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 Patrick.net 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.