Clearly, I’m missing something in Martin Feldstein’s op-ed in the New York Times. Isn’t the most straightforward way to halt the drop in home values to allow them to decline to the market clearing prices? Contrariwise, won’t any other solution merely be postponing the inevitable?
I understand his point: that the loss of wealth reduces consumer spending which in turn reduces total economic activity. But the loss has already occurred. We can’t reinflate the bubble. There are inelasticities that prevent prices from changing rapidly so we see a (relatively) slow motion drop.
And the solution he proposes, reduction in principal, has the defect I mentioned yesterday evening: it will reveal how many banks are actually insolvent.
I was shocked when I read this post at Calculated Risk which contains a comparative breakdown of home sales in several different markets. Just to cite the extremes, in Las Vegas three quarters of all home sales were either foreclosures or short sales, i.e. distressed sales, while in the Mid-Atlantic, a region that includes Baltimore and DC, three quarters of all home sales were non-distressed. That’s an enormous difference and fully supports the claim I’ve been making for a long time: there’s a local problem with national implications billed as a national problem. One size does not fit all. We should be paying a lot more attention to the areas of the country that are in serious straits rather than diluting our efforts trying to find a solution that doesn’t give those areas preference.
A “hit it out of the park” essay.
We get daily emails on properties in Scottsdale at a development called Desert Mountain. My wife and I had a discussion on this topic this very morning. Short sales, distressed sales and on and on…… We get come ons to buy all the time. I feel zero pressure to move. Why? Dave’s point. I don’t think we’ve hit the market clearing point. This is a slow motion crash. So we lie in the weeds.
Much better to take the medicine and move on. That’s how markets heal and adjust.
“Most residential mortgages are effectively nonrecourse loans . . .”
Is this really true?
“. . . creditors can eventually take the house if the homeowner defaults, but cannot take other assets or earnings. Individuals with substantial excess mortgage debt therefore have a strong incentive to stop paying; they can often stay in their homes for a year or more before the property is foreclosed and they are forced to move. ”
Because if it’s not, then the subsequent premise is suspect.
More likely, (1) banks can’t (or won’t) process the foreclosures quick enough; they are picking and choosing instead; (2) government created uncertainty in foreclosures from paperwork issues and attorney general investigations; (3) presence of non-home assets that make people reluctant to seek the “fresh start” of bankruptcy.
It’s so true that there are pockets in the country which have had only a softening of the housing market. The there are other areas, though, where it seems to have collapsed, altogether.
In California alone, San Francisco and the “Westside” in Los Angeles county, has been spared the huge drops in prices. But, then inland from Los Angeles, only 60 miles, there is Riverside County which is awash in housing problems, both in it’s sales and rental sectors.
PD –
Having been, many moons ago, a banker, although an LBO banker not a retail banker, I can tell you the very last thing a bank wants to do is foreclose. Pain in the arse administratively, and rarely a positive event relative to principal owed.
There are those creditors who rely on this to strike a deal.
Dont forget that the banks lost a lot of the titles. Hard to foreclose when you cannot prove you own the place.
Steve
Feature, not bug. Let’s find out exactly how zombified the banking system is.
Yes, I see what you mean. It is a tremendous problem that the mid-Atlantic is financing its boom with trillions of dollars of (government) debt spending every year.
As jan suggests above the greatest problems in the real estate market are even more highly localized than the state level, really a problem of specific counties or even specific neighborhoods rather than spread evenly across the country. Treating the collapse in housing prices as a national one makes it so large as to be intractable; concentrating attention on the areas in which the greatest problems exist might enable us actually to cope with the situation.
This is a political problem not an economic or process problem.
PD Shaw wrote:
Uh, no sale on that point. I know someone personally that had their home illegally foreclosed upon and sold out from under them by BoA. I also know of someone else BoA did that to, and that case was even more egregious – not only did BoA foreclose on a house that they did not hold the mortgage on, they did so even though the house had NO mortgage on it. I both cases the (proper & just) owners found out about what was happening when someone showed up at their doorstep and ordered them to get the Hell out of their houses.
The people in the second case put up a fight which was costing them a good bit of change last I heard. Why BoA was putting up a fight wasn’t clear to me, and why the courts didn’t give a summary judgement against BoA is beyond me to. Except that it’s government by, for and of the bankers.
The couple in the first case had to buy their house back from the dummy corp the bank sold it to – they paid a 50% mark-up over what the dummy corp had paid. GREAT to be a banker, and GREAT to be in bed with bankers. (They wouldn’t sue because the man is too stubborn and principled to do so – he doesn’t believe honest people should lawyer up to solve a dispute. he’s from an America that never really existed. He can’t get it through his thick skull that he isn’t dealing with honest people. They were lucky enough to have the resources to buy their house back with cash.)
And it isn’t like other cases similar to the above haven’t made the newspapers. BoA officials ought to be rotting in jail for the crap they’ve pulled. The AGs of several states investigating them is a case of the AGs finally getting around to doing their fucking jobs, PD, so spare me the clap-trap about “government created uncertainty”. If the banks hadn’t been stealing peoples homes, there wouldn’t be any investigations.
steve wrote:
Didn’t slow down BoA in Florida.
And let me point out on thing that perhaps isn’t obvious. (Well, part of it can’t be because I haven’t told you yet.) In the first case I described above the couple had held the mortgage for over 25 years – no refi at any point. BoA’s foreclosure and sale was pretty close to being pure profit. And of course it HAD to be pure profit on the home they foreclosed upon that they hadn’t ever held any claim to. The zombie banks are propping themselves up by all kinds of methods, clever and not, legal and not.
This is a political problem not an economic or process problem.
Remember that economics was once called political economy*. This political problem IS an economic problem IS a process problem.
* Political economy is a much better term for what that practice OUGHT to be than “economics”. It would make the squishy, non-predictive science aspects of the practice more apparent. Of course, the current practitioners would never agree to this change. They don’t want to give up the pretense that they can predict the future with great efficieny if they can only get the models right. Or get the damned people to behave as the economists wish.
Or get the damned people to behave as the economists wish.
This would be best, of course, because then they wouldn’t have to change the models.
Mortgages in CA are mostly non recourse. In the majority of other states they are recourse. There was in article on the front page of the WSJ recently covering this subject.
Feldstein has lowered my opinion of him and other economists by writing about a subject when he doesn’t know the basic facts.
Sorry Icepick, lots of legal expenses and no summary judgment sound like the issues are more complex than you are aware.
I believe in Florida, an attorney was caught lying to the court about giving notice of foreclosure. I can’t say stuff doesn’t happen, but when people came to the door to take possession, they got the court to throw out the foreclosure. If it happened in Illinois, the lawyer would lose his license. I wouldn’t say that’s the bank’s fault. But the legal system, not just for real estate, depends upon notice and adversaries presenting the other side. If people aren’t showing up, or using, the court system to resolve disputes, I feel some sympathy, but not a lot.
Bad paperwork, missing links in the chain of title, weren’t invented in the last 5-10 years. The legal system has a way of working it out; it’s a cost to cure item as far as I’m concerned.
If people aren’t showing up, or using, the court system to resolve disputes, I feel some sympathy, but not a lot.
So, in the first case I presented they could have gone to court and it would have cost them 30 or 40 thousand with no guarantee of success. It was cheaper (when factoring in aggravation) to buy the house back for 48K. I think they should have pursued legal avenues in order to bring more pressure to bear on the banks. The old man’s pride (and to be fair, possibly the health situation of his family) prevented him from doing so. In the second case, last I heard they had been fighting the bank for over 18 months, with nothing to show for it but legal bills.
As for the courts cracking down on lawyers pulling this kind of crap for the banks? They haven’t done so yet, so why think that they will? The banks have been abusive of the process, it is only just that they get abused back. Not that it will lead to anything menaingful in way of recompense, but it’s a sweet gesture. Plus, it’s a kind of lawyer employment act.
But the legal system, not just for real estate, depends upon notice and adversaries presenting the other side.
Except that I know of two cases when the banks did not notify people that they were foreclosing on their homes. The banks have been operating by rules not allowed to other persons. (You know, the living breathing kind, not the chartered in Delaware kind.) And I mean that I either know the people, or know someone who does. It’s not like this hasn’t come up in Florida before, either.
I don’t want to pick through anecdotes, particularly about friends and states i don’t know much about, but I still stand by my original statement.
I was specifically thinking of New York and one or two other states that have essentially stopped foreclsoures. It takes almost three years to foreclose a home in NY. That doesn’t help home prices clear; it damages the value of the housing stock either because it becomes vacant or the debtor in possession can’t or won’t pay maintenance and upkeep, and while these foreclsoures slowly move through the system, the debtor is incurring fees, penalties and costs.
What can you do about places like Vegas. Go look at an google maps of the place and zoom out. The idea housing would be in short supply for any space of time is laughable. Housing prices could only go nuts like they did via a bubble. Trying to prop up housing prices there will never ever work short of starting a new bubble.
I don’t believe that for a second. Lawyers protect their own.
Steve V, there may be some truth to that, but an attorney making a false statement’s to court is going to lose his/her license for at least a year, regardless of who he is and who his friends are:
http://www.abajournal.com/news/article/ethics_case_against_bankruptcy_lawyer_based_partly_on_his_representation_of/
And that’s a false statement that notice was given a creditor in bankruptcy, in circumstances which I’m not clear would have made much difference to the creditor. I think if the false statement threatened someone’s home, the sanction would be greater.
It is also a “political” problem in the sense that no local government taxing authority wants homes to descend to their actual value. Thus the desire to find any solution which will prop up inflated prperty values. Most home owners are paying far more in property taxes then they ought to be given the real value of their homes. (I’m guessing I’m paying 1/4 to 1/3 too much right now.) If the fiction isn’t maintained tax bases will simply distentegrate.
Which I would be all in favor of as we wouldthen have to find a different way to fund local government and services.
PD,
As you said, I’m not interested in the anecdotes, I’d be more interested in seeing rates for lawyers as a whole. Noting periodic wrist slaps isn’t terribly convincing.
A person can go through an appeal process with the assessor’s office, proving through comparable sales etc., that the value of their home has changed, downward. In this way they can go through a reassessment of their property’s value, ergo a reduction in their property tax.
For Rich:
A person can go through an appeal process with the assessor’s office, proving through comparable sales etc., that the value of their home has changed, downward. In this way they can go through a reassessment of their property’s value, ergo a reduction in their property tax.
jan:
Appealing your assessment and having the appeals board reassess are two different things. I’ve been through this fairly recently with my Mom’s house. Even though we were armed with a professional real estate appraisal that determined the house was worth, roughly, half of the value at which the county had evaluated it, our appeal was rejected. Not only had the value of the house declined since the peak of the boom but the description of the house on the books was in error in significant ways. It didn’t help.
Now that local governments aren’t getting automatic revenue increases as a consequence of generally rising home values appeals boards are increasingly reluctant to revise valuations downwards.
Dave,
You’re probably right about local boards being more reluctant to revise evaluations giving them less money, when everyone is looking under rocks to find more money these days.
However, a few years back, we appealed a 6-unit income property reassessment, after I bought out my sister’s share. They raised the value beyond belief, and we went to bat with all our data, comps and did manage to have a lower value assigned to the building.
I’m just mentioning this as being an example that, although it is difficult, sometimes one can win the battle. It always pays to at least try, IMO.
Now that local governments aren’t getting automatic revenue increases as a consequence of generally rising home values appeals boards are increasingly reluctant to revise valuations downwards.
Shorter: The house always wins.
As for the appeal process itself: How many people know about that? How many people can put together a case that even has a chance of succeeding?