By Mike Whitney
“I still worry about further price declines. There’s no really concrete reason for an upturn now. A recent survey of home buyers didn’t find any sudden change in optimism and there seems to be a souring on the idea of home ownership. That might reverse again as the crisis ends, but I suspect that it’s not easily reversed because the whole idea of proudly owning a home has been tarnished … That’s why I think home prices may still go down.”
-Robert Shiller, co founder of S&P Case-Shiller Home Price Index
There’s an article on the AOL Real Estate blog that explains much of what is happening in today’s housing market although the piece was written back in July 2012. The article, which was written by journalist Teke Wiggen, was widely circulated when it first appeared, but has since been swept down the memory hole to make room for the nonsensical blabber about a “housing recovery”. Even so, it’s worth reviewing the content of Wiggin’s extraordinary piece since the facts are just as relevant today as when he first wrote them 7 months ago. Here’s a clip from the article titled “‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest”:
“As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.
Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said.
Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10 percent of all REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration.” (“‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest”, AOL Real Estate)
It’s worth noting, that CoreLogic and RealtyTrac are two of the most respected names in the industry, in fact, Calculated Risk, the nation’s Number 1 economics blog, frequently uses data from CoreLogic to make its point that prices have “bottomed” and that housing is gradually recovering. Here’s more from the article:
“… if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.
“If they let the dam essentially break. It could be a catastrophic disaster for the U.S. economy,” he said, predicting that some major banks would fail and home prices would nosedive by 20 percent.
That doomsday scenario has many industry professionals supporting lenders’ tactics of holding onto most of their REOs. Otherwise, they would be “causing the floor to fall out from underneath the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork required to put all their foreclosures on the market.” (“‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest”, AOL Real Estate)
So, the banks are deliberately keeping the majority of distressed homes “off market” in order to keep prices artificially high, fleece another generation of credulous buyers, and effect the appearance of a revitalised and soaring housing market. Now–tell me–which part of this equation even vaguely resembles a “free market”? It’s all central planning by a criminal bank cabal that controls all the levers of state power lock, stock and barrel.
Even so, it looks like John Q Public has swallowed this latest load of public relations malarkey judging by data that shows that sales of new and existing homes are gaining pace. Ahh, but looks can be deceiving. A closer inspection of the data suggests that it’s not Mr. Public who’s buying all those homes, but deep-pocket speculators who’ve piled into the market seeking short-term gains. Check this out from Bloomberg:
“Transactions involving investors jumped 75 percent in November from a year earlier in 25 metropolitan areas tracked by Radar Logic Inc. It’s a market that could total 12 million homes, JPMorgan analysts led by Anthony Paolone wrote in a note last month.
Blackstone, the largest U.S. private real estate owner and the only firm with more homes than Hughes, has spent $3 billion on rentals, Jonathan Gray, Blackstone’s global head of real estate said today at a Credit Suisse Financial Services Forum in Miami. Blackstone said last month it spent $2.7 billion on 17,000 properties, accelerating purchases as prices rose faster than anticipated…
The New York-based firm, which started buying single-family houses last year, has bought so quickly it’s “warehousing” more than half of the inventory as it completes purchases, renovates and rents the properties, Gray said in January…
Whether the single-family rental market grows from “a $10 to $20 billion market to a $100 to $200 billion market” will depend “on how successfully institutional investors are able to execute over the next few years,” Bordia said.” (“Billionaire Hughes Chasing Blackstone as U.S. Rental King”, Bloomberg)
Get the picture? It’s a speculator feeding frenzy featuring some of Wall Street’s biggest names all plunging into the sharkpool at the same time. The only thing missing from this bizarre mix is the traditional young couple looking to partake in the American dream by buying their first home or the move-up buyer who wants to use the equity he’s built up over the last decade to buy that 3-bedroom Tudor in the country. Normal “organic” buyers have vanished from the marketplace while ravenous speculators are grabbing everything that isn’t bolted to the floor. Naturally, that’s pushed prices higher while creating the illusion of a thriving market.
But what do these investors really have in mind? Are they planning on becoming responsible long-term landlords committed to serving the needs of the community after the devastation they caused by crashing the financial system in 2008?
In your dreams! Here’s more from Bloomberg:
“New York-based JPMorgan, whose private bank oversees $877 billion, started pooling investments from its clients in mid- 2012 into a partnership to purchase distressed properties, betting that prices will rise over the next several years and provide investors with income from renters along the way, said Lyon…
The goal is to sell the houses within three to four years in one of three ways: through an initial public offering of a real estate investment trust, a sale to an existing REIT or to an institutional buyer such as a pension fund, Lyon, who’s based in San Francisco, said. Clients will receive a share of any price appreciation depending on the size of their investment.” (“JPMorgan Joins Rental Rush For Wealthy Clients: Mortgages”, Bloomberg)
There you have it. The banks are only going to hang-around long enough to see prices surge, then they’re going to dump their inventory back on the market so Mom and Pop can see their equity go down the drain for the second time in a decade. Nice, eh? Speculators aren’t interested in building a strong and sustainable housing market, what they’re looking for is a sharp jolt to quarterly profits, so they can nab that new Maserati Gran Tourismo for those long drives to the Hamptons.
And there’s another part of this story that may seem only remotely connected to the “vanishing REO inventory”, but it has a profound effect on the market all the same, that is, the fact that the banks are still cooking the books to make it look like they’re in better shape than they really are. If these fundamentally-insolvent financial institutions had been taken over and nationalized when the government had the chance in 2009, then their stockpile of toxic assets and non performing loans would have been processed and sold via a gov entity like the Resolution Trust Corporation (RTC) which helped to liquidate bank-owned assets following the savings and loan scandal. That means, housing prices would have found a real bottom by now, and the market would be experiencing positive growth. (unlike the fake investor-fueled growth we see now) But since the TBTF zombies were propped up by trillions in public funds, bailouts, handouts, subsidies and other forms of corporate welfare, the problem persists to this day. Get a load of this from Floyd Norris at the New York Times:
“The board that sets American accounting rules moved on Wednesday to substantially reduce the use of market values in financial statements. The move, if adopted, would give banks more freedom to value financial assets as they deem appropriate.
The proposal by the Financial Accounting Standards Board, contained in what is called an exposure draft, would also end the counter intuitive practice of a bank’s profits rising simply because its credit has worsened, and then falling when the credit recovers…
Under the proposed new rules, which are unlikely to become effective before 2015, it would no longer matter whether a particular bank asset was a bond or a loan. Either way, if the bank intended to keep the asset until it was paid off, it would be carried on the books at cost, without rising or falling in value when market prices changed.” (“Proposal Gives Banks More Freedom to Value Assets”, New York Times)
How do you like that? So, the banks are not only allowed to assign fake prices to their assets, they can also report an increase in profits when their credit deteriorates. Such a deal! In other words, if a mortgage-backed security (MBS) that’s packed with subprimes and liar’s loans has plunged to $.30 cents on the dollar, Mr. Banker can keep it on the books at 100 cents on the dollar, thus, preserving the confidence of his thoroughly-hoodwinked shareholders. This is just another illustration of how the banks have corrupted the regulatory system to the point where no one has the foggiest idea of what they’re really worth.
So, how does all this accounting hanky-panky connect with the fact that the banks are keeping 90% of foreclosed properties off the market?
It just explains how regulators have teamed up with the banks to keep the “housing recovery” charade in place. If the banks were forced to write-down the losses on their stockpile of non performing loans and defunct mortgages, then more REOs would be pushed onto the market and prices would fall sharply. But because the banks are allowed to lie, the housing depression drags on. That’s not only bad for the economy, it also puts the public at risk of another crisis because, as the Wall Street Journal notes:
“… investors will remain reliant on banks’ own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital. Taxpayers, who as a result were called upon to bail out numerous institutions, also are left more vulnerable.” (“Banks Have Their Way With FASB”, Wall Street Journal)
Allowing the banks to lie puts everyone at greater risk. Unfortunately, that doesn’t matter to Obama and his cohorts at the Fed. They’ve done everything in their power to preserve black box banking, an opaque, criminal business model built on deception, avarice and theft, the banker’s trifecta.
About the author: Mike Whitney
Mike Whitney writes on politics and finances and lives in Washington state. He can be reached at [email protected]