Blog on the Run: Reloaded

Friday, December 27, 2013 12:57 pm

And you thought the bursting of the housing bubble was bad …

From the Nov. 11 New Yorker (paywall) on a company called Climate Corporation that uses big data to project crop sizes for every field in the country and insures crops on the basis of that data:

(CEO David) Friedberg is convinced that climate change has the potential to alter land values dramatically, and soon. “We had this economic bubble because of a major housing crisis,” he said. [Strictly speaking, that’s backward — we had an economic crisis because of a (burst) housing bubble — but forget it; he’s rolling. — Lex] “Residential real-estate values dropped, and the debt-equity ratio was so high that there were massive economic consequences for the nation. There is almost certainly a much more significant devaluation that needs to occur with land affected by climate change.” In Kansas, he noted, real estate trades at prices that make sense only if a farmer gets the kind of yield on an acre of corn that is now rare. “In parts of Kansas, farmers should simply not be growing corn,” Friedberg said. “Historically, you would have a heat wave every 20 years there. Now it happens every three years or so, and in those years the crops die.”

The Climate Corporation charges roughly forty dollars an acre to insure crops, and its customers farm more than ten million acres. Many of them give little credence to terms like “climate change” and “global warming.” That doesn’t bother Friedberg. “You don’t need to talk about climate change per se,” he told me. “Statistically, you are looking at a series of numbers. If it were a roulette wheel, you could say, ‘It’s coming up black more and more frequently.’ Can I attribute that to black being overweighted by the croupier? Or to the pit boss, or to the machine being broken? It doesn’t matter. Some people will argue that ice ages have waxed and waned for tens of millennia and that this is part of a natural cycle. That doesn’t change the fact that black is coming up more frequently and you will get less out of an acre of corn than you used to. The price for that land simply cannot be justified by the income it can generate.”

He went on, “It’s going to take a few climatic events in a row, I guess, and then everyone will say, ‘I’m not going to keep buying Kansas real estate at this price,’ or, ‘I’m not going to keep developing in this harbor zone in Florida.’ If you mark down all the stuff to what the discounted value should be — holy shit.” He practically shouted, “It is bad. I am convinced it is going to happen because, the math says it has to happen in at least one or two or three parts of the world. And if it happens at any of them at any point in the next ten years, it will make the housing crisis look small.”

Monday, June 24, 2013 6:12 pm

“This is a uniquely bad time to buy a house.”

I’m not in the market, and if Mike Whitney’s reporting is accurate, you shouldn’t be, either:

… nearly 5 million homes are either seriously delinquent or in some stage of foreclosure. This unseen backlog of distressed homes makes up the so called “shadow inventory” which is still big enough to send prices plunging if even a small portion was released onto the market.   In other words, supply vastly exceeds demand in real terms. Now check this out from Zillow:

“13 million homeowners with a mortgage remain underwater. Moreover, the effective negative equity rate nationally —where the loan-to-value ratio is more than 80%, making it difficult for a homeowner to afford the down payment on another home — is 43.6% of homeowners with a mortgage.” (Zillow)

This might sound a bit confusing, but it’s crucial to understanding what’s really going on. While many people know that 13 million homeowners are underwater on their mortgages,  they probably don’t know that nearly half (43.6%) of the potential “move up” buyers (who represent the bulk of organic sales) don’t have enough equity in their homes to buy another house.  Think about that. Like we said,  housing sales depend almost entirely on two groups of buyers; firsttime homebuyers and move up buyers. Unfortunately, the number of potential move up buyers has been effectively cut in half.  It’s simply impossible for prices to keep rising with so many move up buyers on the ropes.

So, if “repeat” buyers cannot support current prices, then what about the other “demand cohort”,  that is, first-time home buyers?

It looks like demand is weak there, too. According to housing analyst Mark Hanson: “First-timer home volume hit a fresh 4-year lows last month and distressed sales 6-year lows”.

So, no help there either. First-time homebuyers are vanishing due to a number of factors, the biggest of which is the $1 trillion in student loans which is preventing debt-hobbled young people from filling the ranks of the first-time homebuyers. Given the onerous nature of these loans, which cannot be discharged through bankruptcy, many of these people will never own a home which, of course, means that demand will continue to weaken, sales will drop and prices will fall.

Now, despite these appalling numbers, he notes, foreclosures are down by a third from this time last year. Is it because the housing market is really any better? Nope. It’s because the fewer foreclosures the banks follow through on, the fewer losses they have to report, the more profitable they seem and the bigger the bonuses their executives can then claim. The technical term for this behavior is “securities fraud,” and it looks as if every major bank is involved to a greater or lesser degree.

But by all means, let’s reduce enforcement on banks and mortgage companies. Free markets! Murca, hail yeah! Who cares if millions of homeowners and would-be homeowners get hurt?

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