Excellent post IR

Sorry to nit-pick, but the sizes of your color bars in your graph don’t match the numbers. In particular the “disposable income” category in the left-most bar is 40% which therefore should be larger than the 28% home debt. Likewise in the last one, the 15% disposable income should be larger than the 12% “other debt”.

Now, of course not all that income is really “disposable”, because food, transportation costs, health-insurance, etc are not exactly optional.

Yes, they are approximations. I couldn’t shrink down the consumer debt one to be small enough and make the type readable. Also, breaking down the disposable categories would have been more accurate, but I thought it would create more clutter than clarity.

Privately-owned condos and SFRs are trimming rental rates, as well.

Closed leases for Irvine per the SoCalMLS feed are tracked here:

Irvine Leases (Excel Spreadsheet)

Average closing $/sqft for Jan, Feb, and March 2009 were $1.61, $1.62, and $1.58 respectively. This was down from 2008’s numbers of $1.65, $1.67, and $1.63 for the same months.

Closing sales numbers, with mortgage info, will be updated after the first few days of May.

Thanks, and good luck,
-IR2

trying again:
<a>http://irvinerealtorsite.com/IrvineLeases2008.xls</a>

I fixed the link. Thank you for the update.

There is another part of the credit addiction which isn’t commonly mentioned.  It’s the addiction of the shareholder of lenders, and those who invest in certain types of bonds. 

Without investors providing capital, there wouldn’t have been a subprime problem.  Without investors buying shares of now-insolvent lenders, they wouldn’t have existed. 

Investing is typically a pursuit of the best returns, or of a particular mix of expected risk and returns.  Investing is much different than choosing where to work.  Many people don’t pay attention to what firms their pension fund or mutual fund invests in.  They pay attention to returns. 

Even worse, company shares come with voting rights.  Shareholders have the power to: fire management they do not like; nominate management they do like (a very underappreciated but valuable power); vote on propositions; and submit propositions.  Even the threat of certain types of ballot propositions sometimes change behavior.  If Bank X had some vocal shareholder in 2005 saying “get out of subprime”, or even better “all loans require documentation of income and a downpayment”, Bank X might have changed its policies before this even made it to a shareholder vote. 

Management and the press get a very clear signal if such a proposition passes: shareholders really care about this issue, if you get in their way you will probably get overruled or fired.  The management of Banks V, Y, and Z will also take note, “Avoid no doc loans so I don’t get publicly embarassed, have my bonus cut, and may get fired”.

If you have a student loan would that be considered Consumer Debt?

It would be as far as a lender is concerned. All debt service payments are included in the back-end DTI that a lender considers. Many people find they cannot get a large front-end DTI because they are carrying too much other debt.

I have become cynical about the power of shareholders to influence management. Don’t most management teams have more than 51% of the vote tied up through proxies? I have always assumed management controls the board thus enabling them to pay themselves ridiculous sums and do whatever they please.

Fleckenstein over at MSN expressed a sentiment I think the IHB community shares, but we often forget:

“...Poker as teacher
The patience required in investing is not so much the patience for sitting with a position after you establish it but the willingness to be patient beforehand. To quote my friend Jack McHugh (using a Texas Hold ‘Em analogy): “Waiting for more information allows a patient gambler to better know when to commit his or her chips. . . . There’s always another hand to be played, just as there will always be a new set of investment opportunities to consider”...” http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/thank-uncle-sam-for-the-rally.aspx

Caveat - I don’t consider buying a home “investing,” but you can “lose” money by lacking patience when considering buying a home.

The home equity credit system is often looked at as a pyramid scheme.  It can also be viewed as a way of printing money.

Printing actual cash bills is old fashioned, but what if you could create money out of thin air, and you weren’t the government?  For centuries, there has been a line of thought that banks create money, often without individual banks or bankers realizing it. 

The usual explanations of banks creating money involve making loans to people who buy things.  The sellers deposit the money at another bank, which then lends most of it.  That borrower buys some more stuff, and the process repeats.

However, the process behaves differently if the prices of the items being purchased rise, especially if the prices rise faster than interest rates.  In that case, a Bank A lends to Customer B to buy a house.  Seller C gets the proceeds and deposits them at Bank D.  Then, there is a different thing happening.  Bank E makes Customer B a new loan, for the same house.  It’s a HELOC. 

With a cashout refi or HELOC, the same collateral is now being used for a larger loan.  Looser credit terms create more loans, larger loans, and higher prices.

Yes, HELOCs and cash-out refinancing is like printing money. In theory, bank capital is supposed to flow from pooled savings; however, if the “savings pool” is derived from artificially inflated home values, then there is no real savings being loaned. Appreciation is neither income or savings despite the fact that borrowers and lenders treat it that way. The resulting increase in money in circulation is a dramatic increase in money supply and results in stealth inflation and a reduction in value of real savings. Of course, when asset values fall, the process goes in reverse, and you have a contraction in money supply, deflation and an increase in the value of real savings.

I have long been an advocate of watching the cashflows of a potential transaction, or of a company, instead of looking at the accounting implications.  As someone who knows accounting rules very well, I can tell you that a lot of them are quite misleading.

I am now experimenting with a different approach: don’t follow anything which is in dollars.  Watch real variables like cars produced, how long people live, how many homes are in existence.  This provides insights which are hard to get from accounting numbers, or even cashflow. 

I’m getting some pretty interesting observations, I’ll share some over the next few weeks.  Some of those have to do with what is “real” savings.  Savings and investment as a way to “store” value is a longstanding problem in finance.

This post is so important because it touches upon so many deeper issues that led us to the mess we’re in today. I’ve watched as one friend bought a 2br condo for $800k, and they still cling to the illusion that they’ll sell for a profit soon. Other friends make less than half what we make and yet live like they make double. One family member bought a condo in a less desirable neighborhood for $400k with a sizeable down payment and just got laid off. All these people have one thing in common: they’re screwed, but they wouldn’t be if this crazy credit hadn’t been availble to anyone who could sign their name.

Re “Prior to WWII, if you wanted to buy something, you needed to save money from your wage income until you could afford to pay cash for it. “

Actually, that’s not true - the payment plan was created in the 20s, some blame it for helping increase household leverage helping create the Great Depression

http://www.1920-30.com/business/instalment-plan.html

“As America and the world slipped into the depression of the 1930’s, those carrying too much debt were bankrupted, including many of the consumers enticed into debt by instalment purchases. Unemployment increased to unforseen levels and incomes were significantly reduced. It became impossible for many people to maintain repayments and as a consequence people walked away from their homes and farms, or sold their car, or returned goods to retailers. Landlords auctioned off what was left for rent arrears. The market was flooded with cheap items due to oversupply, so it was a buyers market if you had the cash. ”

The official inflation figures were quite low with the govt monkey business in setting CPI using large weight on home interest rates.  From the 1990’s and 2000’s this lead to follow the leader with cooked books.  Internet bubble, Enron bubble, housing bubble.  Just look at the price of a car battery, gallon of milk, bread, vegetables from 1990 compared to today or last year.  By the way regular (non-exectutive) wages have not keep pace with real inflation.  Some people (mostly flippers, MEW’s) got rich at least for a time, but most were seeing less opportunity for themself and their children.

Cartier Aisle??? Is there also a Tiffany Aisle, and a Louis Vuitton Aisle?  How about a Wal-Mart Alley?

“Orange County cultural pathology” on display…

I agree that the index was not done properly.  They followed a flawed method.  My suggestion is to use the Case Shiller numbers and follow the original date of purchase.

This brings up a distinction between “cost of living” and price indexes.  Since people do not buy a new house each month, the cost of living for homeowners is a mixture based on when they bought their homes.  A similar survey to that used for renters could be followed.  “How much are your house payments this month?”  “How much is principal and how much is interest?”  “How much are your property taxes?” etc.

“The only solution to the problem of borrower insolvency is a monumental restructuring of both home and consumer debt.”

Won’t happen. Geithner’s TARP assumes that homes and consumer debt are properly priced. He asserts price declines reflect a liquidity paralysis induced by irrational panic.

  TARP is meant to buff up bank balance sheets so the Execs can sell their shares at inflated prices.

The bankers are in complete control. When all is smoldering rubble they’ll fly off to a stable socialist country of their choice.

What we really need is socialism.

I love the drug dealer analogy. Unless we have major monetary policy reform in the world.  I don’t see anything changing in the future. Except for more bubbles, more frequently, and more volatile.

Lets face it. Who can really make any significant amount of money unless they play the bubbles?

don’t worry it’s coming. But the rules of socialism will mostly affect the average, broke, sheeple.

“What we really need is socialism.”

No, what we really need is a revolution where we throw out the ruling Wall St./Washington oligarch which has found a way to enrich themselves at everyone else’s expense.

Perhaps in a couple of years when people are actually hungry and still out of work, we will be ready.

I hope the transition happens peacefully through the electoral process.  I don’t recall too much social unrest during the Great Depression.  I wonder if we will be as docile this time around.

Thank you for this!

Yes - The Quiet Coup

I’ve been picking through that article over the last two or three weeks.  It seems to hit the mark.

We had a score of socialism in the USA.  It was privatization of profit (even if they were vapor, they were paid cash).  Then the vapor cleared, the losses were socialized as with the 1990 hedge fund bailouts (Mexico), S&L bailout (remember Whitewater), Insurance (Insurance in the Gulf states - a contribution comes in handy), and now in 2000’s Insurance again (AIG) and retail Banks and Investment banks.

MalibuRenter,
The CPI and COL were rigged to use current drops in interest rate to “adjust for lower leading cost and monthly payments.”  I know very few people who refinance yearly to take advantage of this lower monthly cost (only to rack up upfront fees such as points, title insurance, doc fees).  During the 1990’s high end computers were used.  What is the cost saving of purchase a new computer and software with 4 year old tech vs. cost 4 years ago.  Transportation cost were also adjust for “longer life of cars.”  I can partially agree with the latter, but the former adjustments were bunk to keep down COL adjustment for pension and wages.

IR,
You might have overestimate the 15% disposable income for the foreclosure candidate.  What about food, insurance, transportation cost?  They can cut down on clothing cost using Salvation Army Thrift Stores, but it’s very hard to cut down food, insurance and transportation to under 5% income unless you’re Jack Welch.

This post is very informative! every one should think of it.

IR:

I just read part of the interview on the site and i have 2 comments that i like to share with you.

1st, I did like it better when you were anonymus (go, spellingchecker, go! ) It had a certain flair to it

2nd I do like your blog a lot, It’s an unique perception of a housing market thats gone berserk.
And i’m hoping that “we” (house owners in the netherland) can learn from “your” mistakes. (never ever ever erver use your house as an ATM)

Keep it up!

Jump

Very true.  The fact that the current recession is the first one since the Great Depression created by lack of demand—too many goods had been produced due to phantom demand generated by consumption due to a credit bubble—is one of the things that scared people so much about this crisis.  I don’t believe this is the Great Depression Redux but that simalarity was enough to scare the bejeezus out of the governments of the world.

Not to drop names, but I was reading Churchill’s “History of the Second World War” recently, and in his analysis of the causes of WWII the Great Depression was a major factor.  His discussion of the causes of Depression itself is almost exactly what you just wrote—a consumer driven credit bubble. Reading the causes of the bubble and the Depression, I could have been reading about the world economy over the past five years.

Wow, that is like gold to me right now, thanks so much IR2!!!!