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Feeble Justifications for Government Manipulation of the Housing Market

Posted: 30 Sep 2010 03:28 AM PDT

The arguments used to justify the government's manipulation of the housing market are very weak.


Irvine Home Address ... 401 ROCKEFELLER 412 Irvine, CA 92612
Resale Home Price ...... $434,990

When the lights go down in the City
And the sun shines on the bay
I want to be there in my City

Journey -- Lights

Housing is dead for the foreseeable future. Perhaps if we get another leg down, pricing may be low enough to sustain modest appreciation, but most likely prices will decline for a few more years then remain flat for quite some time.

The long housing stalemate

Posted by Colin Barr -- September 21, 2010

Don't get carried away with Tuesday's housing market surprise. A sustainable recovery is still years away.

Housing starts jumped more than 10% to a four-month high, the government said Tuesday. Permits for new construction also rose, the Commerce Department said. The news comes on the heels of the umpteenth bust-era runup in the homebuilding stocks.

But despite the upbeat signs, Tuesday's results were distinctly mixed. The headline housing starts number was boosted by a large rise in the volatile multifamily category. And the closely watched single-family housing permits number actually fell, for the fifth straight month.

"Although the headline looks good, the details of the report paint a more downbeat picture," writes Bank of America Merrill Lynch economist Michelle Meyer.

What's more, the outlook remains dismal, thanks to years of overbuilding that have left housing markets across the country in various states of oversupply. There is a year's worth of unsold houses on the market right now, which is roughly twice the typical level -- and that doesn't even count the so-called shadow inventory that would come onto the market if conditions improved.

Given the reality of those conditions, there is no justification for the government policies we have instituted to date. We have propped up prices by create a massive overhead supply and encouraged squatting on a grand scale. The current pricing is an illusion, so any justification for these policies is just as illusory.

Though there is an impulse nowadays to blame everything on Ben Bernanke and Tim Geithner, another view is that the government's massive efforts to prop up the housing markets – costly though they have been -- have actually worked as well as they might have been expected to.

Expectations must be very low considering how bad conditions really are. 

Sure, prices are still soft and banks are still stuffed to the gills with bad loans and foreclosed properties. Noncurrent assets and other real estate owned hit 3.3% of bank assets in the second quarter – down a shade from last year but nearly seven times the 2005 level.

But by the same token, the relative stability of prices over the past year has given the banking sector time to find its footing and the rest of the economy a chance to creep forward.

The stability over the last year is a temporary aberration, and the economy is only creeping forward because we have too much capital tied up in non-performing assets. The truth is Government Props Weakened the Housing Market and Delayed the Recovery.

According to this view, the government has succeeded in placing the housing market, once the source of so much economic instability, in position for a long slog back to health.

This will not have anyone turning cartwheels, obviously. Given the weakness of the economy and the slow rate of household formation in recent years, it will take years to absorb all the unwanted houses – a sobering thought when there is no end in sight to high unemployment.

But the good news, such as it is, is that unless there's another shock the housing market isn't about to bring the entire house of cards down again.

"Low rates and Fed mortgage buying have freed up sufficient liquidity to allow the 'shadow inventory' to remain in the shadows," says Andrew Barber of Waverly Advisors in Corning, N.Y.

"With such significant supply overhang, however, the market cannot rise appreciably," he adds. "As long as the Fed's put option is in place it might take something like a double-dip scenario or sudden rate environment shock to spur a sell-off. As such we could see this asset class tread water for a very significant time period."

Treading water isn't much fun, but think back to this time two years ago and tell me it doesn't beat the alternative.

If we had let prices crash to market clearing levels, the groundwork would be in place to have real appreciation. Once prices begin a sustainable rise, people regain their mobility, and the move-up market can return to health as people take the equity from a previous purchase to buy a more expensive home. As long as prices stagnate or decline, resale volume will be very low, and the economy will flounder. 

North Korea Towers II 

The only difference between these towers and the North Korea towers (Marquee at Park Place) is who was left holding the bag. The North Korea towers were sold out at the peak of the bubble, and both the investors and those who made loans in that building were left to face crashing prices, unpaid HOA dues, and little hope of recovery. The Astoria towers were not completed in time to catch any bubble sales, and Lennar's backer got to eat the losses.

Since the Marquee at Park Place was been seeing numerous forced sales by foreclosure, prices have been pounded down to the 200s. The Astoria towers are completely owned by Lennar, so there have been no foreclosures there. They are trying to obtain better pricing, but sales have been anemic, and with so much competition at lower prices, sales are not likely to improve there.

Lennar is facing a difficult choice: (1) lower price and take an even larger loss, (2) hold product off the market and hope prices go back up. Obviously, they are choosing to do the latter.

Perhaps we should rethink the terms "shadow inventory." I think we should call it "dark inventory." Many of the properties in shadow inventory are vacant like these towers. Vacant properties have no lights on, so they cast no shadows.

The Astoria is a microcosm of the shadow inventory problem. If you believe prices are going to fall, you would sell quickly to obtain whatever you could before prices fell further. Of course, that action becomes self-fulfilling. If you believe house prices are going to go back up, you want to release properties to the market slowly to allow some appreciation and still liquidate inventory. The problem with that approach is that your competitors may believe prices are going down, and they will provide lower priced product that steals your sales and pushes prices lower. That is the cartel problem. The sellers in Marquee at Park Place are undercutting the Astoria, lowering market prices, and stealing sales from the Astoria.

At the current rate of sales, the Astoria will be selling in 2030. They are betting that once the mess is cleaned up in the Marquee at Park Place that inventory will dry up and they will finally be able to sell for what they want. It isn't going to happen. These units simply aren't worth that much.

Look at the cashflow values. Even with 4.31% interest rates, these properties still cost more to own than they do to rent. What's the compelling reason to buy one of these? What happens when interest rates go up?

For now, Lennar will likely wait and see, but as time goes on and prices do not recover, the urgency to liquidate will increase. Prices will go down. The financial partners that backed this venture are going to lose a great deal of money. 


Irvine Home Address ... 401 ROCKEFELLER 412 Irvine, CA 92612

Resale Home Price ... $434,990

Cost of Ownership
$434,990 .......... Asking Price
$15,225 .......... 3.5% Down FHA Financing
4.31% ............... Mortgage Interest Rate
$419,765 .......... 30-Year Mortgage
$83,129 .......... Income Requirement

$2,080 .......... Monthly Mortgage Payment

$377 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$36 .......... Homeowners Insurance
$876 .......... Homeowners Association Fees
$3,369 .......... Monthly Cash Outlays

-$330 .......... Tax Savings (% of Interest and Property Tax)
-$572 .......... Equity Hidden in Payment
$24 .......... Lost Income to Down Payment (net of taxes)
$54 .......... Maintenance and Replacement Reserves
$2,545 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$4,350 .......... Furnishing and Move In @1%
$4,350 .......... Closing Costs @1%
$4,198 ............ Interest Points @1% of Loan
$15,225 .......... Down Payment
$28,122 .......... Total Cash Costs
$39,000 ............ Emergency Cash Reserves
$67,122 .......... Total Savings Needed

Property Details for 401 ROCKEFELLER 412 Irvine, CA 92612
Beds: 2
Baths: 2 baths
Home size: 1,571 sq ft
($277 / sq ft)
Lot Size: n/a
Year Built: 2010
Days on Market: 44
Listing Updated: 40416
MLS Number: S628969
Property Type: Condominium, Residential
Community: Airport Area
Tract: Cpwas

Brand new Lennar high rise flat in Astoria. 2 bedroom, 2 bath flat with Wonderful Ammenities, Luxury living at its finest with valet parking, beautiful upgrades, gym, wine room, pool, spa and so much more.


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