Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, August 04, 2009

Primer on Housing

I mentioned in my previous comments that the housing incentives aren't working as well as the auto incentives. It's an apples to oranges comparison.

The auto incentives are instantaneous and direct to the customer. You roll into the dealer and roll out with the $4500 already received and applied to the cost of your car. Buying a house, as we all know, doesn't work quiet so easily. It takes a lot longer and you have to wait until tax time to get the credits. It's a much more litigious and corrupted process. And the money has to be filtered through banks, which have little incentive to help.

There are several big problems in the housing market and the problem you focus on depends on where you are in the business. A good resource to follow the market is He also links to articles on Health Care, general economics, and the like. So here is a little primer.

Buyer beware
What is a fair value for this house? If I offer the list price, shouldn't that be enough? No.
Banks and realtors are fabricating bidding wars. Banks will direct the realtor to list low, get multiple offers (sometimes as many as 5-10) and award to the highest bidder or the bidder with the most cash. So as a buyer, you never know if you are player or a patsy. It is a classic Prisoner's Dilemma. Its supposed to be a buyers market, but the seller holds a lot of the cards. The seller is the bank. And they will set the price and then offer the loan. They know what the other bids are on the property. So their agent can tell you all sorts of things (there are multiple offers, some are higher than yours, etc) that will encourage you to offer more and more on a property to "win" it. There is a lack of transparency.
1) buyers bid up prices and screw themselves in the end.
2) buyers make honest offers and never hear back
3) buyers make offers only to see the bank yank the house off the market and then re-list it 2 months later at a higher prices.

Banks in Chaos
What did I loan on this house, and what can I recoup?
1) The banks don't really want to mark down losses. With the houses on their books, they can still list them as assets. Once they sell at a loss, they have to take a hit to their bottom line. This will reveal the depths of their greed and irresponsible lending habits. They hope that if they can hold out long enough, the "market" will bounce back. Delusion is a powerful thing.
2) Banks don't even know what assets they are holding. They have foreclosed on so many houses, they can't keep up. They hand these things to agents to sell. They have little time or manpower to track what the agents are doing with the properties other than selling them or not. The relationship is between the asset manager and the realtor. The rest of the bank is somewhat in the dark.
3) The banks do not have efficient processes in place to deal with the volume of foreclosures and short sales. This tells you how inefficent our banks really are! Th eboom hid these inefficiencies. They had no emergency plans.
4) Old habits die hard and the banks are greedy. Short sales are not supposed to result in bidding wars. Basically, a bank will list a short sale for the outstanding principle on the mortgage. The buyer is basically paying off old debt in exchange for a house. But even these are being treated to the "fabricated bidding war" mentioned above.

Realtors Unite
The number of real estate agents has ballooned. This started in the boom. Take a 2 week course, and you are certified. So there are many charlatans out there who have no a history or background in the business and who care less for ethics. That said, realtors have to put out a lot of effort without a guarantee of payment. They don't get paid until a house sells, so it's a risk.

If a realtor represents bank-owned properties, and the realtor doesn't sell them quickly enough, the bank will relist with a different realtor. This makes ethics in real-estate harder to come by than usual.

Homeowners Renegotiate
If you own your home, are underwater, but still able to make your payments, good luck renegotiating your mortgage payments. What incentive is there for a bank to agree to a lower interest rate when you perform for them? Why give up on a high rate performing loan?

If you are a homeowner in distress, meaning you risk missing your payments, good luck getting someone at your bank or broker to pick up the phone. They will bump you around from one manager to the next, loose your paper work, tell you they never goy your paperwork, ask you to start all over. The right hand doesn't know what the left hand is doing. So one person at the bank will say everything is fine, another will tell you the opposite.
1) the bank often does not know who currently owns your mortgage.
2) the banks do not have the infrastructure to deal with the volume
3) the banks are stalling
4) the state of CA is helping them stall by putting an additional 90 moratorium (started in June) on foreclosure. The idea is that this will give banks time to work with lenders. But that is not happening and the pain is being prolonged.
5) even if the bank renegotiates the mortaguage, many of these owners will default in 3 months again. Many have lost their jobs. So why put out all the effort if it won't change the outcome?

Investors paradise

Investors, Investors . The flipping is still going on. Investors will purchase homes in bulk at auction at deep discounts. And then flip them after they have bought them. Those not sold at auction go to the customers who will fight in the mud for them.

On guy I know is buying up properties cheap, adding new carpet and paint and then renting them. The idea is that when the market turns, he will sell them at a profit. I hope it works for him.

The best stimulus programs are those that are simple, direct, and instant. The rest is a 50/50 chance at best of working. The more interests involved, the more convoluted the process, the less effective.


The Law Talking Guy said...

I repeat my call from several months ago that the federal government should simply offer to convert anyone's home mortgage into a 30-year fixed 5% note. This cannot be more expensive than bailing out the banks. It is also very, very easy to do.

It will easily sort out those who can from those who can't afford to be in their homes (if you can't afford the 30/yr fixed 5% payment, you'll never be able to afford the house).

The Law Talking Guy said...

"They hope that if they can hold out long enough, the "market" will bounce back. Delusion is a powerful thing."

This isn't necessarily deluded. Land is a finite resource. Over time, real estate tends to appreciate if for no other reason than scarcity of desirable locations and population growth. With some exceptions, real estate has been a solid investment for a very long time. I would be very surprised if we don't see nominal housing values reaching 2006 levels by 2015.

USwest said...

That is a long time to let a house rot unsold, and uninhabited and it's a long time for a bank to hold on to an asset. They keep thinking it will bounce back next year. That is delusion.

House values do rise over time, but what happened over the last 10 years was crazy. If you house does the same or slightly better than inflation, then that is a healthy market. But selling a 1000 sq. ft. house built in 1948 and not improved on since for $600K is not healthy to say the least.

Anonymous said...

During the real estate bubble of the late 90's, CA real estate appreciated 700% over ten years, the stock market,in that same 10 year period, appreciated 300%...there is no way that CA real estate was worth more than the companies that comprise the stock is artificial...just like oil speculation...oil is waiting off shore in full tankers, waiting for the price to go up. Prices of houses will go way down when interest rates go to 15 or will only be that scarce for consumers, the banks will be flush with cash, but none of us will have jobs...very weird economy. WW

The Law Talking Guy said...

"Prices of houses will go way down when interest rates go to 15 or 20%"

Not if the reason for high interest rates is inflation, which is probably would be.

USwest said...

Yes, LTG but that isn't value, really. It wasn't inflation that drove them up in the first place. The value of the dollar didn't change so much as to justify the crazy prices. The prices were specualtion. Speculation still exists. If house prices go up drastically again, it will be speculation, not a recovering market.

Every thing I read says that we shouldn't expect much from hosuing for a long while. There are still many resets coming over the next 2-3 years. In fact, the bulk of the resets will come in 2012 since many were taken out at the height of the bubble in 2007. California in particular will feel this.

Overall, the attitude that a home is an investment or ATM has to stop. A home is first and foremost a home. It is a good investment second.

That said, I like your plan about converting everyone's debt to 5%. But even at that, many people with huge debt won't be able to cover it. And actually, many won't cover it all, expecially those with negative amorts. They can't afford what they have now when they aren't even coving their current interest.

Housing has a long way to go, I'm afraid.

Anonymous said...

Seems to me the best stimulus package would be to give every adult in the US a million bucks...rather than bail out the banks and insurance companies...I think that would be stimulating...most folks would pay off their debt, no need for a 5% interest rate, buy goods and services...etc...

By the way LTG, we have already had just has been covered and manipulated by the Fed, mostly all that is coming home to roost and again, printing as much money as they are is highly inflationary, I aggree...but if they are not lending it and no body has a job, prices are not going to go up unless the rich just keep buying and selling their 10 and 12th homes to each other. WW

The Law Talking Guy said...

What do you mean when you say we have already had inflation?

Uswest said...

I believe that WW is referring to the very low interest rates that kicked in after the bust. Greenspan kept the rates low in the face of the bubble. The low rates allow more money to come into the float. It's sort of a paradox: he was so worried about inflation that he fought it off with low interest rates, which then created inflation.

Bubbles are inflationary. We have had housing bubbles and oil bubbles over the last 1o years. When Banks are willing to flood the market with cash in the form of loans, then your money supply increases as do your prices. Thus, we ended up with $500,000 tear downs for houses. It wasn't lack of land that caused that. Look around California. There is tons of open space.

Anonymous said...

Yes, USW and the Fed printed billions to pay off the S&L debacle and that money later went off inflation has been masked for a long just can't print money like they have and not have inflation. If they went back right now and valued gold at 50K per ounce, we would no longer have any debt. WW

The Law Talking Guy said...

USWest, yes there is lots of open space in CA, but not in the desirable areas. The LA Basin, for example, is full. The empty developments are beyond the mountains in the Antelope Valley or Palmdale or the Inland Slumpire. The value of that property is really driven by the value of property in the urban/suburban core. The property people want to buy is a single family home in Beverly Hills or San Marino. To some extent, everything else is sort of priced downslope of that near here.

If we have had secret inflation, we have to ask why it hasn't shown up in the CPI, or in higher interest rates. I am not sure this is the correct diagnosis. I think we WILL see significant inflation when the economy recovers, but probably restrained, something like 5-7% for a few years. That will eat away at purchasing power and prevent a real economic boom, but when salaries gradually increase in 3-4 years' time, it will take a bite out of the debt burdens.

The Law Talking Guy said...

USWEst- you ARE right that a significant group of homeowners won't be able to afford a 30% fixed 5-year note. If so, they must lose their houses, I fear. I don't see how you can help them beyond just giving them free money.

If we had such a note, our mortgage payments would drop by 25%, although we actually have pretty decent rates as it is.