Goldman Sachs: California home prices to drop 35%; $2 Trillion in losses

STIMULUS PLAN A SCAM TO BENEFIT THE RICH / Higher loan limits will lead to Fannie Mae, Freddie Mac bailout: "Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable."

As an investor, I am trying to understand the scope of likely housing losses. If it is a drop in the bucket, I need to be buying back into the market on dips (like today's 3% loss). If it is enormous, I need to pull more cash out of the market. The signs point in a million directions. Now Ben Stein - he of the claims that the housing collapse was a nit - is now using the word "terrifying" to describe the last few months in the markets. One day, I am reading a Fed report on equity extraction - wow, people were pulling billions out of their homes to buy stock - another day, I'm reading in Greenspan's book that our economy is tremendously resilient. Indeed, our recessions have been historically short and infrequent in the few decades I've been alive. The Fed is doing everything they can to put some air back in our sales. On the other hand, who is left to buy houses at prices that are 60% higher than they were just 5 years ago?

I am already seeing sales in the Sacramento market that are more than 30% off peak. A house in a 1970's tract sold for $350k in the bubble, it recently sold as a REO for $235k (33% loss, and I should point out that $350k was the going price for that model - this was not a statistical outlier). Another house, on an odd >1 acre lot was bought for $624k by an "investor" who planned to split the lot; today it's a REO languishing on the market at $399k (36% loss). I've reported on Centex Black Oak, with asking prices 36% lower than last year.

San Diego and L.A. ranked in the top 10 declining markets. San Diego recorded 13% declines. These sorts of price cuts are happening all over the less-desirable inland portions of the state. As commute-distance areas become cheaper than more desirable coastal areas, they will siphon off buyers from those expensive markets. California will probably wag the national market, simply because the abundance of high-dollar home loans gives us a disproportionate share of the total national loan pool.

To put this theoretical $2 Trillion loss into perspective, here are some other things that are valued in the Trillions of dollars:

• Federal government budget: $2.7 Trillion this year; Bush is proposing $3.1 Trillion for next year
• Federal government debt: $9.2 Trillion
• The combined value of all domestic NYSE stocks: $16.3 Trillion
• The Gross Domestic Product of the United States: $13.86 trillion (Purchasing Power Parity)
• The Gross Domestic Product of China: $7.043 trillion (Purchasing Power Parity)
• The Gross Domestic Product of Saudi Arabia: Half a trillion / $572.2 billion (Purchasing Power Parity)
• The Gross Domestic Product of the United Kingdom: $2.472 trillion(official exchange rate)
• Total outstanding mortgage debt in the United States: $10.6 Trillion*

Our mortgage market is nearly as large as our entire GDP - and it is larger than the GDP of any other nation. At $2 Trillion, we're looking at potential losses of 4 times the entire market value of all goods and services sold in Saudi Arabia in a year, or nearly as much as the U.K.'s entire economy. And Saudi Arabia is a wealthy nation! Even if the losses are as low as the widely predicted $400 Billion figure, that's still nearly as much as Saudi Arabia's GDP, 1/6th of the Federal budget, 5% of our national debt. $400 Billion is bad, but doable. $2 Trillion is a catastrophe. A realtor commented on my N.A.R. article that smart buyers are scooping up houses. Maybe the housing market has stalled because smart investors are battening down the hatches.

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Sources:
NYSE, New York Stock Exchange > Listed Securities > Listed Company Directory: "The New York Stock Exchange (NYSE) is the largest equities marketplace in the world. Our listed companies represented a total global market value of approximately $27.1 trillion, as of December 31, 2007. These companies include a cross-section of large, midsize and small capitalization companies. Non-U.S. issuers play an increasingly important role on the Exchange. Our approximately 421 non-U.S. companies are valued at $11.4 trillion."

THE MARKETS: Market Place; Blazing Hot and Highly Volatile - New York Times: "Today, the total value of stocks traded on Nasdaq amounts to $3.7 trillion. The Nasdaq composite index is weighted by market capitalization, and a third of it now is accounted for by just five of the 4,842 companies in the index: Microsoft, Intel, Cisco Systems, MCI-Worldcom and Qualcomm."

The Debt to the Penny and Who Holds It

CIA World Factbook: United States
CIA World Factbook

Default rate on U.S. subprime mortgages continues to rise - International Herald Tribune: "'There are $10.6 trillion of mortgage loans outstanding in the U.S., and even if the brakes had been slammed, it was going to take a long time to slow this locomotive down,' said Youngblood, who has researched home lending for more than 20 years."

* Other data sources put Fannie Mae/Freddie Mac market share at 25%, with ~$4.9 Trillion dollars in debt. That would suggest that outstanding mortgage loans are closer to $20 Trillion. Another source says that ~$2 Trillion dollars in mortgages, roughly 1/4th of all outstanding mortgages, will reset in 2006-2007, making the mortgage market $8 Trillion at time of publication, prior to 2006.

A region's gross domestic product, or GDP, is one of the ways of measuring the size of its economy. The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.

U.S. 10-city home price drop a record in Nov: S&P Reuters: "Home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November, suggesting the housing slump is worsening, according to a Standard & Poor index released on Tuesday.

A broader but newer index of 20 cities recorded an annual decline of 7.7 percent in November, S&P said. Miami and San Diego led with annual declines of 15.1 percent and 13.4 percent, respectively. Other double-digit year-over-year declines were in Las Vegas, Detroit, Phoenix, Tampa and Los Angeles.Total declines in U.S. home prices will be at least 15 percent from the peak to the trough, Meyer said."


My usual disclaimer applies: I am not giving investment advice. I can't even decide how to invest my portfolio! LOL