Signs of the Times

We came to see the real America. This week, we had a good look around.

Fellow Reckoners will recall that we are on a vagabond’s odyssey, traversing the Great Empire in search of a Greater Correction. We began our tour in California, the real estate bubble of the west. It will conclude, if all goes to our back-of-the-envelope plan, in Florida, the real estate bubble of the east. In between – Arizona, Nevada, New Mexico, Texas… We keep our ear to the ground, listening for aftershocks.

About an hour north of Houston, beneath the sometimes flight-path of spaceships bound for mysterious skies overhead, sits Lake Livingston. A sleepy little region of abrupt tranquility, the winding streets and charming locals answer to the moniker, “Small Town America,” like none we’ve yet encountered. Great egrets jostle for position in sunset snapshots by the water and sitting out front on the porch appears to be the town’s favorite pastime.

“The ones with fences, backing onto the lake, they’re the multi-million dollar places,” a local friend told us while we were driving to a decidedly not-multi-million dollar area of town during the week. “Mostly they’re weekend getaways. People come up from the city to go boating or to fish. Then, during the week, the place quiets down again. That’s when the locals come out.”

Driving deeper into the woods, the roads seemed to sprout potholes, first like a teenager’s chin sprouts hairs…then like his cheeks sprout pimples. More and more were we grateful for having chosen the 4WD over our rented sedan.

“This one sold to a man out west, San Francisco, I think. He wanted to rent it out, you know, use it as an investment. I used to know the previous owner. She moved into a retirement home a couple of years back, sometime after Hurricane Ike,” our friend informed us. “But it’s been vacant for months now. The father lost his job and couldn’t pay the rent, then there was some kind of misunderstanding between the tenants and the fellow from San Francisco. I’m trying to help get it rented now, or sold. It’s not easy,” she said.

The place was a modest, three bedroom brick and tile job on a corner block. The current owner, we learned, had tried to fix the place up a bit. A fresh coat of paint…some new, old-looking wallpaper in the kitchen…some new, old-looking curtains in the living room. The story is painful…and painfully unoriginal. Needless to say, the place isn’t renting. Nor is there any interest from buyers. The lawn is long and dust gathers on the fans…

All in all, the Lone Star State fairs pretty well compared with the rest of the nation when it comes to full-blown housing crises. “Only” 11,727 foreclosure postings were filed last month in Texas, or approximately 1 in every 819 housing units. Postings were down 3.7% from June.

In case you’re wondering, Nevada took top dishonors for the 43rd straight month, with one in every 82 housing units receiving a foreclosure filing in July. California, Florida, Illinois, Michigan and Arizona ate the lion’s share of the rotting real estate carcass, with those five states accounting for more than half of the nation’s foreclosure total.

Contrary to mainstream economists’ projections, housing has not stabilized this year. Far from it, in fact. Last month alone, 325,299 properties across the US received a notice of default, auction or bank repossession, according to RealtyTrac. That’s one in 387 households. It was the 17th consecutive month notices exceeded the 300,000 mark. Although down 10% year-on-year, the expiration of various governmental stimulus measures saw July’s number jump 4% from the previous month. Lenders seized 92,858 properties in July, the second-highest monthly tally since RealtyTrac began keeping records in January 2005.

“The numbers are exploding due to unemployment and economic displacement,” said Rick Sharga, senior vice president of marketing at RealtyTrac. “We will see them get a lot worse unless we see some job creation.”

This worsening trend will come as no surprise to anyone who realizes that unemployed people can’t pay mortgages, of course…which is perhaps the reason so many mainstream economists missed it altogether. Fellow Reckoners will recall neo-Keynsian torchbearer, Paul Krugman, announcing on his New York Times Blog that Obama’s stimulus package would keep unemployment below 9%. The $787 billion “emergency” package (which the Congressional Budget Office later revised upwards to $862 billion) was, by the government’s own accounting, supposed to create 3-4 million jobs. Let’s take a quick look at how that panned out:

Initial jobless claims last week rose a fraction to 484,000, the highest in six months, according to the Labor Department.

“This is simply awful,” The Daily Reckoning’s favorite economist, David Rosenberg, wrote in a note this week. “If claims [go] back up above 500k, for at least a few weeks, double-dip risks will rise materially…

“…98% of the time when Household employment contracts three months in a row, we are already in a recession or about to head into one,” Rosenberg continued. “Who knows? Maybe we’ll be lucky and this will be the other 2% this time around.”

Currently, more than 4.4 million people are collecting unemployment benefits nationwide, while an additional 5.3 million are receiving emergency and extended payments.

So, where does that leave housing? What is to become of all those long lawns and dusty fans across America? Longer and dustier, would be our guess.

Supply remaining equal, prices are generally driven by demand. For a border state like Texas, securing additional demand ought to be a cinch. According to the Phoenix New Times, a kind of Village Voice paper we picked up while in Arizona a few weeks back, some 100,000 immigrants – both legal and illegal – have fled the Copper State and its infamous Senate Bill 1070. Most have moved, or will move, to neighboring states.

Driving the back roads of Livingston, Texas, we notice most fences display one of two signs: “For Sale” or “Keep Out.” The immigration debate is one for another day, Fellow Reckoner. For now, we’ll simply point out these strange and worrying signs of the times.

Joel Bowman
for The Daily Reckoning