Monday, September 03, 2012

Some Housing Perspective

If a person took out their mortgage loan between 2004 and 2008, when prices came from fantasy land or if a person took out equity loans or lines of credit during that time period based on the fantasy values it would certainly be likely that they would be "underwater" today. Generally speaking, home prices doubled or even tripled between 1999 and 2006 in many high volumes areas and of course this was pure insanity!

Historically, home prices (values) since the early 1950's (with the exception of the fantasy years mentioned above) have risen about 4% on average. There was no fundamental logic to justify the national insanity displayed in the past decade. The fact is that EVERYONE drank the kool aid, meaning the consumers, the banks, the government lending and taxing agencies at all levels, the home building industry and on and on with little thought that it couldn't last or that something was fundamentally wrong.

My Mother's house in Los Angeles, Ca. was valued at about $80,000 in 1975 and had risen to about $190,000 by 1999, reflective of the 4% guideline. When the "value" jumped to $240,000 by 2001 and then to the insane level of $900,000 by 2006 (the high point) all rational analysis was out the window. Even today, her house is "valued" at about $635,000 which is still too high (it should be about $370,000 at most). Do the math for your house or area pre insanity years compared to now and you may get a better indication of actual value. My Las Vegas home went from a 1998 purchase price of $146,000 (in 1998) to a sale price of $172,000 (in 2002) and then DOUBLED to $340,000 by 2006! Oh come on! The current "value" estimates average about $144,000 which is more realistic (although my city has been hit much harder than most).

For those caught in the trap of the insanity years things have been difficult to be sure. For those who borrowed above there means gambling that the rocket would just keep going up well it should be a sobering lesson. The main point now is for all of us to avoid letting ourselves get sucked into a repeat performance. The pain of these past few years and of the next 4 to 5 years coming up is the collective price that must be paid but perhaps we can return to a more reasonable approach to home ownership and our overall expectations. Housing prices have begun to stabilize in recent months and even increase in many markets as the available inventory lessons, but before anyone can make realistic decisions about buying or selling, the Banks and lenders and government entities need to process virtually all of the distressed mortgages and clear the books so the whole housing market projections are more clear than they are now. Hopefully, homeowners that are "underwater" by 10 to 25% will see their home values increase to at least get them to the break even point within the next 3 to 5 years. If these homeowners bought with the intention of living and raising a family in the home and they are fortunate enough to have the funds to meet the payment obligations, being underwater now should not be a crisis. An important question still is; "Will the players in the housing game try to do it all again?"

As a final and what should be an optimistic note for the housing market, the current 30 year fixed mortgage interest rates at  their LOWEST level since October of 1955 when the rate was 3.5%!! That was 57 years ago!!

Where we are and where we were

                    First, the big error that this Administration made was misjudging the enormity of our economic situation during the final months of 2008 and into the spring and summer of 2009. Of course not many actually did realize it or acknowledge the fundamental collapse that began in the early months of 2008. Most candidates and newly elected officials fall prey to being over optimistic with "recovery" projections. A key thing to remember as we "grade" the past 3 1/2 years is that the American economy DID NOT begin on January 20,2009! The status of our economy at any given time is only an extension of the years and decades that came before.

    Having said that, some facts are; Unemployment in January, 2008 was 4.9%. 13 months later at the end of February, 2009 it was 8.5%, a 73% INCREASE. Unemployment now (end August, 2012) we are at 8.3%, a slight decline. Those who bring in the "real unemployment", projections of 23 million unemployed and portray it as though all the "under employed" were non existent before January, 2009 are simply ignoring the facts. There were millions in that category for years and the business practice of having employees work less than the traditional 40 hours per week has been a growing practice for almost 20 years. Statistically, we are about 2.1% above our 60 years average unemployment, so the immediate goal should be to get down to our long time average %.

    The Dow Jones average at the end of February, 2009 was 6,594, which was a 50% decline from the end of 2007 (12,274). The average as of August 31, 2012 was 13,090 or a 98% INCREASE from February, 2009 and 800 points higher than the end of 2007. In my opinion, we are approaching averages that are actually too high relative to our overall economy, so beware.

    Domestic energy production is currently at the highest levels during the past 8 to 10 years. We have more oil and gas rigs (1272) than the rest of the world. In 2005, 60% of U.S. consumptions of oil was from foreign sources. At the end of 2011, only 45% (a drop of 33%) of U.S. oil consumption was from foreign sources.

    There have been 18 small business tax CUTS signed into law since January of 2009. Americans are currently paying LESS (relative) taxes than at any time since the 1950's. There are currently LESS "government" employees than there were in the mid 1980's under President Reagan,

    As of July, 2012, 1.4 MILLION illegal immigrants had been deported since January, 2009 which is 1 1/2 times the monthly deportation rate for the 8 years of the President Bush administration. There are twice as many border agents in the field now as there were in 2008.

    The housing market collapse that began in 2008 as a result of the collective greed of everyone involved and has been among the key reasons for the level of our financial stress appears, after 4 years to at least be leveling off and in many regions, home prices have begun to rise. Home prices between 2002 and 2009 were just a myth, as most "values" doubled or even tripled in the span of just a few years versus a 60 year average value increase of about 4%. The last thing we should want now is for a quick return to those false levels. Sanity in the housing market will now take several more years to attain and yes, there will be pain, but we need to adjust overall values to be in line with our historical 4% per year increase model. Anything else and we're just asking for another crisis. A final note on housing; mortgage interest rates are currently available at 3.5% which is the LOWEST since 1955 (57 years ago)!

    Our total national debt is too high for sure. Our current national debt or many of the structural reasons for it certainly did not begin on January 20, 2009. This has been decades in the making and is the responsibility of BOTH major political parties.
 "We" owe just under 10 trillion of the 16 trillion to ourselves, meaning about 2.6 TRILLION to the Social Security Trust Fund (16%), about 800 billion to the long term civil service retirement and disability fund (5%), another 381 billion to the Department of Defense Military retirement fund (2.4%), and an additional 1 trillion dollars to many and varied trust funds or insurance funds in the name of Americans or American entities. All of this "debt" (4.77 TRILLION) is noted under the category of Intragovernmental Holdings and is long term "debt" that does not need to be paid immediately. About 5.5 trillion of our total is owed (and held) by foreign nations, with about 1.2 trillion to China and 1.1 trillion to Japan (mostly in the form of Treasury and other bond issues). The remainder of the debt is virtually all in the form of treasury bills, notes and bonds held by the public (citizens and businesses) and is due only on maturity and demand. The point is that the VAST majority of our reported National debt (although very high) is not due and payable now or anytime in the near future,

The "real" debt figures that should be part of the daily conversation are, the interest payments as they become due, any direct loans made to the Federal government, and any amounts due to maturing treasury notes, bills or bonds where the holder wishes to cash out. It is preferable to reduce the foreign debt totals and to repay the huge social security trust fund debt as well as other trust fund and insurance fund debt, but the public discussion of national debt should probably involve only about 3 or 4 trillion dollars. The idea of "projecting" national debt out to a distant horizon has no practical purpose other than the shock value politically. We could project out to a 75 trillion dollar debt but it would be meaningless in the short term

    The "war" in Iraq is OVER. Gaddafi is GONE from Libya. Musharraf is GONE from Egypt. Osama Bin Laden is GONE from the earth. The current administration has continued the streak of protecting America from attack since 2001. A large portion of the Al Quida network has been destroyed or forced into hiding during the past 4 years.

Millions of Americans now have access to health care and health insurance coverage than at any time in the past. The Affordable Care Act is NOT a Government "takeover" of the health care industry! There will be costs but the overall effect should be very beneficial to the millions who have been living on the edges of what should be (at least in America) a fundamental right and privilege bestowed by the greatest nation in history. There is still much to be done with respect to the costs of health services and the cost of insurance but at least the rate of increase as slowed to 4-5% the past two years versus the 7-10% we have endured for most of the past 15 years. 

    In the end, our country still has many areas that need improvement and most areas are trending in the positive direction. The collapse of 2008 was simply too great to overcome in only a 4 year period. The choice now is whether to allow our economy to recover further by maintaining the current path or to start all over again.