Wednesday, August 10, 2011

We Had To Destroy The Village In Order To Save It

A few news stories like this one made the rounds last week:
There are nearly 1.7 million homes in the U.S. in some state of foreclosure. Banks already own some of these homes and will soon have repossessed many more. Many housing economists worry that near constant stream of home sales from banks could keep housing prices down for years to come. But what if some of those homes never hit the market. Increasingly, it appears banks are turning to demolition teams instead of realtors to rid them of their least valuable repossessed homes. Last month, Bank of America announced plans to demolish 100 foreclosed homes in the Cleveland area. The land is then going to be donated back to the local government authorities. BofA says the recent donations in Cleveland are part of a larger plan to rid itself of its least saleable properties, many of which, according to a company spokesperson, are worth less than $10,000. BofA has already donated 100 homes in Detroit and 150 in Chicago, and may add as many as nine more cities by the end of the year.
Everyone seems mildly surprised by this. I wasn't. Unlike "many housing economists," ie: people on the author's speeddial with exactly the same warped worldview and predilection for adjusting information to suit that worldview instead of the other way round, I told you this would happen a long time ago:

Banks, especially big, national banks, are not realtors. They’re not property managers. They have nothing in place to handle owning and selling the property they have on their hands. They will never use a retail approach to unloading them. They will sell them in huge blocks to investors, unload them on the government –who will unload them on favored investors -- or demolish them. These investors will be risking a great deal by buying real estate, and they’re going to demand an enormous return on that investment. They are going to make the most rapacious developers that built the houses in the first place look like Pollyanna.
It's getting lonesome only having myself to quote from the newspapers to prove a point.

They doubled down on teh funnay by mentioning it's "in the Cleveland area." Hmm. I seem to recall something trenchant about real estate and governance in that very area a year ago or so. Oh yes, it was me again:
Remember 2009? Every news outlet was filled with advice on cheap houses you could buy. They were the same news outlets that told you it would be a sound investment to install granite countertops and a stainless steel wine cooler in your kitchen six months before.  Let's pick the first one we find on memory lane: CNNMoney's Radical Cheap: $1000 Homes. What sort of advice did the mainstream media have for us househunters?
Cleveland is another city with many incredibly inexpensive homes. On Ardenall Avenue, in East Cleveland, McMullen Realty has a listing for a four-bedroom, one-and-a-half bath house for $1,900. It's been vandalized inside, but the outside is in good shape...
..."East Cleveland has a beautiful housing stock," she said. "These houses just need someone to come in and love them a little."
I'd never been to East Cleveland, so I took the street they mention in the article and put it into The Google, as our former president charmingly referred to it. And The Zillow. And The City-Data.
Ah yes. If Fallujah is too far to commute to your non-existent job, why not East Cleveland! I did indeed immediately locate a house that sold for $1200 last April. Of course, the city still charges you close to two grand a year in property taxes to live there, which even with today's rock bottom interest rates works out to a $32,000 second mortgage. But think of the amenities the city offers for the money. East Cleveland ranks very highly on City-Data. High pollution, lotsa rape, plenty o’ robbery, burglary, and car theft; you name it, they've got it. I don't believe I've ever seen crime data that's given in thousands per hundred thousand population before. And if you are thinking of getting your tax money's worth back in an education for your kids, City Data ranks schools in Ohio on a 0 (worst) to 100 (best) scale. Shaw High School in East Cleveland is rated a "1."
The first article goes on at some length, accidentally informing me that the banks will write off "the fair market value" of the houses on their taxes, be absolved of the need to pay taxes on or take care of the properties they own, and in many cases get the government to subsidize them to demolish the buildings.

I just fell off the turnip truck, of course, but I doubt that "fair market value" in this case with be the actual market value, which is, of course, not zero. Hold on there, you veritable Warren Buffett you; it's not more than zero, it's less than zero. The bank would have to pay you to take it. A lot. Detroit tried paying people to take a house. They've given up and brought in the dozers, too. There is only one building in any of these benighted cities that needs demolition, and that's city hall. But they're angling to have that be the only building left. 

Speaking of veritable Warren Buffetts, the actual veritable Warren Buffett is quoted in this article on the same topic, suggesting that destroying empty houses would be a swell idea, and it would magically lift the price of the houses that are left -- like Cash for Clunkers crossed with Dresden 1945. He actually referenced Cash for Clunkers as if it worked. I suppose it would be bad form to point out Warren's 19% stake in one of the banks breaking the windows and everything else in these clunky houses with a bulldozer. But then again, the Broken Window Fallacy is only a fallacy if it's your window that's broken. Warren just makes sure he owns no windows, and only sells glass, and he gets good press by observing that taxes should be raised on all wealthy persons that aren't him, expounding from the offices of a shirt company that doesn't make any shirts since he bought it.


Leslie in Az said...

Heavy sigh....(I think it is time for music, the world is getting to be too much...)

Anonymous said...

I just checked out East Cleveland on The Google.

Let's just say that it is not going on my "bucket list".

I will never complain about the imagined ills in my neighborhood again, not even the newly-painted yellow garage across the street. Ok, I'll still complain about that.

misterarthur said...

I don't need to remind you of Detroit's ills. The problem isn't an oversupply of homes - no matter their condition. The problem is jobs. No one in East Cleveland or vast tracts of Detroit has a decent job. I paid for part of my college by working the swing shift at "Dodge Main". (UAW Local 3). Crab about unions all you like; they built the middle class in America. I was a garbage man, too, and AFSCME helped make sure those guys could live pretty well; raise a family, keep up a house, pay property taxes, send their kids on to better things, etc. You can't do that as a retail clerk. Not in East Cleveland, not Detroit.

SippicanCottage said...

Hi Arthur- I wish everyone had a shot at the folowing:

-An education
-A job
-A marriage
-A family
-A house

Now the schools don't educate you and the economy doesn't employ anyone and marriage is an outdated social construct and a family is just a size thirteen carbon footprint and the houses are only worth something if you can rip the plumbing out of them before the next crackhead does.

Everyone under the wheels of that bus is told to jump off the world, they're ruining it for all the eloi. I f***ing hate it.

Anonymous said...

Arthur- the excesses of the unions played no small part in Detroit's jobs exodus.

Having just watched the Iowa GOP debate, I wonder...

On a good day, is an optimistic Mr. Cottage hopeful about any potential 2012 presidential candidates?

An Edjamikated Redneck said...

I have worked in Cuyahoga County real estate.

Bulldozing is too good for these places.

I don't think the banks are bulldozing them and donating the lots to the city as a first option; it is basically the only option the city has allowed them.

The cities in Cuyahoga County have forced the banks to either bulldoze the home or make it habitable- and then leave it vacant.

So it is either bulldoze the 'ASSET' or continue to supply copper for the crackheads.

You could bulldoze every foreclosed home in Cleveland and STILL be able to buy a dozen houses for less than 2 grand apiece.

If you wanted to.

Anonymous said...

Grew up 55 miles southwest of E cleveland. wouldn't go there for love or money. arthur, yeah when you were young unions perhaps had a place, but E. cleve is in the shape it's in as a result of decades of Democrat policies, many of which included mollycoddling the public employees unions. the muncipality of E cleveland was bankrupt, literally, long before the real estate downturn.

Unions are a perfect example of power corrupting. They finally got power, and look at the results.

Bram said...

Bank of America can write off a donation at a much higher value than the $1,200 they might get for selling slum houses. I assume they could justify writing off that donation at the price of the last purchase before foreclosure.

I'm surprised more banks aren't trying this trick. I'm also surprised that Cleveland is allowing it - since they will never collect property tax on that house again.