By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
… as Winston well knew, it was only four years since Oceania had been at war with Eastasia and in alliance with Eurasia. But that was merely a piece of furtive knowledge, which he happened to possess because his memory was not satisfactorily under control. Officially the change of partners had never happened. Oceania was at war with Eurasia: therefore Oceania had always been at war with Eurasia. The enemy of the moment always represented absolute evil, and it followed that any past or future agreement with him was impossible.
George Orwell, 1984
Situated on one side of one hole of the McDowell Mountain Golf Club, on a cul-de-sac, is a 3BR, 2 bath, 2,000 square foot home for rent for the price of $2,150/mo. On the other side of the hole, on a different cul-de-sac, is a 3BR, 2 bath, 2,005 square foot house for sale with an asking price of $310,000.
Our rental, which doesn’t have a pool, is across the street from a house that sits on the golf course: it seems to have a small back yard that backs up to another house. Our house for sale sits on the golf course and seems to have a very nice pool. Public records indicate the house for sale was last sold to its current owners for $696,000 in February, 2006 whereas the house for rent was last sold for $250,749 in Dec., 1999. I’ve never been to Scottsdale but a quick check of other houses suggests both prices are reasonable.
Some quick math shows that with a 30-year loan at 4% interest the nicer house, on the golf course, would yield a monthly P&I payment of $1,183.99 after a $62,000 down-payment plus closing costs. If a buyer qualifies for a 3-percent down-payment they’d have to raise $9,300 plus closing costs which would yield a monthly payment of $1,435.59.
There’s no ambiguity: even with taxes and insurance taken into account it costs much more to rent a mediocre home in the same neighborhood than to purchase a really nice house.
Though it isn’t marked as such the home for sale screams short-sale; it’s price has been reduced and it’s being sold “As-Is.” There’s a fine chance some servicer, after a dozen rounds of “lost documents” and chain-yanking, will seize and auction it to an investor with a bundle of cash for less than the $310,000 asking price. That’s less than half the price it fetched at the height of the bubble, who will then rent it for a tidy profit while waiting for prices to increase.
News articles have been appearing all over about investors paying cash for properties in bubble-states. Phoenix-area homebuyers squeezed out by investors, reads a piece in the Arizona Republic which notes that “cash is king.” In my own backyard, here in Florida, Miami condos have apparently appreciated 49% in the last year alone according to Bloomberg, which points out about 2/3rds of all buyers pay cash.
Irrational exuberance seems to be back in vogue in the bubble states, never mind shadow inventory figures so high that nobody can grasp exactly what they are. People, probably those kicked out of these same houses, are “willing” to pay a premium for rentals, which may make sense when one considers that even inflated rental prices are still less than their bubble-era mortgage payments.
One theme we hear repeatedly is a lack of “inventory,” homes for sale, which is predictably driving up prices. Remember all that talk about foreclosures driving up home prices? Apparently the foreclosure slowdown caused by Robogate instead seems to have done exactly what Adam Smith said it would leaving bankers, economists, and investors shocked — shocked! — at the recent gains in real-estate prices. Infamous Robosigner Linda Green appears to have done more to increase home prices than every government program combined leaving investors and home flippers, reckless villains in the meltdown narrative just last year, as this year’s heroes.
It’s not only private bankers doing this: government-owned but still “private” Fannie Mae and Freddie Mac are selling properties in bulk to investors. Brazenly ignoring their Congressional mandate to minimize losses by selling to the highest bidder (rather than the friendliest), while working to promote affordable housing, they instead work to empower and subsidize high-volume property flippers and land sharks.
These artificial increases are, of course, unsustainable. I have a friend who works for one of the local towns near me here in South Florida. He’s a city employee but with budget cuts worries about his job, part of which includes boarding up empty houses. Lately, however, the empties often aren’t empty.
It’s not uncommon, he says, to board up a needle-strewn empty one month only to be called back by police to board it up again a month or two later. Except that the new occupants aren’t crack dealers: they’ve often done the servicer’s work and cleaned it up. It’s not unusual, he says, to find that they’ve done basic repairs, and one even installed new appliances. OK – that was unusual; it seems the appliance installer rented the house from a random scam artist, paying a security deposit plus first and last month’s rent. Police, of course, will do nothing.
Banks are obviously manipulating the housing supply in an attempt to reignite a bubble to hide their losses, a strategy that’s temporarily working.
Book publishers were recently sued by the Dept. of Justice for price fixing, using similar practices. But I guess they’re not too big to fail. Indeed, I’m half surprised government hasn’t labeled book publishers a national security threat given the problems we’d face if people read and educated themselves about basic economics.
So here we go again. Backyard investors will soon be saying “it’s different this time,” arguing that those rents will never fall as they sink their retirement savings into the same houses that wiped out the retirement accounts of the previous occupants. But Mr. Smith’s invisible hand always wins in the end, sometimes with a gentle nudge and sometimes with a violent smack. There are too many houses for too few people and no private funding anywhere on the horizon. As long as those basic fundamentals hold true it’s not a question of if, but only when, the rental bubble bursts and how much damage it will inflict on everybody else.