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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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The Price-Myth Regarding U.S. Foreclosures

Contributed by Jeff Nielson
of BullionBullsCanada.com
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In doing some reading on the continuing meltdown of the fraud-saturated U.S. housing sector, I read an interesting observation (unfortunately I failed to note the author). The writer pointed out how the habit of media propagandists in referring to prices paid to purchase foreclosed properties as “discounts” was logically indefensible, and I realized this was a point upon which an entire commentary could be based.

In fact, it is a matter of basic economic theory that it is the prices paid for these “marginal purchases” which tend to set the prices for the entire market. Put another way, when a potential buyer is looking at homes (and home prices), that buyer is not going to base what he/she is willing to pay based upon the highest prices paid in a particular market, but rather on the lowest purchase prices.

Thus the prices paid for foreclosed properties in various U.S. housing markets do not represent the “discount price” in a particular market, but simply the new price (for all homes in that market). This is true even when we are viewing markets where foreclosure sales are ‘merely’ a sizable minority of all purchases. Nationally, foreclosure sales have accounted for close to 30% of home sales – a very “sizable minority”. However, this argument becomes much stronger still when we look at the worst of the U.S. housing markets – where foreclosure sales are approaching or already represent a majority of all sales.

As a CNN piece disclosed, in Las Vegas, foreclosure sales now account for 53% of total sales of housing units. Obviously, in Las Vegas the foreclosure market is “the market” for homes, and it is the non-foreclosure sales which are the minority. Thus when propaganda outlets like Realty Trac write that “the average discount for REO [bank-owned] properties is 35%”, this is a complete myth. The reality (when we reverse the arithmetic) is that the average non-foreclosed home in the U.S. is being priced at a 50% premium above the real price.

The numbers get much worse. Realty Trac acknowledges that in some U.S. housing markets the premiums are much larger. In New York state, the “premium” paid for non-foreclosed homes was greater than 100%. And even in markets like Wisconsin and Ohio – which were nowhere near the worst “bubble” markets, the premium being paid for non-foreclosed homes is approximately 100%.

I have never wavered in my own writing that even after the initial collapse of the U.S. housing market that U.S. real estate (nation-wide) remained grossly over-valued. These numbers prove this unequivocally. The only way that someone could argue that these foreclosure prices are merely “temporary anomalies” rather than the future of the U.S. housing market was if there was some end in sight to these millions of foreclosures. There isn’t.

Today, close to 30% of all U.S. mortgages are underwater – the highest level in history, and worse than the (supposed) “bottom” this market hit at the beginning of 2009. Meanwhile, long-term unemployment in the U.S. also remains at the highest level in history. On top of this, the average wage of U.S. workers (i.e. homeowners) continues to fall, while the “cost of living” (i.e. the real inflation rate) is soaring at its fastest rate in decades.

The #1 leading cause of foreclosures are underwater mortgages.

The #2 leading cause of foreclosures is unemployment/job-loss.

The #3 leading cause of foreclosures is debt-bloated households being ‘squeezed’ by falling wages and rising costs.

In short, while the propaganda-machine has been trumpeting the (irrelevant) statistic that the number of new foreclosures has dipped slightly, all this means is that Wall Street banksters are choosing to initiate less foreclosures. Their list of foreclosure “candidates” continues to go higher and higher – with no end in sight on even the most distant horizon.

It gets worse still. There are $10’s of billions of mortgage-resets still occurring in this market, the vast majority of them being the infamous, made-to-fail “option-ARM” mortgages. This represents $10’s of billions of additional (future) foreclosures which are not yet captured by existing numbers.

On top of this, 10’s of millions of spendthrift baby-boomers whose retirements are under-funded, and are in danger of losing all/part of their pension incomes have nothing to fund their retirements except dumping real estate onto this already-oversupplied market (which comprises more than 75% of their total assets).

What this means is that even if the supply of foreclosed properties to this market begins to dry-up five to ten years down the road, that for every one less foreclosed property dumped onto the market (by a desperate seller) there will be one more baby-boomer home dumped onto the most over-supplied housing market in history.

This also adds an additional element to the crusade by state Republicans to destroy the pensions of their state workers. For every retired state worker who has their promised and earned pension stripped from them, this likely means one more home dumped onto the U.S. market – at “fire sale” prices.

What this means is that the tens of millions of heartless Americans who have been cheering-on the foreclosures of “deadbeat homeowners” and cheering-on the slashing of $billions in state pensions are slitting their own throats. The prices paid for the foreclosed homes of bank-fraud victims and the prices paid for the homes of impoverished seniors (cheated out of their pensions) will represent the real value of the homes of all Americans.

Even a Realty Trac shill quoted by CNN acknowledged it would take “three years” to chew through existing inventories. However, this doesn’t include a single home of the “shadow inventory”: the 10’s of millions of U.S. homes held by homeowners with under-water mortgages, and soon-to-be-impoverished baby-boomers. Most of those homes will also end up getting dumped onto the market – to set the new (lower) prices for these housing markets year after year after year.

I have argued in my own writing that much more needed to be done by the U.S. government to prevent Wall Street’s fraud-victims from having their homes stolen from them. I have argued equally strenuously that at a time when the U.S. government has bestowed $15 trillion in hand-outs for Wall Street, that the mean-spirited attempts to “save” 1/100th of that amount by breaking pension promises to state workers are despicable and unjust.

However, these arguments can now be equally supported on much broader policy considerations: the attempt to salvage the entire U.S. housing market, before that market is flooded with ten’s of millions more homes being dumped onto the market by mortgage-fraud victims and seniors robbed of their pensions.

On the one hand, we have the U.S. government continuing to give tax-cuts to the rich, tax-cuts to corporations, and (of course) endless/infinite hand-outs to Wall Street (through 0% “loans”). On the other hand, we have the U.S. government doing nothing while millions of fraud-victims have their homes stolen from them via its corrupt courts. At the same time, while there are always infinite dollars available for the fat-cats, the same hypocrite-politicians are busy slashing unemployment benefits and cheating retired workers out of their pensions – despite the fact that one “Golden Parachute” for a Wall Street bankster is worth more than a hundred such pensions.

These policies go beyond “malice” or “evil”, and simply equate to economic suicide. As I have often observed, Greek philosopher Plutarch told us nearly 2,000 years ago that “an imbalance between rich and poor is the oldest and most fatal ailment of all Republics.”

To explain this in simple economic terms, when we allow the wealthy to steal/hoard all of the wealth of an economy – and thus totally hollow-out that economy – then all such economies inevitably implode. We see this today in unequivocal terms. Deadbeat Western governments are 100% certain to implode into bankruptcy, one after the other, as the tax base has been destroyed for all these economies.

There are far too few workers working, while forty, solid years of slashing their wages (in real dollars) means that even those who do have jobs can’t be ‘squeezed’ for enough tax dollars to support shrinking levels of government services. Aggravating this economic catastrophe, not only have our governments funneled all of our wealth into the hoards of the ultra-wealthy, but they have then cut the taxes for these economic parasites.

The U.S. propaganda-machine continues to suggest that the U.S. housing sector is ‘lagging’ the overall U.S. economy, and the mythical “economic recovery”. The truth is totally opposite: the U.S. housing sector is the perfect microcosm of a fraud-saturated, hollowed-out economy.

The real collapse of this sector has merely been postponed, much like the collapse of the entire U.S. economy. Now, both of these realities loom ahead of Americans, more menacing than ever – and attempts to deny reality and delay its effects become increasingly destructive in economic terms.

Wallpapering over the truth with self-delusion is not going to make these problems disappear. It’s time that the U.S. media joined the real world. It must end the nonsense of referring to foreclosure prices as “discounts” – implying that these lower prices are only temporary. Instead media talking heads need to start focusing on the “premiums” paid for the dwindling number of non-foreclosure sales, since it is those (and only those prices) which are temporary.

There Are 8 Responses So Far. »

  1. Thank you.
    I 100% agree.
    I’m a real estate broker in California and I know that the market is the market for real estate.
    There are no discounts for foreclosed, or REO, or distressed properties.
    There may be reduced prices, but these are not “discounts”.
    If banks offer properties significantly lower than current market value, they tend to get get multiple offers over the asking price.
    If they advertise properties at too high a price, they get no offers at all.
    It’s about buyers and sellers, not “discounts”.
    Folks talking about discounts are ignorant or getting paid by a lender or Realtor supported group and trying to generate enthusiasm for buying.
    I’m a real estae broker, but not a liar.

  2. I love the article and where you are coming from – I agree. However, appraisal is a measure of value as you stated, the problem was overvaluation. I spoke in 2004 and warned of this coming – I was speaking to a group in manufactured housing and said that site built was about to outperform our under-performance for similar reasons. I had been going through appraisals here in Arizona and noted that when cost approach was noted, there was anywhere from 35-50% of blue sky in the market valuation. That can’t hold and it wasn’t just the programs but the sheer frenzy of greed. However, I do believe there is validity in using the word “discount” based on new built – commodities up, no illegal labor, stricter zoning and acquisition cost. Either way, I agree with your final analysis about the future – Arizona is losing population and not just illegals, the effective home buyer market of 99% of all Americans based on financing in 2006 has been reduced by the financing by probably 35%. Also Banks and Wall Street effectively destroyed 200 years worth of investor trust and along with the Government, continue incredibly unsustainable and dangerous behavior.

  3. I agree with most of what the article has to say about the propoganda that websites like RealtyTrac spout however, the obviously biased claim that Republicans are stripping state workers of their pensions is completely false. Trying to fix unsustainable pensions is not stripping them of their pensions. If pension reform is not accomplished in this country then what happens next? Huge future defaults on workers pensions that would inevitably result in them receiving mere pecentages of what they’ve been promised or virtually bankrupted states. The bottomline is the day of reckoning for public pensions is coming and it’s a choice of having something or mearly nothing. Letting that happen is much the same as the government’s irresponsibilty before and after the housing crisis. Let’s not forget the precedent of pensions being voided was already set in the bankruptcy of the city of Vallejo.

  4. If pensions are seized by the FEDS, it should not be till 50% of all assets are individually seized from the rapacious wealthy elite, starting with the membership list of the Council on Foreign Relations whose members has brought this mess to this country.

    See the following link to the membership list of these people–look up the people who own the media, run the treasury, executive branch, heads of the Big Banks who OWN the Federal Reserve–thats right folks the FED is a private corporation owned by the biggest US and Foreign Banks.

    Note: Barney Frank, Biden, Greenspan, Clintons, Bushes, Cheney, Summers, Rubin, Chris Dodd, are all members–go watch the Oscar winning documentary Inside Job. There is a reason Warren Buffett said that there is a class war being conducted in the US and the rich are winning–There is a reason Henry Ford said that if the average american knew how this country was run financially there would be a revolt the next morning–there is a reason Woodrow Wilson said that he sold his country down the river when he signed the bill starting the Federal Reserve–


  5. Excellent

  6. Apples can only be compared with apples. A foreclosure sale is not an REO sale. A foreclosure sale offers no inspection, contingencies, financing or title insurance. Therefore a foreclosure sale is a speculation, not a purchase of real estate. Therefore, if by “foreclosed properties” the author is referring to trustee’s sales, the author is wrong. Trustee’s sales, in the very few cases where the property is sold to a third party, are very much discounted, usually over 35%.

    I assume, however, that the author is referring to the REO sale of a foreclosed property. In such a case, the buyer can get inspections, financing, contingencies and title insurance, just like a “real” sale. If this is what the author is referring to, he is correct — REOs are “real” sales.

    Still, as a class REOs are generally not the same property as non-REOs. On average, the REO inventory will obviously have more deferred maintenance problems than non-REO properties. After all, the owner couldn’t afford his mortgage payments for as long as two years, during which time you can be s/he didn’t put a dime into the property. And banks don’t do anything more than cosmetic repairs. Finally, the market for REOs is smaller simply because many buyers don’t like the feel of living in a home previously lost by another family in foreclosure (I know most of the readers here are probably male and don’t agree, but ask your wife or girlfriend and I think you’ll find out I am correct).

    Therefore, on average REOs will sell for less than non-REOs. But everything that sells is selling “at market”. It’s just that demand is likely higher, and supply lower, for non-REO properties.

  7. I am a member of the shadow inventory in a fraud saturated hollowed out economy as you put it. For 18 months I have been looking for restructure and modification based on hardship from 2009. I am back on my feet and now the lion has come to feed. The predatory proposal is for all payments and all late fees be attatched to the back of the loan making the loan twice the value of the house and forcing us into short sale or foreclosure. No light at the end of the real estate tunnel and certainly no loss for the servicer or investor. My home will be one of those foreclosed homes. I have looked for advocates in congress who have really stepped up to the plate for the homeowners and I have come up empty. I also have very little fight left which is what they count on. I am not poor or broke, I am educated and now find myself a fool to think there would be any help for the middle class schlep, who works everyday and tries to contribute positively. Cosmetic repairs are all they offer as they continue to prey on the middle class

  8. Thanks for the comments everyone – sorry for being late in replying.

    Maureen, getting people to “give up” is part of the tactics which these vampires employ. However, there is a HIGH likelihood of bankster misdeeds in most of these horror stories. Shop carefully for a good lawyer (you should be able to get a free initial consultation), and that may restore some hope to you.

    Jeff (the other one – lol), sorry if my terminology was lacking in precision on certain details. However, I don’t think it alters the analysis or conclusions.

    Anonymouse, obviously your reply would be EXACTLY what I what have replied to HypocritesParadise (in the comment above).

    Paul, to add to your own comment, the media continues to preach all this nonsense about “affordability”. The problem is that neither wages nor housing prices have been properly discounted for inflation, and in historical terms prices are still much too high.

    Jim Elliot, I know there ARE real estate professionals in the U.S. who have NOT sunk to the level of being “cheap promoters”. Glad to hear you number among them!

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