Economist: 'Wall Street has a California problem'

Excellent piece in today's Wall Street Journal exploring the housing slump in California, why it is so important to the rest of the country and why it defies an obvious government solution.

The Journal focuses on the boom-and-bust Central Valley town of Los Banos, where roughly 2,000 of the 10,000 houses in town are in some stage of the foreclosure process. A typical story: Claudia Pedroza, whose husband was making about $3,200 a month -- that's $38,000 a year -- as a house painter two years ago. With no money down, the Pedrozas bought a $375,000 home -- brand new, four bedrooms, three baths. Their initial monthly payment was $2,000. Here's what happened after that:

Ms. Pedroza lost her home to foreclosure when her husband's painting jobs vanished and the couple fell six months behind on their payments. The Pedrozas are now paying $750 a month to rent a two-bedroom apartment in downtown Los Banos.

The Journal points out something we all know but sometimes forget: California is different. The bubble was bigger here, the loans were dumber here, the foreclosures are piling up faster here, prices are falling more rapidly here. In short, folks, we are the problem:

Though California represents about 12% of the nation's population, its homes account for 34% of the loans in a typical mortgage-backed security, according to Fitch Ratings. "California doesn't have a Wall Street problem. Wall Street has a California problem," says Christopher Thornberg, principal at Los-Angeles based Beacon Economics and member of the California Controller's Council of Economic Advisors.

Two cents: California occupies a weird place in the American economy, and American politics, right now. It is the center of the housing crisis that helped cause the financial crisis that will probably tip the presidential election. More than any other state, it gave America subprime lending, no-money-down buying and the booming foreclosure market. Yet the state's economy and specific problems go undiscussed in presidential politics because its votes are already counted for the Democratic Party. If Americans really knew about the details of our wacky housing market -- median home prices above $500,000, house painters buying brand-new $375,000 homes with no money down, etc. -- they would probably be shocked. But there's no need to discuss these issues at presidential debates -- California is politically irrelevant. Weird.

-- Peter Viles

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Photo: Getty Images

Comments

[Hugh]

I have been surprised at how little the CA situation has been avoided. DC talks about the need to artificially prop up prices but all they are doing is stalling the market correction here in CA. I wonder what Barney Frank and Chris Dodd are smoking when they talk about the need to stop the decrease in housing prices.

[MyLessThanPrimeBeef]

Well, we Californians are very, very sorry and to atone for that, the country can just disregard our 55 electoral votes this time.

Again, sorry for the mess.

[JW]

Excellent! I would really like to hear the idiot politicians in Washington talk about this. Can you hear me, Barney Frank, Diane Feinstein, Barbara Boxer, Obama, Charles Schumer, John McCain, .............et al?

[TC]

And here I thought all working class Californians were entitled to the following:

2000+ sqft stucco box with stainless steel appliances

A brand new SUV that get's less than 20 mpg, but has a DVD player in it for the kids!!

A really really big television

[Rob]

Good article. As we head towards Christmas I can smell the Acorns roasting on an open fire...

Government "intervention" to try and bottom out the California market will inflame this economy and the taxpayer. They need to let the prices adjust themselves accordingly. Investors and fence sitters will come. I guess it will depend on the next administration to make the wrong decision...

[Cal]

http://www.mortgagemaxx.us/

Pete,

Just some fodder for discussion (and suggestion to interview the MortgageMaxx guy).

Check out the plunge in the last few weeks. I'd love to learn more about the methodology. It is great that he as a California specific index.

[mike]

california will probably bounce back as a place where people want to live. just try to live through a couple of winters elsewhere. live real time video feed will show that today oct. 22 2008 i am sweating wearing jeans and a t-shirt...

it's very uncomfortable to bundle up in layers of clothing.

[Tex]

How many times do I have to say this: politicians don't care about the CA housing crisis because the result of the election here is a foregone conclusion. Both presidential nominees' housing plans are targeted to swing states such as Ohio, Florida, and Nevada, all of which have serious foreclosure problems, but none of which had a bubble as serious as what we experienced here in CA.

Can somebody explain to me how McCain proposes to buy all the troubled mortgages at face value, continue both wars, and cut taxes for everyone at the same time? Where is this money coming from -- or is he proposing that we borrow it? I am not asking this to be flip -- I know there are a lot of Republicans on this blog and I am interested in what people think.

I'm pretty disappointed in McCain -- when he first said earlier this year that many Americans got themselves into trouble by buying properties they couldn't afford, I stood up, cheered, and even thought about switching my vote. What happened?!

[sheila]

interesting how none of the blowback in Pete's "analysis" hits any of the rapacious, intentionally de-regulated and enabled Big Bankers (lenders and investment) who ACTUALLY caused all this, with help from their cronies in the SEC, Treasury and congress during the Bush Junta. homebuyers were greedy, but they NEVER COULD HAVE DONE ANY OF THIS IF BIG BANKERS WEREN'T WAY MORE GREEDY. how many homeowners had laws and regulations changed expressly to enrich themselves in a pyramid scheme? how many homeowners spent tens of millions bribing congress to look the other way? how many homeowners have had to settle lawsuits for $8 BILLION because they defrauded customers and steered them from fixed, low interest mortgages they could afford and qualified for, into high-fee, risky mortgages? exactly. none.

as always, the right wingers want to point downward to the little guys and blame them for everything their corporatist government causes, while the 700 billion elephants in the room all get their taxpayer-sponsored pedicures, golden parachutes,mansions in the hamptons, and not only keep their jobs but get highly-paid "consultant" positions to administer taxpayer dollars to themselves and their cronies, which do not have to be made available to borrowers. "we" are not the problem. "we" are a symptom of the problem, which is excessive cronyism between Big Business and government. they couldn't bilk us without our complicity, but that's what this was, not the reverse.

i swear, it's like a form of insanity, or maybe Stockholm Syndrome - no matter how CORRUPT AND IRRESPONSIBLE republicans are, no matter how they USE and EXPLOIT their "true believers" to maintain power to enrich their "base," no matter how mercenary and outrageous their blatant power and money grabs are, some people will still stubbornly "stay the course" while mumbling about flag pins or middle names. it's as though facts can't penetrate the brainwash-helmets worn by the dittoheads. you are totally lying to yourself if you think that the republican politicians will EVER look out for your interests, and if that simple fact, proven by overwhelming evidence, doesn't decide this election, then "we" are totally doomed. personally, i fear that this corporate fascism is already so entrenched that democracy is already lost.

[The Original RZ]

I'm always nervous of talk to keep home prices from declining. No, they need to correct! To keep them high is to slap us responsible non-buyers in the face.

[Rob]

Oh Sheila, Sheila.... we can always count on one of your anyone-but-Bush tirades, thank you. Who exactly is this "little guy" in your conspiracy theory? The broker, banker, appraiser.... maybe the unqualified homeowner?

[Cal]

mike:"it's very uncomfortable to bundle up in layers of clothing."

It is also uncomfortable retiring with nothing.

The mythical California "weather premium" doesn't mean that a person has the economic ability to pay for housing. It means that more people live here and that fewer can afford to purchase homes (thus LA county with its renter majority).

There is a distinct difference between wanting to do something and being able to do something.

[smrr]

"California is different"

Hilarious. That was the housing bull mantra on why it was not a bubble. "California is different. People want to live here."

Referring to California bubblocity however, it's entirely accurate.

[smrr]

and yet feinstein and boxer's position is they think they have to maintain the bubble..... as peter pointed out in the bailout legislation "maintain housing values" ridiculous

even npr is waking up and saying it doesn't pay to keep people in overpriced homes when they can rent for 1/2 the price next door.

[LA Land Fan]

I do think there is the California/Nevada/Florida market. And then there is everyone else. I'm the last one to want to prop up the market here. I knew there was a bubble here and it was unsustainable. But I do think when politicians talk about homeowners in trouble, they are probably talking about everyone else. There are some really hurting markets out there that had nothing to do with bubbles and subprime, but loss of jobs. Didn't someone buy a house in Detroit for a dollar? A commenter above was right in describing the market in California as correcting instead of declining. And I think there are some real hurting people are there in middle America, and we've got to think outside of our LA bubble to see it.

[MyLessThanPrimeBeef]

I will be positive and make a couple of suggestions.

1) Palin returns her $150K fancy wardrobe.

2) Obama donates some of that $150 million contribution from September to the poor....like $100 million. I think if you are going to vote for bailing out Wall Street fat cats, that's the least you can do.

[waitingitout]

Wow, Sheila. For a minute I thought I stumbled onto moveon.org by mistake.

[anonymous]

Hey Peter, let's not forget Nevada. Last week the RJ reported the economy in Nevada is the worst in the nation, and the housing market mirrors California. The politicians aren't addressing Nevada, either, and it's one of the states that's up for grabs.

[fresno dan]

I live in Washington DC metro area (hey, I'm a microbiologist) and I was looking forward to going back to Fresno in 2012. Will housing prices return to reason in Fresno by than???? Of course, with Calpers losing 20% today, I am wondering what taxes will be like to make up for that. Hmmmm... I could learn to like Texas

[JW]

To Sheila: Your post was absolutely ludicrous. Perhaps you are just ignorant and don't really understand how all of this mess occurred or either you have an agenda by labeling all Republicans as the bad guys. There's plenty of blame to go around with this but at the top of the food chain for this mess are some very prominent Democrats and Republicans. I suggest you do a little research and quit blaming one specific political party for all of the woes that exist in America today. If you look under some pretty dark rocks, you will find Chris Dodd, Barney Frank, Diane Feinstein, Barbara Boxer, Charles Schumer, Charles Rangel, Maxine Waters (and on and on and on: Is that enough to get you to do a little investigating?). And hiding under those rocks with them will be some equally high ranking Republicans.

[TakeFive]

Sheila wrote:

“…as always, the right wingers want to point downward to the little guys and blame them for everything…”

Well Sheila, I guess were on the same side this time.

I blame Barney Frank, Chris Dodd and all the other democrats that blocked regulation of Fannie Mae on a party line vote. I blame Clinton / Janet Reno for putting the muscle on banks to lend to clearly unqualified people purportedly in some bizarre notion of “fairness”, but was really just a constituency building ploy. I blame ACORN for shakedown operations on lenders and their incestuous relationship democrats who gave them a free hand in exchange for the vote fraud they perpetuate for democratic allies. And finally, the little guy.

Wait, what’s this?

“i swear, it's like a form of insanity, or maybe Stockholm Syndrome - no matter how CORRUPT AND IRRESPONSIBLE republicans…”

Congrats Sheila, I think you’ve managed to write a post the encompasses the entire list of cognitive biases.

http://en.wikipedia.org/wiki/List_of_cognitive_biases

Time for one of mother's little helpers, no?

[Steve]

California is truly unique, yet I feel as a place you want to live and raise family it is over with. After 50 years in California I could not take it anymore and bailed. Where I live now a house is half the cost and quality of life is 10X compared to the hell hole. I feel CA peaked around early 80s and is now in decline.

[socalinvestor]

Interesting article. I'm not so sure that politicians are avoiding the affordability issue because CA is a solid Dem state.

My personal belief is that there is a decision maker / policy maker class in this country comprised of media, politicians, university professoriate, and big business that has a tendency not to listen to what Nixon dubbed the "silent majority".

And even when we're not so silent, such as during the bailout vote, politicians ultimately will do what the economists and CEO's tell them to.

[Arti]

Claudia Pedroza's husband was making $38,000 a year?!

That's actually not too shabby, with this level of income they would have given her a $1.4 million shack in some parts of Santa Monica, too!

[twohoos]

Interesting -- so if California is about 1/3 of the bubble, it's effectively getting 1/3 of the bailouts. That means, by my rough estimate (see below), the feds are propping up California real-estate prices to the tune of about $750 billion. So, if there are, say, 15 million homes here, that's $50K per home! Please be sure to thank your out-of-state friends and relatives for their support.

Date Gov't action Tab ($B)
2/13/2008 Economic Stimulus Act $376
3/17/2008 Bear Stearns bailout $29
7/11/2008 IndyMac bailout $9
9/8/2008 Fannie/Freddie takeover $200
9/16/2008 AIG bailout $85
9/25/2008 WaMu failure (no cost to govt) $-
9/29/2008 Wachovia failure* $258
10/3/2008 Bailout bill $700
10/8/2008 AIG bailout increased $38
10/21/2008 Money-market bailout $540
Total $2,235
*Worst-case gov't liability