Bend Housing Market Hits Rock Bottom in 2012.

First of all, I'm ready to call The End of The Real Estate Crash:

March 2010.

A few things: First, it will inevitably happen several months later, so The Real End will be Oct 2010. But again, later, so March 2011. A few months after that.

Why?

Well, first of all, besides the fact that I AM ALWAYS EARLY, AND from Case-Schiller data & anecdotal observation, RE seems to move in big waves. Most macro-economic events seem to. It's our reactions that are hyper-magnified.

So here is The Biggie of the week, Case Schiller:

Case Schiller, April 2008

CS comes out on the last Tuesday of the month, with a 2 month lag. CS is considered the least "biased" measure of home price movements, as it uses sale pairs for the same house, with various adjustments & exclusions for excessive rehabbing & such.

So why am I even coming out with a call For The End? Well, it appears that things have maxed out their "stretch" on the downside. Before I explain, here's a graph that shows the YoY gains/losses in Case Schiller from inception:

CS, YoY gains/losses

Now, if you look close, you can see that Jul 2006 was The Top of The US Mega-Housing-Bubble. That was also a little ahead of when YoY returns sunk to 0%.

YoY returns actually maxed out June 2004 - Oct 2004, when they were +20%.

You can see from the top graph THAT was a pretty damn good time to own a home, or RE of any kind probably.

YoY returns finally hit 0% in Dec 2006. Nationwide that was probably past the prime. In Bend, where IQ's & the housing market are 18 months behind the times, that was STILL a pretty decent market. Things had slowed, but you could still actually sell, given sufficient incentives.

So in a shorter term sense, the housing bubble began in the Summer 2002. It hit it's max gain inflection point 2 years later. It was rising at it's fastest rate at that time. It finally peaked 2 years after that, in July 2006.

Conversely, we are now almost exactly 2 years off the top. We are also approaching a point of max pain, down 16% YoY. But the growth of max pain may be slowing here. That might imply that the downturn is half over. That means a July 2010 bottom for the housing bust.

Again, in Bend OR, Home Of The Worlds Biggest Cock fighting Ring, things move a little slower, and besides we are still one of only 8 markets nationwide deemed to be far overvalued.

We will, of course bust harder & farther than anywhere else, and will not pull out of this thing till Jan 2012. Medians will fall below $200,000.

Actually, it looks like we'll see 2001 prices, nationwide. And it really shouldn't surprise anyone if most places fall back, several markets excepted as they never really participated.

Where is Bend headed? Well, as a commenter over on BendBB is fond of saying, "Home prices will reflect local incomes"... or something. So here is the answer... or at least part of it:

Monday, June 23, 2008
Ratio: Median Home Price to Median Income

by CalculatedRisk

The Harvard Joint Center for Housing Studies report: "The State of the Nation's Housing 2008" is now online. Unfortunately the table I was really hoping they would update is the House Price to Income ratio by metropolitan statistical areas (MSA).

Here is the excel file from the 2007 report: Metropolitan Area House Price-Income Ratio, 1980-2006 Here is some price-to-income data from the 2007 report (data through 2006). I picked a few random cities and plotted the national average (dashed).

Check out the excel file for your MSA. House Price Income Ratio Click on graph for larger image in new window. Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.0 to 4.6 by the end of 2006 (and has probably declined sharply since then).

This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 1/3 from peak to trough. For Los Angeles, it is reasonable to expect the price to income ratio to fall to between 4 and 5 (the historical average).

This suggests price at the peak were about twice as high as normal. Imagine buying a home at 10 times income. With 10% down, and a 6.0% 30 year mortgage, the P&I payments alone (pre-tax) would be about 54% of the homebuyers gross income. Add in taxes, insurance, maintenance and this homeowner is "house poor" from the get go.

And that brings us to table A-7 in the current report. This table shows that 8.8 million owner occupied households dedicate more than 50% of their income to housing in 2006. Another 13.3 million owner occupied households dedicate 30% to 50% of their income to housing.

Of those 8.8 million owner occupied households with housing a severe burden, approximately 3.3 million are in the middle 50% of household incomes - and this is the fastest growing segment - the middle class with housing a severe burden.

So "3.0 X median family income" was a long held historical standard, and it seems reasonable we'll return to that when all is said & done.

But that "said & done" part is a stickler. See, banks have a funny way of cyclically going bust. It's actually in their nature to go broke. Banks, from a historical perspective appear to be a pretty damn good investment, but actually there is a strong survivorship bias; ie a lot of banks from previous busts actually no longer exist. So current bank indexes (that passes the spell test Timmy, "indicies" doesn't so... ) exclude a lot of 100% losses.

So, as is starting to happen now, banks are actually exacerbating their own demise with STARTLING RAPIDITY. Yup, they are actually doing everything in their power to make things better, but they are making things worse. Far worse:

Credit scores hit by card limits

By Rachel Beck, AP Business Writer Credit-card lenders lower borrowing levels, which hurts consumers' credit scores NEW YORK (AP) -- Just as Americans grow more reliant on credit cards to help pay monthly bills, they're being hit with a one-two punch: Card companies are reducing borrowing limits for tens of thousands of consumers, which then can lead to lower credit scores.

Those facing this predicament might not even know it until they apply for a loan or another credit card, and then get denied because their credit score has dropped.

This is an unintended consequence of the financial world's widespread ratcheting down of risk. Banks and other card lenders are trying to better protect themselves from more massive losses like those they've seen from subprime mortgages.

As a result, they are looking for ways to reduce their exposure to cardholders more likely to default. That's why they are lowering credit limits, which means they are reducing the maximum amount of credit extended to an individual, along with boosting card interest rates and allowing fewer balance transfers.

"This is what they have to do at this time," said John Hall, a spokesman for the American Bankers Association, a Washington-based trade group.

Such moves come as consumers are increasingly using their credit cards as a source of liquidity, especially since it's becoming harder to tap their home equity as much to pay for everything from renovations to vacations to trips to the mall. As the housing and mortgage markets have collapsed, lenders have also reduced the limits on what are known as home equity lines of credit, or HELOCs.

Net home equity extraction fell nearly 60 percent from a year earlier to $205 billion in the first quarter, according to Merrill Lynch. The investment bank also notes that some $1.2 trillion in equity and housing wealth was wiped out in the first quarter alone because of plunging home values.

At the same time, revolving credit usage -- which includes credit cards -- accelerated sharply to a year-over-year growth rate of about 8 percent in recent months. That's the fastest rate in seven years and well ahead of the 2 to 3 percent rate of growth from 2004 through 2006 when home equity lines of credit were a bigger source of cash for consumers, according to Merrill.

But as credit cards are used more frequently, that often results in bigger balances left on the cards. What's worrisome is that consumers who are faced with a number of ugly economic scenarios hitting at once -- falling home prices, surging commodities costs and a weak job outlook -- won't be able to pay their bills.

American Express warned Wednesday that more of its customers were falling behind on their payments. That led some Wall Street analysts to forecast that the card company may soon lower its predicted earnings growth for 2008.

"Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations," American Express' CEO Kenneth Chenault said in a statement.

That's why card companies including Washington Mutual, HSBC and Wells Fargo are lowering their credit limits, according to data from the consulting firm Institutional Risk Analytics.

Consumer advocates aren't saying that is bad news -- in fact, they believe it helps prevent cardholders from overextending themselves and is preferred to having a sudden surge in card interest rates.

"In the purest sense, it is the better way to manage the risk of a cardholder," said Linda Sherry, director of national priorities for Consumer Action, a national non-profit consumer rights and education group. "But a low credit limit can also unknowingly hurt a credit score."

Here's how that happens: Let's say a cardholder has a credit limit of $10,000 and a balance on the card of $4,000. The card company worries that large balance may increase the prospects for default, so it lowers the credit line to $5,000.

But in doing that, it completely changes what is known as the credit utilization rate, raising it from 40 percent to 80 percent. That is then factored into the calculation of one's so-called FICO credit score, which measures creditworthiness, according to Craig Watts, a spokesman for FICO-creator Fair Isaac Corp.

A lower FICO score could make it more expensive for someone trying to borrow money. For instance, someone taking out a $25,000 36-month auto loan would see an interest rate of about 6.4 percent and a monthly payment of $765 if they were in the highest range of FICO scores of 720 to 850, according to Fair Isaac's Web site myFICO.com.

That then jumps to an interest rate of 7.3 percent and a monthly payment of $776 for those with a score of 690 to 719 and as much as 15 percent or $866 a month for those with the lowest FICO range of 500 to 589.

According to the Comptroller of the Currency, one of the government agencies that regulate U.S. banks, companies must notify cardholders at least 15 days in advance before making changes in the terms of their account, such as lowering the credit limit. But they don't have to explain how that could change an individual's credit score.

That puts the burden on consumers to watch out for this. They better so they don't get blindsided.

See, in this Great Deleveraging, they are pulling in their marks as fast as possible. Well, no one ever thought it'd come to this (having to actually pay this debt back out of their own pocket), so people are defaulting far, FAR faster than ever in history. So they are flooding the market with stuff from the ASSET side of their balance sheet. See, when you owe, you either MAKE THE MONEY, or YOU SELL YOUR SHIT to raise the money. That's it. That's all you can do when you cannot borrow more.

And we, The Royal We, cannot borrow anymore. Minsky Moment. Tapped Out. Gotta Sell Our Shit. That's ALL WE CAN DO.

So banks are de-leveraging & will continue to de-leverage. And like they always do, they will go too far, and unnecessarily restrict credit from people who can almost certainly repay their debts. But banks are like jilted stupid broads, they go fucking whacko over the last mega-dump they endured. Cries of "NEVER AGAIN!", and all that frantic bullshit.

So banks will loan to Bill Gates & Phil Knight, and like 3 other white bitches, and that's it. You and I will not get squat. So the historical mulitplier of "3.0" will have to be scaled back for a time. Probably as long as my last fight with my wife. Like 10 fucking years, or something.

It'll probably hit 2.5X.

Now the other problem.

Bend's median family income is around $60K. But.... of course THAT figure has been built on a long, LONG history of a mini-bubble of sort. We have gone, in 25 years, from one of the most undervalued markets in the US, to the single most overvalued.

THAT takes a lot of excess gains not seen by anywhere else in this country for sure, probably on Earth likely as well. Norma DuBois stated some assinine thing like we'll return to a healthy "7-10%" annual returns, or some whacky-ass crap.

Norma: 7-10% is 1,000,000% UNSUSTAINABLE. We hit the fucking lottery.

And it AIN'T cuz we're special. No. As Taleb would tell you, given a sufficient starting population, there will almost certainly be a money that flips a heads 20X in a row. Literally a statistical certainty. We are THAT monkey.

But you will hear local deluded dumbfucks proclaim to High Motherfuckin Heaven that we are EXCEPTIONAL. No. We are not. Listen to this:

Bend Housing Market Second Highest in U.S.

The housing valuation analysis, released by Massachusetts-based Global Insight, says the average home price in Bend runs about $290,500, which is overvalued by 49.5 percent, a slight decrease from first quarter 2007 when median home prices reached $319,900 and were overvalued by 65.7 percent, the study says.

In other words, the study claims a house in Awbrey Butte appraised at $500,000 is really worth only $250,000.

At least one local real estate observer says that is ridiculous.

Bill Robie, director of government affairs for the Central Oregon Association of Realtors, said the results of the study, and others like it that are released from time to time, are misleading because the methodology leaves out huge chunks of information that need to be considered when determining market prices – land permit fees, system development charges, the time it takes to build and the price of the land where the house will be built, to name a few.

“These kinds of statistics have come out before and they do not take into consideration the many local factors that contribute to Bend’s housing market prices,” Robie said.

A local news story that came out a few months ago highlighting a similar report used a similar index, but the problem with those studies is that the index used is inappropriate, Robie said.

“I don’t know the elements, or how they were put together, but I can’t imagine they apply directly to Central Oregon,” he said.

WHEW! What a fucking moron!

Awesome. This Bill Robie guy is clearly a genius, naming several tenants of housing market values, such as SDC charges, land permit fees, and time to build. He left out donkey porno meth shack density, an anal capacity of local City Councilors to take a watermelon up the butt.

"Yes sir, I see you are asking $350,000 for the house. All well and good, but can you tell me about the local SDC charges, land permit fees, and whether my cock will fit in the mouth of COBA's chairman? All these things determine the market value of this home, in case you didn't know."

What a fuckin idiot. Of course you can immediately see the true motivations behind Cascade Business Cali-Bangers in quotes like this: They do not give 2 FUCKS about current residents selling their homes, or buyer looking to purchase an existing home. All they care about is BUILDERS SELLING NEW HOMES.

Land use permits? Did you give 2 fucks about that when you bought your last STD crapper?

Land costs? SDC charges? All that shit is BUILDER COSTS. That's ALL LOCAL MEDIA GIVES A FUCK ABOUT. Sucking Mike Hollern's mega-cock.

“I don’t know the elements, or how they were put together, but I can’t imagine they apply directly to Central Oregon,” he said.

Seriously. Read that. That was a quote from "Bill Robie, director of government affairs for the Central Oregon Association of Realtors".

"What? Where? Who? Whoa. OK, I don't who, what, where, when, what, why, how, who, when, where, how, who, why, what or what the fuck is going on, I just know that it applies to 99.6734% of the rest of this fucking country, just not where I live.

Why? WHY?

OK, I don't who, what, where, when, what, why, how, who, when, where, how, who, why..."

OK folks, we live in a place where THIS MOTHERFUCKER is the Director of Governmental Affairs for the local Association of Realtors. Unbelievable. And The Incredible Hulce sought out this walking schizoid embolism for a front page interview, because of his MOTHERFUCKING EXPERTISE IN REAL ESTATE. Fuck me dead.

OK, where was I... before I was torn off topic by Pamela The Incredible Hulce Andrews, who can leap over the truth in a single bound? Is that a mixed metaphor Dunc?

OK, needless to say we are in a state of dire fuckin straights. Yeah, I said "straights". I want my MTV, motherfucker.

We have had quite a few years of Sons Of the Soil (Burns Hillbillies) making $60K/yr. Why? We have been in the midst of a 25 year mega-mini bubble, that hopped onboard a national bubble in it's final death throes, and that pushed us up to 6.5X median family incomes locally, or almost $400K at one time.

OK, to reiterate, we ain't special. We are, many of us, like Bill "I put the MENTAL in governMENTAL director" Robie, 100% deluded into thinking what has happened in that period is the result of this places divine munificence. It ain't. Munkee flippin. It HAD to happen somewhere, it just happened to happen here.

National mutiples are going to 2.5 - 3.0X median family incomes. And we shall also go there. But... we will suffer from a horrendous shrinkage, not from Costanza shriveling cold water, but from a mass exodus of our population, which will happen because INCOMES ARE SHRINKING RIGHT NOW, AND THEY WILL CONTINUE TO SHRINK.

They will go to $50,000. Maybe less. And we will go to 2.5X medians.

When we bottom out in 2012, medians may go to $125-150,000.

Yup. We got another 50% from here to fall.

But even then, DO NOT buy Bend RE as some sort of "investment". It will, as it has always historically been, terrible. It will NOT outpace inflation. You will pay a higher interest rate than your home will rise in value.

The NOMINAL LOW will be in 2012. The real low will probably be 8-10 years after that. We will drag along the bottom, increasing at a rate well below the inflation rate. Your house MIGHT go up in dollars, BUT your purchasing power will be bled off as you pay interest that swamps any appreciation. Plus, you could have done better in stocks.

By 2020, we'll probably be close to breaching $200K again.

But we WILL endure the worst economic times this area has EVER SEEN. EVER. Timber Bust will look like a tea party. We'll actually be a smaller town, with everyone making LESS MONEY. It'll be a TECHNICAL DEPRESSION.

We will be in a full-fledged DEPRESSION.

You DO NOT want to buy a home here, unless you are fully cognizant that you will lose at least half your money, and have your purchasing power decimated as well. Bend is headed for The Greatest Bust Any US Town Has Seen Since The Great Depression.

If you believe these deluded whackos who are assuring you that All Is Well, then you deserve what you get. Bend is 100% DOOMED. It is worse than you ever thought possible.

Why It’s Worse Than You Think

For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.

Daniel Gross

NEWSWEEK

Updated: 3:25 PM ET Jun 7, 2008

The forgettable first half of 2008 is stumbling to a close. On Friday, the Labor Department reported that American employers axed 49,000 jobs in May, the fifth straight month of job losses—an event that signals a recession sure as the glittery ball dropping on Times Square augurs a New Year. The report, which inspired a 394-point decline in the Dow Jones Industrial Average Friday, was the latest in a run of bad news. Auto sales, the largest retailing sector in the U.S., were off 10.7 percent in May from the year before. And housing? Ugh. Nationwide, according to the Case-Shiller Index, home prices in the first quarter fell 14 percent.

Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year."

The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.

As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food, and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low.

While the treatment of the current malaise has been essentially identical to the reaction to the 2001 slump—aggressive Federal Reserve rate cuts and tax rebates—the symptoms are quite different. In 2001, an implosion in the technology sector and a slump in business investment pushed the economy over the edge. Even though some 3 million jobs were shed between 2001 and 2003, consumers soldiered on through the downturn. "We had a massive reduction in both long- and short-term interest rates, which set off the housing and consumption boom," says Ian Morris, chief U.S. economist at HSBC. (Remember zero-percent car loans?) This time, it's the opposite. While businesses—especially those that export—are holding up, the economy is being dragged down by the cement shoes of a freaked-out consumer and a punk housing market.

The difficulties today start—as they began last year—with housing and housing-related credit. Last Thursday, the Mortgage Bankers Association quarterly report showed that the percentage of mortgage borrowers behind on their payments—6.35 percent—was the highest since the MBA began tracking the number in 1979. It's not just subprime. In the first quarter of 2008, 36 percent of all foreclosures initiated were on prime adjustable-rate mortgages in California. Mark Zandi, chief economist of Moody's Economy.com, says the decline in home prices has slashed $2.5 trillion from household wealth, or about $25,000 per homeowner. The fall has also removed an important source of support for consumer spending, as Americans who grew accustomed to borrowing against rising home equity to finance car purchases or vacations now find themselves bereft. Banks are extricating themselves from the home-equity-line-of-credit business in the same way college students get themselves out of relationships gone bad: abruptly. Judi Froning, a second-grade teacher in San Diego, was surprised last week when she received a letter from Chase informing her that it was terminating her untapped HELOC. "In the light of declining home values, they said they are stopping, effective May 31, any draw on my line of credit," she says.

Despite repeated claims that the damage has been contained, the banks that recklessly financed the housing boom—and then traded mortgage debt even more recklessly—are still cleaning up the mess. But it turns out (surprise!) the same sort of clouded judgment led banks to excesses in commercial lending, and in loans to private-equity firms. The battered financial system, which has raised tens of billions of dollars on onerous terms from new investors to shore up balance sheets, is still likely to suffer more pain from the popped credit bubble, said Bruce Wasserstein, the CEO of the investment bank Lazard, speaking at a New York breakfast. "The harm will radiate for another year." The latest victim: Wachovia CEO G. Thompson Kennedy, cashiered after the North Carolina-based bank suffered a string of losses. Next up: write-offs for bad credit-card and commercial realestate debt. After a serene period between 2004 and '07 in which the Federal Deposit Insurance Corp. went without a single bank failure, four have gone under so far this year. FDIC chairperson Sheila Bair warned of the "possibility that future failures could include institutions of greater size than we have seen in the recent past." In preparation, the agency has brought staffers out of retirement.

The financial system is supposed to be a tube, transmitting lower interest rates. Banks borrow from the Fed, and pass through lower costs to customers and to the markets at large. But today banks are acting more like dried sponges, absorbing the liquidity the Fed is providing to shore up their balance sheets and make up for losses, rather than releasing the cash into the economy. The Federal Reserve reports that in April, 55 percent of commercial banks said they are tightening lending standards on commercial loans, up from 30 percent in January. Judy Eisenbrand, a Moorpark, Calif., real-estate agent, notes that buyers also can't get loans as easily today, even in strong markets. "The standards are so much stricter than they were during the boom days," she says.

The upshot: the Fed's adrenaline isn't really circulating through the commercial bloodstream. According to mortgage-data firm HSH, rates on conforming 30-year mortgages (under $417,000) have only fallen marginally since the Fed began cutting rates, from 6.4 percent on Sept. 21 to 6.17 on May 30, while jumbo loan rates haven't budged at all. Worse, this may be as good as it gets. Last Tuesday, Federal Reserve chairman Ben Bernanke indicated that the Fed may be done cutting rates. Why? "Inflation has remained high," Bernanke said, "largely reflecting continuing sharp increases in the prices of globally traded commodities."

Economists say it generally takes nine to 12 months for Federal Reserve interest-rate cuts to work their way into the system. By contrast, sending checks to consumers tends to produce quick results. Some retailers have reported a surge of business spurred by the tax rebates. But consumers are shopping for necessities, not discretionary items. Sales at Wal-Mart and Costco were up in May, while sales at Kohl's and Nordstrom were down. David Rosenberg, chief economist at Merrill Lynch, argues that higher food and gas prices are eating the rebate. Follow the math. The rebate checks will total about $120 billion. Studies suggest that about 40 percent of that total, or about $48 billion, will be spent in short order; the rest will be saved or spent later. Rosenberg reckons that higher energy costs—crude-oil prices are up 40 percent so far in 2008—are draining about $30 billion out of household cash flow per quarter, and that food inflation, running at a 9 percent annualized rate, drains another $20 billion per quarter. "So instead of the stimulus being filtered into real economic activity, it's being diverted into the checkout counter at Albertson's and the gas station," he says.

Last November, retired school principal Barbara McGeary, 75, of Camp Hill, Pa., switched from a Toyota Rav 4 SUV to a Prius. But the savings she realizes are eaten by a higher food bill. "When I go to the grocery store, I see prices have doubled on some of the things I'm purchasing," she says. Last year she paid $3.99 for a container of about two dozen brownies. Now that they're retailing for $8.49, she bakes her own. McGeary and her husband are also eating at home more than ever. "Restaurants, of course, have had to increase their prices," she says.

While the housing and credit crisis is homegrown, the higher prices for high-octane gasoline and corn chips are effectively imports. Historically, or at least since the end of World War II, if the U.S. sneezed, the world caught a cold. When we used more gas, oil prices rose, and when we used less gas, oil prices fell. As GM vice chairman Bob Lutz points out, "Usually petroleum prices were the first to react to a severe U.S. slowdown." In the past it would have been unthinkable for oil to spike if Americans were cutting back.

Many factors, from a weak dollar to rising speculation, are behind the higher commodity prices. But at root, $4-per-gallon gasoline and $20-per-pound steaks are largely a function of the changing economic geography, and the diminished stature of the U.S. Last January, the talk of the World Economic Forum in Davos (aside from the locale of the Google party) was the prospect of "decoupling"—the notion that India and China could maintain their breakneck economic growth rates even if the U.S. pooped out. Five months later, the global economy seems to have decoupled faster than Jessica Simpson and John Mayer. The world is growing without us. "My impression is that China and India both have sufficient domestic demand-led growth to continue to have vibrant growth even if the U.S. has a sustained period of difficulty," former Treasury secretary Robert Rubin tells NEWSWEEK. Producers of commodities are enjoying the fruits of higher prices. Sorry, Tom Friedman, the world is no longer flat. "It is upside down," says Mohamed El-Erian, co-CEO of bond mutual-fund giant PIMCO. "The growing robustness of the emerging economies enables them to step up to the global plate at a time when the U.S. has to take a breather in order to put its financial house in order." This rampant global economic growth—more people eating better, more people driving, more people using electricity—is translating into higher prices at the Stop & Shop.

The situation we're in is nowhere near stagflation—the consumer price index is rising at a 3 percent annual rate, compared with 13 percent in 1979. But it's still a shock to the system. Fuel surcharges have become de rigueur from exterminators to personal trainers. On May 28, Dow Chemical announced it would increase prices 20 percent to compensate for higher energy prices. The realization that the U.S. no longer controls its economic destiny is contributing to the widespread feeling of unease and crisis of confidence. Economically speaking, the 1990s belonged to the U.S. and New York and Silicon Valley. But as this decade motors toward its close, it seems powered by China, and Russia, and Dubai and Mumbai. It's as though we're home watching reruns while everybody else is out partying. Worse, some of those benefiting the most from the new tilt on the Risk board are hostile to the U.S., like Hugo Chávez of Venezuela. In a recent study, Mary Egan, a partner at the Boston Consulting Group, found that 71 percent of those polled agreed with the following statement: "Because the world has changed so much, the U.S. economy will not be as strong as it was—or at least not for the next several years."

Such surveys measure sentiment, and any analyst worth his weight in PowerPoint presentations will tell you that sentiment doesn't always translate into cash activity in the marketplace. But there's one marketplace where sentiment—and especially consumer confidence—matters greatly: politics. The last time consumer confidence was this low was in October 1992—the month before incumbent George H.W. Bush won 37 percent of the popular vote, the worst performance of any incumbent in history. "The economy is always the biggest issue in a general presidential election," says Tom Mann, a senior fellow at the Brookings Institute, because it's a referendum on the party in power. A recent CBS News poll showed more people identified the economy as their leading concern (34 percent) than identified oil prices (16 percent) and Iraq (15 percent) combined.

Yale economist Ray Fair has developed a formula in which particular economic factors can foreshadow election outcomes. Crude summary: when there's lots of good news on growth and inflation in a presidential term, it favors the incumbent party. With growth low and inflation high, John McCain comes out with 44 percent in November. (Before Obama-ites go making reservations for the Inaugural, consider that the formula misfired in 1992.)

All things being equal, the limping economy should favor Obama. While McCain has taken pains to distance himself from the Bush administration, he has heartily embraced the most significant component of Bush's economic legacy: the tax cuts. But in presidential elections, all things are never equal. Obama and McCain have staked out different economic turf. For Obama, it's middle-class tax cuts, and creating new jobs in environmental and tech fields; for McCain it is repealing the Alternative Minimum Tax, expanding free trade (a winner in an age of rising exports) and a summer gas holiday. But if the economy worsens significantly, if oil spikes to $150 per barrel and unemployment becomes more widespread, the campaign will likely take on a different tenor. The typical dialogues about taxes and spending, health care and pensions will assume a greater prominence. But a crisis atmosphere would require both candidates to come up with big-picture narratives about America's role in the world economy, and how the nation can re- assume financial leadership—something neither has yet done comprehensively.

It's not all doom and gloom. Businesses that thrive on a weak dollar are holding up nicely. "In fact many sectors are benefiting from strong growth overseas, including high-tech, capital goods, chemical and other raw materials, aircraft," says Nariman Behravesh, chief economist at Global Insight. Bob Toney, president of Ft. Lau- derdale, Fla.-based National Liquidators, which auctions repossessed boats and yachts, has doubled his staff to 78 employees to pick up around 120 boats a month. "Two years ago, we had 200 cases in our inventory and now we have 610," he says.

But it's the mainstream indicators—not countercyclical businesses—that will point to a recovery. For signs that tomorrow really is a day away, look to the thing that got us into this mess: housing. "Housing doesn't have to return to the bubble era. It's just that the rate of decline has to stop," says Lakshman Achuthan, managing director at the Economic Cycle Research Institute. Reductions in the level of housing inventories for sale will be a hopeful sign. Other tea leaves are the weekly reports on jobless claims, retail chain stores, and mortgage application activity. "This will give you an early read on potential trend shifts in consumption," says Ian Morris, chief U.S. economist at HSBC.

Just as sharp spikes in the price of oil and commodities have dented confidence, precipitous falls in the commodity markets could bolster consumer confidence. But that doesn't seem likely any time soon: on Friday, the price of a barrel of oil rose $10.75 to a record $138.54.

marge even gave me a link to the CS futures, and it ain't good:

Maybe you can't see it, but CS is predicting a peak-to-trough decline from $910K to $543K in San Fran medians. You can't yank $366K from each homeowner in a city of millions & think it'll all be OK. It won't.

And this scenario will play out MILLIONS of times in almost every city & town in this country. MILLIONS of people LOSING THEIR HOMES & everything they've ever worked for. All gone. It is 100% ARMAGEDDON. It's coming, it is inevitable.

And Bend Oregon is Ground Zero.

But there is a silver lining. It'll all be over by 2020.

Finally, chew on this. This is a broad banking index, 5 year chart:

Bank Stock index, 5 yr

Banks are in one of their "1,000 Year Markets", which just happens to occur about once every 10 years. Remember, the "1,000 Year Floods" of 1993? Yeah, we're dumbfucks.

Anyway, WHEN this thing is going to get bad, and many players will be gone at the end. But, as usual, the survivors will be one hell of a play. They will have to survive, of course, but those that do will do great.

Look for thick, THICK equity cushions. The ones that have done the most stringent cleansing of their balance sheet will be worth a look. I had a BUY screen open for CACB for a short time this week. Again, a PERFECT signal that a quick -10% is coming. I didn't buy, so it may well be -30% now.

These little regionals will be worth a look in a bit. CACB is already well below book value, and falling fast.

As a short aside, you will soon begin why banks go broke so fast. It is because, Young Grasshopper, they are Leveraged Beasts. And they are ALWAYS leveraged the most at exactly the WRONG TIME. Always. Except for Goldman. You leverage at the BOTTOM, and de-lever at the top. Or close. Banks ALWAYS do the opposite. ALWAYS.

They are at 20:1, and when that 20 drops to 19... welp, that's All She Wrote. Banks typically need to have assets impaired 5% and they are dead. This happens all the time. It will happen at a rate & scale in the coming years never witnessed since the Great Depression, in case you are curious.

There will be signals WHEN to buy these beaten down beasts. One might be a turn in the homebuilders:

Home builders, 5 yr.

You can see from the above bank & home builder charts, that housing topped out a full year & a half before the banks. And the builders appear to at least be trying to find a bottom. We're probably not there.

But the timing is interesting. If builders, hellish borrowers of money, can actually turn a corner, it might make sense that the lenders are also ready to turn. Look for builders to turn up markedly for a sustained time, and banks to sink ever lower & you might be able to pull the trigger on some decent bank stock buys.

Hell, even CACB may be worth a look someday. If they don't go broke.

One last thing:

I have been writing this blog, week in and week out since the end of 2006, or so. Whenever BEM quit. Maybe Jan 2007. Anyway, it's been a while.

And I have not wavered on my thinking that This Will Be Worse Than You Ever Thught Possible, and Bend Will Be Ground Zero. Never.

When I got started, things were still pretty fluid, people thought, "Hey, a quick dip & up, up and away", and I have resolutely said "No." to that.


And I've heard the old Contrarion Saw that "I will buy when everyone else is bearish", and I am starting to doubt THAT.

This isn't the stock market. The stock market has a precision to it, that homes & housing markets don't have. You can call a stock market bottom, TO THE SECOND. Not housing.

This thing is like turning the Titanic: It started turning 2 years ago, and we're only about 1/2 way through the turn. Everyone KNOWS this fucker is going lower. Look at that Case Schiller chart: You think that fuckin thing is going to STOP FALLING next month, and advance 4%/yr forever after?

Hell no. It's going to go lower for quite awhile. And EVERYONE knows it. Well, except for Bill Robie & every Realtor in town. Do not use traditional metrics of "bearishness" to gauge a bottom in this thing.

There won't be a statement from COBA about how great Bend homes are as an investment at the bottom. Why? COBA will have disbanded. COAR? Nope. Cascade Business Buttplugs? Same thing. Downtown will be 40% vacant. Cali-bangers will have retreated to Des Moines, cuz they have an uncle there who didn't lose 100% of his 401K in an adolescent pipe dream.

You will know The Bottom, because it will be accompanied by DEAFENING SILENCE.

There will be no one left to congratulate you on your great buy.

I have been saying THE SAME THING for over a year & a half, and local REAL ESTATE EXPERTS, AND BEND'S LOCAL MEDIA HAVE BEEN FEEDING YOU LIES.

Best Buyers Market in 20 Years? Remember that one?


I simply ask, Who Has Been Right? No. That ain't it. It's this:

WHO HAS BEEN 100% WRONG?

Right. It's been local experts. The local RE Industrial Machine. Local Bend Media. They don't give a fuck if you breath or suck goo. They have been persistently & consistently 100% DEAD WRONG.

And they are trying harder than ever to get you to listen to them & do what they want. How have they done so far?

A year and a half. Look at that bank chart. When did the shit hit the fan? This blog, and it's many commenters have persistently said It Is Bad And It's Going To Get Worse.

Bend RE said the Sun Will Come Out Tomorrow.

THINK FOR YOURSELF.