Irvine Housing Blog

You should really isolate the geographic dependence of the bubble.  There is a reason that NV & FL have delinquency rates 2X NC’s.  Also, you need to compare FHA default rates for 2008 era mortgages to all 2008 era mortgages.  The overall default rate is very high, so the 20% number might not seem so dramatic.

I look at federal intervention as slowing the decline and preventing price undershoot.  I think you’ll agree that with or without intervention steady-state pricing is the same.  If you shoot below that by 10% or 20% and do it rapidly, you will have more investor opportunities, but you’ll also have a much more severe shock to the economy, higher unemployment, etc.  Both paths will get to the same place in the end, it’s just that one path will be much more painful.

I chanced upon your superb blog a few days ago and have read through all of your articles.  As a prudent zero debt, high down-payment guy, currently renting because we are in a part of the country we do not want to stay in. I have been feeling like a chump for years.  I often wondered how the hell people with salaries lower than mine could afford 500,000+ houses and Mercedes and nice world treking vacations.  Well it turns out my suspicions that they couldn’t were dead on.  Your casting the entire bubble housing market as a form of speculative futures market is brilliant. I doubt the idiots that bought houses they could never afford and then take ridiculous home equity loans were thinking that deeply but clearly some finciancers were.  Keep up the excellent work.

Remember those ads on the back cover of comic books that said you could “Win a $1 Million Dollar Home in California”?

Well there it is. I think you get bonus package of Rosetta Stone’s when you buy this place.

You really need to be more speficin in this discussion regarding investors stabilizing a market.

There are many cash flow positive markets that investors won’t touch with a 10 foot pole.  What percent of US Markets are currently cash flow positive?  My guess would be around 80%.  Why aren’t the investors stabilizing these markets the way Irvine has stabilized around rental parity?  Current trends make this a rhetorical question, the answer should be obvious.

Is it supposed to be a big deal that the house was bought for $610K in 2000 and now 10 years later is offered for $995K?  The person who buys this likely saw their income triple in this time period.

Most of FDR’s plans failed and prolonged the depression.  The ones that worked are:
1.  Support your friends’ companies
2.  Inflate the currency
3.  Inflate the wages
4.  Continue Hoovers’ grand engineering projects on intrastructure projects, dams, hydroelectric, electric distribution.  FDR added park, reforestization.
5.  Encourage global conflicts while selling to both sides.
6.  Do way with most of the TR trust busting.
7.  Social security to appease the working class.  A Ponzi scheme, but it will blow up on some other generation.

Wage inflation is out of the question with globalization and the lack of US unions.  The only powerful unions are govt. service workers unions.  Most of the others are paper tigers and political lap dogs, who sold out their members.

Which trick (solution) will be used?  Healthcare Ponzi scheme (moved liabilities from the private/corporate sections to the taypayers’ liability—Current plan has picked the worst of both world to blow up on another generation.  Why wasn’t the best of the Swiss, Japanese, or Taiwanese systems used?

I have not seen very many incomes triple from 2000, unless you count in training or school salary as their base for 2000 or banksters’ incomes.

They knew: from the top down, that being Alan Greenspan to banking officials, to mortgage officers, to investment bankers. They knew that financial deregulation plus credit liquidity would be a tremendous transfer of wealth to the insightful and well-connected few.

Until reading here, I lived in ignorance of my Ponzi entitlement—shame on me; there is a price, a loss, to be paid for being simple. 

You write: The props to the housing market provided by the GSEs and FHA are a direct transfer of losses from banks to the Federal Government just like loan modification programs. Whether it stabilizes the market or not is yet to be seen. The fact that lenders are being bailed out of future losses is certain. Losses from 2009 and 2010 vintage loans will all be covered by the US Taxpayer ..... The GSE bail out WILL FALL THROUGH and the Timothy Geithner promised 2010 funding EVAPORATE ... One might ask how? I go to Stockcharts.com and look at the chart of IEF, TLT, and ZROZ, that is at the chart of the 10, 30 and zero coupon US Government debt. On Thursday May 27, 2010, it has turned parabolically lower. And today, the 28th, it is barely trading up on a down stock market day. There is a day coming very soon when investors will no longer see US Treasuries as a safe haven investment. There will come a failed US Treasury auction, to be followed by monetization of debt either by money center bank Treasury purchase or printing of money by the Federal Reserve. Either way the US Treasures will further decline in value; soon thereafter funding of the GSEs terminated along with austerity measures imposed on social security recipients: housing values will fall and loan servicers, that is the banks, will turn to kicking out the squatters and begin to leasing the properties.

The article you provided, stated: Immigrants have prospered in the U.S. for generations because they were thrifty and sacrificed for their children by sweating blood to save money for college educations and for 20% down payments on homes ... One such group was the Asians who came to live in the Excelsior neighborhood of San Francisco; the essence of thrifty immigrants who prospered in community is seen in the article Excelsior District Takes Care Of Its Own. The heart of 94112 is Ocean Ave & Otsego Ave; the neighborhood is 44% asian, sometimes called “acculturated asian”, meaning foreign-born and successful here in the US, with two or three generations living in the same and small house.

You write: Debt destruction becomes the only viable option ... My reply is, this is something that the Spanish Central Bank has ordered for the so-called “savings institutions”, called cajas, that underwrote the Spanish housing boom. Ambrose Evans-Pritchard in Telegraph article Spain Orders Banks To Come Clean On Debts To Restore Shattered Faith writes of new rules that target the savings banks or cajas that account for the lion’s share of the €445bn (£377bn) of property debt accumulated during the credit boom, when real interest rates were negative. The new rules will force lenders to write down bad debts within a year instead of stretching out the pain for up to six years. They must set aside reserves on €60bn of foreclosed property still sitting on their books at face value, using a rising scale of up to 30pc. Santander and BBVA have already done this.

Ambrose-Evans Pritchard relates “Mr Lopez said Spain’s Achilles Heel is private debt of 211pc of GDP. This is much like Britain (213pc), but takes places in the very different context of deflation. Spain cannot easily grow its way out of the crisis because it is structurally overvalued within the EMU.”

The public and private levels of debt in Spain are terrific levels of debt; debt deflation is the way of the future; debt deflation or as you relate debt destruction will not come easy. It will be wrenching to the very core of human existence.

Debt deflation, or debt destruction, whatever term one uses, means bank asset deflation to the point where there is no lending; and where as Timothy Geithner held forth in the Financial Times James Politi and Gillian Tett Financial Times article entitled NY Fed Chief In Push For Global Bank Framework: unified regulation of banking globally; yes a one world bank; where one leases property from the bank; the days of mortgage issuance, is just about over, as this world cannot take any more debt.

Finally, one should consider where your proposal goes. You suggest debt destruction, well there is so much of it, it cannot be destroyed; it must be assigned, yes, all of it assigned universally, that is to every man, woman and child globally.

In other news, Phase 10 of Sonoma, the homes that started in the mids $700k range five months ago now has it’s largest plan priced at $901k.

Two significant observations:

1. I doubt anyone predicted they would be at Phase 10 by this point in time.

2. I doubt anyone predicted that they would raise prices by $30k in 5 months.

Where else in Orange County do we see new home pricing act like this? I’ve argued that TIC has a big hand in setting prices which has been countered that it’s not them but the buyers who set the prices. But if the latter is true, then you cannot argue that Irvine does not have some type of premium in order for hundreds of people to pay these kind of prices.

You need to start writing that second book IR, Irvine’s bubble is still going.

I agree with IR that debt destruction is the SOLUTION. I think wage inflation as a solution is like a big shot of adrenaline and steroids to the whole body when the solution should be local. Wage inflation would have to be nationwide while the debt problems are local and more prevalent in the real bubbly states. Debt destruction and price reduction (by market forces) in certain markets is the solution.

Some great Alan Greenspan quotes from the bubble days:

http://www.fool.com/investing/general/2008/10/15/5-alan-greenspan-quotes-that-make-you-wonder.aspx

Here are some of the best:
“Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity. Many of those who purchased their residence more than a year ago have equity buffers in their homes adequate to withstand any price decline other than a very deep one.”—October 2004

“Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities.”—October 2004

Several more at the linked article/post:
http://www.fool.com/investing/general/2008/10/15/5-alan-greenspan-quotes-that-make-you-wonder.aspx

-Darth

“Price inflation in the absence of wage inflation merely lowers everyone’s standard of living and would cause widespread debt destruction as the over-burdened are crushed.”

Inflation, both wage and price are more accurately described as currency devaluation.  Currency devaluation is theft, from those who have purchased US debt instruments and other fixed income savings notes.  Inflation is a terrible “solution” to what is actually a debt problem.  The only real solution to a debt problem is to pay off the debt.  Inflation is pushing off one’s debt onto someone else.  It will not cure the problem which is the entitlement attitude of the USA, and unless we pay out debt with productivity and output instead of worthless paper promises, we will bring more destruction onto ourselves.

The above may sound a bit nutty, but it is what I have been saying on this blog for the last few years.  Can you see how it is playing out?

For those who think that debt destruction is a solution, have you considered what the consequences are to debt destruction through either currency devaluation or default?

Millions of people are in debt for the same reason: they have the wrong ideas about what they WANT versus what they NEED.. They spend recklessly on their wants, whether on credit cards or in real estate and this obviously has inevitable negative consequences. Until this changes (it probably never will) these problems will persist.

“Until this changes (it probably never will) these problems will persist.”

Actually, it can change, but people need to be educated and understand the differences and similarities between money and currency, and the consequences to using fiat currency.

Real estate mega-firm First American Corp. of Santa Ana is spinning off its property and consumer data business into a separate company, a move designed to increase the value of…

Thanx
Bruce

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Irvine doesn’t lack jobs compared to other cities in the region, and Irvine is much smaller than LA and even Long Beach who both have higher unemployment and higher poverty rates. Irvine doesn’t need to produce as much jobs since it is smaller than Sac, San Fran, La, Long Beach, Santa Ana, Anaheim, and Oakland, and San Diego. Probably La which is 4 million has the greatest difficulty producing jobs relative to its size. Most cites over one million due but cities aound the 150,000 to 300,000 range don’t as much.