The San Francisco Chronicle ran an article about how the increasing number of foreclosures are affecting entire communities.

“The losses (from foreclosures) are extending to neighbors and to entire communities,” said Martin Eakes, chief executive of the Durham, N.C., Center for Responsible Lending, which released the survey on Tuesday. “The spillover effect is disturbing because we’ve only just begun to see the foreclosures.”

Based on federal home loan data, the group said 22,000 homeowners around the nine-county Bay Area who took out subprime loans in 2005 and 2006 face home repossessions. Those foreclosures could depress the values of hundreds of thousands of neighboring homes by $11.6 billion.

“Foreclosures aren’t causing prices to fall - it’s a symptom of the whole thing unraveling,” Thornberg said. “If you had no foreclosures at all, prices were still going to fall. (Foreclosures) may accelerate the process, but it’s a process that has to happen one way or another because when you look at (home) prices relative to income, it’s completely insane.”

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Marketwatch has an article that highlights some things going on with California’s economy that suggest the state may be in recession.

“California seems to be sliding into recession,” wrote Jan Hatzius, chief economist for Goldman Sachs, in a research note earlier this week. Hatzius based his appraisal on the sharp increase in the unemployment rate in the state from 4.7% in November 2006 to 5.6% in September 2007.

How many of those newly unemployed recently lost jobs that were related to housing? That includes mortgage lending, real estate appraisal, real estate agents, and construction. Of those newly unemployed, how many have massive mortgages themselves and instead of saving any profit they earned over the past few years spent it on shiny toys and lavish vacations?

“California is in for at least another year of economic doldrums,” said UCLA economist Ryan Ratcliff in his latest forecast published in September. But California will not sink into a recession unless a second source of weakness develops, or the housing market worsens more than expected, Ratcliff said.

Ah, here we have another economic expert predicting that things will turn around in a year. Pay attention to the last part of what he said - the part about everything being OK as long as the housing market doesn’t worsen more than expected. How much more of a downturn is expected? With mortgage lending standards tightening every day, major banks writing off massive amounts in losses, and home [asking] prices still astronomically higher than what typical buyers can support, it’s difficult to see how things can get get better any time soon.

The state of California isn’t taking any chances. Gov. Arnold Schwarzenegger has ordered state agencies to plan for a 10% cutback in their budgets for next year, figuring that tax receipts could fall significantly along with home prices.

Again, real estate seems to be the problem again. With lower transaction prices, and current owners likely to argue for lower value assessments, the state is expecting lower tax revenue and is acting to reduce budgets to avoid problems. Is 10% enough to be safe?

A few years ago and up until a few months ago, this was predicted by many bloggers and independent authors, yet they were dismissed by the experts as being overly negative doom-and-gloomers. Did they know something the experts did not? Key fundamentals were ignored and instead the Kool-Aid was going around.

Kool-Aid, Economy, Real Estate | 1 Comment »

According to Yahoo News, Federal Reserve Chairman Ben Bernanke said economic problems, including the severe housing slump, will cause business growth to slow in the months ahead.

Bernanke said he and his colleagues believe economic activity will “slow noticeably in the fourth quarter” compared to the 3.9 percent pace of the third quarter.

“Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction begin to wane,” Bernanke told the JEC.

Many economists believe the economy’s maximum point of danger of falling into a recession will occur in the early part of next year. A variety of problems from the steepest housing downturn in more than two decades to a severe credit crunch, surging oil prices and a falling dollar have roiled Wall Street in recent days, triggering big plunges in stock prices.

I guess the first step is to acknowledge that there is a problem.

Bernanke said the Fed plans to issue a proposal by the end of the year that would create new standards and rules for all lenders that issue subprime loans, mortgages offered to borrowers with weak credit histories.

What will these new standards and rules do the housing market? Is a set of rules really necessary? The free market will determine the rules for lending, as we’re seeing now.

Economy, Real Estate | No Comments »

The Financial Times is reporting that Citibank has to write off more losses due to heavy subprime mortgage exposure.

The bank is taking another $8 billion to $11 billion hit to revenues because of “significant” declines in the $55 billion or so in U.S. subprime mortgage exposure it has in its securities business. That adds up to a profit cut of $5 billion to $7 billion.

As a result, Charles Prince decided to step down as Citibank CEO (though his compensation package is probably nothing to complain about).

In a statement Sunday night, Prince said “it is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down. This is what I advised the board.”

Just a few short months ago, Federal Reserve Chairman Ben Bernanke claimed that the mortgage mess is contained. $11B in losses due to bad subprime mortgages by a major bank hardly seems like a ‘contained’ problem.

At Drinking Is Believing, we’re not here to make predictions or give any advice, however it’s difficult to see how the Real Estate market will get better any time soon.

Financial Market, Real Estate | No Comments »