Thinking about building a house

So, I am pretty well tired of living in an apartment. I am getting ready to make the big move to ownership. There are just a few little problems I have to workout.

For many years now, nearly a decade, I have believed that I would purchase a town home or townhouse in my first foray into ownership. This is not unusual in Los Angeles county. Indeed, you can argue that it is the typical middle-class norm, especially if you are a single guy. However, 2009 came and went, and I was utterly horrified by how little prices declined during this period. Rather than coming drastically down to a rational point, the price of real estate stayed relatively high.

Whilst whorish politicians tell you declines in real estate prices are bad, I tell you precisely the opposite. Prices are vastly too high. Prices need to decline drastically. Rather than being a sign of illness in the market, declining prices are sign of improving health.

For those who do not know, real estate prices are utterly insane in Los Angeles county. Perhaps the prices here are not as bad as in San Francisco or New York, but they are terrible. The old banker's rules state that you never lend more than 2.5 times annual income out to anyone in the form of a mortgage. This is a maximum figure. As a good banker, you want to lend less than 2.5 times annual income. A couple hundred years of experience proved that this was the long-term stable and affordable mortgage a growing family could handle. Lending more than 2.5 times annual income is a recipe for financial trouble ahead.

Well folks, the mode, mean and median household income figures in Los Angeles county range between $76K and $85K. This is what the Smiths and the Jones make. They usually need two household incomes to reach that point. A couple of couples I know are right on that borderline. I find the figure believable. If you have a husband who manages movie theaters and a wife who teaches music, you wind up with around $85K.

Logic dictates that the middle class home in Los Angeles should cost around $255,000. That is what a healthy market will bear. That is what a healthy family can afford. I solemnly assure you this not the price of such a house in Los Angeles county. A small townhouse of some 1,500 sqft is more like $350K to $450K. This is a house I would be ashamed to raise my family in. It would pale in comparison to the 2,500 sqft house I was raised in back in Fresno California. The house I was raised in would cost between $550K and $800K if you were to purchase it in the San Fernando valley today. We weren't rich either. Mama was a high school teacher.

Incidentally, my mom purchased that house in Fresno back in 1976 for the price of $78,000 USD. This is just 3 years after Mike Martz was assistant coach at Bullard High School, just down the street. Incidentally, Bullard is my alma mater.

It is absolutely clear that we have arrived at an outrageous and preposterous point. The dysfunction in the market is so strong that every average middle-class home is totally unaffordable by every average middle class family. The prices need to come down. Sure, I can finance what I need, but I would be selling out my class if I capitulated to this market. I refuse. Let the real estate Barron's eat cake.

Like a true quad-Virgo, I have analyzed this problem from 360 different angles. I have almost/nearly reached the conclusion that there is only one workable solution: building a Japanese dome house, not buying an existing house. The indication is that I should build, not buy.

Just what is a Japanese dome house? I will tell you about that next time.

The U.S.A. is bankrupt, and we don't know it...?

A very interesting commentary was published on Bloomberg this morning. You can read it here. Watch the video here. It states emphatically that these lovely United States of America are bankrupt, and we just know it. I deny that. We know it. We just won't admit it.

Let's face the facts folks, we cannot pay off the national debt. When you cannot pay off your debt, that's bankruptcy. When you cannot payback your debt, you meet the official legal definition of the term bankruptcy. Now what we are grappling with her is power and problem of human psychological denial. Given the fact Ram fans can deny the state of their offensive line, and propound that it was a good idea to take an injury prone QB in this years draft, we will certainly be able to deny the robust and concrete fact that our current form of government is bankrupt.

Notice I said our current form of government... Some people just aren't observant. They just don't pay any attention to detail or take note of things.

So Mr. Kotlikoff lays his program for radical simplification. I love it, but it will never happen under this democratic republic. Such a program cannot be initiated until some dude with 4 stars on his lapel drives up to the capital with some tanks and machine guns. When that happens, let's hope he begins a radical simplification program.

When your political power blossoms from the barrel of a gun, it is possible to say no to the special interests. What the former reps say means absolutely nothing at that point. You just implement the reforms. Anybody who doesn't like it is going to get hurt... real bad. They will have a different way of manufacturing consent in those days.

And so we have the righteous ending to the age of Aquarius. The free radicals of the 1960s wanted to spend freely on guns and butter and this is what comes of it. They thought they could regulate Wall Street, or do away with it entirely. Do you see what has happened now? They captured all of your regulatory machinery and all your social programs also. They blew the market economy skyhigh with plenty of help from the government. Good government "on your side" turned into an exercise in the organized looting of the public sector, with bankruptcy resulting.

I guess you were off in the 5th dimension with some drugs and free love whilst this was going on. The only thing that mattered was that the moon was in the 7th house and love was steering the stars at the dawning of the age of Aquarius...

Fuck those sonofabitch Aquarians! Do you see what you have done? You are the stupidest goddamn sonsofbitches on the face of the Earth, and I am not kidding either. I fart in your general direction, and upon all your idealism. Life is a series of difficult trade-offs, and you can never ever learn that. You want your cake and you want to eat it too.

Why you and I should not buy houses in Los Angeles County... just yet

My, my, my... If my mailbox and eMail account are any indications, the State of California and the U.S. Federal Government sure would like me to buy a house in my county right now. I have been informed no less than 13 times this month that CalVets and the U.S. Department of Veterans affairs would like me to exercise my right to a VA home loan... real soon. The time has never been better... or so they say.

I don't agree, and I will tell you why.

House prices remain obscene

Much to the dismay of current home owners and mortgage institutions, the price of houses remains obscene. How do I define that? According to classical banking doctrine, you never write a mortgage for more than 2.5 times the annual household income of the borrower. According to various estimates, Mode, Mean and Median household income in SoCal hovers between 76,000 and 85,000. That means that price on an average middle class home should $212,500. That should be the price because that is what the market should bare.

If you have conducted a study of housing prices in the San Fernando Valley of SoCal, you know that the price cap on a middle class home is nowhere near $212,500. 1,500 sqft will cost you $350,000. You can touch 2,000 sqft for the sum of $400,000, but you had better be prepared to do some repair work. In good hood, we're talking about a major fixer.

The consequence of this market structure is very simple: Most middle class people do not own homes. Most middle class people are renting. Those who bought are struggling like hell. Many of them are organizing short sales or being foreclosed. That's what's up in my neighborhood.

This brings us neatly to the question: Why lend no more than 2.5 times the household income? Who wrote that law? Why are we bound to this rule? Why not more?

The answer is pretty simple: We are currently living the consequences of ignoring this unwritten law that was pregnant with the wisdom of the elders. A youth group came up about 10 to 15 years ago that did not understand the reason why, they ignored the rules, we saw massive inflation in the price of housing, and now the mortgage industry is going bust as people cannot afford to pay what they owe.

The elders understood that 2.5X was the limit of what financially healthy people could afford to pay in terms of mortgages. Anymore and you begin to cut into their contingency funds, their health care payments, car repairs, etc. This is an unwise move for a banker to make. You can't cut the throat of the milk cow to bleed her from the neck. The cow becomes unhealthy if you do this, and you will loose your milk supply. Bad move.

Old bankers restricted mortgage loans to 2.5x to keep housing prices in-line with buyer means. Old bankers restricted mortgage loans to 2.5x to keep borrowers financially sane. Old bankers restricted mortgage loans to 2.5x to allow mortgage holders to have enough financial space for a decent life after the mortgage payment was made. This rule was best for all concerned.

Now look where the fuck we are. Houses are now unaffordable by the middle class. Most people I grew up with do not own homes, despite the fact that all our families owned homes. I am 43 and I have never owned a home. I have lived in apartments or a barracks for most of my adult life. There was an occasion when I rented a room in Mill Valley... Those who own homes cannot sell them at all, much less at a profit. Those who need to buy homes cannot afford them. The market is frozen. It is not liquid, vibrant, healthy, functional or alive. Prices have simply reached an untenable point.

The solution is simple: Those who wrote imprudent loans are going to take the ass-end of the coin they flipped when wrote the mortgage. They knew they were taking a risk, now the risk has come up snake-eyes. You lose. Of course they do not accept this! I know they are resisting this conclusion ferociously. They don't want to admit that they have a Forrest of bad paper on the books. Nevertheless, the fact is that they do.

The Market is going to get healthy... soon

Banks used the Bush/Obama bailouts to avoid foreclosing on the bad paper they hold. They only forestalled the inevitable. I believe that the foreclosure wave is coming in March 2010. It takes about 90 days to complete the process of foreclosure and put a naked house on the market. The buying season begins June 1, 2010. To be ready for this, I believe that the foreclosure notifications begin to fly in about 6-8 days. A ton of houses will be on the market June 1, 2010.

The prices will begin to fall at that point. Banks are hoping that putting foreclosures on the market at the hot-point will decrease the rate of decrease, but I think they understand that prices are going to fall. Let's hope it is a lot more than the $50K drop limit they are hoping for. A $50K drop will not restore the real estate market to health. To be frank with you, even a $100k drop will not restore the market to health. A drop from $400K to $300K is still well short of $212K. It is better than nothing, but the price is still steep for mode, mean and media people of SoCal. They really cannot afford $300K.

Uncle Sam would like my help

Of course, Uncle Sam is a wholly owned subsidiary of the Financial Houses on Wall Street. Ergo, Uncle Sam would very much like me to exercise my VA loan entitlement to buy an overpriced house and support the unhealthy market price structure right now.

This is the very best thing for Wall Street and for Uncle Sam. Interest rates are low. This means Uncle Sam won't have to give me much leverage in the mortgage interest tax deduction. This means I will ultimately pay more taxes. Also, if I buy at a high rate now, financial institutions will take a lower loss on the property they sell me from their current supply of bad paper. That's good for the financial institution because I will pay them more money.

I don't want to help

You will pardon me if I am a bid selfish, but I don't want to help. I want the market to get healthy from my perspective. I want to pay less taxes and pay less to Wall Street. I will buy after:

• The wave of foreclosures come
• The rate of interest increases, and my mortgage tax deduction increases.
• Prices go down
• I can buy $100k cheaper

So why the hell are we in this financial crisis anyway?

The root of the present crisis is pretty simple: The price of housing has reached the preposterous point where every common middle-class home is totally unaffordable by every common middle-class buyer. Housing has been overbought, over-speculated, and overpriced for some time now.

Call me foolish. Call me irresponsible. Call me a dreamer, but I think you have a serious structural problem when every common home is unfordable by every common buyer. I remember when my Dad told me I had to jump in the housing market back in 2005. He insisted that housing had appreciated at the rate of 7% compound per year for the longest time. It was only going to get more expensive. I needed to jump in.

"Where is the growth in real wages to cover this 7% increase in housing prices?" I scoffed.

"Real wages, adjusted for inflation, have been increasing at pretty close to 0.0% for the past 20 years. It might even be negative, according to some reports. Prices cannot continue to increase like this. Houses are already unfordable. Who will buy this houses in a few years?"

My Dad didn't like that at all. He had just refinanced his house, through Country Wide, at something like $350,000. He harvested a ton of 'equity' to open a restaurant, which is now closed for business. The notion of being locked at debt level, or being underwater, did not appeal to him at all. He hated that notion. Still, he grimaced in pain, understanding that there was a problem.

The problem is that markets like to get even. The market is getting even right now. The real value of homes dropped more than 10% from historic highs by the month of September. This created systemic failure in the credit and finance industries. Speculators who were underwater, stopped paying their mortgages. Many abandoned investments, looking forward to foreclosure as a way to get out of a risky gamble. As the losses mounted Country Wide, Fannie Mae, and Freddie Mac all exploded. LIBOR shot through the roof. AIG was swimming in red ink due to "Mortgage Default Swaps", a type of insurance we don't call insurance.

How can the mortgage industry drag the entire system down like this? How can a single burst blood vessel in your brain kill you? How can a little blood clot in your heart give you a fatal heart attack? How can one crushed vertebrae in your back paralyze you? All it takes is one serious point of failure to bring the whole system down into a collective crisis.

But I digress... The real subject of this crisis is the outrageous price of housing. The credit crisis is a side effect not the cause of problem. The boss of BB&T bank, John Allison, says that all the chaos of September 2008 was created by a 10% drop in that price. The good news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country. The bad news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country.

If most of this chaos and crisis was fomented by a 10% drop, what will 30% more look like? There have to be a lot of losers over a significant period of time for the average price of a home to decline another 30%. A lot of ordinary home owners will have to take losses when selling. A lot of real estate investors and developers will have to take losses. A lot of banks will have to take losses. A number of insurance companies have to take losses.

This is going to be a long, tough, grinding deflation.