ultimately into the overall economy. [ii] The supposition was that the widespread use of exotic loans was not the problem; it was the practice of giving these loans to those with low credit scores. In other words, it was not the loans, it was the borrowers. This was wrong. It was not the borrowers; it was the loans. Exotic loans were given to people of all credit backgrounds. Subprime borrowers where the first to show distress, but the Alt-A and Prime borrowers had the same problems and experienced the same outcome.

Conventional wisdom (or market spin) was that the risk of default from subprime would not spill over into Alt-A and Prime loans. This argument was made because these two categories have historically had low default rates. Of course, this argument ignored the “liar loans” taken out by those with higher credit scores, the unmanageable debt-to-income ratios, and payment resets for interest-only and Option ARM loans which were also given to the Alt-A and Prime crowd. Historically, this group had not defaulted because they have not been widely exposed to these loan types.

An adjustable rate mortgage resets to a different (usually higher) interest rate or payment schedule at a time specified in the loan agreement. The increase in payment may be caused by an increasing interest rate or it may be caused by a recast of the loan to a fully-amortized payment schedule. In either case, the monthly payment will rise. If a borrower is unable to make the new payment because wages did not increase or perhaps the payment increase was simply too large, the borrower will need to refinance to a new loan with an affordable payment structure. If at the time of refinancing the borrower is not eligible for available loan programs because the borrower or the property no longer meets the prevailing loan standards, the borrower may have no choice but to default on the existing loan and go through foreclosure on the property. In short, if borrowers cannot make the new payment or refinance, they will lose their homes. This is how many borrowers lost their homes during the Great Housing Bubble.

Loan standards vary over time as the credit cycle loosens and tightens. Many borrowers in the bubble rally were qualified with low credit scores, very high combined-loan-to-values, high debt-to-income ratios, and little or no income verification. When the ensuing credit crunch occurred, all of these standards were tightened and many of those who previously qualified did not qualify under the new standards. If no other conditions changed, this tightening of standards would have forced many borrowers into foreclosure; however, this credit tightening caused a chain reaction sending market prices for residential real estate which were already falling into an even steeper decline.

Figure 27: Adjustable Rate Mortgage Reset Chart

The Adjustable Rate Mortgage Reset Chart produced by Credit Suisse in 2007 details the dollar amounts of mortgages facing payment resets in the six years from 2007-2012. The bulk of the first two years (24 months on the chart) are loan resets from subprime borrowers who purchased in 2005 and 2006. These subprime borrowers paid peak prices for properties. Most of these borrowers were given 100% financing (if they could have saved up for a downpayment, they probably would not have been subprime,) and they were often only qualified based on their ability to make the initial payment rather than on their ability to make the payment after the reset. There was a special loan program called a 2/28 that most subprime borrowers purchased. [iii] This loan fixed a payment for two years; afterward, the payment would increase to a higher interest rate and on a fully-amortized schedule over the remaining 28 years. The payment shock was extreme. This created a condition where most subprime borrowers could not refinance or make their payments, and many of these borrowers defaulted on their loans. Data from early 2008 showed the 2006 and 2007 vintage of subprime loans default rates running close to 50%, and this was before the resets were coming due. Most of these subprime borrowers who went into default lost their properties in foreclosure, and these foreclosures were added to the supply of an already overwhelmed real estate market.

Figure 28: ARM Reset through Foreclosure to Final Sale

There is a sequence of events which occurs between the mortgage reset and the final sale of a property to a new owner on the open market. After the borrower is faced with a mortgage reset, many try to make the new payment and keep their houses. They may borrow from other sources including credit cards or even their retirement accounts–anything to make the payment and keep their homes. Depending on the resources available and the burden imposed by the new payment, the borrower may stay afloat for an indefinite period of time. Some chose to give up immediately and 30 days later, they are in default. Once a borrower defaults on a loan, in most states the lender is required to wait 90 days to give the borrower a chance to get current on their payments. Once a borrower is 90 days late, he receives a Notice of Default from the lender. Following the Notice of Default, there is another 90 day window where the borrower can make good on their payments. If he is unable (or unwilling) to do so, the lender will file a Notice of Trustee Sale and schedule a public auction for 21 days later. If the borrower cannot pay back the loan or find other ways to delay the process, the property is put up for public auction, generally on the courthouse steps in the jurisdiction where the property is located. At this auction, the lender will generally bid the amount of the outstanding loan and hope another party bids more and pays them off. If the lender is the highest bidder, which is often the case, the lender ends up owning the house.

During the bust, the vast majority of properties at auction went back to the lenders because the loan amounts usually exceeded market value. Properties purchased by the lender at a foreclosure auction are called Real Estate Owned or REO. Lenders are not permitted to keep REOs on their books for long, so these properties are offered at market prices, and they must be sold. It will take some time for the property to be prepared for sale. Once the property is finally listed for sale in the conventional resale market, the lender will follow loss mitigation procedures intended to maximize revenue from the property. This often delays the eventual sale 90 days or more. The whole process from mortgage reset to final sale in the market takes at least a year, and it may take much longer.

The subprime borrowers made up the bulk of the mortgage rate resets in 2007 and 2008. Since the default rates were very high, and since prices were already falling before these REOs were added to the market, the subprime foreclosures pushed prices down significantly. This effect was not uniform as subprime borrowers were often concentrated in specific areas or communities. Markets with large concentrations of subprime were decimated first, but all markets are interrelated, as all real estate markets within driving distance are linked together by commuters. When the subprime-dominated markets declined, they created a drag on prices and sales volumes in nearby markets. There was a price differential that enticed people to fringe markets. This created a price drag on the primary markets as some potential buyers were siphoned off by the fringe markets. In California, the collapse of the real estate market was like a land tsunami: it started inland and made it way overland to the coast leveling everything in its path.

The loan reset issue is not confined to those who bought late in the bubble rally. Many borrowers are homeowners who refinanced to take advantage of more favorable loan terms. During the Great Housing Bubble, prices rose dramatically in nearly every market nationally. With such a dramatic increase in prices, one would expect the total home equity for homeowners to increase dramatically as well. If fact, the opposite occurred; home equity declined during the rally of the real estate bubble. By the end of 2007, home equity as a percentage of home values was at record lows. Where did all the equity go? Existing homeowners spent it, and many new homeowners had such low downpayments, that they had very little equity to begin from the start. Refinancing and home equity withdrawal is the primary reason home equity did not rise as prices increased. There was a great deal of conspicuous consumption in the bubble rally, particularly in California. It seemed every house had two luxury cars in the driveway, the malls were always full of shoppers, and every homeowner was busy competing with her neighbor to see who could look richer. Many also spent their “liberated” equity to acquire other properties which was a major driver of the prices in the bubble rally.

Figure 29: Total Home Equity, 1985-2006

Aggregate home equity statistics can be misleading because approximately 30% of US households have no mortgage at all. Also, during the bubble rally, home ownership increased 5% nationwide, and many of these new homeowners were subprime borrowers who utilized 100% financing. This will have some impact on home equity statistics, but it is not sufficient to cancel out a 45% increase in home prices without massive home equity withdrawal. If the home equity statistics are viewed in the context of those households that have a mortgage, total equity nationwide was around 35% in 2006.

The initial price declines caused by defaulting subprime borrowers set the stage for defaults by Alt-A and Prime borrowers by lowering property values. At the time of this writing, the Alt-A and Prime borrowers have not yet faced the prospect of their loans resetting to higher payments as they start facing resets in 2009 that continue through 2011; however, it is not difficult to speculate on what will happen. Both new homes and foreclosures are must-sell inventory. The presence of must-sell inventory in the market forces prices lower. Builders aggressively cut prices in many markets in 2007 and 2008, and it did not help sales. The builders will be forced to lower prices more in 2009 and beyond until prices bottom in the new home market. Foreclosures increased dramatically in all markets in 2007 as the pressure of large debt loads overwhelmed many borrowers. The number of new units and foreclosures is not a problem in a healthy market, but in a declining market with large numbers of REOs, this must-sell inventory drives prices lower. The lowered property values will make it difficult for these borrowers to refinance because they will no longer meet the more stringent loan-to-value ratios that will be required to refinance. It is likely many of these borrowers will not be able to afford the payment at reset, and they will lose their homes just as the subprime borrowers lost their homes. If Alt-A and prime borrowers had utilized conventional mortgages as they had in the past, they would not be facing the mortgage reset time bomb, and they could simply ride out the subprime debacle just as many homeowners did through the declines of the early 90s. However, it is different this time. This time, the loans they have taken out are going to ruin them. It’s not the borrowers, it’s the loans.

The Credit Crunch

In 2007, the financial markets were abuzz with talk of a “credit crunch.” It was portrayed as some unusual and unpredictable outside force like an asteroid impact or a cold winter storm. However, it was not unexpected, and it was not caused by any outside force. The credit crunch began because borrowers were unable to make payments on the loans they were given. When lenders started losing money, they stopped lending money: a credit crunch.

New Century Financial is the poster child for the Great Housing Bubble. New Century Financial was founded in 1995 and headquartered in Irvine, California. New Century Financial Corporation was a real estate investment trust (REIT), providing first and second mortgage products to borrowers nationwide through its operating subsidiaries, New Century Mortgage Corporation and Home123 Corporation. The company was the second largest subprime loan originator by dollar volume in 2006. On April 2, 2007, the company filed for Chapter 11 bankruptcy protections. [iv] The date of their financial implosion is regarded as the day the bubble popped. The death of New Century Financial has come to represent to death of loose lending standards and the beginning of the credit crunch. Subprime lending was widely regarded as the culprit in starting the cycle of credit tightening, and New Century has been linked to this problem, but the scale and scope of the disaster was much larger than subprime.

The massive credit crunch that facilitated the decline of the Great Housing Bubble was a crisis of cashflow insolvency. Basically, people did not have the incomes to consistently make their mortgage payments. This was caused by a combination of exotic loan programs with increasing payments, a deterioration of credit standards allowing debt-to-income ratios well above historic norms, and the systematic practice of fabricating loan applications with phantom income (stated-income or “liar” loans). The problem of cashflow insolvency was very difficult to overcome as borrowing more money would not solve the problem. People needed greater incomes, not greater debt loads.

When more money and debt was created than incomes could support, one of two things needed to happen: either the sum of money needed to shrink to supportable levels (a shrinking money supply is a condition known as deflation,) or the amount of money supported by the available cashflow needed to increase through lower interest rates. Given these two alternatives, the Federal Reserve chose to lower interest rates. The lower interest rates had two effects; first, it did help support the created debt, and second, it created inflationary pressures which further counteracted the deflationary pressures of disappearing debt and declining collateral assets. None of this saved the housing market.

Credit availability moves in cycles of tightening and loosening. Lenders tend to loosen credit guidelines when times are good, and they tend to tighten them when times are bad. This tendency of lenders often exacerbates the growth and contraction of the business cycle. During the decline of the Great Housing Bubble, the contraction of credit certainly played a major role in the decline of house prices. Lenders continued to tighten their standards for extending credit for fear of losing even more money. This meant fewer and fewer people qualified for smaller and smaller loans. This crushed demand for housing and made home prices fall even further.

Figure 30: Personal Savings Rate, 1952-2007

One of the biggest problems for the housing market was the reinstatement of downpayment requirements. During the bubble rally, 100% financing was made widely available. This made it unnecessary for people to save money to get a house. People respond to incentives (Deming, 2000). This is basic economic theory. The availability of 100% financing removed the incentive to save for a downpayment. People responded; our national savings rate went negative. [v] Potential homebuyers, who ordinarily would have been saving money for a downpayment to get a house, stopped saving, borrowed money and went on a consumer spending spree. This created a situation in the aftermath of the bubble crash where very few potential entry-level buyers had any saved money for the newly required downpayments. This created very serious problems for a market already reeling from low affordability, excess inventory, and a large number of foreclosures.

100% Financing

Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, however they did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.

Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the downpayment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.

Table 9: Increasing Interest Rates Impact to House Prices

$        244,900

National Median Home Price

 

 $           47,423

National Median Income

 

 $             3,952

National Monthly Median Income

28.0%

Debt-To-Income Ratio

 

 $       1,106.54

Monthly Payment

         

Interest Rate

Loan Amount

Value

Value Change

4.5%

 $        218,387

 $        272,984

18%

5.0%

 $        206,127

 $        257,659

12%

5.5%

 $        194,885

 $        243,606

6%

6.0%

 $        184,561

 $        230,701

0%

6.4%

 $        177,046

 $        221,307

-4%

7.0%

 $        166,321

 $        207,901

-10%

7.5%

 $        158,254

 $        197,818

-14%

8.0%

 $        150,803

 $        188,503

-18%

8.5%

 $        143,909

 $        179,886

-22%

9.0%

 $        137,522

 $        171,903

-25%

9.5%

 $        131,597

 $        164,496

-29%

10.0%

 $        126,091

 $        157,613

-32%

Note: An increase in interest rates will have a strongly negative impact on house prices.

Rising Interest Rates

Mortgage interest rates are determined in an open market and are subject to the forces of supply and demand. These rates are the sum of three main components: riskless rate of return, risk premium, and inflation expectation. The Great Housing Bubble was characterized by historic lows in the federal funds rate, risk premiums and inflation expectations which resulted in the very low mortgage interest rates.  When credit tightened as prices started to decline, the federal funds rate was lowered in an attempt to provide liquidity to the financial markets. This did temporarily lower one of the three components of interest rates; however, since other central banks around the world did not immediately follow with similar rate cuts, the value of the dollar declined and inflation began to rise. This increased the inflation expectation among investors. The impact of increased inflation expectation was greater than the drop in short-term interest rates, and mortgage interest rates rose steadily. Declining prices also caused losses for lenders as many borrowers defaulted on their loans and the value of the collateral was not sufficient to recover the loan balance. As lenders and investors lost money, they began to demand higher risk premiums. The greater risk premiums and higher inflation expectations caused interest rates to rise and house prices to fall.

Higher interest rates had a dramatic impact on exotic financing as it became more expensive for borrowers. Interest rate spreads grew and the qualification standards tightened to the point they were not usable. This was driven by the defaults and foreclosures. In the heyday of negative amortization loans, lenders qualified borrowers based only on the teaser rate payment without regard to whether or not they could afford the payment at reset. For more sophisticated borrowers, lenders allowed stated income or “liar loans.” Basically, borrowers would tell lenders how much they wanted to borrow, and lenders would fill out fraudulent paperwork showing the borrowers were making enough money to afford the payments. This is amazingly irresponsible lending, but it was widespread. Once the price crash began, lenders required borrowers to be able to actually afford the payments; of course, this makes many borrowers unable to obtain financing. When a negative amortization loan costs 13.8% rather than 3.8%, few borrowers wanted it, and if lenders required borrowers to actually afford the 13.8% interest rate, few borrowers qualified. Either way, negative amortization loans died, and the fate of stated income loans was no better.

Mortgage rates for prime customers were very low because they rarely default. During the rally few defaulted because prices were rising; people just sold if they got in trouble. This allowed banks to originate risky loans at very low interest rates because the loans did not appear risky. Once the market stopped rising, the underlying risk started to show with increasing default rates and default losses. When prices crashed, default rates increased for all borrower classes. Prime borrowers did not default at the high rates of sub-prime borrowers, but they still defaulted at rates higher than in the past; therefore, interest rates increased for prime borrowers as well. The crash in house prices caused all mortgage interest rates to rise. Banks have to make enough money on their good loans to pay for the losses on their bad loans and still make a profit. Higher interest rates make for lower amounts of borrowing, and this in turn leads to lower house prices.

Summary

The ratio of house prices relative to incomes rose considerably during the Great Housing Bubble. Some of this increase was due to lower interest rates, but in bubble markets most was due to supply constraints, regulatory delays, deteriorating credit underwriting standards, and irrational exuberance and the belief that prices were going to rise forever. People stretched to buy real estate as evidenced by the increasing debt service burdens they took on during this time. The rally reached affordability limits where buyers could not push prices any higher. Once these limits were reached, lenders were forced come up with new programs allowing borrowers to take on even more debt to push prices higher, or the rally was going to end. Once prices stopped rising, people lost their incentive to buy and ultimately prices began a decline. This decline is expected to continue unabated until prices fall back to fundamental valuations, or perhaps even lower.

[1] Robert Shiller noted that the causes of a major turning point signifying the popping of a real estate bubble are “fuzzy.” (Shiller, Historic Turning Points in Real Estate, 2007) Any events associated with the end of a speculative bubble may be simply coincidental.

[ii] Federal Reserve Chairman Ben Bernanke gave a speech (Bernanke B. , 2007) in front of the Joint Economic Committee of the U.S. Congress on March 28, 2007 when he claimed, “Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.” In short, the FED Chairman completely missed the scale and scope of the problem. Either that, or he knew how bad the problem was and chose to lie for public relations impact.

[iii] According to Credit Suisse, 80% of subprime loans were the 2/28 variety.

[iv] The information on New Century Financial comes from their website.

[v] Studies have shown people feel less need to save when house prices are increasing in value (Baker D. , 2002).

Post off-topic ideas, links and Craigslist finds here. Please visit the HBB Forum.

California Tribe Hopes to Woo Salmon Home New York Times

Shark-Bitten Crocodile Poop Fossils Found (No, Really) Wired (hat tip reader John M)

For One Tiny Instant, Physicists May Have Broken a Law of Nature PhysOrg (hat tip reader John D)

Baldness ‘could be good for your health’ say scientists BBC (hat tip reader John D)

Nancy Pelosi steeled White House for health push Politico (hat tip Clusterstock)

The ties that bind America to Israel are beginning to fray and break Chris McGreal, Guardian

Another Gulf War Syndrome? Mother Jones (hat tip reader John D)

Greenspan versus Reality, Part 1 David Merkel

Pools That Need Some Sun Gretchen Morgenson, New York Times. Wow, even that presumed reliable bank stuffee, the Federal Home Loan Bank, are now suing banks for misrepresenting the quality of loans they sold.

Bernanke Says Large Bank Bailouts ‘Unconscionable,’ Must End Bloomberg. Kinda late to be saying that…..And even worse, he is a defender of “innovation”: “Toward a More Competitive, Efficient, and Innovative Financial System” Mark Thoma

Why financial regulation must also rebuild trust VoxEU. Per above, Bernanke does not appear to be with the program.

BTW, a week from today, from 2-4 EDT, Lambert Strether will host a discussion of ECONNED at his site. I will participate.

Antidote du jour:

Sales of new homes doubled in Orange County in January, and tripled for newly built single-family houses, Costa Mesa-based Hanley Wood Market Intelligence has reported.

Orange County’s jump from the year before was the biggest in the state among 23 California metro areas.

Buyers signed contracts to purchase 146 newly built houses, condos and townhomes in January, compared to 73 in January 2009. While many of those homes won’t close escrow, the numbers are significant since they give a glimpse of how final new home sales figures will turn out a few months from now.

And these numbers didn’t include the sellout crowds that showed up for the Jan. 30 launch of the Irvine Co.’s new developments in Woodbury. The project hit the company’s 2010 goal of 200 signed contracts within their first month, the company said.

Other highlights from the Hanley Wood report show:

Metro area Jan-09 Jan-10 % ch Orange County 33 100 203% Vallejo/Fairfield 24 53 120.8% Madera 3 6 100.0% Santa Clara County 24 34 41.7% Visalia/Porterville 38 51 34.2% Hanford/Corcoran 12 14 16.7% San Diego County 104 114 9.6% Stockton 42 45 7.1% Bakersfield 84 87 3.6% Sacramento 171 176 2.9% El Centro 17 16 -5.9% East S.F. Bay 121 98 -19.0% Napa 5 4 -20.0% Yuba City/Marysville 8 6 -25.0% S.F. Peninsula 10 7 -30.0% Inland Empire 466 273 -41.4% L.A. County 77 42 -45.5% Ventura County 13 7 -46.2% Fresno 156 83 -46.8% Modesto 24 10 -58.3% Chico 5 1 -80.0% Salinas 11 2 -81.8% Merced 16 1 -93.8% Calif. 1,480 1,230 -16.9%

• Buyers signed contracts to buy 100 newly built houses in the county in January, compared to 33 in January 2009. That’s a 203% gain, the biggest percentage gain in the state. (See chart at right.)
• Buyers signed 23 new condo contracts, up 156% from the year before when just 9 were signed.
• Only townhome and sales of duplexes, triplexes and fourplexes declined: Buyers signed up to buy 23 homes of these types, down 25.8%.
• Prices increased for all housing types except houses. Overall, the median price for all homes combined (or the price at the midpoint of all sales) was $678,267, up 26.8% from the year before.
• House prices fell 20.7% to $773,333.
• Statewide, more than half the metro areas had declines in house sales contracts signed, while house contracts dropped 16.9% in California as a whole.
• The median house price declined 4.6%  to $332,562 statewide.

The Hanley Wood Market New-Home Sales and Pricing Report is based on surveys of housing developments of 10 units or more.

Jonathan Dienhart, Hanley Wood’s published research director, said:

“The last several months have bent the trend of improvement back toward one of volatile uncertainty. As California’s broader economy still struggles with a myriad of challenges, it is unlikely we will see any dramatic recovery in coming months. Nevertheless, as we head into the spring selling season we expect to see incremental improvements and an end to year-over-year sales volume declines.”

Other real estate trends:

New house sales triple in January is a post from: Lansner on Real Estate

I don’t mean to beat up on Spencer at Angry Bear, who has provided an interesting set of comparisons on the perennial question of many investors, “Whither the stock market?”

But one section of his discussion, precisely because it is such conventional thinking, is an illustration of how the blind pursuit of “maximizing shareholder value” is not all it is cracked up to be:

The recent productivity report received much attention. But I did not see anyone point out that the spread between nonfarm corporate prices and unit labor cost was 5.25%, the widest spread on record.

This spread is the single most important variable driving corporate profit margins and implies that you should expect major positive earnings surprises.

Yves here. Translation: employers are continuing to squeeze down on workers to improve their margins. And the US has been pursuing that strategy for some time, of shifting the composition of GDP growth away from increases in worker incomes (via hiring and/or paying them more) to increases in corporate profits. The shift was dramatic in the last supposed expansion; it was called a “jobless recovery” for good reason. In every previous postwar growth period, the labor share of GDP growth was never less than 55% and had averaged not much less than 60%. In the pre-crisis expansion, it plunged to 29%.

Before some readers contend that this pattern is inherent to the “maximizing shareholder value,” let’s start with one consideration: strategies that focus on that goal actually do less well than ones that pursue broader aims. John Kay notes in a 2004 Financial Times article (sadly, no longer available on line):

Paradoxical as it sounds, goals are more likely to be achieved when pursued indirectly. So the most profitable companies are not the most profit -oriented, and the happiest people are not those who make happiness their main aim. The name of this idea? Obliquity….

Obliquity is characteristic of systems that are complex, imperfectly understood, and
change their nature as we engage with them…..

Obliquity is equally relevant to our businesses and our bodies, to the management of our lives and our national economies. We do not maximise shareholder value or the length of our lives, our happiness or the gross national product, for the simple but fundamental reason that we do not know how to and never will. No one will ever be buried with the epitaph “He maximised shareholder value”. Not just because it is a less than inspiring objective, but because even with hindsight there is no way of recognising whether the objective has been achieved.

For most of the 20th century, ICI was Britain’s largest and most successful manufacturing company. In 1987, ICI described its business purpose thus: “ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science. “Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate.”….

In 1991, Hanson, the predatory UK conglomerate that had successfully acquired and reorganised sluggish British manufacturing businesses such as Ever Ready and Imperial Tobacco, bought a modest stake in ICI. While the threat to the company’s independence did not last long, the effects were galvanising. ICI restructured its operations and floated the pharmaceutical division as a separate business, Zeneca. The rump business of ICI declared a new mission statement: “Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base.”….

ICI made the opposite shift – from a grand vision of the responsible application of chemistry to a narrow concentration on established, successful activities. The aim of bringing benefit to a wide range of stakeholders was replaced by the specific objective of creating shareholder value from narrowly focused operations. The company translated this into an operational strategy by disposing of the company’s interests in bulk chemicals to acquire a niche group of speciality businesses: ICI, once the main supplier of chemical products to one third of the world, was reinvented as a smells company.

The outcome was not successful in any terms, including those of creating shareholder
value. The share price peaked in 1998, soon after the new strategy was announced.
The decline since then has been relentless. After two successive dividend cuts the
company was ejected in early 2003 from the FTSE 100 index, the transition from
industrial giant to mid-cap corporation had taken only 12 years…..

Obliquity gives rise to the profit -seeking paradox: the most profitable companies are
not the most profit -oriented. ICI and Boeing illustrate how a greater focus on
shareholder returns was self -defeating in its own narrow terms. Comparisons of the
same companies over time are mirrored in contrasts between different companies in
the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary
Companies, Jim Collins and Jerry Porras compared outstanding companies with
adequate but less remarkable companies with similar operations….

Collins and Porras….found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

Yves again. Simple-minded profit seeking is not what it is cracked up to be. And worse, squeezing worker wages to not simply preserve, but increase profits, is destructive on an economy-wide level (note the rising gap between wages and prices disproves the canard that the wage pressure is necessary to preserve competitiveness).

US business used to operate with the idea that the returns resulting from productivity gains would be shared by workers and the company; that notion now seems as dead as the dodo. But not allowing workers to participate in improvements in corporate returns blunts overall economic growth. Companies are fattening their current bottom lines at the expense of future top line growth. But in our current climate, this strategy looks just dandy….until government stimulus starts to be withdrawn.

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It's pretty obvious that when when some promoter suckers multiple investors into investing in a real estate deal with false promises, that's real estate fraud.  Many people however, are not aware that by the act of creating a real estate investment product, a security can be created. Real estate fraud can sometimes be securities fraud as well.  Here are some recent cases prosecuted by the Arizona Corporation Commission:

The Commission ordered Rex G. Wheeler of Utah to pay $3,174,871 in restitution and a $150,000 administrative penalty for committing securities fraud in connection with an unregistered real estate investment program. The Commission found that while not registered as a securities dealer or salesman in Arizona, Wheeler pooled the money of 17 investors, promising that he would fund real estate loans made to a company in the business of acquiring high-end residences. He assured investors that their money would be safe due to the superior industry reputation of the company acquiring the real estate, but the Commission found that the company did not provide Wheeler with a first-position deed of trust on any real estate. Further, the Commission found that Wheeler extensively comingled investor funds with those of his real estate companies, spending the funds for business and personal expenses. In settling this matter, Wheeler agreed to the entry of the consent order and admitted to the Commission’s findings only for purposes of the administrative proceeding. In a separate case, the Commission ordered Phoenix resident Scot A. Oglesby to pay $13,760 in restitution and a $40,000 administrative penalty for fraudulently offering and selling unregistered deed of trust investments. The restitution amount represents the commissions that Oglesby earned while working as an employee of Mutual Financial Services. The Commission found that while not registered as a securities salesman, Oglesby sold the deed of trust investments to at least 18 investors, most of whom were Arizona seniors. Oglesby told investors that the investment was safe because it was secured by real estate, [I wonder if his was the ad I remember reading?] but the Commission found that he failed to disclose that the real estate development was already encumbered by a first mortgage and that the state of Nevada had taken legal action against him for securities violations. In settling this matter, Oglesby agreed to the entry of the consent order and admitted to the Commission’s findings only for the purposes of the administrative proceeding.

In another matter, the Commission sanctioned Gregory M. Sir of Paradise Valley and his company with a $90,000 administrative penalty for offering and selling unregistered investment contracts and deed of trust investments while not registered to sell securities in Arizona. The Commission found that as the president of Sir Mortgage and Finance of Arizona, Inc., a licensed Arizona mortgage broker, Sir used investor money to fund a wide variety of “hard-money” loans, ranging from $100,000 to $4.5 million secured by real estate. In settling this matter, Sir neither admitted nor denied the Commission findings, but agreed to the entry of the consent order, submitting full payment for the administrative penalty to the state of Arizona.

…

A separate matter involved Stephen G. Van Campen of Peoria who agreed to pay $855,000 in restitution and a $50,000 administrative penalty for offering and selling unregistered securities in a real estate investment program. Van Campen was a licensed real estate salesman, but was not registered to offer or sell securities in Arizona. The Commission found that Van Campen promised investment returns up to 100 percent and represented that investor money would be used to buy commercial buildings under construction—including a condominium project in Rocky Point, Mexico—that would eventually be sold for substantial gains. The Commission found that while working as an employee of Mark Bosworth & Associates, LLC, [ Remember Bosworth?]Van Campen sold the investment program to five investors who were solicited either through newspaper advertisements, web sites, seminars or van trips to Mexico. In settling this matter, Van Campen agreed to the entry of the consent order and admitted to the Commission’s findings only for purposes of the administrative proceeding.

So how can you tell if a real estate investment program is a security or not?  According to the Arizona Corporation Commission, you need to ask:

Even when selling a legitimate product, some promoters do not recognize the investment program they have created is a security. Whether a real estate investment is a security is not always easy to determine and depends upon the unique facts and circumstances of the transaction and not on what a promoter calls the investment product. Even when investing with someone they know, investors should verify the registration of sellers and investment opportunities and investigate disciplinary histories…

Sorry if I"m supposed to already know this even tucked away up here the the Maritimes, but what exactly does this Geico company do all of …

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This is an article describing the changing dynamics in the Phoenix housing market ...

From Craig Anderson at the Arizona Republic: Real-estate investors, who once fueled a run-up in home values, now helping stabilize market (ht JG) For decades to come, participants in the Valley's housing economy are sure to remember 2009 as the Year of the Investor. ... Investors and bank foreclosures helped boost Maricopa County home sales up to 78,899 in 2009, up from 58,454 the previous year, according to The Arizona Republic's analysis of 2009 Valley home-values data from the Information Market, based in Phoenix.

... [Alan] Langston, executive director of the Arizona Real Estate Investors Association, based in Tempe, said a number of recent developments have slowed the rate of lender foreclosure in recent months ...

One factor is the rise in short sales, which have replaced about 25 percent of the foreclosures banks were initiating a year ago, he said. ...

Another recent change is the decision by some lenders to use "drop bids" to sell more properties in default to third-party investors before they become bank-owned, he said.

Before the first half of 2009, it was rare for private parties to buy homes at a trustee's deed sale, a cash-only auction for pre-foreclosed properties that takes place daily at the Maricopa County courthouse.

Drop bids changed all that, Langston said. They are a last-minute decision by the lender to slash a property's auction price. Langston said drop bidding has helped lenders avoid taking possession of even more homes while providing new opportunities for buyers.These investors are very different from the "investors" (really speculators) in the 2003 - 2006 period. The current investors are paying all cash - and planning on renting the homes until prices increase. Of course this is supply that will come back on the market eventually ...

A flurry of news reports abound as President Obama puts on a full court press to pass legislation no one really wants except the President and those who have been bribed. Let's take a look at a handful of articles.

Democrats About Six Votes Short on Health Care, Officials Say
March 19 (Bloomberg) -- Democrats need about six more votes from House members to pass a U.S. health-care overhaul, Obama administration officials said today.

White House and Democratic leaders aim to collect those votes from a pool of about 14 to 15 undecided lawmakers to get to the 216 votes needed to pass the measure, according to the officials, who spoke on condition of anonymity.

Obama has met or called about three dozen lawmakers in the last five days and has cleared his schedule today for more last- minute appeals, including a campaign-style rally in nearby Fairfax, Virginia.

Obama postponed a five-day foreign trip to Indonesia and Australia to remain at the White House this weekend to ensure passage of a $940 billion bill that is of “paramount importance” to his presidency, spokesman Robert Gibbs told reporters yesterday. House Leaders Work to Alleviate 11th-Hour Medicare Concerns
March 19 (Bloomberg) -- House Democratic leaders worked to defuse an 11th-hour rebellion by more than a dozen lawmakers angry that hard-fought increases in Medicare reimbursements for local hospitals were removed from health-care legislation.

“My state is getting screwed,” said Representative Peter DeFazio, an Oregon Democrat. “They have to fix it. I’m a ‘no’ vote unless they fix it.”

Lawmakers representing health-care providers in 17 states are affected by the change, he said. As House leaders corral votes in favor of the legislation, DeFazio said “there are a number of people who may be miscounted at this time.”

House leaders, trying to round up 216 votes to pass revisions to the Senate bill, are working to craft a provision on the Medicare payments that would survive parliamentary challenges by Republicans when the measure is debated in the Senate.

‘Legitimate Concern’

Asked about the issue at a press conference, House Speaker Nancy Pelosi told reporters “we do want the language to be closer” to the House measure, which satisfied lawmakers “who have a legitimate concern about the reimbursement to their states being unfair.”

“We are working on that language,” the speaker said.

A provision to change the Senate version was removed from the legislation yesterday, shortly before House leaders unveiled changes, DeFazio said. It was deleted because Senate staff members told House leaders it might run afoul of parliamentary challenges by Senate Republicans, DeFazio said.

To pass muster, every provision must reduce the deficit under budget reconciliation procedures being deployed to enact the most comprehensive redesign of the health-care system in five decades.

Lawmakers are trying to rewrite the provision to win a favorable ruling from the Senate parliamentarian.
House Bill on Healthcare Is Constitutional, Hoyer Tells CNBC
March 19 (Bloomberg) -- The U.S. House bill on health care that is slated to come to a vote this Sunday is constitutional and should withstand legal challenges, Majority Leader Steny Hoyer told CNBC.

“There’s little doubt in my mind that this bill and its provisions are in fact constitutional,” Hoyer, a Maryland Democrat, said today.

Hoyer said with a “bill of this magnitude,” legal challenges are likely. “That’s the American system that people have an opportunity to say, ‘Look, what you did was not appropriate.’”

The stakes are so high for President Barack Obama that he postponed until June a planned five-day trip to Guam, Indonesia and Australia to remain at the White House this weekend to lobby wavering lawmakers to support the 10-year, $940 billion bill in the last two days.
Obama Rallies Democrats Who Predict Health Passage March 20 (Bloomberg)

President Barack Obama rallied House Democrats to back health-care legislation that he called “the toughest insurance reforms in history” as party leaders said they would have the votes to pass the overhaul tomorrow.

“We have been debating health care for decades,” Obama told lawmakers today at the U.S. Capitol. “It is time to pass health-care reform for Americans, and I am confident you are going to do it.”

The legislation requires Americans to get insurance, offering government aid and new purchasing exchanges to help. Insurers such as Indianapolis-based WellPoint Inc. would get millions of new policyholders, while being required to accept all customers, even with pre-existing conditions.

Representative Dan Lipinski, an Illinois Democrat, said he’s switching his vote to “no” because of the abortion issue. New York Representative Michael Arcuri, who voted for the original House bill, said he’s now a “no” because the new measure doesn’t do enough to control costs. Massachusetts Representative Stephen Lynch is also switching to “no,” the Boston Herald reported.

‘Yes’ Votes

On the other side, Democrats John Boccieri of Ohio, Allen Boyd of Florida, Bart Gordon of Tennessee, Dennis Kucinich of Ohio, Suzanne Kosmas of Florida, Betsy Markey of Colorado and Scott Murphy of New York all now plan to vote “yes” after voting “no” in November, according to statements from the lawmakers or their offices. Hatch Says It’s ’Nuts’ to Think House Vote Ends Health Issue
March 20 (Bloomberg) -- Republican Senator Orrin Hatch said Democrats in the U.S. House of Representatives are “nuts” to think tomorrow’s vote on health-care legislation will resolve the issue.

If the measure passes, Senate Republicans have enough votes on at least two points of order to alter the measure and send it back to the House for a second round of votes, Hatch said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

“If those people think they’re only going to vote on this once, they’re nuts,” Hatch said as House Democratic leaders rounded up support before the scheduled vote on President Barack Obama’s top domestic priority.

The senator from Utah also said the approach Democrats are using to pass the legislation in the House may be unconstitutional because the House and Senate aren’t voting on “exactly the same language.” Business Groups Press Lawmakers to Oppose Health-Care Measure
March 19 (Bloomberg) -- Business groups led by the U.S. Chamber of Commerce today urged lawmakers to oppose the Democratic-backed health-care legislation, as the House headed for a showdown vote this weekend.

The Chamber, the nation’s largest business group, the National Association of Manufacturers and the National Retail Federation told lawmakers in letters that their health-care votes will be highlighted in annual scorecards sent to members before the November election.

The bill is “fundamentally flawed” and would impose job- killing mandates and penalties on businesses and increase taxes, the Chamber said in a letter to members of the House of Representatives. The group said Congress must “start over.”

“The measure would drive up labor costs to the point of forcing job losses,” the National Retail Federation said in its letter. “A ‘transparent procedural ploy’ for passing the package would harm Congress’s reputation.” Caterpillar: Health Bill Would Cost Company $100 Million
Caterpillar Inc. said the proposed overhaul of the U.S. health-care system could increase its costs by $100 million, signaling disquiet in corporate America about the controversial plan.

In a letter Thursday to House Speaker Nancy Pelosi (D., Calif.) and House Republican Leader John Boehner (R., Ohio), Caterpillar urged lawmakers to vote against the plan "because of the substantial cost burdens it would place on our shareholders, employees and retirees."

The company said the potential extra costs would primarily come from provisions to tax the federal subsidies the company now receives for providing prescription-drug benefits to retirees and their spouses.

Since the Medicare drug program was enacted in 2003, Caterpillar and more than 3,500 companies that already provided drug benefits for retirees have received tax-free subsidies from the federal government as an incentive to maintain their drug programs.

The subsidies average $665 per person covered under a company-sponsored prescription program, according to benefits consultant Towers Watson, which recently completed a study on the health-care legislation's effects.

Watson Towers estimates federal taxes on the drug subsidies would amount to $233 per person receiving drug benefits under such programs.

McDevitt estimates that a company with 25,000 retirees on subsidized drug benefits could see its 2010 earnings reduced by $70 million.

Business executives have long complained that the options offered for covering 32 million uninsured would result in higher insurance costs and hinder economic growth. Opponents of the legislation have stepped up their attacks in recent days as the House moves closer toward a vote on the Senate version of the health-care legislation.

A letter Thursday to President Barack Obama and members of Congress signed by more than 130 economists predicted the legislation would discourage companies from hiring more workers and would cause reduced hours and wages for those already employed. States Say We Don’t Need No Stinkin’ Health Reform
If Democratic leaders ever get a health-care overhaul through Congress, they could find themselves only halfway through the slog.

While no arm is left untwisted, no parliamentary maneuver ignored on Capitol Hill, state legislatures have been busy themselves passing laws to defeat whatever package emerges.

Idaho wants no part of any overhaul dreamed up in Washington. Neither does Virginia or Arizona, their legislators say.

“The citizens of our state won’t be subject to another federal mandate or turn over another part of their life to government control,” Idaho Governor Butch Otter declared this week when he became the first governor to sign into law a so- called Health Freedom Act.

The Idaho law says every Idahoan is free “to choose any mode of securing health-care services without penalty.” It then instructs the attorney general to go to court to make that happen.

Already, the law has legal problems of its own. Idaho Attorney General Lawrence Wasden points out that the state constitution gives him the job of deciding whether to go to court and when. No mere statute can change that.

And Wasden isn’t ready to declare his position.

“If Congress does pass legislation, we will review it and determine at that point whether we can bring a lawsuit that has merit,” says Wasden spokesman Bob Cooper.

Virginia’s Route

Virginia’s legislature went a different route. Without telling the attorney general how to do his job, the lawmakers passed a bill that says no Virginia resident “shall be required to obtain or maintain a policy of individual insurance coverage.”

Even advocates say that amending the constitution is a legally preferable route to passing a mere statute.

The Arizona legislature has already gone the amendment route and passed a proposal that will appear on the ballot in November.

But that isn’t law yet. And if you put those three all together, they don’t add up to much of a roadblock at this point.

Gaining Momentum

So advocates point to their movement’s momentum. Beyond the three states, some 30 to 35 others have bills pending, they are quick to say.

There is a long road between dropping a bill in a hopper and attending a signing ceremony. And then, whatever state efforts get that far would have to survive a federal court fight.

“The ivory tower folks will tell you, ‘No, they’re not going anywhere,’” Otter told reporters. “But I’ll tell you what. You get 36 states, that’s a critical mass. That’s a constitutional mass.”

That number approaches the 38 states it takes to ratify an amendment to the U.S. Constitution. Otter is getting ahead of himself, given that his own attorney general, a fellow Republican, has already said he may or may not try to enforce the new law.What A Mess

I am confident President Obama will buy the six votes he needs. That is the way the system works. I am less certain that the House reconciliation bill passes Senate challenges. If not, expect to see the bill back in the House at least once. Should that happen President Obama may need to convince 6 more representatives to sign on. Is that doable? At what cost?

There will not be a vote on Monday unless Pelosi thinks she has the votes. However "think" and "have" are likely but not necessarily the same thing. All it would take is a couple of representatives to decide to torpedo the legislation or simply get cold feet.

That said, the most likely outcome is President Obama will buy the votes he needs. It will be much more difficult the second time if the Senate sends it back because of procedural rules so the House better get it right the first time.

Next week, we will see who is "nuts" and who isn't. Meanwhile, a bill that 37 states and the majority of the US do not want is about to be rammed through Congress by a President willing to buy out anyone and everyone who is against it.

Payback time is November.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.