We are not a glum group at MKCREATIVE by any means. We just believe ‘forewarned is forearmed.’ Yesterday we discussed the local (read: Baltimore-Washington region) housing market, which did not enjoy a notable bubble and (thus?) has not suffered a violent bust. Nevertheless, the region is seeing a striking deflation in home values as foreclosures bite into more and more families. Anecdotal and personal evidence has seen not a few houses go from lived-in to empty to for sale in a few months, victims of foreclosure. In this region’s case, the problems stem not so much from over leveraged home loans made to people told/believing the market would never again shrink but from the fact that the Recession and unemployment (or worse, the terrible and larger problem of underemployment) continue to erode people’s savings and thus their abilities to keep up with their mortgages. Two years into The Great Recession has left many at the end of their abilities to pay, so their homes join the growing list of foreclosures (as reported yesterday, 35% of the homes for sale through April are foreclosed, compared to 22% from last year in Baltimore alone). A short-sold home gives no relief to the home owner from creditors, of course, as creditors get to buy back the house on the cheap and hold it until the market improves so they can sell it again.
Ah, but when will that happen?
Many analysts have begun speaking of the second dip to the Recession, a dip that optimists were loathe to mention last winter. The glut of houses still exists existentially, and it is only being added to by the ongoing swell of foreclosures. The market of buyers, on the other hand, still endure unemployment or stagnant wages. The market of sellers, though, keep selling each other modified/rarified/myth-ified assets to get rich. Les Leopold of The Huffington Post presents one of the best descriptions of this slight-of-hand that we have ever read:
The first thing to note about the Goldman Sachs synthetic CDO scam is that the investments packaged and sold contained nothing real at all. There were no actual subprime mortgages bought and sold. There were no tangible assets involved in any part of the deal. Instead, Goldman Sachs sold a financial instrument that gained or lost value (and paid a rate of return) as if the synthetic product actually represented ownership in the tangible underlying assets.
For those of you who play fantasy sports this might make more sense. Right now 10 million fantasy baseball aficionados (gamblers) “own” teams that reference real major league baseball players. But, of course, they don’t “own” the actual 700 major league baseball players. Rather they just get to reference the statistics (home runs, stolen bases, etc) those players produce as if they owned them. Those fantasy baseball team “owners” bet against each other and real money changes hands. But nobody owns anything real at all.
So though some have touted recovery in consumer spending, many are urging caution (which, alas, can further slow an economy). CNNMoney.com’sinterviewed a number of analysts who want to err on the side of an approaching double dip:
But prospective home buyers, particularly those tempted to think of real estate as an investment again, should tread with caution. One critical obstacle to a housing recovery remains intact: supply. Until the number of empty homes starts to shrink, prices could still fall further.
Moreover, notes Joseph Foudy, a professor of economics and management at NYU’s Stern School of Business, we’re coming off of an artificial bump from the first time home buyer credit, which expired last month. He predicts the second half of this year will see sluggish economic growth and that housing prices, at best, will be flat for the next few months, while commercial real estate “is likely to see significant declines.”
The article then piles on the housing market with such concerns as the Greek (and about to be Italian) crisis, the rise in the Libor/inter-bank lending rate (“Libor… has been on the rise, with Citigroup saying recently that it could end up a full percentage point higher within the next few months.”), and (oh, the tragedy) the confidence with which many US homeowners state they want to put their homes on the market in the next 12 months as they see the recovery develop. Another stream into the housing flood.
To prove we are not sadists, though, good news comes from the Baltimore-Washington corridor as well. The federal government, in cooperation with the Neighborhood Housing Services of Baltimore, has been working hard to check the influence of predatory lenders trying to pressure the financially-strapped to make terribly unfavorable short-term loans on the pretense of helping hard-working folks keep their homes. As reported in The Washington Post last Friday, “Joan Lok, a community affairs specialist with the Federal Deposit Insurance Corp. (FDIC), is trying to make a small dent in this very large problem with an innovative pilot program that provides small dollar, low interest loans to those in need through a coalition of financial institutions, local community-based organization and other partners. Lok said the goal of the ‘Borrow and Save Loan Program’ is to help low and moderate-income borrowers break the perpetual payday borrowing cycle, establish healthy banking relationships, gain personal money management skills, and learn the benefits of saving and asset building. …
“Since last August, the program has provided more than 80 loans with a value of more than $60,000 to recipients with have had little or no relationships with a financial institution. The average annual income of the borrowers has been about $30,000. Neighborhood Housing Services (NHS) of Baltimore serves as the loan underwriter and servicer, and charitable grants have supplemented the operating expenses and technical assistance.”
The work of NHS Baltimore may be precious little in an economy of fantasy baseball fat-cats, but it is still precious.