AvlGuy

What Was Left Out of the Jobs Report

Good job Mish.
I find that biz people who know better and yet insist on citing these bogus labor and GDP and CPI numbers when conversing, to be 1) wanting in honesty and character; or 2) battling emotional denial about whats about to happen to their portfolios, family business, company, industry or locale.

Bill Gross: Inflation and Higher Food Prices for the Next Decade

NotSoSmart & RichJoy comments have a common theme: the financial aptitude & critical thinking skills of American voters & consumers. I see something lurking underneath the current deleveraging, credit, and solvency crises. I see a collision between the 'promise of democracy' and the countervailing 'laziness or voluntary dumbness' of American consumers and voters. As many of our systems (financial, economic, and healthcare) get more complex, more voters grope for simplistic explanations of them and directions on how to use them. Due diligence is avoided at all costs by too many. A working majority of voters and consumers have made choices that hurt both them, their families, their communities and the nation as a whole. The reluctance of voters and news watchers to demand corrections to our bogus CPI, Unemployment and GDP figures are just three glaring examples.

What about the Pocket Recessions?

Billddrummer, you rightly cite the impact of deleveraging. It’s a huge and very real wildcard. There's little historic US data on the deleveraging unfolding, therefore how it runs it course is indeed an unknown. It provides fuel and a mechanism for a future spiraling downward of valuations, consumer spending, employment, public spending (state/city) and wealth. Especially during a 'U', 'W' or 'L' recession. It's worse when one looks at how much real estate development from 2003-2008 was driven by over-leveraged easy debt. The story does not end at a real estate bubble busting. Rather, it begins there. The RE bubble frothed the birth of other vulnerable bubbles. Easy-credit birthed a commercial real estate bubble that birthed what may be a short-lived revitalization of innumerable urban centers nationally, full of restaurants, specialty retail, boutique hotels, and of course hi-end lofts, condos & townhouses. Easy over-leveraged credit allowed consumers to buy those lofts & condos, and the home-as-ATM made it easier to spend more on shopping, travel & dining, and autos. Real estate fueled payrolls in construction, retail, and also cycled back to FIRE employment.
Deleveraging is halting all the dollar turnovers, in some cases reversing the flow. Add in the fact that less than 20% of retail floor space under construction is pre-leased.
Then add in the recession.
It's quite a challenge to see how pocket recessions do not spread in daisy-chained fashion across geography and industries.
Any good news? Yes. San Diego media reports last week that much of the county’s housing is now affordable based on median salaries and median home price. I expect more ‘pocket affordability’ to occur. However, the recession/ deleveraging is a packaged deal that delivers unemployment, shrunken payrolls, and social strains. Especially if its an ‘L’ or ‘W’ recession.
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Unintended Socialization of the Housing Market and Its Consequences

That said (whew), I agree with you, Mark..we need to get median home prices to get closer to median wages and salaries, by market and by category. The only thing sustainable is different housing markets and prices (for-sale and rental) that are affordable to job-holders at every wage level.
But there’s too many forces affecting equilibrium and preventing sustainability, so I expect house prices to move like waves in an ocean seeking an elusive equilibrium.

Unintended Socialization of the Housing Market and Its Consequences

Mark, current homebuyer psychology could result in Frank's proposal rapidly escalating the downward trend of home prices thanks to the high likelihood of panicked-crowd-behavio... documented ad nausea via public tragedies as well as stock market crashes. Here’s how:
An unmanageable swelling of mortgage-current homeowners (the big pool of 9 out of 10) will choose delinquency, slowly at first and then escalating in numbers, thus hemorrhaging bank revenues and brutalizing compliance with reserve requirements. This crashes bank stocks as well as investor confidence.
Simultaneously, the above rapidly accelerates the decline in appraised values of homes, far faster than appraisers can handle and document.
Simultaneously, there's an unmanageable mad dash by the 1-of-10 delinquent homeowners to Frank’s program, overwhelming the government staff as well as the appraisal industry. Frank's new program seizes up mid-stream like a Bush-era FEMA program <snicker>.
Any delusions of a feasible and orderly fix of America's housing crisis are vanquished. The stocks of all residential-real estate related industries sink at an accelerated rate in search of a new bottom.
Voila.....we hit the new equilibrium in home pricing faster than planned….unfortunately with tremendous velocity and inertia..
Unable to overcome inertia, home prices overshoot the equilibrium point, downward. Meanwhile, banks, Fannie/Freddie/FHA, gov't and the appraisal industry try to untangle the mess after months of finger-pointing (there’s always an election coming up). The public freezes up like deer-caught-in-headlig... refusing to enter into any buy/sell transactions.
It's so inter-connected that the sequence of the above can unfold numerous ways but ultimately still arriving at the same destination.
The lubricant for the above is the speed of news information: it allows panic behavior to occur far more easily than before. A nation of 300 million hears the bad news all at the same time, thus allowing mass panic.

BUT WAIT. There’s more!
The creator of the 90s TV Show, Babylon 5 wisely noted that it’s not wars that are so interesting, it’s the unfolding aftermath (e.g. compare the 6 years of military and survival tactics of WWII against the 45 years of ensuing Cold War politics, economic and social shifts, military counter-moves and feints, that followed).
The battle for a new equilibrium in housing prices across different markets and related stocks will see reformists battling socialists battling capitalists in terms of new regulatory and market agencies, intermediaries, and rules.

So…to prevent all the above, the Frank Proposal will have to include targeted moratoriums on certain transaction, probably by geography, housing market, or by date-of-default….kind of like how the Dow uses circuit breakers. It, in turn, will fuel incredibly resentment across congressional districts as homeowners have to “wait their turn” at the trough.