Plenty of economists – and political personnel – are heavily invested in the idea that we’ve turned the corner in housing and are poised for a revitalization. Recent statistics make it more difficult to hold that view. Existing home sales were actually down in February, though up year-over-year. Refinance activity has actually slowed down, the opposite of what was supposed to happen with the tweaking of HARP (HARP activity has increased in the sand states, but it’s not enough to increase refinancing overall, which was the point; it’s yet another “We Can’t Wait” initiative from the Administration that has done less than the hype suggested). And foreclosures jumped up in January, at a pace of over 1 million for 2012. The fact that seniors are using reverse mortgages with higher frequency because they cannot afford retirement shows that the dangers of using houses as debt instruments are still with us.
Forget about all that, the optimists say. The key stat to look at is months-of-supply. That overhang of inventory was the lead weight on housing prices, and now it’s mostly vanished as a problem. We’re down to about 6.4 months of supply (up from 6.0 in January, I might add), the smallest backlog since April 2006, and half of what it was in July 2010.
But you have to be very creative to get to this number. Yes, home building has come in at shockingly low levels, not keeping pace with population, which accounts for some of this. But the real issue is shadow inventory, foreclosed homes that banks have deliberately kept off the market, which number in the millions. With foreclosure starts jumping, this inventory will make its way to the market and sell at a huge discount, reducing prices overall.
But wait! There’s a looming rescue for this problem in the form of bulk sales of foreclosed homes to investment groups. While the pilot program from the FHFA mostly involves properties that are occupied, we’re told that this will, if successful, move into those vacant properties. And this solves everyone’s problem, we’re told. It reduces shadow inventory, increases supply for rental housing (which should lower rents) and allows prices to stabilize. Plus it’s a great investment opportunity:
One of the most bullish investors is Carrington Capital Management, which has teamed up with Los Angeles-based OakTree Capital. They have created a $450 million fund to buy foreclosed homes in bulk and rent them out.
In a marketing document for one of its funds, Carrington claims that without using leverage or borrowed money it can generate an annual yield of 7 percent from rental income alone. Its long-term strategy is to package the fund into a publicly traded real estate investment trust. If that strategy is successful, Carrington projects investors can see an internal rate of return of 25 percent over three years.
Sounds wonderful! Except it’s a totally horrible idea. And one that transfers wealth once again to Wall Street:
In con artistry parlance, they call this the “reload.” That’s when you hit the same mark twice – typically with a second scam designed to “fix” the damage caused by the first scam. Someone robs your house, then comes by the next day and sells you a fancy alarm system, that’s the reload.
In this case, banks pumped up the real estate market by creating huge volumes of subprime loans, then dumped a lot of them on, among others, Fannie and Freddie, the ever-ready enthusiastic state customer. Now the loans have crashed in value, yet the GSEs (Government Sponsored Enterprises) are still out there feeding the banks money through two continuous bailouts.
One, they continue to buy mortgages from the big banks (until recently, even from Bank of America, whom the GSEs were already suing for sales of toxic MBS), giving the banks a permanent market for home loans.
And secondly, they conduct these quiet bulk sales of mortgages, in which huge packets of home loans are sold to banks at a “big discount.”
Fannie and Freddie, aka the taxpayers, get stuck with the losses, along with unlucky borrowers who lose their homes and their net worth. The banks make out great, selling high and buying low, and then renting out the properties to increase their yields. And I don’t know why anyone would think that big institutional investors and hedge funds would make good landlords, or even care about the upkeep of a rental property, or anything for that matter other than getting paid.
If this is the solution, we’ve got bigger problems.