Are YOU Listening, Rick Santelli? February 20, 2009, 9:00PM http://tpmcafe.talkingpointsmemo.com/talk/blogs/jade7243/2009/02/are-you-listening-rick-santell.php Rick Santelli's CNBC whining rant on the so-called "deadbeats with the extra bathroom" has garnered a lot of attention. But few people have really looked at the numbers behind how we got into this mess and who really is affected by it. While it may be good television to pander to the traders at the Chicago Mercantile Exchange or the Chicago Board of Trade or the New York Stock Exchange or NASDAQ, or your buddies on morning televsion on CNBC, MSNBC and all the other cable outlets, the reality is no one on television or elsewhere in the media has approached this problem from an objective viewpoint and with the appropriate statistics to explain the problem. Let's call it the "Enronization" of America. For if you look closely, you will see a pattern emerging -- not just of boom/bust cycles, but of a methodology of creating expensive but worthless "products" designed to extract as much money as quickly as possible from the uninformed consumers who bought it, hook, line and sinker. While one can make a reasoned case that you don't "need" technology and fancy websites with flaming logos (the dotcom boom/bust) or fancy energy and oil derivatives (Enron boom/bust), housing -- and this is about housing, not just home sales -- is a very different matter. Everyone needs shelter. Everyone needs shelter and there are only two ways to get it: you either rent or you buy. And the damage done to housing by this boom/bust affects everyone. California is a bellwether of what is in store for the rest of the country. The independent group, the California Budget Project (www.cbp.org) has taken a comprehensive look at California's budget problems since 1994. Starting 2000, the CBP has published "Locked Out" a series of detailed reports on the status of California housing crisis. The 2008 report is startling. In studying the numbers, you see the problem in a whole different light. This is a housing crisis, not a foreclosure or subprime loan crisis. The harsh reality is that the financial community is to blame for not putting a halt to the sale of over-priced homes by just not writing mortgages on them. Not because there was something wrong with prospective homebuyers, but the home sale was flawed. How do you justify inflating the cost of a home by more than 200% in 5 or 7 years? How do you knowingly write a loan for that house? They did it because they could sell confusing mortgage products to customers in need of housing. And it would make the lenders loads of easy money. OWNING VS RENTING "California has the second-highest share of renter households among US states. More than four out of 10 California households (41.6 percent) rented their homes in 2006, compared to approximately one-third (32.7 percent) of renter households in the US as a whole. (New York is first.) California was one of just 10 states - including Oregon, Nevada, New York, and Texas - in which more than one-third of households rented their homes in 2006," the CBP reports. And when it comes to paying high rental prices, Californians are second only to Hawaii. The CBP says, "Consequently, many Californians, particularly low-wage workers, struggle to afford to pay rents. A Californian who earns the state's minimum wage of $8.00 per hour in 2008 would need to work 83 hours per week, year-round, in order to afford the statewide Fair Market Rent (FMR) of $868 per month for a studio unit." In some parts of California, like Orange County, a minimum wage worker must work more than 100 hours each week to afford that studio apartment. The lack of affordable rental housing is at the heart of the problem here. From the CBP, "In contrast to single-family home construction, multifamily construction continues to lag behind the level achieved prior to the 1990s. On average, developers built 50,172 multifamily units each year between 2000 and 2007, compared to an average of 93,085 units annually in the 1980s.Boosting construction of multifamily units could help to increase the state's supply of affordable rental housing." Why is affordable rental housing important? Because people have two choices for shelter: rented or bought. So what about Californians who bought their shelter? The CBP report can be jaw-dropping. One rarely says that when reading statistics. But here are a few that characterize what California homeowners and homebuyers are going through. "California's housing market has entered a period of turmoil following a boom in which home sales and prices soared. Although the housing market has tumbled, the median home price throughout the state remains unaffordable for most Californians. Despite high home prices, the state's homeownership rate increased modestly during the boom as lenders loosened underwriting standards and promoted loans with risky features, such as adjustable-rate mortgages with short-term promotional or "teaser" interest rates. Many Californians have experienced "payment shock" as low promotional rates have jumped to higher levels after as little as two years, helping to trigger an increase in mortgage delinquencies and foreclosures across the state," reads the opening paragraph of the report's homeownership section. Key bullet points to remember: homeownership increased modestly, home prices are unaffordable for most Californians, lending practices led to "payment shock" and have triggered an increase in delinquencies. It gets worse from there. "During the housing boom, lenders relaxed underwriting standards and promoted relatively risky loans that allowed more consumers to qualify for financing. Lenders increasingly allowed borrowers to put little or no money down, provide few or no details about their income and assets, and spend more than 30 percent of their income on housing costs - the limit recommended by the federal government. Lenders also promoted a variety of loans that allowed homebuyers to borrow larger sums than they could have with a conventional fixed-rate loan as well as allowed many borrowers with weak credit histories to qualify for financing. These loans include: - Adjustable-rate mortgages with short-term promotional interest rates. -Nontraditional mortgages, primarily interest-only and "payment-option" loans. -Subprime loans. (During the housing boom, subprime loans were often structured as ARMs with low promotional interest rates, and many had interest-only features. While many subprime borrowers have weak credit histories, a substantial number of credit-worthy borrowers have received subprime loans. One analysis found that more than half of subprime mortgages in 2005 (55 percent) and 2006 (61 percent) were made to borrowers who had credit scores high enough to qualify for conventional loans with far better terms.)" Additionally, in order for Californians looking for homes to buy, they had to look in cheaper areas of the state, commute to their jobs longer and (surprisingly!) buy smaller homes. One study reported by the CBP found that: "More Californians bought smaller homes than in the past. For example, approximately one-third (32 percent) of Californians who owned a home for less than two years in 2003 bought homes with two or fewer bedrooms, compared to one-quarter of Californians who had owned their homes for 10 or more years." (So the Santelli rant about buying a home with the "extra bathroom and flat screen TV" really doesn't fly.) In short, they bought smaller homes further away. Continued..
But the painful truth comes when you examine the home price/buyer income disparity. From Locked Out: "Despite the downturn in the housing market, California continues to face a shortage of housing that is affordable even for middle-income families. Because housing costs have outpaced wages and incomes of many Californians, the state's residents spend a large share of their incomes on housing, leaving less for food, clothing, health care, and other necessities. Some Californians live in overcrowded conditions or are homeless, while others have sought less expensive housing far from major job centers." "Housing costs have outpaced the wages and incomes of many Californians. For example, the cost of the state's median-priced home nearly tripled between 1989 and 2006, increasing by 193.4 percent. In contrast, the state's median hourly wage - the wage of the worker at the middle of the distribution - increased by 60.3 percent and the state's median household income rose by 67.6 percent during the same period. Rising rents in the greater Los Angeles area, which has nearly half (48.6 percent) of the state's population, also outpaced Californians' wage and income growth between 1989 and 2006, with the exception of high-wage Californians - those at the 80th percentile - whose wages kept pace with the increase in rents in the greater Los Angeles area. The incomes of many renter households in California have not kept pace with inflation. The income of the typical renter household - the renter household at the middle of the distribution - declined by 4.3 percent between 1989 and 2006, from $39,210 to $37,537, after adjusting for inflation. The inflation adjusted income of low-income renter households - those at the 20th percentile - declined even more steeply during this period, falling by 10.5 percent, from $17,741 to $15,880. Although the inflation-adjusted income of the typical owner household increased modestly between 1989 and 2006, the income of low-income owner households only slightly outpaced inflation." The short take: if you are not rich in California, you are struggling to make ends meet. The measure is, "how much income does it take to buy a home in California?": "Despite the wide variation in home prices, buying a home anywhere in the state remains a daunting prospect for many residents. The income needed to purchase the median-priced home with a 30-year conventional fixed-rate mortgage and a 5 percent down payment exceeds the median household income in every county. For example, Tulare County's 2006 median household income was $41,933, but a Tulare County household needed an annual income of at least $55,973 to afford the median-priced home in August 2007." Let's put it in other terms: The median home price in California was $465,000 in 2007. To afford that home, the family income had to be at least $113,162 if the could afford a fixed rate 30-year mortgage with 5% down ($23,250.00) ;or an income of $95.295 with a 20% down payment ($93,000.00). Remember that the house's value ballooned from $200,000 in 2000, to its current price, meaning the homebuyer paid more than $265,000 over the "real" price of the home. And many California buyers were forced to engage in bidding wars to buy their homes, inflating the "worth" of the home even more.;At no time did ANY lender stop the sale of a home saying it was overpriced. No, they encouraged homebuyers to use one of the fancy loan instruments they sold. Here's who could NOT afford that median-priced home: Occupation and Median Hourly Wage Dental Hygienist.....................$79,082 Registered Nurse....................$75,650 Police Patrol Officer................$71,136 Fire Fighter............................$60,549 Elementary School Teacher.....$57,506 HUD Low-Income Limit............$52,000 Carpenter...............................$50,170 Auto Mechanic.......................$38,355 Secretary...............................$32,864 HUD Very Low-Income Limit....$32,500 Construction Worker...............$31,658 Bank Teller............................$24,939 Child Care Worker..................$21,195 Retail Salesperson.................$20,987 (Commodities traders and loud-mouthed talkshow hosts can afford the home at it's inflated price. Ain't that a shame?) The fact remains that 92 percent of all homeowners pay their mortgages on-time. The problem for many of the California buyers is that their loans are structured so that there are substantial prepayment penalties, as home prices drop their mortgages exceed the values of the properties which were overvalued in the first place, in the tight credit market even borrowers with good credit and conformning (fixed rate 30-year loans) cannot get refinanced, and those who need refinancing the most (those with ARM loans) simply cannot get the loans they need. The so-called "moral hazard" of people simply walking away from their homes to take advantage of the bailout is more unlikely because of the tight rental market and the lack of affordability there. Plus, renters need credit, too, so they can lease an apartment for their families. "Walking away" would leave these Californians homeless. But homelessness is increasing. People are staying in homes until they are foreclosed upon. Where they go from there and what happens next is best illustrated by Stockton, CA. It is rapidly becoming a modern day ghost town as more and more inflated loans come due, housing prices plummeted, former homeowners are forced to leave, businesses in the city close, employers and employees cease to make money, bills (including mortgages) go unpaid, more homes go into foreclosure and the cycle continues. I could not wish that fate upon my worst enemy. But that is exactly what Rick Santelli and his ilk are wishing for Americans, not only in California, but Florida, Colorado, Nevada, Georgia, Michigan, New York, New Jersey, Ohio, Washington, Oregon, Arizona, Texas, Louisiana and every other state in the union. It is the Enronization of housing and the economy.
The abdication of personal responsibility is NOT in our country's long term best interests... only naive liberals and/or people needing to be bailed out drink that koolaid. Only in America would we reward fraudsters and the irresponsible in the name of the "greater good" by bailing them out with money our children and grandchildren will have to repay. People used to sacrifice so future generations could lead better lives. Now we steal from future generations to underwrite our mistakes, hoping it will make our lives undeservedly easier.
And only in America would a Republican Presidential candidate (John McCain) appoint Phil "CDS-Enron" Gramm as his economic advisor. Let's face it, many of our so-called "leaders" in Congress threw this Country completely "under the Bus" years ago . . . and lined their pockets accordingly.
And most of the posters on this site have no clue what a Credit Default Swap is, either. - - - So what's your point?
I'm very sorry the banks used to finance anybody with a pulse. However, I'm pretty sure these people (most of them anyway) were able to read. If they had read their contract, which incidentally is part of "Due Diligence", there would be no "Payment Shock" excuse. Where Rick failed in his ranting is that while only 8% of "losers" are not making their payments, What percentage of them refinanced during the good times, reduced their home's equity and bought new toys, or for that matter "Extra Bathrooms"? It is a mess and something has to be done. Not because I feel sorry for the 8%, but their lack of literacy (and general intelligence) is driving all of our home values to where they should be. THAT DOES NOT MEAN I HAVE TO LIKE IT! Sincerely: 1 of the 92
I swear the vast majority of posters on this site never traded a share of anything in their life. -=------------------------------------------------------------------------- BINGO! In fact the vast majority of posters on this site are not in the top tax bracket as well. This site is gone to shit. Hijacked by "Academics", Socialist and a socialist retail traders who put up 5000 to trade on margin. (Which isn't so bad now that BAC is trading in the 3 buck range and BLUE CHIPS are now Pennies".) Nevertheless, the same people who speak out in favor of OBAMA and in Favor of the Trillions pumped into the economy are going to be the ones taking the majority of the pain. Lets face it. They will loose their jobs in the event of "More Business Tax" as OBAMA (FDR) has promised. I mean, lets try and balance the budget in 4 years while we Expand it. And do that during a bust cycle. Clinton did increase taxes but during a BOOM. But pay no attention to me. Look at your futures screen and see where we are looking to open tomorrow. Wait for the markets to re-act this week and take all those 401 ks to 101ks. It feels good to be a yankee in TEXAS. I rather be no other place during the destruction of "Wealth". But the funny thing is, the Rich will stay Rich. The only destruction will ravage very middle class that voted OBAMA in. OBAMA says tax hikes on those married who make 250k. Humm, I did hear him say that before. Then they dropped it to 150k. HUMMMMMMM? Sit back and enjoy the show, its OBAMA NATION!