New York bankers preserved their own home values while crushing others
New York bankers refused to foreclose on properties in New York city to preserve the housing values in their own neighborhoods.
As Bernie Sanders recently pointed out, a cadre of major banks in the United States issue more than 35% of all home mortgages, and when you consider how many they service, the numbers go much higher, providing the too-big-to-fail banks significant influence over the housing market.
When housing went bust back in 2007 and 2008, lenders foreclosed on the subprime mortgages that defaulted first, partly because this was their established loss mitigation procedure, and partly because no bankers were subprime borrowers, so they didn’t give a shit about what happened to them. As a result, areas dominated by subprime mortgages endured price drops back to 1990’s levels.
When prime mortgage holders began defaulting two years after subprime borrowers quit paying, prices were already low in subprime areas, so lenders knew exactly what would happen if they foreclosed on alt-a and prime borrowers — lenders knew they would blow out the last remaining neighborhoods where prices held up. Instead, they opted to offer these borrowers loan modifications, and if the borrower didn’t repay, lenders simply allowed them to squat and live for nothing.
Allowing squatting to sustain home prices came with a cost. Once the word got out that it was possible to quit making payments and stay in their house for nothing, any borrower feeling financial distress from the Great Recession decided it was better to quit paying. Those who took greatest advantage of this were the ones who owed the most.
So we ended up with a bifurcated market. Bankers foreclosed in the poor areas dominated by subprime and pounded home prices back to the stone ages. Bankers didn’t foreclose in nicer areas, so prices remained high.
An example of this bifurcation is shown in the chart below that tracks the ratio of home prices in Orange County versus Las Vegas. The ratio was reasonably stable even through the housing bubble, but the bust was much more severe in subprime-dominated Las Vegas, so the ratio became greatly extended.
Perhaps lenders didn’t foreclose in prime areas because they felt they had no choice. If they wiped out house prices there, they would never recover on their bad loans, and they would go bankrupt. But maybe, just maybe, their motivation was more personal.
Would you like to guess where the ratio of foreclosures to delinquencies was the lowest? New York city — by a wide margin. Lenders foreclosed nearly everywhere else at much, much higher rates than they did in New York city — and not because it was a judicial foreclosure state where foreclosure is more difficult. In New York city, they didn’t even try. Lenders didn’t bother filing foreclosure paperwork for most delinquent mortgages and simply allowed everyone who quit making payments in New York city to squat.
Why would they allow so much squatting in New York city?
Because that’s where the bankers live.
They didn’t want to push down the value of properties in their own neighborhoods, so they let all their neighbors live in houses they weren’t paying for. Given the atrocious behavior of New York bankers, this shouldn’t come as much of a surprise, but it makes it no less outrageous.
Not just did these guys take out financial system to the brink of ruin with their toxic loans that ripped off millions of hapless homeowners, not just did these guys reap huge bonuses and windfalls from the bailouts paid by these same hapless homeowners, they even conspired to preserve their own home values and wealth by allowing any of the financial elite who fell on hard times a free place to live while they figured out the next way to rip everyone off. Assholes.
Robert Frank, Tuesday, 5 Jan 2016
The average apartment price in Manhattan hit a record $1.95 million in the fourth quarter. …
Real estate sales grew 9 percent in the quarter compared to the same quarter last year, according to real estate firm Douglas Elliman. But prices are soaring even higher: The average sales price jumped 12 percent, while the median sales price hit a record $1.15 million and the price per square foot hit a record $1,645.
“The (Manhattan) market continues to be a safe haven,” said Jonathan Miller, president of Miller Samuel, an appraisal firm. “The volatility and government intervention in China will just incentivize more outflows.”
As I noted in Bold California housing market predictions for 2016, “Another wildcard for 2016 is the activity of Chinese Nationals. Over 2015, higher house prices turned off this buyer group, and capital controls made it more difficult for them to get their money out of the country. These trends should worsen next year, eliminating a vital component of local demand. That being said, it could easily turn out the exact opposite if Chinese leaders loosen capital controls.”
Realistically, nobody knows what will happen with Chinese capital flows. If their financial markets continue to be downwardly volatile, there may be a last-minute push to get money out of the country before the illusory wealth evaporates, or this flow may simply be prohibited. In either case, it’s not a stable, long-term source of real estate investment funds.
And neither are the Russians (See: Wealthy Russians dump high-end US real estate)
Still, Manhattan real estate remains a tale of two markets. The condo market, driven in part by new construction favored by overseas buyers, is on a tear, with average sales prices jumping 25 percent over the past year to $2.66 million, and the price per square foot up 26 percent to $1,959. For just new construction, average sales prices hit $3.29 million or $2,210 a square foot.
Yet the co-op market, which is almost exclusively U.S. buyers and largely in older buildings, is selling for an average of $1.28 million or $936 per square foot.
That has bubble written all over it.
By Nick Timiraos, December 23, 2015
Home prices are closing in on their records of the last decade, reigniting fears of bubbles. Time to panic? …
There are concerns from housing analysts that low mortgage rates have allowed buyers to pay more for homes that would look unaffordable relative to incomes if mortgage rates rose to 5% or 6%. “It’s not a bubble, but some markets are overpriced,” said John Burns, who runs a homebuilder consulting firm in Irvine, Calif.
So which markets look most overvalued? …New York: In New York City, prices of condominiums have set nominal records and are very close to their 2006 real records.
None of this is reason to panic, and nobody outside of ZeroHedge is claiming it is. However, it is prudent to be aware of the fact that house prices are high by price-to-income standards due to the very low mortgage rates prevalent today. When mortgage rates finally do rise, housing will be more costly to finance, so future buyers will require much higher incomes to sustain current prices or even push prices higher.
Orange County housing will never be cheap again. I doubt we will see large future price declines, but future appreciation will likely be less than previous generations enjoyed.