Why Is California's Unemployment Rate So High? (Fortuna: insurance, mortgage)

[Ultrarunner]

Originally Posted by Sassberto

The lenders had excess money to lend and huge demand for the money, so they lent it. Along the way they didn't really care about how it got repaid.

Because whether the loan got paid or not was most often someone else's problem.

Most "Lenders" were paid for making the loan and then sold the loan to investors around the world through Wall Street...

[sheri257]

Originally Posted by Charles

But the explanation we always read about (and is referenced by the poster I quoted), is that you can borrow more ("Home Equity ATM") because of increased home equity. The math doesn't support this. Maybe I'm missing something.

It didn't have anything to do with income. They assumed the house was actually worth that much and, if worse came to worse, they could sell it for the amount owed. They were obviously wrong.

All I know is that after we bought our desert house in 2003 ... it supposedly doubled in value in less than two years. We were flooded, and I mean flooded, with refi and home equity offers daily in the mail.

Luckily ... we never took any of them but, a lot of other people did.

[carp killer]

I think what happened is a large percent of people got into homes who didn't understand what that means. When you borrow against the value of your home, IT IS NOT YOUR MONEY! IT IS THE BANKS MONEY! It used to bother me a bit when I would get lectured by my financial guy, that I was missing out on all kinds of opportunities by not "using my equity" in my home. I would say I'm old fashion and was a cash kinda person. If I didn't have the money, cash, I didn't do the deal. I'm also a handshake person, my word is good. Now I sit here totally debt free. That financial guy's office is now for rent.

[sheri257]

The good news of all of this is unemployment is even lower housing prices. I just found a comp in a premium neighborhood where I want to buy with a HUGE price drop. Even lower than the 1996 price this same house sold for so ...

I am sorry that people are losing their jobs but if prices get down to '96 levels ... that will really be something.

[buckeyenative01]

And if people would learn to live within their means, we should be okay for a while

[NVDave]

Originally Posted by sheri257

Yeah ... back then banks collapsed, then housing crashed. In this case housing crashed, then banks collapsed.

The bottom line is that it's all intertwined. California housing boomed more than everywhere else ... now it's crashing bigger than everywhere else.

And employment has gone with it.

The real root of the current debt deflation comes down to this:

The long term trend of median housing valuation in an area/state used to follow a very narrow band of values, from 2.6 to 3.0 times the median household income in that area/state.

This goes back decades.

Here's a great bit of chart porn that illustrates what I'm talking about:

HarvardMedianRatio.jpg (image)

OK, so in California, the housing prices started getting away from this long term trendline and mortgage lenders started inventing ever-goofier products to shoehorn $800K of house in to $150K of household income. 40, 50 year mortgages, interest-only, ARM's, Option-ARM's, etc.

The result was what we see in the above graph. Housing valuations nearly (or did in some areas) double in eight years, based purely on easily available credit.

This was not sustainable. Bubbles in asset valuations based on debt are never sustainable, because not even asset class valuations based on cash are sustainable unless the pot of cash (and the demand) continues to increase without end. I don't care whether we're talking about tulip bulbs in Holland or houses in California.

So the bubble starts to pop when the first wave of home buyers started to default on their mortgages right out of the gate. In March of 2007, CSFB issued some research showing that a class of borrowers, mostly located in California, were defaulting on their mortgages within the first six months. In the banking industry, this was unheard of at the rates being seen in California. Further, there was a subset of these defaulting borrowers who were defaulting from the very first mortgage payment.

This caused heads to come whipping around all over the mortgage industry. This data showed that fundamental assumptions as to the quality of the sub-prime loans made in the latter stages of the California housing bubble were wrong. This reverberated throughout the secondary lending industry and started the wave of securitized mortgage write-downs that caused the first cracks to appear in the financial world in July of 2007.

Between March 2007 and July of 2007, many smaller, seedier brokers and lenders started to go out of business as the secondary market started to push back on the bad paper they had bought from these fly-by-night lenders. The secondary market for sub-prime paper dried up rather quickly throughout 2007, and with this money pulled back from the debt markets, there was no more money to continue inflating the bubble.

Once the easy debt to continue propping up housing prices was removed from the markets, the valuation of housing could no longer be supported. Housing speculators who were financing their "flips" with interest-only notes started to default. More sub-prime ARMs went into default.

A previously little known fact to most homeowners (but a fact that I'm sure everyone in California now knows all too well) is that having only one or two houses in foreclosure in an entire development of hundreds of homes negatively hits the valuation of homes in that development - almost all homes in that development. Having a home or two in foreclosure right next to you craters your housing valuation. Once homes started going into REO or foreclosure, then valuations really started to slide, which put many homeowners upside down on the note, froze HELOC's, etc.

Now the process is engaged and there is nothing that can prop up valuations. Nothing. Housing valuations in California will have to be crushed until they get to a level that is supported by the local incomes. Since the unemployment rate is going up rapidly, that will further crush housing valuations over what a nominal pre-bubble level would have been.

California was the market with the most absurd valuations, and therefore has the farthest to fall (in percentage terms) and being that it is the largest residential real estate market, it was the epicenter of the credit melt-down. Given that your state is also being downgraded on their state and local government credit ratings and many companies in California are having troubles as well... it will be a long time before California sees cheap credit again. The entire state is a bubble economy, from real estate through their tax system and public spending. It was a great example of the economist Hyman Minsky's "tower of debt" which, when you have a failure of one component of the web of debt, causes the entire web of debt to unravel.

In summary: Y'all in California aren't going to see the end of this for quite a while.

ps - yes, it would be great if you could get a house at 1996 valuations. As you see from the graph, that is when California housing has been most realistically valued in the last 15 years.

[Huckleberry3911948]

because recreational spending was so much of our budget.
an economy on steroids.

[carp killer]

Originally Posted by NVDave

The real root of the current debt deflation comes down to this:

The long term trend of median housing valuation in an area/state used to follow a very narrow band of values, from 2.6 to 3.0 times the median household income in that area/state.

This goes back decades.

Here's a great bit of chart porn that illustrates what I'm talking about:

HarvardMedianRatio.jpg (image)

OK, so in California, the housing prices started getting away from this long term trendline and mortgage lenders started inventing ever-goofier products to shoehorn $800K of house in to $150K of household income. 40, 50 year mortgages, interest-only, ARM's, Option-ARM's, etc.

The result was what we see in the above graph. Housing valuations nearly (or did in some areas) double in eight years, based purely on easily available credit.

This was not sustainable. Bubbles in asset valuations based on debt are never sustainable, because not even asset class valuations based on cash are sustainable unless the pot of cash (and the demand) continues to increase without end. I don't care whether we're talking about tulip bulbs in Holland or houses in California.

So the bubble starts to pop when the first wave of home buyers started to default on their mortgages right out of the gate. In March of 2007, CSFB issued some research showing that a class of borrowers, mostly located in California, were defaulting on their mortgages within the first six months. In the banking industry, this was unheard of at the rates being seen in California. Further, there was a subset of these defaulting borrowers who were defaulting from the very first mortgage payment.

This caused heads to come whipping around all over the mortgage industry. This data showed that fundamental assumptions as to the quality of the sub-prime loans made in the latter stages of the California housing bubble were wrong. This reverberated throughout the secondary lending industry and started the wave of securitized mortgage write-downs that caused the first cracks to appear in the financial world in July of 2007.

Between March 2007 and July of 2007, many smaller, seedier brokers and lenders started to go out of business as the secondary market started to push back on the bad paper they had bought from these fly-by-night lenders. The secondary market for sub-prime paper dried up rather quickly throughout 2007, and with this money pulled back from the debt markets, there was no more money to continue inflating the bubble.

Once the easy debt to continue propping up housing prices was removed from the markets, the valuation of housing could no longer be supported. Housing speculators who were financing their "flips" with interest-only notes started to default. More sub-prime ARMs went into default.

A previously little known fact to most homeowners (but a fact that I'm sure everyone in California now knows all too well) is that having only one or two houses in foreclosure in an entire development of hundreds of homes negatively hits the valuation of homes in that development - almost all homes in that development. Having a home or two in foreclosure right next to you craters your housing valuation. Once homes started going into REO or foreclosure, then valuations really started to slide, which put many homeowners upside down on the note, froze HELOC's, etc.

Now the process is engaged and there is nothing that can prop up valuations. Nothing. Housing valuations in California will have to be crushed until they get to a level that is supported by the local incomes. Since the unemployment rate is going up rapidly, that will further crush housing valuations over what a nominal pre-bubble level would have been.

California was the market with the most absurd valuations, and therefore has the farthest to fall (in percentage terms) and being that it is the largest residential real estate market, it was the epicenter of the credit melt-down. Given that your state is also being downgraded on their state and local government credit ratings and many companies in California are having troubles as well... it will be a long time before California sees cheap credit again. The entire state is a bubble economy, from real estate through their tax system and public spending. It was a great example of the economist Hyman Minsky's "tower of debt" which, when you have a failure of one component of the web of debt, causes the entire web of debt to unravel.

In summary: Y'all in California aren't going to see the end of this for quite a while.

ps - yes, it would be great if you could get a house at 1996 valuations. As you see from the graph, that is when California housing has been most realistically valued in the last 15 years.

Excellent post. I'm here in California and I've not really seen a drop in real estate yet. From what Realtor friends tell me is there is massive denial right now. Either that or fear. Real prices will drop when enough fools run out of the means to to hold on to the fantasy price they paid. That hasn't quite happened yet. I know what the median household income in my area is right now and it's falling as I type. The cost of a median home is still about ten times the wage. And a median priced home is a repo dump. I get the sense that the banks want top dollar for these places, they don't want to eat it. So they have been holding out. But I don't know how long they can last. I think they are hoping the tax payer will eat it. "The Messiah" ,who just got elected, will come to their rescue with baskets of our money. But what that will do is still prop up the false price. The median house hold will still not afford that home that is ten times their wage. I've always said when this thing started "Someone has to eat it". Either the fool who bought the house at the fantasy price, the bank that loaned the money or the tax payer. I think it will be the path of least resistance.

Originally Posted by NVDave

ps - yes, it would be great if you could get a house at 1996 valuations. As you see from the graph, that is when California housing has been most realistically valued in the last 15 years.

That's when I finally could afford my house. One day we figured out we were paying the same for rent as a house payment would be. So we jumped in.

[cobmw]

NVDave:

An excellent presentation worth reading over and over. The problem does go beyond housing. As you say, the entire state is a bubble economy - a tower of debt.

[AmericanAnomie]

Originally Posted by cobmw

Why Is California's Unemployment Rate So High?

If you are asking that question, then chances are that your median income and education are well above average.

I am amazed at the number of well-educated, affluent Californians (including family members of mine) who don't realize the gravity of what has been happening to their state over many years. Is it the copious sunshine or the contagious optimism? The buffer of having great world-class universities and exciting cutting-edge industries? What is it in the water over there?

We east coasters are often far less sanguine. Many of us saw this housing crash coming years ago. I'm sure a fair number of California residents did too, based on the number that have been relocating elsewhere in the past several years. This trend only seems to be accelerating.

Californians need to start talking to teachers, social workers, ER nurses and other people on the front lines of the burgeoning poverty in CA, particularly SoCal. The state is in serious need of progressive/independent reform and tough leadership decisions.