This article originally appeared on the Irvine Housing Blog.

As the economy improves, lenders will start to liquidate their inventory. When they do, the lending cartel will collapse, and prices will get pushed lower.

No time wasted, smile on your face
Gotta get out, out of this place
And I’ll lend a helping hand
Cause we got it now, we got it good

Cartel — In No Hurry

Cartel Behavior

Despite the huge backlog of inventory of both bank-owned properties and shadow inventory, the banks are in no hurry to liquidate. It is classic cartel behavior.

When OPEC first formed, a group of oil producers had an idea: if they all agreed to restrict production, it will drive up prices and make them all rich. When they first put their plan into motion in the 1970s, it worked. The member countries curbed production, and prices went up. Once prices were high, each member country had incentive to cheat to obtain more income at the higher price, so the cartel weakened, and many argue it has little or no power today.

Similarly, the heads of all the major lenders today are like minded: they all agree that processing foreclosures into a weak job market will lower prices and reduce the value of their holdings. They all came to this conclusion in 2008, and during 2008 and 2009, they stopped processing foreclosures and restricted the inventory on the market to keep prices high, and it worked.

As the economy pulls out of this recession, each of the members of the banking cartel will change their opinions about the economy and the market. Some will evaluate their procedures and determine changes are in order, and some will evaluate the amount of inventory they must chew through and determine they better get going or they will own real estate for the next 20 years.

The 2:00 problem

Years ago I attended a seminar where the speaker was Kevin Haggerty, 7-year head of trading at Fidelity Capital Markets. He described what is known as the 2:00 problem.

When mutual fund managers want to buy or sell stock, they call the trading desk and place an order. Since these orders are often very large, it may take quite some time to get their orders filled. Let’s say the trader was asked to fill a 100,000 share order, and at 2:00 he has only accumulated 60,000 shares. He informs the head of trading who calls the fund manager. The fund manager has to make a choice: (1) either wait and get the order filled tomorrow, or (2) have the trader fill the order regardless of what it does to the stock price. Filling a large order at the market can cause a major change in price.

The banks have a 2:00 problem… almost. It is only 12:00 in their world. They have only filled a tiny fraction of their original, market-clearing order, and they feel no urgency to fill the order through lowering price… yet.

Two o’clock is coming. When the economy starts to recover, banks will get pressure from regulators and stockholders to clean up the mess on their books. Lenders are not synchronized, and each one will hit 2:00 at a different time. The volume necessary to clear the garbage is simply not going to happen at current price levels. The price-income mismatch makes that impossible. At some point, the pressure to liquidate will force them to impact the market.

Procrastination on Foreclosures, Now ‘Blatant,’ May Backfire

American Banker | Friday, August 27, 2010

By Jeff Horwitz and Kate Berry

Ever since the housing collapse began, market seers have warned of a coming wave of foreclosures that would make the already heightened activity look like a trickle.

The dam would break when moratoriums ended, teaser rates expired, modifications failed and banks finally trained the army of specialists needed to process the volume.

But the flood hasn’t happened. The simple reason is that servicers are not initiating or processing foreclosures at the pace they could be.

It really is that simple. I see uninformed shills write that there is no shadow inventory and other nonsense that realtors tell their customers to dupe them into a false sense of security. The fact is that shadow inventory does exist. It is very large, and eventually banks are going to have to liquidate this inventory. This liquidation will be the collapse of a cartel and may not be the orderly flow they are hoping for.

By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that “the first loss is the best loss” — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults.

I have pointed out on many occasions that lender policy is encouraging strategic defaults.

It is becoming harder to blame legal or logistical bottlenecks, foreclosure analysts said.

“All the excuses have been used up. This is blatant,” said Sean O’Toole, CEO of ForeclosureRadar.com, a Discovery Bay, Calif., company that has been documenting the slowdown in Western markets.

Banks have filed fewer notices of default so far this year in California, the nation’s biggest real estate market, than they did 2009 or 2008, according to data gathered by the company. Foreclosure default notices are now at their lowest level since the second quarter of 2007, when the percentage of seriously delinquent loans in the state was one-sixth what it is now.

Let that sink in: banks have six times as many delinquent borrowers, but they are foreclosing on less of them. What do they expect to do with all these squatters?

New data from LPS Applied Analytics in Jacksonville, Fla., suggests that the backlog is no longer worsening nationally — but foreclosures are not at the levels needed to clear existing inventory.

The simple explanation is that banks are averse to realizing losses on foreclosures, experts said.

“We can’t have 11% of Californians delinquent and so few foreclosures if regulators are actually forcing banks to clean assets off their books,” O’Toole said.

Officially, of course, this problem shouldn’t exist. Accounting rules mandate that banks set aside reserves covering the full amount of their anticipated losses on nonperforming loans, so sales should do no additional harm to balance sheets.

Within the last two quarters, many companies have even begun taking reserve releases based on more bullish assumptions about the value of distressed properties.

That is mark-to-fantasy accounting. The banks are using bullish assumptions that can’t possibly come to pass given the huge inventory that must be liquidated.

Now there is widespread reluctance to test those valuations, an indication that banks either fear they have insufficient or are gambling for a broad housing recovery that experts increasingly say is not coming.

Banks did not choose the strategy on their own.

With the exception of a spike in foreclosure activity that peaked in early-to-mid 2009, after various industry and government moratoriums ended and the Treasury Department released guidelines for the Home Affordable Modification Program, no stage of the process has returned to pre-September 2008 levels. That is when the Treasury unveiled the Troubled Asset Relief Program and promised to help financial institutions avoid liquidating assets at panic-driven prices. The Financial Accounting Standards Board and other authorities followed suit with fair-value dispensations.

These changes made it easier to avoid fire-sale marks — and less attractive to foreclose on bad assets and unload them at market clearing prices. In California, ForeclosureRadar data shows, the volume of foreclosure filings has never returned to the levels they had reached before government intervention gave servicers breathing room.

Some servicing executives acknowledged that stalling on foreclosures will cause worse pain in the future — and that the reckoning may be almost here.

“The industry as a whole got into a panic mode and was worried about all these loans going into foreclosure and driving prices down, so they got all these programs, started Hamp and internal mods and short sales,” said John Marecki, vice president of East Coast foreclosure operations for Prommis Solutions, an Atlanta company that provides foreclosure processing services. Until recently, he was senior vice president of default administration at Flagstar Bank in Troy, Mich. “Now they’re looking at this, how they held off and they’re getting to the point where maybe they made a mistake in that realm.”

Did you catch that? That is the beginning of the end for the lending cartel. Once they lose their like-minded action, once some of the cartel members begin to liquidate, prices will fall, and the cartel will crumble.

Moreover, Fannie Mae and Freddie Mac have increased foreclosures in the past two months on borrowers that failed to get permanent loan modifications from the government, according to data from LPS. If the government-sponsored enterprises’ share of foreclosures is increasing, that implies foreclosure activity by other market participants is even less robust than the aggregate.

“The math doesn’t bode well for what is ultimately going to occur on the real estate market,” said Herb Blecher, a vice president at LPS. “You start asking yourself the question when you look at these numbers whether we are fixing the problem or delaying the inevitable.”

I am amazed that anyone involved really thought the bailouts and false hopes would actually solve this problem. There was never any chance. Those programs were obviously delaying the inevitable.

Blecher said the increase in foreclosure starts by the GSEs “is nowhere near” what is needed to clear through the shadow inventory of 4.5 million loans that were 90 days delinquent or in foreclosure as of July 31.

LPS nationwide data on foreclosure starts reflects the holdup: Though the GSEs have gotten faster since the first quarter, portfolio and private investors have actually slowed.

“What we’re seeing is things are starting to move through the system but the inflows and outflows are not clearing the inventory yet,” he said.

I find it surprising that the government is actually leading the collapse of the cartel. Don’t be surprised if the GSEs stop their foreclosure activity under pressure from banking interests that would rather see us become Japan than see themselves forced out of business.

Delayed foreclosures might be good news for delinquent borrowers, but it comes at a high price.

Stagnant foreclosures likely contributed to the abysmal July home sales, since banks are putting fewer homes for sale at market-clearing prices.

Moreover, Freddie says a good 14% of homes that are seriously delinquent are vacant. In such circumstances, eventual recovery values rapidly deteriorate.

Defaulted borrowers were spending an average of 469 days in their home after ceasing to make payments as of July 31, so the financial attraction of strategic defaults increases.

One possible way banks are dealing with that last threat is through what O’Toole calls “foreclosure roulette,” in which banks maintain a large pool of borrowers in foreclosure but foreclose on a small number at random.

O’Toole said the resulting confusion would make it harder for borrowers to evaluate the costs and benefits of defaulting and fan fears that foreclosure was imminent.

For as cold as Sean’s idea is, it would probably be effective. Random violence is an effective method of generating terror, and what Sean is suggesting is that lenders become terrorists.

Is that what this has devolved into? Are lenders going to resort to terrorist tactics to compel people to pay for lender’s stupid lending mistakes? Are we going to allow lenders to do this? When will the government act for us rather than for the lenders?

The idea that lenders could and would do this makes me want to see them die.

A Dream House After All – Karl Case (of Case-Shiller), NYT

But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free.

Why houses are like dishwashers – Felix Salmon Deconstructing Karl Case

Essentially, what Case is saying here is that once you own a house, you’re guaranteed to be able to live there as long as you like, and that guarantee has real value. If what you want from any investment is an annuity — the ability to get constant real value out of it indefinitely — then in that sense a house is an investment. But that’s emphatically not the same as thinking of a house as an investment in a mark-to-market sense of how much you could sell it for.

Case is a long-term bull on housing: “sooner or later”, he says, prices will rise. Well, yes. But if it’s later rather than sooner, and if they fall a lot from current levels before they start rising, then you might not take much solace in the fact that you’re still getting the same kind of value out of your home that you’re getting out of any other durable good.

Mapping Troubled Housing Markets – Richard Florida

The first map above, prepared by Zara Matheson of the Martin Prosperity Institute based on data from Core Logic, shows the percentages of mortgages that are underwater across U.S. metros. Las Vegas tops the list with nearly three-quarters of all mortgages underwater. More than half of all mortgages are underwater in Stockton, Modesto, Vallejo-Fairfield, Bakersfield, and Riverside, California; Port St. Lucie, Orlando, Cape Coral, and Fort Lauderdale, Florida; Phoenix, and Reno. In Miami, Tampa, and Detroit, more than 45 percent of all mortgages are underwater.

The Next Stimulus is Coming – WaPo

More spending on infrastructure – particularly transportation projects – is also under discussion, sources said. But a person familiar with the talks said it would be easier for a package consisting purely of tax cuts to “avoid the stain of a ‘bailout’ or ’stimulus’ label.” Although many economists say the stimulus package helped pull the nation out of recession, it has been attacked relentlessly as ineffective by Republicans and is viewed with deep skepticism by voters.

Why Obama’s mortgage-relief program failed – SF Weekly

Hiding the truth about home values is something banks have been happy to play along with. Whereas foreclosures might take a few months in better times, banks and loan servicers are sometimes waiting a year or more to face the reality of mortgages gone bad.

“There’s a lot of phantom inventory that could be foreclosed in a twinkling, but they’re not,” says Mountain View attorney Cathleen Moran, a certified bankruptcy specialist who has helped many clients who have failed to enroll in the HAMP program.

Vancouver’s high housing prices threaten growth – Vancouver Sun

‘We did it: We are the least affordable city in North America.”

Realtors, Builders oppose another Housing Tax Credit – CR

“We are not advocating another one. We think it’s important for the market to have time to recover on its own,” says Walter Molony, spokesman for the National Association of Realtors.

Deep-fried beer invented in Texas – Telegraph

The beer is placed inside a pocket of salty, pretzel-like dough and then dunked in oil at 375 degrees for about 20 seconds, a short enough time for the confection to remain alcoholic.

When diners take a bite the hot beer mixes with the dough in what is claimed to be a delicious taste sensation.

The good news is that home sales numbers for Cache County Utah during August were substantially improved compared with last month. The bad news is that although the 68 homes sold is an improvement, it is still down nearly 40% compared with last August of last year. This graph shows the comparison of home sales numbers during 2010, compared with the average monthly home sales over the previous five years.

The other good news is that it looks like September home sales will be even better than August home sales. There are more Cache County Homes under contract than there have been in the last two months. We currently have 107 homes under contract compared with just 98 at this time last month.

One interesting thing about the Logan Utah Homes that sold during August is that they were bigger than the Logan Real Estate that has  sold over the previous four months. The average home that sold was 2,489 square feet, and had an average original list price of $221.767. During April, the average original list price of homes sold was just $176,975, and the average square footage was 2,093 square feet. I think this statistic shows that a much larger percentage of August home sales were made by non first time buyers, whereas, during April the large majority of homes were purchased by first time buyers.

via Logan Utah Real Estate Market Conditions: Cache County August Home Sales Numbers Improved.

U.S. Economy: Confidence Climbs More Than Forecast – Bloomberg

The Conference Board’s confidence index rose to 53.5 from a five-month low of 51 in July, according a report today from the New York-based research group.

Attention RE Agents: NAR Spin is Counter-Productive ! – Barry Ritholtz

Here’s a question for you reality (vs NAR realty) agents. Ever wonder why you seem to be having such a hard time convincing sellers to set reasonable asking prices? Ever ponder why they have such a distorted sense of the true value of their homes? Ever try to get them to set reasonable asking numbers that are competitive with current market prices?

The short answer: NAR spin.

The Land-Residual vs. Building-Residual Methods of Real Estate Valuation – Michael Hudson

How does one decide how much a building’s value grows or shrinks in proportion to the property’s overall value? Does one multiply the building’s cost by the rise in the construction price index since its completion? If a property is sold at a higher price (as usually is the case), is it because the building itself rises in value, or the land site? If the property is sold at a lower price, as sometimes occurs, what is responsible for the decline – the building or the land?

1,000 HomEq Workers Fear For Jobs – SacBee

HomEq, the last vestige of Sacramento subprime lender the Money Store, becomes part of Ocwen after three previous owners in the past decade.

The newest ownership change raised fears that this time hundreds of employees face termination.

Vantage Pointe gives back deposits – Sign On San Diego (HT Patrick)

The move to abandon sales marks the second time in the last year that the developer has given deposits back to buyers in the beleaguered Vantage Pointe project, which has faced one setback after another since launching sales six years ago.

“We’re not able to meet the Fannie Mae or Freddie Mac or FHA requirements in this marketplace because we can’t get enough sales,” said Randy Klapstein, CEO of Pointe of View, developer of the 40-story complex that completed construction last year in the midst of the economic downturn. “We’re not getting the traction we’d hoped for, and we don’t want our customers to stay in limbo, so it’s best to move on.”

It is now likely the $280 million East Village condo project will remain a rental complex for the foreseeable future, said Klapstein, noting that there are roughly 200 renters, about a dozen of whom are buyers who were renting while waiting for their sales contracts to be finalized.

“At this point, we’re going to continue renting,” he added.

Obama Declares an End to Combat Mission in Iraq – NYT

“We have sent our young men and women to make enormous sacrifices in Iraq, and spent vast resources abroad at a time of tight budgets at home,” Mr. Obama said. “Through this remarkable chapter in the history of the United States and Iraq, we have met our responsibility. Now, it’s time to turn the page.”

Movie attendance is down but increased prices made up the difference for now. Bloomberg reports Summer Movie Box-Office Attendance Falls to Lowest Since 1997

Summer movie attendance fell to the lowest level since 1997, while soaring ticket prices produced record revenue for Hollywood studios and theater owners.

The number of tickets sold from the first weekend of May through the U.S. Labor Day holiday is expected to drop 2.6 percent to 552 million, Hollywood.com Box-Office said yesterday in an e-mailed statement. That would be the lowest attendance since summer moviegoers bought 540.3 million tickets in 1997.

“The movies just didn’t excite people the way they needed to,” Paul Dergarabedian, president of Hollywood.com Box-Office, said in an interview. “When you raise prices and perceive that quality goes down, you have a major problem.”

Summer box-office revenue will rise 2.4 percent to a record $4.35 billion in the U.S. and Canada as higher prices more than make up for the lower attendance, Hollywood.com estimates. The average ticket price will increase 5.1 percent to $7.88 from last year’s $7.50, the biggest gain since a 6.3 percent jump in 2000, Hollywood.com said.

The price-conscious majority appears to be overwhelmed by the price-insensitive wealthy, at least for the time being. How much longer this lasts with cheap movie rentals and another downturn in the economy remains to be seen.

Regardless, the results portray an increasing dichotomy between the “haves” and the “have-nots”.

As long as Hollywood can get away with inceasing prices, they will do just that, even if it means an increasing percentage of customers are “priced out”.

Last Hurrah for Housing

Case-Shiller Home Prices in 20 U.S. Cities Rise More Than Forecast

Home prices in 20 U.S. cities rose more than forecast in June from a year earlier, reflecting the influence of a government tax incentive and a sign the market was stabilizing before sales plunged in July.

The S&P/Case-Shiller index of property values increased 4.2 percent from June 2009, the group said today in New York. The median estimate of economists surveyed by Bloomberg News called for a 3.5 percent advance.

The Case-Shiller index is a moving three-month average, which means the June data are still being influenced by transactions in April and May that benefitted from the government incentive. A pullback in demand since the credit ended, mounting foreclosures and an unemployment rate near a 26- year high may weigh on prices in coming months.

Nationally, prices increased 3.6 percent in the second quarter from the same time last year and were up 2.3 percent from the previous three months.

San Francisco, San Diego

Fifteen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year increase, led by a 14 percent gain in San Francisco and an 11 percent increase in San Diego.

Compared with the prior month, 17 of the 20 areas covered showed an increase on an unadjusted basis, led by 2.5 percent gains in Chicago, Detroit and Minneapolis. Two cities were little changed and Las Vegas fell 0.6 percent.

Builders such as KB Home and Lennar Corp. reported falling sales after April 30, the deadline for homebuyers to sign contracts to purchase a home to qualify for the extended tax credit. The deadline to close transactions by June 30 was later extended to Sept. 30.

Donald Tomnitz, chief executive officer of D.R. Horton Inc., the second-largest U.S. homebuilder by revenue, said he welcomes the end of federal homebuyer tax credits that boosted sales earlier in the year.

Back to Normal

“I don’t want the tax credit to be re-enacted or be recreated or extended,” Tomnitz said on an Aug. 3 conference call with investors. “We want to get back to a normalized market.”

Foreclosures may be an obstacle for the market for much of the year. A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010, according to RealtyTrac Inc., an Irvine, California-based data company.

Case-Shiller is a backward looking index. The increasing number of foreclosures, the complete collapse in new home sales, a massive increase in inventory, and the end of tax credits all suggest we are near the end of the line for this bounce in home prices.

Interestingly, even the home builders are against another home tax credit. Is that reflective of the massive distortions caused by the credit, the realization the tax credit was useless, or the fact that homebuilders recognize there is little chance Congress will back another tax credit?

Regardless, here’s the deal: New Home Sales Consensus 330K, Actual 276K, a Record Low. As a followup please see How Many New Home Sales Was That?

Expect to see new all time low prices in some cities later this year or next year as pent-up demand dries up along with incentives that merely brought that demand forward.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Fannie and Freddie Show the Danger of Mortgage Guarantees – The Atlantic

They say that those who learn nothing from history are doomed to repeat it. Policymakers need only to look to Fannie and Freddie to see why government mortgage guarantees might not be such a bright idea.

Don’t get fooled by Bernanke – Brett Arends

When the time comes to write Ben Bernanke’s biography, I already have a great title. How about “Behind The Curve”?

Housing Tax Credit not high on list of options – CR

“Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.”

Psychological Stages of a RE Bubble Market – Barry Ritholtz

Shiller: Time for More ‘Inspirational’ Housing Policy Ideas – WSJ

Any examples? Mr. Shiller offered a few. Mortgages should be indexed to inflation, he said, to allow for greater long-term certainty for borrowers. As inflation rises, so, too, would the mortgage payments–and vice-versa. Those types of loans, which are more common in economically volatile developing countries, grow as inflation—and home prices—rise. Right now, if the U.S. enters a period of deflation and home prices fall further, borrowers’ mortgage debt “is going to be amplified” as it was during the Great Depression, he said.

Another idea: mortgage contracts in the future should include some kind of “preplanned workout,” that would prescribe exactly how a loan modification would proceed if the borrower fell behind on payments.

`Zombie’ Hotels Arise in Ireland as Recession Empties Rooms – Bloomberg

While some establishments cut their losses and shut, others are lowering prices to stay in business and avoid repaying tax breaks if they were to close.

Housing Market: What’s Ahead? – Time

The bottom line for housing  is that the bottom will be long–perhaps very long– and bumpy.

Loan Mod Saves OC ‘Housewife’ Alexis Bellino’s Home – OC Register

The original loan amount was for $4.5 million. Because the Bellinos missed all mortgage payments since the first of the year, the debt — with fees and penalties — swelled up to $4.62 million, the documents indicate.

However, the auction (or trustee sale), scheduled for Wednesday, Aug. 25, never happened. The Bellinos modified the loan on their home, a foreclosure did not occur, and the family never had to move out.

“Chase Bank has been great to work with on my modification,” Jim Bellino said in an interview Friday. “The trustee sale has been canceled, and the modification has been agreed upon.”

Frannie’s juristic parasites – Felix Salmon

Everybody knows that the biggest winners from default and foreclosure are always the lawyers. But did you know that default fees on foreclosed properties alone are now being racked up at a rate of $2 billion a year?

The Un-American Dream – Forbes

America’s distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government’s homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

What is a Deficiency Judgement?

Elk Grove Short Sale sellers have to be concerned with whether or not their lender will file a deficiency judgement against them or not. So what is a deficiency judgement?

According to Wikipedia – A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. [1] The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse loan, which is largely a matter of state law. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans.

Let me illustrate -

Mr. and Mrs. Elk Grove Home Seller purchased their home in 2003 for $350,000 with a first and a second loan. They put $35,000 down, their first loan was $280,000 and their second loan was $35,000. In 2005, before the market crashed, they were able to refinance both the first and second together into one loan totalling $315,000. Today, they cannot afford the payments on this loan due to job cutbacks and they need to sell their home. The value today unfortunately is only $185,000 on this same home and yet they still owe $310,000. The difference between the $310,000 owed to the bank and the $160,000 the bank may net from the short sale or $150,000 may be considered a deficiency by the bank.

Under current California law, the good news is all purchase-money loans on a one- to four-unit owner occupied residential dwelling are exempt from deficiency judgments. The bad news is under current law once Mr. and Mrs. Elk Grove Home Seller refinanced, the new loan may be subject to a deficiency judgement.

So what do Mr. and Mrs. Elk Grove Home Seller do at this point?

First, make sure to talk to a California real estate attorney and get their advice.

Second, talk to the lender and see if they will negotiate for a discounted payoff. Many will, however they may ask you to sign a new promissory note to replace the old one. In this case, make sure the lender returns the old promissory note to you marked paid in full.

If you are a Elk Grove or Sacramento area homeowner and are contemplating a short sale, we are here to help! For more information on Short Sales, make sure to check out these blogs:

HAFA Short Sales avoid deficiency judgement

California Short Sale Sellers Rejoice

Elk Grove Short Sales – Important Questions Answered

Elk Grove Homeowners – Is a Short Sale Right for You?

Elk Grove Short Sales – Is this the market of the moment?

For more information on Short Sales

If you are a seller and wish to contact us for a FREE consultation regarding a possible short sale on your home, please call us at (916) 230-0371 or send email to Lori@ModeandDurhaM.com.

Search all Elk Grove homes here!

Search all Sacramento homes here!

Please note: I am not licensed to give legal advice and provide this information for general information purposes. If you desire legal advice or more information, please contact a California real estate attorney.

This article originally appeared on the Irvine Housing Blog.

Assaulted by bad news, a home debtor has launched a public relations campaign to keep the kool aid flowing.

Some things in life are bad,
They can really make you mad.
Other things just make you swear and curse.
When you’re chewing on life’s gristle,
Don’t grumble, give a wistle!
And this’ll help things turn out for the best…
And… always look on the bright side of life!

Monty Python — Always Look on the Bright Side of Life

Defending Home Ownership

By Barry Ritholtz – August 28th, 2010, 10:42AM

Jonathan Miller and I have been kicking around an idea for a “Home ownership is a good thing” OpEd.

Apparently, we aren’t the only ones:

• Five Reasons to Stop Worrying About Your Home’s Value (Moneywatch)

• In Defense of Home Ownership (NYT)

None of these hit the issues and topics that we want to cover — but it is interesting that other folks are thinking along the same lines.

Now, if only I could figure out whether these articles are 1) Contrarian pushback against the dominant RE meme; or b) proof that the bottom is not yet here, as people cling to the hope of a RE recovery.

I’ll answer that one for you Barry: it is a sign that people are clinging to the hope of a real estate recovery. We are not yet at the bottom.

Why is sentiment so important?

Why are market collapses signified by changes in consumer sentiment? First, we need to distinguish between deflating market bubbles and market swings causing temporarily low prices. The housing bubble was a bubble; prices became elevated from fundamental values, and they are in the process of correcting back to true value. Prices were not temporarily depressed, they were temporarily elevated. In a bubble scenario, prices do not recover.

When market sentiment is still in denial — like most of California’s coastal markets are — people cling to the hope of a recovery that is not going to happen. Stories about the double dip may push the market into fear, but it is nowhere near capitulation and despair like the subprime markets are today. As long as there is the delusion that prime markets are somehow doing to avoid the deflation of the bubble, there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties, and the distressed debt in the market remains. As long as there is overhead supply and people holding distressed debt, the market will not recover because each attempt simply brings out more sellers and prices get pushed downward.

An understanding of this market dynamic is the primary concept separating traders from academics. Traders understand this. Academics don’t. Since the banks get most of their advice from academics, they will consistently make the wrong decisions, the market will not clear, and prices will grind lower until they capitulate and the inventory is finally gone. As we are witnessing today in Las Vegas, everyone must sell, abandon hope, and feel widespread despair before the market bottoms.

In Defense of Home Ownership

By RON LIEBER
Published: August 27, 2010

It’s hard to read the headlines and not conclude that becoming a homeowner is a terrible idea.

This week, the National Association of Realtors announced that existing-home sales in July had fallen an astounding 25.5 percent from the previous year. Sure, there was a federal tax credit in place last summer. But with single-family home sales at their lowest level since 1995 and unemployment still stubbornly high, home prices may fall further.

In the meantime, millions of homeowners are still far underwater, and government programs to help them have fallen well short of their goals. More foreclosures are coming, casting a deeper shadow over home prices. So it’s hardly surprising that the conventional wisdom says that home values will never again rise faster than inflation.

The truth is that home prices cannot rise faster than inflation unless we are inflating a bubble. The only thing surprising is that reasonable people who understand this are being heard right now. Usually, the bullshit from the NAr and the general level of kool aid intoxication in the media makes more noise.

But as with stocks and the weather, it is dangerous to assume any certainty in the housing market. And by wallowing too much in the misery of others, people looking for a new place to live run the risk of thinking every home purchase will end in regret, at least financially.

Many still could, if they buy in hard-hit areas where prices could fall further.

The problem is that people don’t know where prices could fall further. The markets commonly labeled as safe havens are the most at risk whereas the markets labeled as hopeless are at or near the bottom.

But a mortgage is still a form of long-term forced savings, after all. This is more important than ever, since fewer people have access to generous pensions than they did during the last big housing slump. A 401(k) or similar plan is no bargain, either, with its erratic returns and employer matches that come and go as the economic winds shift. Social Security is also likely to be less generous, and Medicare will probably cost more.

Besides, owning a home isn’t just about what shows up on a net worth statement — something that bears repeating after all the “investing” that people thought they were doing when buying homes over the last 10 or 15 years. Many of these more qualitative factors, from living free of a landlord’s whim to having access to a good school district or retirement community, haven’t changed and probably never will.

It is possible, as a homeowner, to make very little money but still buy plenty of happiness. So before you swear off real estate, reconsider a few of the basics.

WORST CASES Some buyers may rue the day in 2010 they bought their homes. They may end up like those who bought in 2006 and have lost their jobs. Now those people face the difficulty of moving to pursue employment elsewhere because they owe much more than their homes are worth.

Marke Hallowell and Allison Firmat, who are getting married next month, are well aware of the history. Yet they plan to put 5 percent or less down, using a fixed-rate mortgage backed by the Federal Housing Administration, once they find a condominium in southern Orange County, Calif. (They’ve already been outbid a few times.)

Ms. Firmat is not working, and Mr. Hallowell is a Web developer. Does he worry about mobility problems or making the payments in the event of a job loss, given that he’s the sole breadwinner? “We’re getting such a good deal on interest rates that we could rent our place out,” he said.

Mr. Hallowell and Ms. Firmat say they believe their approach is conservative, at least compared to what they might have done five years ago.

“Nothing is going to change the rate we will have,” Mr. Hallowell said. “Condos like the ones we’re looking at now were unobtainable in the past, unless we went into something with a total balloon payment. There were times I was tempted, but never seriously.”

Indeed, many people who are buying at the moment are locking in mortgage rates of about 4.5 percent. A year ago, they might have paid 5.25 percent on a $300,000 loan for a monthly payment of about $1,657. Today, you could lock in a lower monthly payment of around $1,520 on a mortgage that size, or you might not need to borrow that much, given that prices have fallen in many areas.

FORCED SAVINGS You may make nothing at all beyond inflation over time on a home, but the part of your mortgage payment that goes toward principal is a form of forced savings.

Sure, you might do better by renting and investing the difference between the rent and the total costs of ownership. But at least three things need to go right.

First, you need to actually save the money. Americans have trouble with that sort of plan. Then, you need an after-tax return that’s better than whatever a home would deliver. That’s a task that might not have gone so well over the last 10 or 12 years, and it involves its own future risk, given how little safer investments are returning now. Finally, you must not raid the savings along the way.

LOL! No HELOC abuse? The problem with the whole forced-savings argument is that it is not forced anymore. Unless you live in Texas where they restrict HELOC use — which is why Texas avoided the bubble — then forced savings requires self discipline. In our Ponzi culture here in Southern California, self-discipline is in short supply.

DIFFICULT LANDLORDS A bank can kick you out only if you don’t pay your mortgage. But landlords can drive you away in any number of ways.

Laura Mapp and her husband, Carl Berg, rented from a relative, but it didn’t go particularly well. They found another landlord they liked, but came back from a holiday trip one year to a note saying he wanted to move in himself. They had a month to scram. (The note came with a bottle of wine, at least.)

In yet another rental, they let their landlord know they were looking to buy and inquired about a month-to-month lease. No problem, their landlord said, as long as they used his boyfriend as their real estate agent.

Earlier this year, the couple gave up on landlords and bought a house in the Highland Park neighborhood in Seattle.

This is another specious argument. Landlords rarely if ever throw out a good tenant. In fact, landlords often won’t raise rents for fear of losing a good tenant. This article makes it sound like landlords are a capricious lot that likes to exercise their power to make people move. That idea is rather silly.

Look at it another way: how many people have been evicted by their lendinglords over the last 3 years as compared to the number of capricious landlord evictions? Avoiding a landlord is a great idea, but substituting a landlord for a lendinglord isn’t much of an improvement. What people should strive for is to pay off a mortgage so they don’t need to worry about a landlord or a lendinglord. Of course, that requires sacrifice, so most people opt to service debt, abuse their HELOCs, and take their chances.

THE NICE PART OF TOWN No matter how pretty the neighborhood, prices may still fall further in places like greater Detroit, Cleveland and Las Vegas; outlying areas of Los Angeles, San Francisco and Phoenix; and much of Florida.

This writer is a safe-haven fool. Detroit and Cleveland won’t come back because their economies are a shambles. However, Las Vegas, Phoenix, Riverside County, most of Florida, and the San Francisco suburbs are going to recover, and the low prices there represent buying opportunities. The “nice part of town” hasn’t endured its price correction yet, so those markets are in danger.

If you’re looking elsewhere, consult The Times’s rent-versus-buy calculator, halfway down the page at nytimes.com/yourmoney.

Their rent-versus-buy calculator is crap compared to the IHB calculator. Theirs was likely produced by the NAr.

But if you want to live in the Fox Hill Farm development in Glen Mills, Pa., you’ll have to buy because renters are not allowed, said Bob Kuhn, who lives there. The same may be true of other communities for older people.

And there may not be many family-size rentals — or at least any financial edge to be gained by renting — in suburbs or urban neighborhoods with excellent public schools.

This is nonsense and scare tactics. You can rent beautiful properties in the best neighborhoods in Irvine, and right now, those rents are below the cost of ownership. (High-end rental deal of the day: 31 Plumeria)

After many years of building their down-payment fund and a couple of years of watching the listings in the Eagle Rock and Mount Washington areas of Los Angeles, Garret and Alison Williams realized that prices simply were not falling much there.

That is the worst reason to buy.

By the time they were ready to pounce this year, they had a big enough down payment and interest rates had fallen so far that renting didn’t make much financial sense, even if they could have found a rental big enough for them and their two small children.

“Had we rented, we would be paying more than we’re paying for a mortgage,” said Ms. Williams, who had lived in the same two-bedroom rental for 12 years before she and her family moved into their new house in Eagle Rock earlier this month. “I don’t see how we could really regret having made the move when it’s so much better for us on so many levels.”

I question whether or not this family was getting a house equivilent to a rental if prices had not corrected yet. Perhaps their new mortgage payment is lower than rent, but they are moving into an inferior property.

I am bullish on ownership under certain conditions, and first among those is acquiring the property for a price below rental parity. In fact, I can flip from bearish to bullish quickly if prices fall below rental parity. We should start seeing more properties like that soon. I would prefer to purchase at the top of the interest rate cycle and refi on the way down, but that may be years from now, and if prices are below rental parity, I probably will not wait until 2015 for interest rates to hit 7%.

The bottom line is this: absent appreciation in excess of inflation, home ownership is a financial burden. There are emotional benefits to owning, but obtaining these benefits comes at a price. If the price is right, home ownership is wonderful, and if the price is wrong, home ownership can be a crushing weight or ball and chain.

It’s worth noting that not everyone thinks our obsession with home ownership is a good thing:

Promoting Homeownership Is Not Only Un-American: It Contributed to the Housing Bubble

Posted on 08/29/10 at 2:53pm by Professor Mark J. Perry

From the Forbes.com article “The Un-American Dream“:

“For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren’t limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.

Policymakers assure us that the next generation of government housing programs will be “carefully designed” (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.

“I do believe in the American Dream,” said President Bush in 2002. “Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you’re realizing the American dream.” Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream. They’re wrong. A government crusade to promote homeownership is un-American.

America’s distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government’s homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

Here’s the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It’s the undiluted freedom to decide how you want to live–and, if you want to own a home, it’s the freedom to work, save, establish credit, and earn one. In America, the government’s job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.

Government intervention in housing runs deep, and it can’t be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program.”

MP: You can add the government’s role in promoting fixed-rate 30-year mortgages, and subsidizing FHA mortgages that only require a 3.5% down payment to the list of policies that the government has used to increase homeownership.

The chart above shows how the political promotion of homeownership in the U.S. may have contributed to the housing bubble.  The blue line is the quarterly homeownership rate from the Census Bureau (data here) going back to 1991, which went from 64% in the early 1990s to a record high of more than 69% in 2004.  During that same time period, the Federal Housing Finance Agency’s (FHFA) Home Price Index (data here) doubled from 100 in 1991 to 200 in 2005, before reaching a peak of more than 222 at the height of the real estate bubble in 2007.

In the aftermath of  the real estate bubble’s crash, the homeownership rate has fallen to a 10-year low of 66.9% (QII 2010) and the FHFA home price has fallen back to 2004 levels.   Promoting homeownerhip is not only un-American, but it helped create an unsustainable real estates bubble, which turned the “American dream” into an “American nightmare” for millions of Americans by turning “good renters into terrible homeowners.“

This report is for June, the last month for the federal homebuyer tax credit. Home prices are likely falling today, but that may not be reflected in Case-Shiller reports for another couple of months. Their report is an average of three months.

From Standard & Poors The Second Quarter of 2010 Saw Modest Improvement in Home Prices

New York, August 31, 2010 – Data through June 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index rose 4.4% in the second quarter of 2010, after having fallen 2.8% in the first quarter. Nationally, home prices are 3.6% above their year-earlier levels. In June, 17 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were up; and the two
composites and 15 MSAs showed year-over-year gains. Housing prices have rebounded from crisis lows, but other recent housing indicators point to more ominous signals as tax incentives have ended and foreclosures continue.

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 3.6% improvement in the second quarter of 2010 over the second quarter of 2009. In June, the 10-City and 20-City Composites recorded annual returns of +5.0% and +4.2%, respectively. These two indices are reported at a monthly frequency and, after 16  consecutive months of improvement in their annual rates of return, June’s figures were the first to moderate from their prior month’s pace, pointing to a possible deceleration in home price returns. The 10-City Composite posted a +5.0% annual growth rate in June, versus +5.4% in May, and the 20-City Composite was up 4.2%, versus its +4.6% May print.

“The monthly Composites cover June and the national index covers the second quarter, when the government’s program for first time home-buyers was winding down. While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year. Further, California’s cities have moved from some of the hardest hit to three of the four leading cities based on year-over-year gains. Among the other hard hit cities, the news is also a bit encouraging – Las Vegas, however, remains among the weaker cities.

“Seventeen of the 20 MSAs and both Composites saw home prices increase in June over May – Las Vegas was down 0.6%, Phoenix and Seattle were both flat. Through the second quarter, 15 of the 20 MSAs and both Composites have positive annual growth rates, and no market is registering a doubledigit decline. The worry starts when you remember that the Homebuyers’ Tax Credit has expired, foreclosures are still at high levels, and July data on home sales and starts were very, very weak. The inventory of unsold homes and months’ supply data were particularly troubling. If this relative weakness in demand continues, it will likely filter through to home prices in coming months.”

Calculated Risk adds:

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.0% from the peak, and up 0.3% in June (SA).

Prices increased (SA) in 9 of the 20 Case-Shiller cities in June seasonally adjusted.

Prices in Las Vegas are off 56.5% from the peak, and prices in Dallas only off 4.8% from the peak.

People are still emailing me, making a mountain out of a molehill of a Rosenberg statement I quoted in Burning Down the House; New Home Sales Consensus 330K, Actual 276K, a Record Low; Nationwide, Zero New Homes Sold Above 750K

I failed to comment yesterday on the huge miss by economists on consensus new home sales, but Rosenberg has some nice comments today in Breakfast with Dave.

The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row. Only 1,000 units priced above 500,000 moved last month. That’s it! Over 80% of the homes that the builders managed to sell were priced for under $300,000. Just another sign of how this remains a full-fledged buyers’ market — at least for the ones that can either afford to put down a downpayment or are creditworthy enough to secure a mortgage loan (keeping in mind that 25% of the household sector does have a sub-600 FICO score).

How Many is Zero?

There are a couple of issues here.

1. New home sales are recorded at contract signing. So recent closings at a higher rate do not count. Nor do existing home sales. Many of those complaining were looking at closing data or existing home sales.

2. The other factor is rounding error. Rosenberg should not have been so emphatic.

From the Census Bureau New Home Sales Spreadsheet

Table 2 – $750K home sold
“(Z) Less than 500 units or less than 0.5 percent.”

Anyone targeting Rosenberg’s statement is making a mountain out of a molehill.

Let me put it this way “There was a statistically irrelevant number of new home sales above $750K, somewhere between zero and 500″.

This is not worth the amount of attention it has received.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

The Canadian Housing Bubble is going to be one of the last to burst, along with China, Australia, and Singapore.

Most Canadians, of course, believe that they are different because they have more sound lending practices than we Americans. They may, but that doesn’t mean they don’t also have a bubble. They aren’t different, just late to the party.

This is the best graph I’ve seen about the Canadian Housing Bubble. And, no…boat money from Asia isn’t enough to justify this.

Hat Tip: Vancouver Real Estate Anecdote Archive

This article originally appeared on the Irvine Housing Blog.

The general public is waking up to the reality that the artificial bottom the government produced is not curing the housing market’s ills. It’s time to let house prices fall.

I was sitting in a meeting not long ago with a group of homebuilding industry insiders. During our discussions, the topic of future home prices came up, and I was astounded to hear the assembled group say they wanted to see the market props removed so that house prices could fall to a level that clears the market. The people who make a living from real estate are finally waking up to the idea that artificially high house prices is hindering sales, making acquisition decisions problematic, and ultimately delaying the recovery of the homebuilding industry. My only comment was “Halleluia.” I preached that gospel for 3 years to no avail, and suddenly people came to the same conclusion on their own.

There comes a point when you have to give up resisting and let nature take its course. Like physicians in an emergency room that try every procedure and stimulant, there comes a time when you just stop because you have done all you can and nothing more is going to make a difference.

Time to let home prices fall?

Many expect another wave of foreclosures to further deflate prices. The government could offer new incentives — or let market forces rule.

By Tom Petruno Market Beat

August 28, 2010

You can’t force someone to buy a house.

But as a society we’ve long tried to make homeownership an offer you couldn’t refuse.

The crazy part is that the market has its own mechanism to incentivize ownership: a price disparity between ownership and rental. The reason I am so bullish on Las Vegas is because prices have fallen so low that the cost of ownership is a small fraction of rents. You can find properties there that rent for $1,000 a month that cost about $600 a month to own with conventional financing. As the cost of ownership falls relative to rents, the incentive to own increases. The market will correct its own imbalances through price if given the chance.

And since the real estate mega-bubble burst three years ago, the government has tried even more tricks to get people to sign home purchase contracts.

Now, a grim reality has set in: Despite the still-rich basket of tax breaks for residential property owners, and the lowest mortgage rates in a generation, the pool of willing or able buyers is dwindling.

The housing market’s new woes expose the limits of government’s ability to end the real estate bust, while also raising the odds that policymakers could resort to more dramatic moves to try to support the market.

This is my greatest fear: the government may do something really stupid that totally screws me in favor of equity-stripping squatters who borrowed imprudently to obtain real estate they could not afford and crowded me out in the process. If past borrower behavior is rewarded with continued government bailouts, we will se much more of it, and the housing market will become a massive government Ponzi scheme. 

Reports this week on home purchases in July were beyond dismal. Sales of existing homes tumbled 27% from June and 25% from a year earlier. New-home sales slumped to an annualized rate of just 276,000 units, down 32% from July 2009 and the lowest since at least the early 1960s.

Some of the fall-off undoubtedly reflected the spring expiration of the latest federal housing gimmick — tax credits of $8,000 for first-time buyers who met certain income requirements, and $6,500 for repeat buyers.

But it can’t be a coincidence that the summer plunge in housing demand occurred as faith in the year-old economic recovery continued to wane.

“It’s not a housing issue anymore — it’s an overall economic issue,” said David Crowe, chief economist for the National Assn. of Home Builders.

Historically, housing has led the way in recoveries. “But this is a case where housing is going to follow the economy, not lead it,” Crowe said.

Mr. Crowe is right on both counts. The lending cartel doesn’t foreclose on the squatters because they know that while the economy is in recession, there are no buyers for their product, and liquidation would crush prices. Ordinarily, housing would lead out of a recession because as employment picks up, so does the demand for houses. Unfortunately, housing was the cause of this recession, and the demand for housing will be limited by the fact that so many former homeowners do not have the credit to buy. Plus, we have too much inventory to reabsorb. Unemployment in the housing sector will also be a long-term drag on the economy.

You need a job to afford a home, unless you’re rolling in cash, and everyone knows that the U.S. has created precious few net new jobs since April — just 80,000 over the last three months in a nation of 310 million people.

The national unemployment rate remains stuck at 9.5%, and even among workers who have jobs more than one-quarter live in fear of being laid off, according to a Gallup poll this month.

How do you stoke housing demand given that backdrop?

The question is not how do you do it, the question really is “why should we stoke housing demand?” What is the benefit versus the cost?

Congress figured the tax-credit giveaway would encourage buyers, and it did to an extent. The credit helped boost sales of existing homes to an annualized rate of 5.79 million units in April, up from about 5 million in January and February.

But the risk of offering any giveaway with a deadline (in this case, April 30) is that it will artificially inflate activity for a limited period and simply steal from future sales.

“We conferred an $8,000 benefit on people who were going to buy a house anyway,” asserts David Resler, chief economist at Nomura Securities in New York.

Though government intervention may be well-meaning, each new effort “completely clouds whether there has been any fundamental improvement in the housing market,” he said.

Far from being clouded, the message is clear: the fact that sales fell off a cliff after the expiration of the credit reveals that there was no fundamental improvement in the housing market.

And if you didn’t buy in time to get the credit, you may well figure that if you wait long enough Congress will bring it back. So why rush to buy now? The 2010 credit, after all, was an extension of one that expired last November.

What do we gain by pulling demand forward? The tax credit did not get more people to buy, it just created the incentive to buy earlier. Do we really want to produce another spike and bust with an enormous cost and no benefit?

Over the last two years, federal attempts to help brake the housing market’s plunge have been monumental, of course.

The U.S. has nationalized the biggest sources of mortgage credit ( Fannie Mae and Freddie Mac), pushed home loan rates sharply lower via Federal Reserve purchases of mortgage-backed bonds, and offered to pay banks to get them to agree to loan modifications for struggling borrowers.

A new program will offer no-interest loans of up to $50,000 for unemployed homeowners to help them make their mortgage payments until they find work.

The Obama administration “has taken a broad set of actions to help stabilize the housing market and help American homeowners,” Treasury spokesman Mark Paustenbach said.

Help American homeowners? Liar. The measures were taken to help American banks. It’s impact on homeowners has been negative. First, we have put a large number of people into homes at inflated prices, and now many of them will fall underwater. Second, those that were being “saved” are merely being sentenced to increased debt servitude in order to keep our banking system solvent. So neither previous owners or new buyers have benefited from this program. The banks are obtaining a huge benefit at the expense of the government and homeowners.

Those programs surely get some credit for the uptick in home prices over the last year. The S&P/Case-Shiller index of home prices in 20 U.S. cities bottomed in April 2009 after plunging 33% from its peak in July 2006. The most recent report, for May, showed the index up 4.7% from a year earlier.

Government policy has been aimed at slowing or stopping the decline in prices, for obvious reasons: A further drop in home values would push more owners underwater, meaning their homes would be worth less than their mortgage balance. An estimated 21.5% of single-family homes with mortgages were underwater in the second quarter, down from 23% a year earlier, according to Zillow Real Estate Market Reports.

Why is that reason obvious? A further drop in prices would create more strategic default which would cause the banks more pain, but it doesn’t impact homeowners, except perhaps those who are counting on HELOCs to support their lifestyles.

Our policy makers are basing their decisions on faulty assumptions. They all assume lower house prices are bad, and they aren’t. Affordable housing that permits mobility of the population is a great societal benefit. Bloated house prices that drain the population of its resources and limits mobility is a curse, not a blessing.

A continuing rise in house prices would mean that more homeowners who can no longer afford their mortgages might be able to sell for enough to cover their loans, thus avoiding adding to the mountain of homes already in foreclosure. About 4.6% of all loans outstanding were in the foreclosure process at the end of June, according to the Mortgage Bankers Assn.

Yet the collapse in home sales in July suggests that prices overall are likely to begin sliding again. Despite average 30-year mortgage rates under 4.4%, many would-be buyers who can get financing must not believe that prices are attractive enough to justify taking the plunge.

Given the 4 million existing homes on the market – an inventory that could double based on the number of homes in foreclosure – buyers clearly have the upper hand now.

Dean Baker, co-director of the Center for Economic Policy and Research in Washington, believes home prices still are overvalued by 15% to 20% in many areas.

For government to stand in the way of a further price decline is unfair to the next generation of buyers, he said. “The people who get hurt the most are those who are overpaying for houses today,” he said.

Is it really fair for Baby Boomers to ask the generations that follow to pay for their mistakes? Isn’t that what is really happening here? The boomers bought houses, spent the appreciation, and now they are asking us to buy their overpriced homes and pay off their debts. And the buyers today will get none of the appreciation benefits that boomers enjoyed during the bubble.

Robert Shiller, co-creator of the S&P/Case-Shiller price indexes, said that although he doesn’t forecast prices, “I think the scenario of declining home prices for years to come is underemphasized by people.”

The NAr certainly is underemphasizing the deflation scenario. Now is a great time to buy, right?

That’s an argument for allowing the housing market to hit bottom sooner, so that a genuine recovery also can begin sooner.

The risk is that another downward spiral in home prices would feed a deflationary mind-set, meaning the sense that prices for all sorts of goods, services and assets can only go lower. That could cause many consumers to severely rein in spending, leading to another recession, or worse.

That idea is rather silly. Lower house prices will result in a disparity between the cost of rents and the cost of ownership that will create an incentive for renters to buy. Deflation is only a cycle until prices drop to cashflow levels where people have a new reason to buy.

But a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy’s woes: the gigantic debt load consumers took on over the last two decades.

The Obama administration’s program to persuade banks to modify troubled home loans has met with relatively little success. And few banks over the last year have been willing to take the step of permanently reducing struggling borrowers’ mortgage debt to keep them in their homes.

Banks are not going to reduce principal. Once they start giving away free money, the entire banking system becomes a welfare system, and everyone will sign up for as much free money as they can get.

The initial wave of subprime mortgage foreclosures caused a torrent of losses for the financial system. Writing down millions more mortgages could cause another wave of red ink.

Christian Weller, an economist at the Center for American Progress in Washington, argues that debt reduction on a huge scale is inevitable. “Right now the pain is with the consumer,” he said. “We should force the banks to take some of that pain.”

Another idea, endorsed by Pimco bond guru Bill Gross, is for Fannie Mae and Freddie Mac to allow even underwater homeowners to refinance their mortgages at current low rates, reducing their monthly payments. No bank on its own would refi a home with negative equity. But the government already bears the risk of default by these borrowers on their Fannie and Freddie loans. Refinancing wouldn’t raise that risk.

I may address Bill Gross’s idea at length in an upcoming post. I think the idea is foolish. First, it only benefits a segment of homeowners who are locked in at higher mortgage interest rates. This idea does nothing for renters, for owners who were able to refinance because they wisely managed their debts, or for owners who purchased with low rates. Second, the cost will be paid by US taxpayers through increasing losses at the GSEs. The GSEs bought and insured these loans with expectation of a certain income stream. This money is needed to offset losses in its portfolio. If you reduce their income, you merely increase the impact of their losses. In short, it benefits a few people, many of which don’t deserve it, and it costs taxpayers plenty.

Richard Green, director of USC’s Lusk Center for Real Estate, suggests that lenders and the government should embrace the idea of converting troubled loans into shared-equity mortgages, which forgive a portion of a borrower’s principal in return for a stake in any future equity gain when the home is sold.

Do we really want the government or banks on title with us as owners? Do you think owners are willing to split the profits in this way? Would the government have to approve any future refinancing or HELOCs to protect its interest? It think the idea is half-baked, and not very likely to produce a positive result.

All of these ideas, however, are bailouts of one sort or another. “There is no ‘fair’ answer here,” Green concedes.

Well, there is one: Leave housing to market forces, let prices fall until buyers are motivated to come in, and hope that the economy can stand one final cathartic wave to clear the excesses of the bubble.

tom.petruno@latimes.com

Allowing house prices to fall to levels that clear the market is the only solution. Further, the government must phase itself out of the mortgage market and allow private lending to take over. Allowing house prices to fall is the easy part. Getting off the government subsidies will be much harder. In the short term, allowing house prices to fall is all we have. This fall and winter may get ugly.

Widespread Fear Freezes Housing Market – NYT

Clearly, Mr. Yun needs to get out a little more often. Specifically, he ought to talk to people on the ground — like mortgage lenders or prospective borrowers. Talking to these people would probably give him a more sober take on the larger meaning of the latest sales numbers for existing homes. Sometimes, you see, lemons really can’t be turned into lemonade.

In Defense of Home Ownership – NYT

“Had we rented, we would be paying more than we’re paying for a mortgage,” said Ms. Williams, who had lived in the same two-bedroom rental for 12 years before she and her family moved into their new house in Eagle Rock earlier this month. “I don’t see how we could really regret having made the move when it’s so much better for us on so many levels.”

Pimco’s El-Erian Sees ‘Lost Decade’ for U.S. Jobs – BusinessWeek

“This country has very weak safety nets,” he said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “It is built on the assumption that our labor markets are very flexible, that if you lose your job in California you move somewhere else, you get another job, and what we’re seeing is structural unemployment.”

No Decision on Reviving Homebuyer Credit: Donovan – NYT

“It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

US consumers split into two camps – FT

This bifurcation of the US consumer has become apparent across the spectrum, from restaurants and grocery stores to products such as coffee and beer.

In each case, a consistent trend has emerged: people who have survived the worst of the economic downturn of 2008-2009 with secure jobs are spending the way that consumers normally spend at the tail end of a recession. But unlike the circumstances after previous US recessions, where spending rebounded across the board, an entire segment of American consumers has been left behind.

Another Home Buyer Tax Credit? – Diana Olick

Just when I thought the housing market was finally being left to correct on its own, I’m starting to hear talk regarding yet another home buyer tax credit. From HUD to the hedge funds, it sounds as if it is gaining steam yet again. This one could involve not just first time/move-up buyers, but a credit for buyers purchasing foreclosed properties or short sales (when the bank allows you to buy a home for less than the value of the outstanding mortgage).

What are the obstacles to being a landlord? – Felix Salmon

The days of lending only against home values are long gone; we have to move back to a world where lenders look at borrowers’ wealth and income too.

Foreclosures of million-dollar-plus homes on the rise – LA Times

Flipper Cash Propping Up Housing Market – NPR

In cities across the country, there are investors like Fuhr taking advantage of depressed housing prices to snap up dozens of properties on the cheap. When they’re not flipping those houses, they’re turning them into rentals.

Working with short sales

According to AroundTheCapitol.com

“This bill would prohibit a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of not more than 4 units in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. The bill would provide that written consent of the holder of the first deed of trust
or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.”

This means that California short sale sellers will be exempt from a deficiency judgement on a first deed of trust or mortgage, even if it is not a purchase money loan….so if they have refinanced or even if it is a hard money loan.

Watch for upcoming news that Governor Schwarzenegger signs the bill into law!

If you are a Elk Grove or Sacramento area homeowner and are contemplating a short sale, we are here to help! For more information on Short Sales, may sure to check out these blogs:

Elk Grove Short Sales – Important Questions Answered

Elk Grove Homeowners – Is a Short Sale Right for You?

Elk Grove Short Sales – Is this the market of the moment?

Wachovia Short Sales Made Easy

For more information on Short Sales

If you are a seller and wish to contact us for a FREE consultation regarding a possible short sale on your home, please call us at (916) 230-0371 0371 or send email to Lori@ModeandDurhaM.com.

Search all Elk Grove homes here!

Search all Sacramento homes here!

Slightly over one year ago, I received an email from “Morally Conflicted in Arizona” who at the time was considering “Walking Away”. I responded to his email on August 18, 2009 in Bright Side of Falling Home Prices

It turns out “Morally Conflicted” did indeed walk away. Here is a followup email I received a few days ago, about his experience.

End of the Line

“Morally Conflicted” writes …

Hello Mish,

It’s been over a year since I asked for your opinion about how long it would take for the housing market to “recover,” which was about the same time that I stopped paying my mortgage and decided to walk away.

Well, the game is finally over. I moved out last week, and the trustee’s sale occurred last Thursday.

After thinking repeatedly about it recently, the end results look something like this:

After purchasing the house in 2005 for about $740K with only $40K down, if you count my mortgage payments as “rent,” in a sense, I recovered my down payment over the past year by living “rent” free over the past year.

The current value of the house is most likely around $400K. Thus, I was able to “get out from under” a $300K loss by walking away.

After a bit of looking over the past couple of months, found a two-bedroom house I can rent for $1200/month. The rental is in Scottsdale, just a few miles from my old house. It’s definitely smaller and not as nice, but it’s more than adequate.

Given my new rent payment, I am estimating that I will be saving at least $1500/month by renting the new house vs. staying in the old house, even with a modified payment (and yes, I am accounting for the tax break on my old property.

Therefore, as things currently stand, I believe I will “save” $150K over the next 100 months – assuming of course that my rent doesn’t change and/or I don’t move again.

Thus, I believe I can conservatively estimate that my decision to walk on the house will essentially increase my net worth by approximately $300K over the next 100 months had I struggled in the existing loan. Moreover, that assumes the old house increases in value in that timeframe. If not, the number may be more like $450K.

On top of everything, just this week, I was contacted by the real estate agency that will be selling the house for the new owner (i.e., the bank – it looks like they bought the house “from themselves” at the trustee’s sale), and I am being offered $2500 to leave the appliances, etc., in the old house.

The only real downside I see at this point is that my credit is shot. I guess I’ll have a foreclosure on my “record” for the rest of my life.

However, the irony is that if there has ever been a time in my life when I do not want to borrow any money for anything, it is now.

I’m not trying to make light of the situation. This is not something that I’m proud of. However, it does feel good to have it over with, and looking at the math, it really seems like the right thing to do. Sure, I “could” have been paying my mortgage over the past year, but given the hit my income took last year and the first part of this year, I would essentially be living paycheck to paycheck right now.

As always, I appreciate your work. Please keep it up.

Thank you,
Morally Conflicted in AZ

P.S. I did consult with an attorney before making the final decision to walk away.

Glad I could Help

Thanks “Morally Conflicted” I am glad I could help.

For more on the morals and ethics of “Walking Away” please see

• Moral Obligations Of Walking Away
• Walking Away Revisited – Reader Mailbag – Moral Dilemma
• Emails from Housing Hypocrites about Ethics
• Many Chime In On “Housing Hypocrites” Post

Seek Legal Counsel

That “P.S.” line above regarding consulting an attorney is very important. I did advise”Morally Conflicted” to do just that.

For more on the needs to seek proper legal advice, please see …

• Before Walking Away Consult An Attorney
• How to Find a Bankruptcy Attorney

There are many potential snags to consider if you go it alone. Don’t do it!

Walking Away Goes Mainstream

The moral stigma regarding “Walking Away” is now pretty much gone. That it ever existed in the first place is quite hypocritical.

Henry Blodget and Aaron Task discuss the hypocrisy a few days ago in It’s Okay To Walk Away: Let’s End The “Morality” Double-Standard On Mortgage Defaults

I was way out in front of this issue, almost two years ago.

If “Walking Away” is in your best financial interest, there is nothing wrong with doing just that.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Dylan Ratigan and Peter Schiff discuss the economy, stock market, and housing.

Visit msnbc.com for breaking news, world news, and news about the economy

In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It’s time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read – and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend – but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)

And speaking of first, I once again need some help from readers. I will be in “jail” next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video – and then make your donation!

I thank you and I am sure Jerry’s kids thank you too!

Secular Bull and Bear Markets

Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull’s Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.

(For the record, even though I am talking about the US stock market, the principles apply to most markets everywhere. We are all human.)

“Cycles” are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc. Some of the patterns are the result of fundamental factors, while others are more likely coincidence. The phases of the moon occur due to cycles among the moon, the earth, and the sun. In other situations, though, apparent patterns are no more than the alignment of random events into an observable sequence.

All cycles have several components in common. Cycles have a start and an end, they have characteristics that repeat from cycle to cycle, and they often have an explainable cause.

Stock market observers have identified what they believe to be scores of cycles, patterns, correlations, and relationships that have spawned a seemingly endless inventory of predictions and trading schemes. Every trader has his favorite system, well-fortified with back-tested “research” and “facts.” These systems all work fine until you begin to use them with real money.

The patterns are so numerous that some market experts discount all theories and acquiesce to a philosophy of randomness (that would be you, Burt!). However, just because we don’t understand it, doesn’t mean there’s not useful information contained within a pattern.

I argue that we should use valuations and not prices as the criterion for determining secular bull and bear cycles. If you use valuations, the cycles jump off the page at you. Using prices, it is very difficult. Let’s look at a table prepared by my good friend Ed Easterling of Crestmont Research. Ed co-authored the two chapters in Bull’s Eye Investing on stock market cycles and has a treasure trove of charts and tables on a wide variety of investment topics at www.crestmontresearch.com. And his book Unexpected Returns is a must-read for anyone who manages money, whether their own or someone else’s.

OK, the following chart shows secular bears in terms of valuations. There have been four bulls and five bears (we are in one now) since 1900. (You can see a larger chart at Ed’s site, under secular cycles.)

Secular bulls begin with low valuations and continue until valuations get “too high” in terms of P/E ratios. The opposite for secular bears. The average cycle over the last 110 years lasted about 13 years. These are not short-term phenomena.

Within those longer-term secular cycles you can have so-called cyclical swings based on price, and some of those counter-trend cycles can be quite large!

The first cycle of the twentieth century was a bear. It started in 1901 with the market P/E ratio cresting at 23. Twenty years later, with the P/E ratio firmly in single digits at 5, the bear went into hibernation. Over the twenty years of that secular bear, the Dow Jones Industrial Average (DJIA) had managed to tick up from 71 at year-end 1900 to 72 at year-end 1920.

But, during those two decades, the market moves were far from calm. Annual returns from New Years’ Eve to New Years’ Eve ranged from -38% to +82%! The best-performing three years were +82%, +47%, and +42%. After each of those years I am sure the pundits proclaimed the death of the bear. Yet the three worst years were -38%, -33%, and -31%. As we’ll see with most secular bear cycles, the period was as violent and choppy as the high seas in a monsoon. Across the 20 years in this bear cycle, 45% were positive-return years – but never more than two in a row! The 11 down years were generally singles or pairs, with only one three-year stretch at the start of the cycle. Although the average gain was +30% and the average loss was 17%, the change from beginning to end was a paltry +2% in total.

Yet during that secular bear cycle, the economy grew and earnings rose. However, P/E valuations declined and offset virtually all of the economic growth. The market’s price (P) was essentially unchanged from start to finish, and E (earnings per share) rose sharply. So with the market price (P) virtually unchanged, it is clear that the decline in the P/E ratio offset the gains in earnings (E). Earnings growth is often strong in bear markets – and that growth is eroded by declining P/E ratios.

Most investors do not think of the years 1933-36 as being part of a bull cycle, as the markets did not make a new high from the 1929 high. We think of those times as the heart of the Depression. But P/E ratios rose from single digits to 19, and the market tripled in just a short time. It behooves those who are genetically predisposed to a bearish position to remember that markets have a logic of their own.

The critical factor is to notice that at the start of each bull cycle, the markets had single-digit P/E ratios, with no exception. NO secular bull market ever began with high P/E ratios, even though significant rallies often started from high P/E ratios. The lesson of history is that all periods of high valuations come to an unhappy end.

And that will be the case for cycles to come. Notice that real secular bull cycles begin with low double-digit or single-digit P/E ratios. Today the P/E on reported earnings is 16.3, down from the 42 at which this cycle started, but still a long way to go until we get to low double digits.

You hear a lot of BS on various media about forward P/E ratios being only 11.5; so if that is the case then stocks are cheap, even by my standards. But those stock touts and shills use operating earnings, something that was really never done until the 1990s, and that is a way for companies and people who want you to buy stocks or mutual funds to maintain that valuations are better than you think. Operating earnings estimates are over 39% higher than estimated as-reported earnings.

Reported earnings are real, in our pockets, what we put on our tax returns. Operating earnings are of the EBIH variety, that is Earnings Before Interest and Hype, or Earnings Before Interest and Bad Stuff (the BS of earnings). Those are the expenses they ignore because they pinky swear those mistakes will never happen again. Anybody using operating earnings on TV should have a flashing warning underneath their picture that says “stock promoter” or “cheerleader” or worse. I lose patience with such pandering.

That being said, using reported earnings estimates, by the end of 2011 stocks may be getting to the place where there is some value in the broad market, based on history. Not by a lot, but enough that the next ten years might not be a write-off, again by historical standards. Enough to make me a bull? No, because we will likely not be down close to single digits. But we will be getting there.

It’s Not the (Stupid) Economy

How many times are we told by the financial “experts” that the economy drives the stock market? It’s often emphasized that when the economy picks up, the stock market will follow (or even lead).

While this may be true in the short term, the data clearly shows it is not so in the long term. The economy and earnings can be rising even as the market falls or drifts sideways. Over time, the stock market is driven by two major factors: long-term earnings and price/earnings (P/E) ratios. We do recognize that the economy clearly affects long-term earnings. As a matter of fact, research demonstrates a strong relationship between earnings and nominal economic growth.

However, the most significant driver of stock market returns is the valuation embedded in the P/E ratio. Over the past century, P/E ratios have cycled from higher levels to lower levels. The range from high to low has been substantial.

Let’s accept that earnings are generally growing, increasing over time. When P/E ratios are rising, the double impact of rising earnings and rising P/E’s produces substantial stock market gains – secular bull markets. When earnings are rising yet P/E ratios are declining, the offsetting impact is a choppy, flat stock market with some rather large downdrafts from time to time – a secular bear market.

Does the economy matter? Yes. Does the stock market necessarily follow the economy? No. The key to knowing the longer-term direction of the market is to know the longer-term direction of the P/E ratio.

Thus, the question of the day becomes: how can we know the direction of P/E ratios?

Interestingly, average P/E ratios tend to trend over long periods of time, and markets move around them. Let’s look at some charts that Ed sent to me this morning. The first is the move in P/E ratios since 1970, with Ed giving us the trendline as a dotted line. The red portion going into 2011 is based on estimated earnings. Notice that after being way below trend we are on our way (if estimates are right) to being back above.

Now, let go back to 1900 and project forward on that trend line until 2030.

Notice that earnings rise to almost $180 (in real terms), well more than double from where they are today. And that has been the trend for 110 years, so it is fairly well established. But now let’s look at this same chart on a log scale, and with me adding a few lines of my own.

Now, let me explain how I have marked up Ed’s graph. First, I have circled in yellow the period from about 1930 through 1940. Note that the trend growth in earnings per share was well below the smoothed line we saw in the previous graph. No surprise, we were in a deflationary depression. But the point is that we got back to trend after the war and continued merrily on our way. Those ten years were not fun, but we did recover.

Now fast forward to today. What if something like the same phenomena happened over the next 20 years? I penciled in a black line going sideways (from 2010) for about 7-9 years as earnings rise, but not as fast, and then a true boom back to the “normal” trendline by the end of 2030. And what a boom it would be to get back to the long-term trend!

The Consequences of a Credit Crisis

I have written in numerous letters that the aftermath of a credit-crisis recession is a lengthy period, maybe as much as ten years, where all sorts of markets are more volatile and there are more frequent recessions. By definition, recessions are not good for earnings. We should expect two recessions between now and the end of the decade. That is what comes with the end of a credit crisis and the ensuing deleveraging cycle.

That is going to weigh on corporate earnings. But it will do more. Think about the period from 1966 through 1982. Four recessions, volatility, and P/E ratios ending up at 7, as Business Week famously declared “The End of Equities” on its cover. Who wanted to own stocks? Investors were disgusted.

Could that happen this decade? I think it is very possible. The stock market goes sideways and P/E ratios keep marching right on down, as we go through two more recessions and people get disgusted with stocks, just like in the early ’80s. Then, as we (hopefully) get our government fiscal house in order, and as new technologies kick in, we see a true boom in the 2020s! It is once again the Roaring 20s!

The Dark Side of Deficits

Two last charts from Ed. The first is the average GDP for the last 110 years, and the next is a graph of real GDP above and below that average of 3.3%. Note that GDP per capita in the 2000s was the second lowest for the last 110 years. Also that real GDP was the second lowest. Not pretty.

One could take comfort from the long perspective that the US will get back to trend GDP growth of 3.3% and that earnings will go back to trend, as I illustrated in a previous chart. That would require a decade well above trend growth to balance things out. And that is what SHOULD happen.

There is one caveat. The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.

But whatever – if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy. If we do indeed see trend growth slip to 2.3%, then my optimistic “we get back to trend earnings by 2030,” along with a roaring bull market, is at serious risk.

Let me jump on Paul Krugman again. He writes a great op-ed in the NY Times today questioning whether we are in recovery, and then pounds the table for more stimulus money. He (and all neo-Keynesians everywhere, with too many in the government) only see the next 6-12 months. Running up debt today? No problem.

Yet we risk our future potential growth if we continue on our present track. The research is clear. If we wish avoid some pain today, we create even more pain, and not that far in the future. There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road. Not getting our fiscal deficits under control risks the whole economy.

Let’s summarize. We are still in a secular bear market. Valuations, while lower, are still not at what could be called historical cyclical bottoms. Patience is the order of the day. We will get there.

And for the record, I will probably become a bull way too early and have to endure some pain on the way to profit. Such is life.

And we risk that ultimately positive scenario if we do not get our federal fiscal house in order. If that does not happen, all bets are off. ALL BETS.