Location, Location, Location

This post is not about location in the traditional sense but rather as an illustration on how misguided public policies on housing have been to date.

Location has always been a key factor in real estate. It is far more crucial now, rendering all the nationwide statistics such as new home and existing home sales relatively useless. Since there is no national land use policy, the default housing strategy has been urban sprawl. This is unlikely to change.

During the Greenspan era and the subsequent subprime bubble years, land was developed and houses were built with no regards to true housing demand. As long as they could be sold, builders would build them, the bigger the better. Buyers were scooping them up not because of need, but because someone would lend them the money and because they thought the next round of suckers/buyers would be more stupid and greedier than they themselves were, and would be prepared to pay them an even higher price. Supply, therefore, was randomly added to locations where the builders could make a fast buck.

Reckless financing allowed all locations to inflate, though some far more than others. Ironically, the locations that inflated most disproportionally were not necessarily the best locations, but locations where builders could add to supply with little restriction. They were concentrated on the fringes of the urban sprawl such as Central Valley in California, Las Vegas, the deserts around Phoenix and Tucson or already over-supplied cities in Florida.

The bubble finally burst. Trillions have been thrown in by Bernanke's printing press and never ending rounds of government interventions have been deployed, each round more insane than the last. Economists and Wall Street analysts used their elaborate spread sheets to come up with meaningless projections, drawn from erroneous data points.

Allow me to state my case. Take a look at San Joaquin County (Stockton/Lodi/Manteca): this is the poster child of overbuilding, excess supply, subprime hotbeds and foreclosures.

Realtytrac shows 3367 REO's for all lenders, 1638 notices of trustee's sales and 2368 notices of defaults in the region. That is a total of 7,373 properties that sit  in the foreclosure pipeline.

See for yourself on the Realtytrac  site (type in San Joaquin County).

San Joaquin is a county with a population of 685,000 people living in 233,000 housing units with a 62.5% ownership rate. This according to the most recently available census data. You can roughly extrapolate today's numbers from the data.

In this sea of foreclosures, defaults and an unknown number of short sales, 18 communities of new homes are being built. Builders are apparently building to guarantee an endless supply of future REO's. See this link from Newhomesource.com for confirmation.

Here is the current REO inventory of two big lenders in region:

Fannie Mae currently has 243 REOs  listed on its website in San Joaquin County.

Bank of America has 123 REO's listed in the same county.

Click on some these listings if you are interested in the details.

These are homes that were built a few years ago by the same builders that are busy adding more junk to the saturated market today.

How is this possible? Free market forces should drive house prices down, choking off supply so demand has an opportunity to catch up and give the market a chance to eventually reach a clearing level over time.

Instead of allowing a natural market correction to occur, policy makers artificially propped up these markets via tax credits, easy low down payment FHA financing, foreclosure restrictions, HAMP and HARP, while 'the Bernank' randomly spent trillions buying MBS with no understanding of what the effects would be. Builders are once again building just because they can, not because of actual demand. Every new house they build and sell is taking demand from the existing oversupply, exacerbating the housing crisis.

Apply the same analysis to Las Vegas and you will arrive at a similar conclusion as to why public policies have not worked.

How about the rust belt? Bernanke can manipulate  long term interest rates to zero and still won't be able to stimulate the real estate market there. Unless there are jobs, who is going to move to towns where factories have closed and corporations have moved away? On the other hand, if the jobs were to return, no stimulus would be needed to fill up all those vacant REO's.

So if we add up the housing data for locations such as San Joaquin, Vegas, Indiana, New Jersey ….. then what data do we get? It's a case of garbage in, garbage out. Even if you narrow things down to, say, California: Inland Empire, Central Valley, Coastal, Silicon Valley all have different housing issues. While some solutions may be applicable to all, most would not be.

In summary, much of the real estate problems facing the country today are localized. Nationwide intervention using an aggregated batch of nationwide data is not only ineffective, it has proven to be quite harmful. The Bernank has openly stated that he will not rule out another round of MBS purchases.

I think it would be much better if Bernanke simply resigned.

 


 


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Location, Location, Location”

  • I have experience here with a housing bubble back in the 1980’s. This new building is all about banks unloading inventory of undeveloped property. I bet you would find lot prices half or less than they were in the boom to start. Second, you would find homes being sold at prices that were maybe what they were back in 2001. It will be that way as long as there is inventory.

    Here (DFW), we are having roughly 4200 foreclosure filings a month. I don’t know what is being hidden, what is being foreclosed, but this the rate of filing. It was this high at the peak in 2007, that is the filings were this high and they were putting up about the same number of homes as there were filings for foreclosures at the time. What this meant to me was there was plenty of building, but as many homes were being vacated due to bad loans as were being built.

    This is a hot market as markets go and there is plenty of speculation. Also, I was told by a Realtor in a place to know that Wall Street was putting together deals to buy this stuff at 40% of loan value and the sticking point was the lenders were trying to get the government to put up another 40% so they could eat the loss. Nothing like organized crime between the perpetrators of this bubble and the government to put together what is likely a no risk, sweet heart deal. May hell be hotter than they expect.

  • killben:

    “I think it would be much better if Bernanke simply resigned”

    I have been waiting for this for the last so many years. My wish would have been fulfilled but for President Obama — Obama was not ready to call his bluff — Elect me or Else markets will tank. President Obama did not have the courage to throw him out. He needed to have just looked at all the grossly foolish statement of Bernanke (“sub-prime contained”, “home prices never fall”, “what recession” etc.). to do it.. Incompetent guy at the helm of Fed is bad enough but a dogmatic idiot is worse!

  • jimmyjames:

    How is this possible? Free market forces should drive house prices down, choking off supply so demand has an opportunity to catch up and give the market a chance to eventually reach a clearing level over time.

    Instead of allowing a natural market correction to occur, policy makers artificially propped up these markets via tax credits, easy low down payment FHA financing, foreclosure restrictions, HAMP and HARP, while ‘the Bernank’ randomly spent trillions buying MBS with no understanding of what the effects would be.

    **********
    Isn’t the real reason for the Feds housing prop because almost every toxic asset CDO’s/CDS’s etc. are leveraged to the price of housing/mortgages ?
    As the price of homes fall-the now negative leverage gearing in these instruments winds up backwards even more–

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • No results available

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

     
    Buy Silver Now!
     
    Buy Gold Now!