I have been wanting to share some insights on the state of housing here in the So. Cal. region. I live here, so I see it every day, unlike the ivory tower elitists in DC who just bury their heads in charts and consistently get it wrong.
For a starting point, I like to think in terms of incentives to help me focus my thoughts. After doing so, the conclusion is inescapable, and naturally leads to one's desire to hold precious metals, which makes this discussion relevant to this blog.
The premise: at no point during the housing bubble were there any proper incentives which could have operated as a check or balance to the rampant greed by all involved. Incentives must be realigned or else the underlying structural problems will not be solved, and the economy will take years or decades to recover.
Let's look at it.
Prospective home buyer: no incentive to tell truth about only making $8.00 an hour, since no bank would approve loan; likewise, HUGE incentive to lie about income, etc.
Prospective home seller: who cares who buys the home, just sell home for as much as possible; move up to bigger McMansion.
Existing home owner: huge incentive to get free money via home equity ATM. Tap that home equity line of credit, after all, it's free, hooray! In Orange County, CA (think home prices were increasing on average, about 10% per year. Median price for single family house conservatively was $500,000 or better. Think about it? Simply borrowing money at artificially low teaser rate and securing it against a single family house would result in home equity appreciation of $50,000 per year! Why have a job when you can just buy real estate? Did that create market distortions or what?
Real estate agent for buyer: any sale is a good thing, but a higher price is better. Given the ease to acquire a real estate license, droves of unqualified people were streaming into the market and becoming real estate agents. More agents equal more hype, hence the bubble mentality was self-reinforcing.
Real estate agent for seller: any sale is a good thing, but a higher price is better, AND, who cares where the financing comes from so long as there is a sale!
National Association of Realtards: I have nothing against a professional association, in general. But when the outright lying became laughable, someone should have stuffed a sock in the puppet's mouth ("It's a good time to buy!"). The NAR is a HUGE campaign contributor to all forms of political scum, so maybe that explains why no one has gone to jail? Just a thought.
Mortgage loan originator: who cares whether the buyer tells the truth, so long as a live body signs the paperwork, the commission on the deal is fine by me! The more the merrier!
Originating lender: any loan closed is a good thing, since origination fees and all the rest of the fees are a good thing; and, who cares whether the buyer can actually make the payment, the loan is being sold to someone else anyway. Underwriting standards? What standards? Just fill out the paper and move it pronto.
Escrow company: more transactions, more money, churn that paper!
Appraiser: more transactions, more money; who cares what the value really is, the comp's are all rising, so the home must be worth what the buyer/seller/lender say it's worth. Plus, if I come in low, then no one will hire me again to do an appraisal, and anyway, who cares if I fudge the numbers anyway, everyone else is doing it. Note also, that there is no enforcement mechanism against bogus appraisers anyhow!
Regulating agencies, local level: what regulations? Each transaction generates taxes, which means huge revenue, hooray!
Secondary lender, refinancer: more transactions, more money, and, who cares whether buyer can pay, loan is being sold anyhow.
Bankers: more pooled loans into more securities, means more fees, means more bonuses! Greed, greed, greed, greed is the word. The underlying originating lenders all had underwriting standards, so all of the mortgage paper is just fine.
Investment trusts: this banker paper is great! Look at those underwriting standards! We are going to make tons of money. I know, let's synthesize these into CDO's too! Hooray! More volume, means more tranches at higher rates, more money to be made, and who cares about the synthetic nature of the MBS, since Moodys, Fitch, etc., rated the paper AAA?
Institutional investors: look at these AAA rated bonds with these high interest rates. These are PERFECT for funding our pensions which assume 8% year over year in order to reach payout targets. Good thing these are rated AAA, so THERE IS NO RISK OF DEFAULT, else we could not invest in these securities.
Securities ratings agencies: the issuers are paying us to rate their securities? But, um, what if we rate these securities as not worthy of AAA rating because of the fallacious underlying assumptions, like an illegal alien gardener can afford a $500,000 3 bedroom, 2 bath house in Modesto with an average median income of $42,000 per year? Oh well, let's ignore that and rate the securities AAA anyway, since if we don't give the client the rating, then they will not use us again. That would be devastating to our business model. Conflict of interest, you say? Shhhhhhh, people might hear!
Congress, politicians in general at the higher levels: home ownership is a good thing, let's encourage it, meaning let's not look too carefully at this golden goose. Besides, the GSE's give us huge campaign contributions and we all need to be reelected to stay on the gravy train . . .
Politicians, state and regional level: more transactions, more fees, more property taxes, more revenue hand over fist, hooray, let's spend on social programs and get reelected!!! Remember, California implemented a new law that withheld taxes upfront from each real estate transaction! Free money, let's spend it!!!
Marginal prospective buyers: bad credit, no job history, heck, can't even find or hold down a job, but they will loan me $500,000? WTF? Of course I want to buy a house!! Hooray!!
Homebuilders, remodelers, contractors, etc.: more homes, faster, faster!!!! Let's make money!!!
Commercial real estate owners: more residential units, equals more demand for commercial space. Let's build it out to eternity!! More nail salons, more Home Depots so people can paint and redecorate their new homes!
So . . .
As demand from prospective home buyers (and flippers) accelerated, this amounted to a huge change in demand, which then resulted in a massive misallocation of capital and drove home prices skyward, and the cycle continued, until the pool of buyers exhausted and dried up. Then, as we all know, the aftermath . . .
So, in looking at all of the incentives, which group stood to gain by putting a stop to the nonsense?
The only group which stood to gain were responsible renters, who looked at the fundamentals, and elected to sit out the frenzy, knowing that the rise in prices was unrealistic. Did this group have any political or economic clout to affect any sensibility in the market? No way. In fact, just the opposite occurred. Sensible people were RIDICULED for missing the run up in prices, and were told things like: "better buy now or be priced out forever."
So, how to fix the problem?
Jail time for fraud on all levels, no matter what. Fraudulent loan application? Borrower, mortgage broker, lender, real estate agent, appraiser, all of then, they all do time. Criminal restitution should be ordered as well.
Market-based pricing. Let the banks fail, let the shadow inventory be sold in the open market, let the prices reach natural equilibrium. Many large institutions will fail. Many pensions funds will fail. Many favored groups will lose political power and influence. Many politicians will be removed from office. g
Then ask yourself, is this solution really going to happen?
When you stop laughing at the obvious conclusion, then you know why QE to infinity is coming, and you know to prepare and keep stacking.
Home prices will not correct in the near term because they cannot do so and keep the people in power who are currently in power, simply that. So there will be a very long term, painful process, unless the above solution plays out. And there you have it.
Want to see it up close? Come to San Bernardino / Riverside. Drive around, see for yourself, then ask yourself who can afford to pay $550,000 for a three bedroom two bath house on 1/8 acre? Then ask yourself who will?
Even the typical shills in the mainstream print media are catching on:
So, I hope I have done a little to start the discussion. As far as solutions go, I would hope and pray for a better alternative, but so far, it is looking bleak.