Sweet Orange

Thomas Friedman at Davos Economic Forum

According to Pulitzer Prize winning columnist Thomas Friedman, our problems in California are just a preview of the problems that the rest of the country will face. Friedman sees U.S. problems as stemming from the following:

• too much money in politics
• gerrymandering of political districts
• Internet use which “at its worst provides a home for every extreme view and spawns digital lynch mobs from across the political spectrum that attack anyone who departs from their specific orthodoxy.” He also states that “at its best, [Internet use] provides a check on elites and establishments and opens the way for new voices.”
• a permanent presidential campaign
• U.S. business community that has become so global that the business community does not feel  a commitment to local areas or even the U.S. as a whole

Friedman has also stated that much of our problems come from the failure of our leaders–and the public–to think and act for the long term. He calls this our “I’ll be gone, you’ll be gone” attitude toward the economy and the environment. According to Friedman, we have been using accounting practices for both our financial system and the environment that under price risk, privatize gain, and socialize losses.

For video interviews with Thomas Friedman, see Friedman’s New York Times webpage.

Sources: Thomas Friedman, “Advice from Grandma“; The New York Times; Charlie Rose

Contrary to Hunter Lewis’ opinion that policies of the 1980s lead to the Reagan prosperity era, political commenter and former Nixon White House strategist Kevin Phillips has stated that our problems started around Ronald Reagan’s time. Phillips also states that for various reasons these problems have been masked.

I will probably write more on this at some other time, but for now here is a quote:

“Bad money” refers to a new phenomenon in wayward megafinance-the emergence of a U.S. economy that is globally dependent and dominated by hubris-driven financial services.–Barnes & Noble summary of Bad Money

For more information on this, see Phillips’ book Bad Money: Reckless Finance. Failed Politics and the Global Crisis of American Capitalism.

Yesterday, we took a look at Hunter Lewis’ view of  the causes of our economic problems. Today, some contrary views from economist Paul Krugman:

In 1999, when the first version of “The Return of Depression Economics” was published, the title seemed provocative and its thesis was cavalierly dismissed by conservative economists. But today, fear rules the markets, John Maynard Keynes is back in fashion, and the stars of Milton Friedman and Alan Greenspan are fading.
–Andrew Leonard, Salon

In a Forbes.com video, Pulitzer-price-winning economist and NY Times commenter Paul Krugman says forgetting Keynes statement that interest rates can be too low was one reason for our current economic problems.

Krugman also says that the more important cause of our current problems is that we forgot the need for the safeguards and regulations–such as the regulations put in place after the Great Depression of the 1930s and which, according to Krugman, allowed us to avoid “Depression Economics” for about 60 years.

For more on this, see Krugman’s book, The Return of Depression Economics and the Crisis of 2008.

Tomorrow: political commenter Kevin Phillips with a viewpoint that the Reagan era was not all that some say it was

This week we’ll have a little survey of various opinions on the cause of our economic difficulties. Up first author and financial advisor Hunter Lewis. Lewis has also held many positions on various charitable organizations.

In a Forbes.com video, author Hunter Lewis says that former Fed Chief Alan Greenspan’s return to Keynesian economics is what lead to current economic problems. He also said the that the quite different actions by former Fed Chief Paul Volker during the 1980s brought about the Reagan prosperity era.

Lewis also say that “recessions are necessary,” and debt is what caused our problems.  He continues to say that this debt came from the housing problem, and the housing problem came from the dot.com problem. For more on this, see Lewis’ book, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts.

Tomorrow: some views from economist Paul Krugman

Wednesday: political commenter Kevin Phillips with a viwpoint that the Reagan era was not all that some say it was

I just came across some informative numbers from real estate and finance sector analyst Mark Hanson. These numbers provides a follow up on a previous post that I wrote concerning our unsustainable personal debt to income ratio. Hanson quotes the Wall Street Journal:

According to the Federal Reserve, total household indebtedness peaked at the end of 2007 at 132% of disposable income. That was by far the highest level since at least the end of World War II, nearly quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting, the ratio had fallen to 124%, a tad lower but still miles from the level of, say, 69% in the middle of 1985.
–”Debt Burden to Weigh on Stocks, Consumers’ Inability to Drive Economic Growth Likely to End Big Gains,” E.S. Browning, Annelena Lobb

These numbers shows that our economy on the personal level, not just the national government level, was on a course that could not last. They also show that, with a current ratio of 124% personal debt to income ratio, we are still at an unsustainable personal debt level and will need to endure further corrections.

To see how this personal debt to income ratio has been progressing on this unsustainable course for many years, see my previous post: “Personal Debt to Income Ratio Rose to Over 100%-How Did This Happen?”

GRAPH COURTESY JAMES QUINN

According to First American CoreLogic’s August index report, the median selling price for houses in Orange County was 7.9% less than it was in August 2008. If the distressed properties (short sale and bank-owned properties) are excluded, the decrease is 7.1%. However, First American sees an increase for the Orange County median selling price in 2010.

Here is First American’s 2010 prediction for Orange County housing prices as well as some others. The percentages listed are the amount that the median home price in Orange County is predicted to increase or decrease by next year. I have listed them in descending order from the most optimistic to the least optimistic forecast.

• UCLA Anderson Center–up 15.9% to 16.6%
• First American CoreLogic–up 9.5% (California prices up 7.9%, U.S. prices up 4.6%)
• Veros–up 2% by year-end September 2010 for their benchmark, which is single-family mid-priced homes
• Anil Puri of Cal State Fullerton–down during the first half of 2010, then flat or up 2% to 3%

Keep in mind that a predicted increase for the median price of all Orange County homes does not necessarily mean that the price for your home or a home that you want to buy is predicted to increase. Rather it could just mean that more homes on the high- or mid-level will sell during the next year that did this year.

Up to this point most of the homes selling in Orange County (or the nation for that matter) were on the low-end of the housing market. As more homes on the mid- and high-end of the market are sold, the overall median selling price will increase, but the selling price of many of the individual homes in the mid- and high-end might decrease from what the home would have sold for in the previous year.

For more information, see “Forecast sees 9.5% price gain for O.C. homes,” Jeff Collins, OC Register November 3, 2009

Are we all socialist now? Based on comments from some surprising sources, the answer to this question might be “Yes.  At least if it is to our advantage at the moment.”

A curious example on the city level can be found in Costa Mesa. As you know, the California budget is a mess. We’re in the “red” by the billions. One of the solutions that the governor suggested and is now in the process of being made a reality is the sale of state assets, including an iconic piece of Orange County land in Costa Mesa, the Orange County Fairgrounds.

Well, the Costa Mesa city council, that bastion of free-market rights and a let-the-private-sector-do-it attitude, is not about to let the market have its way with the fairgrounds. As Mayor Mansoor, an ardent free-marketeer, stated, he is not interested in selling “the heart of the community.” Apparently, even the most hard-core capitalist doesn’t think that the bottom line should be judged solely in a monetary way.

In spite of Costa Mesa’s objections, the city could not keep the state of California from putting the fairgrounds on the market. However, Costa Mesa is setting up land-use restrictions that will ensure that the Orange County Fairgrounds are used as a fairgrounds and events center only, no matter who the owners end up being. Of course, this greatly reduces the amount that someone or some organization would pay for the land. The state’s Department of General Services, which is in charge of selling the land, is not pleased, and the possibility of litigation is being implied, if not outright threatened.

Some, including some in Costa Mesa, have been critical of the land-use regulations that Irvine has put on the development of the former El Toro Marine Air Station land. They feel that the El Toro land that is being transformed into the Orange County Great Park (Orange County’s first metropolitan park) and the Great Park Neighborhoods (a housing, commercial and open space development by the home building company Lennar and its partners) should be developed strictly by market forces. In other words, no land-use restrictions.

However, what Costa Mesa is considering for the fairgrounds is similar to what Irvine has done for the El Toro land. Costa Mesa wants to ensure that the fairgrounds are used in a way that they feel will provide the most benefit for the area and Costa Mesa residents. Irvine’s intention for the El Toro (and now Orange County Great Park) land is similar. It seems that neither city wants another subdivision-mall development (or public airport) plopped down on large tracts of prime real estate that have historic significance.

Apparently, economic hard times are making for some strange bedfellows in the O.C. and the discovery of “socialists” in the most unusual places.

We may have reached the bottom but there will not be a leveraged world in the future….Growth in the old model probably will not be reasonable growth in the new model.
–Bill Gross  (Mary Ann Milbourn, “Boom times behind us, says Pimco bond king,” The Orange County Register)

According to Bill Gross, Managing Director of Newport Beach’s Pimco (the world’s largest bond fund), the fundamentals of our economy are changing, and we should not compare the dynamics of this recession to past recessions. Because of these changes, Gross sees the following as part of our economic future:

• The 3 percent to 4 percent growth that we got use to during the last 20 years is a thing of the past; instead, expect 1 percent to 2 percent growth for the next 5 to 10 years.
• Consumers will save more and spend less.
• Business will take less risk.
• Government regulation of business will be more prominent than it was during the last 20 years, and this increased regulation will to be the case for the next 20 years.
• Governments will enact new trade limits.
  

Meanwhile, Federal Reserve officials are predicting upcoming growth of 2.2 percent to 3.3 percent. And Fed Reserve Chief Ben Bernanke told the House Financial Services Committee that analysts expect growth in 2010, but even at 3 percent growth, unemployment will most likely still be above 9 percent. (”Bernanke says jobless rate may stay over 9%,” Bloomberg News)

Economist Alan Beaulieu, president of the Institute for Trend Research, had some opinions that are similar to those of Gross:

If you’re holding your breath waiting for 2007 to return, you die. We’re not going back there. We need strategies for a new climate of diminished growth.

He also states:

We don’t think the U.S. returns to sustained growth until after 2013.

Even then, in some cases, Beaulieu does not expect to see 2007 prices for 15 years, and housing might take even longer.

In other words, the old rules are gone; the dynamics of our economy are in for some new rules.

The National Association of Realtors (NAR) has come out with the August housing numbers. They show a mixed-bag for the U.S. housing market:

U.S. Sales Numbers
U.S. housing sales in August were 5.1 million. This is a drop of 2.7% from the July number of 5.24 million and a drop of 30% from the peak, which was about four years ago. However, this is up 3.4% from this time last year and up 14% from the bottom which was in January.

According to NAR economist Lawrence Yun, a stable housing market cannot be claimed until U.S. home sales increase to about 5.5 to 6 million.

U.S. Median Sales Price
In August 2009, the median price for housing in the U.S. was $177,700. In July 2009, it was $178,400. The August 2009 number is down 12.5% from the August 2008 number.

U.S. Inventory
In August, 3.6 million homes were on the market. This is a decrease from the July number, which was 4 million. According to the NAR, if homes sell at the current pace, it will take 8.5 months to sell these homes. This is the shortest time in two year that analysts have predicted it will take to sell existing housing inventory.

Conclusion
The good news for anyone who wants to sell a house is that inventory is down when compared to last month and sales are up when compared to a year ago.

The bad news for anyone who wants to sell a house is that home sales need to increase substantially if we are to return to a stable market. In addition, housing analysts expected August housing sales to be larger than they were in July; instead, July home sales went down 2.7%.

This month-to-month sale decline has some wondering if we are in for a reverse in that has been an improving market for national housing sales. However, Paul Dales of Capital Economics thinks that this is not the case:

We suspect it is just a temporary blip in the improving trend rather than a sign of renewed weakness.

We’ll see…

Note: See the LA Land blog for additional information and a link to relevant housing charts and graphs.

We’ve had a stealth event concerning the housing industry happen in Irvine a few weeks ago. What I am writing about is the mysterious sell out of the phase three Ivy homes that went on sale recently.

There has been a lot of buzz around the quick sell out of the Ivy home offered for sale in phase one and two. Ivy is the new construction development that is in the process of being built in Irvine’s Woodbury East community. These homes will not be available for move-in until sometime next year; however, both phase one and phase two sold out within 15 minutes of going on sale (July 11th and August 1st respectively). The Irvine Company announced that phase three homes would go on the market in 3 to 5 weeks of the phase two date. So I have been watching for an announcement of the exact date.

Phase 1 and 2 came out with a lot of fanfare: newspaper ads, e-mail announcements, Google banner ads on numerous blogs, and newspaper articles. Not so with phase three. I saw no mention of the phase three opening date until  I got an e-mail  on Wednesday of last week (September 23rd) from the Irvine Company that said:

“Homebuyers are continuing to prove that Woodbury East is Irvine’s most popular new address. Our first neighborhood, Ivy, continues to be a huge success and has sold out its first three phases. With pricing beginning in the mid $300,000s, Woodbury East has made its debut as a great place to buy now and enjoy for years to come.”

Apparently the phase three sale date has come and gone with hardly a word. It must be all a part of the marketing plan.

Tomorrow’s post: a look at the current prices for the Ivy homes. Hint: Prices have increased with each new sales phase.

Related posts:

• Deja Vu in Woodbury East! Phase Two of Irvine’s Ivy Housing Development Sells Out in 15 Minutes-Prices Increased
• New Construction Housing Development Sells Out in 15 Minutes
• Ivy. an Irvine Woodbury East Development, Opens with Smaller, More Affordable Housing Options
• Pros and Cons of New Irvine Development: Ivy, a Woodbury East Neighborhood