As I sit an look at how we got here, its apparent to me that no one really has a clue about how we got here in the housing market. Its a “cover my you know what” scenario now, but its really our nature to look on the bright side while its happening and the dark side after its over.
Unbridled optimism got us here.
“The Dark Side of Optimism [Salon] via Naked Capitalism: Why looking on the bright side keeps us from thinking critically,” management consultant Susan Webber argues yes. In her view, “the financial and business communities dismissed all the warnings” about the housing meltdown/credit crunch bearing down upon them because they wilfully adhered to an always-sunny-side-up view of life.
Ok back to reality…
Foreclosed homes that sit vacant are sometimes a better option for homeless because the utilities are still running.
“Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy,” Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.
That’s not the optimism I was expecting.
Daniel Gross in his Moneybox Column on Slate explores the proposed restrictions on foreclosures. He argues that these actions simply delay the inevitable process of “price discovery“, a process where the market determines a price based on supply and demand.
In other words, the optimism that got the mortgage industry and borrowers in trouble has carried through to the political process, whose optimism will delay getting out of this quagmire.
The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer.
Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs.
Optimism is met with an equal and opposite reaction: Pessimism.
Banks are blacklisting condo projects to minimize their damage. Major lenders have created blacklists. This seems like a prudent decision…avoid certain projects to avoid issuing a high risk mortgage. But doesn’t this accomplish exactly opposite by poisoning a local market delaying its recovery and placing performing assets in the market at higher risk?
Warning to developers: this will make it extremely difficult for most buyers to come to close on Miami’s newest buildings.
Unbridled pessimism brings unforseen risks just like optimism does by inserting external forces that fight the natural order of supply and demand.
Of course, there is another way to deal with our natural housing optimism: take a bus and get a boxed lunch on a foreclosure tour.