“The end is near. Tomorrow is another day”, John from Cincinnati ... by gimleteye

I’m a big fan of the new HBO show, “John from Cincinnati”. John, a stranger who sparks changes in a southern California, white trash family of surfers bobs through the show like a character with a cognitive disorder, you can't tell if he is unhinged from reality or the master of it.

As such, John seems fairly representative of many things: like the startling dissonance between the confidence of Wall Street, reflected in the exuberance of the US stock market—and falling consumer confidence because of inflation (rising fast) and falling housing markets (except where inflated incomes based on financial engineering or energized foreign currencies have funneled buyers—like Manhattan).

Housing prices in cities like Miami ran away with common sense during the late, greatest boom in construction and development in the Sunshine state’s history. A 2007 report by the Miami Dade Planning and Zoning Department shows that, according to a 2005 data sample, an astounding 53.8 percent of Miami-Dade homeowners with mortgages paid more than 30 percent of their income to housing, up from 40.9 percent in 1999.

The psychology underlying these numbers have more to do with “John from Cincinnati” than any analysis by economists, dutifully reported by the mainstream press. For whatever reason, magical or not, millions of Americans have loaded up on debt--in particular, mortgages--far in excess of their financial capacity.

Though the press, especially the Wall Street Journal, has done (finally) a credible job of reporting the subprime mortgage mess, what the media has failed to cover is the extent to which reasonable people are investing far too much disposable income in housing.

What deserves attention is not the implosion of the riskiest traunches in mortgage backed securities (MBS) or collateral debt obligations (CDO), but that the 2005 and 2006 issues represented the last traunch of prospects who had not yet been lured into the housing boom, including lots of mortgagees who could scarcely qualify for a credit card much less a home.

During the boom, home buyers of good credit made bad decisions in taking on more mortgage than they could afford, on the premise that home ownership is the kind of asset class that always rises and is always liquid.

Miami is filled with such buyers: people who saw the housing boom as the same way to profit from the culture of speculative investment that entered the mainstream consciousness in the dot.com era.

Miami is also filled with production home builders who are desperately searching for ways to re-ignite the condo and single-family housing markets.

The builders’ lobby was in the Florida state capital, Tallahassee, just a few months ago touting property tax reform as the answer, ginning up state legislators who—like their counterparts in the city and county commissions around the state—let the building boom run away like a man on fire.

Now that the headlines from the special session are over, it is more of the glum same: a predicted $1.2 billion shortfall in revenue this year from falling real estate transaction revenue. Tax reform, which will result in nominal returns to homeowners, is causing massive dislocation in municipal and county budgets.

What's a production home builder to do, next? Miami builders have a lot of influence at the nation’s housing agency, HUD.

Here, one of their plans has been to support HUD taking over the scandal-plagued County Housing Agency, turned into a cesspool of corruption during the years that the builders and their cronies on the county commission had been focused, nearly to the exclusion of any other public responsibility, on rezoning farmland and permitting platted subdivisions to fulfill the dream of the “ownership society”: now revealed in its last gaps to have been buoyed by mortgage fraud, liar loans, and incestuous relationships between builders and bankers.

Perhaps, the thinking must go, federal dollars can be channeled so that erstwhile developers of suburban sprawl can meet the needs of affordable housing, now that subprime markets have dried up completely.

One can just as easily imagine Miami production home builders coming up with the idea of sending HUD to China: "please send money."

And that in fact was the story on B5 in the Sat/Sunday edition of The Wall Street Journal: “HUD Chief, in China, Touts the virtues of Ginnie Maes.”

It sounds like another good idea from the production homebuilders: send the US government housing agency on bent knee to the nation whose trade surplus with the United States reveals in the hollowing out of the US manufacturing sector, woe to hundreds of thousands of US jobs in the past decade and dead home markets in the American Rust Belt.

Reading about HUD Jackson appealing to the China —whose own housing sector is now defined by speculative froth—to buy more US home-related debt to shore up America’s home builders —who cannot be shored up until the excess is wrung from the markets—sounds like a plot line from a TV series no sane producer would ever bring to life.

There’s nothing new in asking for help from the wrecking crew. “According to US housing department figures, Chinese investors held less than $3 billion in US mortgage-backed securities in June 2003, but by June 2006 that number had risen to $107.5 billion.”

On a shinier side of the same coin, the same B5 page in the Wall Street Journal reports “Fannie, Freddie Adopt Rules”. Fannie Mae and Freddie MAC said “they would buy only those mortgages on the secondary market that comply with federal underwriting standards that were released in October for nontraditional and exotic mortgages.”

The substitution of speculation for real asset creation cannot stand in the long run.

More and more Americans, persuaded to buy into a speculative housing bubble, assumed far more debt than they could reasonably handle: the yardstick is 30 percent of income for a reason.

In the coming months, many will have to sell their homes into falling real estate markets amidst conditions of tightening credit. Soon enough the mainstream media will capture the distress in the better quality traunches of financial derivates and not just the subprime mess.

When HUD, representing a nation of debtors persuaded that inflation is low because cheaply made goods are available from China, goes hat-in-hand to China to sell more US mortgage debt, why not believe—like John from Cincinnati—that the end is near?

I don't believe the end is near. That doesn't start to happen until bond rating agencies are compelled accurately price MBS and other financial derivatives, and financial institutions then mark-to-market the hundreds of billions of debt in their portfolios: until then, tomorrow is another day.