so long and thanks for all the fish

As Kevin posted yesterday, after some discussion over the last month we have decided it was time to close the blog.

Although I initially wanted to try and keep it going till the end of the year, I think this is the right time for us to wind things down. When I was telling people back in 2006 that this housing run up in Baltimore was going to end badly everyone looked at me like I was a nutball. Well 2 years and trillions in taxpayer funds later and I feel vindicated.

As I told Kevin when I started doing posts I have always looked at this as community service more than anything else. I am glad to see that we did build a pretty large audience and from looking at the google stats a very affluent one at that.

Now that we are probably at the eye of the storm it makes sense to move on as I have other things I now want to focus my energy on.

As for predictions.....this was the biggest run up in history and it will over correct to the downside I guarantee. As I sit here this morning and watch the CNBC talking heads argue about the sell off in stocks due to hedge fund redemption I have to agree with the one sane person of them all Mark Haines. His rant this morning said it best.

"This is not rosy and is not going to be for years and years. Am I the only one willing to say the truth that this horrible? This was lead by housing! Housing takes years to unwind due to the transaction costs. This happened because people got loans they never had any hope of paying back."

For those of you who think that in 5 years we will be back to peak I have a news for you, that is not going to happen. All the growth since 2000 was due to "creative lending". Think about that.....this means no home equity lines of credit and essentially lower consumption. If people want to sell, they are going to have to come to the table with money.
People are going have to....(gasp) SAVE if they want to buy a big ticket item.

Unlike the bubble markets of the west (CA, NV, AZ) and Florida, we are winding down in a more orderly fashion. That being said this will drag out the pain for us. More people who did not speculate are going to get hit by this (baby boomers who bought 20+ yrs ago) than if it quickly imploded like Florida.

We are going to develop a market very similar to Southern California after the late 80's bubble. Homes that were bought at peak will sit as the guy next door sells his for 40% off a couple years later. If you bought in a neighborhood you "settled on" in hope of selling and moving up in a couple years, I would recommend you re-adjust your priorities. Get to know your neighbors, get involved in your community, and make do with what you have.

If you want one good easy button to click and see if it's time to buy click here. You will see we are the most overheated market from a price/income ratio. Hell even Bethesda's market down in DC makes more sense. When we get below 3 on the housing barometer it's time.

One part of this that is overlooked by many in the mainstream press is the effect this crash will have on the young folks coming out of college and are a few years into the workforce. They have never lived through a real recession like the misery from 79-83. To them this is going to change them for the rest of their lives. They will be a lot more thrifty and are not going to speculate on homes.

They will not have access to no money down loans and unlike the generation before they are likely on the hook for 10's of thousands of dollars in Student Loan debt. This is debt that never goes away and will really hurt the purchasing power of the new pipeline of homebuyers. Saving up a 20% downpayment is going to be difficult. Hell even trying to save up 5% for a FHA loan(3% down 2% for transaction costs) is near impossible. If you think housing is expensive now, wait 10 years and your going to be shocked that how the "investment" is actually "consumption".

I would like to share another aspect of this that I have come to terms with over the past 2 months. The 30 year fixed mortgage was great in the economy of the 1960's where people went to work for one company for 30+ years. They were stable and buying a house made sense as they were not going anywhere.

The 21st century economy is not one of long commitments. Companies and workers are now viewing each other as a short term relationship. People who are mobile have a competitive advantage over people who are stuck because they are in a mortgage that is underwater. They cannot take that promotion in another town or take a new job that pays a lot more in a cheaper market because they have a housing noose around them. This new paradigm, as it takes shape over time will make owning less attractive, especially to single folks. This is the starter rung on the property ladder and until they return in large numbers the rest of the market will stay sluggish.

Another aspect is many of the brightest and best went to school to get a finance degree. Today the world of high finance deleveraging to 1/3 the size it was in 2007. That is a hell of a lot of jobs. Think millions of jobs. They are now unprepaired because they are not going to make 100k+ 2 years out of school. Expectations are going to have to be adjusted. Retooling with an engineering degree is recommended. 2 billion people in China and India want your standard of living. They already graduate more engineers than the US. If we do not have the workforce that drives innovation our standard of living will go down over time.

As for Adam's prediction of when we get out of this hole we have dug? I see us as having 2 options.

1. War. Massive world war on the scale of world war II. This is what happens under normal conditions to something like this.

2. Massive investment in the creation of a domestically produced cheap energy infrastucture.

This will only happen if adults are running the show. It will take America experimenting and willing to do it all (clean-coal, natural gas, nuclear, solar, wind, geo-thermal and yes even off shore oil). The growth of the 1990's was not by accident it was from efficiency created by information technology and just in time logistics. To create income growth we need to become the most energy efficent location to do business on the planet.

This is may create another bubble but at least we get something out of it, unlike the housing bubble that gave us nothing but massive debts and pissed off people.

I hope this blog was helpful to those of you looking for information besides what the realtor cheerleaders were telling you. These people are essentually used house salemen(women) they have a vested intrest in you spending more than your means. It's a tranaction based business. As Kevin said we are going to leave this up as a reference for a while.

Good luck and remember the first rule of real estate for the next 5 years. If the house was bought from 2002-2008 and they want more than they paid for it, move on as it is overpriced.

Closing Blog

I have decided to shut down the blog since most things I spoke of on this blog and in real life regarding housing and economics have come to pass. My goal was to provide a counter balance to the perma bulls and housing shills and to help anybody who would listen not to buy a home or encourage over extended homeowners to sell as soon as possible since things would only get much worse. I spoke of depression over a year ago on this blog back when the media could not even fathom the concept of a mild recession. Now the main stream media admits to a prolonged multi year recession, but they are still underestimating the full extent of the contraction of credit.

I have no intent on kicking people while they are down, but its seems that now the news has turned bearish, any posting only seems to do just that. I do not want to remind people that they might be losing their jobs, losing their homes, be unable to feed and clothe their families, be unable to retire, etc... I hope those of you who read my blog took action just like the dozens of people in real life who heard my rants on housing, economics and the stock market. I also know some people are still in denial and claim Maryland is different, but I can assure you Maryland is not.

I wish you all well and best of luck weathering this storm.

-Kevin

p.s. Adam from time to time might still post his rants.

Fraud in Charm City why paying 300k for a rowhome in idiotic due to fraud

Ed over at the city paper has been pretty busy lately doing a lot of investigative reporting on the BS going on in Canton, Fells Point, and Federal Hill and why you need to wait till houses come down to 2000 price levels before buying. (Realtors please do not email me crying because the gig is up you are a bunch of hucksters that need to explain to sellers that a 1300sq/ft rehab is only worth 180k, not 300k)

Take a look here at this amazing amount of fraud on Madeira Street. This just sickens me at how much of this bubble was total fraud on the part of the realtors, appraisers, and mortgage brokers.

This was an industry all its own in the downtown area. This is not the only street either. This was extremely common as everyone thought they were going to get rich and keep 100k plus earnings a year but selling each other houses.

But just like all bubbles the ponzi scheme ends and now we have a contraction of 70% of the businesses. In 2 years I bet that we have only 1/3 the amount of realtors left in the downtown area. The mortgage brokers are now gone and the appriasers left are under such a microscope and pressure from the banks to comp down that they are making less than half of what they were before.

I'd recommend anyone thinking of buying now take a look. This will explain why waiting 2 years for the bottom to fall out makes sense. Till then rent for cheaper than it costs to buy.

Here come the state and local tax increases...looks like Marty and Shelia will squeeze blood from the taxpayers

I'd like to point out that Kevin and I brought this up over 2 years ago that the state and local governments needed to make big time cuts to get spending back to around 2002 levels as tax revenues are going to fall off the cliff without housing bubble injections.

Mayor Dixon warns city may consider layoffs(hat tip Baltimore Sun)

Mayor Sheila Dixon said yesterday that she would consider layoffs as one way to shore up the city's budget, which she said "does not look good." She said that agency heads are reviewing all capital projects to see if any can be postponed so belt-tightening won't "impact people's livelihood." The city expects a dip in revenue from its recordation and transfer taxes because of the slumping housing market and fewer dividends from investments.

Now we find out what Shelia is made of. The cheerleader realtors in the city are going to have to get out the pom poms and offer to wash your car and do your house chores if you think this is not going to crash the city even more. Shelia does not care about those in Canton, Fed Hill, or Fells. Your just supposed to pay your crazy taxes that are double the county and let her and the cronies on the council spend money on social engineering and handout in East and West Baltimore. Those of you in the city deserve what you get.

The council is not going to layoff that many people. Why? They are the biggest voters. So what's next? Let's tax the people that actually make money, the new settlers in the neighborhoods near the waterfront. Hell I would not even be surprised if they pass a realtor tax, a special fee for those who make money as used house salesman(women) in the city.

Expect income, real estate, and fees(think like 50 bucks for a visit to city hall or to call 311 next) to go up dramatically. What's next the introduction of a 50 cent drink tax on all beer and liquor per drink to help make up for the shortfall like Pittsburgh? (This should go over well considering the only reason most people come downtown is to eat dinner and entertainment.)

As more and more people leave the 350k mortgaged rowhomes in Canton that are only really worth 185k (and those above the park forget about it) maybe the city will finally realize that it needs to come up with a real tax plan similar to the way San Francisco and Boston did during the 1970's.

Now for the State; if Mike Miller and Martin O'Malley are not working on cuts now we might be the next state after California asking the Treasury for a bailout.


State weighs cuts in critical needs

Amid a gloomy economy that has severely eroded tax collections, Gov. Martin O'Malley is considering steep cuts to public education and health care programs and might ask state employees to take a six-day unpaid leave.

The spending reductions under consideration total $397 million in a state general fund budget of $14billion, according to a memo obtained yesterday by The Baltimore Sun. Budget Secretary T. Eloise Foster, who compiled the list, said in the memo that the cuts "will certainly impact services and programs," compared with previous budget-cutting that eliminated "non-contentious items."

The governor learned last month that the state faces a $432 million revenue shortfall that could rise to nearly $1 billion in the next fiscal year. It is a dilemma facing many states, as the foreclosure crisis and credit crunch shrinks the U.S. economy and ripples across the globe.

O'Malley needs to cut only about $250 million immediately, because he can tap into a relatively small pool of surplus funds. But he said he might make more trims as the economy continues to slide.

Well if you a school teacher, a state employee, or in public safety I'd say you are going to be lucky to get pay freezes for the next 3 years. Either that are major layoffs. Could be worse I suppose we could be like a lot of cities in California that had to declare bankruptcy



Politicians need to put aside the blame and work this out.

House minority leader Del. Anthony J. O'Donnell said the budget needs to be pared but argued that O'Malley should have predicted and been better prepared for the economic downturn. O'Donnell and other Republicans are calling for a statewide spending freeze.

"Unfortunately, the governor is responsible for creating the problem," said O'Donnell, of St. Mary's and Calvert counties, "through irresponsible spending increases on the heels of historic tax increases at a time when the economy was turning south."

O'Malley spokesman Rick Abbruzzese dismissed the minority leader's criticism. "Did Tony O'Donnell predict the banking crisis? Did he predict Lehman Bros. would file for bankruptcy? Did he predict the federal government would have to step in with a $700 billion bailout for Wall Street … while a Republican president was at the helm of our national government?"

Guys come on grow up and cut the budget. I do not want to pay higher taxes. We have local governments that are going to fall off the cliff and the federal government that is going to let the Bush taxcuts expire. Maybe it's time to look at pay freezes and cut the contractors? How about cut the trips overseas? Maybe it's time for a reorg and figure out who is actually working and who is just sitting around collecting a paycheck?

Here is a list of potential cuts. (Thanks Baltimore Sun)

One thing I do not see here. How about pay cuts for the MD board of regents? Maryland already has the highest tuition of state institutions in the country. One of the reasons is the overpriced fluff and middle management. These guys think they are special and entitled. (Sounds like our Wall Street elite) Sorry the money should go to the programs not these guys. Times are tough and the 200k do nothing jobs are over. The explosion of the credit bubble will prick the education bubble finally I hope and make college affordable again as student loans increase and salaries decrease.



I've cut my budget by 15% over the past year putting the difference into savings. What have the rest of you been doing?

Have a house for sale over 417k? Better get it sold by Dec 31 or your screwed

As many of you are aware the first housing bailout bill from earlier this year temporary increased the conforming rate of from $417,000. However this ends on Dec 31. With Congress out in re-election land till after the new year expect this to expire, especially since prices have come down in California and Florida.

Check this out from Wells Fargo:

Larger loan amounts for Conforming loans:

* Higher loan limits. In certain metropolitan areas, conforming loan limits may be as high as $729,750 (Typically capped at $417,000)
* Lower interest rates: Lower interest rate than typical jumbo loans
* Opportunity: Buy or refinance a home with fixed and adjustable-rate choices
* Limited Time: Increased conforming loan limits are only available on loans closed through December 31, 2008

Larger loan amounts for FHA loans:

* Higher loan limits. In certain metropolitan areas, FHA loan limits may be as high as $729,750
* Lower interest rates: Lower interest rate than typical jumbo loans
* Opportunity: Buy or refinance a home with fixed and adjustable-rate choices
* Options: Make a low down payment and use gift funds for down payment and/or closing costs
* Limited Time: Increased FHA loan limits are only available on loans with final approval received on or before December 31, 2008

Now here's the kicker. Most of these jumbo loan homes in the past 4 years in Baltimore have been purchased with ARM's. They are getting close to reset. (This would explain the reason why everything on the market is of 2004-2007 vintage).

Check out the current rate for Jumbo's here:



Um...pushing 10%. That sucks. That's like double the interest rate of only 18 months ago.

World of easy credit:

Monthly payment: 30 Years
Interest rate: 5.000%
Loan amount: $ 500,000.00
$ 2,684.11 a month

New Reality of "normal" credit conditions:

Monthly payment: 30 Years
Interest rate: 9.000%
Loan amount: $ 500,000.00
$ 4,023.11 a month

Difference a month: $1339.00

Ouch. Now this is of course without including taxes and insurances or any HOA fee. And I am assuming your going to have 20% for a downpayment.(yeah sure everyone does) If you do not expect to pay PMI and that has sky rocketed since AIG and others have been killed by defaults.

Add in the fact that downpayment assistance is bye bye you either gotta bring money to settlement, plan on hunkering down for a long time, or walk away. That's your choices. The smart people are on the sidelines and will stay on the sidelines till the asset bubble totally deflates. The pretty much anyone who could buy in the past couple years did. The rest are either financially prudent or subprime deadbeats who now have to pay off credit cards and car loans, the hell with a mortgage.

Got to love once in a lifetime bubbles. They make intelligent people drunk and stupid about financial decisions.

As people hunker down, layoffs, stock market crash, bonuses cut, and salaries stagnant who thinks it's really the best time to buy? Maybe waiting 2 years is the better decision, it's not like prices are going to go up in the next 2 years.

Congress passes so-called bailout and Chief Chimp signs..now the "Governator" wants more for California

So anyone go out looking for a home this week? Anyone trying to sell? Guess what, the only stuff selling are things that are at 2003 levels at this point. See it is 720 credit scores and 20% down central right now and if you think your overpriced crapshack you bought in 2005 with an no money down is not underwater than I'd suggest you take a drive into West Baltimore and pick up some dope and wig out for about a decade, then maybe you'll recover your "investment".




Congress approved the $700 billion bank bailout afternoon with Bush speedly signing(must have had a pen in his hand waiting for the courier that's how quick this thing was signed) a short time later.




Although this is a housing blog I would like to point something really scary out.





Jan 19, 2001 DJIA: 10,587.59 Bush inaguration.

Oct 3, 2008 DJIA: 10325.38 Bailout Bill signed.

Now a stat like that makes me think who the hell feels good about buying anything right now? If anything this has made it worse not better for the people in the market for a home.

Now just so everyone understands this for the past 7 years people have been putting money in housing and ignoring their 401k's. Think about that. We had a negative savings rate in this country for years. Even with that the stock market went up 30% .

Some are you are thinking that your smart right?...... I'm in the money on my house? Yep if you are a baby boomer who bought 20 years ago you are. And guess who your going to screw? Boy are there is going to be some fuming GEN Xers when someone younger than them buys a house for 40%-50% less than they paid.

The money that was in the stock market is back to 2001 levels. This is even worse when you take into account inflation. So what's my point?

The way this has always worked is that when stocks went down suddenly housing would stop going up. It would usually recover 2 years after the stock market.

This time it is totally different. The housing bubble caused the stock market to crash. This has never happened before.

The stock market will bottom before housing. Average bear market is a 30% drop. This 700 billion puts a floor on stocks but does not put a floor on housing.

The stock market will recover as soon as things settle down in the credit market. My guess is that's a year or two away. The stock market will start its run when we are coming out of the tunnel of the obvious recession.

Now for all those talking depression I'd like to say I do not think we are going to enter a depression. This could be worse than the 1980-82 doubledip but we will come back. (I'm all for an alternative energy bubble. I think that's the only way out of our economic and national security mess. We need electify the auto fleet. We need the rail transport system to electrify as well to get the trucks off the road. To do this we need to build a nukes for baseline power and make big investiments in solar and wind. This along with drill baby drill as even if we get off of oil for transportation we need it for so many other things.)

Housing on the other hand? Well when the stock market makes it back it's loss starting in 10/07 and then adds another 20% then should have our housing bottom. Why? That 20% means that incomes are rising in a deveveraged environment.
This means that housing will more than likely come back to around 2001 levels. I know some of you think that's crazy but 2 years ago you all thought stated income loans were a good idea.

The problem with housing though comes down to this: (hat tip maryland policy)

The median wage in Maryland in 2007 grew by 2.5% over 2006. At $18.25 it is only 4.4% above the 1999 level, adjusted for inflation.

Maryland now enjoys the highest median household income among the 50 states, at $68,080. The increase seems to have been driven mostly by income growth among affluent and upper-middle class Marylanders, not middle-class and blue-collar workers. Moreover, Maryland’s high median family income masks great disparities among Maryland’s localities. Maryland includes two of the nation’s wealthiest 10 jurisdictions over 250,000 population (Montgomery and Howard Counties), while Baltimore City has the eighth lowest median income of any jurisdiction over 250,000 population.

The gap between high-and low-earning workers in Maryland remains persistently high, mirroring national trends.

68k at 3x income with 20% down = $204,000-$40,800 = $163200 loan

$163200 with a 30yr fixed at 6.5%(no points) =$1,032 P&I

Add in: Property Taxes (1.1 for Baltimore county)
Insurance (700 yr is average for md this is up big time since 2000)


What the average mortgage across the state should be: $1223 a month


Somehow I think we have a long long way to go. It may even overcorrect as this bubble was big. If incomes go dow and unemployment goes up....well you get the picture.

Housing will move to the back of the line for a while while we muddle our way out of this mess. We have highter costs for everything else that will take precidence over housing.

Now something I find really funny. California, the land where this funny business in housing(not wall street) was cooked up is asking for more.

California may seek Treasury financing

California Gov. Arnold Schwarzenegger, alarmed by the
ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on
Thursday that the state might need an emergency loan of as much as $7 billion
from the federal government within weeks.
The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

Here is a copy of the Arnold letter to the treasury.





Are you freaking kidding me? I mean this 700 billion is not even close to being enough to cover the loss in housing over the next decade(think 4 trillion in depreciation before bottom folks). Calfornia is probably responsible for close to half this mess with Arizona, Nevada, and Florida another 20%. (Those of us in Baltimore we are basically at the point Calfornia was in 10/07. We all know how that went can't you wait to see 10/09 prices)

California is already in a recession and dragging the rest of us down with it. This is not funny. We are already subsidizing these pothead smoking losers in Orange County with this bill. I think it would be better to let the state go bankrupt. Yes let it fall apart and reorganize. This is the only way to teach these arrogant jerks how to live within there means. This will cause them to really deal with the illegals problem as they cannot afford to subsidize them anymore.

Personally I don't think the treasury will do this. This will setup a crazy precidence. Other states will follow. Maryland alone has a $1billion dollar hole even after sky high tax increases.


So anyone think that paying 400k for a 100 year old home in Canton or Fed Hill was a smart thing to have when everything else is going up? Yeah good luck with that deflated to reality price of 185k house in 2012.