Ownership Society Failures

THE DETROIT NEWS is reporting that defaults are soaring in Michigan:

“Wayne County ranks worst in the nation for foreclosures.

“Katherine Ben-Ami closed on 11 homes a minute Wednesday.

“If she were the world’s fastest real estate agent, that would be good news, but the sad fact is Ben-Ami is an attorney for the Wayne County Sheriff’s Office, and in 35 minutes, she supervised the auction of 379 foreclosed Wayne County homes.

“‘Wednesday’s always been a big day,’ she said, ‘but not this big…’

“After recording more than 9,000 foreclosures in 2005, Wayne County ended January with 3,364 homes in active foreclosure, the highest of any county in the nation by more than 1,000, according to statistics compiled by Foreclosure.com of Boca Raton, Fla….

“The numbers illustrate one of cruelest side effects of the region’s economic troubles. Every repossessed home is a broken American dream for families, who lose not only money and a home, but also give up years of happy memories and hopes for a solid future.

“The burgeoning foreclosure rate also takes a toll on the larger community.

“Lenders, stuck with the homes, lose up to $50,000 per house as they clear them out at below-market prices. That can lower property values in neighborhoods, pushing more homeowners to move out, and eventually hurt property tax collections for local governments.

“‘Foreclosure depresses an area in a variety of ways,’ said LaSalle Bank chief economist Carl Tannenbaum.

“And these days, southeast Michigan has plenty to be depressed about.

“Taken together, Wayne, Oakland, and Macomb counties account for more than half of the state’s 8,284 active foreclosures. By itself, Wayne records 40 of the state total.

“‘This is the worst I’ve ever seen,’ said Gary Meyers, a foreclosure specialist with Venturi Realty of Salt Lake City, who made his first trip to the Wayne County courthouse Wednesday. ‘I’ve been all over the United States, and the most I’ve ever seen in a day is 30…’

“‘You want to buy my house?’ asked the owner of a home on West Grand Boulevard during Wednesday’s auction.

“A few missed payments, a subprime refinancing, and back taxes cost him his home.

“The well-dressed, middle-aged General Motors Corp. line worker once owned the home free and clear. During a separation from his wife, he took out a 30-year mortgage but fell behind in the payments. He refinanced to a subprime loan charging 13% interest. But he had fallen behind on taxes, too, and now owes more than $64,000 to the lender, including $16,000 for taxes. Although he’s declared bankruptcy, the home was excluded.

“‘My monthly payment went from $500 to $2,200 because of the negative escrow account,’ he said, asking that his name be kept out of the newspaper…

“‘Many people are biting off more than they can chew,’ said Bettina Pearch, a counselor with Greenpath Debt Solutions in Allen Park. ‘I see a lot of people who are living for the mortgage. There’s a lot of creative financing out there that is not really in the client’s best interest.’

“Overly affordable loans leave buyers stuck if something breaks around the home or in their budget, whether it’s a furnace, a roof, a medical emergency, or a layoff.

“Buyers often stretch finances to get into a home with a low- or no-down mortgage or a loan with initially low payments, and often don’t have savings to fall back on. With little or no equity in the property, they can’t borrow against the home for repairs or extra cash and can’t refinance to put some breathing room in the budget.

“Even selling the property is out of the question, since the owner would need to pay thousands of dollars in real estate sales commissions and closing costs just to get out from under the mortgage.

“Budget counselors, lawyers, REALTORS, and lenders say they see many unprepared homeowners who don’t realize just what they’re getting into when they buy a house.

“Many get tripped up by real estate taxes and homeowners insurance bills, often because lenders or brokers haven’t explained the financial details. Under Michigan law, for example, the taxable value of a home is capped for homeowners, but the property is reassessed to reflect the market value when the home is sold.

“Buyers who based their budget on those old, lower taxes are shocked when the newly adjusted bill shows up, often months after they’ve moved in.

“Often, the lender demands a lump sum payment of a few thousand dollars for the tax escrow account, and raises the monthly escrow payment. If the buyer can’t catch up, the lender pays the tax and moves to foreclose.

“‘Brokers are really trying to get people into homes,’ Pearch said. ‘Not everybody is destined to be a homeowner, nor should they be a homeowner.’

“Even with so many foreclosed homes, few actually sell at auction; most end up going back to the lender. In most cases, explained Ben-Ami of the Sheriff’s Office, the homes are worth no more than what’s due to the bank. At Wednesday’s auction, three of the 379 houses brought bids — all for just $1 over the amount owed.”

Highlights

There are a lot of interesting factoids in that article. Let’s highlight them:

“‘Many people are biting off more than they can chew,’ said Bettina Pearch, a counselor with Greenpath Debt Solutions in Allen Park. ‘I see a lot of people who are living for the mortgage. There’s a lot of creative financing out there that is not really in the client’s best interest.'”

Indeed. Anything to keep the ball rolling. Lenders simply do not care about the moral hazards of what they are doing. If they can make a fast buck. they do not care if someone goes bankrupt in the process. This greed will eventually backfire, of course, in ways that are not yet known:

“Under Michigan law, for example, the taxable value of a home is capped for homeowners, but the property is reassessed to reflect the market value when the home is sold.

“Buyers who based their budget on those old, lower taxes are shocked when the newly adjusted bill shows up, often months after they’ve moved in.”

This is a problem of the buyer not knowing the implications of what he or she is doing. One might think that a lender would take the time to explain the consequences, but then again if a lender can make $10,000, who cares if people lose their life savings?:

“Even with so many foreclosed homes, few actually sell at auction; most end up going back to the lender. In most cases, explained Ben-Ami of the Sheriff’s Office, the homes are worth no more than what’s due to the bank. At Wednesday’s auction, three of the 379 houses brought bids — all for just $1 over the amount owed.”

Right now, this is an indication that banks are buying back their own properties, more than likely for far more than they would fetch on the open market:

“‘Brokers are really trying to get people into homes,’ Pearch said. ‘Not everybody is destined to be a homeowner, nor should they be a homeowner.'”

The Ownership Society

This is going to prove to be the ultimate failure of Bush’s “ownership society.” Pearch is correct: Not everyone can or should be a homeowner. We have hundreds of government programs all trying to force home ownership on people who cannot afford, and perhaps do not even want, homes.

Why are homes unaffordable? One of the key reasons is government programs that attempt to make homes affordable. The market, not the government, should decide home preferences.

Glockenspieler on The Motley Fool writes:

“It’s bad, especially high-end exec houses. More leaving than moving here. A year ago when we were considering moving, I looked at about 50 houses. There was one that we looked at for fun (out of our price range) and loved — great location, very private, a lot of land, but close to the urban area, move-in condition. The realtor told us that the family had transferred there and only lived in the house for a year. We drove past it the other day, and it’s still for sale, over a year later. I looked up the price online, and it has dropped from the high 800s to 799k, and the ad basically says, ‘Owner must sell now.’ I don’t know what they paid when they moved in two years ago, but they have to be taking a hit. No one wants to trade up because the future of the area is so insecure.”

Kuriooo on The Motley Fool writes:

“Yup, I’m in the metro Detroit area, and it’s not great. Pfizer has also done some ‘adjusting’ of the work force at the R&D lab in Ann Arbor, and many of the scientists whose jobs are ending cannot find comparable work without a move to the East Coast.”

Message Lines

On that note, the Mish telepathic message lines are now open. WOW! I am flooded with telepathic messages. They all seem to be the same: “Mish, you cannot possibly be calling a failure of the ownership society on the basis of Michigan.”

Mish Reply: Michigan is but a drop in the bucket of what is to come. Expect to see the same scenario played out in California, Florida, Arizona, Nevada, and every current bubble area. The only reason we have not seen it happen so far is that home appreciation has bailed out homebuyers in the bubble areas. The “pool of stupid buyers” is running out. Price discounts in Sacramento and other places prove it.

People bought houses for the same reason they bought stocks in 1999 and early 2000: They were going up. P/Es did not matter in January of 2000, and affordability and wages did not matter with houses until now. Unlike stocks, however, houses are not liquid. People will pull them off the market and wait for “better times” to sell. The best time to sell in most places was 6-8 months ago. But one can not roll back the hands of time. If one wants to sell, or worse yet needs to sell, waiting for prices to rise again is likely a big mistake. As the economy slows, more and more people are going to find that “walking away from their home” looks attractive. For many it will end in bankruptcy.

There is no doubt that there is a national housing bubble. There is also no doubt that it is extremely uneven in “bubbleness.” The bubblier your area (as measured by percent increases in recent years or percent above the trendline growth for your area), the more inclined one should be to get the heck out. These factors, as well as the fact that people are extremely reluctant to sell houses for a loss (many cannot), make prices “sticky.” Be forewarned: This can really be a long, drawn-out affair. One simply must be prepared for it. More on preparedness later.

There is another good reason to sell: if your income is not keeping up with expenses and taxes. Wages are not keeping up with expenses and even though I am a devout deflationist I have to admit that the CPI is a total, manipulated joke. Medical and energy costs are severely understated in the CPI. Outsourcing of manufacturing is nearly complete but outsourcing of services has barely just begun. While the administration brags about job growth, we have largely replaced high paying jobs with jobs at Walmart. This recovery has been very uneven. Wages for the “have-nots” have severely lagged the wages and bonuses of the “haves”. The negative savings rate should be proof enough.

Yet it is important to look ahead. I remain adamant that the long bond sees what is coming: a recession. Still, housing is a personal thing and there are reasons to own a house other than price appreciation, provided of course that one has not stretched to make that housing payment, and also provided that one is prepared for an economic slowdown.

Bankruptcy Filers

Please consider The Boston Globe is reporting “Surprise! Bankruptcy Filers Really Are Broke”:

“In what will undoubtedly be the first of many ‘I told you so’ reports, the National Association of Consumer Bankruptcy Attorneys has found that, overwhelmingly, people who file for bankruptcy protection aren’t deadbeats who went on shopping sprees with the intention of shirking their debts.

“That’s quite contrary to what was being charged by supporters of a federal bankruptcy law that went into effect last October.

“For years, those proponents argued that billions of dollars were being lost because people were simply being allowed to walk away from their debts.

“‘As retailers, we have seen firsthand the dramatic effect bankruptcy has had on both consumers’ finances and on our ability to serve the public,’ wrote Steve Pfister, senior vice president for government relations of the National Retail Federation, in a letter to House members as the bankruptcy bill was being debated.

“‘These filings ultimately cost the tens of millions of households we serve hundreds of dollars each in unseen costs every year. Unfortunately, many of those losses are the result of misuse of the law by irresponsible, higher-income filers,’ he added.

“On the day President Bush signed the bankruptcy bill, he said: ‘In recent years, too many people have abused the bankruptcy laws. They’ve walked away from debts even when they had the ability to repay them.’

“The law now requires people to get credit counseling before they can file for bankruptcy protection.

“The premise behind this provision is that by forcing people to get counseling, it will show that many bankruptcy filers in fact have enough money left over after taking care of their essential expenses to repay creditors.

“I spent several years reporting on bankruptcy, and I saw no evidence (academic or anecdotal) to support claims that scores of people were gaming the system.

“Now, in the first analysis of the tens of thousands of people who have undergone credit counseling since the law passed, the bankruptcy attorneys association found that nearly all (97%) of the debtors truly couldn’t pay their debts.”

How Prepared Are You?

Now might be a good time for everyone to do some genuine soul searching about home appreciation expectations, cost of ownership, cost to rent vs. cost to own, percentage of income devoted to housing, and job stability.

How prepared are you for the loss of your job?

How prepared are you for the loss of your spouse’s job?

How prepared are you for unexpected medical expenses?

Do you have three months of expenses stashed away?

Do you have six months of expenses stashed away?

Do you have nine months of expenses stashed away?

How prepared are you for the unexpected?

Those that are not prepared should consider themselves potential candidates for failure in the ownership society.

Regards,
Mike Shedlock ~ “Mish”
March 7, 2006