If you know who Pete Seeger is, you’ll recognize that I’m about to pirate the song he sang about the cyclical nature of war. Hang in there. I promise I’ll tie this into real estate investing.
Where have all the houses gone?
Gone off balance sheet, every one.
When will they ever learn?
When will they e…ver learn?
You gotta be wondering where I’m going with this. This is not meant to be an essay about the just war theory. I want to illustrate why it’s crazy to drive down a highway with one foot on the brake and one foot on the accelerator. I think our government is doing exactly that with its interventionist policies towards the real estate market.
Sean Purcell wrote an article, over on Bloodhound Blog, about how the “shadow inventory”. Check out the graph in his article. Close to one out of ten mortgages in this country are in default yet only 60% of those distressed properties are going to foreclosure. He opines that there is a financial incentive for banks to “hide” that inventory rather than to dispose of it. Such an unseemly policy seems more befitting of Messrs, Lay and Madoff than it does bankers and Federal officials. As I don my tin-foil hat, cursed with the knowledge that two plus two really does equal four, I wonder…
Where have all the houses gone?
…which is what real estate salvagers, should be asking. The song continues.
Where have all the houses gone? Gone off balance sheet, every one.
The government is encouraging bankers to bury the bad loans, in hopes they can “work them out”, then charging them with fraud for doing the very thing it encouraged the bankers to do. It’s the political-banking complex and its downward spiral is more dysfunctional than the military-industrial complex Pete Seeger sang about.
Our housing market is being decimated (literally) and our government is putting severe restrictions on salvagers. Last week I wrote about the HUD suspension of the 90-day flipping rule. Upon further investigation, it appears that my observation will be proven wrong but my admonition might still be warranted. The profit restrictions, the HUD directive imposes, could be adopted as policy for all loan programs. Many underwriters, from different lenders, remarked that the profit restriction, as defined by the HUD directive, was a good guideline to quantify the profit they would “permit” a salvager when financing his/her buyer. Before you appallingly scream about an underwriters “right” to define your profit, consider the pickle they are in. Underwriters can be targeted as fraudsters, too.
When will they ever learn? When will they e…ver learn ?
While Zillow discovered that the gross margins appear healthy on distressed properties, anybody who attempts the salvaging process knows that the properties sometimes come with delinquent taxes to cure, unknown repairs to make, and ever changing loan guidelines for the folks who want to buy this property from us. Take away the profit motive and you drastically reduce the willing salvagers when we are most needed.
The free market is a sometimes ruthless but always honest crier. Governments have tried to manipulate it for centuries through sleight-of-hand tricks, subsidy schemes, and “planned” economies. The free market always has its say. While the political-banking complex tries to remake the old Pete Seeger classic, we know that the result is a vicious cycle of false bubbles and brutal busts. The real estate market is going through a period of price discovery. Messing with that is like trying to stop the rain.
10% of the public either can’t or won’t make their mortgage payments and will lose their properties. With over 18 million vacant properties, you gotta wonder if they didn’t already move out.
Now, more than ever, does this market need Winston Wolf. It is my opinion that it may be harder for Mr. Wolf to find profitable salvage opportunities because distressed (and perhaps vacant) properties are being added to the “shadow inventory” Mr. Purcell discussed on Bloodhound Blog. This leads me to my questions:
How might we circumvent this forced housing supply drought to find opportunities in profitable salvage opportunities? Are any investors contacting defaulted homeowners or pre-foreclosure owners, in an attempt to purchase a property through short sale? What success (or failures) have you had? What tips might you offer?
Gone to graveyards, everyone.
When will they ever learn? When will they e…ver learn?