Unemployment and the Market

We saw the unemployment numbers improve pretty dramatically on Friday. We all know the dramatic improvement was due to a lot of people dropping off the edge of unemployment reports: that is, they are no longer counted, and may not be looking.

As we pointed out earlier, during Mr. Obaba’s reign, the use of food stamps has increased by 33%, or more. Mr Newt said that it was the biggest increase ever under one president, but he was wrong. It was the second biggest (Bush’s was bigger), but when the Jan numbers come out, Mr. Newt may be right. In any case, for leaders of our country to let this happen is inexcusable.

I have heard many many talking heads on Bloomberg say that we won’t improve the economy until we let the housing sector recover. Many say just let the bottom fall out and recover naturally, some say support it to keep our spirits up and confidence high to support spending.

You can’t spend what you don’t have. And aren’t making. And we all talk about the discrepancy between the haves, and have-nots, and it’s getting bigger, and worse. Even to the point where billionaires say “I volunteer to pay more taxes” which is of course meaningless in the long term, without spending cuts. “you can’t spend what you don’t have” should apply to the US Government, but as we see, it doesn’t.

So what is all this ramble about? It’s about housing, and the recovery as applied to improvements in the housing market.

Prices have come down, but as the blue collar workers lose ground, they still can’t afford to buy houses. Many white collar workers have houses, maybe underwater, but do possess them. As Mannwich’s article pointed out, many feel caught at higher interest rates since banks won’t let them refinance. We all know banks are mostly all insolvent if the government decided to make them mark their assets to market value. So the banks need this high interest rate revenue. The question is, what do banks do with the foreclosures, which are a drain on their revenues from their securities?

The answer was given to us Thursday. There are some private equity firms negotiating with Fannie and Freddie to take the troubled properties off their hands and fix them up and offer them as rental properties (since rentals are on the rise).

This will be a disaster for the housing market. Here’s why: I have looked at a bunch of repos here in the bay area, They are all dumps, where anyone with 600K-1KK price range would not want to live. And even after dumping 100K in upgrades into the property, you still end up with a hacked-up layout, a fixed-up camp. A dump. How will this hurt the housing market?

Fannie and Freddie will sell the securitized properties to the private equity firms for substantially less than their value. You and I can’t invest in this, because we can’t buy an entire security, we could only buy one or two of the components. So we won’t be allowed to participate. Anyway, we can’t afford to buy the property paying 4.25% mortgage, + property tax, + lost revenue on the down payment even with a 90% rental rate, because even at that rate, we will not have a positive yield, and it may be years and years before we can get our money out. What will happen when the PE firms buy is that the taxpayer will pay for the Fannie and Freddie losses (either directly or through AIG), and the PE firms will own the dumps.

The dumps aren’t necessarily concentrated. If they are, they will be slightly repaired and offered to the Blue Collar workers (who are dropping out of the jobs market, remember), and will ultimately likely become ghettos. If they are not concentrated, they are scattered throughout YOUR neighborhoods. And the blue collar workders will be moving in. Next door to you.

Unintended consequences could be ghettos (as I said earlier), lower property-tax income for towns, poorer schools, higher crime (I mean, even in my white-collar neighborhood, my Christmas lights were stolen), and an even brighter and more focused spotlight on the have-have not disparity.. Most of the new building permits are for multi-family dwellings, and this effort to provide low-cost rental property will stop those permits for sure.

Bottom line, your property values will go down, and your tax rates will go up. And, of course, we’ll all have to pay for the losses taken by Fannie and Freddie, and we will give all that money to the PE firms.

Sounds like a deal.

This, I think, is your future. Luckily, it is not Rock’s future, but I weep for my children, and for you. I am desperately sorry I helped bring this about.