Housing Decline and whats to come.

Posted: July 17th, 2008 | Author: admin | Filed under: Truth | No Comments »

This guy is always right on, with his no-nonsense analysis of the economy.  I believe every word of this is true.

I certainly hope the housing market falls to the 2.5x your income level.  Then maybe someday even *I* could afford a house!

(Source)

Housing Decline and whats to come.

It’s time for me to put on the serious journalist hat and share a few things that have come across my desk in the past day or so, because this is the “Stop the Presses!” kind of news which should be on the front page of every paper in America, yet which the MainStreamMedia hasn’t been explaining except is scattered pieces, because the Big Picture would scare everyone to death and collapse the economy for sure. It may anyway, but at least we have 80-days until then to get ready for it.

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The first item involves some common sense about housing prices and the current mortgage mess, sent along by my colleague Stephen Swain, who as both a tax attorney and CPA (and personal consigliori) has nevertheless managed to continue to view things in a common sense way.

Swaim, who I’ve exchanged notes on the economy with since the mid-1990′s on the old Longwaves discussion group hosted by the University of Colorado, explains that we may be able to accurately estimate how bad the mortgage and foreclosure unwinding will be by looking at historical variations of the income to home price ratio.

Sounds complicated, but it’s not. Back when I bought a house in 1973/74, the new home I wanted was going for $43,950. My income was carefully inspected because the requirement back then was that the home could not exceed 2.5 times my annual income. Because I was making about $28,000 a year at the time, it was no problem.

Back to the point, Swain did some work in 2000, as he explained in this email I’ve been given permission to share parts of…

“…that showed how housing purchase prices as a ratio of people’s income dramatically took off after the tech meltdown in 2000. If you will recall at the time I said at the time that the “Bubble” mindset would move to Real Estate and become a MUCH bigger bubble … and voila it did. The Ratio of housing prices to income skyrocketed way above trend line to the 4.5x area from about 3.0x in 2000.

My old experience with that ratio (which I looked at all the way back when I did my original work in 78/79) was that the typical long term ratio of about 2.5 seemed to match up well to people’s ability (in mass) to be able to service their mortgages over the long term.

At least here in the Mid West where we got regular recessions individual markets would run into problems during the next recession if the ratio had somehow been able to climb up to the 2.8x level. (at the 2.5 level people seemed to mostly be able to scrape enough together to survive even most job loss situations without loosing their houses in mass).

Even 3.0x then was on the riskier side of the proper safe leverage ratio and meant that most buyers would be thinly capitalized if hard times hit. 4.5x was/is an unbelievable amount of leverage … particularly if one is on any sort of ARM where the payments can up UP in ANY WAY (including the loss of builder buy downs) (as I recall ONLY Hawaii was up in that stratospheric realm back then … and they had a very high foreclosure problem, though of course they always had new people from the mainland coming out who brought funds to buy with).

Another thought to keep in mind is that at 4.5x vs. 2.5x one’s real estate tax burden is in most states going to add another huge additional monthly charge … equivalent to a large additional interest rate kicker on the loan compared to a house bought with a 2.5x ratio.

I made a post yesterday that included that chart as I made some other points, principally about the Dollar and US Govt debt issuing.

The chart indicated that IF housing prices held steady here it would take 9 years for the trend line to come up far enough so that the ratio would drop back to the 3x income level (which is still high imo). I of course do NOT expect housing prices to hold steady for that long … but for an actual decline to occur.

IF that decline occurs during the length of time that my study of traditional bubble collapses indicate taken place then one should expect OVERALL about a 30%-35% decline in housing prices from my 1/1/06 top date to my projected 1/1/10 bottom date JUST TO GET BACK TO THE TREND LINE of 3x income levels.”

What does all this mean? Simply that if you had a household income of $100,000 in 2000 and bought a home for $450,000, the bottom of this periodic housing decline won’t likely be over until we revert to historical norms which would be an income to house ratio of 2.5 to 2.8 times.

In other words, when your house (or the national average) gets down to that $250,000 top $280,000 level, then the bottom will likely be in — assuming we have no overshoot to the downside, which is quite likely.

How come no one in the MSM is putting this out? Namely that the bottom is at least a year (or longer) out and a much larger decline is at hand? Back to Swaim’s email, he explains that everyone is focused on ‘bottom up’ accounting and reporting…which in turn is…

… because of the wacky accounting rules now in place there is NO WAY one can rely upon a bottoms up analysis of the financial firms that are out there. The fact that Citi alone has MORE THAN 7000 off balance sheet entities (ala Enron accounting) and is now admitting that “some” of them are creating liabilities for Citi itself indicates there are serious undisclosed problems that exist not just for Citi, but across the entire banking and financial world (7,000 VIEs and more than 100 QSPEs entities for CITI alone PER their deputy controller in a letter to FASB in June 2008)

Because one can NOT do any valid bottoms up analysis of the problem one can ONLY get a handle on it by doing a TOP DOWN analysis. Try to get a handle on the problem from an overall perspective … then try to figure out who are the weakest players or those who used the most creative accounting and then assign out – via back of the envelope analysis – where you think those losses are sitting.

For me doing that kind of analysis of Enron actually got me pretty close to an accurate handle on where they stood (my recollection is that my numbers showed that on an operations and trading basis they were losing about $800 million a MONTH near the end except for their California energy deals where they receiving somewhat more than that – not very far off from what their final numbers were shown to be after their collapse after all the accounting gimmicks were removed – btw I made my calculations many months before their collapse, I think some of them though not all are in the the University of Colorado LW site archives so you can verify how close I was with my analysis)

Anyway … don’t mean to scare you, but things ARE matching up exactly to my projects from many years ago.

Now, as I projected the Govt is bailing out this or that thinly or undercapitalized entity TAKING ON BOTH THE LOSSES AND RISK itself (very Kenyesian in it’s actions … and exactly what I projected would happen), until they are also so loaded up with losses and risk that foreign buyers of US debt will start to look askance at the US Government as a place to put their ADDITIONAL money. (remember we need $2 Billion in NEW foreign money PER DAY just to keep the current game going, and that is withOUT adding in the additional risks/losses that the Government is now assuming willy-nilly.

BIG ENTITY collapses are now in store for THIS next wave of the collapse (well they would collapse without government bailouts … so I still call those collapses). Fannie and Freddie are just the first (and maybe the biggest) of several to come over the fall/winter. This wave has now begun in earnest (about 3 weeks before I expected), and will have multiple scary events occur over the fall/winter.

It is in what I project the FINAL wave down, next summer to fall 09/winter 10 that the US government itself will have it’s economic viability questioned.

Amazingly, while the Hank and Ben Show has been urging more powers for the government (and the banker-owned banks that make up the “Federal” reserve system), there comes word of “Black Monday 2008″ (which seems to fit the July 8 linguistic release period to a tee):

“In a nutshell, what happened is that Monday morning, all the major mortgage banks in the U.S. issued some kind of order or decree, that they would cease conducting any kind of workouts or negotiations with borrowers, and instead foreclose on every home they could.”

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“I know this because the nonprofit I work for is a sort of hub that helps people understand their options and take steps to avoid foreclosure. That means that I’m in regular communication with, among other people, brokers and lawyers who are trying to help people who have problems with their mortgages and need to negotiate with their mortgage companies; as well as individuals who are trying to work things out themselves.”

See a design pattern yet? Because the economy moves at glacial speed, a conspiracy theorist’s view of things might go something like this as I’ll synthesize for you a number of concepts floating around the ‘net into a semi-coherent viewpoint:

“When it became clear that the final upswing in Grand Super Cycle economics from the first Depression lows of the 1930′s was complete with the Dow topping out in early 2000 at 11,723, which would be 14,677.58 on an inflation adjusted basis today, then Fed Chairman Alan Greenspan engineered the Housing bubble to get the country part way across the financial abyss.

This was helped, in no small measure by a terrorist (arguably false flag operation [FFO]) which was used to spin the country into a couple of wars that neither Congress nor the American people would have stood for under normal conditions. The housing bubble and the increase in war spending combined to get the country part way through the horrific economic workout that accompanies Great Depressions.

The resulting WOT has kept Americans distracted from the underlying issues of a declining standard of living and has provided an avenue for high government spending levels in a modern analog to the Civilian Conservation Corps of the 1930′s as well as the Works Progress Administration.

With a major decline to new economic lows on the horizon for this fall, it is almost a sure better that another FFO will occur in order to keep the population under control and following ‘the script’ which is to usurp as much of the saved wealth of the Baby Boom generation as possible and continue to concentration of wealth into the hands of ‘the elite’.

Concurrently, the next FFO would also be engineered in such a way as to provide huge government employment projects which Americans will embrace. That they will have to do so because of foreclosures and theft of their wealth will be blame-shifted and the country remain intact and the existing power structure in place.”

Scary? Outlandish? Well…Unfortunately, not only do the ‘top down’ facts seem to fit this scenario pretty well, but the linguistics work over at www.halfpasthuman.com paints the massive mess (crap storm) coming in the late September to January ’09 period as a 30% military, 30% economic, 30% terra entity event. Till we get to the Mid December quake, of course.

And in the meantime, the odds of a large-scale power outage in what remains of summer are still quite high and my money is that it will happen in Region 10 (Washington, Oregon, Idaho, Montana) where we’re hearing rumbles of increased power security now.

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Against this background, we regret what’s ahead, but the world is an amazingly complex system such that a continuation of the Cold War “thinking the unthinkable” makes sense, if one is fully committed to continuing the existing power structures as the ‘best there is’ in which case the people behind all this, will no doubt wrap things up in a flag and demand we all salute it, impervious to the actual words of the Constitution which are supposed to protect “We the People” from the overarching intrusion of Government turned corporate Nanny State.

The Corpgov folks would no doubt argue ‘It has to be done” as we will likely bear witness to over the coming year. So we’ll just hang out in rural America with field glasses, popcorn and beer, thanks. Ya’ll have fun.

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