Monday, June 08, 2009

Banks gaming the real estate market? You bet.

The Exiled Online
Fatwah / June 5, 2009
Depression Porn: How Banks Are Gaming The Real Estate Market
By Yasha Levine
[Warning: online article contains some indelicate language.]

...while 1 in 4 houses are vacant, and obviously have been for quite some time (just judging by the dilapidated state of the empty houses), very few of these empty houses are on the market for sale.

The San Francisco Chronicle wrote:

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.”

...Nationwide, there is a two-year supply of unsold homes, twice what official statistics estimate.

To put it simply: banks are limiting supply in order to keep inflating the bubble. Keeping properties off the market makes sense for two reasons: it allows banks to engage in another round of brazen ripoffs by selling at least some of their properties at artificially high prices to a new wave of sucker investors (many of which are first-time home buyers). But more importantly, it allows the banks to avoid recording a loss on their balance sheets, making them look more profitable then they really are...

Here’s an account by the WSJ of how it went down:

The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don’t trade on exchanges — to “mark to market.” But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation’s largest firms on the brink of failure.

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.

Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics.

The one obvious connection that is not being made is that this change in accounting, linked up with the shadow real estate inventory, is the shady base supporting our entire economy. Without the new rules, banks wouldn’t be able to pad their books in order to appear profitable. And without fudging the numbers, banks would never pass Geithner’s “stress test” or ever hope to to appear even slightly solvent...

So if anyone tells you that "now's the time to buy a house!" - well, don't punch them in the face, but make it clear you're not buying that bull malarky. Housing prices have nowhere to go but down. As this article mentions and we had already seen in previous articles, we're nowhere done with foreclosures from flaky adjustable rate mortgages, and as unemployment continues to increase and benefits begin to end, there will be even more foreclosures on people who never got anywhere near a flaky mortgage.

You might recall the trendline that I superimposed on a graph a couple of years ago:

This trendline generously ignores the great depression. When you factor the great depression back in, however, the trendline is a lot less optimistic. This chart only shows a decline of about 40-50% in home values from peak. With the great depression era added back in you get a 60-70% decline in value from peak to reach equilibrium value. With our unemployment rate now reaching depression-era values, it seems reasonable to presume our home values must include depression-era data in their historical valuations. The great depression, unfortunately, was not a one-time thing. It is a regrettable but recurring part of the debt-based monetary and business cycles.

That means your house is, in reality, only worth about 30%-40% of what you paid for it if you bought it in the last five years or so. The banks, however, could not survive if most people realized that. Trust in them would disappear, and people would rebel at having to fork over such a huge percentage of their paychecks for something that will not regain its former value anytime in the next couple of decades. So the banks have and will continue to make every effort to hide the obvious from the general public.

This doesn't really surprise you, does it?

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