Let us look at how charge-offs react with recessions:

Now here we have a fascinating look into the balance sheet of banks with assets of more than $20 billion.  We are looking at the too big to fail here.  Even with all the support their net charge-offs are spiking into record territory.  Now look at data from the last recessions.  What you will see is that charge-offs were already declining in the early 1990s.  The recession in the early 2000s is somewhat of an anomaly because as charge-offs spiked, a flood of easy loans made its way into the market quickly reversing this trend (money created by the Federal Reserve).  We were out of the recession before banks realized how much credit was flooding the market.

Loan loss reserves have gone up with non-performing loans:

Over 5.6 percent of all loans on bank balance sheets are non-performing!  This is enormous for a system that carries trillions of dollars in loans with mortgages, auto loans, student loans, and credit card debt.  Why are we to expect that the recession is over if non-performing loans are still moving higher and higher?  The banking system would like you to believe that all is well but their actions and balance sheets tell us a very different story.  We should fill our ears with wax otherwise the siren calls of the banks will lead us into disaster yet again.

If we want to get a sense as to what banks are doing with the additional bailout money, we can simply look at excess reserves:

The short drop recently comes from banks using funds to speculate through their own investment division in the stock market.  This has very little to do with bank lending to American consumers.  This policy tells us banks have little faith in the American consumer and economy although their message for the bailouts was on a different tune.

If we chart the path of credit on a chart, you can see that for the last 60 years the strongest booms and bust have come from the credit cycle.  One of the most stunning charts comes from the consumer loan securitization market:

In other words banks want very little to do with consumer debt.  And much of this also stems from the weakness emerging from the housing market yet again:

Home prices are yet again tracking lower.  So what can we expect?  We can expect that non-performing loans will continue to grow as the economy struggles while banks sit on large reserves trying to ride out the financial storm on the back of taxpayers.  This isn’t exactly what they are telling the public but this is clearly what is occurring in the data.  Similar trends in the higher education bubble and student loans are showing similar patterns.  Banks are in battle formation yet telling the public that all is well.  The above charts show otherwise.

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Worth a read this weekend:

“(NY Times) Whatever you may think progress looks like — a rebounding stock market, a new house, a good raise — the governments of the world have long held the view that only one statistic, the measure of gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output — a tally of, among many other things, manufacturers’ shipments, farmers’ harvests, retail sales and construction spending. It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing. In the U.S., economic activity plummeted at the start of 2009 and only started moving up during the second half of the year. Apparently things are moving in that direction still. In the first quarter of this year, the economy again expanded, this time by an annual rate of about 3.2 percent.”

“As it happens, all those things — cooking, cleaning, home care, three-week vacations and so forth — are the kind of activity that keep Low-G.D.P. Man and his wife busy. High-G.D.P. Man likes his washer and dryer; Low-G.D.P. Man doesn’t mind hanging his laundry on the clothesline. High-G.D.P. Man buys bags of prewashed salad at the grocery store; Low-G.D.P. Man grows vegetables in his garden. When High-G.D.P. Man wants a book, he buys it; Low-G.D.P. Man checks it out of the library. When High-G.D.P. Man wants to get in shape, he joins a gym; Low-G.D.P. Man digs out an old pair of Nikes and runs through the neighborhood. On his morning commute, High-G.D.P. Man drives past Low-G.D.P. Man, who is walking to work in wrinkled khakis.”

In 2009 productivity of American workers went through the roof while corporate profits soared.  Squeeze the bottom so the top can get their lemonade.

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Now to most people outside of California, this doesn’t seem like a big deal.  But ask anyone in the Bay Area about Oakland versus San Francisco or Hayward and San Mateo and you’ll get two very different stories.  And the price of housing reflects this difference:

We should spend some time analyzing the above data since it gives us good perspective with the market.  All zip codes in Hayward and San Mateo are up in price over the year.  In fact, in one Hayward zip code prices are up 56 percent!  This brings back memories of the California housing bubble.  Now part of this is also being driven by banks retooling and understanding how to squeeze people into FHA insured loans that require only 3.5 percent down.  If you combine this with the expired tax credit, many people were able to move in with nothing down.  Nothing down was part of the toxic mortgage problems in the state but also has created an incentive for strategic defaults if things go bust.

San Mateo is clearly more expensive but sales are brisk in both areas.  In fact, in the 94403 zip code prices are up 30 percent for the year with 28 sales.  This is a good set for measurement.  What does this tell us?  That housing bubbles are alive and well in both Hayward and San Mateo and with two different audiences.

For each zip code in Hayward a family would need to bring in at least $100,000 a year to purchase the lower end homes.  Yet the median income for the area is $61,000 and roughly 20% of families bring in more than $100,000 a year.  This is typical of areas in California with housing bubbles.

The results for San Mateo are similar but the data is pulled higher but not to a level that would justify current prices:

The median household income for San Mateo is over $100,000.  Two zip codes in San Mateo have prices of $662,000 and $710,000.  Let us just say we are looking to buy a $700,000 home.  A household would need to gross roughly $250,000 per year to be able to afford this house without stretching their budget.  The data shows that less than 15% of households meet this metric.

In other words, you have the same tiny sliver of people that can afford a common home in these areas.   This was very common in bubble areas across California.  The above information shows us that in Northern California home prices are once again reaching bubble levels.  This is unsupportable and will adjust.  Short of families doubling income in the next year, it is hard to see this remaining this high for a very long time.

Leave it to California to start housing bubbles again.

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