Sunday, October 27, 2013

In the interests of the petty real estate speculators

Because the history of the USA is mostly about filling up a continent with immigrants, the dominant economic activity from day one was real estate speculation.  Yes, guys like me like to stress that what made USA unique was its nurturing of invention and inventors, but in the cold light of day I must admit that the foremost economic activity was drawing imaginary lines on the ground and selling the resulting plots.

Unlike the process of perfecting the mass production of steel or inventing the microchip, it doesn't require much genius or capital to get into real estate speculation.  In fact, there wouldn't BE much speculation if it wasn't an activity almost anyone could get into.  Even so, what land is "worth" is usually a function of what someone does with the land and THAT usually requires genius, capital, and in the case of something like agriculture, a lot of hard work.  What this means is that while the number of potential participants in real estate speculation is very large, especially when practiced on a continent-wide scale, there are very few folks who become John Jacob Astor wealthy.

What made the real estate craziness of the early 21st century different was the idea that mortgages could be bundled and sold on Wall Street.  While all real estate bubbles are doomed, this one was especially cursed because this bundling undermined hundreds of years of legal magic that protected the values of land with those lines drawn on it.  Hard to bundle mortgages if every time they change hands, folks have to trek down to the county offices to change the title. So when Wall Street got involved in the business of petty real estate speculation, it caused the bubble to inflate faster and by destroying the legal magic that has given "legitimacy" to the whole enterprise over the years, made the resulting collapse much MUCH messier.

It is easy once in a while to just dismiss the whole affair as a bunch of low-level victimless crimes.  From sales, to the inspectors who assess valuation, to the mortgage lenders, to the legal magicians, real estate attracts some pretty unsavory characters.  If those folks are hurting because they were out trying to corner some greater fraction of unearned wealth, it is hard to muster much sympathy.  But when we look at the collapse of a real estate bubble, we are also talking about folks who are losing their homes, farms, and businesses.  So while we are looking at the destruction of a lot of fake valuations, we are also see the destruction of real wealth.  It is this factor makes the resulting economic catastrophe so long-lasting and nasty.

When the big players on Wall Street got involved in a petty business like real estate, it was a sign that they were running out of ideas.  There was something especially vile about using the sophisticated financial machinery of Wall Street to loan-shark sub-prime mortgages.  The utterly lame response to the crises of 2008 shows pretty clearly that the big boys are still out of ideas.  Of course the reason they are out of ideas in the first place is that they limit their imaginations to get-rich-quick schemes.

"4,594,000 Mortgages Going Unpaid in the United States."

What Recovery?


Buying a house is a lot like buying a car. If you don’t look under the hood, you could wind up with a lemon. Only with housing, it’s not as simple as checking the dipstick or looking for oil under the rear axle. No, smart home buyers check the data to see what’s really going on. That’s the best way to cut through the hype and separate the fact from the fiction.

Lately, interest rates have been inching higher while prices have been rising. The combination of the two has put the kibosh on sales leading to a more generalized slowdown. But sluggish sales and higher rates don’t tell the whole story. For that, we need to take a peak under the hood and see what the cheerleaders in the media have been hiding from view. And what they’ve been hiding is nearly 5 million homeowners who’ve stopped paying their mortgages altogether. That’s no small matter. Here’s the story from DS News:
Lender Processing Services provided the media with a “first look” at the company’s mortgage performance statistics for the month of September….LPS counts a total of 3,266,000 mortgages nationwide that are 30 or more days past due but not yet in foreclosure. That tally represents 6.46 percent of all outstanding mortgages…..

Of the more than 3 million delinquent loans, LPS says 1,331,000 have missed at least three payments but haven’t started the foreclosure process. Another 1,328,000 mortgages are currently winding their way through foreclosure pipelines, according to LPS’ data….

All-in-all, there are 4,594,000 mortgages going unpaid in the United States.” (“Number of U.S. Mortgages Going Unpaid = 4,594,000″, DS News)
Yikes. Now, that doesn’t necessarily mean that it’s a bad time to buy a house, but one should at least be aware of the fact that there’s a gargantuan stockpile of backlogged homes just waiting to flood the market once the banks get their act together. Of course, maybe that day will never come, right? After all, we’re already 5 years into this thing and the banks are actually dragging the process out longer today than ever before. Maybe you don’t believe that. Maybe you think that there’s actually a shortage of supply which is why prices have been going up for the last year or so. Okay, but why not withhold judgment until you check this out. This is from an article at Housingwire titled “Prolonged liquidation timelines shake up home prices”:
“Timelines on distressed inventory continue to drag on, while elevated mortgage loss severities continue to offset positive gains on home prices…..

Liquidations increased 32.2 months for the third quarter, up from 31.1 months for the second quarter, and also up from 28.3 months a year ago. In aggregate, timelines have increased every quarter since the fourth quarter of 2008 and remain at historical highs…

Nonetheless, the most seasoned inventory continues to prove difficult to liquidate, skewing aggregate timelines higher.

“The percentage of distressed mortgages that are five or more years delinquent has tripled just in the last year,” Nelson said.” (“Prolonged liquidation timelines shake up home prices”, Housingwire)
Read that last line over a couple times and let it sink in: “The percentage of distressed mortgages that are five or more years delinquent has tripled just in the last year.”

That doesn’t sound like the “Happy days are here again” refrain we’ve been hearing in the media, does it? It sounds like the banks still haven’t even dumped the subprimes they’ve had on their books for 5-long years. In fact, the article alludes to that very fact. Here’s the money-quote: “Subprime loss severities have remained flat with timelines in excess of 34 months and home price gains lower than the national average.”

The banks are still writing down the losses on subprime mortgages? What a farce.

Now, I know the article was written in opaque business-journal-type gibberish that makes it hard to understand, but just consider what the author is saying: “Liquidations increased 32.2 months for the third quarter… up from 28.3 months a year ago.” So the banks are actually taking LONGER to process the gunk on their books than even last year. Why would they do that? Why would they drag out the process longer than they had to?

Three reasons:
  1. Because they don’t have the money to cover the losses.
  2. Because they don’t want to dump more homes on the market and push down prices.
  3. Because the Fed is lending them money at zero rates so they can roll over their prodigious debtpile at no cost to themselves.
So, you see, the whole system has been rejiggered to accommodate a handful of underwater, zombie institutions who wouldn’t know how to make an honest buck in a normal business transaction if it was staring them in the face.

Back to housing: So there’s a humongous shadow inventory of distressed homes that have yet to reach the market. And the banks are dragging their feet to keep prices artificially high. Everyone knows this now, in fact, even CNN ran a story on the topic last week. Here’s a clip:
“Foreclosure sounds like the end of the line, but actual eviction can take months or years — even after the bank has repossessed a home. RealtyTrac estimates that 47% of the nation’s foreclosed homes are currently occupied. The percentage actually tops 60% in some hot housing markets, like Miami and Los Angeles.

Those still living in repossessed homes include both former owners and renters. Either way, their time in the homes is mortgage and rent free….

And banks may be in no rush to kick people out. They will take their time in markets with a lot of homes for sale and depressed prices. Plus, letting homeowners stick around can help protect homes from abuse.” (“Half of nation’s foreclosed homes still occupied”, CNN Money)
What’s funny about this article is that the banks have been fighting tooth-n-nail for the last year for the Consumer Financial Protection Bureau (CFPB) to ease lending standards on their Qualified Mortgage (QM) rule so they can blow up the system again and leave us all with another 5 or 6 million foreclosures. What’s that saying about “old dogs and new tricks”?

There’s no point in going over the same material over and over again. People who follow the market already know that mortgage applications are down, rates are up, sales are down, prices are up, etc, etc, etc. But potential homebuyers should at least know that this is the weirdest housing market of all time. The extent of the manipulation is simply mindboggling. It’s a stretch to call it a market at all since the fundamentals have been tossed out and replaced with fake rates, fake inventory, fake mortgage modification programs, and fake demand. For example, get a load of this from RealtyTrac:
1—”All-cash purchases nationwide represented 49 percent of all residential sales in September…..

2–September had the highest percentage of institutional investor purchases of any month since RealtyTrac began tracking in January 2011. ….

3–“The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash,” said Daren Blomquist, vice president at RealtyTrac. (“Institutional Investor Purchases Reach New High in September with 14 Percent of all U.S. Residential Sales”, RealtyTrac)
Does that sound like a normal market to you?

Whatever happened to firsttime homebuyers who used to make up the bulk of housing sales?

You know what happened to them, don’t you? They’re either buried under a mountain of student debt from which they will never emerge or stuck in crappy part-time jobs that don’t pay enough to even meet the monthly rent, right? These people will probably never own a home; it’s just not in the cards, which is why firsttime homebuyers are following the Dodo into extinction.

And the same rule applies to “move up” buyers, too. Move up buyers are the folks who use the equity in their first home to buy a nicer home in a better neighborhood. Move up buyers used to be the second biggest buyer of homes in the US, but not any more. They’re struggling too, mainly because housing prices are still below their 2006 peak (which means many of these people are either still underwater on their mortgages) or because they have zero equity in the homes.

So, who’s buying all the houses?

Speculators. People who have no intention of moving into the homes they buy. That’s what keeps the recovery going. And that’s what low interest rates and QE-pump priming achieves; it transforms markets that are a critical part of a thriving economy into an annex of the Wall Street Casino where houses are flipped in a frenzy of speculation like credit default swaps or some equally dodgy debt instrument. This is the world Bernanke has created, a topsy-turvy world of lightening-fast trades that blows up every 5 or 6 years.

I mean, think of it: 49 percent of all residential sales in September were all-cash purchases.

That’s ridiculous.

And where are all these deep-pocket buyers coming from?

Wall Street, of course. The big boys have switched from junk bonds and farmland to housing, which should be expected given the ocean of liquidity the Fed has pumped into the financial markets. Naturally, there’s been some spillover into housing which is creating a new regime of credit bubbles. Booyah, Bernanke, you’ve done it again!

Are you surprised? Are you surprised that institutional investors are snapping up these foreclosures like hotcakes even though there are 4.5 million more in the pipeline? That must mean that the banks made some kind of deal with the PE guys that they wouldn’t dump their houses on the market without giving them a heads up first, right? (wink, wink)

Of course, it’s right. It’s all rigged. You know it, I know it, everyone knows it. The whole bloody country is owned by a credit monopoly that never gets tired of fleecing us.

That’s just what they do. more


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