patrick.net

Hi All,

I got in touch with Patrick a few days ago via email, and he suggested that I post the contents (more or less) of my email here, in his forum, for people to read and discuss. This is a response to his request.

Most of the articles on this website seem to point in one direction: Unemployment to go up, demand to drop, foreclosures to rise, inventory to rise, prices to fall. To be fair, that could be considered the"bias", or the sole purpose of this website; to make the case for an ongoing, perhaps escalating, collapse in house prices. (I don't use the word "home", because I rent, and much to the chagrin of "the powers that be" trying to brainwash me, don't consider myself "homeless")

Coming back to the discussion about the basic conclusions this website seems to make. One can draw almost linear causal relationships between the various factors mentioned above. Not only that, since rising house prices were responsible for keeping most of the economy of this country afloat, we actually enter a vicious cycle. That can only mean a "crash" in house prices, not a "drop".

All of this seems right, except for one flaw. "Foreclosures to rise" forms a large part of the basis for the conclusion. But for foreclosures to rise, banks have to be willing to process foreclosures. With a suspension of mark-to-market rules, they no longer need to. If, as mortgage holders, you can't make payments, don't. Squat in your houses. You can't foreclose, and you can't short sell. This is also clear from the fact that, all of a sudden, all the toxic loans out there are no longer being considered a problem, even though we still have a whole barrage of resets about to hit us. The only reason they're not being considered a problem, is that they don't expect any of it to affect bank balance sheets. Banks are not expected to take much of a hit from potentially "at-risk" mortgages and mortgage backed assets.

When you have a bunch of dominoes  lined up and one tips over, the simplest way to prevent the whole thing from collapsing is to remove a domino down the line. So from the Fed and Treasury's point of view, it only makes sense to think as follows: "If we don't process foreclosures, we don't have a spike in inventories. Banks, however, will want to get at least something out of the house, so they'll either want to short sell or foreclose. Well, suspending mark-to-market removes any need to do either of those." And by doing this, they've removed potentially the most "destructive"domino from the chain AND used accounting hand-waving to make banks look healthy again. It's actually quite brilliant, without getting into the ethics of it.

The housing inventory in San Diego has shrunk to 3 months. In a flash. Not only is it not an over-supplied market, they've actually turned it into a tight market. Banks have simply stopped processing foreclosures there. Indeed, as discussed, they have no incentive to.

I personally like the sentence Patrick used to summarize this process in his reply to me. He said, and I quote:

"If  you get close to winning the game (buying a cheap house) they change the rules so that you lose (foreclosures are being stalled)."

There's definitely a sense of "conspiracy theorist" in this sentence, though I personally agree with it. I don't think agreeing with it is a necessary requirement for you and me seeing eye to eye. Because, whether deliberate or not, that's exactly what's happening.

We can all discuss how this will eventually fail, how the economy won't be able to grow and how we'll stagnate. I'll take any one of you up on the offer of having that discussion, with a pre-emptive warning that you won't gain much from talking to me since I'll only agree with you; wholeheartedly. And I find discussions with like-minded individuals eventually futile. But this message was meant for those of you waiting for the foreclosure spike to happen to drive home prices down. That is the one thing that WILL NOT be allowed to happen, to the extent that "they" can control it.

Best regards,

Rohan.

#housing