Imagine or Dream?

I am right now sitting at the dentist's office, waiting on my son to finish his appointment. I have few minutes, and a WiFi connection. Time to blog!

My Dentist has a TV in the waiting room, which is good. They also play HGTV channel which is, well, interesting, and a whole lot better than CNN.

Don't get me wrong; I like home improvement, but these shows are basically 30 to 60 minute commercials for products most of us don't need. Another example of the Great American Dream Machine.

Like the show on now: 'Income Property'. What a joke.

An unmarried couple, who have been dating and living with their parents for TEN YEARS are looking for a rental property, so they will have some income so they can afford a home. They are spending SIX HUNDRED AND FIFTY THOUSAND DOLLARS! Sorry for the all caps, but Holy Cow! They are planning on spending almost 3 times the average home price. Maybe that is average in their market, but still, what is the average income? They are looking at a rental unit worth $1800 a month; again- Holy Cow!

Then the improvement starts; basically 5 or 6 minutes of destruction- where they teach the new homeowner to swing a hammer- and then 5 or 6 minutes of construction- where they teach the homeowner to use the new found hammer swinging skill to drive a nail- and then tell you how much money the work is worth.

They miss one or two points on these deals; what it costs to BE a landlord, and then to share your home with strangers. And then be forced to collect money from them on a monthly basis. Want to have a family party in the back yard? What was once private space is now a fishbowl with your tenants looking on. How much is your privacy worth?

And where do the tenants live? Below you, where every step you take thunders on their heads, or upstairs where their steps will pound on yours?

Plus, they don't talk about the costs associated with being a landlord. Rental income isn't tax free; it IS income. Then there are the costs of repairs and maintenance on the unit. Then most cities will have a tax per rental unit. Do you own the property as individuals, or do you form some sort of company? Individually has risks- like if the tenant's kid falls down the stairs and breaks a bone- but companies mean you need to have an accountant and an attorney to handle the paperwork and taxes.

None of this is mentioned in the show at all. Most of it is just shopping. Dream Machine, remember?

These are the same types of shows that a few years ago were all about property flipping. We saw how well that turned out, right?

Maybe things like this work out, but like in this show, they are borrowing a couple of hundred grand - yes, $200,000.00 for the down payment, and then another $70,000 for the renovation. Plus the mortgage. Not a problem, they feel. And the obligatory lesson in how to swing a hammer. That's where the renovation budget goes sky high.

Will this work out? We will never know. I suspect a disaster in the making. These folks don't know either; this is their first home, right?

Ever notice that these shows usually feature newbies? Is it because the folks who have done this before know better than to do the types of things that make for drama on these types of shows? Probably.

But the big question; was the show entertaining?  Eh; not for me so much. But it was a lot better than the alternative; CNN.

Same Old Pattern

I have spent the last two days examining the titles on 10 properties in a part of town I know reasonably well. It is also an area that I go to as seldom as possible. It has the reputation as a 'Bad' part of town.

But that reputation is fairly new. A few years ago it was considered declining, and a few years before that it was considered nice.

What happened?

I saw the exact same course of events in each of these ten exams. The timing varied a little, but each had the same chain. And all 10 are currently owned by the same couple.

I can't go into too many details, but I can share a few. All 10 properties are in the Western Cincinnati neighborhood of Price Hill; most are in Lower Price Hill.

All of these properties were purchased in the late 1950's/early 1960's by a couple who lived there 30 years or more, and raised a family there.

How can I tell that from a title exam? Because Mom and Dad both had that address when they died and when the kids inherited the property. And then sold it.

This is where the decline of the property, and, by extension, the neighborhood starts. None of the kids wanted the house in 9 cases and it was sold outright. They were all still owner occupied; I could tell by the address the court used during the foreclosure case. It was the purchase after the foreclosure where things went down hill. Usually purchased by a Trust, or LLC or even a husband and wife, sometimes years after the foreclosure, the first sign is when the tax bill is sent not to a lender or the house, but to the owners at a different address, usually in a much better part of town.

Price Hill was known for years as a working class haven. Mostly blue collar, mostly smaller, older homes (All of my 10 were built between 1900 and 1915), but a clean, well kept community. It has/had several well attended churches. Not a rich neighborhood by any means, but respectable.

I saw one house sell for over $150,000 one year, and for $75,000 at sheriff's sale 5 years later. Then $6000 to an absentee landlord 2 years after that. Do you seriously think that chain of events doesn't affect the rest of the housing values in the neighborhood?

But once the property become a rental things can go downhill fast; especially in a 90 or 100 year old house. And it only takes one house to start a slide. Two houses will accelerate it, and three on a street will guarantee it, especially in an older, less expensive neighborhood.

Because you will have two types of neighbors: elderly, been there forever and renters. The renters don't care and the elderly can't make their voices heard. And their kids won't do anything; moving Mom and/or Dad to a nursing home and selling- or renting- the house is much easier than dealing with the lousy absentee property owners and lousier neighbors.

And things decline anther notch.

Why is this important? because it may soon be coming to a neighborhood near you. Look around your block; how many old couples do you see? The ones who have lived there 20 years or more? How much sales activity do you see? For Sale signs sprout and then age, only to be replaced by another sign, from a different broker.

Or maybe it is the legal notices, and the couple up the street with the three kids have packed up and moved away, 2 steps ahead of the sheriff. It doesn't take much sometimes; a divorce and the wife can't afford the house on one income and child support. Or a layoff, and his salary can't make ends meet. Or a long term-illness; Wife; Husband, or God forbid one of the kids. Between doctors and medicines and hospitals and what insurance doesn't cover it doesn't take long.

Shortly nobody is cutting the yard. Then some punk breaks a window. Next thing you know its two houses on the block; then three-four-10. Each empty property is not an opportunity, but a sign; or a signpost to the families that are now buying in the suburbs.

Don't say it can't happen to your neighborhood; they once said that about Price Hill.

The Zombie Apocalypse is Here

I ran into this article the other day about 'zombie foreclosures'.

Absolutely sickening.

Consistent readers will note that I have had a long term interest in the housing market and the attendant foreclosure crisis. Part of the reason for my concern was situations just like this.

I'll be blunt; the banks in this nations have been getting a legal pass for years in foreclosures, basically because the debtors never fight back. Statistically only a small percentage ever file a response, and it is not the court's job to protect your rights; its your job the spell out those rights and ask the court to enforce them.

Since the debtors rarely have done that, lenders and their attorneys have become increasingly lax about addressing those rights in their own pleadings and official paperwork.

Ever heard of Robo-Signing? Basically, in order to file suit you need an affidavit- a sworn statement- of the facts, and that statement requires the signer to state that they have 'personal knowledge' of the facts they have just sworn to.

Guess what? In some (maybe a majority, and maybe a VAST majority of the)  cases they did not. These sworn affidavits would be signed without  review of the file or any knowledge, much less personal knowledge, of the facts.

Another issue was banks foreclosing on mortgages they didn't legal own. In order to have the power to foreclose a lender either has to have a mortgage of record or a valid assignment of that mortgage of record in the county where the property is located, and usually the county where the foreclosure is taking place.

This was a requirement the courts have only recently- since 2010 or so- been enforcing, by requiring the lender to file a copy of the assignment with the foreclosure complaint. But for years banks were able to process a foreclosure through the Sheriff's sale and taking possession without ever legal proving they had the authority to do so.

So we have been through the robots and now we are on to zombies. One more way for the banks to steal by using the court system.

And why are the banks behaving like this? Well, I can think of multiple reasons.

1. The Cities and Counties are making the banks maintain the homes they have title to;
2. The housing market is still collapsing, and the banks know it;
3. The debt they are owed is well above the value of the property;
4. The costs of maintaining and selling the property cut into what little profit there is in the property;
5. The legal risks of owning the property outweigh the benefit of having title;
6. The legal fees are lower, because they have cut out approximately 40% of the process;
7. The judgment can be held over a creditors head for years, guaranteeing the creditor or collector will receive some payment.

Cities and Counties. I have some experience in two of the cites named in the article, both in Ohio. In these areas- especially Cleveland/Cuyahoga County- the government is cracking down hard on bank owned property. Some communities are requiring owners to maintain the property in a livable condition, meaning working plumbing and electrical, intact windows and doors and a good coat of paint.

The problem is these communities are incredibly depressed. Property values are basically the based on the amount of copper in the standing structure. Homes are selling for less than $10,000 on a consistent basis. Yet, as soon as the local thieves break down your door and steal all of the wiring and copper plumbing, the owner is required to make repairs. For the second, third or fourth time.

Although conceived as a plan to keep the community livable and to make sure the banks didn't become owners of vast swaths of decaying property, the banks quickly developed a work around. Knowing they held a $40,000 mortgage and a $45,000 judgment, the property would sell for less than $20,000, of which they would realize, after taxes, real estate commissions, transfer costs and the cost of the foreclosure action itself, maybe $10,000. Better to sell the judgement to a third-party collector than actually take the collateral for the debt. This instantly solves items 1, 3, 4, 5 and 6.

It contributes to item 2, but what do the banks care? Housing will depreciate whether they take title or not. Item 7 is the leverage the banks have when they sell the judgment. In most states this judgment will last 10-15 years, and be a lien on any property the debtor owns. They are unable to buy another home; the judgment would have priority the new mortgage, so the banks won't lend, and if they can scrape up enough cash for a home, the judgment can be enforced against the new house. The debt collector will get his money in better than 60% of the cases.

Not that I am against debtor's paying their debts or banks making a profit or taking advantage of a legal procedure. But a long standing process for the repayment of a bad mortgage has been established. It's the reason the property was pledged as collateral for the loan.

But the process of failing to complete the sale of the property is criminal. After all, no law requires these banks to purchase the property at sale. Let the property go to sale, accept the proceeds of the sale to a third party against your judgment and then file for a deficiency judgment for the balance, which they can then sell to the third-party collector.

Then it becomes a better situation all the way around. The debtor no longer has possession of the property; the bank has their mortgage satisfied; the property has a new owner who will start caring for it immediately, which helps the community, and the bank has no liability to assume or portfolio of real estate to manage.

There is probably a very good reason that banks have decided on their current course of action instead of the one I propose.

But I'll be honest; I can't see what it would be.

But maybe because I'm not a bean counter at some Lender or another.

A Target Rich Environment

This morning the news was full of blogging material. I couldn't turn around without hearing something that set my teeth on edge and my blood pressure soaring.

There was some woman on the radio this morning talking about suing a local park district because she doesn't like the rules at the park; it seems that a rule against 'Garbage Picking' is code for 'We don't want the homeless in our park'. Who knew?

And then there was Obama and his speech today in Cincinnati. Apparently he feels there is too much government support of automakers.

Not in this country; in CHINA! apparently having your government actually, you know, OWN an automaker is not problem. But just financially supporting them is against the rules.

But the winner?

The Fed is going to print money to buy MORTGAGES!

Here is how this will help (allegedly):

By printing money to buy mortgages they will keep interest rates low (lower than 0%!?!?!?) by keeping the banks flush with cash (you mean more than the Trillions they are already sitting on from TARP and the other 'Quantitative Easing' programs?!?!?!?), so more people will be able to get a loan (based on WHAT JOB!?!?!?) and buy a house, increasing demand and raising housing.

And then all of the unicorns will fart a hundred rainbows and everybody will sing Happy Days are Here Again! and the economy will instantly recover. I made up a part of that. I'll let you guess which part.

They are completely missing that housing prices are a SYMPTOM, not a cause. The cause is TOO MUCH MONEY SUPPLY.

Which printing more money will not help, will it?

50 more days until we can get rid of these idiots.

Pssst; Wanna Buy a Cheap House?

The housing market is the last economic driver in this country.

Why? Because it is the only one they cannot ship offshore (although I am sure plans are in the works for Mexican house builders to ship completed sections north).

And why is that a problem?

Housing has not hit bottom yet, and may not for 3-5 more years.

Housing will soon only have the value that cash money can buy, as lenders will not lend long term on a depreciating asset, will they?

And housing is still depreciating; a fall that will only accelerate when the Federal money from Freddie and Fannie dries up completely.

And the bank owned homes will be the first to fall. A house to the owner is not an asset to be liquidated; it has a value as shelter that creates it's primary value. When the cost of that shelter becomes more than its worth, it becomes a drag on the budget, but never should it be considered an asset.

But the bank has to liquify the asset; they deal in liquidity, not in real estate.

And when the banks own a sizable percentage of the real estate, that liquidation will be costly to home values.

It was the idea of the last ten years to make your home an asset to be liquidated.

Re-fi and take the cash, right? Home Equity lines to pay for the trip to Disney World or pay off the credit cards that were run up at The Gap and Target; turn your Home into CASH.

And then interest rates rise a little, and housing values fall a little, and now your cash cow has dried up. Instead of being able to take another 10k out of your home to pay off the Visa, the bank is calling in your credit limit.

And so the bust began. To many leaks in the credit dike, and not enough fingers. Everybody who was strung out at the end of their credit line went bust.

Which was apparently quite a sizable percentage of the country.

If you have ever seen video of a sinkhole beginning and developing, that is the exact way the housing values are progressing. The houses that seemed safe at first are now starring down the abyss, and the guy next door is planning on taking a hit as well.

Home value is about two things; what someone will pay, and what someone will lend. A bank doesn't care what you are paying for the place; they will tell you what they will lend. if you can make up the difference, then everybody goes home happy. When you can't...

And values fall again.

You want to know when housing has hit bottom?

When the banks stop sitting on piles of liquidity, and start investing in mortgages.

Without Fannie and Freddie (READ: US Taxpayer) to bail them out.

Housing Values Continues to Slide

I found this article through Instapundit (as usual). Its from CNBC, and it makes sense (not as usual). And (as usual) the comments are the best part.

And the most sobering. Like this one:

lfbowman1234 | Jan 11, 2011 12:15 PM ET

The whole economy is in a depression, if you take out the unemployment benefits and the student loan program. Realize the first depression didn't have 5 trillion of new government spending. We are really 10 times worse than the first depression. Illegals have replaced our work force, along with outsourced jobs. Pull out the flood of taxpayer money , then you could see how bad off we really are now. Local government will have to raise taxes by 100 to 400 percent, in the near future, to keep this boat floating. The Federal government will do the same with a VAT tax.

I think I'll keep that comment handy for the next time I am constipated; it clean scared the crap outta me.

And the commenter is correct. FDR did not have the political backing to spend more than the country's annual GDP in borrowed money in a year. Obama did; so he did.

There are two questions: what are the short term effects, and what are the long term effects?

Short term; did the massive spending keep us from going deeper into a depression, or did it prolong the effects of the recession, because the government borrowing blocked business from doing the borrowing and creating jobs?

Maybe a look at Europe, especially Germany, where the government left the economy alone to heal, maybe a good indicator?

Long term: we are on the hook for borrowed TRILLIONS. the cost of the repayment of this debt, Hell, just the cost of the INTEREST on this debt will cripple the economy for at least a generation, maybe two.

So, we and our descendants will be paying this money back for a long time.

Was there enough benefit for the spending to make the cost worthwhile?

In a word, Nope.

Even if there was a benefit from the spending, which I doubt there was, the cost will hamstring everything business tries to do in this country for the next 50 years. Job creation will be restricted because of the cost of an employee, mainly due to the cost of taxation. Borrowing for business expansion and homes will be curtailed because of the lack of money to lend. The Federal grants will dry up and local governments will be forced to either cut services or raise taxes. Guess with direction they will choose?

I hate to sound all gloom and doom, but that attitude is actually the best one.

I am disappointed less often.

Bursting The Housing Bubble Myth

I was out surfing this morning and ran into this, another blogspot to find the sage and cogent writing of Sippican Cottage.

And as usual, he is dead on the money. The commenter's are a fairly competent bunch as well.

Until the 1990s your home was not a short term investment piggy bank. You bought a house and took out a mortgage because you could build equity over a long term- 10 to 15 years usually- and building that equity was a hedge for retirement.

Then all of the sudden your house would increase 20% in value (for no real apparent reason), and folks would strip that equity out of their homes and spend it. Encouraged by two things; free money tax encouragements and the lemming-like follow the Jones over the cliff instant gratification society.

Why did the government encourage spending yourself into debt? Because our economy has been based on consumerism since the end of the Cold War. We don't make things in this country and sell them to others; we employ each other by swapping goods we bought from China (on credit) for money we borrowed from China, back and forth, each time hoping we could make enough on THIS transaction to get us out of the debt we were incurring on both ends.

Guess what?

Didn't work, did it?

Nothing is worth more than somebody will pay for it. The problem with housing became that people were not spending their own money. They didn't care what they paid for a house when they spent your money for it. And since the loss was yours when they walked away, they didn't care if they did that either, and walked away from the debt in droves.

Now we can either bail out the homeowners with government (Chinese borrowed) money; bail out the lenders with government (Chinese borrowed) money, or allow the entire financial structure of this country's (and a decent portion of the western world's) to collapse.

Damned if you do and damned if you don't.

But this is why I was in favor of the original TARP bailout 2 years ago. The original program was to relieve the banks of their worst defaulted properties, allowing them to liquidize these troubled assets and let the Federal Government hold them until they regained some worth.

But somewhere between the stated purpose of the bill and the spending of the money we got shafted. The Feds just gave the money away to their buddies, who donated large portions back to the elected officials who gave them billions.

It was not a housing bubble; it was a government bubble.