Gary North’s REALITY CHECK
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Issue 754 May 16, 2008
THE $10,000 ATLANTA HOUSES
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, scrape 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.
It 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.”
Boggled, indeed.
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.
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?
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.
“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.”
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.
One of the houses is on the books at $101,700. It is
being offered for sale at $5,900.
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.
GaryNorth.com/snip.568.htm
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.”
www.garynorth.com/snip/567.htm
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.
CONCLUSION
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.
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