“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Monday, January 21, 2008

Which Candidate Can Help Housing?

There is so much distortion in housing, one knows hardly where to begin to fix the problem. Some of it is structural. Too many overly large houses were built in almost every market. Do not be surprised to see many of them converted into twin units in the future.

No surplus dollar holders are going to start throwing money at housing again and make no equity loans. The problem is intensified by vanishing equity. It is inconceivable that housing prices will continue to go anywhere but south.

It will spill over to all parts of the economy. The reverse wealth affect will affect automobiles and consumer hard goods markets for some time. It is also hard to believe that presidential and congressional candidates are going to argue to permit markets to take their course. That will not happen. Someone will win the coming election. There is a real possibility and likelihood that someone will make things worse. Any ideas?

Overvalued homes discourage buyers
By Patrice Hill
January 21, 2008

Home prices are falling at a record pace and are down by 6 percent or more from their peaks, but economists say that may be just the beginning.

Computer models show that home prices remain as much as 50 percent too high in major cities, where even households with twice the U.S. median income of $47,845 often are unable to afford median home prices ranging from $400,000 to more than $600,000.

The overvaluation of homes has created a buyers strike as potential buyers sit on the sidelines waiting for prices to fall. How much prices have to drop to bring buyers back into the market has become a critical question for the housing market and the economy.

Hanging in the balance is not only the health of the housing and finance industries but also the accumulated wealth and chief asset of the nearly 70 percent of Americans who own their homes.

James Haffly, an Alexandria defense worker, would like to buy a house in the Washington area but thinks that prices are way too high and must come down substantially.

"Housing is out of reach for many folks here unless they have a rich relative," he said, noting that having a high-income, dual-earner family doesn't suffice anymore to buy a typical "starter" home for about $400,000.

He's hoping that the 1 million to 2 million foreclosures predicted nationwide this year will help to drive down prices to affordable levels.

"I mean, here we are at $125,000 a year, and to buy a home on the low end means spending 40 percent of our take-home pay. Something ain't right. I wouldn't buy in this market, not with rent amounts at half or less of what a house payment would be."

Mr. Haffly said he is willing to wait a year or more until prices fall to a level he can comfortably afford. Meanwhile, he can take advantage of the many good deals available on rental housing — sometimes offered by desperate real estate investors who are renting out properties to avoid foreclosure.

The eagerness of buyers to see prices drop puts them at odds with millions of homeowners and banks who financed home purchases and refinancings during the housing boom. These homeowners and lenders face big losses and even foreclosure if prices fall too far. The 5 percent to 25 percent drop in prices in some D.C. suburbs already has spawned record foreclosures and losses.

Ultimately, economists say, how far prices fall could be a critical factor determining whether the U.S. economy experiences only a mild downturn this year or a full-blown recession with wrenching dislocations for homeowners and bank failures that the nation hasn't experienced in nearly two decades.

"The underlying cause of the problems in the financial sector is a persistent fall in house prices," said John Makin, economist with the American Enterprise Institute for Public Policy Research. He expects prices to keep declining until next year for a cumulative reduction of 15 percent nationwide. Such a decline could involve much bigger drops in high-priced cities such as Washington.

Like many economists, Mr. Makin is concerned about the consequences of such big price drops. While it might make houses more affordable for first-time home-buyers, it is hurting homeowners who made a habit of tapping into their housing gains during the housing boom to finance an array of purchases from second homes to college educations. The home-fueled spending was an important impetus to economic growth in recent years.

"The drop in house prices has removed a large part of the elastic credit and wealth appreciation that helped to support consumption during the period of zero savings since the last recession in 2001," Mr. Makin said.

The tense standoff between buyers and homeowners is slowly playing out in the home sales market, where sales have fallen by half since 2006 as buyers wait for bigger price drops and better deals. Many homeowners are pulling their homes off the market rather than sell at steep discounts that buyers are demanding.

"Sellers continue to adjust their price expectations downward but not quickly enough to keep pace with declining demand," said Stephen Bedikian, research director at Real IQ, which tracks home prices in the top 20 U.S. markets.

The group found that price drops accelerated in high-priced cities such as San Francisco, San Diego and Washington at the end of last year after a credit crunch sharply restricted mortgage lending.

Three types of loans were particularly affected: jumbo mortgages of more than $417,000 needed to buy high-priced homes, loans for people attempting to buy homes with no down payment, and "subprime" borrowing by those with shaky credit.

Mr. Haffly puts himself in the latter two categories. He and his wife are attempting to repair their credit after problem credit-card debt put them into a troubled category. On top of that, they would need to finance 100 percent of their home purchase because they have not saved enough for a down payment.

The difficulty buyers are having getting loans is making it harder and even impossible for some to buy high-priced homes, putting further pressure on sellers to lower prices, analysts say.

David A. Levy, head of the Jerome Levy Forecasting Center in Mount Kisco, N.Y., estimates that house prices have to fall from 30 percent to 50 percent from their peaks now that many of the loan products that made homes affordable to first-time buyers have disappeared.

Estimates of how far prices must fall often are based on the historic relationship between home prices and rents. A model comparing the monthly cost of renting versus homeownership in major U.S. cities developed by RBS Greenwich Capital finds home prices overvalued by 24 percent in the D.C. area and 16 percent nationwide at the end of last year.

Among the biggest losers as prices continue to drop are banks and brokerages, which have provided mortgage financing for much of the nation's $23 trillion housing stock. Mr. Makin estimates a 15 percent drop in home prices would cause a $3.5 trillion loss of home values nationwide.

Such a gigantic loss eclipses the $1 trillion of capital banks and brokerages have on hand to offset their share of the losses, he said. Because of that, he predicts banks will be scrambling to shore up their finances — and as a result restricting lending to consumers and businesses — for some time to come.

Their troubles will weigh on the economy, which Mr. Makin expects to fall into recession. He also thinks that bank losses will lead to failures of some financial institutions and an eventual federal bailout of bank depositors that will eclipse the 1980s savings and loan bailout in size.

"This time, the cost — even excluding shareholders — could run to $500 billion," he said


  1. Outrunning the avalanche

    Credit crisis looms large over annual Davos summit

    By William L. Watts, MarketWatch
    Last update: 5:30 p.m. EST Jan. 18, 2008
    Print E-mail RSS Disable Live Quotes
    LONDON (MarketWatch) - With the world's financial markets teetering on the brink of panic, the world's most powerful executives, financiers and politicians will be searching for answers to the global credit meltdown when they gather for their annual retreat next week in the Swiss Alps.
    The annual meeting of the World Economic Forum in Davos isn't designed to produce detailed policy proposals, but participants say it will provide a platform to take a look at what went wrong. And front and center will be a look at how the practice of selling mortgages to home buyers and then re-packaging them and selling them as securities to other institutions got so out of hand on a global scale.
    "I think there will be a high level debate on whether the 'originate and distribute' model now prevalent in financial markets is sustainable," said Howard Davies, director of the London School of Economics and Political Science. "That's the high-level politico-economic question."

  2. Makin says that things should get better in 2009. The conventional wisdom is that there is an 18-month supply (as of nov/dec) of housing on the market today. If we have only a 12% correction in house prices that would be great for most of us who enjoyed the almost doubling in house prices from 2001 onward. Yes, in some parts of the country appreciation went from a traditional 5%-6% per year to a superheated 15%-25%. In the high growth states and cities, the coming correction may be closer to 50% than 12%. For many people, that simply means that they won't make a "killing on the house" when they get ready to retire and move to Florida.

    Corrections are good things. They restore a measure of sanity.

  3. Corrections are good things. They restore a measure of sanity.

    ...and make for good buying opportunities.

  4. here in our neck of the woods we never saw more than 2% a year growth in home prices for MOST of the state.

    There were small selected areas in that seemed to be crazy that had growth in prices of 10-25% a year...

    to those speculators i say...

    sometimes you win and sometimes you loose...

    aint our problem

    On the coasts I had watch with amazement at the prices soaring beyond belief and guess what? they were

    from the days of price earning ratios for amazon in the 14,000 - 22,000 range, the markets seem to swing to the unbelievable, sucking stupid,greedy people into them

    this cycle is not new...

    every few years it is a NEW concept that will find the suckers that are born every minute.

    MOST of AMerica is not suckered, Most of us have memories and historic knowledge...

    If you are offered an investment that promises a 10-25% apr buyer beware...

    Somehow select groups of people loose their minds every so often, gambling on scheme like i gamble on whether to put extra pickle on my burger..

    day traders, home speculating, network marketing (herbalife), magnets, flipping, stock market/tech stocks, if i gave it some thought I could make a list of ways greedy, stupid people SPECULATE and call it investing...

    corrections are good...

  5. We are now seeing another aspect of the "War on Terror" inflation, spreading into the economy.

    The real estate values reflected the loss in the dollars value.
    New housing being a sum of various commidities & labor.

    Labor costs had been held steady, regressed in real terms, by using the illegal labor market to skew that part of the equation, since the last Real Estate meltdown, the S&L fiasco that McCain was a keystone player in.

    Greater Phoenix Median Home Price Changes from December 2006 to December 2007. Single Family Homes

    More than the 10% decline in values, but it is the 24% decline in year to year sales that is causing the economic disruption. Considering Phoenix was the already the low cost alternative to San Diego and las Vegas.

    The median household income in the city was $41,207. The median home value now $200,000.

    A standard 20/80 loan requiring a years worth of income to be put down. A tidy sum for most to accumulate.

    The $180,000 loan
    Monthly payment: 30 Years
    Interest rate: 5.750%
    Loan amount: $ 180,000.00
    $ 1,050.43 a month
    $12,600 per year plus Taxes and insurance

    Totally about a 30% of pretax dollars. Taxes, about another 20% of income, or $10,000.

    Home rentals, not lower than the $1,000 per month. Though the apartment rental median is $622 per month.

    It is not the monthly payment that is the difficult threshold to cross, but the standard 20% down payment.

    With a savings rate of 0, most folk cannot accumulate a full year income.

  6. well that's why they went to no money down mortgages. It is especially difficult to save when you have credit card debt carrying 18% interest. Corrections are a necessary part of the economic world but this one, due to the pervasiveness of the rot, appears to be particularly painful. The latest talk by all of a stimulus package may be like trying to put out a fire by tossing gas on it - that is if you believe the problem stems from a devalued US dollar.

  7. A no-money down loan for the same house @ 7% instead of 5.75% the monthly nut is $1,330.60
    $16,000 annually or 40% of median income.

    Which folk think they can handle, but then reality sets in ...

  8. The construction costs went from $50 per square foot to over $100 per square foot. While labor costs remained steady, thanks to the illegals entering the labor market.

    The existing home values following the upward trend of new consruction costs.

    Until the market could not handle the higher Dollar Stanard costs of new housing, or the existing homes priced at competitive to new levels.

    Part of the reason to buld the big box homes was to average the cost per square ft lower.
    The high cost items of kitchens, climate control, and baths spread over greater volumes of empty space.

    Built on ever smaller lots.

  9. It has been my impression that most folks, when buying, look to the monthly payment as a gauge of affordability. They then buy to the max. of what they think they can afford relying on the notion that, as it always does, income grows. Unfortunately when the truism fails and/or the monthly nut goes up then failure rears its ugly head. The ever rising house prices seems to have backstopped the problem 'cause you could always just sell the sucker. Now...

    Many have said, 'ah but it is just a small portion of the the market' and 'buyer beware' and 'corrections are good' but the flipping and packaging of the paper built up over a number of years coupled with the inflation produced via war (masked by an under performing economy) and a parasitic financial class adding little to no value and we have a huge problem on our hands.

  10. Sitting atop this whole mess you have the elites who have experienced huge increases in their income guiding the whole show while the majority of folk have seen little to no gain. This hasn't been going on for a decade or so, but at least 3! They are leading the lemmings over the cliff.

    "A generation ago, American men in their thirties had median annual incomes of about $40,000 compared with men of the same age who now make about $35,000 a year, adjusted for inflation. That’s a 12.5 percent drop between 1974 and 2004, according to the report from the Pew Charitable Trusts’ Economic Mobility Project."

  11. 30 years of trickle down failure but soooo many crow how great Reagan was. BAH!

  12. Inflation, was under control after Mr Reagan bit the bullet and suffered the slings and arrows of the Keynesians. Bush41 and Clinton maintained reasonably steady monetary policies.

    The unfunded and never ending "War on Terror" has pumped $1 trillion dollars into the economy, with no "goods" to chase. It has also effected the mentality of the market, by changing perseptions.

    The new "Core Inflation" is an understated "inflation" number. One that was "adjusted" to remove those "volatile" items, like oil and food.

    The Government denying the inflation was occuring, until the resulting realities became inescapable.

    Housing and oil, just the tip of the stagnated income iceberg.

    Rebates and grants pumping more liqudity into the economy will not solve the challenge. Though few will turn down the vote buying largesse.

    I'll certainly cash the check.

  13. The stagnated incomes, ash, a direct result of the illegal immigrant workforce.

    The entire civilian labor force in December was 153.9 million
    12 million illegals making up 8% of that number.

    Maintaining downward pressure, by inflating the size of the workforce. This was coodified in 1986, but excelerated under Team43, as a method holding wage inflation in check. Further warping the US economy through Free Trade.

    Exporting jobs while importing labor.

  14. The stats cited are median incomes which limit the effect of the top and bottom on the number does it not? Wouldn't those illegals reside at the bottom rungs whose wages are discounted as those pulling in a bunch at the top? If memory serves me correct the bottom, the poor, have actually seen income increases over the past 30 years not near so large an increase as those at the top but an improvement - unlike the hordes stuck in the vast middle.

  15. I don't think it's going to be as bad as many believe. The banks are finally "writing off" the bad loans, and getting infusions of cash from the "Exporting" economies while interest rates are falling as we speak.

    We have some "interesting" challenges coming down the road in the energy arena, and we'll, probably, have some rought times until we get that figured out; But, we will, eventually, after all else fails, get all "scared" and works that out, too.

  16. New Rasmussen Fl poll has to be giving the good "Shamniacs" at Fox News heartburn. It shows Romney up over McCain something like 25 - 20.

  17. Just the stereotypical immigrants, ash.

    The illegals are in the lower half of the median, but legal immigrants, under the H-1b and L-1 standards amount to almost 1.25 million legal immigrants annually that do not fit the myth.

    Legal and illegal immigration about even, numerically.

    These folks are engineers, doctors and other professionals, often working in professions that historicly earn above the median.
    These H-1b and L-1 immigrants are used to suppress wage inflation, again by increasing the supply of skilled workers.
    Which depresses prices, seen on any Econ 101 Supply & demand chart.

  18. rat, you are really stretching it to try to extend your dislike of illegal immigration to an explanation of stagnant wage gains for the last 30 years. Some of the obvious problems with your analysis is that you state a labor force of 150 million and an illegal immigrant force of 12 million. Not all illegal immigrants are in the labor force, the 12 million figure is dubious, and the statistics cited are medians not means. The 8% you cite is thus a might bit inflated and we both know inflation causes problems (ar ar ar). True legal immigrants probably earn more then illegals.

  19. It is strange, rufus, that Rasmussen has two differing results on it's web site.

    Monday, January 21, 2008

    ... It's Romney at 25%, McCain at 20%, and Giuliani at 19%. Romney has picked up seven points over the past week while McCain and Giuliani each inched up a point.

    While on it's chart for 20JAN01
    it shows these numbers
    Giuliani 8%
    Huckabee 17%
    Thompson 12%
    Romney 20%
    McCain 23%
    A swing like that, over night, not to be trusted as accurate.

  20. The 12 million number is the workforce, there are almost 20 million illegals in the country. The 12 million number bantied about was accurate in 2003 Census Report, 4 years old, it is not accurate, with an average 4,000 migrants coming illegally each day, since that 12 million was announced in 2003.

    Add 6 to 7 million to that number, gets US to 20 million, a conservative estimate, actually.

  21. The 2003 Report the latest available, while previously there was one provided annually.

    Effecting the debate by limiting the statistical data available.

  22. Rat, I pretty much like to use the last three, or four polls, and average them out. I, also, never, completely trust "one" poll.

    Sometimes I give a little extra weight to a local polling firm that has a good reputation.

  23. As you know, I've been a Romney supporter all along; but, I don't pretend to have a "Clue" as to how this will all work out. I wouldn't bet a red cent on anything having to do with "politics." I've never seen a person with less ability to predict the actions of "crowds" than myself.

  24. They have a whole 11% divergence on Rudy, from their chart to their phone survey.

    I'd like to see Rudy get the nod, but only because the libertarian ideology is ill served by Ron Paul.

    But then again ...
    He's the best spokesman it's had.

  25. This article in Time present an accurate scenario for the GOP

    A Split Decision on Super Tuesday?

    First, so many big and expensive states are in play on February 5 that no single Republican contender has the cash to compete in them all. Which means every Republican is likely to concentrate his time and money on their five or six most favorable targets.

    Second, regional identities could hasten the divide-and-conquer approach. Under this scenario, each candidate plays — for reasons of time, money and simplicity — to his geographical strength. That has happened in the past in big, multi-candidate, multi-state primaries. Given the nature of the field - one candidate from New York, another from the Southwest; a third from the heartland and a fourth who's got both cultural links to the intermountain West and a record in New England - it could well happen again.

    As polls stand now - admittedly a useless indicator - the candidates are poised to split the spoils on February 5, even if we assume everyone contends for the trove of GOP delegates at play in California, which is not a winner take all state.

    Interesting reading, but may not be accurate, who's to know?

  26. I've never seen a person with less ability to predict the actions of "crowds" than myself. Rufus

    Ah, Rufus, but you forget the track record of Al-Bob, The Predictor. I believe I have only gotten one right to this point, Clinton winning Michigan, where she was unopposed, and I almost lost that to 'uncommitted.'