The House Is Still a Dump
"Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next." This is The Wall Street Journal further confirming the mounting evidence that the presidential election did not cure what is fundamentally sick.
The supposed recovery of the last two years is the least convincing in anyone's living memory. Domestic investment has only recently returned to 2005 levels and business lending trends suggest that it is going to take another hit.
But let's return now to what marked the beginning of this whole fiasco: housing. The current housing price numbers have shown improvement. Some people claim that now is a once-in-a-lifetime opportunity to buy a house. Housing prices will bubble up again and you don't want to miss it.
I doubt it.
Here, however, is the indisputable fact: We still have a housing crisis. In cities like Las Vegas, 60-70% of homeowners are underwater. As Paul Jackson, CEO of HousingWire, told banking analyst Chris Whalen recently, "Just because we are all tired of the housing crisis does not mean that it is going away."
Judging by the presidential campaign, you'd think the effects of the housing crash are yesterday's news. After all, wasn't there that $25 billion government settlement with the big banks that was supposed to take care of underwater homeowners. Where did that money go?
Well, like the tobacco settlement money years ago, state governments have siphoned half this dough into their general budgets or other pet projects. For instance, HuffPost reports:
"In South Carolina, the Republican-led state legislature recently voted to override the veto of Republican Gov. Nikki Haley, who sought to spend the money on housing programs as intended. Instead, about $10 million will go to a fund that incentivizes companies to relocate to South Carolina, while $21 million will go to the state’s general fund." In foreclosure-ravaged Georgia, all $99 million of the settlement money was redirected to that state's economic development programs. In California, Gov. Moonbeam managed to redirect all of his state's allocation ($400 million) to the Golden State's general budget, which is $15.7 billion underwater itself.
Even if the money went where it was supposed to, it was to go to "housing counseling" and other fuzzy, feel-good government nonsense that does nothing to clear the massive malinvestment in housing.
There is the appearance that housing markets are tight, leading to some price bumps in various markets. But as Mr. Whalen points out, there are millions of homes in the process of foreclosure that are not yet available for sale.
"There are 2 million-plus foreclosed awaiting movement to sales category," says professor Anthony Sanders at George Mason University. "But there are still millions of borrowers who can no longer qualify. Count the number who went through foreclosures and add some percentage for people who avoided foreclosure, but went late."
This housing situation reminds Whalen of the computer chip market. There is a transition period between old and new memory chips when the supply is tight. "Then comes a flood of product."
What's keeping the homes off the market are government rules, as in the case of FHA, which has strict limits on the number of homes it can release for sale in a given neighborhood. In various subdivisions in the sand states, entire blocks of homes are underwater with homeowners not making payments. Whalen explains:
"No more than 50% of the REO properties purchased from FHA, for example, can be put on the market for sale as a vacant foreclosure, FHA acting commissioner [Carol] Galante said last month. Instead, the buyer needs to put in place another solution, such as leaving the homeowner as a renter of the home." Also, banks have every reason to delay foreclosure. "By dragging their feet on foreclosure, banks delay the day of loss recognition and also keep supply off the market. This is good for prices in the short term, but does not solve the supply problem," Whalen writes.
In Las Vegas, Ken LoBene, director of the U.S. Housing and Urban Development office, says 65% of FHA loans are nonperforming, or delinquent. It a normal market It would be 8-13%. He added, “We lose about 77 cents on the dollar on every foreclosure."
According to Venicia Considine, attorney with the Legal Aid Center of Southern Nevada, more and more people who can pay have stopped paying and are strategically defaulting. “I have more people calling me saying they’re the last owner on the block, they paid $300,000 for their home, and everyone else is a renter. That’s the shadow inventory we’re worried about.”
With the banks, the GSEs and the FHA sitting on their hands, more people have become “strategic squatters,” living in homes making no payments and waiting for their inevitable eviction.
At the same time, taxable sales are up in Las Vegas, and local experts point to strategic squatters as the reason. Steve Brown, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas: “I think there’s a good chance that unpaid mortgages are affecting taxable sales. If they have a job, people who aren’t paying their mortgages might have some extra disposable income.”
Realtor Chris Rubeis told the Las Vegas Review-Journal, “It’s certainly more common than ever. The stigma of short sale, foreclosure or bankruptcy is long gone. Seventy percent of the market is underwater. Those people are saying, ‘I bought for $300,000. My house is worth $100,000. Why should I stay? I’ll never get the equity back.’ So they stop paying.”
And if you're not making a mortgage payment, it’s “common sense” that the consumer economy would get a boost, according to Rubeis.
Yet perversely, builders are scrambling for land to build on in Las Vegas, pushing prices up. Homebuilders are getting more aggressive at buying land, according to John Prlina, president of land acquisition and development for Discovery Homes. His company purchased several lots this year in southwest Las Vegas.
“Things are coming back in the valley because there’s nothing in the resale market and the foreclosure process is just a drip,” Prlina told the Review-Journal. “We don’t know what the banks are going to do. As a builder, that’s OK as long as they don’t pour them out at one time.”
However, the co-creator of the S&P/Case-Shiller index is not so sure about a housing recovery. “It can get as big as it was again maybe in 50 years. This housing bubble was a once-in-a-lifetime thing, I imagine,” Robert Shiller told CNBC's Futures Now program. “Although, you know, the market might be more volatile, so the future is always unknown.”
Once upon a time, a house was a place to live in. And the mortgage debt was considered a yoke around one's neck until the loan could be paid off, and a mortgage burning party was scheduled to celebrate. “Fifty years ago, hardly anyone thought of houses as investments, but now people are focused on it like never before,” Shiller said.
Like it was once said about politics, all real estate is local. But post-9/11, the boom went coast to coast. “The funny thing about this recent experience is it became so nationwide. Housing markets aren’t supposed to be correlated all over the country like that. It was a rare phenomenon,” Shiller said.
The housing market hasn't been allowed to completely correct. At the same time government has thrown every bit of stimulus it has at housing, the outsized government presence in the market and law has all combined to keep the housing market from bottoming. Some of this is easy to understand: tax incentives for first time purchasers, record low interest rates, and legislation making foreclosure cumbersome.
What's not so easy to understand is why builders want to rush in and buy land, knowing there is this overhang of supply waiting to come on the market. But homebuilders were cashed up with the Worker, Homeownership, and Business Assistance Act of 2009, which, as many people know, extended unemployment benefits and the first-time-homebuyer tax-credit program.
But quietly included in this political potpourri was a provision allowing big businesses to offset the losses of 2008 and 2009 against profits made as far back as 2004. This provision generated corporate tax refunds of $33 billion, according to The New York Times. Previously, only small companies could offset losses against past years’ profits.
Big homebuilders were the prime beneficiaries. After racking up monster profits during the housing boom, the industry booked huge losses in the bust, accentuated by write-downs of their land positions totaling $28.5 billion for the 14 largest publicly traded homebuilders. These large homebuilders are recapturing some of what Uncle Sam took away during the boom years and they're buying dirt.
Returning taxes to businesses is great, but homebuilders are reading distorted economic tea leaves. In September, builders started construction on homes at the fastest rate since July 2008, "a further indication that the housing recovery is strengthening and could help the economy grow," gushed a wire service story. Both construction starts and permits were up at double-digit rates from a year ago.
What all this means is that more supply is being added to the hidden supply of homes that already lurks in the foreclosure shadows. However, builders are being fooled again. So are Wall Street investors who have sent homebuilding stocks through the roof. The SPDR S&P Homebuilders ETF (XHB) is up 56% from the start of the year.
Keep your housing powder dry. This crisis is far from over. No matter what government does, market forces will eventually have their way.
Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.
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