The World, Explained

Peter Schiff explains what's going on with the world, at least the economics of it all.

{Hat tip to Samizdata}

It Has Its Ups and Downs

US Housing prices rendered as a roller coaster ride (adjusted for inflation):



Very clever!

{H/T Tam}

Buy 'n Bail

Because there just hasn't been enough fraud in the real estate market of late, the Wall Street Journal reports on a growing phenomenon of homeowners buying a second house at today's reduced prices, promising the lender that the loan payments on the second house will be financed from rent on the first house, and then walking away from the first house. Which then gets foreclosed.

If you think qualifying for home loan was difficult before, it's about to get a lot harder.

{H/T Volokh Conspiracy}

Story of a foreclosure

I know I am probably a broken record on the subject, but I thought discussing an actual foreclosure might be of some use.

It took me a while to come up with a foreclosed property that I could discuss. Apparently my firm is a bit more successful than I had realized in the REO market. Anyhow, the following property is one with which I have had absolutely no involvement. All the information I have is derived from public records.

Some background information: The property is a house and lot located in south Fulton County. Fulton County is the largest county in Georgia, both in size and population. Atlanta proper is located mostly in central Fulton County. North Fulton County is largely middle class to upper middle class suburbia. Many athletes and CEO's live in north Fulton County. South Fulton County was, until very recently, a backwater. There are actually still some working farms in south Fulton. Within the past five or so years, there has been a boom in affordable starter type housing construction in south Fulton.

Our purchaser, Mr Kelly, bought the property back in October of 2004 from a builder. He paid $167,000 for it. The property was a new house located in a brand new subdivision. To finance his purchase, he borrowed $127,500 on a first loan with an adjustable interest rate and $25,000 on a second with a fifteen year balloon payment. That means he was to pay interest only for fifteen years and the entire amount of the loan would be due at the end of the term. The interest rate on the first started at 5.125% and could potentially increase by one per centum every six months. Mr Kelly did not have to make any principle payments on his first note until 2014.

Since 2004, Mr Kelly accumulated a total of eight starter type houses, all in south Fulton. He, however, lives in New York City. Late last year his properties started to be foreclosed upon. So far, he has lost six of his eight properties. Our property was foreclosed on April 1, 2008. The lender on the first note bought it back in at auction for $140,000. The lender on the second note was cut off and lost everything.

For those who have difficulty following the math, Mr Kelly bought the property for $167,000. He financed $152,500 of his purchase, meaning he actually paid (cash) $14,500. This is not a happy story. A man bought a house, probably for speculative purposes, couldn't sell it and wound up losing his investment. A lender lent him money on a second and lost all of their money as well. The lender on the first note now has a house and lot that it likely will not be able to sell for anything close to what was lent on it any time soon.

It is a sad situation. My point is that, while it is typical, it bears little to no resemblance to the situation being presented in the media. To the best of my knowledge, Mr Kelly is not homeless. He actually had a decent interest rate on his first note. His credit rating is likely in tatters, but that is not the end of the world. And he still has two houses left.

Finally, I could find none of the indicia of bad faith anywhere. There were no gouging interest rates, no weird financing, fly by night lenders, powers of attorney to strangers, flip sales or stray documents.

The sub prime lending market makes a great story and sub prime lenders make great culprits, but, at least here in Georgia, what's driving the foreclosures is that the former owners bought investment property at the peak of the real estate cycle. Builders over built houses compared to demand. And lenders got over-excited about generating commissions for making loans. Housing prices are getting rational again and those who bought high are getting squeezed.

There is no solution needed. This is a self-correcting problem. In a few years, housing will exceed the stocks in demand and prices will rise again. No one need do anything at all.

Hey Hey! Ho Ho! Deadbeats Have Got To Go!

The first Tuesday of every month is foreclosure day in Georgia. Foreclosure auctions are generally held on the courthouse steps of the county where the property is located.

This morning I was in the Fulton County Courthouse. The Fulton County Courthouse is in downtown Atlanta and is three blocks away from the State Capitol and two blocks from Atlanta City Hall. as is often the case on foreclosure day, a group had decided to add to the press of people and have a little protest.

Marching up and down the street in front of the foreclosures were a total of twelve protesters when I entered the courthouse. Ten of them had very similar signs that read (more or less) "Abolish sub-prime loans. Stop illegal foreclosures." One protester had a sign that said simply "Stop obesity" against the background of a dollar bill. The last had a very verbose sign alleging someone named Angela is a political prisoner in the jail.

When I left the courthouse all twelve were still there. However, they were gathering in a tight group and there was a video crew with a talking head. So if anyone watches the evening news tonight and sees a protest group in Atlanta at the county courthouse, please remember there were only twelve of them.

With any luck they won't be chanting during the shoot. They were singing a hymn when I entered the courthouse and doing an excellent job of it. So you may be able to hear some good singing instead of the usual chanted drivel.

Poster Child for the Foreclosure Crisis

Laura Richardson (D-Calif.) of Long Beach bought a second house in Sacramento when she was a state representative. Shortly thereafter she ran for Congress and won.

What followed was pretty much inevitable.

I wonder how safe her seat is?

Observation on The Current Foreclosure Situation

Drudge, Kendall Harmon and others are linking to a lot of articles about how dire the current real estate situation is. The mainstream media is discussing how awful it is that people are losing their homes due to poor decisions made by them (adjustable rate mortgages, loans with balloon payments and such). I think it would be bad to lose my home. As with most people, I can empathize with someone who is about to lose their home.

However (you just knew that was coming), I have been dealing with a lot of houses that have been foreclosed upon recently. They represent a large portion of our current business. The vast (over 80%) of the houses that I've seen owned by lenders are not the prior owners residence. They were investment properties. Real estate, especially investment real estate, follows a distinct cycle in each market.

I do not know if we are in a recession. I suspect we may be. I do know that the current real estate situation is more of a correction to a prior bubble than an actual melt down. Real estate became over heated due to a false perception of security and access to easy credit by bad credit risks. All investments are subject to risk. Any tangible asset can vary in its value. This includes gold, by the way. The Japanese learned the hard way last real estate cycle that real estate prices can deflate rapidly (anyone want to buy a golf course?). Now the 'flip this house' crowd is learning it as well.

It is very much possible to make money on real estate in the manner shown on television. I know investors who have made fortunes buying foreclosure properties. I know investors who have also made fortunes flipping houses. In most cases, they are the same individuals. But these are folks who are willing and able to buy a house, work very hard rehabilitating it and then wait for it to sell. They are smart, hard working investors who stay on top of all the trends in the local real estate market. They also sink a great deal of their own money into these projects and so have considerable equity in them as well as the ability to wait.

What triggered my paying attention to this was that Sally and I saw a house that I had run the title on on a real estate flipping program. I recognized the address, but none of the names and facts matched what I remembered. I dug out my notes and discovered that what the program reported was completely bogus. The house was not owned by the person they identified as the owner. It was not purchased for the amount the program said. It did not sell at the time they said and for the amount they said. It therefore did not make the profit reported.

I know of exactly one person who bought a house without any experience in flipping that made money doing it. He also did not finance the purchase. He bought it outright. I am sure there are other people who have made money as amateurs in flips. I have never met them.

I'm formulating Matthew's law: "If you see a show on television about a way to make money in real estate, then the time for making money using that method has already passed." If the method were still valid, then the promoters would be using it to continue making the big bucks and not making television programs or infomercials.

One final note, the people who look sad and blue on television are not representative of the people who are in distress. Most of the people who have been burnt by the drying up of easy credit were legitimate investors. I do feel sorry for them. But some were the miscreants who made Atlanta number one in the nation in real estate fraud for several years running. For that lot, I have no sympathy.

Sub Prime Debacle and Renting

This made me laugh. Out loud. Really. Scared the heck out of my cat Grace who was sleeping on the computer at the time. Which made me laugh even more. Which scared the heck out of our cat Boo who was sleeping on the couch in the next room.

Anyhow, here's a viral video from the renter's union.

Property Law in Middle Earth

Jacob Kaufman has a great take on the true meaning and purpose of the Lord of the Rings trilogy.

[H/T Volokh Conspiracy]

The Future of Suburbia

Prof. Christopher Leinberger has an interesting article about the imminent decline of modern American suburbia. I found it thought provoking, but I'm not certain I buy his central thesis. I think he is ignores to a certain extent the changes modern technology has made possible in time allocation.

Assuming arguendo that his thesis is correct, our house will likely retain its value. We are in a close in, upscale urban setting of single detached homes. Tiny single detached homes, but they are nonetheless the models of the American dream house. Our situation combines the best of urban and suburban life. However, thanks to technological advances, I spend two to three days a week working completely from home. On those days, I have no commute time. Most of my peers are in a similar situation. Working from home is increasingly common. Those who do maintain actual physical offices have moved them from the inner city out to where they dwell, also trimming commute times.

As for the collapse of new development housing prices, all kidding aside, we've seen it before. Developers by their nature tend to be optimists and every seven years the real estate market cycles. If you are living in a boom area the downcycle may not be noticeable, but it is always there. Supply and demand plays a major role in real estate. When apartments are over built, rents decline. When houses are over built, the developer heads into bankruptcy, the units get sold for pennies on the dollar and a subdivision that was planned to be upscale becomes the land of section 8 housing.

Further, I think it the height of folly to discuss national trends in real estate. Real estate is about as local as you can get. To have any idea what the future holds, you have know what the local conditions are. "Location, location, location" remember?

Also, in the interest of a provocative article, the good professor looks too far into the future. Fifty years ago the brightest pundits predicted a golden future for Detroit. Today's reality is somewhat different. Fifty years from today, the trend might very well be the reclamation and restoration of today's much vilified McMansions.

{This is a first draft, I may come back and revise}

The Real Estate Market Today

I am not linking to it, but I just read a rather fat headed post about the 'real estate meltdown'. The writer of the post had no clue as to what has caused the current 'crisis' (Please note the use of 'scare' quotes).

Here is why some houses are now worth less than they were a year ago.

Lenders used brokers to loan people who had not previously been considered credit worthy one hundred percent of equity loans with adjustable interest rates. These rates were made artificially low as an incentive to borrow.

Two simple sentences and that explains it.

Let me break it down.

The lenders generally did not use salaried employees to evaluate the loans that were being made. They used brokers whose compensation depended directly upon making loans. The more loans made, the greater the brokers' compensation. Further the lenders relied upon the brokers to obtain accurate facts from the prospective borrowers and to evaluate their credit worthiness. {sarcasm}There was of course no incentive on the part of the brokers to fudge, shade the facts or lie {/sarcasm}.

The number of mortgage brokers had grown considerably while interest rates were falling. When the rates stopped declining or even rose, the huge pool of borrowers with good credit who had been refinancing dried up. The brokers then looked around for loans they could make so that they could continue to get paid.

Borrowers with poor credit are typically charged a higher rate of interest than borrowers with good credit. That is because they have a higher default rate and the lender wants to offset the risk. In addition, people buying houses have typically been required to put a hefty down payment on their new house. This makes sure that the new homeowner is invested into the house and is therefore committed to it. If the house declines in value due to neglect the first person to feel the pinch will be the homeowner, not the lender.

Recently it has been possible for almost all purchasers to borrow as much as one hundred percent of the sale price. This has been accomplished by using two loans. One at standard terms and one with a line of credit at a higher interest rate. The amount at risk for the purchaser is therefore nothing or pretty near close to. There is therefore no incentive on the part of the purchaser to stick with the home.

The use of teaser rates (artificially low interest rates) and balloon payment loans (loans that require little or no principle payment for a set period, typically six months to a year, and then require either payment in full or a hefty principle payment) has resulted in people buying houses that they could not afford to make payments on once the payments increased to market rates.

Put all of the above factors together and you get the current mess. However, it is not a universal mess. In our local market, most housing prices have not declined. What has been hit hard are new-construction starter homes. That is houses that have been recently built for persons looking to buy their first house. As builders and developers tend to build and develop by subdivision rather than piecemeal, this has caused certain neighborhoods to decline in value. The new owners bought the house, the payments increased, they found they could not refinance to lower the payments, they walked away. When that happens often enough in a neighborhood, prices begin to fall.

And to be blunt, real estate has been over heated in recent years. The housing supply was growing faster than the population at large. When supply exceeds demand, prices fall.

The main thing to remember is that the three most important words in real estate are location, location and location. A house on Park Avenue will always be worth more than a house on Mediterranean.

Wiki Proposal

In the comments to my Abandonment post, Cathy Lou proposed that a Web page of all Episcopal litigation be created. I'm game to try. I've never set up a wiki before, but the scant reading I've done on it suggests that that might be the way to go. To get things rolling, I'm just going to list the Episcopal church lawsuits that I know of:

1. Rochester NY, currently in appeal
2. Pawley's Island, SC, currently being appealed
3. Peachtree City, GA. Decided. No appeal as yet.
4. San Diego, CA. Three suits, all on appeal.
5. Virginia. One consolidated suit, litigation pending.
6. Connecticut. No information
7. Pittsburgh, PA. I believe the trial is over. I don't know if it has been appealed.
8. Florida. I've heard rumours of litigation, but have no knowledge.
9. Savannah, GA. Suit has been filed. I have no other information.

If anyone has any information about these or other lawsuits, please post in the comments here or email me at mousestalker {at} gmail.com (replace the '{at}' with '@').

Assuming all this can get fleshed out, I'll consolidate the information into a wiki so that everyone can contribute.

What inquiring minds would like to know is who are the parties, who are their attorneys, what is the status of the litigation, where is the suit being brought and how much is it costing everyone?

The Truth Will Out

A realtor finally comes out and says it. Keep in mind though, that practicing law without a license is as evil an act as can be imagined. Selling real estate without a license may be malum prohibitum, but practicing law without a license is malum in se.

Get Out the Old Crystal Ball

The Chicago Mercantile Housing Price Index (combined ten cities) is not looking real hopeful for the next couple of years. My only hope is that the Atnlanta market (which isn't part of the basket of ten) will show strong individual growth. Unfortunately, I can't think of any good reasons why it should.

Because the refi market is so healthy right now

There's a move in Congress to kill it even more.