Sean Olender

12 Observations on Residential Housing

People who make $200K a year are not rich. People who make more like $1 million a year and up are rich. Remember in the 1980s when people said, "Oh, that job pays $60,000 a year?" Well the constant debasement of the dollar has rendered that a $200,000 job. Cops where I live start at $74,000 a year. That's a job that requires a high school diploma and nothing more.

Part of the reason that there's such a serious debate about tax policy in the United States is that people who aren't rich think they are and people who are poor think they are middle class. Debasement of the currency confuses everyone into thinking they belong to a different socioeconomic class then they actually do.

And it's not just income, it's wealth. There are a lot of people making $175K to $250K with huge student loans, and who bleed under zero down mortgages on $1 million condos that are two bedroom one bath. They have little wealth and their income goes mostly to interest payments. 35 years ago the idea that someone making a salary in the top 10% of income earners would, regardless of actual saved wealth, be able to afford something a little nicer than a two bedroom one bath condo. Debasing the currency causes this sort of confusion.

Debasing the currency causes people to see quite modest acquisitions like small condominiums as a luxury objects reserved to the truly wealthy. If Americans had better math skills, they'd realize that the tax rules should focus on those making $1 million a year and more. Aside from the 1920s and the 1980s and now, the highest earners used to pay close to 50% in income tax. Now it's low 30s.

Capital gains taxes at 15% and not subject to "payroll tax" the capital gains exclusion for real estate and so many other rules have been used to try to bribe people making $200K a year by taxing people who make $75K a year even more! (note the "payroll tax" ending at $100K and that huge 15% tax being spent mostly on general tax fund expenditures with now a $2.3 trillion hole in the trust fund from this regressive tax that essentially was a bribe to those making $150K to $250K a year because if their taxes were a bit higher (and they are the new middle class), then the truly rich would have had political problems maintaining existing tax rules.

The saddest part of all of this is that the average person has used finance and credit in a way that put off for 20 years really understanding what these rules have wrought. That consumer credit expansion and erosion of the savings appears to have reached the end of the road as it doesn't seem mathematically possible for the trend to continue.

Americans will figure out how much prices have risen when they have to pay for things with their income instead of HELOCs, 2nd mortgages, borrowing against rising asset prices, etc. When people try to get by using their incomes to buy thing instead of credit, they'll realize that perhaps 80% of Americans are really poorer than at any time since the 1970s.

Could Housing Panic Actually Save Countrywide?

Well, it's been a few months and this author was shown to lack foresight. Anyone who bought into this "bargain" in November 2007 is down 50% now.

Jingle Mail, in Practice

California, Florida and several other states have anti deficiency statutes that prohibit lenders from seeking deficiency judgments from residential borrowers except under certain circumstances relating to cash out refinances, HELOCs, and other types of debt not related to buying and/or refinancing the principal balance of the loan used to buy the house.

I think some of these bailout proposals and these Hope Now phone numbers are at least as much to keep people from finding out about their right to walk as they are to allegedly help borrowers. Many borrowers would be better off walking. Credit scores are important if you need or want to borrow money. Americans have become incredibly preoccupied with their credit scores because many people finance almost every aspect of their day to day living. The median American family pays 17% of income in interest payments.

There are two ways out of this uncomfortable situation: either home prices fall far, or the price of everything else rises. Either way will be unpleasant, but reckless monetary and fiscal policy to encourage price inflation will be much worse and will render every American poorer (except those with investments outside the United States).

Moreover, the longer this takes, the worse it is going to be. Many sellers are still balking at lowering prices. "But my home IS worth more. It's not like those other homes that dropped in value, just look at my home! It's really nice." If this disconnect between buyers and sellers continues, prices may remain flat for or decline slowly for a while until foreclosure auctions take them abruptly lower in a highly uncontrolled manner.

Although I think that the place housing has come to occupy in the American economy is inappropriate and is a mis allocation of resources, continued drops in home sales will too abruptly rattle things and not allow enough time for other areas to grow absorbing unemployed construction workers, real estate agents, mortgage brokers, and even the economy around home improvement, furniture sales, home electronics, etc.

A drop in prices may also encourage longer term "doubling up" where people move in together - whether with parents, roommates, etc. A trend over the past few decades has put fewer Americans in each housing unit. Some of this is vacation homes, but most of it is fewer people having roommates, or living with relatives. High, sticky prices in a sluggish or recessionary economy may reverse that trend and that will have far reaching and much longer term consequences. We could end up with eight or ten million too many homes.

If nationwide prices, and especially prices in California drop far, we'll have a recession and maybe a nasty one. But a nasty recession is something that ends relatively quickly - a year, even two years is a relatively short time. Major structural changes in how people live can last decades.

Also, I like Mr. Salmon's writing usually, but I'm still a bit peeved that he called me a "nutcase" in reviewing my December 9, 2007 article in the San Francisco Chronicle. The idea that investment banks, bond rating agencies and originating banks may have communicated back and forth about how to maximize ratings while minimizing the likelihood that any could be left holding the bag is far from a conspiracy theory. Bond rating agencies worked closely with investment banks selling this junk and the investment banks paid them to rate it. They paid them billions. The bond rating agencies need an excuse to give a high rating. Perhaps stated income was one of the hooks. "If originators could generate more stated income loans, we could rate the bonds as if the borrowers really had the income they asserted and then disclose on page 149 of the prospectus that we can't independently verify the validity of the borrowers' income and that the rating is based on an assumption that the borrower told the truth." Then the investment bank talks to the originator and explains what they need to do to get the higher prices for their loans. I think if worked for an investment bank and I was getting several hundred million or even billions of dollars in mortgages from an originator, I'd be on fairly good speaking terms with those folks.

Anyway, I have little doubt that every possible means will be used to shut down efforts to get to the investment banks because they own the people who would do the investigating. It's more than a little interesting how the Circuit Court shut down Andrew Cuomo and now a friendlier agency is doing the investigating. We can probably expect a big fat "suggestion" as a penalty for the investment banks, "we think you need to be more careful in the future, okay?"

Jingle Mail, in Practice

California, Florida and a few other states have anti deficiency statutes that specifically prohibit the lender on residential real property from seeking a deficiency judgment against the homeowner/borrower. The exceptions to this are HELOCs and some types of cash out 2nd mortgages.

While I don't think that this is a great situation, it was banks, real estate agents, mortgage brokers, and Fed monetary policy from 2003 to 2004 that caused this situation much more than it was greedy borrowers. There were unbelievable nonstop ads, phone calls, faxes, junk mail, the television news wouldn't shut up about it. It was hard not to behave irresponsibly because people thought you were nuts if you didn't borrow as much money as you could to buy the most expensive home you qualified for. The "experts" on the financial news were regularly advising people to "consolidate" consumer debt at "much more favorable rates" by borrowing against their homes (and financing toasters and handbags over 30 years).

Home prices have to come down, or the price of everything else has to go up. Either way, it is going to be highly unpleasant for everyone. But if a flood of loose credit drives up the price of everything so home prices only drop 5% or 10%, then we're all going to be much, much poorer.

And although I customarily like Mr. Salmon's writing, I'm still a little peeved by him calling me a "nutcase" in his review of my San Francisco Chronicle article of December 9, 2007.

Could Housing Panic Actually Save Countrywide?

Yes, it would take the same "guts" as jumping out of a plane without a parachute. Well, maybe not that bad. But anyone closely following this could tell you that we are almost certain to lose at least one major bank in the next twelve months.

This untested financial architecture is crumbling before the recession. Now it appears that a contraction of credit, a likely recession, the flight of foreign investors to escape their mounting exchange rate losses, and the exhaustion of the American consumer are coming together at a single point that might cause enough pressure and heat to create a fission reaction.

If it was just Countrywide, I'd say yes. But here most banks are fighting to stay afloat with fraudulent accounting right now and loans from the Fed and FHLB (which gave out something like $170 billion over the past few months).

I disagree for three reasons. First, I don't know that big banks are going to be looking for acquisitions when they are only able to maintain themselves by pretending in accounting obfuscations that their losses aren't as big as they really are (ala Japan's bank strategy in the 1990s). Second, there are many banks on the brink of failure, so CFC is just one of many cheap options. Third, it seems to me that mortgage lending is dead in America. CFC and Wall Street ruined it for everyone. When this is over, I wouldn't be surprised if the only place to get a mortgage is the US government. Home prices will be falling for several years and investors are not going to buy mortgage securities secured by depreciating assets.

The only way these jerks at the Fed and Treasury can keep housing from deflating fast is by inflating everything else with big "injections" of freshly printed money. Well, guess what, when you print money and "inject" it into your friendly conspiratorial banker's account balance, you DEVALUE all of the other dollars circulating here and around the world. Americans are too foolish to get mad about that. They think PRICES are going up and can't understand that it's the fresh palates of money being handed out that drive up prices. Foreign investors are signaling that they've had enough of this counterfeiting. They are threatening to bail. We can't get on without them. We need $2 billion a day flowing into this place. When they debase the currency, they hurt foreign investors. if their American stocks or bonds are "up" 8% this year, they still lost money because the dollar plunged against their currency by more than 10%. Without some responsible management of the money supply, foreigners are going to bail and then it's going to get ugly.

The Fed is stuck between bailing out its Wall Street friends and bringing on the apocalypse of the dollar losing reserve currency status. Let's hope they understand what's at stake.