Kick the Foreclosure Can

The Government’s only coherent strategy for dealing with the Housing Depression is to delay inevitable foreclosures in a failed attempt to prop up housing values and forestall economic pain.

The following is an excerpt from and link to a Bloomberg story which details recent Fannie Mae efforts which encapsulate this tragic political and economic strategy.

“April 24 (Bloomberg) -- Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

The big game of kick the can strikes at a deep-seated fear among many investors -- that banks and others faced with mounting housing losses are finding all manner of dubious ways to push a day of reckoning into the future.”

Fannie Plays "Kick the Can"


The Danger of Playing "Relative Price Valuation"

Home buyers continue to delude themselves into believing that they are getting good deals simply because prices have fallen.  This misconception is born out of an affinity towards valuing assets on a relative basis rather than developing an understanding of fundamental value.

I can only assume that these are the same people who believed that Pets.com, Enron and Lehman Brothers were bargains as they collapsed.

• Who cares that the Nikkei Average was at 38,916 in 1989.  Today it is at 8,700.
• It simply doesn’t matter that the Nasdaq was at 5,049 in 2000.  Today it is at 1,679.
• If you want a real bargain the Dow was at 14,164 in 2007.  Today it is at 8,025.
• Is the Dow undervalued today or was it overvalued 18 months ago?

The Housing Bubble was at least partially fueled by the deeply flawed and misunderstood concept of relative valuation.  Comparable valuation analysis is the lifeblood of the real estate brokerage industry.  These valuation exercises are conceptually appealing and easy enough to comprehend that most brokers can understand them.  According to comparable transaction analysis housing as an asset class can never overvalued!  Even better, if some fool or scam artist overpays for a house, all comparable properties rise in value commensurately.  No wonder real estate brokers are so fond of the tool.

Such valuations focus solely on the relative valuations of other comparable assets in recent transactions.  “Comps” are a useful mechanism for valuing an asset for a current transaction, but absolutely worthless in gaining an understanding of actual value, or of predicting the future performance of an asset.

Today brokers and buyers are using similar relativism to convince themselves of their own financial prowess and good fortune.  Relative to 2005 prices, houses are a bargain.  I wonder why this same logic isn’t applied towards evaluating housing prices relative to pre-bubble valuations in 1997?

Why is it that most home buyers are willing to purchase houses at half off based on relative values but are unwilling to enthusiastically buy into the stock market at the same discount?  Do you know anyone who has borrowed hundreds of thousands of dollars to buy stocks in the past six months?  Yet millions of home buyers continue to enter into such transactions.

I hazard a thesis that these buyers seem to grasp that the stock market is both risky and unlikely to return to bubble valuations for years to come.  Yet for some reason these same people fail to grasp that real estate is presently more risky, has yet to stabilize, is falling at the fastest rate in U.S. history and represents a leveraged transaction making the damage of price declines even more devastating.

Borrowing money to buy an asset at a 50% discount isn’t a good thing when future price declines are inevitable.

Home Buyers Don’t Understand How “Housing Depression Hot Potato” is Played

The rules of “Housing Depression Hot Potato” are easy.  Don’t get stuck owning a house that is collapsing in value and you win.  At the end of every day that you are unencumbered by homeownership you are the victor. 

Each day:

• Houses become cheaper, and thus more affordable 
• Renters become wealthier by saving the incremental, relative cost of homeownership
• Renters avoid losing homeowner equity on a leveraged basis

There has rarely been a better opportunity to increase one’s real wealth than that represented presently by the avoidance of homeownership in an environment where prices are falling.
 
All one has to do to receive this benefit is to avoid purchasing a “Hot Potato”.  Yet somehow those same people who have been consistently winning the game simply by being on the sideline, can not resist the lure of a relative discount, and are willfully snatching up these tempting spuds.  

I offer advice for those who have fallen victim to song of the siren or the allure of the discount.  Wait one more day before you buy your house.  And then, if at all possible, wait another.  Consider the savings and avoided losses associated with homeownership even for that short period of time.  I promise you that the country is not going to run out of houses while you wait.  Foreclosures are not going to disappear.  There will be plenty of those irresistible distressed homes on sale for years to come.  And the money you save by renting and on the eventual purchase price of your home may be the easiest you ever make.