Suburban Housing Markets Are Unsustainable (Part 2)

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Housing Has Bottomed

At the center of the Earth
In the parking lot
Of the 7-11 where I was taught
The motto was just a lie
It says home is where your heart is
But what a shame
Cause everyone's heart
Doesn't beat the same
It's beating out of time

Jesus of Suburbia – Green Day

There is no need to worry. Jim “Mad Money” Cramer assures us that the bottom is in for housing. Here are his words:

The bottom, well, is now. We are seeing a huge wave of buying of foreclosed homes in Northern and Southern California and in Florida. The numbers are too positive to think that these, the hardest-hit areas, aren't putting in long-term bottoms.

Jim Cramer – April 19, 2009

Of course, Jimbo has called more bottoms than a proctologist. His housing market bottom call of 2006 was off slightly, by about 4 years. His latest call will be off by two years, so he is getting better. Jim Cramer is the best salesman since P.T. Barnum. He is able to hock his 4 books and website twenty times in the space of an hour every night, while helping clueless morons lose what is remaining of their retirement savings. You will learn more and lose less by watching Cash Cab every night from 6:00 pm to 7:00 pm rather than watching the shameless shill Jim Cramer.

Based on past results, I think I’d rather put my faith in Professor Robert Shiller, who called the Tech bubble and the Housing bubble when others were proclaiming a new paradigm. According to the Case-Shiller Index, home prices have dropped between 25% and 30% since the mid-2006 peak.

Based on the Case-Shiller Futures Index which has performed better than a Jim Cramer appearance on the Daily Show with Jon Stewart, the bottom of the housing market will occur in late 2010, with further declines of 5% to 25% in major markets. Cramer’s house in Northern New Jersey will take a 24% hit by November 2010 according to the futures market. I’m sure he sees that coming. It would be refreshing if he ever looked at facts and based his ever changing recommendations on a sound basis in reality.

How can anyone in their right mind say that housing has bottomed when the months supply of new homes is at an all-time high of 13 months, the months supply of existing homes is 10 months, there will be 2.1 million foreclosures in 2009 versus 1.7 million in 2008, and 7 to 8 million more people will lose their jobs in 2009? Neither foreclosure counseling, foreclosure moratoriums or magic pixie dust will keep housing prices from completing their roundtrip back to 2000 levels. Bubbles never burst halfway. They burst completely and the mess spreads everywhere.

Boulevard of Broken Dreams

Now the bad news. We are in a momentary lull of mortgage resets. The subprime crisis is mostly behind us. Now the Option ARM and Alt-A crisis is coming down the track like a freight train. Even a Citicorp (NYSE:C) or Bank of America (NYSE:BAC) CEO could understand the following chart, given enough time and sixth grader to explain it to them. The Option ARM wins the prize for most creative financial product of mass destruction. These are ticking time bombs set to explode in 2010 and 2011.

The beauty of an Option ARM is that it usually has three options. You can make a principal & interest payment, just an interest payment, or a minimum payment that increases the principal balance. Most of these loans also had introductory low teaser rates. The resets for these loans skyrocket in 2010 and 2011. Payments on these loans will go up 50% to 80%. Most of these loans are already underwater. Millions more “homeowners” will walk away and foreclosures will grow. Luckily, the Federal Reserve and Treasury cut the Stress Test off in 2010. The coming enormous bank losses in 2011 would have put a crimp in their little confidence game. The government solution to this problem has been to coerce, threaten, and provoke fear in the populace to seize their tax dollars, pile the hundreds of billions into a giant dump truck and unload the pile of tax dollars onto the front steps of Citicorp, Bank of America, Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC) and JP Morgan (NYSE:JPM). Creative market based solutions that require thought, rationale, wisdom, and fortitude are dismissed. John Mauldin’s proposal to grant a green card to any immigrant who buys a home and John Hussman’s PAR proposal that would solve the foreclosure problem aren’t even considered because they wouldn’t increase the power of government over the people.

Turning Japanese

The good news is that housing prices will eventually bottom. This will likely occur in 2010. Then what? The cheerleaders on CNBC expect 5% to 10% gains to resume as if nothing had happened. The example of Japan is more likely to be our future. Every circumstance leading up to the Japanese housing crash has been present in the U.S. during the last decade:

  • Historically low interest rates
  • Housing touted as a 'can't miss investment'
  • Median home prices doubled
  • Median home prices in largest markets tripled
  • Lenders offered risky loans
  • Government acted as a partner to industry
  • Home price increases far outpaced wages and rents

After reaching peak values, Japanese home prices declined by an average of 40%. In the country's largest cities, the declines were worse, averaging 65%. Homes in Tokyo lost 80% of their value and are still on the downward slide to this day. National home prices in Japan were $125,000 in 1985. Twenty years later home prices are again at or near the $125,000 level. If the U.S. follows this path, median home prices will be $143,600 in 2020, the same level as 2000. You won’t hear any “experts” making this prediction, because the economic implications would be too dire. A nice dose of runaway inflation could solve this dilemma. Are you up for it?

Fraud, Lies & Deceit

“The lies the government and media tell are amplifications of the lies we tell ourselves. To stop being conned, stop conning yourself.”

James Wolcott

The entire suburban existence of the last twenty years has been a fraud, built on a foundation of debt, with bankers lying to investors and homeowners deceiving themselves. Fraud is the intentional perversion of truth in order to induce another to part with something of value. The CEO’s of major financial institutions intentionally created and marketed fraudulent mortgage products in order to enrich themselves. Why would someone create NINJA loans (No Income, No Job or Assets) unless you wanted to induce borrowers to commit fraud? What good business reason would a professional financial manager have for not wanting to know whether the person has a job or income when you are loaning them $400,000?

The reason is simple. They knew the loans they were making were frauds, but they didn’t care. They were bribing Moody’s and S&P with huge payoffs to buy a AAA rating for their packages of fraudulent loans, so they could sell them to unsuspecting investors throughout the world. Former banking regulator William Black described the process:

The way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

The executives of Countrywide, Indy Mac, Washington Mutual, among others committed this fraud on a gigantic scale. CEOs, Vice Presidents, mortgage brokers, appraisers, and loan officers all knew they were committing fraud. Were these people raised by moral parents or Satan? None of them are in jail. How could trillions be lost and no one goes to jail? Angelo Mozilo is working on his tan on a beach in the Caribbean enjoying the $140 million he sucked out of Countrywide, when he should be in prison worrying what will happen during his next shower. Our government is covering up. William Black explains why:

Geithner is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have massive losses, and that they're fine. These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money, $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

The lies we’ve been told by government, corporate America, and the media are no worse than the lies we’ve told ourselves. We have tripled the size of our houses, and reduced the sense of community in our nation. Many have perfectly manicured lawns, polished appliances, 12 spotless rooms and dysfunctional, aloof, joyless lives. A McMansion, stainless steel appliances, 6 flat screens, and granite countertops do not guarantee happiness. When all of these items are bought on credit, you have a tragedy. America has degenerated into a materialistic, corrupt, me first, soul-less society. Nobody is right. Nobody is wrong. Everyone deserves to win, even if they made horrible decisions. Unless this changes soon, this country is doomed. By 2020 the United States will essentially be an old aged pension fund with an army.

The time for fraud, lies and deceit are over. Anyone within the banking industrial complex, from CEOs to loan officers that committed fraud must go to jail. If individuals lied on their mortgage documents, they should be prosecuted for fraud. If Hank Paulson and Ben Bernanke told Ken Lewis to lie, they should be prosecuted. If you borrowed too much and can’t make the payment on the house you are occupying, move out. You lose. Let prices fall to bargain levels and the winners in society who didn’t take on 150% leverage will buy the houses. A twenty year period of economic stagnation may be the best thing that could happen to this country. Saving would again become a virtue. Materialism would be ridiculed. Homes would be a place to live, rather than an investment. Truly important things like family, friends, community, trust and faith might take precedence once again. Or we could go on flipping houses and keeping up with the Joneses. What would Jesus of Suburbia Do?