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

[Nick]

To Tex:

I think McCain is pretty full of it also, although in fairness his overly optimistic assessments are not any more of a stretch than Obama's. In fact, it occurred to me that although most far right or left wing zealots (looking at you Sheila) will blame everything on the other party while ignoring their own party's culpability, and ignoring the particulars, McCain and Obama are actually pretty similar in high-level goals now.

To wit, they both want to:
- Wind down the Iraq military presence while focusing efforts in Afganistan
- Prevent Iran from acquiring nukes
- Build more domestic energy production
- Create jobs
- Give people better access to healthcare
- Keep home "owners" in their homes they can't afford and should not have been able to purchase
- Lower taxes for the "middle class"
- Pay off big corporations through government spending on bad loans

In fact, the only real substantive difference I can see in their high-level goals is that Obama wants to redistribute wealth from the people who earn it to the people who "need" it, while McCain wants to let people who earn money keep it. That's the only substantive policy difference between them, and it's directly reflected in their support demographics.

(Apologies to Peter for making a mostly-political post on a housing blog, but as was stated, the election has a large impact on housing, so it's at least somewhat relevant.)

[Jonathan]

Last Friday half the staff at my company was laid off. We're in the video games industry. The reasoning behind these lay offs is that they want to be absolutely certain they have a sustainable cash flow through the recession. Luckily I was not let go, but next time it could be me. Anyway, my point here is that people are only just starting to feel the crisis in their every day lives and it's hitting hard. A lot of people are out of jobs now and it'll get exponentially worse as bigger and bigger companies either fail or take precautionary action. There's absolutely no way the current house prices are sustainable and even after the market has "corrected" itself according to the median income to price ratio, we'll see a double correction as the tidal wave from the stock exchange disaster hits the private economy hard across the entire US. The psychology of fear that has brought the stock indexes to its knees is fully applicable to your every day economy. The company I work at stands as proof of that. We're in the early phase of a recession when companies are forced (scared) into a mode of panic and survival. Layoffs are inevitable and will be plentiful and painful in the time to come. Even businesses that are doing reasonably well right now will start to feel the effects of the tightening global economy pretty soon, and take necessary measures to ensure that they come out of the storm in one piece. The very foundation of our economy is shaking and we can only watch and learn as it crumbles before our very feet. Many people are cheering on the fall of house prices, looking to get into a reasonable house at a major discount. A lot of these people will be without jobs soon, or experience a significant income reduction rendering them unable to afford basic rent, let alone the mortgage on a house. In the more distant future the slumlords will have a ball, we'll see more crime, more poverty expanding into larger areas of L.A. That's not to say certain doom is looming over all of us. For those who have the means there will be many great opportunities. The golden days of the real estate agent profession have come to an end, though, and building contractors as well as electricians, plumbers etc. are already experiencing rougher times. As they are forced to live more frugally, this affects other lines of work and devalues the professions further. Families are forced to move out of the more expensive cities. Less people with less money means cheaper houses and cheaper rent. This means less profit for home owners and landlords who are then less likely to invest in new residential buildings etc.. we're moving towards some interesting changes in this country but we have to let it play out without any more government interference.

[Spencer Rascoff]

Pete,
Spencer from Zillow here.
This is the problem with the Electoral College -- not all votes are created equal, and presidential politics ends up centering around issues that matter in swing states but not to most Americans (e.g., Cuba for Floridians).

I'll be on Fox Business News tomorrow around 9am PST talking about the California real estate market. It certainly is ground zero for the housing crisis. As usual, California leads the country, though it was a lot more fun when it was leading the country in a good way rather than a bad way!

[Lou]

The sad thing is that people like Obama, McCain, and Sheila think that the people in the article are victims. They are no different than the Wall St scum that leveraged their way into this economic mess. How can a person who makes $38,000 a year seriously believe they can afford a $350,000 house. It's idiotic.

People like Sheila and the right wingers on the opposite spectrum are the problem with this country. They have to take sides and be partisan. Everyone from Wall St to the homeowner is guilty in this mess.

[sfvrealestate]

Sheila is absolutely right. I'll go one farther: This "blame the little guy" stuff is elitist, and is often more than a little racist (not you, Peter).

[xtine]

I'm sorry SFV, but you are usually sensible.

To assume that people of color were too stupid to read their contracts or understand that they were getting into too much debt, and thus should be babysat through every transaction they make, is racist.

Everyone has the same brain capacity, no matter their income or color. Period.

[356man]

Time to bring back the California Republic? We should be able to count on Sarah Palin's support.

[sheila]

in case you didn't get it from my first diatribe, i am making the case that this was a "trickle down" problem, not a "populist" problem. why, when it is about benefits and money, do you people always claim the system starts at the top (so nothing ever reaches the middle or bottom), but when it's about blame, it's all the fault of the unwashed masses defying gravity and ruining life for the jet-set? do you really think this is how a pyramid scheme works? because that is exactly what this "mortgage meltdown" is - a pyramid scheme. which starts at the top.

the "victims" at the bottom of the pyramid are the pensioners, the 401(k) investors, tens of thousands of borrowers who were, by Countrywide's admission (and more lenders to come), totally defrauded and lied to about which loan they were getting, the tens of thousands of victims of aggressive predatory lending, people who believed Greenspan and thought they could re-fi ARMS without any problems, and all the marginally related people who are losing their jobs and savings through no fault of their own, plus the middle-class taxpayers.

the "perpetrators" are Paulson and his investment banker buddies who went to the SEC in 2004 and demanded to be allowed to liquidate their billions of dollars being held in reserve against bad investments, so they could buy mortgage-backed securities, which they then chopped up into unrecognizable packages and sold for inconceivable amounts. this was UNPRECEDENTED. freddie mac, who hired republican lobbyists DCI for $2 million to convince republicans to vote against regulating them (it worked). the Democratic minority in the 2005 senate which also voted against regulating Freddie and Fannie - but if republicans wanted it, they could have passed it without dems. Bush, who confronted the Attorneys General of all 50 states and demanded they stop trying to regulate mortgage brokers who they knew were committing fraud, then refused to regulate them himself. the 2005 republican Congress, who heard hour after hour of testimony from appraisers that they were being forced by lenders to either falsify appraisals or lose their jobs, and then refused to act. Mortgage brokers who front-loaded their (often falsified) deals and walked away, knowing they would implode.

the "tools" are the greedy house buyers and speculators who tried to beat the system on a small scale by buying more house than they could afford, cashing out to buy luxury items, and lying on their loan docs (who, by the way, falsely propped up this dead economy via this spending). like i said, NONE of this could have happened without their complicity and greed, but they were not the drivers - the deregulated lenders and the investment bankers were. i get so sick of hearing about greedy buyer this and greedy buyer that. yes, of course they were greedy (and don't deserve our help), but they were a means to an end or they never would have been able to get any money! LOOK UPWARD, NOT DOWNWARD, TO SEE WHERE THE MONEY AND POWER HAVE GONE! Cuomo had to force AIG to stop shelling out $600 million in merit-based bonuses to their financial services division this week. merit based bonuses! get it?? the greedy borrowers amounts are peanuts in their world...

it's only because derivatives, hedge funds, dissected securities, global markets and investment banking are too complicated for most of us to understand that these mercenaries are getting away with the biggest scam in history. the more they can get the public to blame greedy housepainters, the more blame they deflect from themselves. these guys are brilliant... but evil.

[Crash and Burn]

OK, here is a town that basically got wiped out financially, and what happened? Are they living in tents in the fields, did they have to pack all of their stuff and move to Oklahoma? No, they all became renters, and rent is cheap because no one in the town has any money. “I’m a renter. What the heck”. This is the best quote I have seen on this housing crisis. For all these ridiculous proposals at price controls for real estate, here is the most dire consequence: people rent houses at affordable rates.

We need an end to these ridiculous attempts at price controls for real estate by the government, the worst of the worst of which espoused by McCain to buy up Mortgages from the Banks at FACE VALUE. This is one thing I can agree with all sides that price controls for housing are the stupidest ideas that have ever been floated. You can help individuals deal with the sputtering economy, you can jumpstart the economy with cash injections and public works projects, you can even give callously give truckloads of taxpayer cash away to big business, give free government owned oil reserves to big oil, and allow war profiteering by Halliburton and allow the crumbs to trickle down, but you can’t do anything but harm the economy and stop it from functioning properly if assets such as housing can not be valued correctly. Some of the stupidest things I heard from the Bankers were that the more transparent accounting rules caused the liquidity crisis because they couldn’t hide their losses as well as they could previously by declaring that their junk was worth what they paid. No, this caused reality to occur more quickly and the burning to begin more quickly, the holes dug to be less deep, and the opportunity for this recession to be that much less severe. In this case the housing bubble has started forcing people to live within reasonable economic means that the economy can support.

Yes, California is one of those places that is not “the real America” as can be identified by the lack of numerous Confederate flags flying. I am a little dumbfounded by the article’s stunning analysis that prices shot up all the way to $300K for a nice three bedroom house in this cowtown and that this has a huge link to the economic crisis and mortgage securities. When you do a comparable analysis for LA, you realize that prices for the same house in LA in a nicer area shot up to $1000K (333% higher), yet even the foreclosures are still being listed as $800K. So assets in LA for Wall Street are still calculated with at most a 20% reduction in LA, yet even every investment bank who own these securities is forecasting at least a 60% reduction with some areas even worse. Yea, great time to by people, Los Angeles is an island from the rest of California because . . .umm because . . . umm . .. our prices went so much higher?

[Lou]

Sheila, I completely agree with you that this mess was created by in part by the gov't (both parties) and Wall St fat cats but you continually falsely portray the homeowners as victims when they are not.

"the tens of thousands of victims of aggressive predatory lending, people who believed Greenspan and thought they could re-fi ARMS without any problems,"

Alan Greenspan can say that if you eat McDonald's everyday, you'll lose weight. It doesn't mean I have to believe it. People get hard-sold everytime, from the timeshare salesman in Vegas after giving you free tickets to the Blue Man Group to the car salesman. It doesn't mean you have to fall for it.

I worked for a subprime lender when I graduated from college (I quit after a year and a half out of total disgust). Let me tell you a little secret Sheila. These poor "victims", these poor people, THEY ABSOLUTELY WANTED THESE LOANS. I did my best to not qualify the marginal people and they would complain. And if there were truly tens of thousands of victims as you state, let me ask you this question: how come they weren't complaining when they bubble was raging? If there were truly as many victims as you claim, then there should have been a huge stink raised by them in the past couple of years. If tens of thousands of people were ripped off during the bubble years, why are they only now complaining after the bubble popped? I'll tell you why they didn't complain then. Because they saw dollar signs in their eyes or were blinded by the false notion that housing is always a good investment. Don't get me wrong, there were victims of predatory lending but they are a small percentage.

"the more they can get the public to blame greedy housepainters"

Did you read the article? Were these two sisters duped? No! If fact, ACORN helped them out. Is there any mention by them that they were vicims of predatory lending? You compare it to a pyramid scheme. No it was more like a Ponzi scheme where irrational investors bought into nonsense to get a short term high return because they saw other people do it. Instead of doing their due diligence, people from Wall St. to Main St. dove right in with their money without any regard for logic or common sense and are now feeling the consequenses.

You rightly claim that Wall St needed these greedy buyers for this scheme to work but then talk about how sick you are or hearing about greedy buyers? If there were no greedy buyers, THEN THE SCHEME WOULD NOT HAVE WORKED. You admit their complicit role in all of this yet you don't like it when people criticize them? That makes no sense.

Like I said, you are 100% on Bush, Paulson, the gov't, and Wall St. They are all POS in my book. But the irresponsible borrower is just as guilty as them. I wish for a second you could've seen all the borrowers when I worked at the subprime lender, you would completely change your tune on them.

[Laker]

Great article. Check out this part to define a true knife catcher.
"....Mr. Knoff's house has traveled the arc of the local market. Built on vacant land in 2002, it sold for $280,000. Its original owner unsuccessfully tried to sell it in 2006 for $450,000. Mr. Knoff bought it out of foreclosure in March of this year for $320,000. Today, based on local sales, he figures the house is worth about $220,000.

Mr. Knoff paid nearly half of the purchase price in cash, so most of his equity has been wiped out. But he said he believes in taking responsibility for such choices. "The government can buy up troubled mortgages. But it should kick the people out of their houses," said the 61-year-old information technology manager. "Why should I pay for someone to buy their house?"....."

[peter]

You go Sheila! I've never been politically active until this year. When I finished college, a lot of my friends were Republican and it seemed they all did well and had money. So I thought, "hey, maybe I'll get some of that thru association" and when I thought about it, I liked the idea of fiscal conservatism and personal responsibility. But those days are officially and forever over. I feel like I've been raped every single day for the last 8 years. I am thoroughly disgusted and ashamed to have ever partook in this Rove/Bush/Chenny/Paulson Republican Ponzi scheme. Sarah Palin is an exact mirror image of the poor stupid Republican base....zero intellectual curiosity and a "my team must win at all costs" cheerleader mentality. "Ditto Heads" who have been raped and pillaged by their leader Carl Rove and have no idea just how f$%#@ they are. A whole bunch of "Joe the Plumbers" who will NEVER own their own plumbing business. How on Gods green earth can any "thinking" Republican (outside the top 1/2 percent)in their right mind not feel totally and utterly violated ? Its not a game Jackass..its your country!

[John T Watts]

Sounds like it might be a pretty good time to buy an apartment building with apartments that rent for $750 per mo. Are those buildings dropping in price too?

[bigunit]

Lou - I'm not sure that I agree with your statement entirely. My wife & I worked in RE for the past 10 years, me as an appraiser & my wife owning an independent escrow company. Since Aug 2007 over 90% of our clients have gone out of business. The $450k home that we purchased and later refinanced in 2003 to $500k is now a monthly burden due to us having had to change careers at the same time to make ends meet. We are seeing our saving dwindle yet we keep making that payment monthly (haven't missed one yet). Sure, there are people who took advantage of the system at so many levels who are getting a bailout. Not us - and I don't expect one. Wall St is primarily responsible for this sham/ponzi scheme. Lending regulations and oversight should have never allowed it to get so out of hand. This is nothing less than the complete financial collapse of a capitalist society....and it's a shame.

[rooney]

Peter, you forgot to mention the heretofore tolerant attitude towards illegal aliens, who were not only allowed to work here, but were courted by banks like B of A and Wells Fargo and encouraged to buy homes.

Seriously--who could be a shakier home loan risk than an illegal alien?

[Fourth Generation]

It is nice to point to the case of the house painter that got into a $375K house. But that is not the real question or the issue here. The issue is that no matter how greedy a house painter a cook or a gardener is/are without the bankers complicity none of those low paying workers would have been able to buy the house. PERIOD.

[Rob]

Peter: Its not a game Jackass..its your country!

WILL THE REAL PETER PLEASE STAND UP....

[Rich]

Once the straw has broken the camel's back, nobody's paying any attention to the straw any more because the stinking camel carcass is blocking the road. The massive over-leveraging of the worldwide financial system may have gone unnoticed for decades, or something other than the California real estate bubble may have started the deleveraging avalanche, but once the avalanche is going it's the effect of deleveraging on the economy and not the homeowner problems that require urgent attention...

[MyLessThanPrimeBeef]

A republic can not stand if 50% of its citizens think the other 50% evil reincarnate.

It can only survive if they come together as one and work through their differences.

[sheila]

lou, i listed 3 categories. victims, perpetrators and tools. greedy buyers (like the sisters) are tools, not victims. i do not excuse their behavior, nor do i support "bailing them out." i hope that clarifies my post.

i also do not think it's in this nation's best interest for the buck to stop with tools. because they were tools. of the perpetrators. who are getting away scott free, plus getting more money from victims (this time taxpayers), plus getting new jobs (doling out the spoils to themselves), plus keeping their old ones (including their compensation and bonus packages).

to pretend that there was not predatory lending because you yourself did not practice it is a logical fallacy. there was, and continues to be TONS of it - the military had to crack down during the bubble on lenders who were exploiting the kids who enrolled, the FBI and SEC are both conducting (too little, too late) investigations into intentional duping of undereducated, struggling borrowers into far worse situations, just to get their up-front fees. as long as we are telling anecdotes, i have 2 friends who worked (briefly) for a company here in LA that targeted HS dropouts, first generation immigrants, people with shaky credit, elderly and disabled to trick them with lies and aggressive sales tactics into "refinancing" and they got something like $1,500 for every application completed, and walked away. predatory lending is real, and it created victims. who are different from "tools."

alan greenspan basically admitted to having been totally wrong in his "free market will monitor itself" policies over the past 20 years since he totally ignored "short term" vs. "long term" self interest of lenders and investment bankers, plus he ignored the "too big to fail" model that he basically created with deregulation. it never occurred to him that the ARM, which had been used successfully for 20 years was an inherently risky tool that was inappropriate during a bubble. and it never occurred to him that banks would simply stop lending. if these things don't occur to the guy who is in charge of deciding these things, why would joe sixpack be expected to recognize it?

rooney - sorry to burst your ignorant bubble, but illegal aliens are actually coming through with their payments every month and are not being foreclosed on, unlike "the real america." in a meritocracy, which America is supposed to be, we should look at responsible behavior that contributes to the well being of the nation, not to the accident of one's birth, to judge people. looks like our friends from out of town come out ahead in many ways, including working hard and paying their bills on time:

http://tinyurl.com/568q7p

[TakeFive]

Sheila - what are you going to do if McCain/Palin take the Whitehouse?

[xtine]

sorry to burst your ignorant bubble, but illegal aliens are actually coming through with their payments every month and are not being foreclosed on, unlike "the real america."

Sheila - you are a busy lady, and seemingly hopped up on meth judging from the length and breathless tone of your posts.

How long did it take you to interview and review the financial records of every illegal alien in California?

Or are you just making a generalization about people? And because it's a positive one regarding a minority group, you feel ok about that?

Generalizations and stereotypes, no matter their tone or positivity are not helpful, to you or the group in question.

I'm a pretty hard core liberal, but people like you make me want to move to a state where people don't wrap their bigotry in regurgitated politically-correct backwash.

[Erica]

OK, I live in this backwards little town of Los Banos. Yes, literally every other house has a sign up, the fences are kicked down and there is tagging every where from all the empty homes. The schools used to be on a track system due to the overflow of kids, but now with everyone leaving this area they are going back to a traditional system. Town itself has backwards thinking about everything, not just the housing.

Making $38k in this small town isn't bad, however you must drive 60-80 miles to get to any real city, such as Fresno, San Jose, or Modesto. Gas is very high here and it takes advatage of it's commuters. The gas in town is average 40-55 cents higher than places outside the town. For example, yesterday I was in Turlock...the gas there at 3 gas stations was $1.99. The gas in LB is from $2.39-$2.49.

But really?! Whose so smart that they even think that they could survive on 3200/month with a mortage payment of 2000?? really? That's more than half his paycheck. Plus they have 2 kids?! Do they pay for Daycare so she can workl? Does the wife work so they don't have to pay for daycare?? Bills? DO they not pay for food, utilities, car payments, gas, water, trash, sewage, clothes?? Sounds to me like there was issues on both parties, the lender and the couple. They got SO excited on having a house that they didn't do their part.

The new homes that are mentioned in these articles are not small. They are mostly 2800-4500 sqft. They are mostly mini mansions here. So you can only imagine the AC and heating bills. People come here to have their own little mansions and drive to the bay area and make $100k per year.

We have seen a HUGE increase in our utilites, water, trash and sewage bills. We have gotten together with our neighbors to figure out what's going on. Our court has 5 houses, 1 is empty from forclosure another just got forclosed on, and two more of us are in danger of forclosing.

I've seen a lot of property management companies come in to buy some of these "cheap" homes and try to rent them. Unfortunatly, they just sit "For Rent" for very long periods of time because the amount of rent they are asking for. So they just sit, sometimes with both a "For Sale" and 'For Rent" sign in its front yard.

Life in this little town is like a black hole!