Banks are Destroying America’s Neighborhoods Part 2 – Response to Comments
March 23, 2012
Wow – I never expected that my post about Banks Killing America’s Neighborhoods would attract so many readers. I want to thank Daniel Roth for highlighting my thoughts on LinkedIn. I also really appreciate all the comments that were left here on my blog and on the LinkedIn Residential Real Estate discussion board. I’ll try to respond to a few comments here but I may need a few separate replies to cover all the topics.
1. Several people pointed out that if the banks sold everything at once it would, in fact, drive down prices further. Of course it would (although I don’t think it would cut prices in half as someone suggested). I didn’t mean to argue otherwise although I think there’s so much inventory being held up that it would take a long time to push it through whether it was all listed at once or not. But, when banks hold on to these properties it is definitely causing the problems I mentioned with deteriorating structures and crime. I’ve seen it first-hand. So the banks are going to lose money either way – whether they hold on or sell quickly. Frankly, I think they’d be far better off selling before the houses in their inventory are damaged due to neglect or vandalism. When a house sits empty for over a year people notice and some will take advantage, often to the detriment of the property. And, yes, I’m an investor and so when prices fall it does benefit me if I’m buying but it would also hurt my existing portfolio. I’m a small-time player not flipping properties and plan to hold long-term (at least 6 years when I will likely begin paying college tuition for 3 kids) so I’m not really looking too closely at short term price considerations. My motivation here isn’t to drive down prices, I would just like to see the banks act responsibly so places that I care about don’t suffer from neglect. I would definitely prefer that local investors own and manage these properties, at least they have something to lose if they act with the same indifference. Clearly the banks won’t be punished for neglecting neighborhoods if recent history is any guide.
2. Lots of comments about the role of government in the process. I didn’t mean to blame the banks and exclude government from all blame. The GSEs are not much better – Fannie, Freddie, HUD, etc. They are stumbling around like idiots, at least in the market that I monitor. They have no real understanding of how to maintain, market or price homes for sale. They create little near-monopolies for a handful of realtors who get all the listings. And they are guilty of moving too slow but I think in their case it’s due to incompetence. I don’t see evidence that they’re intentionally holding up inventory (again, this is my personal anecdotal observation not based on any data analysis) so I have bigger problems with the bank-owned side of the equation. One or two comments suggested I was naive for not understanding that all expenses tied to bank-owned properties are being covered by the government. I’m not an expert on this but I’m fairly certain that’s not true. Some foreclosures are guaranteed by Fannie, Freddie and friends. Some are not. If they’re not, the banks are holding the bag and taking the hit (unless you consider the 2008 bailout funds as subsidies).
3. Plenty of anecdotal evidence that banks are actively holding inventory back. Some people commented that banks have been sitting on offers. Dick Stoner writes “Please explain why banks won’t act quickly on offers. We presented a short sale offer, close to a previously approved ( but failed to settle) offer on January 11, 2012, and as of March 21 we only know that a ” negotiator” has been assigned in March. No word on whether the price may be acceptable or not, just a number of people concerned with minutiae like whether the address, zip code and other data may have errors in the mortgage docs. We can’t expect buyers to wait forever to get a response to their valid cash, or approved loan offers. ” I have had similar experiences in Pueblo. One property in particular comes to mind; this one owned by a large bank. I made a cash offer on the home, it was rejected and then put up for auction on some relatively obscure website. No one bid on it at auction and it was back on the market a few months later. So, I made another offer, this one higher. It took over 2 weeks but the bank finally countered. We were only $9k apart so I thought we would be able to negotiate a deal. I made another (higher) offer hoping to close in on a mutually agreeable price. I waited over 3 weeks for a response and then my offer was rejected (without any counter) and put back up for auction on some website. My Realtor has said that he never sees any homes sold on the auction website and he’s not sure why banks list them there. Now it sounds like the property will go to a bulk sale where they will likely get less money than I was offering and continue to be neglected by some large flipping entity who might not actually hold title until they find a sucker, I mean buyer. I think it’s just another delay tactic. Hopefully the place won’t get trashed in the meantime.
4. What would constitute “normal” market conditions? Tiffany asks me to define “normal” – as in what is not normal now and how would normal conditions differ. I think the key thing that is not normal now is that a huge portion of homes available for sale and in the pipeline (i.e., the shadow inventory) are foreclosures. Once the vast majority of sellers are owners rather than banks/lenders and GSEs then we will have what I consider to be a normal market where prices will stabilize and neighborhoods won’t be at the mercy of large entities.
5. Don’t paint all banks with the same brush. Great point. It’s the large banking entities that are the biggest culprits. They are essentially functioning as a financial cartel with way too much market power. They should be broken up into pieces, maybe regionally, to protect communities. None of these mega-banks have sufficient skin in any individual property or community to care what happens to the borrower, the property or the neighborhood…..isn’t that how the whole mess got started?