Wednesday, October 19, 2011

This 'Great Depression' Could be Worse

Congress and the Federal Reserve have suggested that the banks ease up on their lending restrictions and loan out more money to get the economy going. It’s a little like lowering the drinking age to increase liquor consumption. In essence, we need to restart the real estate party of a few years back. The “fog a mirror loans” are gone, the banks want full docs. If they had been doing that in the first place, the real estate bubble wouldn’t have happened.

Out here in California lenders are foreclosing quickly on the 300K mansions that originally sold for 100K. They are taking their sweet time on the “million dollar” homes for good reason. The hidden inventory is becoming rather obvious, a lock box on the door handle and a brown lawn.

Many Californians bought their homes and paid them off before the great housing bubble, These people are nearing retirement, and expect a slice of that “Glorious bubble real estate pricing” and its isn’t going to happen. More supply, less demand. Meanwhile, the banks out here, holding real estate, are like chickens sitting on unfertile eggs. Nothing is happening, just a lot of hope that things will improve, if given time.

Realtors drop off lists of homes sold in my area. The lists reflect short sales, regular sales, and REO’s. The short sales and REO’s reflect pretty drastic price drops for the area. The regular sales don’t. What happens here, when a home goes on the foreclosure auction block, auctioneer has an automatic bid from the bank, on money owed. If the bank is the only bidder, the home is theirs. This is counted as a “regular sale.” So if the original owner owed 600k on a first mortgage, with the homes current value at 300k, this would be listed as a sale at 600k to the bank. Hey, that looks great for comps if you are a real estate agent. So when you see the sale price, that the bank paid, that has no real bearing on what the current value is for the home.

What is hurting the banks is a concept labeled “the velocity of money.” When you have a feeding frenzy, you have high velocity. Right now, we have low velocity; no one is begging for a loan, the banks can’t find enough people qualified to loan too. The go-go party years of real estate banking are gone.

Our future looks bleaker than the historical times of the 1930’s and 1940’s. The US was pulled out of the Great Depression by war. When it ended, we were the only supplier of finished goods. The rest of the world had no production capacity to speak of. This time it could be very different, we are not the only global supplier with production capacity in need of buyers to survive.

Once you realize this, the concepts of what are happening in this world leaves doubts as to how a real and acceptable solution is an option. I have questions, but no answers and that is scary. From here you need to tell the wife, the cute student you’ve rented the spare room to will bring in a few dollars. If she calls you a Democrat, you know it isn’t going to float.


Anonymous said...

After the picture finally loaded and opened in its full glory, I couldn't help but LOL at how damn accurate it really is... Have you heard some of these uneducated fools on TV protesting on Wall Street? Pathetic how ignorant they are.

I do believe a nice touch to your picture would have been a few dozen ostriches spread out through the US with their heads planted in the ground.

I would bet that 80% of the US does not comprehend (or even give a damn) the extent of the situation.

Another great post Jim.


Jim in San Marcos said...


I can't take credit for it, somebody sent it to me in an email. I didn't realize that it's a half a meg, I'll cut it down to size a bit. Glad you liked it.

Audrey said...

Thanks for the post Jim.
A lady at school said to me yesterday: I feel like I'm about to swoon. Tell my kids I was expecting it if I faint.
And another lady: I'm just running and running all day long. Except I never go anywhere. She works as an aide at an elementary school library.
Nobody around me talks about what is happening around the world - except in code. And I don't think they know they are talking about it. They think they are talking about themselves.
I don't have any answers either.
But if language was a gift from the great ether, then at least we can still enjoy that by talking about what is happening.
Thank you.

Sackerson said...

Brilliant graphic, apparently created by Rob Sheridan (see 3rd comment here: Love the one about Europe, but the rest is so good, too.

Jim in San Marcos said...

Hi Sack

Thanks for the link. I'll edit the pic to give him credit.

frakrak said...

Commenting on ATP, agree ....
These people should make their first port of call with their protests at your Congress and the financial regulators!!!!!

As much as we are in uncharted territory ... having two, large viable economies still afloat may also soften the impact for the world???

What's the worst that could happen here? China buys Europe at bargain basement prices! India starts setting up call centers in the Big Apple, and pays cash for Silicon Valley(1 million rupees)! Australians are dispossessed of their land by Chinese mining companies and are shipped off to New Zealand as cheap farm labourers.

Seen it all before ....

Anonymous said...

Jim --

Thought you would appreciate this two part article --

AIM said...

No one is going to be able to get off this runaway train. It will fly off the tracks soon. Ouch!

Jim in San Marcos said...

Hi Anon 9:25

Thank you for the link, it is a well thought out discussion.

The trouble is, when we discuss economics, you've lost 90 percent of your audience after the third paragraph. That's why I try to keep everything I write to about one page.

Its the people who saved their money for retirement who really lose everything. It is happening in Greece right now. 50% cut in pensions. When the government falls, it will be 100%. And of course, it could never happen here-----now could it?

Jim in San Marcos said...


I can see it stretching out into 2013 before we hit that brick wall.

The Hoi Polloi expect tomorrow to be the same as today and it is most of the time. You can point at a cute chick, but you can't point to the national debt. So reality is, ask the cute chick out for dinner, the national debt can be someone else's date.

The real thing that bothers me, is that this is nobody's fault. So we can't shoot anybody that deserves it (figuratively speaking).

Anonymous said...

Jim, would you consider making a thread on what we should do during these trying times? Should we invest in gold, houses, old tools, chiquaquas? How should the average middle-class person react to survive all this financial nonsense?

Anonymous said...

Martin Armstrong of Princeton Economics who has had great stats using his model for prediction purposes says we have until 2015 before the sovereign debt crashes and all hell breaks loose.

Prepare for the worst and hope for the best.

raptor said...

I lived trough 300%+ inflation in 2 months in early 1990's...the only thing back then that saved me was I had half my savings in Dollars. (I was totally clueless back then about all the economics what money is and such things /like most of the ppl in usa today/. just luck saved me)
This time it wont help... so I think some gold/silver would preserve savings.
Other than that a house you will live into and be able to pay, seems like a good thing.
The bad thing is here in USA they mess too much and prop things... otherwise it will be over and done in 1-2 years (except if there is riots and such).
We got devastated and cleaned up in less than a year. Not that was OK after that, but at least it wasn't the UNKNOWN.... we just knew it sucks and will suck unless you get your hands dirty and watch for yourself and your family and friends..
The top of the ice cream was when I got 6$ salary for a month work ;(, happy days ;)