Monday, April 12, 2010

Homebuyer Blues

It is an interesting time to be in the housing market.  Interesting, as in "grotesque."  From all corners you hear it screamed from the rooftops "it's a buyer's market!"  As I am in the market for a house myself, I can assure you that it is not.

Take, for example, a peculiar relationship which has developed between the homebuyer tax credit and new FHA lending rules.  The tax credit, which is due to expire at the end of April but probably will be reinstated under some new guise once the housing market starts circling the bowl again, gives an $8000 credit for first time buyers and $6000 for everyone else.  That is not a deduction, but an actual credit - $8000 cash, as if you had paid in that much tax without having to actually do so.  So you'll get back $8000 on next year's tax return, assuming you pay at least that much tax.  The FHA has stiffened lending rules by requiring a minimum down payment of 3.5%, as I was recently informed by a particularly bubbly realtor that suddenly turned very solemn when the subject came up.

My, how times have changed. 3.5 whole percent. Oh, the austerity!  But not so fast.

$8000 is a sizeable chunk of money.  Just how, I wonder, might a prospective homebuyer choose to employ it?  You guessed it!  Ka-ching -- down payment!  Lenders have been allowing homebuyers to sign over next year's tax return in lieu of a down payment today.  This arrangement apparently satisfies the FHA.

The tax break effectively nullifies the down payment requirement, for now, and markets are presently flooded with buyers waving fat government checks and snapping up properties on the taxpayer's dime.  If my math is correct, a homebuyer can bid around $170K, or a first timer up to $230K, without ponying up a penny of his own cash.  In my neck of the woods, decent new offerings rarely stay listed more than a day or two, and are generally selling at very minimal discounts to prices two years ago.

Which is great ... if you happen to be a bank selling foreclosed properties in this price range.  Or somebody who wants to buy a home but doesn't have any money saved up.  But if you are a buyer trying to put down 20% the old fashioned way (ahem), you face pretty stiff bidding competition from the teeming hordes of no-cash down subsidy mongers.  It's difficult to really twist a seller's arm when pretty much anybody with a pulse and a tax return can put up a $170K bid. And the banks are on a seemingly permanent cash IV drip courtesy of the taxpayer and really aren’t in any hurry to sell.

This logic seems to be lost on the public, however, which is more inclined to believe that this policy "helps buyers." According to this thinking, the credit makes it possible for buyers to bid on slightly nicer homes than they otherwise could afford.  Right.  It never seems to occur to them that maybe those buyers might have been able to afford that nicer property with their own money had the government left well enough alone and the banks forced to play fair and stand on their own two feet.  Gary North likes to describe markets as auctions.  Suppose somebody, maybe a government agency, walks into an auction, maybe a house auction, and starts handing out buckets of money which can only be spent at the auction.  Who winds up with the money at the end of the day?  Will prices be higher or lower?  Who benefits from the arrangement?

Believe me, the banks know and understand every bit of this and are taking full advantage of it.

Speaking of auctions, another sleazy ploy has recently been instituted in attempt to rip off buyers.  When this whole mess first started, banks would put up their properties at auction, but bid on their own properties if they did not get the price they wanted, buying back their own properties in a sort of non-auction auction.  Hundreds of properties would go on the block, with none sold except back to the banks that owned them.  The selling price, however, was recorded as if an actual sale had taken place.  This made it look as if volumes were high and prices stable.  But eventually the public caught on, and nobody showed up to the auctions anymore since they were a waste of time anyway. 

Now it seems the banks are taking a similar strategy directly to listings.  I bid on a foreclosed house a couple of weeks ago, listed among the regular listings, only to find out that there was no human agent at the other end of the negotiating table, only a computer interface.  The computer took almost two weeks to respond, declining my offer and counteroffering exactly the same price as the listing!  Not a penny less!

It appears that we've moved from non-auctions to non-negotiations. The banks aren't interested in selling, they are just fishing for suckers.  This is a dishonest tactic and a waste of people's time.  Meanwhile, even as the banking system sits on thousands of perfectly salable properties that it refuses to sell, it receives government aid courtesy of the US government and the taxpayer.  A buyer's market?  Hardly. The banks don't have to negotiate, and they know it.  The government intervenes in their favor every time.  You can't put the squeeze on them.  It isn't allowed.  They just run off to mommy-government anytime the situation isn't in their favor.

One thing to remember about this whole shabby parade of events when investing your hard earned money is to recognize that, thanks mostly to these dishonest government interventions, markets can very well stay irrational longer than you can stay solvent.  You may be perfectly right in your economic assessments, but there are very deep pockets out there with agendas.  If you invest against the grain or try to wait the jerks out, recognize that it could be a very long time before reality is allowed to assert itself, and before that happens you could wind up broke or dead.  Meanwhile, the mindless lemmings out there are living it up and making a killing in a completely artificial, nonsensical system.

At least until the whole thing really does come crashing down around our ears.  Buyer beware.

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