Panic
California, particularly the San Joaquin Valley, staked its whole future on the real estate speculation. And things are now coming apart in a big way.
The Valley, of course, is not New York or Washington, where the decisions were made that created both the housing bubble and its bust. Our local finance, insurance, real estate, landowning and political leaders (FIRE Plus) are merely reacting to forces far beyond their control. Their thinking, in a literal sense, is totally "derivative." But, if rumbles in the County Administrative Building are any indication, the local chapter of FIRE Plus is in a major panic.
At the bottom, there are some local stories about the regional real estate deal. However, I included parts of Doug Noland's recent piece in Asia Times above them to provide a critical perspective on the de facto nationalization of Fannie Mae and Freddie Mac. Noland puts forth a convincing argument that this latest Bush-administration handout to cronies is the financial equivalent of the invasion of Iraq.
The Valley "leaders" remind us of a pied piper whose melodious flak has led the regional economy into a barrel now under heavy fire. Still, even in such an unpleasant situation, it is possible to think critically and perhaps decide what to protect and preserve. But, that thinking cannot occur in an atmosphere dominated by group panic and reaction, attacks on the most vulnerable citizens and blind lashing out. Real estate values are falling because they were highly inflated. As a result of the international real estate bubble, which created a great deal of paper wealth in this region (and enormous political corruption), the entire credit system -- apparently in the whole world -- is melting.
It has been clear since the bubble began that its critics had it right: it was unsustainable and would lead us into uncharted financial waters. The press has been full of stories including indications that "it has not been this bad for five years, 10 years, 20 years, since as long as I've been in real estate, since as long as such and such an agency has been keeping that kind of records ..." all tending back toward 1929 and the early Thirties. This is no dotcom collapse, the near meltdown of the Long-Term Capital Management or the 1987 stock market crash. It isn't even another S&L collapse. Something is happening that may not be described adequately by the word, "recession."
And yet, the level of denial today is even higher than the level of denial during the height of the bubble, and the acting out of greed sickness -- in fear now rather than in arrogance -- is even more demonstrable. Local government, the land-use agencies that approved all the projects, many of them half-finished and containing growing numbers of empty houses, seems to have adopted panic as the appropriate response. Perhaps this reflects the number of ruined speculators among our local officials. It certainly reflects general funding problems states, counties and cities are encountering. But, instead of the leadership the public has a right to, especially in critical times like these, we are getting a pathetic display of cringing cowardice, greater lies and suppression of public information, hostility and even a few actions that border on the psychotic from local officials. Examples are evident in a region whose entire power structure has been based on land ownership since the end of Indian times.
Badlands Journal editorial board
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3-28-08
Asia Times
CREDIT BUBBLE BULLETIN
Nationalization and dislocation
Commentary and weekly watch by Doug Noland
http://www.atimes.com/atimes/Global_Economy/JC26Dj02.html
As long-time readers are all too familiar, I have been a persistent critic of government-sponsored enterprises, or GSEs - notably mortgage finance agencies Fannie Mae and Freddie Mac. These behemoths of historic credit excess - instigators of the mortgage finance and housing bubbles - liquidity backstops for the ballooning leveraged speculating community - and instrumental agents for an unparalleled misallocation of financial and economic resources - are proving themselves the Freddie Krueger of systemic distortions and policy failures.
Two recent comments, the first from Friday's Washington Post,paint part of the picture:
To understand Wednesday's decision by federal regulators to let Fannie Mae and Freddie Mac set aside less cash to protect against losses, imagine a family that keeps its precious antique silver in a strongbox on a high shelf, beyond easy reach. The regulators have essentially authorized Fannie and Freddie to pawn some of their family silver.
Currently, the two firms, known as government-sponsored enterprises, or GSEs, have combined reserves of US$82 billion. This includes an extra amount that the regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), required them to hold while they got their books in order after accounting scandals. Now it is reducing that extra cushion by $5.8 billion. The newly freed-up money will leverage the purchase and securitization of up to $200 billion in home loans.
The point, however, is not to save Fannie and Freddie themselves but to use the two firms, which buy mortgages and resell bunches of them to investors in the form of bonds, to ease the difficulties of borrowers more generally. It’s as if our hypothetical family pawned its silver to help the neighbors out of a financial jam … This is risky. If all goes well, freeing up the GSEs will buoy mortgage lending, thus slowing or reversing the slide in housing prices … But if housing continues to tank, and the GSEs rack up new multibillion-dollar losses on top of those they have already incurred in recent months, they will have that much less in reserve to fall back on. The GSEs enjoy an implicit federal guarantee, but reducing their capital for a purpose such as this, at a time such as this, goes a fair way toward making that bailout promise an explicit one. (Washington Post, March 21)
I found OFHEO director James Lockhart's interview late Wednesday afternoon on CNBC also worthy of documentation:...
Lockhart: Well, it may take awhile. The mortgage market is one issue, but there are some other markets out there as well. I think this is going to be a major step forward. As you said, they can do $200 billion in purchases immediately. And to the extent they’re guaranteeing mortgage-backed securities - that could almost get into the trillions. We’re looking at that they would have the capacity - between what we did today and the significant capital raising that they committed to - they could do over $2 trillion in business this year if the market needs that money.
It would be an outright crime if thinly capitalized Fannie and Freddie were allowed to increase their Books of Business (mortgages retained on their balance sheets and MBS guaranteed in the marketplace) by $2 trillion this year - "if the market needs that money".
I was shocked when Mr Lockhart imparted that they were now in a position to accomplish such a feat. It is certainly a terrible idea to put Fannie and Freddie guarantees on millions of new mortgages created from restructuring loans of troubled borrowers. This would amount to nothing less than a despicable transfer of massive prospective credit losses directly to the American taxpayer (current owners of this paper should not be bailed out).
Wishful thinking
I have fully expected the GSEs, at some point, to be taken over by the federal government. It may have been orchestrated subtly, but I can only presume that such a historic endeavor was accepted last week as the only means of averting financial dislocation. And for their regulator to suggest that the GSEs today have any handle whatsoever over their unfolding "risk management" challenge is wishful thinking - at best.
As far as I’m concerned, much of the US mortgage market was this week essentially nationalized. I’ll take the dramatic narrowing in agency debt and MBS (mortgage-backed securities) spreads as support for this view. Additional support arrived from comments from Mr Lockhart, US Treasury Secretary Henry Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) "implied" government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry nationalization. To be sure, the Fed’s splashy "Sunday Night Special" bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s quiet coup.
I have my own hunches about the rise and inevitable fall of the GSEs. I’ve always assumed that the Greenspan Fed was pleased (relieved?) to watch Fannie and Freddie morph in the early '90s from conservative mortgage insurance providers to aggressive bank-like lending institutions and market operators. GSE credit creation (and timely market interventions) worked greatly to alleviate the forceful economic headwinds created by an impaired banking system...
I also have a hunch with regard to Alan Greenspan's now infamous prodding, when he was Fed chairman, of households into adjustable-rate mortgages. I think he recognized clearly the degree to which the impaired GSEs (and their scantily capitalized counterparties) had become acutely vulnerable to a rise in market yields. As the Maestro, his interest-rate policies (market manipulations) orchestrated a massive shift of interest-rate risk from the financial sector to the household sector. In the process, however, recklessly low interest rates spurred unprecedented mortgage lending and speculative excesses that today imperil borrower, lender, leveraged speculator and system stability alike...
After first reaching $2 trillion in 1999, Fannie and Freddie’s combined books of business surpassed $5.0 trillion in January. This "book" increased $638 billion, or 16%, last year, in what will surely be the greatest transfer yet of risky mortgage credit to the GSEs (only to be greatly outdone in 2008). Interestingly, OFHEO, Washington politicians, and Wall Street analysts are keen to play a dangerous game pretending that there is limited risk in guaranteeing MBS (as opposed to the obvious risk associated with mortgages retained on their balance sheet). The absurdity of Mr Lockhart stating that the GSEs will be in a position to take on an additional $2 trillion of mortgage risk this year is simply incomprehensible. Keep in mind that the GSEs are on the hook for the "timely payment of principle and interest" on more than $5 trillion of American mortgages - and counting … Such obligations will, in the post-bubble era, prove untenable...Well, where are our "populist" statesmen today? The average American is getting slammed by rapid inflation in the prices for fuel, food, healthcare, education and other basis necessities. He was duped into various dangerous mortgage products to purchase homes with, in many cases, grossly inflated market values. Millions are in the process of losing virtually everything.
The average American was also duped into various risky investment products, while the bursting of bubble markets will leave him dreadfully unprepared for retirement. Now, he is seeing the returns from his savings crushed by the melee to bailout Wall Street "money changers" and speculators. Over the coming months, millions will lose their jobs with the inevitable adjustment and realignment to cope with post-bubble realities. And now, apparently, the American taxpayer is to sit back and watch his contingent liabilities balloon (even further) with the nationalization of the US mortgage market.
I understand perfectly the motivation Wall Street, the administration and the Fed have in blindly throwing the kitchen sink at this unfolding crisis. These are indeed scary times bereft of solutions. I am certainly familiar with the view that bailing out Wall Street and the speculators is medicine necessary to stabilize the system. But not only is this approach both inequitable and unethical on moral grounds, it is my view that such endeavors will prove only further destabilizing for the system overall...
Surely, policymakers were keen to mete out some punishment on the increasingly destabilizing "systemic risk trade" (shorting stocks, bonds, credit derivative indices, buying bearish derivative products, etc.), but the upshot was only further destabilization.
News that the GSEs were back in the game in a big way added to an already highly unsettled situation for myriad sophisticated trading strategies. But before getting too excited about the spectacular short-squeeze, keep in mind that shorting has become an instrumental facet of leveraged speculator trading strategies - and, really, contemporary finance more broadly speaking. And the disintegration of an ever increasing number of hedge fund and Wall Street strategies, as I’ve written previously, remains at the heart of deepening monetary disorder.
Not surprisingly, the Fed could not risk a Bear Stearns failure - not with all of its derivative, repo and counterparty exposures. It really was not a difficult fix. Yet the rapidly lengthening line of vulnerable non-bank lenders (Thornburg, CIT Group, and Rescap come immediately to mind) and hedge funds will pose a greater challenge. There are some very substantial balance sheets at risk and significantly more "de-leveraging" in the offing - and the big banks will have no appetite.
The S&P500 is down a modest 7% from the much-changed financial and economic world of one year ago. While having little impact on the unfolding credit crisis (or home prices), policymakers have thus far largely succeeded in sustaining inflated US stock prices. But, in reality, the profound deterioration in the US and global credit backdrop has greatly altered prospects for the vast majority of companies, industries, and the US and global economies more generally.
Unsustainable credit
Despite any number of policy actions and all the good intentions imaginable, there is absolutely no way that the US financial system will now be capable of sustaining either the (pre-bust) quantity of credit or the uniform flow of finance that levitated bubble economy asset prices, household incomes, corporate cash-flows, "investment" spending or consumption.
Huge sections of the credit infrastructures (notably throughout Wall Street-backed finance) are inoperable and discredited. Prominent monetary processes have been broken and the resulting flow of finance radically revamped.
Prospective credit and financial flows will prove insufficient for scores of companies, as well as for state and local governments and various entities all along the economic food chain. Enormous numbers of business downsizings and failures - many by companies that thrived during the bubble era - will lead to huge losses of jobs and incomes (many at the "upper end" where the greatest excesses transpired)...Nationalization will prove a further blow to already fragile confidence...
3-28-08
Sacramento Bee
Home Front: Sacramento-area home builders play it cautious...Jim Wasserman
http://www.sacbee.com/103/story/817589.html
Sacramento-area home builders are being extraordinarily cautious this year about starting new homes. That's evident in the newest count of building permits taken out at area city halls.Home builders in El Dorado, Placer, Sacramento and Yolo counties are pulling back at more than double the statewide average rate, seeking only 589 building permits to start new houses, condominiums and apartments in January and February. That compares with 1,833 permits the same time last year, the Burbank-based Construction Industry Research Board reports.In Yuba and Sutter counties, builders got 92 permits during the first two months of 2008. The same time last year they took out 234 permits. March figures aren't available yet...jobless numbers in the capital region are up nearly one percentage point over February 2007...Half or more of the region's homebuyers are choosing homes repossessed by banks. And the number of foreclosures that will lead to more bank-owned inventory for sale has not slowed.
This year's slowdown has builders worried statewide that government approvals for their newest subdivisions will expire before they get a chance to start building in them. They're pressing the Legislature to pass Senate Bill 1185, which would extend the life of California's existing subdivisions for two years. A similar bill passed in 1996, at the height of the state's last housing downturn..."What we're seeing, frankly, is that builders aren't willing to take any forward-looking risk at this time," says Gregory Group owner Greg Paquin. He says builders are making sure their buyers are serious and aren't starting construction until they're sure the deal won't be canceled.
Auctions rage on
Less than a year ago when the first big foreclosed-home auction came to Sacramento's Cal Expo, hundreds of bidders registered to buy 107 houses.Now, whenever Irvine auction giant Real Estate Disposition Corp. comes to town, there are almost four times that many. The firm's newest auction of Sacramento-area bank repossessions at Cal Expo is scheduled for April 19-20.
Bidders will have a crack at 397 homes. And that's just the Sacramento region. In total, more than 1,500 houses in Sacramento, Stockton, Merced, Fresno, San Jose and Oakland will go up for auction in April and early May...
REDC, which did big business in home auctions during the 1990s downturn, is really going to town in the current housing slump. A look at its auction calendar shows nearly 300 homes being auctioned this weekend in New York, New Jersey and Massachusetts. Starting next week the firm's auctioneers will unload 1,500 more in Southern California and 1,000 in Florida. More "huge" auctions are planned in May in Atlanta, Denver and Minnesota, the firm says.
What's it all mean for the market? Experts talk about a forest fire clearing out the underbrush so the green grass of a healthier market can reappear. This is the forest fire...
Rates edge down again
Finally, interest rates continued their downward drift for the second week in a row, falling to a national average of 5.85 percent for a 30-year fixed-rate loan. That's down from 5.87 percent last week, reported federal mortgage giant Freddie Mac.
Rates averaged 5.80 percent in the West, according to the firm's weekly survey.
The new rates mean lower borrowing costs at the same time Sacramento-area real estate agents and mortgage brokers are reporting multiple bids for homes priced in the $200,000 range.
Thirty-year rates reached their lowest point of the year, 5.48 percent, the week of Jan. 24. This time last year, they averaged 6.16 percent.
Bakersfield Californian
Party vigilance falls to neighbors...JOHN COX
http://www.bakersfield.com/102/story/401430.html\
Leticia Avila’s blood pressure plummeted when she saw what partyers had done to her south Bakersfield home. Blood and spray paint stained her upstairs bedroom. Beer bottles littered the kitchen. Her fence had been partially torn down and many of her windows shattered. The scene was all the more shocking to Avila because she had put the home up for sale only about a month before, and was living just a few blocks away when police and neighbors say a large, unruly party broke out at the house.
By the time police arrived to break it up, a young man had been beaten unconscious and two others were badly hurt.
“It can’t continue like this,” she said.
But continue it has. In March, young people staged at least four large illegal parties in empty homes around Bakersfield, including the one March 2 at Avila’s home in the 5100 block of Yellow Rose Court, near Monitor Street and Pacheco Road.Youths partying in vacant houses is nothing new. What’s new, local authorities and real estate people say, is that the troubled housing market has widened the selection of empty homes, and so the parties are taking place in nicer, larger homes in more affluent neighborhoods...
3-28-08
Stockton Record
Realtors membership plummets
Decline attributed to market, internal disillusionment...Bruce Spence
http://www.recordnet.com/apps/pbcs.dll/article?AID=/20080328/A_BIZ/80328...
The Central Valley Association of Realtors, a trade group covering Stanislaus County and much of San Joaquin County, was expecting a huge membership loss this year as more and more agents dropped out of the sales market. But instead of an expected drop from 2,900 to 1,700 year to year, the association, which mainly provides educational services and lobbying efforts, has seen membership shrivel to about 1,200...
3-29-08
North County Times
FALLBROOK: Homeowners upset by 'downsizing' plans...TOM PFINGSTEN
http://www.nctimes.com/articles/2008/03/29/news/inland/fallbrook/eb34fdd...
Homeowners in the new Shady Grove subdivision said Friday they were concerned that their upscale houses will plummet in value if the developer of the neighborhood is allowed to shrink the size of most of the homes that are still in the planning stages.Meanwhile, real estate industry analysts said the decision by KB Home to downsize the Shady Grove houses is just the latest example of a regional trend.
Those who already paid top dollar for custom-quality homes in the neighborhood say they're unhappy with the idea of smaller, cheaper homes filling up the rest of the subdivision.
Shady Grove resident Mickie St. Pierre said Friday that the 3,285-square-foot home she and her husband bought there cost more than $700,000 last year. After extensive upgrades, she estimated it would now be worth about $1 million, if the market recovered to where it was before the downturn.While it is uncertain what effect the smaller houses would have on the value of existing homes in the development, St. Pierre said she cringes when she thinks about it.
"You're talking about homes right around the corner that would go for $300,000 or $400,000, so (ours) would probably go down into the $700,000s or $800,000s," she said. "It's a huge loss."
Nicole Dennison, president of the Shady Grove Homeowners Association, said she and her husband bought their "dream home" at the hillside development last year, and that they were dismayed by the builder's plans for plainer, cheaper homes.
"I'd love to see KB Home stick it out and keep offering the original models they advertised," Dennison said. "I understand that it's business, but they'll cut the legs out from under the homeowners. (The owners) will never recoup what they've put into these houses"...Alan Nevin, an analyst for real estate tracking firm MarketPointe, said Friday that the Shady Grove case "is not isolated at all."
He said builders who replace original floor plans in their developments with smaller homes are usually trying to sell all the lots quickly.
"The reality is that firms like KB Home will probably wind up building those new (smaller) homes and making little, if any, profit, just to use up the lots," said Nevin. "In the world of publicly held builders, land is a liability, not an asset, so they try to remove themselves from heavy lot positions, and one of the ways they can do that is by downsizing their homes."