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..