Manipulating for-sale home supply succeeded wildly for bankers
Reducing the number of homes for sale was the essential ingredient to bail out bankers and loanowners whose foolish behavior caused the housing bubble.
From early in the housing bust, I knew that how the banking cartel disposed of their REO would determine the fate of the housing market. Since lenders modify loans, hold non-performing loans on their books, and allow delinquent borrowers to squat, they control the flow of properties through the foreclosure process. Also, they control the approval of short sales; therefore, they control the flow of properties through the short sale process. Since distressed sales of foreclosure properties and short sales flooded the market during the bust, lenders controlled the bulk of the supply on the market.
At the time, I believed this cartel would fall apart partly because all cartels are inherently unstable. Cartels work when the members have an alignment of interests; however, once prices start going up, each member has incentive to cheat and release product into the rising tide to hasten their own liquidations. In 2011 and part of 2012 I was certain a cartel of bankers could not coordinate their efforts and effectively remove the distressed supply from the market.
I was wrong.
To my astonishment (and embarrassment) my predictions of a collapsing banking cartel didn’t come to pass. In fact, they succeeded wildly, so wildly that they engineered a housing rally nearly as steep as the housing bubble itself. Though I find it despicable, I have to admire their ability to pull it off.
But why do I think it’s despicable? Am I pissed off because I didn’t buy a home for myself at the bottom? No. I bought plenty of real estate in 2011 and 2012, so it’s not a matter of personal gain or loss. I find this behavior despicable because it’s a hidden bailout of irresponsible lenders and foolish borrowers, a bailout paid by new and future homeowners who must pay inflated house prices to save a bunch of idiots. Foolish lenders and greedy borrowers entered into private transactions that went bad, and rather than accept the consequences of their mistakes, they begged for and received massive bailouts, both direct and indirect.
So when today’s buyers are forced to pay prices 30% higher than they should be, they can thank the banking cartel and their supporters in power.
Diana Olick, Monday, 15 Feb 2016
… for home buyers nationwide: There is precious, record little for sale. …
“I think inventory is going to remain tight. The closer you are to urban centers, the tighter the inventory, because the demand is strong, and a lot of that stuff gets scooped up before it hits the market,” said Jane Fairweather, a real estate agent in Bethesda, Maryland.
The latest numbers paint an empty picture. Inventory at the end of December nationally was down nearly 4 percent from the previous December, but sales were up nearly 8 percent, according to the National Association of Realtors. The supply of homes for sale was the lowest since the start of 2005, and back then there were far more homes being built to add to overall supply. …
I believe early 2016 is going to see somewhat higher sales because more people have good jobs, but more dramatically, the combination of low mortgage rates and low supply is likely to trigger another steep price rally. Like the rally in 2012 and 2013, this one will carry on until rising mortgage rates lower the affordability ceiling. Hopefully, this happens sooner rather than later, or housing will inflate too much and new buyers will be put in a position to endure a painful correction.
“The inventory question is a puzzle,” said Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies.
I’m not sure why people find this puzzling. The answer was obvious to anyone willing to admit what the banks did to engineer the market bottom and brisk reflation rally. The supply is low because banks quit foreclosing and approving short sales. It’s actually pretty simple.
“If you drill down and say, what’s happening at the lower end of the market, what’s happening in more affordable neighborhoods, those places had a much more dramatic boom-bust in house prices. Even though prices have come back there pretty strongly, they are much more likely to be underwater or low equity, so I think part of it is even though we think we have seen the market heal, there’s still a lot of healing left to do.” …
“Even with surging home prices, listings were still down in January from a year ago,” said Redfin chief economist Nela Richardson. “Sellers are worried that today’s buyers won’t pay enough for their current home to finance their next-level house.” …
When I first wrote about this problem, I stated that inventory would come back to market when prices reached the peak — and they have — but not enough to bring inventories back up to normal. While many struggling borrowers will sell at the earliest opportunity, many others who might ordinarily want to sell will wait until house prices are 25% to 30% above their mortgage balances because at that price level, they have enough to cover sales commissions and put 20% down on a different home. Since house prices haven’t reached the peak yet in most markets, it will be another decade before prices get 25% to 30% above the peak where housing inventories will fully recover.
Low inventory is one of the four traits of the new normal in housing.