The government blew up the housing market - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 June 2010
The government blew up the housing market A  A  A

Delray Beach, Florida

Flip 'em on the way up...
Flop 'em on the way down...

Subsidize 'em on the way up...
Subsidize the subsidizer on the way down...

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Bloomberg News, sent from my iPhone.
Banks Face Short-Sale Fraud as Home 'Flopping' Rises

June 10 (Bloomberg) -- Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.

Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford's federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed -- known as a short sale -- without disclosing that there were better offers. They then flipped the houses for a profit.

There is always a way to make money. When prices were rising, unscrupulous speculators made money by pretending houses were worth more than they really were. Now they make money by pretending they're worth less than they really are.

Trouble is, no one knows exactly what things are worth. They know even less what they'll be worth tomorrow or the next day.

The theories about economics and markets developed in the last 100 years are almost all nonsense. Markets are not perfect. They do not reflect the actual value of things. There's no way of knowing what the actual value is.

Instead, markets are always discovering value in fits and starts -- imperfectly. They reflect reality and fantasy...the future and the past...math and muddle.

When the feds pushed down interest rates following the '01 mini recession, homeowners realized that they could own more home with the same monthly payments. Houses suddenly became more valuable. This pushed up prices and led homeowners to conclude that houses were a good investment as well as a good place to hang your hat. And because the value of their collateral had increased, it enticed the mortgage industry to lend more aggressively...and ultimately, recklessly.

Prices moved up even more. Happy days were here.

And then, the market discovered that houses weren't really worth so much after all. Because the mortgage industry had canoodled with Wall Street and Washington to inflate house prices far beyond what people could afford to pay. The average homeowner could no longer come close to buying the average house. Fannie and Freddie, for example, backed every crackerjack mortgage scheme that came along. And then, wouldn't you know it, people had mortgage payments they couldn't meet.

Prices fell. Bummer.

And now comes news that Fannie and Freddie need a bigger bailout:

"Fannie Freddie Fix at $160 billion, $1 trillion worst case..."

Up, down....down, up. Flip 'em...flop 'em. Subsidize them...then rescue the subsidizer.

Even when markets are allowed to operate freely, they can never make up their minds. But at least it's an honest confusion. Imagine what happens when the feds deliberately distort prices by raising the money supply, holding down interest rates, and subsidizing borrowers.

This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the US government was instrumental in causing the blow up in the housing market. The New York Times:

"Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers - a speech that got surprisingly little attention - Ms. Bair listed her three main recommendations to "put the mortgage industry on a sounder footing." The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.

"For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers," Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.

She tossed in Fannie Mae and Freddie Mac, the two "G.S.E.'s" (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers - and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.

She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be "unsustainable," Ms. Bair said.

She concluded: "Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer." Like, you know, renting.

We had no doubt about it. Anyone can make a mistake. But if you want to make a real mess of things, you need taxpayer support.

*** A newspaper from Victoria, Texas, reported that the Hispanic community decided to voice its displeasure with upcoming immigration law changes. How? By boycotting businesses owned by Caucasians. They then announced that the boycott was a success reducing sales by 19%.

The business community, however, claimed success too. It said shoplifting had gone down 77%.

If those figures are correct, it suggests that Hispanics in Victoria buy 20% of goods sold but steal of those that disappear from the shelves.

*** "What?"

Elizabeth and her husband (your editor) are both in Florida. Their youngest son, Edward, 16, was left in Maryland on his own for one night, Sunday, with careful instructions on what to do and what not to do. His brother would call him in the evening to make sure he was okay. His sister, not far away, would check on him on Monday morning. The family worried that he might be a little lonely in the house by himself.

"I got there this morning," his sister reported. "He was outside with a whole group of his friends. They had the music blaring. It was only 10AM...and they were partying already. Then, I realized that some of them must have been partying all night.

"I asked him what was going on... He said he had just invited a couple of friends over to celebrate the end of the school year.

"He told me there wasn't anyone in the house. But when I went in I found another group of a dozen teenagers. And one girl was asleep on Henry's bed.

"That was it; I shooed them all out.... But at least they seemed to be pretty good kids. They didn't seem to be drinking or taking drugs..."

"Oh my... We've turned into the kind of parents other parents hate," said Elizabeth when she heard the news. "We let our son turn the house into the neighborhood party central..."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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