San Diego Housing Bubble News and Analysis

You're correct.

In the early 1990's, I worked through the RTC cleanup as an analyst on a mortgage bond trading desk, whole loan securitization, pouring over pools of mortgages, working with underwriters, analyzing characteristics of the underlying debt instruments so as to optimize the return on the securitization process for the bank.

The quality of debt in circulation now is easily 3-5 times worse, and I suspect that's a conservative estimate. If total losses end up in the range of $1-2T, I believe that puts us about 30% of the way through the write-downs. Many more failures on the way, major institutions beyond Bear and IndyMac.

Also, I would suggest that the impact of today's crisis has spread far beyond subprime and the secondary mortgage market. The larger market for credit has become extremely tight, which exerts further downward pressure on the economy just as we are entering into a fairly serious business cycle correction / contraction.

On top of this, we're going to have to cut spending at the state and local levels -- again, just as we're entering into a contraction. The federal side is in a bind as well, walking the monetary tightrope between stagant growth and inflation. Things are precarious right now, and I'm quite concerned.

@Gandalf, it sounds like you know the debt business fairly well. Given this situation as you've described above, where do you see interest rates on mortgages headed in the next 12 months?
Thanks.

Given this situation as you've described above, where do you see interest rates on mortgages headed in the next 12 months?

You might want to clarify. There is a difference between treasury rates, fed reserve window rates and mortgage rates.

"...,where do you see interest rates on mortgages headed in the next 12 months?"

What will a 30 year fixed be?

That is a GREAT question. I've thought about it often and I don't know the answer. Short-term, if we can hold things together, I think they'll be about the same. The powers that be seem engaged in a kind of stumbling defense of the status quo and a long, slow unwinding. The Bear and GSE bailouts offer us insight with their emergency meetings -- they don't know what to do. Many of the traditional options for dealing with the current environment are having limited effect or involve adverse consequences.

I used to think we would run out the value on all this debt with inflation, CPI of 10% over five years would certainly make all this ridiculous debt easier to carry. Sounds simple enough, and inflation is up. Problem is, output and wages aren't following, unemployment is spiking, especially in certain regions, and the economy is at risk of a severe contraction. Asset prices are falling back down to earth, leaving the paper out to hang in the wind. On the dollar-side, debasing makes petrol expensive, which further crimps output. Throw in the outside possibility of a currency crash.

Some general observations, I'm certain the economic dislocations are going to be very severe in certain regions and the economic pain will be unevenly distributed, just as it was in the S&L crisis. We're seeing this here in San Diego, with some neighborhoods getting devastated while others barely notice a difference. On balance, I think local RE will be down for a while. We're a destination city with a diversified economy and all, but fundamentals are so incredibly out of whack -- supply/demand, affordability, rent-price ratio, etc.

Back in 2005 or so, there was a lag between fed tightening and continued excesses in the real estate / mortgage business. I asked Rich what he thought about it. It was puzzling to me, and to him as well. Whatever the root cause (globalization?), it highlights how much we overestimated our ability to 'scheme' our way out of things, and underestimated the broader consequences of misguided behavior in the marketplace.

A quick aside, I've enjoyed following this website the past couple of years. It's provided a wonderful forum for exactly these kinds of questions and conversations. (Many thanks, Rich.) All of us, we're trying to figure things out as best we can, unchartered territory of sorts. Let's hope it ends well.

What do you think? Look forward to your thoughts.

isnt it much worse?

Having witnessed the S&L crash and the down cycle in RE in the early 1990's, I would call this "much worse" without a doubt. Foreclosures topped-out in SD County at around 700 a month after years of downward pressure. We're now near 2,000 a month in about 1 or so years. And it seems to be growing with more in the pipeline. Almost anyone who bought from 2004 on is now upside down. That's a lot of transactions. Throw in refinance as well and you've got many people who owe more than their home is worth. Unemployment growing and wages totally stagnating for the last 8 years.
And this is systemic, not just CA. Many parts of the country are going through this and now it appears that RE bubbles are bursting in countries around Europre and Asia.
I think that any rise over 1% more would be the final nail in the coffin of RE. So it would be hard for it to rise. I suspect that the new loan world will be one of at least 20% down and extensive documentation on income as well as much more conservative DTI ratios. This of course may have a similar, albeit, less effect as raising rates in that it will take a lot of potential buyers out of the market, while mitigating more of the risk.

Yeah, totally. peterb, I agree with everything you said, and the extra basis point on the cost of money side puts additional pressure on pricing. No where to turn.

The only glint on the cloud is that wages have risen for most so anyone saying 'prices will go back to 2000' or whichever year you choose, should really, adjust their view to adjust for the fact that 2000 prices are now a lot more affordable than in 2000 (see Rich's CPI adjusted chart).

The exceptions are low skilled jobs where wages have hardly move in the 21st century brought on by globalisation and immigration, so areas that had /have demand mainly from people with those kind of wages cannot have this silver ling.

Of course, in the rich areas, incomes and wealth have shot up since 2000 to to a surge in inequality brought on by the same globalisation , much reducing the extent of any price crash.

I think eveyone should check out shadowstatistics.com to get a real view of what saturating the world with US$ has done to the value of the US$. A quick look at the Euro and Gold will give you a quick snap shot of reality. Sure the US$ has rebounded a little lately. But check out it's 5 year chart against these other commodities. Show me how US wages have faired against this drop in US$ value?

Show me how US wages have faired against this drop in US$ value?

The flip-side is that perhaps domestic salaries were too high (and oil too low) making labor costs excessive for US employers and creating a big push for out-sourcing.

I've seen more and more stories about American communities experiencing oil booms, as the high price of petro is making it economical to produce it locally.

I've heard Houston is doing quite well. Oil services in general. Maybe OK as well? It's come down to natural resources. A glimmer of hope.
Wage arbitration is alive and well. Most Asians sill make way less that US counter parts. Of course, Central and south america is not much different.

The only glint on the cloud is that wages have risen for most so anyone saying 'prices will go back to 2000

Most people talk about 2000 prices in the real sense, not the nominal sense. Since 2000 the wages of all the top 1% have at best been flat versus inflation. That means there really is no fundamental reason that prices should be any higher in real terms over the year 2000 prices. What drove up prices was the easy availability of lending that led to record highs for homeownership. People also tend to spend other people's money much differently than they'd spend their own.

Inflation only helps debt if we get the corresponding wage inflation as well. Without wage inflation the debt becomes that more toxic as people are squeezed even tighter by increased costs.

Hello Deflation!! It's coming on hard and fast now. What's Ben's next trick to get reflation going? I cant wait for this one.

Are they still saying the Mortgage Crisis is not as bad as the S&L crisis?

I pretty sure that Fannie and Freddie are bigger than all the failed banks of the 90's, well all the failed banks put together ever for that matter.

Houston, Dallas, Atlanta are all boom cities now with much cheaper housing and higher wages than here in San Diego.

The problem with San Diego is the government is so anti business, anti growth. All the silly fees, licenses, hoops to jump through. This means no companies of any size will move here because it costs too much to operate here and it costs too much to move employees here.

I see years of gradually lowering house prices as the old folks die off and leave their houses to their 50 year old surfer dude kids who have never had a job worth mentioning on a resume.

John

CA is a horrible place for small business owner because rents, employee costs (low end retail only) are much higher (30-50%)than Houston, etc, while revenues are 10-20% higher. The state regs are usually small part of problem. Why open a small retail/rest here when in another state you can actually make profits? Nice weather is always the pat answer. People want to live here, even if it is financially irresponsible.

"If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered." - Thomas Jefferson

"Hello Deflation!! It's coming on hard and fast now. What's Ben's next trick to get reflation going? I cant wait for this one."

I have been wondering the same thing, and I came up with the following:

- Fed or Treasury takes over Fannie and Freddie

- The new nationalized lending institution offers home owners refinancing at Greenspan rediciously low rates 1% -2%.

- Now bad mortgages (6%) are refinanced to 2% and the defaults go much lower. The rent to own equation moves in favor of own - the ownership cost is cut by 60%.

- The Fed creates new mortgage bonds that it forces the reserve banks to buy (or locks them out of the short term, or long term lending facilities).

- The Fed justifies this by saying it would cost more to do nothing.

- The cycle of mortgages going bad is stopped or at least the housing crash is delayed and slowly deflates - in a manageable way for banks.

- The new money to pay for the above, adds to inflation, and in a few years, (10), the problem is solved.

I am really hoping that someone can explain why this will not work, and that the FED will need to come up with a real solution!

bubba99, I think the kind of inflation they're thinking of is the kind that stimulates growth. Otherwise it's really devaluing the UD$ even more and we still get a recession/depression.

I think that's essentially what the Japanese did in the 1990's. Bury the problem. But I think it is a recipe for stagflation at best. And it's probably what we'll get except that we're not nearly the exporter that Japan is. So it'll be way worse for us.

The real problem, as I see it, is that credit has been destroyed. This forces everyone to consume at the level of their real wages. And real wages have not increased in at least 10 years. I think this may be the major part of Peter Schiff's thesis that we are headed back to housing prices of the late 1990's. Because that's when the mortgage lending practices were realistic and sustainable.

I think that this time, the market cannot be denied.