Thursday, September 18, 2008

"The Acceptable Lust"

From the Sacramento Bee:

Sacramento-area home sales tailed off slightly in August from their July highs, while median prices in Sacramento County, the largest sector of the region's real estate market, held steady at $210,000. Though only one month's worth of data, it show the first time since May 2007 that median prices in Sacramento County have not fallen from the previous month.
...
Sacramento County's $210,000 median sales price...is down 32.7 percent from the same time last year, and off 45.7 percent from the county's August 2005 high of $387,000.
From the Sacramento Bee:
The refinancing wave is on. Prompted by the financial chaos on Wall Street and the move by investors to the kind of bonds that fund mortgages, rates have plunged fast the past two weeks. But here's the bad news: Those in need most of refinancing probably can't. Credit standards are tight, locking out all but the most qualified borrowers.

"Credit standards are getting higher all the time," said William Martin, chief executive officer of the Bank of Sacramento. Martin said many lenders have taken such big losses on mortgages that they simply have less money to loan.

The dramatic drop in values over the past two years also means it will be difficult for many borrowers who now owe more than their homes are worth to refinance. "For every one we're accepting we're having to turn away two because there's not sufficient equity for the property," said Brent Wilson, a mortgage strategist with Sacramento's Comstock Mortgage.
From the Sacramento Business Journal:
The Modesto Bee this week announced plans to lay off 12 employees, including its sports editor....The layoffs are part of a companywide effort announced this week by The Modesto Bee’s parent, The McClatchy Co., to reduce its work force by another 10 percent, or about 1,150 full-time positions.
From the Sacramento Business Journal:
The McClatchy Co.’s credit rating was downgraded by two notches Wednesday as Moody’s Investors Service put the Sacramento-based newspaper publisher deeper into junk bond territory. Moody’s lowered McClatchy’s credit rating to B2 from Ba3....
From Portfolio.com:
In all the public finger-pointing about the American real estate bust, surprisingly little attention has been paid to its origin...However terrible the sins of the financial markets, they’re merely a reflection of a cultural predisposition. To blame the people who lent the money for the real estate boom is like blaming the crack dealers for creating addicts. Americans feel a deep urge to live in houses that are bigger than they can afford. This desire cuts so cleanly through the population that it touches just about everyone. It’s the acceptable lust.

Consider, for example, the Garcias. On May 30, the New York Times ran a story about a couple, Lilia and Jesus Garcia, who were behind on their mortgage payments and in danger of losing their homes. The Garcias had a perfectly nice house near Stockton, California, that they bought in 2003 for 160 grand. Given their joint income of $65,000, they could afford to borrow about $160,000 against a home. But then, in 2006, they stumbled upon their dream house. The new property was in Linden, California, and, judging from its picture, had distinctly mansionlike qualities. Its price, $535,000, was a stretch.

Then, of course, the market turned. The Garcias failed to make their mortgage payments and couldn’t sell their original house. They owed the bank about $700,000 and were facing eviction. The mistake supposedly illustrated by the Garcias’ predicament was that they held on to their former home in Stockton as an investment. The moral: Americans are in their current bind because too many of them saw houses as moneymaking opportunities.

But the real moral is that when a middle-class couple buys a house they can’t afford, defaults on their mortgage, and then sits down to explain it to a reporter from the New York Times, they can be confident that he will overlook the reason for their financial distress: the peculiar willingness of Americans to risk it all for a house above their station. People who buy something they cannot afford usually hear a little voice warning them away or prodding them to feel guilty. But when the item in question is a house, all the signals in American life conspire to drown out the little voice. The tax code tells people like the Garcias that while their interest payments are now gargantuan relative to their income, they’re deductible. Their friends tell them how impressed they are—and they mean it. Their family tells them that while theirs is indeed a big house, they have worked hard, and Americans who work hard deserve to own a dream house. Their kids love them for it.

10 comments:

Rich said...

off topic, but here's a great explanation of the current financial market turmoil

http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/

RV6Flyer said...

"People who buy something they cannot afford usually hear a little voice warning them away or prodding them to feel guilty."

I don't think people hear this little voice because there is zero recourse in borrowing money to buy a home. You can buy another house, walk away from the old one, and live happily ever after.

Try going to your commercial banker and asking him if you can buy another building because you can't afford the one you have. Try walking away from an SBA loan. They have you wrapped up every way possible. This type of responsiblity keeps people and markets rational.

What I don't get is I have been in commercial and small business lending for a very long time. We have less regulation than residential lending, yet, for the most part, our underwriting standards are much higher and markets a little more reasonalble (I will admit we have had our problems in the past).

Why didn't heavy disclosure and regulation stop this? It's all geared towards protecting the borrower, yet there has been no protection. We want to try and protect borrowers after the fact, rather than before they ever got into a funny loan to begin with.

The regulators are only there to regulate what congress tell them to regulate, so this is where I am placing most of the blame. Where was Barney Frank to save everyone before this happened?

Patient Renter said...

Where was Barney Frank to save everyone before this happened?

I believe that's a good question.

sacramentia said...

The portfolio article just pissed me off, trying to blame just the borrowers. The Investment Banks are just as bad...

If you had a friend that levered 30:1 during the boom and went bust you'd call them a f--- idiot. If I levered 30:1 during the boom I'd have made extra 20mil, but would be bust right now, and a f--- idiot.

I guess they don't teach basic math at the ivy league schools, they probably figure the folks admitted know that already.

Diggin Deeper said...

Here's a good explanation of CDO's and why the world economy is at risk regardless of how much money the Feds pump into the system or how many companies they end up bailing out.

http://www.moneymorning.com/2008/09/18/credit-default-swaps/

Perfect Storm said...

and off 45.7 percent from the county's August 2005 high of $387,000.

Were almost there, just a little bit longer, with everbodys help we can achieve a 50% decline by 2009.

Diggin Deeper said...

It really doesn't matter how low prices go from here. If there's no credit, there's no activity, and people get in line to wait for some institution to gather up enough risk capital to loan... while others get in line to remove their money from their checking accounts. One certainly is not supported by the other.

Let's face it, the Fed is in panic mode....

Printing presses are in high gear. Pour enough capital on the fire, smooth things out for a short period of time, and then repeat, over and over again.

I heard a former Fed gov, yesterday, on some business news program, say that the Fed has INFINITE capital to throw at the problem. Gee, I'd like to be able to buy a loaf of bread for $5 or better. Please don't use up all that INFINITE capital all at once.

Presidential candidates are blurred in confusion and are clueless as to what's happening right now. How can you ask for another stimulus plan, or just say "leave it alone" when either option produces the same net result?

As for Sacramento real estate...for the moment...Who cares whether we go down to 50% off or 60% off. It won't really matter if these problems don't get solved first.

Patient Renter said...

Fed has INFINITE capital to throw at the problem

It's true. So far the question has been would they do it? With the current crop of clowns running the show, so far the answer has been yes. I wonder if there's any limit though. Is 1 trillion enough? More?

Patient Renter said...

Presidential candidates are blurred in confusion and are clueless as to what's happening right now.

The candidates who are left are certainly confused. I caught one of the former candidates on TV last night where he was being praised as a visionary and asked by the interviewer if people come up to him in the chamber and tell him he was right about all of this. They do. But it doesn't matter now, Obama and McCain are what we have.

Diggin Deeper said...

PR...

It's quickly becoming a "save yourself" world. Nothing can stop investment failures that are structurally f***ed up, leveraged upwards of 30-1, and tied to the positive growth and health of our RE industry. Notional values on these investments are in the tens of $Trillions, held by domestic and foregin concerns alike. When they fail, they take not only the face value of the original investment, but the notional value of what's been piled on top these same investments (can you say leverage). It's like, "how can I lose $30 when I only put $1." This is where the problem gets completely out of the Feds control and why we're seeing credit all over the world seize up. They might be able to prop up AIG, Bear Stearns, Fannie/Freddie, etc, but they cannot prevent their toxic investments from failing and causing damage to the entities that own them. That's why there's panic out there. Either the RE market bottoms and starts rising again, quickly, or the s**t hits the fan over and over again.