Price trend of Quill Condos in Downey using data from Redfin

I thought it would be interesting to look at the sale prices of condos in the condo complex where we rent in Downey, CA. The graph speaks for itself. Prices in Southern California were completely out of touch with reality. Look at the bubble in the early 90′s. Prices only went up by 50% and then declined for 6 straight years. In this last bubble, prices increased nearly 350% between 2000 and 2007. Much of those gains have been wiped out in 2 years since the bubble burst.

This graph is quite useful because it is comparing identical units (~300 sq. ft. max difference) in close proximity to each other. Expanding the comparison to Downey as a whole would introduce comparisons between dissimilar homes in substantially different neighborhoods. It doesn’t make much sense mixing the large sprawling homes of Northeast Downey in with the tiny houses south of the 105.

Does anybody really believe prices will continue to trend upwards with high unemployment, shadow inventory twice the size of what is listed and the upcoming wave of Option ARM recasts? Good thing Congress extended the $8,000 credit, wouldn’t want housing to be affordable.

AN ACT EXEMPTING FROM FEDERAL REGULATION UNDER THE COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES A FIREARM, A FIREARM ACCESSORY, OR AMMUNITION MANUFACTURED AND RETAINED IN MONTANA; AND PROVIDING AN APPLICABILITY DATE.

If you aren’t too familiar with interstate commerce, I found this excellent analysis of the original purpose for the federal government’s power of regulating interstate commerce. The power to regulate was not meant to be on the actual items themselves, but the imposition of tariffs by states on each other and with foreign countries. If State A imports widgets from State B and State C, it would be harmful to state relations to allow State A to impose a tariff on the goods from State B and not on State C. State B could retaliate on State A and C with its own tariffs. It doesn’t matter what the widget is, it is the actual “commerce” and “trade” that needs to be regulated.

The federal government has developed lots of powers using interstate commerce as a justification. Let’s look at the Gun-Free School Zones Act of 1990. In United States vs. Lopez, the government argued it could ban firearms in schools because possession of a firearm there would lead to violent crime which would cause damages, increase insurance rates and then spread to the greater economy there by affecting interstate commerce. The Supreme Court struck this down in 1995 because it gave the federal government nearly unlimited power to regulate anything that might eventually lead to violent crime. The powers of the federal government are enumerated in the Constitution and the court found that possession of a handgun was not a commercial activity or even remotely related to one.

So what’s all this have to do with Montana? The law Montana passed makes firearm regulations justified by interstate commerce moot. If the federal government wanted to impose a 50 cent tax on each round of ammunition, it would use interstate commerce as a justification because that ammunition could move over state lines. Remember, there is no enumerated power given to Congress that specifically gives it the power to regulate ammunition. The Montana law says that if the ammunition is manufactured, sold, possessed and used in Montana, then the federal government has absolutely zero power to regulate that ammunition.

This is big. Utah and Texas have similar laws going through their state legislatures. States are telling the federal government that they want them to go the hell away. This isn’t just about firearm laws either. The DEA has been prosecuting people here in California for marijuana violations even though the state okay’d medical marijuana over a decade ago. A similar law passed here could say that all marijuana grown, sold and used for medicinal purposes in California is exempt from federal law. This isn’t about what issues you agree or disagree with, this is all about state rights and fighting back against unenumerated powers held by the federal government.

I truly believe the founding fathers never intended the government to wield such far reaching powers and any movement back towards the idea of putting the federal government in a box and leaving everything outside that box up to the states is okay with me. It will be interesting to see what happens with these laws and how things go down in the Supreme Court when they’re eventually challenged. Something tells me the bureaucrats won’t cede their power quietly.

I’m not attacking the idea of paying these veterans and acknowledging their service, but I’m just a little perplexed about the timing and why it is even in this bill that is suppose to create lasting and sustainable growth. In the context of economic stimulus this just seems like something out of left field. Turns out this was a bill in Congress last year, but never got voted on. It probably got pushed into this bill by Sen. Daniel Akaka, D-Hawaii, who sponsored it in the Senate. Hey, we’re giving money to NASA so why not Filipino veterans?

I’m thoroughly convinced that the sole purpose of “The American Recovery and Reinvestment Act of 2009″ is to spend money on anything as quickly as possible. I seriously don’t know what else to say, I’m completely flabbergasted.

“We can’t embrace the losing formula that says only tax cuts will work for every problem we face; that ignores critical challenges like our addiction to foreign oil, or the soaring cost of health care, or falling schools and crumbling bridges and roads and levees.”

“They didn’t vote for the status quo — they sent us here to bring change.”

“Then there’s the argument, well, this is full of pet projects.  When was the last time that we saw a bill of this magnitude move out with no earmarks in it?  Not one.  (Applause.)”

“Millions more Americans will lose their jobs.  Homes will be lost. Families will go without health care.  Our crippling dependence on foreign oil will continue.  That is the price of inaction.”

“I believe that legislation of this enormous magnitude, that by necessity we are moving quickly — we’re not moving quickly because we’re trying to jamb something down people’s throats.  We’re moving quickly because we’re told that if we don’t move quickly, that the economy is going keep on getting worse, and we’ll have another 2 or 3 or 4 million jobs loss this year.”

“Number two, it is expected that we are going to lose about a trillion dollars worth of demand this year, a trillion dollars of demand next year because of the contraction in the economy.  So the reason that this has to be big is to try to fill some of that lost demand.  And as it is, there are many who think that we should be doing even more.  (Applause.)  So we are taking prudent steps.”

“So then you get the argument, well, this is not a stimulus bill, this is a spending bill.  What do you think a stimulus is?  (Laughter and applause.) That’s the whole point.  No, seriously. (Laughter.)  That’s the point. (Applause.) “

“But let’s think big right now.  Let’s not think small.  Let’s not think narrowly.”

“This plan will save or create over three million jobs — almost all of them in the private sector.”

No price tag is too big if we believe it will solve all of our problems.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

You end up with low or negative equity two ways: you bought a house and then took a home equity loan based on the new appraised price or you were unlucky and bought an overvalued home before prices walked off the cliff. If home prices never went down low equity wouldn’t be a problem, but they are and they’re going down hard. As prices go down people start to owe more than the house is actually worth, still not a problem. The problem comes from not being able to afford the monthly payments on the home which means the borrower should have never gotten the loan in the first place!

So why does Bernanke want people to have equity in their homes? So they can tap it like an ATM and spend it on fancy cars and boats, pumping much needed money into the economy. But that money isn’t real and is being conjured from the perceived value of a big wooden box we call a house. Haven’t we learned anything from the past 4 years? Lenders have started returning to their senses and are requiring down payments and income documentation. Borrowers are realizing their overpriced McMansions aren’t worth holding onto and are walking away. Prices are falling, construction is slowing and inventories are going up. So where will things end up? Right where the market determines they should be. I think we’ll see the return of affordable single family homes in late 2009-2010.

The Fed cuts interest rates by 0.75%, markets around the globe take big hits over night and Heath Ledger dies; what else could possibly go wrong? How about a 421.2% increase in the number of foreclosures in California over last year during the 4th quarter. Default notices were up too. Some might argue we have already cannon-balled into the recession swimming pool and haven’t realized it, but I think we’ve got our feet in and are just waiting to jump in all the way. Things might turn around, but looking at the housing situation I’m not optimistic for this year. Mortgage resets peak later this Spring and until the bad loans get cleaned out of the system there’s no way to know when and how low the bottom will hit. All I know is I’m going to start saving so I can buy a house when that time arrives.

I might base my Presidential vote on which candidate has the best grasp of what is going on with the economy and what they plan to do about it.

Drop Foreseen in Median Price of U.S. Homes

I don’t really consider myself a pessimist, but I do pride myself on looking at the facts and coming to my own conclusions. To me the outlook of the housing market and the economy as a whole have some troubling times ahead. Somebody finally realized you can’t loan hundreds of thousands of dollars to people who couldn’t afford the payment at normal interest rates.
Don’t have a down payment? Just take out another loan for it.

Need some easy cash? Turn your house into an ATM and cash out your equity.
Prices went up so quickly because there were lots of people in the market with easy access to credit through risky loans. Would you give half a million dollars to someone without any income documentation? Equity is determined by the appraised value of your home, the only problem is that equity isn’t realized until you actually sell your home. That’s all fine and dandy in a world were home prices never go down, but without congruent increases in income those prices can’t be sustained.

Fast forward a little bit: lenders start tightening up loose standards, foreclosures go up, supply goes up, demand goes down and prices start to follow. Cashing out your equity combined with decreasing prices puts you in the predicament that the outstanding loans on your home could be more than the market price. Hello negative equity. Now what happens when you can’t make the monthly payment on a house that is worth less than you owe? You try and sell or end up foreclosing which has the double wammy effect of ruining an individual’s finances and if it starts happening enough, effects the lenders, banks, and economy.

Where do I think we are? I think we’ve just seen the tip of the iceberg, but the iceberg isn’t enough to sink the economy. The people that weren’t suppose to get loans in the first place will default on their loans, there will be a surplus in inventory and then prices will drop and stagnate for a while until wages can catch up. The bigger issue at hand though is our nation’s infatuation with spending money we don’t have. If things keep going the way they are we’ll probably be in a world of hurt in a few decades.

Thank you reading my somewhat organized and logical rant.

• Increase of price of crude oil (which is not set by oil companies, thank the commodities market and OPEC for that)
• Decreased refining capacity
• Cost of transporting gasoline to stations (those big trucks run on gas too don’t they)
• Current supply interruptions, Nigeria, who supplys the US ~13% of our oil is completely shutdown because of political turmoil
• Futures market is being bid up, caused by anxiety of future supply interruptions
• Switch over from winter to summer blends (know how gas prices go up at the time leading into summer, they have to use a different cleaner burning formula, during transition it kills the productivity of refineries)
• People aren’t changing their lifestyles and driving less
• People are still buying big cars (~25% of cars sold last year had a large V8 engine)
• The government has increased excise taxes on gasoline over the past few decades, not reduced them.

That’s just off the top of my head using information gained from reading and listening to the radio.

I don’t see much changing. Hybrids aren’t an attractive alternative yet (unless you mind paying $5000 over sticker which would take a decade to make up with the savings on gas) and their isn’t enough ethanol being produced to make a dent (3.4 billion gallons of ethanol produced a year compared to the 131.4 billion gallons of gasoline used per year in the US).

So what do I think? Let the market go where it will and keep the government out of it. If people are willing to pay over a dollar for a 12 oz bottle of water then they have no room to complain about gas.