Wednesday, November 12, 2008

Pinball Wizard Goes Tilt!

In today's news: Nov. 12 (Bloomberg) -- "U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

'Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,' Paulson said in the text of a speech today in Washington. ' This is creating a heavy burden on the American people and reducing the number of jobs in our economy.' "

Gee, wonder why Paulson got religion all of a sudden? Now that he and his banking buddies filled up at the taxpayer trough he suddenly cares about credit cards, student loans, and car loans? This is going to get interesting.

Last week I noticed a Phoenix 3 bedroom, 2 bath house that was listed for sale at $87K. It's a cute place on a mountainside with great views. Noticed yesterday that it was now listed at $75K. It's a bank-owned foreclosure so I looked it up to see if there was any history on the property. Looks like this place was "bought" in August by Fannie Mae for $105K. I'm guessing the new lower asking price means Fannie Mae is dumping this place as quick as it can. This sudden drop in price, which was mirrored in other properties just in the last few days, indicated something interesting going on behind the scenes.

Then this morning I hear Paulson announce the bailout is no longer for buying "toxic" mortgage assets (as if it ever was). Instead the bailout is now for credit cards. Hmmm, sounds like a whole lot of houses are going to be on the market at freefall prices now that the government is no longer pretending it can set a floor beneath property values.

The government is freaking out because people are no longer buying stuff. People are no longer borrowing to buy stuff. They can't. The entire economy is stalled out. People are losing jobs. I have no idea how the government is planning on getting people to charge up their Visa and Amex cards for Christmas.

On top of this, the banks are now requiring 20% down to buy a home. This means that to get into the $75K house a buyer has to have 15,000 dollars as a down payment, plus assorted closing costs. Most people buying a $75K starter home don't have $20,000 to get into a house.

What I'm also seeing is $45K foreclosure homes showing up in $200K neighborhoods. These cheap homes become comps for the neighborhood. The person who thinks they own a $200K home and goes to sell will discover that no bank will lend a buyer anything close to $200K. The banks will pull up the $45K sale as a comp. If I interpret what Paulson is saying correctly we are going to start seeing foreclosure properties dumped en masse all over the Valley. The spiral down effect on home prices will be devastating, as if things weren't bad enough already.

This also means that Phoenix never really recovered from the S&L crisis which kept prices here stagnant through the 80s and 90s. The drop back towards 1990s residential prices will inevitably effect commercial property, too.

The bailout was sold as a means to salvage the mortgage market. Of course that didn't happen at all. Money was handed to big banks who said thank you and put the money, where else, in the bank.

Still, the fact that the Powers That Be are giving up all pretense is scary. I'm looking at what this does to the Phoenix market but the entire country is hurting as people lose jobs or cut back on spending, afraid they may lose their jobs. Giving up on houses in order to prop up credit card spending sounds desperate to me. Paulson, the financial Pinball Wizard, might as well admit, "Game Over!"

No comments: