Bernanke Goes On Self-Promotional Media Blitz

Before discussing Bernanke's self-promotional blitz, let's take a look a the Fed's massive coverup job on its balance sheet.

Eliot Spitzer, the former governor and attorney-general of New York says Federal Reserve is ‘a Ponzi scheme, an inside job’.

In a wide-ranging discussion of the bank bailouts on MSNBC’s Morning Meeting, host Dylan Ratigan described the process by which the Federal Reserve exchanged $13.9 trillion of bad bank debt for cash that it gave to the struggling banks.

Spitzer — who built a reputation as “the Sheriff of Wall Street” for his zealous prosecutions of corporate crime as New York’s attorney-general and then resigned as the state’s governor over revelations he had paid for prostitutes — seemed to agree with Ratigan that the bank bailout amounts to “America’s greatest theft and cover-up ever.”

Advocating in favor of a House bill to audit the Federal Reserve, Spitzer said: “The Federal Reserve has benefited for decades from the notion that it is quasi-autonomous, it’s supposed to be independent. Let me tell you a dirty secret: The Fed has done an absolutely disastrous job since [former Fed Chairman] Paul Volcker left.

“The reality is the Fed has blown it. Time and time again, they blew it. Bubble after bubble, they failed to understand what they were doing to the economy.

Bernanke Goes On Media Blitz

Bernanke is mindful of the fact that he has done a horrible job. In an attempt to change perceptions, Bernanke has gone on a media blitz attempting to whitewash the Fed's failures, while seeking still more power for the Fed.

The Fed's media blitz started in March as noted by a Cream Puff Interview With Bernanke On 60 Minutes.

Bernanke stepped up his advertising campaign this weekend in a town hall meeting on public TV. The show will air this week in three installments on PBS' "The NewsHour with Jim Lehrer."

Jim Lehrer invited questions and comments in advance. Here is the question/comment that I submitted.

Hello Ben

Given that you failed miserably to see what was coming, how can giving the Fed more regulatory power possibly fix anything? I have a better idea, let’s get rid of the Fed totally along with its micro-mismanagement of interest rates that repetitively blows bubbles of increasing amplitude. Face the facts Ben, you no more know where interest rates should be than you know where the price of orange juice should be. The housing bubble and subsequent collapse that you failed to see coming is proof enough of your ineptitude. Only the free market knows what the price of money should be at any given time. Regardless, you sure don’t know. How about coming up with a 5 year plan to abolish the Fed?

Mike “Mish” Shedlock

Think they will use my question? I don't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Preemptive Defaults

Many consumers, trapped in a whirlpool of debt, interest payments, and fees spiraling out of control, finally see the light of preemptive defaults and elect to walk away.

Please consider the New York Times article When Debtors Decide to Default.

Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.

They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

“They’ve done the math on their account and they’re very angry,” said Corey Calabrese, a Fordham Law student who is an administrator of the school’s walk-in clinic for debtors at Manhattan Civil Court. Public sentiment is on their side, she added: “For the first time, Americans are no longer blaming the borrower but are looking at the credit card companies.”

According to a Quinnipiac University poll in February, 62 percent of those polled blamed lenders “who loaned the money to people who may not be able to pay it back.” Only a quarter blamed homeowners.

Like many who default, Ms. Birks first asked her credit card company to lower her 19 percent interest rate. No dice, Bank of America responded. After she tried to get the bank’s attention by skipping a payment, it immediately raised her rate to 25 percent. As Ms. Birks’ debt swelled, so did a sense of injustice mingled with helplessness.

Ms. Birks asked Bank of America about a settlement this spring. Since her account was up to date, she was told she didn’t qualify. She stopped paying, the bank started calling.

When Bank of America finally got her on the phone, it agreed for the first time to drastically reduce her interest rate. She did not take the deal, but considered it progress.

Banks Send Message - "Don't Pay"

By refusing to negotiate before defaults, banks are sending a strong message "Don't Pay" your bills. And now that Ms. Birks, who owes $28,830, decided to stop paying cold turkey, Bank of America wants to talk turkey.

More than likely it is now too late. Instead of negotiating an interest rate reduction, Ms. Birks probably wants a balance adjustment as well. And this is what Bank of America and all the banks deserve. It's no wonder its default rate is up to a whopping 13.8%.

Debt Slave Act of 2005 Comes Back To Haunt Banks

The Debt Slave act of 2005, officially known as the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" has come back to bite banks big time.

Banks asked for and got their dream list of everything they wanted in that bill, including a "means test" making it very hard for consumers to walk away from debt, at least in theory.

Of course theory is one thing and practice is another as Ms. Birks and those like her clearly show. Also note that with unemployment at 9.5% and rising, many can now easily pass even the most stringent of "means tests".

Plenty of Blame to Go Around

Of course consumers are partially to blame for this mess, but the preponderance of the blame must be placed squarely on the shoulders of banks and lending institutions who made horrendously bad lending decisions.

Banks allowed consumers to rack up enormous amounts of debt in relation to their salaries. If that's not the banks' fault, whose fault is it? Now is payback time.

Bernanke has thrown $trillions at banks and now those very banks are back throwing "happy days are here again" parties while handing out big bonuses and raises. Is it any wonder consumers are fed up?

Clearly the banks have learned nothing, nor did Bernanke.

Mortgage Preemptive Defaults On The Rise

“I’m astonished that people would walk away from their homes,” Bank of America chief executive Kenneth Lewis said in late 2007.

Last week I received an email update from Jon Maddux, CEO, of You Walk Away

Hello Mish,

I hope all is well. I thought you might want an update. About 90% people who sign up for our service now days, are "A" paper good credit borrowers who can afford their mortgages, but they just don't think it makes sense to keep paying. The rest either already got a loan modification and didn't get a principal reduction or just really can't afford to own any longer. I wish you the best!

Kind regards,

Jon Maddux
CEO

Welcome to the real world Mr. Lewis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Calpers Rolls the Dice, Gambling that Riskier Bets will Restore its Health

Calpers, the California Public Employees’ Retirement System, is in deep trouble. Calpers got in trouble by not understanding risk. It still does not understand risk and thinks risk is the solution.

Please consider the New York Times article California Pension Fund Hopes Riskier Bets Will Restore Its Health.

Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall.

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

Gov. Arnold Schwarzenegger, who is on the Calpers board, has called the fund “unsustainable.” He has specifically criticized a decision by Calpers last month to give California municipalities a break on their required contributions. Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars.

Mr. Schwarzenegger called it a “pass the buck to our kids idea.” Calpers says municipalities, which pay 15 percent of their payroll — or about $11 billion a year — into the fund, needed the help.

In the end, Mr. Dear, who will get $408,000 to $612,000 in salary and can qualify for a performance bonus of up to 75 percent of that salary, will be judged by portfolio returns.

Calpers Follows Roll The Dice Model

Interestingly, Mr Dear is following the Hedge Fund "Roll The Dice Model". For those unfamiliar with how hedge funds operate, many get 2% up front and 20% of the profits. Thus, there is a huge incentive for hedge fund managers to take huge risks as the payouts can be enormous.

For example, imagine managing a billion dollars and doubling it under that model. Dear's temptation is not as great, but a bonus of 75% on a starting salary of $408,000 to $612,000 is certainly not a bad incentive to take unwarranted extra risks.

Hoping To Recover From Bad Year

Here is a chart of Calpers' rates of return from the New York Times article.



Calpers 10-Year rate of return is 2.41%. It's 20-year rate of return is a respectable 7.75%. For comparison purposes, check out a chart of 10-year treasuries for the last 20-years.

$TNX 10-Year Treasury Yield



click on chart for sharper image

The average yield on 10-year treasuries for the last 10 years is about 4.25% or so. The average yield on 10-year treasuries for the prior 10-year period is roughly 6.5%. Counting capital gains, one could easily have exceeded 7.75% just sitting in treasuries for the last 20 years.

However, if yields stabilize here, one might get 4-5%. If yields soar, one would have capital losses buying 10-year treasuries, unless held to duration. Certainly short-term treasuries are no help given they are yielding a mere .18%!

This is enormously problematic given Calpers investment return assumptions.

Calpers Assumes Rate of Return at 7.75%

Inquiring minds are digging into the California 2009 Funding Assumption Survey. Lines 2 and 5 refer to legislative and judicial assumptions at 7.0% and 7.25% respectively. Line 37 shows the general Calpers assumption of 7.75%.

Clearly on those assumptions, Calpers cannot sit in any treasuries. So, what to do? Risk taking is what.

CalPERS and partner buy shopping centers

The Sacramento Bee is reporting CalPERS and partner buy shopping centers.

Tormented by sagging investments over the past year, CalPERS is fighting back by going bargain hunting. The big pension fund and a partner are paying more than $1 billion for a collection of shopping centers that they sold just four years ago for a much higher price.

"This is a great example of the many positive opportunities there will be in the marketplace for CalPERS coming out of the distress in the market," said Ted Eliopoulos, senior real estate investment officer for the California Public Employees' Retirement System.

Question For CalPERS

If Calpers is so astute with "positive opportunities", how the hell did it manage to lose 23.4% last year?

Neighborhood centers that cater to necessities, not luxuries, are "a recession-hardy part of the real estate market," said Jim Hurley, CalPERS real estate portfolio manager.

Really? What about the recession-proof excursion into commodities based on piss-poor decoupling theories (or whatever rationale CalPERS used) to dive into commodities at the peak in 2008?

Bumpy Road For Calpers

On June 16th Fox & Hounds reported "Smoothing” Today Makes For Bumpy Road Tomorrow.

This week, the board of the California Public Employee Retirement System (CalPERS), the largest pension fund in the country, will be asked to approve a “smoothing” proposal designed to provide short- term cash flow relief to local and state governments by deferring pension contributions. If that sounds to you like a free lunch, you’re right. Such an offer is tempting to governments facing harsh budget troubles, but CalPERS should reject the proposal as at best imprudent and at worst dangerous to future generations.

Unfortunately we have been here before. In 1999, CalPERS told California governments at that time that they could not only defer contributions but also even boost pension promises retroactively by tens of billions of dollars because future investment earnings would cover the cost. As things turned out, not only did CalPERS not earn what was projected, but proposed contributions from governments today are nearly 5 times greater than what CalPERS projected would be the case. As a result, general funds in California today are facing an unanticipated $3 billion of contributions for past promises underfunded on faulty assumptions.

Worse, even those higher contributions understate the amounts required to put CalPERS on financially sound footing and to protect future general funds. This is because CalPERS continues to employ a high-yield earnings assumption ungrounded in reality (particularly for such a large fund), lulling employers into complacency about the real size of contributions needed to meet pension promises. To put this matter in perspective, to meet its earnings assumptions CalPERS needs the Dow Jones Industrial Average to grow even faster in the 21st century than it grew in the 20th century and to yield more than the legendary investor Warren Buffett assumes his defined benefit plan assets will earn.

The difference between a reasonable and unreasonable assumption means life or death for government programs. Because of the long-term nature of these liabilities, a tiny difference in earnings assumption can mean billions of dollars of shortfall and, as a result, understaffed and undercompensated police, parks, fire, education and other departments for decades to come.

Calpers Gives Municipalities "A Break"

For political expediency, Calpers gave municipalities a "break" on contributions as noted above:

Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars.

This was no "break". Calpers does not want a consumer backlash in the midst of huge recession. Unfortunately all this is going to do is make problems worse in the long run.

Interested parties should read the rest of the Fox & Hound article because the writer, David Crane, nails it with other promises unlikely to be met.

Who Is On The Hook?

New readers to this blog may be asking "who is on the hook for this nonsense?"

Longtime readers already know the score: California taxpayers are on the hook for this madness. If Calpers massive gamble pays off, taxpayers break even, assuming one calls paying ridiculous pensions to a bunch of government bureaucrats "breaking even".

However, if Calpers' dice roll comes up snake eyes, taxpayers foot the bills.

Please take one more look at that treasury chart while pondering the implications of short-term rates at .18% and Calpers' 10-year rate of return of 2.41%.

Like your chances on Calpers' rolling the dice? I don't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

California Budget Resolution puts Band-Aid on Failing Dike

After months of political wrangling between Democrats, Republicans, and the governor, California Approves Budget, Sends Bills to Governor.

California Governor Arnold Schwarzenegger said he supports the plan the Legislature approved today to erase a $26 billion deficit that pushed the most-populous U.S. state to the brink of insolvency.

The Senate and Assembly passed the package of more than two-dozen bills though a marathon 18-hour session. Schwarzenegger told reporters afterwards that he will sign the budget reduction plan within days after using his line-item veto authority to trim spending and bolster state reserves.

The package cuts spending by $15 billion, including $6 billion from schools and community colleges, $3 billion from universities and $1.2 billion from prisons. It also raises $4 billion, in part by accelerating personal and corporate income- tax withholding and increasing the amount withheld by 10 percent.

The passage will allow the state to use $2 billion of local property taxes meant for cities and other local jurisdictions and some $1.7 billion earmarked for redevelopment agencies.

The deficit plan also shifts $1.5 billion between accounts and moves the last payday for workers this fiscal year to the next 12-month period.

Hollingsworth, the Republican leader, said he hopes that lawmakers don’t have to redraw the budget yet again should the state’s revenue keep falling.

Budget Incorporates Fiscally Unsound, Possibly Illegal Budget Gimmicks

For starters, the much ballyhooed budged is not even balanced. Borrowing money from local governments is fiscally unsound and possibly illegal.

Please consider California Cities Knock State Budget, Wary of Bonds.

California local governments criticized the budget deal struck last night and expressed doubts about plans to tap $2 billion of their property taxes to close the $26 billion state deficit.

McKenzie and Paul McIntosh, the executive director of the California State Association of Counties, said localities may file a lawsuit challenging the use of their gasoline tax and redevelopment funds, which they said violates the state constitution.

“They don’t want to cut spending and they don’t want to raise taxes,” said McKenzie. “They find it’s easier to steal the money.”

The Los Angeles County supervisors voted unanimously today to sue the state if $400 million of funds it expected are withheld, the Associated Press reported.

Numerous Unsolved Structural Defects

California has numerous unsolved structural defects that are going to come back time and time again to haunt its citizens.

“We had a deficit,” said Assembly speaker Karen Bass, a Los Angeles Democrat. “We fixed the problem. The IOUs should stop soon.” California Treasurer Bill Lockyer said the new budget plan addresses the state’s structural deficit.

Speaker Karen Bass and Treasurer Bill Lockyer are sadly mistaken, assuming they even believe the nonsense they are spouting. This bill solves nothing. Not a single structural problem was addressed.

Ongoing Structural Defects

• An ever increasing demand for free services by an influx of illegal aliens
• Too many free social programs in general
  
• Massive underfunding of pension plans especially CALPers
• An untenable pension system in general based on defined benefits on too few years of service
• Structurally unfair property tax system
• Union contracts the state cannot afford
• A bloated prison system

Schwarzenegger Proposes Two Tier Pension System

On June 30, Schwarzenegger calls for two-tier state pension system.

California public employee unions already reeling from pay cuts have been dealt a new blow by Gov. Arnold Schwarzenegger – a push to lower pension and retiree health care benefits for state workers hired after today.

Schwarzenegger's call for creation of a two-tier system of retiree benefits was part of a package of proposals submitted to Democratic leaders Saturday in tense negotiations over the state's $24.3 billion shortfall.

The plan would not affect existing state employees.

Specifically, Schwarzenegger's retiree proposals for future state workers would:

• Alter the pension formula to ensure lower benefits or longer public service. For example, most state workers who are not public safety employees now may retire at age 55 with a pension totaling 2 percent of their salary multiplied by number of years worked. The new formula would pay that benefit at age 60.
• Compute pensions for peace officers, firefighters and highway patrol officers based on the highest three years of compensation earned, rather than the highest single year.
• Provide lifetime health care benefits only for retirees who have worked 25 years. Currently, the state pays 50 percent of retiree health insurance costs for employees with 10 years of service. The percentage rises 5 percent annually, to 100 percent for 20-year employees.
• Lower the state's contribution for retiree health care benefits from 100 percent of the average HMO premium to an amount that matches the contribution for active state employees – generally 85 percent of the insurance premium.

Those are modest proposals that do not come close to solving the structural problems I mentioned above. However, they would be a step in the right direction. Unfortunately, the California legislature failed to address, or even discuss Schwarzenegger's proposals. It is equally unfortunate that Schwarzenegger would not stick to his guns and force such a discussion.

Sadly, but not unexpectedly, the end result of months of political wrangling is a California budget bill that fails to address or even consider numerous structural defects. This is akin to putting a Band-Aid on a failing dike, hoping the problems go away on their own accord, something that will never happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Hotel Hell - Luxury Hotels Foreclosed

Luxury hotels are defaulting on their loans as the economy kills off business travel. But what is ailing the hotel industry is good for consumers as room rates fall.

CNNMoney tells the story of 8 foreclosed luxury hotels in Foreclosure Inn.

Here are a few of my favorites. Please click on the link to see them all.

W Hotel San Diego

Location: Downtown San Diego
Stars: 3
Labor Day Weekend rate $153

An early California satellite of the New York City-based chain that caters to affluent hipsters, the "W" quickly became a chic gathering spot. It's just a few blocks from the harbor and near the Gaslight Quarter and it numerous clubs, bars and restaurants.

Default: The owner, Sunstone Hotel Investors, announced in June that it would default on a payment on its $65 million loan and would let the property be repossessed by its lender. Declines in both business and holiday travel cut into room rates and pushed down occupancy and the property is now worth less than its debt, according to Sunstone's CFO. It continues to take in guests and operate normally.

St. Regis Monarch Beach Resort

Location: Orange County, Calif.
Stars: 5
Labor Day Weekend rate: $478

If you want to feel like an upper management type on a corporate junket after the company has accepted a multimillion-dollar government bailout, try this ultra-luxury resort. After all, it's where AIG spent $440,000 on a corporate retreat a week after the Federal Reserve gave the company an emergency $85 billion loan.

Default: The owners defaulted on their $70 million loan to CitiGroup and voluntarily transferred their interests to the bank this week, according to a spokeswoman for Starwood Hotels & Resorts, which runs the hotel. The spokeswoman said the default has not affected operations and it continues to be business as usual there.

The Ritz-Carlton Kapalua

Location: Maui, Hawaii
Stars: 4
Labor Day Weekend rate: $299

This slice of the American Paradise forms part of a 23,000-acre pineapple plantation. There's plenty to do here with two golf courses, a triple-tiered swimming pool and ocean beaches. There's also great pampering in the 14,000-square-foot spa with 15 private rooms.

The hotel went through a recent renovation that left rooms with new marble baths, native Hawaiian paintings and other decorations and spacious lanais. There's also a new fitness center with yoga and Pacific views.

Default: The majority owners, an investment group headed up by Goldman Sachs and Gencom, defaulted on a $260 million loan in April, but the Ritz-Carlton, a division of Marriot, continues to run the inn.

The Wigwam Resort

Location: Litchfield Park, Ariz.
Stars: 3
Labor Day Weekend rate: $79

The Wigwam opened in 1929, and the grounds remain lovely, with meandering pathways and desert-scapes of saguaro and other cacti, palm trees and cottonwoods. The sunny Arizona weather enables guests to enjoy great golfing with 54 championship holes. There are also nine tennis courts, and two pools with water slides.

The resort lies in a northwestern suburb of Phoenix well away from the hustle of the city. But a glut of hotel rooms in the Phoenix area and a drop in pricing have hurt the Wigwam's profits.

Default: The resort was set to be auctioned off in early July, but the action was postponed after the owners filed for bankruptcy. The case is now before a court and the parties may try to negotiate a settlement on the $65 million debt.

No Bids For Watergate Hotel

Inquiring minds and history buffs like are reading D.C.'s Watergate Hotel draws no bids at foreclosure auction

The Watergate Hotel, the iconic property synonymous with the downfall of President Richard Nixon, failed to attract any bids when it was auctioned Tuesday.

Joseph Cooper, who wielded the gavel, seemed surprised when there was silence after the auction opened at $25 million.

"It's a Washington landmark," said Cooper, the president of Alex Cooper Auctioneers, after calling the bid a few times.

"It's a national landmark, really," he told the crowd. The June 17, 1972, burglary of Democratic National Committee headquarters at the complex was at the center of the scandal that would lead to Nixon's resignation two years later.

Big-name Washingtonians such as Justice Ruth Bader Ginsburg, former Senate leader Bob Dole and former Secretary of State Condoleezza Rice have been residents of the complex. So was Monica Lewinsky, the other woman in the Bill Clinton impeachment scandal, who lived with her mother next door to Dole.

In the end, New York-based PB Capital Corp., which had lent previous owner Monument Realty $40 million for the property, agreed to take the hotel for $25 million.

Hotel Foreclosures Soar In California

CoStar is reporting California Hotel Foreclosures Double in Last Three Months.

From Watch List reader, Alan X. Reay, founder and president of Atlas Hospitality Group in Irvine, CA, comes this astounding statistic. The number of California hotels in default or foreclosed on has jumped 125% in the last 60 days. The state now has 31 hotels that have been foreclosed on and 175 in default.

"Initially, the wave of distress in California was seen by the smaller, non-flagged hotels in secondary and tertiary markets," Reay said. "As the hotel economy worsened, we have seen it impact all property types.The properties range from the luxurious St. Regis Monarch Beach Resort in Dana Point to the more economical Extended Stay and Red Roof Inn chains. No market or brand is immune in this downturn."

"In reviewing the hotels in default or foreclosed on, we found that over 75% of the loans originated from 2005 to 2007. During this period, over 2,500 California hotels either refinanced or obtained new purchase loan financing," Reay added. "Unfortunately, based on today's market values, we estimate that none of these hotels have any equity remaining."

Hotel hell is just beginning as consumers and corporations alike remain in belt-tightening mode, and no recovery in jobs is on the horizon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Charity as Catalyst

When you can use your photography and enthusiasm as a force for good, it's a win-win-win:

Strobist reader Jeremy Sale details how he used a local fund-raising event as a vehicle to practice his lighting skills, while providing cool portraits and raising money for a good cause.

More info, pix, a vid and what he learned, here.

-30-

U.S. Home Vacancies Hit 18.7 Million; What's the Real Story?

Bloomberg is reporting U.S. Home Vacancies Hit 18.7 Million on Bank Seizures.

More than 18.7 million homes stood empty in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers.

The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. The quarterly homeownership rate was 67.3 percent, seasonally adjusted.

More than 14 percent of homes were vacant in the period, the Census said. Home values dropped 33 percent since 2006, according to the S&P/Case-Shiller index, and the unemployment rate in June rose to the highest in almost 26 years. Tumbling home prices and rising job losses have thwarted government efforts to reverse the housing decline at the heart of the longest U.S. recession since the 1930s.

There were 130.8 million homes in the U.S. in the second quarter, the Census Bureau said. In addition to the 1.9 million empty properties for sale, the report counted 4.4 million vacant homes for rent and 4.6 million seasonal properties that are only used for part of the year.

Graphs From Calculated Risk

As is typical, Calculated Risk has posted some great charts showing the trends.

The homeowner vacancy rate was 2.5% in Q2 2009.


click on chart for sharper image

This is the lowest vacancy rate since mid-2006, but still very high. A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 0.8% above normal, and with approximately 75 million homeowner occupied homes; this gives about 600 thousand excess vacant homes.

The rental vacancy rate increased to a record 10.6% in Q2 2009.


click on chart for sharper image

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 40 million rental units in the U.S. If the rental vacancy rate declined from 10.6% to 8%, there would be 2.6% X 40 million units or about 1.04 million units absorbed.

These excess units will keep pressure on rents and house prices for some time.

Dip In Vacancy Rate Reflects Rise In Rental Rate

It appears as if there is improvement in the homeowner vacancy rate, but the main reason for the dip in homeowner vacancies is consumers have given up on trying to sell their homes and instead are attempting to to rent them. Furthermore, the record 10.6% rental vacancy rate is pressuring rental prices as Calculated Risk noted above.

Of course there are many finished condo building that were for sale that are instead for rent as apartment buildings. Many of those anticipated condo sales will never be sold. Oversupply of condos is especially rampant in places like Florida, Las Vegas, and San Diego. That adds to various localized pressures.

I spoke with Calculated Risk this morning and asked "How many of those vacancies" are even livable. Neither of us could find an answer.

Yet the question is an important one as 50 Cities Must "Shrink to Survive".

The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Banks Walk Away On Foreclosures

For further proof many homes are worth nothing (or a liability) please consider Banks Walk Away On Foreclosures.

City officials and housing advocates in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

Astonishing Home Prices In Detroit

Also note that Median Home Prices In Detroit Fall To $6,000 as Detroit heads towards bankruptcy.

Totaling Unlivable, Worthless Home

How many homes for sale in Detroit are unlivable with liabilities that exceed the asking price or are simply unlivable at all? What about Flint, LA, Memphis, Toledo, and even places like Danville, Illinois?

There is simply no way to know what that total is.

Looking ahead, how many more foreclosures will we see as the unemployment rate heads towards 11% in 2010?

These are the kind of factors that are not readily apparent when one looks at the headlines such as "Home Vacancies Hit 18.7 Million on Bank Seizures" and then sees a dip in vacancies.

The real story is things are much worse than they look in many ways, even if one could figure out how to subtract vacant "unlivable worthless" homes from the totals.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List