Bend Oregon: Misery Reaches New Highs

Well now.

On Friday we had yet another pang of SOBRIETY regarding the RE hangover. The misery index, jumped an astounding .5% on Friday, when unemployment exploded nationally, from 5% to 5.5%, FAR higher than anyone expected.

So with inflation still at (an incredibly understated) 3.9%, we hit 9.4% on the misery index, an indicator wikipedia syas, "Some economists posit that the components of the Misery Index drive the crime rate to a degree. They have found that the Misery Index and the Crime Rate correlate strongly and that the Misery Index seems to lead the Crime Rate by a year or so."

This may answer the question I've heard in some corners, "Is it just me, or is there a lot more crime stories on the local news recently"? Yes.

If you go to miseryindex.us, and look at the index by month, you see that the current readings are the highest for G Dub's tenure, except for Sept 2005, when it had a quick spike to 9.8%. Clinton, after a rocky inheritable situation from G Dub's Dad, never really even came close.

This is actually a very interesting graph, especially the monthly version. In a brief period in the mid 1950's, there was no inflation, and this reading was composed only of a very low unemployment rate of 3.5%, or so.

Flash forward to the Ford/Carter years when things got especially terrible, and the index maxed out near 22%.

I've heard some economists state that inflation is not really that bad, because it is accompanied by growth, and hence inflation is a sign of a robust economy.

This is, of course, ridiculous.

Inflation is just a measure of how fast a fixed quantity of money is losing value.

If your paycheck increases 10%, and inflation increases 15%, you are worse off.

These economists err on this idea, because many times inflation IS accompanied by similarly large growth rates. China is a great current day example. They have had very robust growth & inflation rates recently, and they are probably the most vital economy in the World.

But inflation can also be accompanied by contraction, as can be easily seen by these misery index charts. The 1970's & early 80's are clear illustrations of this: Very high unemployment & very high devaluation of the currency.

This is the Worst of All Worlds: Stagflation.

And this is where I think Future Bend will differ from the Bend of Olde.

Bend used to be chronically Undervalued, because of the extreme cyclicality of the local economy. This place boomed & busted, everyone knew it, and so people had to play a middle ground when making home purchases. You priced for the bottom of the cycle, cuz everyone knew it was coming.

But then things began riding a Long Wave up, for about the past 3 decades. Bend went from chronically & deeply undervalued, to wildly overvalued. The Long Wave has finally crested, and we are going to again ride things back down, where Terribly Cyclical Bend reasserts itself.

But at least when things were terrible employment-wise here, they were OK inflation-wise.

Finding a job was hell, but homes were dirt cheap. Things "evened out". We had lots of one kind of misery, but almost none of the other. Poverty. With a View... and Cheap Houses.

Now? Now, we are returning to Poverty. And we do have a View. But we also have almost rampant, out of control inflation. Our home prices are falling, true, but you DON'T pay the value of the house each month, you pay THE MORTGAGE. And if you've bought sometime from 2004-2008, you've essentially "locked in" an incredibly high inflation rate via your mortgage. And we have nationwide inflation exploding higher.

Friday, oil prices spiked higher in the largest one-day price advance ever recorded, up almost $12/bbl.

So we are notching FAR higher unemployment rates, 6.8% at last count. And home values are imploding, which is probably a far better indicator of a large number of independent contractor wages around here than anything. And national inflation is on the verge of a spiral higher.

This all converges to give Bend probably one of the highest Misery Indexes in this country, by far.

We don't make much money. We have a far higher unemployment rate than the nationwide averages. Our local economy is cyclical in the extreme. Our "locked in" inflation has eclipsed the entire country for the largest purchase item most people will make in their lives.

The misery index for Bend continues to climb, and will push this area into the deepest economic depression ever witnessed.

Now, I want to do some "reprints" of some blogs of interest. First Dunc:

Saturday, June 7, 2008

Worm Ouroboros

Sometimes, something is so glaringly obvious that you ignore it. It's right in your face, you know there is something wrong, but you're distracted by other wilder, crazier things.

I've felt that we were building too many houses in Bend for several years; actually, I think I was saying that even before the actual bubble. My concern was that Bend didn't have an underlying industry, or economic base, to justify all the housing.

I didn't think minimum wage tourism jobs could pay for them, and there were only so many amenity rich transplants we were likely to convince to move here. I'm not even sure I was all that conscious that it was a national problem, I just could see what was obvious here in Bend.

I never felt that retired people were big spenders. The number of stores in Bend seems wildly excessive. It seemed that an awful lot of the newcomers were involved in real estate or building or support industries. More and more, it appeared to me that growth was the industry of Bend, and the industry of Bend was growth, a big Ouroboros Worm eating it's tail.

I wasn't really very aware of the credit/liquidity problem until it burst. I don't remember too many people talking about it, or reading very many stories about it. In hindsight, that too was obvious. I'd heard plenty of troubling stories over the years about people borrowing money that I didn't think they could afford to pay back.

But subprime and Alt loans and other guaranteed to make you 'house poor' schemes have been around for years. Was it the cause or the effect of too many houses? Whatever, it was the precipitating factor in bursting the bubble. The curtain was drawn back, and the wizard behind the screen was naked as a jaybird. I've begun to see the whole housing thing as a true pyramid scheme. At the top, the fewest and the biggest, and probably the ones who scammed most of the money, were the big financial firms; the Bear, Stearns, the Lehman's.

Right underneath of them, a bit more numerous, were the big banks. Both of these found loopholes in the relaxed regulations to bundle problematic schemes into 'investments.' Next level under, more numerous, were the national builders, the national chains, and the big box developments. Again, I've felt too many commercial buildings were being built, especially locally. All done, in my opinion, in money borrowed from the future. A vast pool of liquidity that seemed 'free'; but will have to be paid. Just below them, the regional banks, builders, and mortgage companies; the wannabes and the followers.

Under them, in much bigger numbers, a crazy number of local mortgage and banks and other financial services. And an even crazier number of local builders and construction firms. Working for them, a vast pool of real estate agents, and construction workers, and mortgage agents, and clerks working at stores supplying the bubble, and so on. And finally, in at the base, the home buyers themselves. Prime, alt-loans, and subprime.

In most pyramid schemes, the top walks off with all the money. Whats unusual this time is that the problem first appeared at the top. The level of greed and graft and stupidity was so massive, that once we saw the wizard's big, red, hairy butt, we wanted our money back. After the collapse of Bear, Stearns, the government rushed to reassure us that they are buying the other financial services some fine pants. Don't worry, we'll take care of it!

But, as usual in a pyramid scheme, the biggest number at the bottom are bearing most of the brunt. Do you see the part of the pyramid that hasn't really been talked about much? Except for a few high profile national builders, it seems to me that most of the developers and big builders, both regionally and locally, haven't really been punished yet.

Even when a company seems to run into problems, someone else comes along and bails them out. Randy Sebastian is given another lease on life, albeit with his nuts firmly clamped. It has been commented in passing, that building just seems to keep going on, despite the glut of housing and the lending problems. Yesterday, the Wall Street Journal had an article that partly explained what's been going on:

In "Real-Estate Woes of Banks Mount," Michael Corkery, Jonathan Karp and Damian Paletta of the Wall Street Journal: (Italics are mine, to highlight the role of the developers.) "Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums. "Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky..."
"...banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern..." "Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting." ""We believe this period of procrastination is nearly over," says Ivy Zelman, chief executive of Zelman & Associates.

"The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis..." 'Real-estate lenders had been hoping for a decent spring sales season for new homes, which would have helped builders stay current on their loans. But the selling season has been a bust.' "..."Finally the banks are capitulating and saying, 'Let's mark to market and flush this all out.' The market is going to get worse. We don't want to hold on to this stuff."

For me, this is the final piece of the puzzle. It both explains why frenzied building continues by developers, and the response of the banks. It finally let me see the whole thing as the pyramid scheme I detailed above. It also appears to me that problems are starting to ricochet through the different levels -- the government steps in to try to firm up one problem, but it breaks out on another level and so on. Which mean, it probably can't be controlled.

I'd thought most of the bad news would be put on the back burner during the spring and summer, and the accounting would take place in the fall. Now, I'm wondering if even locally, they'll be able to hold off taking the developers out of play. If you don't mind, I'd like to repeat one of the above quoted paragraphs, in Capital Letters and Italicized.

"REAL-ESTATE LENDERS HAD BEEN HOPING FOR A DECENT SPRING SALES SEASON FOR NEW HOMES, WHICH WOULD HAVE HELPED BUILDERS STAY CURRENT ON THEIR LOANS. BUT THE SELLING SEASON HAS BEEN A BUST."

That says it all. There is no way to "gracefully" unwind a Ponzi Scheme (ie Bubble). Our government powers that be, clear down to local City Councilors, media outlet editors, and housing associations will slowly but surely learn this.

What I find baffling is that the markets seem unable to comprehend that we are in uncharted territory. Unemployment just exploded higher, catch EVERYONE by surprise. Well, almost everyone. I wasn't surprised by that, but I have been profoundly baffled as to why so few seem able to see through to the ultimate effects of this catastrophe. I still find this baffling.

Usually the markets discount things to the befuddlement of almost everyone, then The Event comes to light. The markets are an almost mysteriously good discounter of the future. Not in this case. They seem like they are years behind. Again, baffling.

Another Best Of Bends Blogs for the week was from Jesse Felders My Back Pages:

Can we finally put an end to the "it's different here" mantra?

Now that the news outlets have covered the latest National City Housing Valuation Analysis, I think it's time to clarify an important point of the study. Today's coverage of the study in the Bend Bulletin suggests its conclusion, that Bend is one of the most overvalued markets in the country, may be flawed:

Dave Woodland, the vice president and regional manager of Signet Mortgage in Bend, urged caution in drawing too much from the national survey, which doesn’t capture the true income of the area, he said.

“They look at Bend and say it’s overpriced based on reported compensation levels,” Woodland said. “The reason Bend is so popular is that it’s a great retirement area, and there are a base of individuals who are independently wealthy, self-employed or retired.”

This is the most common rebuttal of the study that I've heard. However, those suggesting that the attractiveness of Bend is not factored in have not examined the study's methodology. Actually, for the purposes of estimating "fair value" the study gives Bend a premium on par with similar areas such as Missoula, Montana; Flagstaff, Arizona and Santa Fe, New Mexico. In fact, Bend's premium is greater than that attributed to Boulder, Colorado; Las Vegas, Nevada and Naples, Florida and equal to that of ultra-wealthy Honolulu, Hawaii and San Jose, California. Take a look; The methodology is there for everyone to see.

I agree that Bend is a wonderful place to live but it is no better than these other areas. And it's far from the utopic wonderland the housing bulls would have us believe. So can we finally put an end to the "it's different here" mantra? For one, it's not valid. And two, it sounds way too much like the "it's different this time" mantra of the tech stock bulls of 2000.

Again, just a great piece. Many people, including yours truly, do not read the fine print on voluminous reports like this, and the media gets a pass when they spout their obligatory bullshit about Quality Of Life, and how that one factor will always justify any and all Bend home prices, no matter how high.

Also note how he points out that CA & FL, yesteryears Marquee Centers of Overvaluation, have returned to some semblance of normalcy, while Bend remains wildly overvalued. THIS is further proof that Bend lags the trends of the country as a whole, significantly. Everyone else has bled off significant portions of their overvaluation. Not us.

Good Job Jesse for spotting this one refuting point of fact that has eluded every media outlet in Bend.

Here is just a very good piece from The NY Times:

About 1 in 11 Mortgageholders Face Loan Problems

By VIKAS BAJAJ and MICHAEL M. GRYNBAUM

About 1 in 11 American mortgages were past due or in foreclosure at the end of March, according to a report released on Thursday, a figure that is rising fast as home prices fall and the job market weakens.

The first three months of 2008 marked the worst quarter for American homeowners in nearly three decades, according to the report, issued by the Mortgage Bankers Association. The rate of new foreclosures and past-due payments surged to their highest level since 1979, when the group first started collecting the data.

All told, about 8.8 percent of home loans were past due or in foreclosure, or about 4.8 million loans. That is up from 7.9 percent at the end of December. (About a third of American homeowners do not have mortgages.)

Delinquency and foreclosure rates started rising from historically low levels in late 2006 and have picked up speed in nearly every quarter since. Analysts say at first past due mortgages represented mostly high-risk loans made to borrowers with blemished, or subprime, credit. Now, as the economy has weakened and home prices have fallen in many parts of the country, homeowners with better loans are also falling behind.

Economists worry that a big loss of jobs in the coming months could drive default rates much higher. The Labor Department will release its report on the job market for May on Friday.

“It’s not going to help the housing market out at all if you have a loss of jobs,” said John Lonski, chief economist at Moody’s Investors Service. “When employment’s contracting, that makes it all the more difficult to sell your home at an attractive price.”

Though defaults are rising in many places, it is worst in areas where home prices soared in recent years or where the local economy is now struggling.

California and Florida, for instance, accounted for nearly a third of all mortgages that were in foreclosure or 90 days delinquent. Home prices, construction and mortgage lending were particularly ebullient in those states earlier this decade. The housing industry accounted for a bigger portion of their economies during the boom.

“The problems in California and Florida are extraordinary, and they are the main drivers of the national trend,” said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association.

Midwestern states like Michigan and Ohio, where home prices did not soar, are suffering mostly from the loss of manufacturing jobs and high-risk loans. Default rates in those states appear to have leveled off in the last few months, which may be an early hopeful sign.

About 9.7 percent of loans in five Midwestern states were past due or in foreclosure in the first quarter, down from 10.5 in the fourth quarter.

“This decade has been brutal on the industrial economies of the United States,” said Michael D. Youngblood, a mortgage analyst at Friedman, Billings, Ramsey. But “the rate of labor market deterioration in these depressed cities is significantly slowing.”

Michigan, Indiana and Ohio are still among the five states with the highest default rates. The other two states in that list are Florida and Mississippi.

Defaults are highest for adjustable-rate mortgages — loans that promised a low, fixed-interest rate for the first few years. But people who took out such mortgages are falling behind even before those loans reset to a higher adjustable rate. Analysts say that reflects the fact that those mortgages were popular among investors, buyers who made small or no down payments, and those who did not provide proof of their incomes.

Falling home prices are also contributing greatly to foreclosures. Homeowners who owe more on their loan than their homes are worth are more likely to default if they encounter financial distress, said Robert Van Order, an adjunct finance professor at the University of Michigan.

In past housing downturns like the one in the early 1990s, he said, housing prices did not fall nationwide and even in local markets they fell much more slowly. So far, home prices have fallen about 16 percent from their peak in the summer of 2006, according to the Standard & Poor’s/Case-Shiller index. Economists at Lehman Brothers expect the decline to bottom at 25 percent.

“What that means now is people don’t have that equity cushion as they get into trouble,” said Mr. Van Order, who was once chief economist at Freddie Mac. “The incentive to beg, borrow and steal is not there.”

By many measures the job market is not falling apart; the unemployment rate was 5 percent in April. But these are challenging times even for those who have not lost jobs with gas prices at $4 a gallon, economists said.

“Wage increases are not keeping pace with inflation,” said Bernard Baumohl, managing director of the Economic Outlook Group. “That really puts a lot of pressure on households to make some very serious financial decisions.”

The surge in defaults has been challenging for mortgage servicing companies, which find it hard to keep up with the growing backlog of loans awaiting foreclosure, analysts say.

Some mortgage servicing firms appear to be holding off because lawmakers in Congress are talking about a plan to refinance up to $300 billion in loans using the Federal Housing Administration, Mr. Youngblood said. The discussions are “giving servicers hope of a better solution for many borrowers,” he said.

In states like California and Florida where they have huge inventories of repossessed homes, some companies are starting to move a little faster by auctioning off properties, Mr. Youngblood and others say. In some markets like Las Vegas about half the homes sold in recent months had been in foreclosure.

Dean Williams, chief executive of the auction firm Williams & Williams, said mortgage companies are most eager to hire his firm in markets that have a “rapidly and constantly increasing pile up” of homes.

Note that since this piece was printed, unemployment is up to 5.5%. Have I mentioned that?

Notice that Americans in trouble now looks to be near 11%. Virtually no one had trouble paying mortgages 2 years ago. Why?

Because, as was mentioned by BEM in the comments, HELOC's were used as "income" for many years. And when home values are increasing, homes in some cases, sort of pay for themselves. HELOC it up every couple of years & you pretty much live for free in a house.

Now it's The Dark Side of this Ponzi Scheme. It still seems incomprehensible how bad it can & will get in a place like Bend, where incomes are so overwhelmingly tied to an imploding industry that'll make the timber bust look positively glorious.

Remember: See how bad it is nationwide? We are 18 months behind, and beta 5. Multiple whatever happens nationwide by 5 or a glimpse of Future Bend.

And possibly the most gloomy post of the week was by Cheri Smith, a local Realtor with the appropriately named "Buy In Bend" blog:

I have to admit I was disappointed to see that there was virtually no change in the number of home sales from April to May. And since I’m busy and not feeling very witty, I’ll leave it at that.

	Active	Pending	Sold
May	2132	193	115
April	2003	201	102
March	2009	194	82
February	1867	116	62

Wow. You can FEEL the despondent resignation in this womans tone.

You can also catch some VERY "realistic" vibes from Realty Times entries:

Fran McCormack: "Prices have turned sharply downwards. The average price of a single family residents is running around 475K. If you are an investor the Short Sale market is a place to pick up rental property or buildable land."

Debbie Hood: "We are still in the midst of a downward market correction, with Sellers adjusting their expectations from 2005 home prices."

Bev Sherrer: "Bend Oregon is a buyers market, interest rates are down and the inventory is up."

How about that Bev Sherrer? That's her entire entry, no mincing words, she's just fed up, incapable of an entry more than a few clipped words.

Go to Realty Times and you can get a taste for what it's like when an entire community of people are trying to talk themselves out of suicide.

And what would a weekly blog entry be with a self-administered kick in my crotch?

From Buster:

My humble opinion, is that this blog is a collective representation of Bend in decline, of intellectual laziness, This blog is Bend. Add insult to injury 99% of the folks on this blog are self-defeating renter losers.

You can't get more Bend than this group. You got the 'pussy' and his gorilla wife at the bike shop, this is what this blog is all about, middle age guys camping on their computer while their wives SELL in order to pay the bills. One day I went in to the Pussy's bike shop to find a part, as its near my house.

The first word was "Can I HELP YOU", this women was a white version of Grace Jones, a real man-hater. I quickly did a 180, and announced that I had a senior moment. Bitch Slapping this group is like stepping on a newborn litter of critters, what's the fucking point?

Bend is fucked, I think all of us know, and it will be years before the toilet bowl flushes the detritus. The people on this blog 100% represent the new-bend, which is why they constantly call each other cali-Ho's, because they are. It will take years to flush the toilet. I have done a good job of educating during the past 1-1/2 years, I'm a contrarian, as duncan has said, what's the fucking point? This is what the bottom looks like.

The "humble opinion" part was pretty damn funny.

But aside from that, you just really have to wonder about the motivations for Good 'Ol Buster. He supposedly owns rental homes which encapsulate most of his wealth, but want RE to implode. Why? He hates everyone here, but asserts that he'll never leave.

Plus he admits freely over & over that "Bend is fucked", and yet he says he abandoned this blog because he has outlined, along with BEM, ways to "fix" Bend. I've also outlined what I thought would fix Bend, but that was a long time ago, and I think it's too late.

Anther area where he & I seem to differ is the Ultimate Path that Bend will take. My own "humble opinion" is that local businesses are slowly but surely being crushed out of the Center. The center of Bend is being avidly turned into wildly overpriced commercial space, most of which is becoming vacant on Opening Day, even with signed tenants, who are defaulting on their leases.

The standard Bend business cannot survive at these lease rates. That's it.

So who does fill the space? Is it filled at all?

I do think we'll hit some eye-popping vacancy rates here in the next few years, but I'm afraid that we'll remain on corporate radars as a place to plop down a franchise. Sonic has just plotzed out the latest soulless edifice to much fanfare.

I visited Sonic this past week, and was left profoundly confused as to why ANYONE would line up to eat there. Not bad. Just wildly expensive & totally pedestrian food. I may never go again. Dandy's is FAR, FAR better. Greasy as hell. But way better.

This is The Problem. Sonic comes in under a corporate spending umbrella, Dandy's goes out.

Yarg.

It's already happening. Look for A Wave of locally owned restaurants to go under in the next 1-2 years downtown. WAVES of them. Retailers too. Then, look to see what pops up in it's place. Might be 2-3 years to fill some spots, but some may fill quick. Is it local? Or is it some slimy ass slick bullshit imported turd?

I'm guessing there'll be more of the latter, and less of the former. THAT will drive people OUT, and they will go in search of The Next Bend.