Has Uncle Sam Put Closure To The Foreclosure?
Friday, August 8, 2008 | Ethan RobertsRating:
Alan Greenspan gave an interview on CNBC last week, in which he said the housing market is "nowhere near the bottom of the home price thing", and the US is "right on the brink" of a recession.OUCH! That's a 1-2 punch, and the market sold off 200 points in the final hour after Greenspan's speech. Even his assurance that the U.S. is in remarkably good shape, given the financial system problems in the past year, failed to assuage the bear market's fervor for a sell off.
I remember how my father, an avid CNBC watcher for years before he passed away last year, would often plead with the TV, "Why can't that blankety blank Greenspan just shut up?! Every time he opens his mouth, the market tanks!"
Greenspan added that the bottom of the housing market is the "critical statistic" in creating a balanced economy, and that "Until then, I hope we can get a sufficiently stable stock price because there is the fundamental source of capital from which we get the ability to re-capitalize a goodly part of the financial system which surely needs it."
Translation: Real estate prices and the stock market are currently enmeshed. Greenspan was echoing the words of the frequently maligned James Cramer, who predicted last autumn that the stock market will not stabilize until the real estate market does.
Now this week, pouring gasoline on the fire, Oppenheimer analyst Meredith Whitney told CNBC that in her view, homes could fall another 30% in value before it is all over! That means that if the home for which you paid $350,000 is now worth $400,000, and if Meredith Whitney is right, your home will soon be worth $280,000. Makes you want to scream, doesn't it?
Edvard Munch's 19th century expressionistic portrayal of the latest Meredith Whitney prediction. Amazing how he knew it would happen...
I recently wrote an article for Tycoon, "Would You Journey 300 miles To Buy Investment Real Estate", in which I detailed a foreclosure purchase that I made on the Southwest Gulf Coast of Florida. This past week I traveled back to that area to do some minor rehab work on the home, getting it ready to be rented.
When I asked a Realtor what was selling in her local area, she simply crowed, "FORECLOSURES!"
She added that regularly priced homes were still sitting unsold for many months. Both investors and owner occupants alike are taking advantage of the lower priced bargains that are pervasive, and who can blame them? Lower mortgage payments, greater return on investment, and protecting oneself with equity from continued decline, are all valid reasons to buy distressed property. Many of the foreclosures are just as pristine as their more expensive counterparts.
In fact, while I was there, I bid on another foreclosure, and although my offer was fairly strong, another offer was superior to mine, and so I lost the bid. Competition for a bargain is heating up.
In my own area of Northeast Florida, we now have 610 foreclosures listed for sale on our local Multiple Listing Service (MLS). At the height of the seller's market in 2006, there were perhaps 35 or 40 foreclosures at any given time. So we have vacillated from one extreme to another. An additional 1725 short sales continue to clog inventory levels here. After five consecutive months of slightly increasing closed sales on single family homes, the July closed sales are down 19% from June, and over 30% from July, 2007. The condo closed sales figures are almost identical. Although there are recent reports of improving sales in other areas of the U.S., these numbers do not bode well for my local Real Estate market in the second half of the year.
UNCLE SAM TO THE RESCUE?!
The American Housing Rescue and Foreclosure Prevention Act of 2008 (H.R. 3221), which President Bush signed into law last week may help the real estate markets, but it will take some time to really make an impact. The bill provides a $300 billion plan for helping some 400,000 homeowners to pay off sub prime mortgages, and replace them with more affordable FHA loans. But the catch is that the lender must agree to reduce the principal of each loan to 90% of the current appraised value in order to refinance them, and the borrower must agree to share 50% of all future appreciation with FHA!
As prices continue to decline in many areas, it becomes increasingly more expensive for the lenders to reduce enough principal to make the loans sufficient. The congressional budget office has estimated that as many as 35% of the refinanced loans could end up in default again. That means Tommy and Tammy Taxpayer could be picking up the tax tab twice. Now there's a tongue twister!
You may have heard that another feature of this bill is to provide a tax refund to first-time home buyers, worth up to 10% of a home's purchase price, but with a cap of $7,500. Sounds like a great deal for first time home buyers, right? What you may not have heard however, is that this tax refund is really an interest free loan that has to be paid back to the IRS in $500 installments over 15 years. Uncle Sam has become like one of those automobile dealers, where the ads make the deal sounds fantastic, until you read the fine print!
There's nothing fine about fine print...
Finally, the bill provides communities with $4 billion to buy and revitalize foreclosed properties. President Bush had opposed this measure, because he felt that all it did was help the lenders, but ended his opposition to it when faced with political pressure. It was argued that it would help to remove deserted and blighted homes from neighborhoods, stabilizing nearby values as a result. In addition, it will provide jobs to thousands of contractors and their crews.
It remains to be seen what the states will do with these homes once they are purchased and rehabilitated. One possibility would be to provide families, currently on long waiting lists, with rental homes, under the HUD Section 8 program. Another option is to provide homes to persons who have lost their homes due to hurricanes and other natural disasters.
Hey, maybe they should just give these homes to people who have lost their own home to foreclosure!
(JUST KIDDING!!! No hate mail, please)
Applicants await Section 8 vouchers Katrina victims cope with floods
Reviewing the Tycoon member comments over the last couple of months, I am struck by the dichotomy of opinions expressed about the Real Estate market, foreclosures, sub prime mess, etc. Many of you have passionately expressed anger and frustration over the bailouts of lenders and home owners alike, saying the free market must be allowed to find its own bottom, while others have stated your case that we need to help home owners who were victimized, and stabilize the markets to avoid further damage.
Someday we may all look back at 2008 as a crazy, chaotic period, in which our American society was confronted with serious issues of self-reliance, responsibility, the proper role of government, and perhaps even Machiavellian attitudes toward the financial system as a totality.
In the meantime, there remains no closure yet to the ongoing foreclosure problem, and I am wondering how many more of them we will see as job layoffs continue. Most of the foreclosures within the past two years have been from sub prime loans, but as the economy struggles, even those with conventional fixed rate loans who have lost their jobs and can't sell their homes, could be at risk for default. Refinancing will not be an option for those with no jobs.
As always, there is money to be made from calamity, whether from the purchase of a home that sells for 40% less than it did two years ago, or from shorting the weakest Real Estate or financial stocks, or from buying ETF's that short these sectors, such as SRS or SKF.
However, in the long term, what is best for the country is to get closure on the foreclosure mess, before it drags us into a 1929 style depression. Although like everyone else, I am not happy to be the Tommy Taxpayer who has to pick up the tab for this mess, I sincerely hope that the new government housing bill will provide some much needed stimulus for the end of the housing debacle.
Tycoon Readers, have any better ideas on what to do? Send them in!
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
