Home Equity

It is not immediately clear how much of the net drop in mortgage balances from $8.033 trillion to $7.932 trillion was due to defaults as opposed to actual pay downs and non-credit rating impairing deleveraging. We do know that a whopping $577 billion in new mortgages were opened in Q1, the highest since Q3 of 2007.  Which means that some $680 billion in mortgages should have been extinguished in one quarter. If this happened primarily via defaults and discharges, one can only wonder just how the bank balance sheets were not decimated in Q1. As a reminder, half a year ago we observed that the bulk of US mortgage debt reduction has come from defaults not from actual deleveraging.

The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. Nothing could be further from the truth.

Explains the political motivation for slamming the account holders in Cypriot banks.

The Status Quo is shameless when it comes to hyping the recovery by whatever metric is most positive. Recently, that has been the stock market, but if GDP rises significantly (and recall GDP increases if the government borrows and blows money), then that number is duly trotted out by politicos and Mainstream Media toadies. If we scrape away this ceaseless perception management, we find that legitimate broadbased prosperity is always based on rising employment and increased purchasing power of wages. The phantom wealth that is conjured by asset bubbles vanishes when the bubbles inevitably pop, leaving all those who borrowed against their ephemeral bubble wealth hapless debt-serfs. If prosperity ultimately depends on employment and earned income (wages), how are we doing as a nation? Unfortunately, the answer is "terrible." As a percentage of the population, full-time employment is down. Only 36% of the population has a full-time job.

What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013?  Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.

I really need to stop being so pessimistic. I’m getting richer by the day. My home value is rising at a rate of 1% per month according to the National Association of Realtors. At that rate, my house will be worth $1 million in less than 10 years. Every mainstream media newspaper, magazine, and news channel is telling me the “strong” housing recovery is propelling the economy and creating millions of new jobs. Keynesian economists, Wall Street bankers, government apparatchiks and housing trade organizations are all in agreement that the wealth effect from rising home prices will be the jumpstart our economy needs to get back to the glory days of 2005. Who am I to argue with such honorable men with degrees from Ivy League schools and a track record of unquestioned accuracy as we can see in the chart below? These are the facts. But why trust facts when you can believe Baghdad Ben and the NAR? It’s always the best time to buy.

At some point, absorbing more information about the unsustainability of modern society yields diminishing returns. It becomes emotionally draining and thus counterproductive. Part of this exhaustion results from recognizing our powerlessness within the Status Quo, where independent thinking and structural innovation are intentionally winnowed out as threats to existing institutions and industries. Another part arises from the burden of knowing that the supposedly permanent Status Quo is far more vulnerable than generally believed. This is the psychology of knowing what lies ahead in The Burden of Knowing. These 'burdens of knowing' can diminish the small but real joys of the present - anti-thesised by an attitude such as “don’t worry; be happy.” And it certainly makes sense when life is still comfortable and enjoyable. But the philosophy of “thinking about the future is a downer, so I live in the present” ultimately rests on a false confidence that the future will take care of itself. Though Keynesian economists argue that nations are not like households, in truth debt/financial fragility is scale-invariant, meaning that rising debt, a high cost basis, and zero savings/investment lead to fragility in households, enterprises, communities, and nations alike.

Money – we all want it, but few of us are willing to sacrifice to get it. Those that have it generally don't understand it, and those that don't have it come up with excuses why they can't get it. If this sounds confusing – it is. For all that we have accomplished in the United States in the last 200+ years we have failed miserably at teaching our children the basics of money management. We are not talking about stock and bond portfolios but rather the basics of spending less than you make, understanding of credit, and how to balance a check a book. We are inundated daily with credit card commercials that show how great life can be – just charge it. We are enticed to buy things that we don't really need though the use of zero percent financing – but only while it lasts. We are motivated to consume anything and everything in pursuit of the American dream but no one ever talks about the consequences of our actions. The secret, of course, is the true road to wealth and happiness. It is irrefutable, undeniable and absolutely achievable - spend less than you make.

Unfortunately, the spectacular rise of Wall Street’s securitization machine will likely forever frustrate attempts to ascertain the extent to which the Fed is responsible for what happened to the U.S. housing market and financial system in 2008.  After all, it wouldn’t be fair to short sell (no pun intended) all the Special Purpose Vehicle sponsors, CDO asset managers, investors, and ratings agencies who, for at least five years, worked so hard to collapse the system.

Since 2009 all cash buyers have purchased roughly one third of all Southern California home sales. This is a significant number and unlike the early 2000s, many of these buyers are looking to hold onto properties as rentals. A good portion of buying has come from larger hedge funds and an increase of foreign money has caused competition on an already low selection of homes to become more pronounced. The latest inventory report for California is telling in many ways. Many of the larger metro areas in California are seeing annual inventory drops of 50 to 70 percent. Those looking to buy are facing added competition from a variety of unlikely sources. Last year in February we set a record with the number of homes sold to absentee buyers (29.9 percent). Where is all the inventory going in California?

Bank of America just reported yet another quarter marked by a bevy of "one-time" charges, which have now become normal course of business, even as NIM declined Y/Y, and sales and trading revenues declined sequentially. Loan loss reserve releases of $900 million more than offset the declining Noninterest income, and contributed to a positive pre-tax net income number. The biggest threat continue to be private Rep and Warrant outstanding claims which increased by almost 42 billion in the quarter to a total of $12.3 billion.

In economies dependent on ever-rising consumption, austerity had a negative connotation even before its politically charged meaning commandeered the public debate. When the entire Status Quo depends on discretionary consumption not just for "growth" but for its survival, austerity is welcomed with approximately the same enthusiasm Superman reserves for Kryptonite. This is of course a contradiction: an economy based not just on consumption of all net income but debt-based consumption is an economy devoid of savings, i.e. capital to invest in productive assets. An economy without capital is lacking a key component of classic capitalism. The loss of resilience and cost sensitivity has consequences. We have created an economy with an extremely high cost-basis, and as a result it is brittle, fragile and vulnerable to even modest "austerity."

California home prices experienced a big surge in 2012. This might fly in the face of stagnant household incomes but the incredible push for lower interest rates and reliance on low down payment FHA insured loans has brought many people off the fence. In Southern California home sales are up by 14 percent over the last year and the median price is now up by 16 percent. The median price is largely being pushed by the mix of home sales. Distressed properties are making up a smaller pool of sales. With low inventory, you have regular home buyers competing also with house flippers, big Wall Street buyers, and foreign money with limited supply on the market. The result has been to push home prices much higher making it more difficult for middle class families to afford a home. As we approach the end of 2012, let us look at the data for Southern California.

The assumption that households are doing much better simply because the stock market is up is really a problematic understanding of how wealth is dispersed across the United States. I vividly remember a handful of parties back during the peak of the bubble where people would often quote how much their net worth went up courtesy of the housing bubble. “My home that I bought in the 1990s is now worth over $1 million.” As all of you know, until you sell the home those gains are largely on paper and many did not sell. In fact, many tapped out large portions of that equity and spent it. This is why even with home prices moderately recovering US households still have close to record low equity in their homes. It probably does not help that low down payment FHA insured loans are such a large part of the market encouraging Americans to make the biggest purchase of their lives with very little down. The Fed reported last week on net worth figures and it is worth digging deep into the data.