Home Values at or Near Pre-Recession Highs in 1000+ U.S. Cities…or Are They?
Ask any Realtor, name the single most important economic impact to housing and they will tell you, its jobs. Yes, it really is that cut and dry, you must have a job to get and keep a home. So, a recent article by RISMedia really caught my attention as it announced “Home Values at or Near Pre-Recession Highs in 1000+ U.S. Cities”. You see, I don’t understand how this can be, especially when you look at our employment numbers.
Back…right before the recession, our lowest unemployment number was 4.4% in May of 2007 and for all of us, the talk of a bubble was rumored to be some crazy economic conspiracy theory. During this time, we had NINJA loans and taxi cab drivers flipping 300,000 homes on the side with their interest only loans. To the best of my knowledge, those times haven’t returned and in fact, our unemployment rate is 6.3% and that doesn’t include the “real” unemployment number which includes all of those that dropped out of the workforce.
First, I asked myself, when was the last time we had a 6.3% unemployment rate and what was housing doing then? Well, the last time we had anything close to a 6.3% unemployment rate was back in September / October 2008, when the recession was getting into full swing. Housing then was terrible, prices were falling, foreclosure were skyrocketing and the industry started talking more and more about short sales. So, why is this 6.3% unemployment rate any different?
Truth is, it’s not. Regardless of your political persuasion, a 6.3% unemployment rate is still a 6.3% unemployment rate and as such, we really should be seeing similar housing prices and trends to what we saw back in 2008. So, why aren’t we?
In my opinion, the biggest single reason why housing isn’t acting the same as it did in 2008 is because of the loss mitigation techniques employed in recent years by many of the “to big to fail” servicers who contributed to why we had a bubble in the first place. Let me be more specific
When a bank gives John Smith a loan for a home, the bank relies on the fact that John will be able to pay back that loan and, build equity. A lot of people don’t understand, the bank needs both things to happen otherwise they loose out big. You can build equity at least 2 ways. First, you build equity by forced savings when you make a mortgage payment each month. Secondly, you build equity if home prices rise, either way, you build equity. For many Servicers (Banks), who gave out risky loans, their clients like John Smith, bought a home he couldn’t afford and therefore, couldn’t build equity and before you know it, John was in a negative equity situation, that is, he owed more on the home than what it was worth. Now, sadly, these banks have lost money however, it’s not really the “banks” money so much as it’s the money of the banks depositors…you and me. Well, some banks, lent out so much money that they were actually concerned that if a run was to happen on their bank, they literally wouldn’t have the cash on hand to actually pay people back on their deposits. That’s right, you could have ended up going to the ATM to withdraw your money and the ATM has no money to give you. Granted, it’s a bit more complicated but, you get the idea.
In order to lessen the impact or mitigate the loss of these bad decisions, many banks moved these non-performing assets or clients like John Smith to shell companies called NBS’s or Non-Bank Servicers. This way it looks like they took the loss on their books and that they are “recovering” and doing much better. The reality is, they have these NBS’s hold these NPA (Non-Performing Assets) in this shell company by offering clients like John Smith some type of deal to “save their home from foreclosure”. These schemes will keep the homeowner in the home for years if necessary, just to prevent the foreclosure. Obviously the more foreclosure a bank has on it’s spreadsheets, the worse the finical condition it appears to be in and WallStreet isn’t having that.
So, here is where it gets very interesting. Let’s say, you have a neighborhood where 25% of the homeowners are upside down, granted….we all know that’s actually a very low number for most of us. The vast majority of the country is still in a Negative Equity situation and per the article I referenced above, it eludes that only about 30% or less of America is in positive equity so that means that 70% of us still haven’t recovered. None the less, let’s say that 25% of a neighborhood is upside down and of that 25%, let’s say 70% of them are owned by Great Bank. Well, Great Bank knows the law of supply and demand and then decides to do some “save my home” schemes and hold foreclosure at bay by offering to keep homeowners in their home at all cost. Sounds ok…right?
Well, it’s not ok because, what they are doing is artificially creating a bubble by using loss mitigation techniques through NBS’s. That’s right, you see an increase in prices, even thought unemployment hasn’t gotten good enough to warrant the price increase in a free market therefore, it’s a bubble. At the very least, you will see a turbulent few years of peaks and valleys in prices because the bank is slowly, trickling inventory on the market as prices rise to capitalize and lessen their loss. Keep in mind, because they own so much inventory in that particular neighborhood, they are literally able to control the price by simply controlling their own inventory and therefore, they can pick and choose which neighborhoods win and which suffer a foreclosure influx.
Now, take that and add the new QL (Qualified Loan) guidelines release this year, the pull back of QE (Quantitative Easing), the further tightening of credit markets with bank to bank lending and what do you end up with? You end up with a completely unjustified housing price bubble that you better be concerned with.
Sure, right now, it doesn’t seem that it’s too bad but, if this continues through the circular selling season and into the fall or even winter of 2014….I would be very cautious…very cautious.
