Doubling up, and freebies, in the rental market.

Makes sense - there’s an increasing supply of unsold homes being laid on top of traditional rentals - it is simple supply versus demand. This competition may exacerbate housing price declines too, in the course of determining true valuation with down and dirty mathematics.

At least one was in Detroit:

One dollar can get you a large soda at McDonald’s, a used VHS movie at 7-Eleven or a house in Detroit. The fact that a home on the city’s east side was listed for $1 recently shows how depressed the real estate market has become in one of America’s poorest big cities. And it still took 19 days to find a buyer.

It was actually sold for negative $9,999, as the bank was force to pay closing costs and real estate sales commissions. The house was gutted by looters prior to the sale and completely non-functional - still back taxes were over $5,000 (and likely accruing).

Intrinsic (or purely sentimental) value aside, homes are an asset like anything else, and assets are widely priced at the present value of future cash flows. The lender may well have made the right decision here.

Reason:

“There’s a great misunderstanding of what’s happened,” says economist Allan Meltzer. The main trouble, in his view, is not that Americans are suffering from weak or negative economic growth. It’s that they have suffered a loss of wealth, a very different ailment…

When the economy contracts, the government may use sound monetary and fiscal policy to help revive growth. But when wealth goes up in smoke, the government can’t necessarily bring it back. If it tries, the effect is likely to resemble what happens when you give a recovering alcoholic a drink: deceptively pleasant at first, but ultimately calamitous.

Institute the No-Loss Rule, retroactively, for housing.

I was fishing Wednesday, and I had an all day meeting on Friday (which unfortunately was on a river, so I couldn’t use NewsGator Go! to stay abreast). Saturday I pulled another all-dayer - there was no business talk but there was plenty of discussion regarding “life aquatica” and how to fool them. Some folks might think I missed a lot:

The AP giveth, and the bloggers taketh away…
• The bastion of bias lays out a price list for what is legally free. Techcrunch asks them to pay up.
• Maybe the AP should chase after their member news outlets and leave everyone else alone. The Huffington Post is doing it.

The secrets of success…

• According to George Soros - accept losses and move on.
• According to Bill Gates - compete against stupid, lazy people.
• According to Carl Icahn - be angry.

From the housing market…

• Senators from Connecticut have all the fun.
• Living in Southern California? Not so fun.
• And renters may not be losing their shirts, but they are still second-class citizens.

And the environmentally-friendly, in the world according to Forbes…

• Here’s to the upcoming hydrogen economy, and why the same ol’ players will control it.
• You can’t turn water into wine (without grapes, of course), but someone will try turning algae into oil (with the idea that gasoline comes next).
• Big dams are making a comeback - I wouldn’t mind a few more tailwaters, but I hope big fish get some consideration.

Interestingly, Forbes threw in a note - people aren’t visiting national parks like they use to.

Maybe they’re too busy keeping up with the news.

I’m not sure if The Associated Press is now a subsidiary of the National Association of Realtors, but their headlines sure make them seem that way…

Home sales unexpectedly rise in April :

Sales of new homes rose in April for the first time in six months although the unexpected increase still left activity near the lowest level in 17 years.

The headline should have said…

“Home sales ‘unexpectedly’ revised downward for March so April’s look much better, and we hope the NAR will stop telling their members that the housing decline is entirely the fault of the press”

The downward revision / “this month’s great” game has been going on for some time.

UPDATE: Even easier - New Home Sales Fall 42%.

In theory, what if…

You let those who are about to be foreclosed on be foreclosed on. Bank inventories would rise, and house prices would fall. This is called correction, and in many circles it is considered healthy. Rather than pour capital into the inevitably failing cause of bailouts, relax restrictions on the purchase of foreclosure properties. Lenders provide capital to those that qualify, instead of requiring investors to show up with a check for the full purchase price. Potential buyers sitting on the sidelines (with healthy credit ratings and plenty of savings) move in because there is now the visible possibility of a return on equity. Prices stabilize.

Meanwhile, people that probably shouldn’t have been owners in the first place - they didn’t have a down payment and/or had to fudge their income - go back to renting. Rents rise with demand, and price/rent ratios move towards historical equilibrium. Those highly credit-worthy borrowers with an understanding of the basic concept of return on capital and positive cash flow (please move over, Carlton Sheets crowd), move in further. This time they are buying to maintain, rent out, and garner a long term return on their investment - not flip to the next joker two days after they close.

Lenders are already putting the kibosh on home equity lines, so there is no need to argue this will bring the consumer-led economy to a screeching halt. Prices of everyday goods are taking care of that, and much of the non-core inflation is a direct result of interest rates and the falling dollar. Yes, demand will fall, but a significant amount that demand is consumers’ insatiable appetite for foreign goods. If the influx of good manufactured outside the US slows, you trip a decline in commodities prices - foreign demand in foreign currencies slows as a result of shrinking sales to the US, exacerbated by a stronger dollar on the back of dwindling supplies of it.

While markets aren’t keen to consider the effects of negative growth with a smile, maybe they should consider the effect of rising margins too. Falling prices means decreasing cost of goods too. Meanwhile, price conscious consumers see bargains everywhere, which negates some of the revenue declines and the unemployment associated with it.

Heck, we’re a services economy anyway, and it’s going to take plenty of accountants and attorneys and bankers to get those foreclosed homes into the right hands. And plenty of plumbers and electricians and interior designers to fix them up. Retirees make crap a few bricks while watching the Dow correct itself, but if you have 2/3rds of the savings you had before while a gallon of gas costs 1/3rd what it did while you were socking away, why would that matter? We might also see rising interest rates under this scenario, which means fixed income portfolio losses (on paper) but plenty of extra cash flow to support daily needs.

Yes, it all means some pain, especially for trading partners. I suspect the far east economies wouldn’t be particularly pleased at the thought of forced moderation to their now improving lifestyles. And first you have to buy into the idea we do truly live in a global economy - and that decoupling doesn’t exist.

Could it work?

UPDATE: Some of this might happen whether we like it or not - the Fed is finally already warning on inflation.

UPDATE 2: More on housing price/rent ratios. Note that the forecast doesn’t reflect rising rents - the spike is caused by projected housing price adjustment.

The Fed Chairman is “reiterating” ad nauseum. Screwing follows.

I reiterate we need to forgive people for their misinterpretation of basic economic fundamentals

Bernanke, in a speech in New York today, reiterated his call for lenders to forgive portions of mortgages for some struggling homeowners. He said proposals should be “tightly targeted” at borrowers at greatest risk of losing their properties, and avoid providing an incentive for defaults.

The map is not pretty (scroll to the bottom) - states that are vital to the condition of the overall economy are showing heavy leverage, heavy delinquencies, as well as heavy “non-owner” occupation. Price drops are now being singled out as THE reason people are getting pummeled, and the Fed is urging banks to unilaterally revise mortgage terms to put mortgagees on an even keel. Screw market economics.

The people most at risk of default are: 1) those who have the least “skin in the game” (i.e. those who put the least amount of money down under the assumption that home prices would rise forever); and 2) those that as a result of delusional assumptions thought becoming a real estate investor was a guaranteed lottery win. As generous as banks are historically known to be, they aren’t going to reduce mortgage principal to a point where borrowers are sitting pretty - no, they are going to revalue homes and adjust loans down to just that new level. Mortgagees will still be without their imaginary wealth, and they’ll still be on the hook for the original principal amount should the house sell down the road. In other words, they are still screwed, and I suspect there will be few takers either.

The potential ill side effect of this?

During summer past, everyone thought that the mortgage problem was contained to the sub-prime sector. It was portrayed across the media spectrum as a low-income borrower, low-end housing problem. “Sub-prime, sub-prime, sub-prime” was drilled into the citizen vocabulary. However, it is becoming more apparent to more people that containment wasn’t the case, and now that the problem is being recast as a nationwide, multi-tiered issue of pricing. The predicted result - accelerating defaults. Anyone with the means to continue paying their mortgage, and who has now bought into the idea that their home really is worth less than their mortgage, is going to bring their stated income down to size and either beg the bank for a favor or downright threaten their lender with walking unless they do. The latter becomes an even more substantive ploy if the borrower is aware of the court backlog in foreclosure proceedings, the growing inventory of bank-owned properties, and/or the fact that the court system isn’t buying shoddy mortgage record keeping.

I reiterate that government subsidization is the answer, no matter what the long term cost may be

Bernanke also reiterated his call for a stronger role for Fannie Mae and Freddie Mac, the government-chartered companies that are the biggest sources of money for U.S. mortgages, to ease the crisis.

This, in spite of the fact that Fannie Mae lost 2.2 billion in the latest quarter and is now planning to raise billions in additional capital to stay afloat. As THE primary funder of mortgages, Fannie Mae (and Freddie Mac) are getting screwed - they will wind up taking a hit for the principal reductions on in-house paper. But with the Fed behind them, they can probably screw investors down line - the ones who invested in their bonds for their secure, income-generating potential. The ones that aren’t invited to the negotiating table. And of course they get to screw the last money in - $6 billion is likely the minimum necessary to keep the GSAs’ regulatory formulas in line, but unless they magically begin turning a profit they’ll be back at the trough in no time.

In the midst of conjuring this post, the market was not reacting as such. While Fannie Mae bleeds from all orifices, the market was taking light of the fact that Fannie said their loan quality was going to go up, and the stock was following the same path. It may take a few days or weeks to sink in, but dilution and/or unservice-able debt are rarely good ingredients for a stock’s price. Furthermore, the magic awaits - how is Fannie going to increase their purchases of “at-the-money” loans to desperate borrowers while portraying it as a higher quality portfolio? They can’t…someone’s going to get screwed.

Cringing at the thought of more screwing, and looking forward to continued reiteration.

UPDATE: Dan Mudd, CEO of Fannie Mae, says…

“We’ve got to get across a bridge where we don’t miss the opportunities we have…we will feast off this book of business we are putting on.”

Easy to say when the alternative is feasting on taxpayer dollars if you don’t get across the bridge, thereby missing all those wonderful opportunities.

UPDATE 2: More Fannie Mae facts.

Light on thought.

• Check out today’s shocking level of discount window borrowing. Who wants to start a bank?
• A crank Craigslist posting led to a run on an Oregon man’s possessions. Henry Blodget wonders who’s responsible (i.e. who should pay for the ransacking). I’m wondering when the copycats are going to arrive.
• Luxury car sales are on the decline, and Ford is selling Jaguar and Land Rover as a result. Not too long ago luxury goods sales were being touted as a mainstay. What changed all of a sudden? Failing hedge funds?
• New home sales fell to a 13-year low. You wouldn’t know it if all you were listening to was the National Association of Realtor’s counter-productive spin.

Commentary will remain light around here for the next few months…until the project I am working on has reached its next milestone or I catch a ten pound trout, whichever comes first.

I only shrug and nod compliantly when tech folks say the housing debacle, the credit crunch, the equity market gyrations, and other macroeconomic factors those very same tech folks proudly proclaim their ignorance of, does not effect them.

It does. And it will continue to do so.

Read tomorrow when you’re nursing your hangover - it’ll certainly make more sense then.

Filed under Do As I Say, Not As I Do:

Filed under The Lord Works In Mysterious Ways:

Filed under The Bigger They Are, The Harder They Fall:

Filed under More Than You Bargained For:

and…

Filed under That Overpriced Conditioner Won’t Help: