Consequences

Joe Doakes from Como Park emails:

Some people believe today’s high housing prices are due to stimulus payments. All those people getting unemployment checks and $1,400 gifts are using them to bid $50-60,000 over the market for houses. I don’t think so. I think realtors are correct: there’s a shortage of houses for sale, about 40% lower inventory than normal. Low supply, high price, basic economics.

A person who lost his job during the Covid pandemic could sell his house and reap the equity, but then he’d have nowhere to live. During the moratorium on foreclosures, he can live in the house rent-free. And there’s always the hope he may get back on his feet, the government may offer an assistance program, he might win the lottery, something might work out that he can keep the house. Psychologically, people in financial distress hang on too long, they end up staying until they’re evicted because they can’t downsize and shed debt fast enough. Their houses are being artificially withheld from the market because of the moratorium on foreclosures.

Even if they did sell, there are increasingly fewer places to rent because landlords can’t evict tenants during the eviction moratorium (recently extended to next June). Fewer available apartments, higher rent, basic economics.

Ramsey County’s normal foreclosure rate is about 300-400 per year in good times (2000-2003 and again 2017-2019): people died, got divorced, lost their jobs, etc. Foreclosures dropped to single digits in April 2020 when the moratorium took effect. There’s a 15 month backlog of ordinary foreclosures and if the economy stutters when inflation causes interest rates to rise, there could be a great deal more coming. Hundreds of bank-owned properties will flood the market in a short period. Banks dump properties cheap. High supply, low price, basic economics again.

Sale prices will drop. Appraisers see the value of comparable sales dropping – appraised values drop. You won’t be able to sell sell your house for what it was worth in 2021 because the appraisal won’t support the sale price. It’s the 2008 downward spiral all over again.

The government knew that its panic reaction to Covid would throw millions of people out of work, making them unable to afford their mortgages, sending them into foreclosure, and exacerbating the homeless crisis. The Band-Aid approach was a moratorium on foreclosures and evictions. But that’s just a Band-Aid, it doesn’t solve the underlying problem of people out of work, unable to repay their loans. There’s a storm coming. It has nothing to do with stimulus payments.

Of course, there is one way housing prices don’t fall:

Shovel pandemic relief money to the politically well-connected who will stash it in safe currencies; continue endless ‘temporary’ moratoria on foreclosures and evictions to keep masses quiet even as landlords go broke; extend/increase unemployment benefits to hide the destruction of the working economy; and allow hyper-inflation to conceal the destruction of middle-class savings/wealth. Your house will be worth a million dollars, which will be just enough to buy a loaf of bread. Zimbabwe, Argentina . . . America?

If I was one of the well-connected people able to stash my wealth to ride out the ensuing global crash, that might actually be considered a feature, not a bug. I wonder who else is thinking that way?

Joe Doakes

Thinking? Of course.

Able to act?

8 thoughts on “Consequences

  1. Good analysis JD. I’m asking myself what if the Biden administration gets its way and pushes for fewer lending restrictions. Money will flow to those without means to make mortgage payments long term, housing prices will inflate, eventually a bubble of secondary mortgages will emerge and it will be 2008 all over again.

  2. golfdoc.

    You are correct, but the Democrats have no sense of economic forces. They are closely tied to the Fed who will continue to print fiat currency. As soon as 75% of the people realize the the world economy is controlled by a handful of elitist billionaires, i. e. George Soros, Klaus Schwab and a few Rothschilds that have the Democrats in their pockets, their game of keeping EVERYONE down and in debt, should be over.

  3. A few things, and I’m not using my gainsaying tone here, fwiw.

    No one believes housing prices are inflated because of “all those people getting unemployment checks and $1400 gifts.”  I asserted in these pages last week that I think there’s probably a link between housing and the business loans that went out to Mr. and Mrs. Small Biz in amounts ranging from 10s of thousands to a million with pretty forgiving terms.  I’ve looked at the publicly available spreadsheets, particularly for my own village. It’s a who’s who of who has a business in the village, everyone took a loan.  The tranny shop got several tens of thousand, and I wouldn’t guess they ever closed their doors.  Now restaurants: in our village the family restaurant took high 6 figures (and they were closed six months or more).  Restaurants keep making the news because of this flashpoint between them complaining they don’t have workers and the loans they took.  Just about any time one’s in the news, like Lions Tap, like Birchwood, it’s revealed they all took high 6 figures, maybe a million.  Now don’t tell me when a business gets that amount of free money that great big chunks don’t make it into the owners income rather than go to pandemic paycheck protection.  Mind you, I’m not making a value judgement here, I’m just talking about practical income and bookkeeping.  It stands to reason a bit of this money has chased housing.  I have not seen a thinkpiece that supports my assertion, nor one that UI money inflated the housing market.

    Your (Doakes) bringing up of the foreclosure moratorium is a fine point.  Had there not been a moratorium, there no doubt wouldn’t be so much upward pressure on house prices.

    There isn’t going to be a foreclosure spike when the moratorium goes away.  The shortage is way too structural by now.  And, in any contemplation of “housing bubbles”, it also ought to be understood that even in all our standard, run of the mill 9 month recessions we’ve had since the end of WWII, there was only one “pop” of the housing bubble with accompanying foreclosure spike, that being 2008-12.  The reason that one is different is because of the presence and profligacy of the Adjustable Rate Mortgage then.  ARMs are once again basically a non entity, there’s not going to be a foreclosure spike.

    Appraising, properly understood, has nothing to do with sale prices.  A residential appraiser doing a residential appraisal serves the mortgage underwriting process.  It’s testifying to the bank as an expert having performed a value evaluation that the bank can make the mortgage because the collateral value is in excess of the loan value.  At the point all these people are throwing 25 and 50 and 75k cash into their bids at this time, that actually relieves the long term potential of there being underwater mortgages during future housing softness.

    Paragragh 8, starting with “Shovel pandemic $ to the well connected.”  Pandemic money was shoveled to everyone.  I know in the beginning, there were sporadic reports of the money having been soaked up… but by this time, any business that wanted pandemic money got it.  The thing about the relief packages is, such that everyone got $, the correct critique is not that it was a corruption pigs feed at the govt trough gambit.  The proper critique is that it was a change the peoples’ relationship with the govt and the govt’s relationship to the economy gambit.  … Ya know, talking in terms of COVID being a pretext.  Also re this being an economic gambit or a relationship to the government gambit and “safe currencies”.  There are no safe currencies to store value in an inflationary environment.  You’re making a logic / economics mistake there in your desire to support this thing as a different kind of conspiracy than it is.  You’d put your value in assets to protect against inflation, and there’s no way to be an arbitrage guy and buy on the dip assuming everyone has to liquidate at some point…. It’s just really not an economic conspiracy to make Soros or whoever rich.  The better critique is, as I say, that it was a change the peoples’ relationship to the govt and economy gambit.

    Pandemic UI isn’t going to be continued past the current end date of Labor Day.  The Biden admin has acknowledged the political reality of that vis a vis the labor shortage and the incentive structure of pandemic UI.

  4. Well, there you have it, a clear difference of opinion: housing prices are headed for a crash, or they’re not. Let’s bookmark this column for review in 3 years and see where we are.

  5. JD, I believe you missed one point and would like your and others take on it. Higher prices mean higher property taxes. Higher property taxes mean higher graft from the ruling class and they will be loath to give it up. This means they will prop up higher prices at all cost to keep property tax money flowing. For as long as they can.

  6. JPA – I don’t know how it works in other parts of the country, but in Minnesota, property taxes are levied by the local units of government – city, school district, county, and sometimes a special government unit or two (watershed district, for example). The money is taxed locally and for the most part is spent locally.*

    “The Ruling Class” in local taxing jurisdictions is the Mayor, the County Board, the School Board. They love their tax income and would love to have more, but they lack the power to prop up home prices to keep the money flowing. Interest rates are set at the Federal Reserve. Stimulus money comes from Congress or possibly the legislature. There’s not much the locals can do to directly prop up housing prices. Best they could do would be to make their city/school an attractive place to live by fixing the streets, fighting crime, keeping tax rates low, but those activities aren’t sexy so nobody wants to focus on them.

    *Yes, I know about school district equalization and LGA transfers, but those don’t affect the point I’m making about local versus national.

  7. Well, this time around grifters have help. Funds like Blackrock are buying up inventory to drive prices up. I do not know if this happened before, or to what extent, but we may be in an uncharted territory. As loathsome as these funds are, one thing they are not is stupid. They are filling the bubble with a hose tied to firehydrant. And when it breaks…

    I have a personal interest in how big this bubble gets. In TX, property taxes are based on % of property value levied by local units of government. If these units could make do with current level of receipts (and they do since most run a surplus), what will they do when receipts double? Clawing the money back is always more difficult. BTW, if I remember correctly, one of the special sessions Abbot will be calling this year is to address a property tax relief bill.

  8. I was also just going to bring up Blackrock like jpa. It seems to be relatively new.

    There have also always been house flippers, but generally seemed like people who could do the work themselves and that was just what they did. Now, big companies like Zillow are in the market for house flipping. They just paid more for a neighbor’s house than any house on the block has ever sold for. It’s actually kind of frightening the price that they gave.

    The housing bubble needs to burst. But, like jpa said- these bigger businesses aren’t stupid, and I don’t think any end game is going to benefit regular people like us.

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