Investors Clear Houses

Last August I wrote:

The first thing we noticed is that many houses on the market in our area are completely trashed. ...

By encouraging people to buy houses who would not otherwise qualify, the federal government has handed over the keys to people who frankly are not ready for home ownership. Many simply aren't ready to take care of the houses or to competently rent them out, so they end up dumping trashed-out houses on the market. My guess is that this is a large, if not the major, cause of depressed housing prices in many areas.

Today's Denver Post offers information on the housing market that seems to verify my speculation:

Of the 150,000 home sales in the metro area in the past three years, about 3,400 homes appear to have been fixed and flipped within a 12-month period, according to an analysis by Your Castle Real Estate. The analysis includes six counties -- Jefferson, Arapahoe, Adams, Douglas, Denver and Broomfield.

The gross margin, or difference between purchase price and sales price, on fix and flip homes has steadily increased from an average of $38,792 during the first quarter of 2005 to $80,538 during the third quarter this year.

I assume that a big reason for the increase in margin is that people are buying houses in horrible condition and whipping them into shape.

Clearly there are people who are good at evaluating houses and fixing them up. Unfortunately, the government has gone into direct competition with them, meaning that wasteful bureaucrats will push out profit-driven businesses:

The City and County of Denver has received $6.1 million through the federal Housing and Economic Recovery Act of 2008 to acquire and redevelop foreclosed properties that might otherwise become sources of abandonment and blight. It's applied for an additional $10 million from the state.

But Denver has no business entering the housing market. The practice falls far beyond the proper scope of government -- which is to protect individual rights -- and it involves the use of forcibly transfered funds.

The Big House Buy

You may have noticed that things have been somewhat slow at FreeColorado.com lately. This is because, in addition to writing a book and co-authoring an issue paper, I closed on a house on Wednesday. My wife and I closed on a house, I should emphasize. Our experiences may offer some insight into today's housing market.

The price we paid will bring down the averages: the sales tag was $145,000, not bad for a three-bedroom house at its location. However, we are paying for that low price in other ways. Consider:

* The process took eleven weeks. During that time, we had to put most of our stuff in storage and live in a temporary situation.

* The siding was a complete disaster; it hadn't been painted in many years, and much of it was bare. To qualify for the loan, I had to spend my own time and money, prior to closing, to scrape and prime the house. We also had to fix two windows. I have never heard of a real estate deal where the buyer fixes the house before closing.

* There's quite a lot wrong with the house. In addition to the siding repairs, it needs new paint inside and out, some patchwork to repair old water leaks, a new hot water heater, a complete landscaping job, bathroom repairs, and so on. So, even though the price is lower, this largely reflects the time and money that we'll have to put into the place.

* The previous owner had the place rented and those parties had some sort of dispute about the place. For my first inspection, I couldn't get access to the house, so I had to pay extra for the wasted trip.

Put simply, very few people would have had the time, patience, or resources to buy this house. On several occasions I was convinced the deal had fallen through. So bear that in mind when you hear averages of housing prices. My guess is that we are approaching the point where marginal buyers will start to feel more secure about the market, then they'll buy, buy, buy. Once all the difficult houses are off the market, real estate values will improve nicely. But that's just a guess.

Need a Loan?

The buy would not have been possible without the dedication of our loan officer, Elsa Wohlford of Premier Mortgage Group. She went so far beyond the call of duty that I'll be forever grateful. (I get nothing for promoting her other than the satisfaction of doing so. Readers should not assume that she endorses any of my views or positions.) If you're looking to buy a house via a loan, or refinance, you could do no better than to sign up with Elsa.

Notes on the Housing Market

As Yaron Brook has pointed out, the primary cause of the housing crisis is an array misguided federal policies. As my wife and I have have tried to buy a house, I've noticed a few details that fit into this picture.

The first thing we noticed is that many houses on the market in our area are completely trashed. We were interested in one house because it's a fixer-upper, and we were told that we couldn't qualify for a loan to buy it, because it needs so much work. This puzzled me till I worked out why loans in such cases generally don't work. If we were going to buy that house, we'd need to dump somewhere between $10,000 and $20,000 into it to bring it up to standard living conditions. (This house has completely stained carpets, goop on the walls, holes in the walls, broken windows, a dead tree and weeds in the yard, and siding in desperate need of repairs and paint.) We were told that lenders are worried that, once people move into such houses, they won't be willing or able fund the needed repairs. For a moment I wondered why a lender wouldn't simply give us a loan that included cash for the repairs; then I put myself in the lender's shoes and saw the danger of such a deal.

By encouraging people to buy houses who would not otherwise qualify, the federal government has handed over the keys to people who frankly are not ready for home ownership. Many simply aren't ready to take care of the houses or to competently rent them out, so they end up dumping trashed-out houses on the market. My guess is that this is a large, if not the major, cause of depressed housing prices in many areas.

Also in our area, some very nice houses have sold for what they were going for a few years ago. So, while well-kept houses aren't showing strong equity growth, neither are they showing severe losses. (Granted, I live in Colorado, not Los Angeles or Las Vegas.)

Another thing I noticed is that, between about 2000 and 2004, housing prices shot through the roof. This does seem to have been a bubble, which also fits with slumping housing prices now.

Of course, part of the problem is that buyers don't know where the market will bottom out, so they're reluctant to buy given the uncertainty. However, I get the sense that, once the market is clearly turning up, a lot of hesitant people will jump in suddenly.

My wife and I have been trying to buy a house on "short sale," which means that the bank is controlling the sale and willing to take less than the price of the outstanding mortgage. This house, too, has substantial (but I think superficial) problems, which goes a long way toward explaining its relatively low price.

The take-home lesson is that averages don't account for the state of particular houses. Depressed housing prices reflect, in part, a declining condition of many houses. And that in turn was fostered by idiotic federal policies. While certainly it's a good idea to be aware of economic trends, it's also easy to get caught up in statistics and lose sight of what's really going on.