Wednesday, March 17, 2010

Melting on up...

The markets rolled on to new 18 month highs on light volume despite traders ducking out early for a little St. Patrick's Day pub crawl. It's important to note what is behind this latest surge - strength of the Euro.

The Euro has been firming every time another "We've rescued Greece" story starts working it's way around the web. The firming of the Euro has weakened the US dollar. As I've said a thousand times falling US dollars push up prices of commodities (including stocks). Oil, gold, and stocks have all been on a roll for the past week. Just make sure your trading profits will cover the cost to fill up your tank next week.

If this is a normal recovery things might look a little different....

"But if this were a normal cycle, then:

Employment would already be at a new high, not 8.4 million shy of the old peak.

The level of real GDP would already be at a new cycle high, not almost 2% below the old peak.

Consumer confidence would be closer to 100 than 50.

Bank credit would be expanding at a 14% annual rate, not contracting by that pace.

The Fed would certainly not have a $2.3 trillion balance sheet

And, the government deficit would not be running in excess of 10% of GDP or twice the ratio that FDR ever dared to run in the 1930s.

If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.

If this were a normal cycle, then the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.

If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.

But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention."

The joy of squatting... There seem to be a ton of stories out right now about people that have just "stopped paying" and the banks can't catch up with the backlog. I can't figure out if there is a bubble in "stopped paying" stories or if there is a real hidden backlog of people that have stopped paying.

I first profiled today's featured property back in September of 2009 in the post Bluebell, a shocking example of gaming the system here in Irvine.

The owner of today's featured property paid $465,000 on 10/23/2003.

She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment.

On 12/30/2004 she refinanced into an Option ARM for $486,500.

Two months later on 2/3/2005 she opened a HELOC for $67,000.

Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees.

Total mortgage equity withdrawal is $88,500.

Consider what this woman accomplished:

She put no money into the transaction. None.

She extracted $88,500 in just over one year. That is nearly the median income in Irvine, and that money came to her without tax withholding.

She has lived in the property since 2003, and in the full term of ownership, she has not made payments totaling what she pulled from the property.
I admit to feeling foolish. I looked at property in late 2003, and I deemed it too expensive. It never occurred to me that anyone could accomplish what this woman has done, or I might have followed in her footsteps. I feel like an idiot struggling to actually pay for my housing costs when I could have obtained a free ride for the last seven years. I hope lenders know that California borrowers are learning their lessons well."

Weird news of the day: A former Massachusetts dentist is accused of placing paper clips instead of stainless steel posts inside the teeth of root canal patients while billing Medicaid for the more expensive parts.


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