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George Hernandez looks at job openings at the Foothill Employment and Training Connection on February 3, 2012 in Pasadena, California.
A solid national jobs report this morning — 227,000 new jobs added, unemployment rate steady at 8.3 percent — was followed by a psychologically significant California report, from the state's Employment Development Department. At long last, we're below 11 percent — 10.9 to be exact, for January 2012.
Bear in mind that 10.9 percent is still much higher than the national rate. In Los Angeles, it's even higher, at 11.6 percent (that's the December 2011 number). Still, the overall trend is down. After a rough 2011, we can start to feel better about the economy's momentum.
Importantly, in California we're beginning to see signs of a recovery in the housing sector. Home sales and home buildings appear to be picking up, although it's still unclear whether prices have bottomed. The market continues to be out of whack and could take another four or five years to normalize. But improvements showed up nationally and at the state level, as construction added jobs. The pace is slow, but the direction is positive.
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MIAMI, FL - NOVEMBER 10: Renzo Salazar, from Real Signs of Ace Post Holding Inc., places a bank owned sign on top of a for sale sign in front of a foreclosed home on November 10, 2011 in Miami, Florida.
The L.A. Times' Michael Hiltzik is appalled at the moralizing going on around "strategic defaults" — a default on a mortgage undertaken from a position of cold, hard financial calculation, rather than from some sentimental notion that a borrower should always, always pay, no matter what cards life deals him:
What often gets overlooked in the debate over walkaways is why it should matter. A default is a default, isn't it? [Old Dominion University's Michael J.] Seiler, for one, disagrees — he argues that defaults for noneconomic reasons have a uniquely corrosive effect on social behavior.
That's based on the notion that borrowers have a moral obligation to pay their debts. Yet a mortgage contract is a legal document, not moral catechism. It doesn't require you to make your payment regardless of your financial state; only that you recognize that if you don't, you might lose your house.
Mortgage lenders customarily try to price the likelihood of delinquency or default into the loan; that's why borrowers with the best credit scores typically pay the lowest interest rates. Nor is the credit score a gauge of moral purity — it's an empirical reflection of the borrower's debt load and bill-paying record.
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Warren Buffett, chairman of Berkshire Hathaway, attends the Allen & Company Sun Valley Conference.
Billionaire investor Warren Buffett released his annual Berkshire Hathaway shareholder letter over the weekend. As Marketplace's Heidi N. Moore reported on Monday, this is a much-anticipated and closely studied document. And as one of her sources pointed out, sometimes it's more interesting to focus on what went wrong in Buffett-land than on what went right — because Buffett provides engaging details on both outcomes.
For this letter, you want to zero in on the housing market, which in early 2011 Buffett figured would begin to recover in a "year or so." Wrong! Or to quote the Great Man himself: "dead wrong." Berkshire Hathaway has several housing-related companies in its portfolio, so Buffett would ultimately like to see the long-expected bounce-back. He's optimistic — because you can't fight human nature! Or more accurately, randy human hormones:
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I was emailed this story from the San Gabriel Valley Tribune last week, about how Norman's Nursery is relocating what amounted to a semi-permanent landscaping forest from the San Gabriel Valley to Ventura Country. Why? The housing crisis has pushed the company's sales down 60 percent. And the effect?
The removal of thousands of boxed trees, shrubs and ornamentals stored along a one-mile stretch of Arrow Highway on the northern border of Irwindale and Baldwin Park has already had an aesthetic impact. The flat land adjoining the Santa Fe Dam was leased from the Army Corps of Engineers by Norman's Nursery for growing plants. The large swath of potted trees, plants and shrubs placed side by side and in rows formed a greenbelt that has existed for more than 20 years, Norman said. At first glance, it appeared as if the trees were permanently planted there.
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Well, this is interesting. The Federal Reserve has produced a white paper that tackles the Very Big Problem of the ongoing housing crisis and submitted it to Congress. It's a veritable treasure trove of clear-eyed analysis about why the housing market is still in such rotten shape. But beyond that, it offers a suite of equally clear-eyed ways to fix the problem.
One of these is particularly intriguing: taking foreclosed properties and, instead of trying to sell them to new homeowners — which requires mortgage financing which isn't now widely available to any but the most creditworthy borrowers — turning them into rentals. And who will do the renting? Real estate investors are the secret sauce (just a bit of translation: "REO" means "real estate owned," i.e. foreclosures):
To date, REO holders have avoided selling properties in bulk to third-party investors because the recoveries that REO holders receive on such sales are generally lower than the corresponding recoveries on sales to owner occupants. Investors considering such bulk-sale transactions tend to demand a higher risk premium than owner occupants and thus will purchase only at lower prices. Investors in such transactions also might have more difficulty obtaining debt financing than owner occupants. Although mortgage products are available for individual one- to four-family houses and for multifamily properties (albeit currently at tight terms), no mortgage products currently exist for a portfolio of single-family homes. [My emphasis] In addition, REO holders must absorb the costs of assembling inventory for bulk sale — that is, holding properties off the market until enough properties have been assembled to cover the fixed costs of a rental program. Until the inventory is assembled, the REO holder receives no revenue from the property but incurs direct financing costs; carrying costs such as taxes, utilities, and maintenance expenses; and the continued depreciation of the property.
An REO-to-rental program that relies on sales to third-party investors will be more viable if this cost-pricing differential can be narrowed. REO holders will likely get better pricing on these sales if the program is designed to be attractive to a wide variety of investors. Selling to third-party investors via competitive auction processes may also improve the loss recoveries.