by Gary North
by Gary North
You read that right. You can buy a house in Atlanta for $10,000.
That's if you're a high roller. How about one for $5,900?
Whenever you see something like this, you should think to yourself: "This sounds crazy; so, the government has to be involved." This may be incorrect, but you will save a lot of time barking up wrong trees by starting with this assumption.
In this case, it's a conclusion, not just an assumption. I will get to this later on. But first. . . .
A PARALYZED SYSTEM
There are a dozen houses listed by local real estate agents that you can buy for $10,000 per home. You can buy ten times as many if you are willing to pay $20,000.
How can this be? It is true that we are somewhere in the unwinding of a housing market that has suffered from mania. But this is more than unwinding.
There are foreclosures. But how can prices fall this far? Aren't there any bidders at $10,000? The answer is simple: no. Are these houses abandoned? Probably. Well, abandoned by their original owners. They may not be abandoned by local entrepreneurs in the pharmaceutical trade.
When I first read about this, I noticed that the article did not use the code words that immediately pop into the typical reader's mind — words associated with the now-illegal bank practice of "redlining." There are some neighborhoods that are high risk. Yet, even here, people rent. They don't rent for $50 a month. So, why don't renters see an opportunity? They could go to the seller — a bank — and offer to buy the place for no money down and then fix it up. If they have any repair skills, they could make a good case. That is surely a better deal for the renter and the banker than having the house sit empty.
Please don't tell me they aren't smart enough. Those previously mentioned entrepreneurs are very sophisticated in matters financial. Some gangs demonstrate remarkable abilities to handle positive cash flow. People on the street know what things cost and who is profiting.
Yet the houses are not selling. If I worked for a foreclosing bank or lending agency, I would go to local pastors and suggest an arrangement. I would try to sell them houses as investments. They have money. Failing this, I would encourage them to locate church members who would like a place to own. In short, I would make a deal. I would get the houses off the books. These houses are not doing the foreclosing agencies any good standing empty.
If nothing else, I would go to Habitat for Humanity or the Fuller Center for Housing, both headquartered in Georgia. I would find out if they could do something with the properties, such as buy them, scrap them, and build new houses.
The fact that this has not been done indicates that there is a terrible paralysis in the foreclosure process. This paralysis points to government regulation. It also points to corporate centralization. Nobody at the local level is being offered incentives to get these properties off the books.
This problem is not confined to Atlanta. I speak from recent experience.
I plan to buy a house next year in an Atlanta suburb. If prices fall enough, I will buy more than one. So, I sent my wife to the area in early May to see how the foreclosure market is doing. She found out.
She went to the courthouse steps to view the auction for foreclosed properties. The sellers had all posted minimum bids. One by one, the houses were offered for sale. There was not one bid. This meant that the asking price was the high bid. Every house went back to the foreclosing lender.
These houses were not priced to sell. They were priced to subsidize the local pharmaceutical trade. "You want free rent? You've got it!"
One house that caught my attention was foreclosed last December. The bank is unwilling to drop the price below $250,000. So, it keeps buying it back.
I subscribe to RealtyTrac. It costs $50 a month, but it saves me time, which is valuable. It lists some 250 bank-owned properties in the town I am looking at. Some of these properties have been on the banks' books for over a year. There is an occasional SOLD entry: maybe one out of every 30 houses listed.
As the housing slowdown continues, and as prices slowly fall because a few sellers become desperate, the number of foreclosed houses in inventory will serve as a constant source of houses in competition with sellers of owner-occupied houses. At some point, the banks holding these foreclosed homes off the market will decide to price them to sell.
When that happens, property tax assessors will enter the twilight zone.
In Atlanta, they already have.
A TAX ASSESSOR'S NIGHTMARE
On May 12, the Atlanta Journal Constitution ran a story on this in its Metro section: "Tax Assessors Boggled by Housing Dip."
The article reported on the $10,000 and $20,000 houses for sale. The reporter asked the right questions. They are the questions confronting tax assessors.
The problem is, the assessors do not have agreed-upon answers. Distressed property sales — sales by distressed sellers — are not supposed to count. But when distressed sales are the bulk of sales, what then? The article quotes the chief appraiser for Fulton County.
What is the value of a lot if no one can get a loan to buy it? How should you value a home that sits on the market for a year with no offers? When a neighborhood has several foreclosures, short sales and abandoned properties, do they set the market?
"We are trying to understand all these things," said Manning. "What's the right answer? We don't know. It's tough. I've got entire neighborhoods where all I've got is distressed sales. I don't have any good sales."One of the houses is on the books at $101,700. It is being offered for sale at $5,900.
In fact, seven of Atlanta's least-expensive homes are listed on average for $8,800 but taxed at an average value of nearly $93,000.
The problem is getting worse. The foreclosures keep increasing. They are expected to increase through 2009, if we believe the chief economist for Freddie Mac, the government-sponsored mortgage company.
Already, there are Atlanta neighborhoods where banks own 90% of the properties on the market. This is accelerating. One agent explained the problem. The tax authorities have these properties on their books at high prices. The prospective buyers do not want to buy these properties when they know they will be hit by high taxes. He said that he had a buyer for a $95,000 duplex. The buyer backed out when he discovered that the property was on the tax roles at $300,000. I would have backed out, too.
The tax assessor has a major problem. If he keeps these properties on the books at the old prices, they won't sell. If they won't sell, the sellers will be forced to lower their prices. If these prices fall, the market for normal, non-foreclosure houses locks up. There is too great a discrepancy between the foreclosed house prices and the owner-occupied house prices.
Some of the sellers will then stop paying their mortgages. They will walk away. This is not a major factor yet, but as the economy slows, some people will be trapped. They cannot sell their homes, due to existing foreclosure offers. They have to move. So, they will walk away. Result: another house moves into the foreclosed homes inventory.
And the beat goes on. And the beat goes on.
What's a tax assessor to do? Lower the appraised value of the homes, of course. But that creates a problem for the local government. Tax revenues fall. The unit of government finds itself running a deficit.
It's called the Vallejo problem. The city of Vallejo in northern California is very close to going bankrupt. The city council voted to file for bankruptcy on May 6, but the papers have not been filed with the court. Falling housing prices caused a property tax reassessment downward; the result is a fall in property tax revenues. This is not a small city: 100,000.
City councils across the United States will soon find themselves facing the same problem. Property tax assessments will fall if the assessors are faced with a situation in which the sale of foreclosed properties are greater than the sale of retail properties — the "good sales." In California, this may be the situation by the middle of summer. If the lenders start offering properties priced to sell, it will be the case. When the lenders are forced by law to write down the value of their REO's — real estate owned properties: foreclosure — they will finally start unloading them.
That is when I will be do my best to help them out — at a market-clearing price, of course.
The longer they hold out, hoping for an upturn in the housing market, hoping also for Congress to intervene and a President to sign the bill, the worse the fire sale will be. When the bankers at last see that the game of wait and see is over, they will stop putting in minimum bids.
When the auctions for foreclosed houses are more like eBay and less like Neiman Marcus, the dam will break. Pity the sellers of owner-occupied homes.
I will not pity the property tax assessors or the city council of America. They profited greatly while the Greenspan bubble was roaring. Bernanke has popped that bubble. What goes up must come down . . . at least until the Federal Reserve capitulates and starts inflating in earnest. That is not now, and it will take years for anything but mass inflation to bring prices back to their 2005 bubble phase.
In the meantime, reality has not penetrated the insulated world of banks or property tax assessors.
Thomas Stump, interim chief appraiser in DeKalb, said the number of "good sales" dropped from 12,400 last year to 8,500 this year. The lower number makes it even harder for the assessors to come up with values, he said.
"We have people in our office who want to sell but can't find a buyer," Stump said. "Still, there are buyers out there. It may take much longer. I don't think you can say a property has no value because it won't sell."
Yes, a property has value. It has value because the bank that foreclosed is run by people who do not want to admit in full public view that they made loans that should never have been made. They don't want to admit that the collateral for these unwise loans has fallen to fifty cents on the dollar, let alone ten cents. So, they hold these properties off the market at above-market prices. They "buy" the properties.
Someday, they will sell. What property tax assessors call "good sales" will slow to a trickle. This means that "good sellers" will have to grin and bear it. They will have to occupy their homes longer than they had planned.
Some will give up. They will walk.
HOW DID THIS HAPPEN?
The Federal Reserve System inflated in the 1990's to get out of the 1991 recession. In 1995, the housing bubble began in earnest. Then, beginning in mid-2000 and escalating in 2001, the FED continued to inflate. This made the 2001 recession mild. It was mitigated by the housing boom.
That mitigation has now disappeared. The reverse process is now operating. It has not yet peaked.
For a decade, the two government-sponsored enterprises, Fannie Mae and Freddie Mac, put together packages of loans that diversified risk. That was what the academic economists' formulas said. Then they sold these loans to investors.
The process was centralized. The old system of local banks and savings & loans issuing local mortgages went into decline. Costs of administration were low. Centralization allowed economies of scale.
Yes, they did: going up. Now they don't: going down. Local agents of national banks and investment organizations have little authority. The distant decision-makers have no tested formula to handle the popped bubbles. They are flying blind, hoping for relief.
The tooth fairy is out of town. She sold her San Francisco condo and now resides in Baja California. She left no forwarding address.
When the cat's away, the mice will play. From 1996—2006, the cat was away. The mice played. What did they play? Fast and loose.
I received this note from John Schaub, whose site, www.JohnSchaub.com, is one of the best sources of information on single-family home investing.
There was a lot of mortgage fraud in the intercity areas of many big cities like Atlanta. They would take a house worth $5000 and sell it for $50,000 to a friend who would get a loan based on the $50,000. That did not make the house worth $50,000 but the tax assessor would pick up the new "value" off the recorded deed. Other properties were sold with owner financing at terrifically inflated prices, then the loans (first mortgages on single family houses — how could you go wrong) were sold to investors. I've long advised never to buy a loan unless you are willing to go see the property. Many of these houses have negative value. It would cost more to tear the house down than the lot is worth.
The government and its licensed monopoly, the Federal Reserve System, made possible the housing bubble. Now they must face the consequences. So must people who want to sell their homes. Nobody wants to face the consequences. But eventually reality intrudes.
As for those of us who want to buy some bargains, the times are good and will get much better.
People who lose their homes in a foreclosure will have to rent. It is a great time for people who have the credit ratings, the management skills, the negotiating skills, and the liquidity to buy houses from distressed sellers, as bankers will be before the year is over, and surely before 2009 is over.
If you are such a person, your ship is about to come in. When it does, don't be at the bus terminal.
May 17, 2008
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