This is happening all over the country.  There was a recent article showing that 40 percent of those employed nationwide are currently working at low paying service sector jobs.  Will these people bring on housing boom 2.0 with Wal-Mart wages?  Today we’ll be looking at 10 charts that show us a very clear picture of the nationwide housing market.  What we find is the housing market is anything but steady.  From Alt-A and option ARMs to strategic defaults we are dealing with trends we have never seen before.

Chart #1 – Housing Starts

At one point housing starts were operating at a 1.8+ million SAAR.  Even today after all the trillions of dollars pumped into the housing market we are operating at 66% below the peak of 2006.  Just imagine the number of construction, finance, and real estate related jobs that are now gone because of this contraction.  This crash level has only appeared one other time in history and we would have to go back to the Great Depression for that.

Chart #2 – Single Family Home Sales

The recent jump in home sales, both newly built and existing is as artificial as the fruit flavor in your soda.  And this is saying a lot given that we already subsidize the housing market like it was going out of fashion.  We subsidize housing through interest deductions, artificially low interest rates, and basically using the government seal of approval for the entire mortgage market.  Even with all of this, we had to sweeten the pot further with another front-end tax credit to get sales to move up.  That is now over and right when the credit ended, preliminary data shows that home sales and applications are starting to trend lower.  So what can we derive from this?  That housing without complete and ultimate government subsidies doesn’t have a leg to stand on.  Yet this puts a mask on the more perverse problems of underemployment and weak wage growth.  The big mistake made here is that we put housing ahead of employment growth when focusing on dealing with this crisis.  But then again, the people had no say here.  This was guided all by the crony banking system policy and for them, real estate was the focus from the beginning.

Chart #3 – Household Debt Service

I love this chart because it clearly shows the housing bubble in full context.  Starting in 2000, households took on much larger debt simply to buy homes.  It wasn’t a rise in income but a desire to play into the mania.  At the same time, those that remained as renters saw their overall debt load go lower.  It is the case that many prudent households refrained from buying at inflated prices and stayed renting.  Because let us be honest, anyone that wanted to buy a home in the bubble decade was able to get a loan as long as they were able to fog a mirror.  So the amount of those who bought homes shot up and debt service is still relatively high compared to the early 1990s level of 14 percent (we still need a drop of 2 percent to get back to that level).  Expect this trend to continue.

Chart #4 – Texas Ratio at Big Banks

Source:  BankRegdata

The Texas Ratio shows us that the too big to fail banks still have a large amount of toxic waste on their balance sheets.  How is this calculated?

(non performing loans + real estate owned) / (tangible common equity capital and loan loss reserves)

And as you can see from the above charts, many of the biggest banks have large amounts of bank owned property and non performing loans.  This ratio shows us that banks are going to be facing years of toxic loans until they can adequately gut their balance sheet.  Since banks wouldn’t be standing if it weren’t for taxpayer dollars, that means we are all on the hook for these massive losses.  These ratios tell us that real estate is not even close to recovering.

Chart #5 – Home Price to Median Income

As things stand home values in many areas are still overpriced.  I’ve seen the above charts used over and over but when you look at the data they are using for income, they are pulling data from 2008!  Since that time, our economy has flown off the cliff so the ratio is still high and only appears to be going lower because of income data used from the latest Census survey.  Once we get data nationwide in September when the 2009 Census numbers come out, we will see that the ratio remains high in many areas.  Home prices can only support what local incomes can shoulder.  This has been the case for a century and we are now going back to tried and tested metrics.

Chart #6 – Construction Spending

You would think that those in construction spending would know something about home demand.  If we look at the above chart, construction spending is still near the trough.  This applies to both residential and nonresidential building.  The market is full of toxic mortgages and vacant properties that there is little need for any home building for a few years.  When we look at shadow inventory data we realize that we built for a decade.  Some areas are now talking about bulldozing places!  This is what constitutes a solution like destroying food in the Great Depression while people starved.  The above chart shows where people are putting their money and it isn’t into real estate construction.

Chart #7 – Pending Home Sales

I’ve seen the above chart used many times as well to show how the housing market is recovering.  Only looking at this chart, you might be able to spin it that way.  But putting all the other data into context, you realize this chart is an anomaly.  In fact, this recent jump in home sales is all thanks to the tax credit.  That is gone and leads us into the next chart which shows the next trend.

Chart #8 – Mortgage Applications

Mortgage applications have collapsed.  It should come as no surprise given the pull forward.  In fact, activity is so low because we have to remove all of the refinancing activity that we had during the housing bubble days.  So now, mortgage applications are for home sales typically.  Many times, these are one and done deals.  That is, someone buys a foreclosed home and that is it.  In the bubble days, you had someone selling a home and then buying one at the same time (two mortgages compared to one).  There is little reason to believe this will be booming anytime soon.

Chart #9 – Nationwide Foreclosures

Contrary to what we hear, foreclosures are still at record levels.  We are on pace to seeing 3.5 to 4 million foreclosure filings in 2010.  And this is good news how?  Now we are seeing foreclosures dominate prime markets just like we saw in toxic mortgage markets a few years ago.  FHA insured loan defaults are at record highs and Fannie Mae and Freddie Mac have quarterly billion dollar losses as if this were a common theme.  Until we see foreclosure filings dip to the 100,000 to 150,000 range per month, any housing recovery talk is nonsense.

Chart #10 – Homeowner Equity

Source: Calculated Risk

This chart tells it all.  Homeowners are tapped out.  Keep in mind the above chart also includes the one-third of homeowners that actually own their homes free and clear.  So the reality is, those that own a home with a mortgage have much lower equity than the current headline.  With one third of mortgage holders underwater, there is little HELOC and home equity loans to be tapped out which supported our economy for the entire bubble decade.

The above charts don’t show any signs of a housing recovery.  The only sugar high jump came from the tax credit but even with that, you can see how little it did to impact the overall mega-trend.  Focus on the facts and don’t get caught up by the gimmicks.  We are a long way from any recovery.

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I wanted to go into the details on the current U.S. housing market and the data is not pleasant.  In fact, it is downright disturbing.  For background information, the U.S. has roughly 51 million active mortgages.  As we go through the next 10 charts, it is important to keep this in mind.  Whitney Tilson’s T2 Partners came out with some riveting charts regarding the current state of the housing market.  Let us go through 10 of the most crucial charts.

Chart 1 – Homes in foreclosure

The ultimate sign of housing distress is foreclosure.  This should be obvious.  So for all the talk of a housing recovery I point to the above chart.  Today, as in right now, we are in record territory for the number of homes in foreclosure.  14 percent of all U.S. mortgages are in some form of foreclosure.  If you do the rough math, this equates to:

51 million x .14                 =   7,140,000 mortgages in default or 30+ days late

I always get this question about how folks arrive at the figure of 7 million.  The above equation should give you an idea.  This by the way is not a good situation.  And with many toxic loans including option ARMs and Alt-As still lingering in the market, we have a few more years of problems baked in unfortunately.

Chart 2 – Foreclosure filings

Building off chart one, foreclosure filings are still at record levels.  In fact we are heading to a 3.5 to 4 million foreclosure year in 2010!  This is somehow a positive thing for the market?  People forget that foreclosures happen because of underlying economic issues.  If everyone was making big bucks and homes were going up in value then we wouldn’t have this problem.  Just look at the number of foreclosure filings back in 2005.  Roughly 60,000 to 70,000 per month.  Last month we hit 367,000+ which was an all time record.  When foreclosure filings get back down to more normal levels, then we can say the housing market is improving.

What about strategic defaults?  At most, 1 out of 5 foreclosures is probably a strategic default.  But that means 4 out of 5 are losing their home because they can’t pay.  This is why we absolutely need bigger down payment requirements.  If you get a government backed loan (aka the 96.5 percent of the market) then you should at the very minimum put down 10 percent from actual cash sources (no using tax credit nonsense).

Chart 3 – Home prices dropping

I think some people have a hard time understanding why home prices have fallen lately.  Well, when a large part of home sales are distress properties prices usually shoot to the downside.  We had a nice little bump from the alphabet soup of government programs including HAMP, tax credits, and other gimmicks but the trend is back to lower prices.  Why?  Because the underlying economy is still not healthy.  Now that people have to at least show some proof of income, it turns out that many cannot afford high priced houses.  Is this a surprise to anyone?  What do you expect when your strategy involves kicking the can down the road?  The above chart basically shows one World Cup kick to the can.

Chart 4 – Nationalized housing market

Congratulations, you are the housing market.  96.5% of all originated loans are now government backed.  Remember Fannie Mae and Freddie Mac and their epic continuing losses?  Apparently banks have no problem originating loans as long as they can use the government money to gamble in the stock market.

Wall Street enjoys handing your money out.  They like to beat on their chest about the free market but have no intention of lending out their own money (i.e., your bailout funds).  In fact, Wall Street has convinced itself that your money is basically their hard earned cash.  For the risky housing market, they’ll be the middleman in lending out mortgages that are defaulting in mass.  What do they care if the economy is on stable footing?  They don’t care if you lose your job and can’t pay the mortgage in one or two years.  By then, the banks will be gambling in another bubble putting another sector of the economy at risk.

Chart 5 – Housing overhang

Remember that 7 million figure?  Well there it is.  Keep in mind that we keep adding to this pile because foreclosure filings are running at 300,000+ per month.  So the market is actually saturated with inventory.  You may not always see this in the actual data but we’ve gone through multiple case studies of shadow inventory.  This large amount of overhang will add additional pressure to housing prices in the next few years.  In fact, with this amount of housing we have anywhere from 7 to 9 years of inventory to clean out!

Chart 6 – Distress inventory as sales

The dip you see in 2009 was basically the failed efforts of HAMP and other bank stalling efforts.  Now that banks have basically nationalized the housing market and have made Fannie Mae and Freddie Mac their dumping ground, they really don’t care.  They can use the taxpayer money they get under the guise of helping homeowners to speculate on Wall Street while funneling GSE debt to the public.  An absolute win for them.  The biggest and most risky of debt gets pushed to taxpayers while the lion share of profits stays in house as bonuses.  The system couldn’t be more corrupt or broken.

Chart 7 – Not paying and living with no foreclosure

This is a stunning chart.  24% of those that have made no payment in the last year are still not in foreclosure!  In other words, you have tens of thousands of people living rent free while banks pretend everything is fine and claim billions of dollars in profits.  What a sham!  Just look at the 24 months with no payment column.  39,000 people have not made a payment in 2 years and no foreclosure has been filed!

Chart 8 – Home equity lines

With so many homes underwater, the second mortgage market has virtually disappeared.  But we still have $842 billion in loans made during the peak of the bubble outstanding.  Most of these are actually held by the big four banks and that is probably another reason why banks are moving aggressively against some while letting others stay in their home without payment.  In fact, if you look at the above chart it seems that if you leveraged yourself with multiple mortgages banks might wait to move on you while if you only had one mortgage backed by a GSE, you’re out.  Fannie Mae and Freddie Mac defaults on standard mortgages are spiking to record levels.        

HELOC defaults are soaring:

This means further bank losses but can Wall Street gambling outpace the losses from the housing market?

Chart 9 – nonpayment savings

There is an upside to not paying on your mortgage.  More money to spend!  Ironically some of the recent increase in consumer spending hasn’t come from job gains or actual employment improvement.  It has come from people not paying their mortgage, downsizing (or getting a similar house for half off), and using the freed up income to spend.  The estimate is that $8 to $12 billion per month is freed up from people not paying on their mortgage.  You must have some uncanny self delusion to spin that as good news.

Chart 10 – REO vs distress

This chart pretty much sums it up.  Banks are moving on current REOs (the small batch that they have) and pumping this up as good news but the 90 days plus foreclosure number is still trending up.  How is this magic done?  We’ve talked about it above.  You simply don’t move on delinquent homeowners.  You ignore actual losses.  You mark your assets to fantasy valuations.

In total the housing market is in worse shape today than it was a few years ago.  If the stock market was tied to housing we probably have a Dow 20,000 with 14 million foreclosures.  The bailouts have been one large transfer of wealth to the banking sector.  Remember that the bailouts were brought about under the guise of helping the housing market and keeping people in their homes.  None of that has happened.  Ironically the only thing that seems to keep people in their home is when they stop paying their mortgage!  If that is the strategy we have arrived at after $13 trillion in bailouts and backstops to Wall Street we are in for a world of problems.

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As HBB readers will tell you, the state of Florida exemplifies housing-bubble consequence with blistering veracity.  And one of the most pointed details of Florida’s economic and literal skyline is the monstrosity of their market in condominiums.  It seems the available inventory looms over the state like a giant, ominous, pink flamingo (with beady little eyes), and how could any bank, ANY BANK, possibly anticipate loss mitigation in holding foreclosed condos off the market until an even later date?

Believe it or not, HBB readers, there is still shadow inventory, even in the bonfire that is Florida.  It seems that banks, in all their senselessness, will still refuse to foreclose on condominiums and other properties when subject to overdue HOA fees.

According to Ben Solomon, a Florida attorney, there is a substantial number of residential properties in Florida on which the owner stopped paying the mortgage more than 6 months ago, yet foreclosure proceedings have not begun.  Says Mr. Solomon, “The main reason is that these units are financially upside down, meaning the amount of the mortgages are significantly greater than the value of such units.  The lenders do not want to assume such upside down units because of all of the liabilities associated with them, including the obligation to pay maintenance assessments to the association, late fees, attorneys’ fees, costs, taxes, insurance, etc.”

When asked whether he thought banks were colluding to hold real estate off the market in an attempt to hide the true extent of their REO holdings, Mr. Solomon said yes.  “It is likely that many of these financially upside down units have already been internally written off as losses on such banks’ balance sheets, but they are hoping for potential short sales or other opportunities to liquidate these bad assets before having to acknowledge the same to the public and announce such losses to Wall Street.”

Mr. Solomon explains that accumulated HOA fees do nothing to inspire a foreclosing bank to unload its dreary asset.  “Due to the fact that the HOA statute (F.S. 720) and the Condominium Act (F.S. 718) both provide significant relief and discounts to qualified first mortgage holders in the amounts they must to pay to the associations when they take title, the law actually provides a disincentive for lenders to complete their foreclosures because they believe that whether they take 2 years, 3 years, or even 5 years, they still only have to pay the association the lesser of 6 months or 1% (under current condo law, although this may change to 12 months depending on laws coming out of Tallahassee) or  12 months or 1% (under current HOA law).”   

He believes lenders are acting in bad faith by not aggressively pursuing flagrant defaults under mortgage agreements, to the severe detriment of associations throughout the state.  Mr. Solomon also adds, “Associations need to be more aggressive than ever in pursuing all amounts due to them, including interest on past-due amounts (if authorized under the governing documents), all attorneys fees and costs, in addition to the full amounts due to the association.  A lawyer must be found who understands the latest legal strategies and preferably agrees to defer all of his or her legal fees until such fees are finally collected from the owner or their successor in title such as the bank (the way our firm does).”

From the Sun Sentinel. “No one can blame stressed Florida condominium owners and association leaders for seeking financial relief, and many are pinning high hopes on condo-reform legislation now on Gov. Charlie Crist’s desk awaiting his signature. ‘This bill contains elements that will help thousands of associations recover from this humongous recession,’ said Dan Mason, a unit owner and former association president of the Country Club Tower, the biggest high-rise in Coral Springs. ‘We are just keeping our head above water’ due to high condo unit vacancy and foreclosure rates.’”

“The bill would require lenders to pay 12 month’s worth of back fees — or 1 percent of the mortgage value — when they take title to a property through foreclosure or deed in lieu of foreclosure. Currently, banks and lenders must pay only up to six months of fees.”

From Barron’s. “If a condominium owner is behind on his mortgage, he usually isn’t paying his condo association dues either. And that, oddly, could be helping to prevent the already roaring rate of U.S. condominium foreclosures from becoming even worse. Condominium preforeclosure actions — the legal maneuvers that must be completed before a property can be seized — rose 37% last year, to 188,617, from 2008’s level, compared with 32% for all homes, according to RealtyTrac. But completed condo foreclosures fell 9%, to 66,506.”

“In part, this reflects an overwhelmed court system, federal pressure to get lenders to work with borrowers and the willingness of those lenders to allow short sales to keep from adding to the number of deadbeat properties on their books. But lenders’ reluctance to pick up condo-association fees also plays a role.”

“In the most troubled markets — think Florida, California, Nevada, Arizona and parts of the Midwest — some condos are three years in arrears on association fees. When a bank takes ownership, it risks having to pay those fees, plus any that accrue until it resells the unit.”

“For lenders, the simplest way to delay — or avoid — paying the dues is by postponing foreclosure until a buyer turns up who’s willing to shell out the accrued dues if the property is priced low enough. But in the current market, especially in the worst-hit areas, that can take a very long time.”

“Says Andrew Fortin, a vice president of the Community Association Institute, a national organization that represents 30,000 single-family-home and condo associations: ‘A lot of banks just aren’t foreclosing, but leaving people to live in their property two years without making payments to their associations or on their mortgages.’”

“Pompano Beach, Fla., lawyer Peter Wallis, who often represents condo associations, says this is understandable because the lenders ‘aren’t really getting hurt’ any more than they would be otherwise by delaying foreclosures, but that the associations are ‘getting mauled.’”

The News Journal. “At the peak of the area’s housing boom four years ago, Chicago native James Dolan bought a unit at the nine-story Oceanside Inn here when it converted from a hotel to a condo-tel. But, since then, the housing bust has cost him plenty. The owners association recently passed its second special assessment, on top of monthly maintenance fees, to make up for other owners who are in foreclosure or walked away and are not paying their fees. ”

“‘It ticks me off that I had to pay $6,000 above the asking price to get the place and then they let these deadbeats buy with questionable financing and now the place is in debt,’ Dolan said.”

“Circuit Court Judge Richard Graham recently approved the appointment of a ‘blanket receiver’ for the Oceanside Inn. It’s the first such ruling in the 7th Judicial Circuit, attorney Jason Harr said. ‘It’s groundbreaking in this district. It’s been approved in other districts, but it’s never been asked for and the court has never approved it here prior to when we did it,’ he said. ‘It’s given a life preserver to the association that was in dire straits.’”

“Owners associations by law are able to foreclose on the owner of a unit that is behind in fee payments. But the association has to file separate claims for each unit and owner. The cost is usually prohibitive for an association already under financial stress, Harr said. The blanket receiver order allows the association to include all delinquent units in one filing.”

“Similar blanket receivers have been approved in just a few Florida jurisdictions. They are not binding and have not been challenged in an appeals court, said Kevin Miller, head of the collections and foreclosures division for Becker & Poliakoff, a large community association legal firm in Fort Lauderdale. Most blanket-receiver cases involve large condos that are in significant financial stress and need emergency relief.”

“‘It’s up to each judge to interpret the statutes in each case,’ Miller said. ‘But, it’s a new strategy, a new argument, novel and it is catching on.’”

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The California Tax Break Window – Combining California Tax Credit with Federal Credit for $18,000 in Tax Credits. Southern California Housing Update. Giving $200 Million in Home Buyer Tax Credits While the State has a $20 Billion Budget Gap.

California in its infinite wisdom is allocating $200 million in tax credits for home buyers.  This is a very generous credit since existing home owners can use the $10,000 credit on a new home and new buyers can use it on either an existing home purchase or a new property.  And for a limited time, you will be able to combine the California tax credit with the expiring $8,000 federal credit (if you close escrow between May 1st and June 30^th) for a stunning $18,000 reduction in taxes.  But of course, most typical families will not use every penny of this credit and it is really a boost to a segment of our population that is doing better in this economic crisis (maybe we want to look at the 15 million unemployed first?).  Do we also need to point out that California will now have $200 million less to plug the $20 billion budget gap?

From the way the bill is posted, it looks like any unused funds will not rollover.  So say you are a family in the Inland Empire looking to buy a home for $200,000 and make $70,000 a year:

The tax credit is actually spread out over three years with a maximum allowance per year of $3,333.  So in the case above, it would not use the entire amount and whatever is “leftover” expires and does not rollover to the next year.  So in essence for the above, the person is getting a $2,500 incentive to buy a home.  This will of course lower tax revenues to the state for three years but apparently a $20 billion budget deficit means we can give out $10,000 tax credits like candy.  This is also similar to an option ARM in a weird way.  If you talk to a tax professional, they may recommend you adjust your withholdings and you will likely get $200 more per month in take home pay.  But what happens after year 3?  In reality, you will need to make more than $80,000 a year or more to reap the entire benefit if you are married and $60,000 if single.  If you happen to close between May 1^st and June 30^th you can also add in the federal credit to reduce your fed income taxes since the national government is flush with money as well.

For all the nuances and legal language, this is misdirected policy and a large waste of money.  This is not a good step in balancing the budget or putting our overall economy on the right track.  And on Tuesday Southern California home sale data was released and shows a market that is heavily dependent on government subsidies and investors:

The median price in all SoCal counties went up for the month yet sales are still off of their bubble highs by large amounts.  You would expect stabilizing prices with so much money being thrown into the market but the details are more troubling and show this may only be temporary.  Nearly 40 percent of homes purchased in Southern California were with FHA insured loans.  Using the $285,000 median home price that means someone looking to buy would only need $9,975 as a down payment.  And from recent data most that use FHA insured loans are going with the absolute minimum amount (this has also contributed to booming delinquencies).

Ironically even the government websites tell us a general rule we already know and that is you should not take on a mortgage that is 3 times larger than your annual household income:

The above data is based on a household income of $100,000.  As we have pointed out in certain cities this ratio is completely out of whack.  It’ll be interesting to see what happens once government programs start pulling back.

So last month, roughly 40 percent of all home purchases in SoCal were FHA insured meaning absolutely rock bottom down payments.  Another 27 percent were all cash buyers and I would imagine many are buying out in areas like the Inland Empire as investors.  Most are looking to flip and this game is getting thin because the rental market is flooded in these areas.  Investors are not looking to hold and are aiming to find a diamond in the rough, shine it up, and make some money on it quickly.  This is the bulk from what I have seen.  We do have cash flow investors in California but not many.

Looking at the typical mortgage payment we have to ask some questions however:

The typical monthly payment for those with a mortgage last month was $1,220.  This tells us a couple of things.  First, those that sell and have some equity use this to buy another place and pay down the new mortgage of the new home.  Also, recent buyers with FHA loans are paying the minimum 3.5 percent down payment but are likely buying in lower priced areas.

Right now the market is being artificially propped up like a mannequin with all the following programs:

-1.  $8,000 tax credit

-2.  Federal Reserve juicing the mortgage markets (artificially low rate)

-3.  New state tax credit (many will buy now so they can close escrow in May and June and double up the benefit between the state and federal tax credits)

-4.  Massive amount of distress sales (nearly 4 out of 10 were foreclosure resales)

The above are not signs of a healthy market.  I think many in Southern California still remember the $505,000 median price for the region so $285,000 must seem like a bargain.  But there are many factors that won’t remain for long.  Can interest rates remain this low in a market where risk is exploding?  Just look at Greece and what happened to their interest rate.  You think California is in better shape?  Just look at what is happening in L.A. right now.  They are fighting because tax revenues are extraordinarily weak.  The $200 million tax credit will run out quick.  Are we going to do this over and over in the face of a $20 billion budget deficit?  You have to remember that the state lags the general economy one or two years.  How?  Take for example property taxes on homes that are now priced at much lower levels.  In other words, we are building in lower tax revenues to adjust to the new reality and these are slower to react compared to general market sentiment.

I still look at the 12.5 percent headline unemployment rate and this gives me pause when looking at the housing market.  Even if the private sector starts hiring (this isn’t happening yet) the state and local governments are already looking to cut (or raise taxes).  We’ll have to find $200 million from somewhere else because we’ve just allocated that amount for people to buy more homes that they were probably going to buy anyway.

The Foreclosure Story: What does the Process Look Like?

We all know that foreclosures are on the rise throughout the nation. Most people realize that a foreclosure means that you will lose your home. But how does this process look like? In reality, the foreclosure process is a drawn out and lengthy ordeal. It is a gut wrenching and personal nightmare for most folks. So this article is a story about a couple. A couple who is the poster representation of the housing boom and now bust. In this article, we will examine their profession, income, and monthly budget. Amazingly, folks are very upfront when they are making lots of money but go into clandestine mode when they are having financial difficulties. Below is the couple’s profile:

Joe and Mary

Ages: 29 and 28

Professions: Joe – Senior Account Executive (lender), Mary – Real Estate Agent

Location: Orange County

Yearly Income Combined: $130,000 Gross

Net Monthly Income (After Taxes): $8,200

Automobiles: Mercedes E350 Sedan ($599/33 month Lease), GL 450 Suv Purchase ($56,000)

Monthly Auto Fuel Cost (Filling up Once Per Week): $350

Home Purchase: Costa Mesa 4/2 Home, Bought Late 2004 for $675,000

Credit Card Debt: $25,000

Monthly Food Budget (Including Dining Out): $700

So this should give you a nice snapshot of the couple. Since they were sophisticated investors in the know, they decided to jump into the home with a 2/28 loan, interest only with no money down. After all, someone making $130,000 a year can clearly sustain pretty much anything right? And as we all know, no money down was no longer simply a thing of late night infomercials but a mainstream way of buying a home. Here is the monthly budget below with the teaser rate loan (they had it for 2.75%):

2004 Budget

House Payment (PITI – at 2.75% interest only/2 years): $2,249

Auto Cost (monthly payment/lease/loan/fuel): $1,749

Dining: $700

Credit Card Payment: $500

Total: $5,198

Monthly Net: $8,200

Disposable income: $3,002

Keep in mind we are not factoring in medical insurance, cell phone cost, utility bills, retirement accounts, and many other items. These are things that I am aware regarding their budget since I was privy to the information. Well, more like them showing off to me, but I made mental notes on these items as I would with a past client showing me their monthly budget. So even with that said, $3,002 a month in disposable income is a pretty nice chunk of change to pay the remaining monthly items. But again, this was a teaser 2/28 loan. Unfortunately, they didn’t factor in one of them losing their job, a rate reset, and a slumping housing market. Let us take a look at the late 2006 monthly budget:

2006 Budget

House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962

Auto Cost (monthly payment/lease/loan/fuel): $1,749

Dining: $700

Credit Card Payment: $500

Total: $7,911

Monthly Net: $8,200

Disposable income: $289

Suddenly the jump in the rate creates a crunch on the household income. Keep in mind the above still doesn’t factor in other monthly cost. In addition, this was in late 2006 before, Joe lost his Senior Account job because the company went under. They were already feeling the pinch since the housing industry was already showing signs of weakness and their income being variable with commissions, was also taking a hit. Joe jumped to another mortgage outfit but they were only able to give him $30,000 a year base plus any commissions. Of course with the tightening of the housing market business is not going so well since both of their careers are tied directly to the housing industry. Their combined income is no longer $130,000 a year but approximately $80,000 a year. So let us run the numbers again with the new household income:

2007 Budget

House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962

Auto Cost (monthly payment/lease/loan/fuel): $1,749

Dining: $700

Credit Card Payment: $500

Total: $7,911

Monthly Net: $5,804

Disposable income: $-2,107

Now we are running massive monthly budget deficits. It may come to a shock to many people that a household earning $130,000 a year actually may have financial difficulties. But looking above, you can see how easy and quickly someone can go into financial ruin. Statistically, this couple was in the top 10 percent of household incomes in the country. Yet they spent way beyond their means. California living is very expensive. You’ll also notice that being in the industry they are in, they felt that they needed symbols of affluence to keep up with the Joneses. So now that you can see that not only folks that make $14,000 a year purchasing $720,000 go into mortgage trouble, even those that are considered the most affluent also have financial problems. The next phase of this case study is the foreclosure process.

What Does Foreclosure Really Look Like?

Foreclosure has been a somewhat unheard of novel thing in California for the past decade. Any homeowner in trouble was able to put their home up for sale and it would sell quickly before the entire process ran its course. The market was so hot that it covered financial irresponsibility by letting folks off the hook. This all ended last year. Suddenly, the market is declining yet rates are still resetting. Folks are realizing that they are unable to make the payments, sell for their asking price, and losing their homes. So how did Joe and Mary lose their home? This is the next stage of the foreclosure story and a sad one.

The psychology of running massive monthly deficits is a hard one. For one, you are probably wondering about the incredibly high car cost. This is Southern California and having a new model is somewhat common practice. The worst depreciating item you can own is a vehicle. Regardless, they purchased one of the two Mercedes and after a year or so, if they decided to sell they would be selling at a loss. So after Joe lost his job, they decided to put their home up for sale knowing they would be unable to make the payments. At first, they thought that they would be able to make a nice profit on the home. This was not the case. This is how the following months looked like:

Month 1-6 – (Pre-Foreclosure)

Joe and Mary miss one payment. They have their home listed at $790,000 on the MLS. No bites. The bank sends a late notice to their home. Since they’ve been in the industry, they have seen homes sell even before landing on the MLS. They are certain that they will sell the home.

Total Monthly Payment Behind: $4,962

Late Payment: $40

Total to Cure Account: $5,002

Another month goes by and no offers. They lower the price to $775,000 to generate some interest. Nothing. They start getting a bit anxious. They get another payment from the bank but this time, they will need to make two payments. At this point, they make a conscious decision not to pay the mortgage and put in a clause for a future buyer to cure the account when they buy:

Total Monthly Payment behind: $9924

Late Payment: $40 x 2

Total to Cure Account: $10,004

At this point the bank tries to make contact with Joe and Mary. If they couldn’t pay $5,002 how are they going to pay double that? A third month comes along and they lower the home price to $750,000. Still the market is dry and silent. At this point the couple receives letters from the bank and attorney. They now start receiving formal letters:

Total Monthly Payment behind: $14,886

Late Payment: $40 x 3

Legal Fees: $75

Total to Cure Account: $15,081

Forth month comes along:

Total Monthly Payment behind: $19,848

Late Payment: $40 x 4

Legal Fees: $75 x 2

Total to Cure Account: $20,158

Fifth Month:

Total Monthly Payment behind: $24,810

Late Payment: $40 x 5

Legal Fees: $75 x 3

Total to Cure Account: $25,160

The bank issues a demand for full payment including full balance, back interest, plus late charges, and legal fees all at once. The legal notices start. Joe and Mary now have their home listed at $715,000. Still no bites. They did have some people come by but the deals didn’t materialize. Now they need $25,160 to cure the account but the bank has legally informed them that they will accept no payments except a full balance payment on their original $675,000 note. Keep in mind the bank is no place for negotiations. Can you imagine calling up your local Mercedes dealer and saying, “Hello Mercedes? Yeah, I’m not going to be able to afford the $600 this month but would you be willing to take $300 plus a free Dodger ticket?” The bank now sends a certified letter of notice of intent to foreclose. Joe and Mary realize they will not sell their home. The notice and waiting period begins. They stay in the place two more months. Now it will cost $35,000+ to bring the account current plus a full payment on the balance. Of course this will never happen given the circumstances of their finances. No payments are arranged and the house is sold at auction and of course, the bank reclaims the home as REO since they are on the sheets for $675,000.

The home is now officially REO and get this, they have it listed for $750,000! The bank is delusional. Joe and Mary now have a foreclosure on their credit record and rent a much smaller home. They managed to break the lease on the Mercedes but are on the hook for the purchased SUV. You’ll notice how things spiral out of control when you spend more than you earn. I can only imagine households with $60,000 getting into this mess. If anything, it will accelerate ten times faster. They are considering bankruptcy but the new laws are now more stringent in terms of letting people completely off the hook, especially a couple that makes nearly twice the median US income.

Hopefully this article gives you an inside look at the story of foreclosure and how it can happen to anyone. I’ve seen many blogs talk about foreclosures and the numbers but haven’t seen a post detailing the entire process and how it impacts a home owner’s bottom line. Not only that, but you should get an understanding that we are in a bubble so large, that missing one payment puts you in arrears for $10,000, or the down payment of a modest home in many states of the US. If this is what happening at stage one of the bubble, what do you see happening in the latter stages?

But let us return to current housing values.  Are prices cheap?

Source:  Chart of Day

On the surface, especially when you aggregate the U.S. into one data point, the above chart seems to show prices coming back in line.  But this is highly deceptive for a variety of reasons.  As we have noted, home prices should ideally be a function of local incomes and economic industries.  After all, these are the people that will live in these places and service the debt.  At times it appears those in Wall Street have never ventured out to actually see the cities where many of their toxic loans were made.  Not only do they not care, they have no idea what the local economy can support.  I recall that in 1929, at the height of the stock market right before the crash, a time when supposedly all was well 60 percent of Americans fell under the poverty line!  This egocentric view of Wall Street has not changed over the century.

And when we think of home prices, we first have to look at employment levels:

Gallup now has a poll tracking underemployment and we find that 20.2 percent of Americans fall in this category.  This is why in the midst of one of the most historical stock market rebounds ever, many Americans are unable to pay their bills.  This is another reason why in the middle of countless government programs, home foreclosures are still on pace for another record this year.  It has gotten to the point where some banks are offering a six month payment free plan where if unemployment hits you, then you can stop paying your mortgage (millions have already done so):

“(CNN Money) We’re planning to help recently unemployed homeowners by giving them the ability to pay as little as $500 a month on their mortgage, which is effectively less than the price of an average one-bedroom rental nationally,” Sanjiv Das, CitiMortgage’s president and CEO, told CNN Radio.

Borrowers are covered by the program for 90 days when they submit documents proving they are recent recipients of state unemployment benefits, Das said. Some homeowners may be able to get extensions after the 90 days expire, depending on their situation.”

As worthy a cause this may be, many Americans already know another option is available.  Renting.  All these banking bailouts and mortgage gimmicks have failed to address the actual underlying problems in the overall economy.  In fact, they try to return to the heyday of the housing and banking bubble.  As you have noticed, home values have not increased yet stock values of banks have soared.  This is no accident.

In states like California, home valuations are still in bubbles in many cities.  Let us take a look at California as one entity first:

One often used metric of home valuation is household income versus price.  Even after a 50 percent drop in home values in the state, home values are still too high with a home price to income ratio of over four.  Overtime it seems that a ratio of three seems to reflect a “fair” value and of course this depends on local economies since some states have higher wages.  It is important to note that California was actually in line with home values in 1970 and then went off on its own path.  But a state with a 12.5 percent unemployment rate, much higher than nationwide data, is hard to stand pat and justify sky high prices in certain areas.  In some regions like Riverside County homes with five figures can now be found.  Yet this correction means little to the middle class if they have no job or fear being cut.  There can be no sustained housing recovery without having an economy to back it up.

Now we can use Nevada, Arizona, and Michigan to show really “affordable” housing but again looking at this in context of employment it doesn’t really show the entire story.  Let us rather look at a diverse market area like Los Angeles County since this is a good example of an overpriced region that has corrected fiercely yet is still overpriced:

Prices in Los Angeles County have fallen by 42 percent from their peak. Although this correction seems significant the median price is still $315,000 while the median household income is at $70,029 (a ratio of 4.4).  Much of this is skewed since lower priced areas are the bulk of recent home sales.  In some cities the ratio is over 7.  Now compare this to values in 2000 when the median home price was $187,000 and median household income was approximately $50,000 (a ratio of 3.74).  Keep in mind this is based on 2008 Census data.  Since then, the unemployment rate in Los Angeles is now over 13 percent meaning the underemployment rate is up to 25 percent.

It is easy to get caught up in the depth of price cuts but prices have fallen for an important reason.  They were overpriced.  The question now centers on economic valuations and many areas are still in deep economic trouble and home prices do not reflect these new realities.  That is why for most Americans, when they hear about an economic recovery to them it centers around employment.

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Thanks Mandelman, for being out there and keeping us on the straight and narrow. OMG Just don’t read this if you are prone to peeing your pants when you laugh too hard!

Did I say HELP? I didn’t mean help. I meant OFFER to HELP. Or talk about helping. It depends on your definition of HELP.

Help me, dear Lord.

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, in a report issued yesterday, says the Obama administration is… well, absolutely full of you-know-what as related to the administration’s Making Home Affordable program.  He says the administration has established “meaningless” goals for its “flagship mortgage assistance program”.  (His words, not mine.  If HAMP is a flagship, it’s the Titanic for damn sure.)

When Obama introduced the program in the latter part of February of 2009, he claimed that the program would help 3-4 million homeowners, but as it turns out, the program has at best helped… and I use that term very loosely… about 170,000 homeowners to-date.

Assuming the plan’s goal was to create foreclosures, it’s doing fairly well.  Only 170,000 loan mods have slipped through.  As to how many of those 170,000 loan mods are worth a darn, and how many are saving $20 a month for the next couple of years… I don’t even want to know.  You heard me right… please no one study that.  I don’t think I could stand the program being shown to be any stupider than it already clearly is.

And as far the program’s cost, let’s not talk about that either.  After all, keep it in perspective: $375 BILLION is only a couple years bonuses at Goldman Sachs.

The administration’s response to Barofsky’s report was something to behold, however.  Keep in mind that I voted for Mr. Obama and at least some of the reason for my voting the way I did was that his administration was to be nothing if not “SMART”.  Annoyingly smart.  Harvard all the way, right?  Okay, so that being said…

The administration’s response to Barofsky’s report emphasized that:

WE MUST REALIZE THAT THE PLAN’S GOAL IS TO MERELY OFFER HELP TO THOSE MILLIONS OF HOMEOWNERS.

The obvious distinction being… not to actually provide help, but merely offer to help.  Send them a letter of encouragement, perhaps.  Maybe a wink and a nod… chin up… pip pip… that sort of thing?  And I suppose on the Offer-to-Help Scale, the administration thinks they’re doing swimmingly?

Barofsky responded to the administration’s embarrassingly inane blathering by saying that the Obama administration is measuring the performance of the program by a QUESTIONABLE STANDARD.

WELL… SHUT THE FRONT DOOR.  You are one badass diplomat, Neil.

But, seriously Neil… I’m here to help, and I want to help.  What questions are you struggling to answer here?  A questionable standard?  Funny stuff, Neil.  Very funny stuff.  John Stewart are you following this guy?

Neil was also quoted by the AP as writing the following in response to the Obama administration:

“Defining success by how many offers are given can reasonably be perceived as essentially meaningless,” Instead, the program’s goal “must relate to how many people are helped to avoid foreclosure.”

I’m thinking that Neil may just be onto something here, but I’m not a Harvard grad, so I hesitate to even weigh in here.

Assistant Treasury Secretary Herbert Allison, responding to the report in a letter, said that statements about the plan’s goals “have not always been precise.”  But he argued that “offers of help” is a meaningful measurement because some borrowers who don’t qualify for the government program will still be able to avoid foreclosure.

Okay, nobody make any fast movements, and please no loud noises.  I’m really trying to hold it together over here, and it’s no easy job, as I’m sure you’d readily agree.  Easy big fella’.  Let me get some water… okay, better now.

One more time… Herb Allison said that statements about the plan’s goals “have not always been precise.”  But he argued that “offers of help” is a meaningful measurement because some borrowers who don’t qualify for the government program will still be able to avoid foreclosure.

That’s what Herbie said, and if you have any idea what he means… well… my best advice would be to kill yourself.

Here’s what is says about Mr. Herbert Allison in Wikipedia:

Herbert M. Allison, Jr. (born 1943) is currently serving as Assistant Secretary of the Treasury for Financial Stability of the United States.  He was confirmed by the Senate on June 19, 2009.  As such, he develops as well as coordinates United States Department of the Treasury policies concerning financial stability. As part of his duties he also oversees the Troubled Asset Relief Program (TARP), the $700 billion fund to purchase assets and equity from financial institutions in order to strengthen the financial sector of the economy.

His previous position was as President and CEO of Fannie Mae, a post to which he was appointed in September 2008. Prior to that, Mr. Allison was Chairman, President and Chief Executive Officer of TIAA-CREF from 2002 until his retirement in 2008.

Mr. Allison began his career at Merrill Lynch as an associate in investment banking and served variously as Treasurer, Director of Human Resources, Chief Financial Officer, Executive Vice President, President, Chief Operating Officer and as a member of the Board during his 28 years there.  After leaving Merrill Lynch in mid-1999, he served as National Finance Chair for U.S. Senator John McCain’s first Presidential Campaign.

From 2000 to 2002, Mr. Allison was President and Chief Executive Officer of the Alliance for Lifelong Learning, Inc., which offers online, college-level courses to adults.

Allison currently is a member of several boards and advisory councils including Time Warner Inc., Yale School of Management, Stanford Graduate School of Business, and the International Advisory Committee of the Federal Reserve Bank of New York.  From 2003 to 2005 he was a director of the New York Stock Exchange.

Allison, the son of an FBI agent, earned a B.A. in philosophy from Yale University. Following four years as an officer in the U.S. Navy, including one year in Vietnam, he received an M.B.A. from Stanford University.

So, let’s just run a quick tape here and see what nets out.  Herb had a cup of coffee at the helm of Fannie Mae in 2008, so crackerjack work there.  From 2002 to 2008, some very tough years those for the financial services industry, he was the shiz at TIAA-CREF… so nicely done there.

He spent 28 years at Merrill Lynch, including a stint as Director of Human Resources, so thanks for explaining the company’s health plan to a bunch of financial advisors who’s advice cost me pretty much all of my savings.  He was National Finance Chair for John McCain’s first failed presidential campaign; bang-up job there.  And from 2003-2005, he was director of the New York Stock Exchange, so nice job phoning it in for two years there Herbie.

Oh, and let’s not forget a B.A. in philosophy from Yale University… oh come on.  That’s a gag line isn’t it?  Does Yale even teach philosophy, other than perhaps the philosophy of money and how to inherit it?  And an MBA from Stanford?  Big deal.  I did my MBA at Pepperdine and I can barely balance my checkbook.

Look… I was promised SMART people in this administration.  And in lieu of smart, how about you just deliver people who can utter sentences that make some amount of sense and are remotely responsive to the question at hand.  No?  You can’t even deliver that?  Well, then shut up Herbie… you’re a dolt and you’re embarrassing yourself by opening your mouth.

Barofsky also said in his scathing report that an unnamed Treasury official estimated that 1.5 million to 2 million homeowners would complete the program by the end of 2012.

An unnamed Treasury official?  Is that right?  An unnamed Treasury official?  Well, then I’d say everything’s looking just fine then.  Why didn’t they just say that to begin with and I wouldn’t have gotten so upset.  Never-frigging-mind.

Barofsky’s response to Mr. Unnamed Treasury Official was to say: “That may only be a small fraction of the foreclosures that will occur in that period.”  And while that’s unquestionably true, it’s a whole lot more than any unnamed Treasury wonk deserves in the way of response after making such an absurd and baseless claim.

Barofsky’s report also lambastes the government in other areas, including saying that numerous changes to government guidelines “caused confusion and delay” and that the government did not do enough to advertise the program.

Herb Allison, who apparently just cannot stop from adding insult to injury, also noted that:

“The program is the largest, most complex mortgage modification program of its kind and there was little precedent for how to design such an endeavor.”

Oh, isn’t that just absolutely perfect?  Kind of makes you feel all warm and fuzzy about the just passed “largest and most complex health care reform program of its kind,” doesn’t it?

Sop it.  We’re talking loan modifications here.  I’m sure they got health care reform right.  Health care’s a lot easier than loan modifications.

Meanwhile… in an inexplicably unrelated story…

Any for-profit company, law firm, or individual attorney that offered to represent a homeowner for a fee, and worked to obtain a loan modification agreement for that homeowner, regardless of how many loan modifications were successfully obtained… is clearly a scammer no matter what.

Morons… morons everywhere.

Ergo bibamus, guys… ergo friggin’ bibamus.

As I pointed out on March 17th, the housing "tax credit" has run out of gas - and today's existing home sales numbers prove it:

Sales of existing homes have thus fallen three consecutive months, a reversal after having risen steadily through the fall in response to a federal subsidy for first-time home buyers. The tax credit has been restored and expanded to repeat buyers, but there has been no increase in sales yet.

Notice the "yet" - despite the fact that you must have a signed contract by April 30th to get the credit.

Let's cut the crap - the debt channel is stuffed for consumers.  Without the ability to take on more debt the American Consumer cannot continue to buy houses, cars, or anything else that they cannot pay for with current income.

"We need to have a second surge," said Lawrence Yun, chief economist for the real estate lobbying group. However, the jury's still out, he said.

You're not going to get one.

There is only one way to clear the housing market - prices must decline dramatically so that Americans can buy homes at a reasonable multiple of their incomes.

Historical "fair values" have been at 3x incomes, but that's assuming 20% down payments and all 30 year fixed mortgages.  The difficulty of saving up a 20% down payment when one is burdened with insane amounts of credit card, automobile and student loan debt is obvious.

There is no solution to the problem that does not clear, not simply defer, this excessive debt.

Yes, I know this means that all the major banks have to be "resolved."  Yes, I know this means that those who bought houses (myself included) during the last 10 years are going to take losses if we thought we were "preserving" or "building" wealth (I didn't - I consider my house to be a place to hang my hat, but I'm in the minority.)  Yes, I know that ultimately this may well mean that home prices contract to 2x or even one times incomes on average in a given area.

I have been talking about "pulled forward demand" for quite some time - pretty much since The Ticker began publication.  That has been the official policy of government every time there has been a recession for the last 30 years.  But when the ability to take on more debt is exhausted you can no longer pull forward demand and you get to deal with the vacuum you left behind!

What I or anyone else (including The Fed and Government) may want doesn't matter. 

Tax credit or no tax credit, Federal Reserve interference in "buying down" interest rates by intentionally overpaying for mortgage securities and Fannie/Freddie paper or not, if the consumer is stuffed full of debt and cannot afford to take on and service more, nothing you do other than clearing that excessive debt can make a difference to the outcome.

It really is that simple, whether we want it to be or not.

Let us now look at 5 major trends hitting the market today.

Trend #1 – Increase in MLS Inventory

Part of the issue with shadow inventory revolved around the fact that the foreclosure process was stunted.  In fact, the foreclosure process has been drawn out to record timelines:

“(HousingWire) …Again using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.”

Now with banks having additional money from stock market profits and unlimited backing from the Federal Reserve and U.S. Treasury, they are more willing to put inventory on the market.  In some areas like the Inland Empire investors are crowding out first time buyers and are speculating:

“(Press Enterprise) Bruce Norris, a longtime Riverside real estate investor and consultant who warned other investors early on that the real estate market was about to tank, said the deluge of houses hitting the foreclosure auctions and the numbers of buyers chasing them are far beyond what he had expected. He recalled that a year ago it was common for just a handful of investors to turn out to hear the trustee’s auctioneer reel off the addresses of houses for sale and sometimes the auctioneer would speak to an empty courtyard, he said.

Interest in foreclosure auctions is driven by a dwindling supply of bank-owned houses listed for sale. Investors can quickly resell houses purchased at auction to first-time buyers and others eager for affordable prices, low interest rates and government tax rebates.

Investors also say the apparent stabilizing of the real estate market has soothed their fears that the price of a home may fall before they can sell it.”

People are being drawn by the low prices and speculators are back in.  Not to the level during the boom but it is back however many of these folks have cash to put down.  The idea is to buy, rent it out a few years, and make a nice sum selling it in a few years when prices boom again.  That is another bet.  Yet economically speaking, the Inland Empire is seeing an underemployment rate of 25% and rents are falling because of the flood of vacancies and investors buying properties.  This is speculation just from a different angle.  With people putting their own money on the line, this is different from the flippers using option ARMs to make quick sells with OPM (other people’s money).

The MLS inventory increase is coming from more short sales and additional bank owned properties making the public view.  What will this do to prices?  It’ll probably bring them down especially that the home buyer tax credit is set to expire soon and quantitative easing from the Federal Reserve is ending soon as well.

Trend #2 – Falling Rents

Rents continue to fall because of a flood of inventory as we have mentioned but also because of a weak economy:

“(OC Register) February’s SoCal Consumer Price Index tells us that renters’ expenses fell again — this time at an 0.8% annual rate. That ties January and is a touch higher than the 0.9% rate of decline for December — the steepest fall since 1995.”

Renters have a lot of choice in this current market.  In some areas renting makes the most sense as a hedge against further adjustment in real estate prices especially in expensive markets.  The market is still in high distress.  In fact, if we look at the amount of distress properties in California it is at a record high:

Source:  CNN Money

Over 15 percent of California homes with a mortgage are either in foreclosure or 30+ days late.  This number is astounding and includes tens of thousands of toxic mortgages.  Even more troubling, the amount of “prime” loans going bad is also increasing.  What is also missed in the data is people doubling up or moving back home.  Many recent graduates are going into a terrible job market so many instead of renting their first apartment are heading back home.  Until the economy improves, this trend will continue.

Trend #3 – Competition for any Job

More news from the trenches, jobs are hard to come by.  And those that are available pay much less than previous jobs during the boom:

“(LA Times) Theme parks are being flooded with applications from job seekers, as unemployed mortgage agents, sales clerks and construction workers who can’t find work elsewhere seek temporary positions that often pay little more than minimum wage.

A job fair at Six Flags Magic Mountain in Valencia last weekend drew 1,600 people — in the rain. Universal Studios Hollywood took in more than 1,100 job applications on just one day last month.

Disneyland in Anaheim and Knott’s Berry Farm in Buena Park have received so many job applications that they put off plans to hold jobs fairs this year.

In the past, summer jobs at theme parks were often the path for teenagers and college students to get their first paycheck, doing such tasks as playing Goofy, Snow White and other costumed characters at Disneyland or running roller coasters at Magic Mountain.

But with the unemployment rate in California at 12.4%, the parks are now getting applications from people with years of work experience.”

Now think about this and how this impacts housing both on the rental side of the equation but also for purchasing a home.  Those former mortgage brokers and construction workers who were once able to afford a home or condo can no longer do that.  And these were high paying jobs during the housing bubble.  The only mass hiring going on is coming from low pay seasonal work.  In the next few months we might see national unemployment slightly improve because of Census worker hiring.  But this is definitely part-time and won’t last beyond the year.  Then what?  Until we see this trend reverse, housing prices will either move sideways or go lower.

Trend #4 – FHA Defaults Rising

It was only a matter of time before FHA insured loans started going bad like milk on a hot summer day:

“(CNNMoney.com) — The recent spike in the number of delinquent Federal Housing Administration-insured loans has some people worried that taxpayers will eventually have to bail the agency out.

Seriously delinquent FHA loans, those 90 days or more late, jumped 62.1% in the past year to 558,944, or 9.4% of FHA loans, as of the end of January, according to agency statistics released on Friday.”

Almost 10 percent of all FHA loans are now seriously delinquent.  This is incredible but has to do with the 3.5% down payment and weak vetting.  But let us be honest, it has to do with the low down payment and home buyer tax credit.  It is government backed zero down mortgages:

A bailout is going to happen.  This isn’t stunning.  It is a matter of giving loans to people with very little down in an economy that isn’t adding good jobs.  So even though people salivate at a $250,000 home in California, how can you support this on temporary work?  You can’t.

Trend #5 – Not Paying Mortgage

Let us run some quick numbers shall we?

California homes with a mortgage:           5,290,276

Source:  Census, 2008 American Community Survey

15.02 Percent of Mortgages are in foreclosure or at least one payment behind

5,290,276 x  15.02 percent = 794,599 properties 30+ days late or in foreclosure

The statewide MLS has about 160,000 homes listed.  So over 630,000 homes that are in foreclosure or are 30+ days behind are for the most part, hidden from the public.  The public doesn’t really look at the NOD + auction + REO data but they are actually living it.  This is an enormous amount of inventory.  The L.A. Times had data showing that 5% of distressed properties have no foreclosure or notice of default filed.  But that still leaves hundreds of thousands of properties sitting in limbo.  Many right now are simply not paying their mortgage.  And with toxic option ARMs and other junk mortgages, we can expect this trend to continue.

So tying this all together is rather straight forward.  Prices are not going to increase.  The economy will keep pressure on prices simply because incomes are not there.  The government has stepped in and all it did was stalled the inevitable correction in some markets.  With the tax credit ending and quantitative easing almost done, this will add more pressure on prices.  In more mid to upper tier markets, prices will correct simply because they are still overpriced and show signs of bubbles.

After all this time, the “solution” was to delay the pain over the years.  Trillions of dollars in tax money and this was the grand plan of the banks.

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