Wednesday, October 19, 2011
This 'Great Depression' Could be Worse
Out here in California lenders are foreclosing quickly on the 300K mansions that originally sold for 100K. They are taking their sweet time on the “million dollar” homes for good reason. The hidden inventory is becoming rather obvious, a lock box on the door handle and a brown lawn.
Many Californians bought their homes and paid them off before the great housing bubble, These people are nearing retirement, and expect a slice of that “Glorious bubble real estate pricing” and its isn’t going to happen. More supply, less demand. Meanwhile, the banks out here, holding real estate, are like chickens sitting on unfertile eggs. Nothing is happening, just a lot of hope that things will improve, if given time.
Realtors drop off lists of homes sold in my area. The lists reflect short sales, regular sales, and REO’s. The short sales and REO’s reflect pretty drastic price drops for the area. The regular sales don’t. What happens here, when a home goes on the foreclosure auction block, auctioneer has an automatic bid from the bank, on money owed. If the bank is the only bidder, the home is theirs. This is counted as a “regular sale.” So if the original owner owed 600k on a first mortgage, with the homes current value at 300k, this would be listed as a sale at 600k to the bank. Hey, that looks great for comps if you are a real estate agent. So when you see the sale price, that the bank paid, that has no real bearing on what the current value is for the home.
What is hurting the banks is a concept labeled “the velocity of money.” When you have a feeding frenzy, you have high velocity. Right now, we have low velocity; no one is begging for a loan, the banks can’t find enough people qualified to loan too. The go-go party years of real estate banking are gone.
Our future looks bleaker than the historical times of the 1930’s and 1940’s. The US was pulled out of the Great Depression by war. When it ended, we were the only supplier of finished goods. The rest of the world had no production capacity to speak of. This time it could be very different, we are not the only global supplier with production capacity in need of buyers to survive.
Once you realize this, the concepts of what are happening in this world leaves doubts as to how a real and acceptable solution is an option. I have questions, but no answers and that is scary. From here you need to tell the wife, the cute student you’ve rented the spare room to will bring in a few dollars. If she calls you a Democrat, you know it isn’t going to float.