Friday, March 6, 2009


Are we making too much of the foreclosure markets, and not nearly enough on the unemployment figures? Of course, for many, these go hand in hand, however, the maps above suggest that the foreclosure densities are primarily focused on the southwest and southeast portions of the nation, and could be attacked from a state level.
A new study takes issue with the media narrative that foreclosures are dangerously widespread. The paper’s authors, William Lucy and Jeff Herlitz at the University of Virginia, examined foreclosure rates in every state, 35 metropolitan areas and 236 counties, and they found that 62 percent of foreclosures in 2008 were in the four states mentioned above.
California in particular was responsible for a disproportionately high number of foreclosures. The state may have had only 10 percent of the nation’s housing units, but it had 34 percent of the nation’s foreclosures in 2008. (Nevada, however, had the highest foreclosure rate, as you’ll see in the map below.)
California was especially vulnerable, the authors wrote, because the homes that its residents bought were quite expensive compared with their incomes.
The median value of owner-occupied housing in 2007 was 8.3 times median family income, the authors found, while the 2007 national average was 3.2. Housing costs relative to incomes were especially high in the Los Angeles metropolitan area, “where more than 20 percent of mortgage holders in each county were paying at least 50 percent of their income in housing related costs,” the authors wrote.
The huge run-up in housing prices in California created opportunities for large gains for home buyers if price increases continued. Thus, more households may have been attracted to potential gains, worried, perhaps, that they would be priced out of the home buying market if they did not act quickly. Some lenders (Countrywide) specializing in subprime, no principal, interest only, and no income check loans got their start in California and focused there.
Perhaps Proposition 13 was influential. Because Proposition 13 limited property tax increases to one and one-half percent per year, home buyers could buy with a low interest ARM, perhaps interest only, for two or more years, pay little more in property taxes in the second and third years as their property value increased, and sell at a substantial profit in two or three years before the reset ARM higher interest rate became too burdensome—an attractive opportunity for some young buyers anticipating moving.
The Obama administration's proposed foreclosure prevention program sets a target of households spending between 31 percent and 38 percent of their income on housing-related expenses. The program will try to prevent foreclosures in residences where Fannie Mae and Freddie Mac have purchased the mortgages by permitting downward adjustments to mortgage rates, to where the value of mortgages is not more than 105 percent of the houses' value, which will certainly leave California, if not literally out in the cold, largely un helped by the proposals by the Obama administration, because of the dramatic downturn in home values experienced over the past two to three years.
Timing is everything in life. And if consumers made unwise home purchases at the top of the market swing, we simply cannot help them. Part of the freedoms we enjoy is the freedom to fail, and obviously, in thinking the real estate bubble would continue long enough for them to profitize it into 2010 and beyond was a failing proposition.
For me, as socialistic as I am, I cannot fathom how we can, or should help these consumers, except to continue to insure they can find gainful employment. To help them through what is now realized as faltering investment practises and hopes (as we continue to do for the banking / insurance industry), along with extremely unethical joint practices between the consumer and finance industries, is a recipe for disaster for our economy. And, as loathe as I am to admit it, we simply must let the housing industry run its course unabated to its inevitable conclusion. I am afraid our motto must be caveat emptor: let the buyer beware, lest the greedy among us will capitalize on the unfortunate unawares.
As for the government, I think their focus should be on refinancing any loan possible to a fixed rate, currently under 5% almost everywhere (and 4.5% with a qualifying FICO score), the creation of jobs--all job sectors, not just "green" jobs, and a look into the astronomic rise in credit card interest rates, as credit card companies run scared that their customers will be unable to pay off balances. And stop watching the stock market ticker. it would be more beneficial to watch the bond market.
But the Obama administration must spend every day looking at the unemployment figures. Every day. We have lost 4.4 million jobs since December of 2007. 655,000 in January and 651,000 in February. That is over 2.5 million in the last 4 months alone. Highest unemployment rates in 25 years, 8.1 percent. And if you add in the underemployed (part time workers desperately needing full time status), and people giving up on looking for work, the rate jumps up to 14.8% of the American workforce. Is this staggering enough? How about this....31.8 million people are currently on food stamps. Lord how many else need them, but are too proud to take them.
Save their houses? How can we do that if they are unemployed and unable to so much as afford food? The Obama administration needs to think jobs first. Everything else must take a back seat to creating jobs, or this downward economic spiral will end in us all living........ in our automobiles back seats.

No comments: