http://mhanson.com/archives/242

You make an interesting argument that holding the shadow and meta-shadow homes off the market is a better play long term but there are some problems with it.

For one thing, the shadow stock is not exactly in some sci-fi kind of “statis field”, eternally preserved until the time is right to sell. Rather, many of these places are on an accelerated course towards dilapidation. Homes don’t automatically fix their leaks, run heat to prevent pipe freezing, call the police when squatters arrive, detect and resist invading pests and insects, or care for the landscaping – and the banks don’t appear to be keeping up with these little details.

For another thing, nobody should be damn fool enough to buy into a market with a large shadow and meta-shadow stock because there’s an excellent chance (think “L-shaped recovery”) that they’ll quickly wind up under-water.

For yet another thing, holding these homes off the market for a long time – trickling them out – hurts at least two other segments that are traditional profit centers for banks: housing starts and home improvement.

Another: you suggesting a business strategy of price fixing and an investment strategy of market timing, all over an asset class that is depreciating rapidly in use value. Somehow, I don’t think that story ends well.

Another: your strategy keeps people who are likely doomed to eventual foreclosure from doing a title in lieu of foreclosure to move to a cheaper place. In that way you are hurting both consumer spending and raising the transaction costs of processing the “meta-shadow” market. Your also losing fees and interest on new, lower principle mortgages that would actually be serviced by debtors.

An analogy to what you are suggesting might be to certain forms of agricultural subsidy and market controls which succeed in *both* sucking up tax dollars *and* badly distorting the technology of production into irrational modes.

I suppose that if it keeps up long enough, we’ll probably start to see a new found popularity of the notion of exercising eminent domain. That’ll be a fun fight. In the alternative, we’ll all wind up with foreign, mostly Asian holding company, landlords. It’ll be OK, though. We’ll be able to settle in the shanty towns that spring up in the parking lots and buildings of foreclosed and abandoned shopping malls.

In your second message you speculate that if the stock were all put to market it would all wind up in the hands of speculators. Whose hands, exactly, do you think it is right now?

-t

You won’t cry tears for people who weren’t informed enough to realize overpaid for their homes, but you want me to cry tears for you because you weren’t informed enough to realize that the government would step in when this all went to shambles and that the banks wouldn’t fire sell every house for less than is owed in exchange for more loans? You didn’t consider that the banks might instead prop up the market and only want cash? So your innocent and getting screwed because you listened to financial pundits who said real estate was going to crash to 1994 levels while ignoring political and economic realities that make it so they won’t; but people who relied on their RE agents, appraisers and lenders (the so called experts in the field to whom they paid thousands of dollars to provide them with services) are idiots who deserve to get burned? I’m not sure I follow your logic. I know life’s not fair, but that’s not going to change. I know you’re mad, but at least be mad at the right people.

I don’t think you fully understood what I was saying. Prices won’t necessarily go “BACK TO WHERE THEY SHOULD HAVE BEEN” faster either way. When banks do have to unload inventory today, investors are already picking up these foreclosures by the handful and sitting on them for future profits. The prices have now dropped far enough for this to be happening today. For you to buy that house, you have to either pay the investor’s profit or get really lucky on a public auction foreclosure that is willing to give you time to get a mortgage over an investor who has cash in hand. If you, as an apparently responsible hope-to-be homeowner, think you’d be able to get that same great deal as the investors, think again. The hope-to-be-homeowner often doesn’t have the connections to get the best deals (not everything goes out on the public market). Unsold finished homes, unfinished homes and raw dirt lots for entire subdivisions are being sold in packages. The same investors are moving in and sweeping up previously owned foreclosure inventory to consolidate business within individual areas, and position themselves for sales in the future. Even if they end up taking a slight loss (say the 6% mentioned in the post), they’ll more than make that back by avoiding having foreclosures all over their neighborhoods. I see it happening here a lot in the last few months; and they’re paying cash. And therein lies the problem. They’re buying cheap by buying in bulk and/or paying cash, pushing appraised values way down, but not actually putting homes on the market at these lower prices for you to buy. So even if you do get to bid on a given house, the market is so unstable, that you as a hope-to-be homeowner is going to have trouble getting a loan for the amount you’ll need to pay for a foreclosed home without an especially hefty down payment or cash in hand. Cash is still king, and the only people with cash are the investors. This also means that owner-occupiers in the neighborhood who might need to refinance, say, a 5-1 arm might find themselves in a situation where their house now appraises for way less than is owed due to the cash deals artificially lowering prices below natural level. Dumping more inventory will make this even worse. Now you have another foreclosure being scarfed up by investors that might have been avoided if prices stayed propped up. Like I said in my previous post, the people who have the most to gain from the “foreclose everything now” strategy are investors.

Just how many hope-to-be-homeowners with hefty down payments in their pockets do you think are out there? Probably less than the number of homeowners who are still making monthly payments but may have paid a little too much for their homes. Unless you saved up an awful lot of money, you may still not be eligible for the best deals. Dumping these foreclosures on the market may not improve your situation, it may only move empty houses from banks to investors and owner-occupied houses to investors and still leave you out in the cold. It hurts homeowners who paid too much while not helping you as a potential buyer who can’t pay in full. So the banks defrauded buyers by appraising their house for more than it was worth, but when the homeowner want’s to renegotiate those terms, they’re somehow the bad guy who’s oppressing you?

So what we’re seeing is a re-inflation of the same exact bubble in these areas. It really doesn’t matter if the bank owns it as a foreclosure, or an investor owns it. Either way, a lot of homes are being kept off the market. Lot’s of false scarcity exists not so much because homes that should be foreclosed upon are not being foreclosed upon. False scarcity exists to a large extent because we have a new wave of investors re-inflating the bubble. You think these banks are delaying foreclosure’s out of the goodness of their hearts (the FM/FM “foreclosure moratorium” was lifted 5 months ago)? No, they’re playing a strategic game of inflate the value of their assets. Remember that most banks are no longer as desperate for cash as they were 6 months ago. Sorry, homes in most areas will not be going down to their 1994 prices, ever. The bottom line is that the “get ‘em all on the market” rally cry is not the silver bullet some like to claim it is.

Also consider this; if you’ve ever had bad neighbors, you know how they can cause you issues. Empty homes don’t generally make for good neighbors. So in neighborhoods with loads of previously occupied foreclosures but with fewer professional investors, there are a whole host of related problems. What you have here are lots of amateur investors who let the property go to hell until just before they’re ready to sell or they rent them. Neither is good for home values in neighborhoods. Overburdened towns and HOAs with lots of homes that owe back taxes and dues don’t make good enforcers. So if you’re really so responsible, you won’t buy in these dumpy neighborhoods, even if prices are cheap, so even if you do end up with lot’s of empty houses for sale, how does this help you? How does blame the “poor downtrodden homeowner,” to use your own words, really address the guilty parties, when the homeowner’s simply trusted hired professionals who were the ones either committing fraud or unqualified to do their job?

So while I was lucky enough to have bought before the bubble in an established neighborhood, I do have a friend who lives in one of those very towns who bought at a price that he could afford, but higher than what he could get for his house today. He’s by no means, rich, looking for a quick buck, or irresponsibly gambling. Meanwhile, if his situation changes, these fire sales being called for could find himself upside-down on the house. For people like him, keeping prices propped up may just keep him in his house, rather that adding to the problem. In libertarian land there would be no government bail outs and this wouldn’t be acceptable, but in the real world this is how things work and have worked, so no one should really be surprised. Would I have bought when and where he did? No. But I could have turned out to be wrong. But did I buy into the stock market on a supposed expert’s advice 10 years ago expecting to at least keep up with inflation over the course of a decade? Yes. Would I have been better off buying CDs? Yes. Like him, I’m doing the best I can, and sometimes make mistakes. It’s all a gamble to some extent. This “dump the RE onto the market” cry just reeks of “Drill baby Drill” to me; another non-solution that get’s people riled up and diverts peoples focus from the real problems.

“…actually talk to the people that live there and understand their local market, you can really see why it isn’t going to help the situation, and may actually make the problem both more severe and more prolonged.. ”

I’m fighting back the tears for these poor unfortunates…

Solution: Let them rent like the rest of did when it was a safer to do so than buy a property.

Those poor, poor Maricopa, AZ or Henderson, NV, or Victorville, CA idiot homeowners and greedy flippers who bought at the peak in these places, laughing off warnings from prudent renters during the end of the bubble. Did anyone raise their voice in concern for the poor potential buyers who lost money to rent when they would have preferred buying because they refused to overpay for real estate they knew they could not reasonably afford and are now as liable to suffer the economic and tax consequences of these idiots’ actions?

Of course not. We should instead do everything possible to protect the morons who got us into this mess even if it means continuing to punish the innocent people who got screwed because they didn’t want to gamble. Please let us know if the poor downtrodden homeowners you’re concerned about are going to be cold this winter and we’ll send them our furniture, clothes and cash to burn if they need it to keep warm in the houses we just bought them with our tax money.

How about this… hurry up and foreclose so that prices GET BACK TO WHERE THEY SHOULD HAVE BEEN in the first place and prevent the further penalization of those who had nothing to do with this mess by forcing those guilty of participation to PAY as they should along with the mortgage originators, banks, and RE industry for their actions and at least permitting innocent and prudent first time buyers to purchase the properties at a reasonable rate – which should directly reflect the crappy job market AFTER discounting for the deflated credit bubble.

Please, if anyone here can’t afford to keep paying their mortgage any longer, I encourage you to just walk away from it. After I buy your house from the bank for its 1994 price, you will find my apartment available for you to rent for as many years you need to save for a real down payment on a house you can better afford with your income.

This rallying against short sighted solutions and only offering up other short sighted solutions really pisses me off. Given all of the unintended consequences, it seems that dropping inventory onto the market may actually prolong the situation even more than what is currently being done. Or maybe not. But I’m pretty sure no one really knows. So let’s be honest, this certainly isn’t as simple as ripping off the band-aid versus slowly peeling it off. The end results will not be the same. The hurry up and foreclose solution may be appropriate for Long Island, NY but come out west and visit Maricopa, AZ or Henderson, NV, or Victorville, CA, and actually talk to the people that live there and understand their local market, you can really see why it isn’t going to help the situation, and may actually make the problem both more severe and more prolonged.