OT- Still more signs of severe stress in the housing market.

[rickortreat]

Since most Americans consider their home their number one asset, the latest news is quite troubling.  53% of borrowers with loans modified in the first three months of 2008 and 51% of  those with loans modified in the 2nd quarter could not keep up with payments after 6 months.

This program was supposed to try to help homeowners stay in their homes and stabilize the housing market and the banks. If half the loans are failing something is wrong with the restructuring or the borrowers should not have qualified for refinancing.  It doesn't seem likely, although possible that these unfortunate homeowners all lost jobs in the past few months.

When the economy is growing, people are happy to buy homes, but this is not a time when people feel secure about their situation. Now that homes are in a clear downtrend, buyers are getting the chance to pick and choose through the best of them and still negotiate a better deal. It makes more sense in most situations to wait, even if you want to and are able to buy a house.

[Lurker]

This program was supposed to try to help homeowners stay in their homes and stabilize the housing market and the banks. If half the loans are failing something is wrong with the restructuring or the borrowers should not have qualified for refinancing.  It doesn't seem likely, although possible that these unfortunate homeowners all lost jobs in the past few months.

Most of them should have never qualified for a house in the first place.  Even with restructuring of their debt they still had more house than they could afford.  Some also fell prey to mounting job losses.  The marginal home buyers and constant refinancers were not the ones to be "bailed out".  But these are the most likely to be in dire straits.

[jemagee]

Maybe it's just because i wish i had some money to capitalize on this situation (even though goleta real estate hasn't taken much of a hit i could probably get something better for the 1900 a month i'm paying now than my two bedroom condo with a crappy kitchen)...but i find it aggravating when i was watching the news yesterday and they were talking about adjusting the mortgage rates to 4.5% for those who got themselves in trouble - so you screwed yourself so they're going to make it easier?  We make our mortgage payment on my gf house (in up state new york) every damn month - how about lowering my interest rate as well - maybe i would help stimulate the economy like the dude on CNBC said if i could refinance at that lower rate.

[JoMal]

The news just keeps getting worse.

The latest unemployment statistics that came out in early December shocked Congress so much, they completely changed their minds about bailing out the car industry and gave them some money. I would think many of those individuals who could not afford their home loans after refinancing were likely victims of the job losses.

The State of California is going broke by leaps and bounds. We will be out of money by March at the current rate of collapse. A five percent reduction in pay is being mentioned, which we had to suffer through once before when Pete Wilson was governor and he tried every year to steal money from State workers or from PERS. He managed the five percent reduction one year and we did not get the money back till Grey Davis became governor.

At my work, we had 14 slotted positions in my unit at the beginning of the year. A program specialist who worked for me retired yesterday and I promoted the analyst under her to replace her, then a program specialist in the other unit took a promotion elsewhere in the State, so another analyst who worked for me took a promotion to replace him as a program specialist under the other manager in my unit. THEN, I found out yesterday my immediate boss took a job in Arizona as the State Demographer there. That, plus a women in the other unit who had gastric bypass surgery several years ago has so many health issues now that she has to take three months off work starting this month.

As part of the State cutbacks, we lost the analyst position after I promoted her perminently as my new program specialist. We can not fill the position of the women who is taking the time off, I have to hire a replacement for the analyst I lost who was promoted elsewhere and who was my best worker, and I have no idea what is going to happen regarding the position immediately above me. It likely will not be filled also.

You kind of hope things get a bit easier as you move through your career, then a thirty day period like this one comes along and you are back scratching for workers and survival just to meet deadlines.

[Lurker]

but i find it aggravating when i was watching the news yesterday and they were talking about adjusting the mortgage rates to 4.5% for those who got themselves in trouble - so you screwed yourself so they're going to make it easier?  We make our mortgage payment on my gf house (in up state new york) every damn month - how about lowering my interest rate as well - maybe i would help stimulate the economy like the dude on CNBC said if i could refinance at that lower rate.

IMO this is a big part of the problem.  They are trying to help those who are doomed to fail.  People who bought too much house for their income or whose jobs are/were shaky to start with.

Both of my kids have bought houses in the past 3-4 years.  They and their spouses work hard (and one even went through a job change after being laid off earlier this year) to make their mortgage payments on time.  Both couples have 6-6 1/2% interest rates.  But because they have jobs and are paying their mortgages timely they are not eligible for government assistance.  What a country!

[westkoast]

but i find it aggravating when i was watching the news yesterday and they were talking about adjusting the mortgage rates to 4.5% for those who got themselves in trouble - so you screwed yourself so they're going to make it easier?  We make our mortgage payment on my gf house (in up state new york) every damn month - how about lowering my interest rate as well - maybe i would help stimulate the economy like the dude on CNBC said if i could refinance at that lower rate.

IMO this is a big part of the problem.  They are trying to help those who are doomed to fail.  People who bought too much house for their income or whose jobs are/were shaky to start with.

Both of my kids have bought houses in the past 3-4 years.  They and their spouses work hard (and one even went through a job change after being laid off earlier this year) to make their mortgage payments on time.  Both couples have 6-6 1/2% interest rates.  But because they have jobs and are paying their mortgages timely they are not eligible for government assistance.  What a country!

Rewarding people who don't work as hard is sort of the American way isnt it?  Whether its a bail out like this or an insane salary.  A lot of the big pay checks people recieved in this country are not based on the same level of work or effort another person puts in.  Look no further than the guys in Wall Street....

[rickortreat]

When I said overhaul of the economy, I MEANT every aspect of it.  The money problems came out of excessive credit, lending to the uncreditworthy, and then leveraging the crap out of the money borrowed.

But all of this is symptomatic of an even deeper problem, which is that America isn't growing anymore, we aren't making much for export, which doesn't help our balance of payments. But it is through manufacturing that innovations come, the types of discoveries that keep businesses successful.  Where has all that native American creativity gone to?  The smart guys ended up on Wall Street running hedge funds and screwing the rest of us.  Not exactly job creation machines, or the type that build teamwork and group objectives.

And while I am sympathetic to JoMal since I know him from this site, because he is a government worker, he should realize that his job is a cost to taxpayers, and whether it's worth it or not is less important than if it is essential.

State Governments spend money and and tax their citizens to pay the bill. When the government gets irresponsible spending far more than their receiving in revenue, one of the mast rational things to expect is that at some point the government will have to spend less, which means job cuts.  This is why citizens should be careful about what they expect their governments to do for them, there is always a cost involved.

I think that most people forget how the US got to this point, or recognize how severe the decay is in areas which used to provide the wealth for the people and through them to the states and federal gov.

We live in a society where we are very interdependent and money is the grease that enables all of us to participate.  The money games they are playing now are very dangerous, and it looks like the flight to the security of the dollar (sic) is over. The outlook is now to expect a depression, or hyperinflation as International Governments attempt to kick-start the world economy.  In either case, Gold has finally started to move upward, breaking out above $800 which is technically very significant price behavior.

I'm tempted to tell you to fill up your tanks soon, because I think it won't be long before oil starts to head up too, but as of today, the oil market continues to head downwards, West Texas Intermediate Crude is still below $45 a barrel, at least a 3-year low and neraly $100 below it's highest price, this past July.

Historically either scenario is good for gold, as is all of the noise coming from India and Pakistan.  Frankly, Pakistan is not acting responsibly or reasonably at all.  The recent terror attack in India was carried out by Pakistani nationals, training in Pakistan to carry out a mission in Mumbai, and the group was allegedly created by the ISI, Pakistani intelligence!  And if that isn't enough, it's quite possible that some of the money the US has given to Pakistan to fight terrorists got diverted into this terror group!

Whether they're directly responsible or have lost control over their agencies, Pakistan should realize that such actions are intolerable.  Either they get control over the terrorists, taliban, mujahadeen or whoever they are, because the world will not accept Pakistan as being a safe haven for terrorists in Afghanistan, India or elsewhere.  And they have no right to expect others to respect their territorial integrity if they can't stop these people from acting outside of Pakistan.  That means more US raids into Pakistan as well as the possibility of retaliation by India.  AS if the world didn't have enough trouble!

[ziggy]

Quick synopsis from wikipedia.  My comments after the underlined portion.

Inflation
The Austrian School has consistently argued that a "traditionalist" approach to inflation yields the most accurate understanding of the causes (and the cure) for inflation. Austrian economists maintain that inflation is always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.

Given that all major economies currently have a central bank supporting the private banking system, almost all new money is supplied into the economy by way of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles (see Austrian Business Cycle Theory) and maintain that this "wave-like" or "boomerang" effect on economic activity is one of the most damaging effects of monetary inflation.

According to the Austrian Business Cycle Theory, it is the central bank's policy of ineffectually attempting to control the complex multi-faceted ever-evolving market economy that creates volatile credit cycles or business cycles, and, as a necessary by-product, inflation (especially in asset markets). By the central bank artificially "stimulating" the economy with artificially low interest rates (thereby permitting excessive increases in the money supply), the government-sponsored central bank itself allows debasement of the means of exchange (inflation), often focused in asset or capital markets, resulting in "false signals" going out to the market place, in turn resulting in clusters of malinvestments, and the artificial lowering of the returns on savings, which eventually causes the malinvestments to be liquidated as they inevitably show their underlying unprofitability and unsustainability.[22]

Austrian economists therefore regard the state-sponsored central bank as the main cause of inflation, because it is the institution charged with the creation of new currency units, referred to as bank credit. When newly created bank credit is injected into the fractional-reserve banking system, the credit expands, thus enhancing the inflationary effect.[23]

The Austrian School also views the "contemporary" definition of inflation as inherently misleading in that it draws attention only to the effect of inflation (rising prices) and does not address the "true" phenomenon of inflation which they believe is the debasement of the means of exchange. They argue that this semantic difference is important in defining inflation and finding a cure for inflation. Austrian School economists maintain the most effective cure is the strict maintenance of a stable money supply.[24] Ludwig von Mises, the seminal scholar of the Austrian School, asserts that:

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.[25]

Business cycles
Main article: Austrian Business Cycle Theory
According to Austrian economist Joseph Salerno, what most distinctly sets the Austrian school apart from neoclassical economics is the Austrian Business Cycle Theory:[2]

? The Austrian theory embodies all the distinctive Austrian traits: the theory of heterogeneous capital, the structure of production, the passage of time, sequential analysis of monetary interventionism, the market origins and function of the interest rate, and more. And it tells a compelling story about an area of history neoclassicals think of as their turf. The model of applying this theory remains Rothbard's America's Great Depression. ?

Austrian economists focus on the amplifying, "wave-like" effects of the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set "artificial" interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles" and "artificially" low savings.[40]

According to the Austrian business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "monetary boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. The global economic crisis of 2008 represents, according to some pundits, an example of the Austrian business cycle theory's dependability.[41]

Austrian economists argue that a correction or "credit crunch" ? commonly called a "recession" or "bust" ? occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back toward more efficient uses.

This is what has happened.  Massive monetary expansion through excessive liquidity from the Fed and lots of other central banks as well.  Has been going on for a long time.  The 1991 recession was because of excessive liquidity.  LTCM and the Asian currency crisis.  The tech bubble.  Then housing.  Then commodities.  Massive monetary inflation leads to price inflation.  That price inflation may be consumer prices, or producer prices, or equities, or residential real estate, or commercial real estate, or commodities.  All the same, it is monetary inflation, and it gets manifest as price inflation in many different ways.

Inflation leads to unemployment, and that is what is happening today.  The run in commodities from 9/07 through 7/08 was all about excessive liquidity from the Fed.  This action has caused the correction that we had to have in housing become even worse, because the Fed exacerbated the issue.  We had 3.3% growth in 3rd qtr 07, and the Fed cut rates a full point within the next qtr, which happened to be when the recession "officially" started.  You cut rates to get out of a recession, but we put ourselves into one faster than we would have otherwise, and made the depth of the recession far worse than it would have been.  Ergo Hayek's assertion that inflation leads to unemployment is manifest.  In my business and in Jomals case, and throughout the economy, unemployment has exploded in the past 14 months, SINCE THE FED STARTED TO CUT RATES.  The only way to address the effects of rampant inflation is to cut costs where ever you can, because you cannot raise prices fast enough to cover your inflation expense increase.  This leads to cutting labor, as that is typically the largest discretionary expense you have.

Once we had the Lehman default then we had what would be expected, a mad rush to add capital, and improve your balance sheets.  When that happened, we had an unprecedented amount of money vaporize, because we de-leveraged, and de-liquified.  This is the inevitable outcome from excessive monetary expansion.  That is the essence of the Austrian Business Cycle.

I have enclosed a link to a article on what some believe will happen to commodities going forward.  The price of commodities went up only because of excessive liquidity/credit.  That is going away, and prices are tanking.  When will they return?  When the Fed and the other central banks over-liquify.  They have created TRILLIONS of $ out of whole cloth, but it is going onto balance sheets as equity, not as loans.  Once that money starts to be loaned out, look out, inflation will roar back with a vengence.  When it does then commodities will run again.  Bernanke says he will mop up the money as he needs to.  My gut says POPPYCOCK, he has been an utter disaster so far.

http://www.nakedcapitalism.com/2008/12/questioning-commodities-super-cycle.html

[rickortreat]

Excellent Ziggy! You go to top of the class.  There aren't many Austrian Economists teaching in the Universities, and definitely not at Harvard or Yale.  Yet again Austrian economic theory proves to explain what is occurring in the economy and why.

Yet again politicians, ignorant of the tenets of Austrian economics have managed to put us all in major peril.

Just be ready for inflation when it comes. Because times are going to get hard, it makes sense to get out of debt first, and start moving your savings into Gold and commodities. Gold's time is looking like it could be now, but it's too soon to tell in a market as volatile as this one has been.  The volatility is another sign of the struggle, and it is also creating great opportunities for day traders, but basically screwing anyone else, like a normal investor.

If gold does continue up-wards at this time, it is because people are scared and running to safety. Gold is one of the few things that has held or increased it's value in depressions. It also does well in an inflation, but that is over until the dollar breaks down. It has broken it's uptrend, but is still holding at a high level. To a trader than means wait to see what happens next.

[ziggy]

Excellent Ziggy! You go to top of the class.  There aren't many Austrian Economists teaching in the Universities, and definitely not at Harvard or Yale.  Yet again Austrian economic theory proves to explain what is occurring in the economy and why.

I graduated magna cum laude with a BLS in Economics and Business Administration from Hillsdale College, one of the few schools that actually teaches Austrian Theory.  So I was already at the top of the class.  Of course the Keynesians would classify me as a "MORON".

[Reality]

Bottom line it for me zig, when does the housing price bottom out and start upward.

If you can further break it down by US regions, i will definitely marvel more then any Keynaziyun ever has.

[rickortreat]

Even an Austrian economist isn't clairvoyant, these days it is very hard to know what exactly will happen since people can make decisions which could have a huge impact on the course of the US economy.

What is known is that we are in the aftermath of a bubble of epic size and that there will be severe negative consequences.  But there is no way to know for sure if war will break out, as it often does in these economic circumstances.  And we don;t know how the new administration will try to intervene to put in a bottom in the economy by engaging in massive public works projects and programs.

All that anyone can say is, the bottom in the housing market hasn't occurred yet, but that with so much economic uncertainty a house is becoming more of a liability and less of an asset. With a house you sort of loose flexibility in being able to go where the money is, and you always have property taxes and energy costs as well as maintenance and improvements. Still everyone needs a place to live. Best thing to do if you want a house is to imagine your dream home and see if it comes down in price to a level you can afford.

[rickortreat]

Excellent Ziggy! You go to top of the class.  There aren't many Austrian Economists teaching in the Universities, and definitely not at Harvard or Yale.  Yet again Austrian economic theory proves to explain what is occurring in the economy and why.

I graduated magna cum laude with a BLS in Economics and Business Administration from Hillsdale College, one of the few schools that actually teaches Austrian Theory.  So I was already at the top of the class.  Of course the Keynesians would classify me as a "MORON".

Yes, but he who laughs last laughs best!  History has demonstrated time and again that government intervention is the primary cause of significant financial hazard.  Forcing them onto a gold standard eliminates governments ability to intervene easily, which is why they abandoned it in the first place!  Keynes tried to justify this sort of action, but he was clearly mistaken.

We need people like you advising Obama. Adopting an Austrian economic perspective is exactly what this country needs.  Followed to it's logical extreme, it will impact trade policy, public spending, tax policy and monetary policy, and provide the country with a sound platform for continued internally generated economic growth.

[Lurker]

All that anyone can say is, the bottom in the housing market hasn't occurred yet, but that with so much economic uncertainty a house is becoming more of a liability and less of an asset. With a house you sort of loose flexibility in being able to go where the money is, and you always have property taxes and energy costs as well as maintenance and improvements. Still everyone needs a place to live. Best thing to do if you want a house is to imagine your dream home and see if it comes down in price to a level you can afford.

Rick...you start off so good in your answer then go off the deep end.

A house is a great asset.  Utility costs will be incurred whether you live in a house or an apartment.  The costs of taxes and maintenance are built into rent.  A fixed mortgage gives you a fixed housing cost whereas rents can and ARE raised on a regular basis.  Also with home ownership the fixed cost of a mortgage eventually disappears in which the opportunity cost of a house skyrockets.  If you are making $1,500 a month payment (w/o escrow) and you pay off your mortgage you have in essence been given a $1,500 a month annuity.  Figure that benefit over 20-30 (or more) years.

Also mortgage payments is the best forced savings program in the world.  No where else is a person forced to put money every month into an asset that has low liquidity.  Over 30 years a house WILL raise in value.  I have a relative in Las Vegas whose house went up in value almost 150% in the past 4 years.  It has now dropped almost 60% but they are still ahead from when they bought it.  But everyone focuses on teh 60%drop not the runup before hand.  And you buy a house using high leverage even with 10-15% down.  The the government subsidizes your payments with tax incentives (interest & tax deductions).  Add to this the fact that you use inflation adjusted dollars over 30 years to repay and it becomes a no brainer.  You don't wait to find your "dream house" at a price you can afford but you are better finding a starter home that you can afford and start working your way up to your dream house. 

[WayOutWest]

But it is through manufacturing that innovations come, the types of discoveries that keep businesses successful.

 

I disagree.  Pure R&D was responsible for the greatest innovation/invention of the 20th century.  There are tons of ways innovation in this country is generated, IMO manufacturing is not a key contributor.  That industry takes advantage of innovation but rarely creates it, not since Ford anyway.

Where has all that native American creativity gone to?

FYI, most of the "native" Americans were wiped out in the best implementation of government genocide to date (Hitler and the Nazi's were rank amateurs!).

The problem with "American ingenuity" is that's it's traveled across our boarders and oversees.  The US has become too complacent, IMO it started in the 70's and was already becoming a problem in the 80's.  American's have switched from "being the best we can be" to "doing enough to get by".  It starts in school and continues all the way to the grave in every aspect of like, from music/art to medical R&D.  I've done a lot of work for pharmaceutical companies and I was shocked to learn that foreign companies basically buy what little American innovation is left in that field.  They will sponsor (pay) for R&D projects at prestigious research hospitals and universities and then keep/own any discovery or break through generated, foreign countries have TRUELY learned the "American way".  The "American way" was to break the backs of the little guy to get ahead.  Take advantage of cheap labor, slavery was pretty cheap if I remember correctly, and work into the ground and replace that laborer with another when it broke down.  Other countries are doing the same things and are succeeding.  The problem in the US is that cheap labor force is mostly gone, the US has to rely on illegal immigrants to get that same "bang for the buck".  Other countries like Japan and Korea will soon experience the same thing, and hopefully China will some day as well.  China is effing up a lot of stuff because their people are starting to make a little money and their middle class went from 30 to 50 million people up to 250 million people.  Those new "middle" classers want stuff and they are putting a heavy strain on resources and the environment.

And while I am sympathetic to JoMal since I know him from this site, because he is a government worker, he should realize that his job is a cost to taxpayers, and whether it's worth it or not is less important than if it is essential.

What is essential?  I doubt very much you could gauge what is or is not essential for every state citizen.  There are obvious BS jobs in the state but IMO a garbage collector is just as essential as a police officer.

Whether they're directly responsible or have lost control over their agencies, Pakistan should realize that such actions are intolerable.  Either they get control over the terrorists, taliban, mujahadeen or whoever they are, because the world will not accept Pakistan as being a safe haven for terrorists in Afghanistan, India or elsewhere.  And they have no right to expect others to respect their territorial integrity if they can't stop these people from acting outside of Pakistan.  That means more US raids into Pakistan as well as the possibility of retaliation by India.  AS if the world didn't have enough trouble!

How short sighted is that?  You want to start another war?  Don't we have enough to deal with already?  Why don't we do the smart thing and just pull out of all the wars we're in right now and just attack China.  The US will eliminate a huge competitor for world resources, reduce the American and Chinese population by millions and totally jump start the economy by creating a major need for conventional weapons since we will be fighting a huge army and not a bunch of hit and run terrorists squads.  Hopefully we'll keep nukes off the table...but does it matter at this point?