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How The Wall Street Reform Act Hurts Main Street

Wanna get back at those greedy, Wall Street guys?  That seems to be the populist message in the Financial Reform Act.  Hidden in the legislation, is a host of regulations that reduce those bankers' competition, by regulating non-bank financial institutions (and leaving bankers exempt), and increasing closing costs to home buyers through the elimination of yield spread premium (YSP). 

Yield Spread Premium is a way for home buyers to reducee closing costs, through acceptance of a higher note rate on their mortgage.  

Florida mortgage originator Dan Poulos gives us a righteous, ranting lesson on how this bill will hurt California home buyers:

Higher Mortgage Rates Could Be Tempered By Anti-Consumerism

Higher mortgage rates, in the near-term future, is the conclusion of many economists.  They cite an expansion of the money supply, the eventual end of the Fed's mortgage-backed securities purchase program, China's willful selling of US Treasury securites, and a recovering economy.  Logic dictates that all those factors would contribute to 70-s style hyperinflation.  I agreed until it hit me...

A generation of Americans may have changed their spending habits forever.  If sustainability is the new black dress, frugality is the new accessory.  Consider this parsed comment by my partner, Sean Purcell:

Religion and economics are very, very similar. They are both based on faith rather than any real, empirical evidence. For decades now economics has tried to establish itself as science in our institutions of higher learning. I remember in the 80s when I was a Psychology major we were doing much the same thing. But Religion, Economics, Psychology.. these are all Social Studies not Social Sciences.

American consumerism was driven by belief in a grander future due to an underlying model.  Our post-9/11 model was debt-driven.  At one point, a full percentage point of our GDP came from withdrawn home equity; we were robbing Peter to buy from Paul.  That strategy was hardly sustainable and not in concert with the frugalty associated with the "American Spirit".

The Fall, 2008 financial meltdown changed that flawed belief in deficit spending (for households).  As 'wealth" evaporated, a function of that "wealth", (i.e spending), evaporated as well.  Plainly put, you're less likely to spend an extra hundred bucks each month if you lost five grand in your mutual fund.  I can't scientifically tell you exactly how much that will affect future GDP but I'm speculating that it removes at least 1-2 percentage points from it.  Tightening the belt is not just removing the frothy spending; it contracts spending to the point where you try to "get back your losses".  Not only will you cut back on that former expenditure of $100/month, you'll cut back MORE to save $100/month- and you'll do that for the fifty months it takes to get back your losses.

Patagonia is cashing in on the rebirth of American frugality with it's T-shirt.  I saw at least ten people wearing these shirts on my vacation to Catalina Island.  Americans are questioning restaurant checks, asking for itemized business proposals, and spending time on hold to understand why the local utility provider is collecting "franchise fees" (HINT:  it's a tax).  We're embracing the simple life and de-cluttering our garages, homes, offices, and lives.  It is no longer fashionable to conspicuously consume because your neighbor is wondering if his tax dollars are bailing out the mortgage you used to buy your Hummer.  We're seeing inconspicuous consumption in the luxury market.  Wealthy people are not comfortable displaying signs of opulence (even though they earned it):

"Luxury shame is very real," says travel industry analyst Henry Harteveldt of Forrester Research. "When your neighbors are losing their jobs and you're doing well, you don't flaunt your success. Of course, there are still people who will continue to enjoy the fruits of their success. They may still rent the beachfront home and continue to fly in the G5 and tool around in the leased Bentley, but they're not going to go home and brag that that's what they did on vacation."

This recession is different from the last big one.  The last severe recession was in the early 80's.  The Baby Boomers led us out of that recession because they were 20-40 years old; they were still in the acquisition part of the family wealth cycle.  Today, those folks are 45-65 and facing reduced income and a longer life span; they're in the conservation part of the family life cycle.  Their political heroes have changed from Ronald Reagan (who gave them more money to spend through tax cuts) to Barack Obama (who tells them they won't have to pay for anything).  For President Obama's "Care State" to work, he'll have to raise income taxes on the people still working...that "ain't goin' over so good".

Cheap is cool now because cheap suggests future cash in the bank.  If a generational shift from conspicuous consumption is underway, economic expansion will be reached with  1-3% GDP growth rather than 4-6% GDP growth.  Slower growth rates will contract P/E ratios, leading to stagnated stock prices.  Slower growth will lead to lower price/rent ratios, leading to stagnated real estate appreciation.  

Slow and predictable growth could lead to a long period of stability in the mortgage markets.

Today's Federally-subsidized mortgage rates are a full percentage point below the real cost of mortgage capital.  Jumbo loans, with no Federal guarantees behind them, are currently 6-6.25%.  A growing economy could see those rates rise to as much as .7%.  When the Fed pulls its mortgages subsidy, we could see conforming mortgage rates rise to about .25%-.5% below the jumbo loan rates.

What this means is that we could see conforming mortgage rates (under $417,000) jump up into the 6's and fluctuate from 5.75% to 6.75% for another 5-7 years.  Admittedly, that's materially higher than the current level but a far cry from the double digit mortgage rates world of 1977-1990.

What's that mean to you?

If you have a loan that can be refinanced before the end of the year, do it.  If your loan can not be refinanced, and you have an adjustable rate mortgage, you might not have to hit the panic button. Most ARMs adjust to LIBOR plus 2.75%.  Today, that adjustment would go to about 5.0%.  Your ARM could very well remain in the 5-6.5% range, for the next five years if my newfound theory of anti-consumerism is correct.

Is Texas Now The Golden State?

Many Californians who are close to me have heard me query this; " If the last 50 years were the 'California half-century', will the next 50 years be known as the 'Texas-half century?' "  I've had this conversation with Texas-phile Jeff Brown, mortgage partner Sean Purcell, and Texas buddy and money manager Nick Ripostella.

My thoughts:

1- While I warned that Texas' property taxes were a reason not to invest there, it appears that California's "buy now, pay later" approach (Proposition 13) is broken. 

2- California's march to socialism is an experiment gone awry.  If left unchecked, it will penalize the net producers in favor of the net consumers.  That penalty will drive producers to a state like...well, Texas.  Sean Purcell's argument was that the creative genius in California (ie- the Hollywood types) are decidedly liberal and would never leave.  My counter to that argument was that those creative types are still capitalists at heart, despite what they portray to the public.

3- Texas is more business-friendly and hell bent on a constructive immigration policy that continues the American tradition of new immigrants pushing the whole economy upwards instead of the California model of vote-buying through appeasement.  Texas' focus is on assimilation while California's is on victimization. 

4- While I believe Texas is advantaged today, California leads the nation and arguably the world in intellectual capital and innovation.  We thrive in spite of the actions of our obstructionist Legislature.  This (admittedly "homer") idea maintains my belief that California will eventually prevail.

I'm not alone.  The Economist must have been reading my mind:

Plenty of American states have budget crises; but California’s illustrate two more structural worries about the state. Back in its golden age in the 1950s and 1960s, it offered middle-class people, not just techy high-fliers, a shot at the American dream—complete with superb schools and universities, and an enviable physical infrastructure. These days California’s unemployment rate is running at 11.5%, two points ahead of the national average. In such Californian cities as Fresno, Merced and El Centro, jobless rates are higher than in Detroit. Its roads and schools are crumbling. Every year, over 100,000 more Americans leave the state than enter it.

This was the overarching theme in my hypothesis.  When you create an environment that gives middle-class people an incentive to build wealth, you have a winning formula.  Think of Hollywood in the 40's and 50's.  Think of Long Beach, for the defense workers,  in the 50s and 60s.  Think of Silicon Valley, for high-tech,  in the 80s and 90s.  Think of San Diego , for life sciences, in the 90s and this decade.  Californian entrepreneurs innovate and invent and of jobs (should) follow suit.  

The second worry has to do with dysfunctional government. No state has quite so many overlapping systems of accountability or such a gerrymandered legislature. Ballot initiatives, the crack cocaine of democracy, have left only around a quarter of its budget within the power of its representative politicians. (One reason budget cuts are inevitable is that voters rejected tax increases in a package of ballot measures in May.) Not that Californian government comes cheap: it has the second-highest top level of state income tax in America (after Hawaii, of all places). Indeed, high taxes, coupled with intrusive regulation of business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy. Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years.

This is the real chokepoint in California; our Legislature.  They just don't understand the California with Ronald Reagan at the helm.   They have irresponsibly spent money, in pursuit of the great social experiment, to the detriment of the innovators and inventors.  The result?  Businesses, and people, are leaving California for better opportunities in...

Good Lord....TEXAS????  Even LA Jollan, Arthur Laffer is eyeing the Lone Star State:

American conservatives have seized on this reversal of fortune: Arthur Laffer, a Reaganite economist, hails the Texan model over the Gipper’s now hopelessly leftish home. Despite all this, it still seems too early to cede America’s future to the Lone Star state. To begin with, that lean Texan model has its own problems. It has not invested enough in education, and many experts rightly worry about a “lost generation” of mostly Hispanic Texans with insufficient skills for the demands of the knowledge economy. Now immigration is likely to reconvert Texas from Republican red to Democratic blue; Latinos may justly demand a bigger, more “Californian” state to educate them and provide them with decent health care. But Texas could then end up with the same over-empowered public-sector unions who have helped wreck government in California.

Alas, the Economist's conclusion is identical to mine.  I believe that the inevitable California bankruptcy will pave the way for a reversal...a rebirth if you will.  Sharp leaders like Tom Mc Clintock will lead this "rebirth" and restore the gold to California's beautiful coastlines and mountaintops. 

I gotta stay positive because I'm an optimist at heart.  After all, that's why I moved here.

Expect June 2009 Mortgage Rates To Improve

UPDATE:  Now locking all loans closing before June 21, 2009.

The catastrophic mortgage rates meltdown is almost over.  The mortgage-backed securities market dropped significantly, driving retail par mortgage rates from 4.5% (8-9 days ago) to a high of 5.375% (Wednesday).  While many cautioned that mortgage rates were headed higher, I separated personal opinion from my analysis and suggested that bond traders overreacted.  I advised borrowers to suspend the rate lock decision until retail mortgage rates came back down to 5% or better.  I expected that to happen next week. 

I was wrong...

...it just happened.   One of our leading banks "repriced" this afternoon and the retail par rate is now 5.0%. 4.875% has a quarter-point cost.  If you have to close next week, 5.0% isn't a bad rate to grab.  I think we'll see the rest of the lenders follow this big bank's lead, early next week.

What could make this mortgage rate recovery advance to 4.5% next week?  Remember, mortgage bonds drive retail mortgage rates so we want to be looking for bond-friendly events. Investors look for safe havens when there is unrest in the world.  US Treasuries and mortgage-backed securities are a favorite safe haven.  If North Korea launches more missiles or Iran keeps taunting Israel to the point of armed conflict, investors might buy bonds which would drive down mortgage rates.  Increased Fed mortgage market intervention is likely too.

What could reverse the current recovery and send mortgage rates to 5.5%?  Inflation, or the fear of it, is the market enemy number one.  If traders think the economic recovery is nigh, we could see rates inch up again.  I think that's unlikely; the economic data we receive suggests the opposite.  If traders get back on the McClintock-Gross bandwagon and think that the US Government is about to declare bankruptcy, we'll see higher mortgage rates.

My money's on a sputtering economy, a pugnacious North Korea, an annoying Iran, and a sustained mortgage rates recovery.  I'm looking for rates to get back to to 4.75% by the end of next week.

Apply online now.  It's really simple and should take about 20 minutes.

June '09 Mortgage Rates May Not Rise, Despite Mortgage Industry Insiders' Opinions

Mortgage rates have jumped in the waning days of May, 2009.  This meteoric rise is striking fear into the hearts of home buyers, folks looking to refinance, and mortgage industry professionals.  I noted that three people triggered this collapse and suggested that locking-in a mortgage rate tomorrow, might just be a bit hasty:

What’s this mean to you? Locking in your mortgage rate is probably a hasty decision right now.  Expect Ben Bernanke to speak by Friday in his gentle, reassuring tone.  Tim Geithner should be front and center, calming down those impetuous bond traders tomorrow.  Mortgage rates should drift down by the end of next week.

The Chinese, Tom McClintock, and Bill Gross are all correct; the US government’s actions are inflationary and destructive.  They are all correct but early.  The time to panic will be this fall; hopefully you’ll do what you need to get done by then.

Why am I, a self-proclaimed “free-marketeer”,  banking on the Government to bail us out of this little mess? If you’re a regular reader of Mortgage Rates Report, you know that there are two sides to me:

1) conspiracy theory loving member of the Vast Right Wing Conspiracy (who is unhappy with our nation’’s course in fiscal policy) and …

2) buttoned-down, former Wall Street securities broker.  The latter side of my personality is more interested in the analysis of Government policy rather than the former side’s opinion. Lend your ear to the former securities broker rather than the crack-pot Libertarian.

What this means to you, the potential home buyer or mortgage shopper, is that my opinion, as far-flung as it may be at times, is subordinate to my analysis of the situation.  I tend to hold a contrarian opinion to the traditional,  mortgage industry, knee-jerk reactions to market movements.  While most originators scream “Rates are going up ! “, I want to be looking beyond the next 48 hours and trying to discover what might happen next week and next month.

I said, earlier tonight, that the Federal Reserve Bank has a boatload of money shelved to spend on the purchase of treasury bills and mortgage-backed securities, in order to provide access to cheap capital during the recession.  While I’ve never met the man, I have been reading Fed Chairman Ben Bernanke’s position papers, about the Fed’s role during The Great Depression, for years:

Despite the varied theories espoused by many establishment economists, it was none other than the Federal Reserve that caused the Great Depression and the horrific suffering, deprivation and dislocation America and the world experienced in its wake. At least, that’s the clearly stated view of current Fed Chairman Ben Bernanke.

I don’t expect him to change his posture because China waived its economic saber at one of his subordinates.

and now…

Here comes the excuse spin for MASSIVE Fed intervention over the next few days:

The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Demand for some of the Fed’s emergency programs has waned as the grip of the credit crunch loosens, with loans to banks shrinking 38 percent since Jan. 1. The main tool to keep the central bank’s holdings from falling from the current $2.1 trillion would be more purchases of Treasuries, said analysts including former Fed Governor Laurence Meyer.

Demand for Fed loans has waned so it need more assets for its balance sheet (rather than reducing its liabilities).  What this means is that they intend to inject more liquidity into the system because they don’t see an economic recovery underway… just yet.  The unexpected jump in mortgage rates could stall the de-leveraging of the American consumer before fiscal policies could gain traction.  Make no mistake about it; the Fed wants everyone to have a shot at a 4.5% mortgage rate and will use all of the arrows in its quiver to get those mortgage rates down…

…until the close to a billion arrows left are all gone.

Don’t panic just yet. I’m sometimes early in my predictions but I think Bernanke’s going to be writing some big checks in the next 7-10 days.

Apply online now.  It's really simple and should take about 20 minutes.

Higher June '09 Mortgage Rates? Not So Fast

We’re in the “Era Of Finger Pointing” so I”ll just pile on; mortgage rates have skyrocketed in the past week and it’s all the Chinese, Tom McClintock, and Bill Gross’ fault.

Tom McClintock is a  California Congressman (and former gubernatorial candidate).  Congressman McClintock wrote an opinion piece, in the Washington Times this past weekend, that suggested that the budget crisis in California foreshadows the inevitable national crisis:

What can California do? Its credit is stretched to the breaking point, and increasing tax rates now produces decreasing tax revenues. Its deficit vastly exceeds resolution by conventional budget reductions. There is no line item labeled “waste,” and the state’s deficit vastly exceeds the truly obsolete and overlapping programs strewn throughout its budget.

McClintock’s summary and warning:

The decline and fall of the California Republic is a morality play in the form of Greek tragedy. Before dismissing California’s agony as the just price for its hubris and folly, though, heed this warning: Congress is well under way toward imposing the same policies on the rest of the nation. California is just a little further down that road.

Bill Gross is perhaps the most prescient fixed-income money manager in the world.  He’s often known for being early but correct.  Mr. Gross suggested that America’s soverign debt might lose it’s rock-solid AAA rating and that we’re headed for the junk bond heap:

Bill Gross, manager of the world’s biggest bond fund, warned on Thursday the United States will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure.

Throw in the unsolicited money management advice from our largest creditor, the Maoists, and you have a recipe for a panic run on mortgage bonds.

Mortgage rates responded appropriately; the mortgage-backed securities market sold off about 3% in the last five days.  This means that a 4.5% mortgage rate, that cost 1 point a week ago, costs 4 points today.  This is a short-term overreaction.   Moody’s rating service, mostly owned by Friend of Obama (FOO), Warren Buffett, reaffirmed the US Treasury’s Aaa (highest) rating today:

And today, Warren Buffett’s Moody’s (MCO) went ahead and decided to kick sand in Bill Gross’s face yet again. How so? Moody’s affirmed the U.S.’s Aaa rating, arguing that “the U.S. economy’s long-term resilience and key role in global affairs should bolster its ability to resume a strong performance following the current recession.”

In addition to the Gross-slap Warren Buffett administered today, the Fed still has $600-700 billion earmarked to support mortgage-backed securities.  This means that they can buy a bunch of mortgage bonds, to bid up the lost 3% and drive rates back down into the 4’s.

Is this crazy? Why are we borrowing from Mao to subsidize Joe’s mortgage?  The answer lies in the depression recession war; we gotta subsidize housing by any means available if we want to pull out of the economic nose dive- even if it means we have to bribe “Big Daddy Buffett” to git ‘er done.

What’s this mean to you? Locking in your mortgage rate is probably a hasty decision right now.  Expect Ben Bernanke to speak by Friday in his gentle, reassuring tone.  Tim Geithner should be front and center, calming down those impetuous bond traders tomorrow.  Mortgage rates should drift down by the end of next week.

The Chinese, Tom McClintock, and Bill Gross are all correct; the US government’s actions are inflationary and destructive.  They are all correct but early.  The time to panic will be this fall; hopefully you’ll do what you need to get done by then.

Apply online now.  It's really simple and should take about 20 minutes.

How Important Are First Time Home Buyers To the California Real Estate Market?

I asked my LinkedIn community how important first time home buyers were to their (local) real estate market. 

Rosemary Joles of San Diego said:

Many of the San Diego first time home buyers thought they had been priced out of the market at the top of the real estate boom. They now are beginning to realize they can fulfill the dream of home ownership again here in San Diego. 50% of my business is first time home buyers, so they are extremely important to me. In addition they are very important to the revitalization of the housing market as a whole. Especially since they make up 41% of the current market share.

I agree, Rosemary.  Two years ago, I warned of the impending collapse of the under $500,000 market in San Diego County.  Last year, I thought that market would be robust this year and that the $500,000- $1,000,000 market would suffer due to lack of available financing.  As it turns out, I was right both years.  I think we'll continue to see "bargains" in the under $500,000 market, well into 2010 and increasing value in the mid-priced homes, as its prices collapse.

Will Handley, a Los Angeles home inspector said:

First time buyers are the industries life blood. My business expands and or contracts based on the healthy in-flow of new first time buyers into the market. With employment numbers in decline, the corporate transfer client base is shrinking as well. Thank goodness for the exceptionally robust REO market.

Amen, Will.  The REO market (foreclosed homes being offered by the bank) isn't just healthy for the real estate industry, its healthy for the economy if we intend to battle back from this recession. 

John Pucciano, a REALTOR in the DC-area, remarked:

At this stage, particularly with the $8,000 stimulus credit for first time buyers, low interest rates and affordable housing, first timers make up more than 40% of my business. This appears to be more than a local market experience (see resources below). While they do require additional effort, it is very satisfying to help the first timers progress to home ownership. I have been making a concerted effort to reach out to them.

John's correct.  The $8,000 tax credit, for people who have not owned a home in the past three years, is akin to federal bribery.  Simply put, the Government is willing to give you eight grand if you'll buy a home between now and December 1.  I think the problem is that many first time home buyers either:

(a) don't know that the program expires December 1, 2009
(b) don't believe the Government will stop the program.

I can't intelligently speculate about the unpredictable actions of our Government but I do know that its prone to do whatever will garner them votes.  Unemployed, unhappy people don't vote for the party in power so take that into account.

San Diego Mortgage Rates Report: January 14, 2009

The US Treasury Department has been supporting the mortgage bonds market, in order to keep mortgage rates under 5%.  I cited two reasons why sub-5% rates might not happen:

1- Capacity: Lenders don’t have the horses to ride since they laid off so many workers in 2008.

2- Greed:  Lenders typically made a loan at a rate and sold it for about a half a point profit.  The improvement in mortgage bonds allowed lenders to fatten up their margins and make as much as 3% of the loan when they sold it.

I think the real reason was more in line with my first guess; capacity.  What I didn’t realize was that the mortgage lenders were out of money.  Well, sort of.  To understand this concept you have to understand the “flow” of mortgage loans.  The big banks, like B of A, Citi, and Wells, loan direct or buy loans from other lenders and brokers.  We “commit” those loans to them and they sell the loans off to Wall Street.  If my company loans you $300,000, we’ll sell it to a bigger bank for $303,000, and they sell it to Wall Street for $306,000…except…

They don’t really get paid but once a quarter.  Loans made back in October have been COMMITTED to Wall Street, by those big lenders, but the transaction (sale of the loan) only happens every three months.  While they wait for that transaction day, their funding line gets filled up.  Imagine a funding line (sometimes called a warehouse line of credit) like a big credit card,  Normally, a big bank needs, say $100 Billion for its line.  The unexpected refinance volume filled up that line quickly.

Those big lenders were “at their credit limit”…until today.

Today was this past quarter’s settlement day, which means, the big lenders sold off all of the loans to Wall Street and paid off their “super-sized credit card”. From Mortgage News Daily:

Tomorrow brings us the final day of Class A settlement, in which sellers of MBS deliver the loans in pools to satisfy the executed sale trades made over the last 3 months.  When this occurs, sellers will finally receive payment for the most action-packed month of originations in recent memory.  Up until now, the cost to originate these loans has been borne by MBS sellers, aka originators.  We have surmised that one of the several components that is causing a much-larger-than-welcome margin of MBS prices to lenders’ rate sheets is the funding constraint created by the gradual exhaustion of money to satisfy a rapidly increasing originationd demand.  As this money has dried up, it stands to reason that lenders must artificially raise rates to deter incoming business in order to avoid exceeding their funding sources.

Lenders have lots of cash to lend again. NOW is when we should see the lenders start pricing in line with the mortgage bonds market.  Mortgage rates should drop to 4.5% …IF the mortgage-backed securities market remains strong.

This is what the Treasury Department was waiting for.  Expect the Government to support mortgage bonds, so that lenders can lend out all this cheap money they have and still make a healthy profit.  It might take a few days and I don’t expect mortgage rates to stay this low for too long.

Listen to how this phenomenon might get you a mortgage rate as low as 4.5% on Radio Mortgage.

At the risk of sounding alarmist, you should be getting your ducks lined up and talking to a mortgage adviser….NOW…not later.  I’m not selling you, I’m TELLING you to…

…take action now.

 

The phone is the most effective way to contact me.

Transparency in Taxation Exposes The Cost Of Government

Dean Calbreath, of the San Diego Union Tribune, attacks Governor Schwarzenegger's sales tax plan as a regressive tax that could penalize the poor in our state.  The alternatives he offers, however could be more regressive than a sales tax:

He's also creating new taxes. If his proposal passes the Legislature, California will join virtually every other oil-producing region and nation around the world in levying a tax on the oil that is extracted within its territory – a wise measure that is long overdue.

Any freshman economics student will tell you that producers pass through those taxes to consumers.  Taxation on gasoline is the second most regressive tax one can levy (food being first). In car-crazy California, both Paris Hilton and illegal immigrants pay taxes at the pump.  If we're looking to avoid taxing the "working poor", we would be well advised to refrain from any new taxation on fossil fuels.  The argument "everyone's doing it" doesn't necessarily make it right.

Lenny Goldberg, executive director of the California Tax Reform Association in Sacramento, recommends reintroducing a rate of 10 percent for couples earning more than $300,000 per year – the top 1 percent of the population – and 11 percent for couples earning more than $600,000. He estimates that a restoration of those old tax rates could generate $6.5 billion in the first year and $5 billion in future years.

The Assembly moved to reinstate the higher rates last spring, but it failed to meet a legislative deadline. The California Chamber of Commerce calls the idea a “job killer,” saying that it would hurt entrepreneurs. But the effects of a tax increase would be reduced by a deduction in federal income taxes. And is it really true that small businesses would shrivel up and die if we returned to Reagan-era tax levels? That's hard to imagine.

Mr Calbreath is missing the boat on this one.  Taxing the most productive members of society is never well advised in a down economy.  That $5 billion is revenues can create a lot of jobs.  Reagan was an ardent supporter of less taxes on the businessman:

Reagan did institute property and inventory tax cuts, but during his tenure the sales tax was increased to six percent and withholding was introduced to the state income tax system. Under Reagan’s administration, state funding for public schools (grades K- 12) increased 105 percent (although enrollment went up only 5 percent), state support for junior colleges increased 323 percent, and grants and loans to college students increased 900 percent Reagan’s major proposal to hold down the cost of government was a constitutional amendment to limit state spending to a specified (slowly declining) percentage of the gross income of the state’s population. The measure was submitted to the voters as an initiative measure, Proposition One, but was defeated when liberal opponents pictured it as a measure that would force local tax increases.

Reagan continued in this interview that businesses don't pay, they collect taxes:

But they are fools in thinking that business somehow is getting a special break. Who pays the business tax anyway? We do! You can’t tax business. Business doesn’t pay taxes. It collects taxes. And if they can’t be passed on to the customer in the price of the product as a cost of operation, business goes out of business. Now what they’re going to do is make it easier for demagogic politicians–and you’ve got plenty of them in the state legislature–to say to the people, look, we need money for this worthwhile project but we’re not going to tax you, we’re going to tax business, now that we can do it by a one vote margin. So they’ll tax business and the price of the product will go up and the people will blame the storekeeper for the rise in the price of the product, not recognizing that all he’s doing is passing on to them a hidden sales tax.

There's the beauty of a sales tax; the true cost of government becomes completely transparent to the consumer.  The consumer gets to "vote" on government policy, daily.  If those taxes become so repressive that consumer elect to not purchase goods and services, shopkeepers and producers would put the appropriate pressure upon the government to reduce its services.

This method of taxation is most notably prevalent in Europe where it is referred to as a "value added tax" or VAT.  Criticisms are that it's mostly regressive but we can exempt certain transactions (food, fuel, housing, clothing. etc) to avoid the burden on the poor.  I love the term "value added" because consumers are reminded, daily, to justify the "value" their government offers when purchasing goods and services.

A sales tax is scary to government officials because of its transparency and voluntary participation.  In times of economic despair, consumers and producers alike will turn to the government and require them to reduce spending, which requires a reduction in services...

...and a reduced dependence on government.  Bureaucrats don't like that because, just like you, their job security becomes subject to periodic review.

The answer to declining tax revenues is always a reduction in spending.  Californians, from Crescent City to San Ysidro, are tightening their belt during these tough economic times.  Let's insist that the folks in Sacramento do the same.

San Diego Real Estate and Housing Outlook for 2009

The outlook for San Diego's real estate and housing industry remains flat for 2009.  A marked difference from last year's forecast is that the mid-priced housing units ( $500,000-$1,000,000 ) should experience steep declines whereas the low-priced housing stock led the way in 2008.

I compared my year over year prognostications, about the San Diego Housing market for 2009 and 2008, on Bloodhound Blog:

I think I underreached here.  Four times median income is more reasonable for San Diego, which suggests a median price under $300,000.  I was right; San Diego County’s median price hit $350,000 but I think I was softening the blow by stopping there.

I mentioned on another post, that weblog since disappeared, that the San Diego County housing market would bifurcate.  I suspected that any income growth would happen on the top end and that the bottom half would see little to no income growth.  Combine that with a liquidity crisis and the lower-end homes would get slaughtered while the upper-end would just decline a bit. That happened in San Diego County; lower priced homes are starting to make lots of sense right now.

Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline.  The median price may very well drop but the lower-priced homes will hold value.  The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year. Watch  Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit.  Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).

The key component to the housing recovery for San Diego remains in the ability for a home buyer to get financing.  The US Treasury stepped in to provide financing for properties under $625,000, by:

(a) increasing the loan limits for FHA, conforming and VA loans to 115% of median price (expected Jan,2009)
(b) nationalizing Fannie Mae and Freddie Mac (guaranteeing the loan from default)

The luxury home market ($1,000,000 and above) is generally a cash market.  As such, credit availability affects those housing units far less than the "rank and file" developments inhabited by those of us in the "working class". Expect SOME softness in the luxury home market but if the buyer likes the home, she'll either pay cash or have access to highly specialized financing available to the only asset-rich. 

In 2008, I predicted that the median price would decline some 20-25% in San Diego County.  While I didn't expect the mid-range housing stock to be affected by foreclosures, I did expect the lower-priced units to be the first to crumble.  My exact quote, for 2008, was that "the rich will get not rich and the poor will get clobbered".  That's EXACTLY what happened.

Communities like Oceanside, Vista, San Marcos, and Escondido in the North County declined as much as 55%, peak to trough.  The entire South Bay experienced severe declines.  Lower income areas of the City of San Diego and the East County experienced steep declines.  Some areas declined so much that their prices have retreated to point where investment makes complete sense.  The fundamental value of those properties, as measured by the price to rent ratio, is such that it's less expensive to own rather than to rent; we haven't seen that phenomenon in San Diego County since 1999.

Investors, looking to plunk 20% down and receive positive cash-flow, are finding that bank-owned homes, (as opposed to short sales), in distressed areas, are priced so well that they can achieve that objective.  We work with real estate agents who are astute at identifying such opportunities and can help you if you are quick to act.  We expect those opportunities to remain plentiful throughout the first half of 2009.

The cautious real estate buyer will avoid the mid-range priced homes ($500,000-$1,000,000) in San Diego throughout 2009. As more folks in mid-priced homes lose jobs, foreclosure activity will rise.  The problem with that price range is that there will be little or no financing available for buyers due to the loan limit of $625,000.  This means that if the mortgage payment on your Carmel Valley home, worth $1.1 million, is causing you financial discomfort, you'll be selling that home into a market where a willing (and well-heeled) home buyer can't get mortgage financing unless he puts a minimum of a half a million bucks down.

How many people do you know that have a half a million bucks liquid? 

Communities like Poway, Scripps Ranch, 4-S Ranch,Rancho Bernardo, Rancho Penasquitos, La Mesa, Pacific Beach, Ocean Beach, Solana Beach, Carlsbad, Encinitas, and Cardiff may experience declines of 20-25% this year.  The argument has always been that the homes near the Coast have special value and are somewhat impervious to a decline.  The financing vacuum will prove that theory wrong next year.  When financing for that $625,000 to $1,000,000 becomes available, expect those communities to quickly rebound quickly but...

...if "there ain't no money, there ain't no sale".

Fortunes are made in periods of chaos and unrest.  Don't wait to scoop up bargains under $400,000; those properties are about as cheap as they're going to be.  Stand ready to pounce on that $900,000 Cardiff home with the ocean view; you'll probably pick it up for $650,000 in June of 2009.