Housing: Local Problems, National Problems

by lizard

This is how HUD (Housing an Urban Development) describes affordable housing:

The generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing. Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care.

For a person on the low end of an SSI pay out, around $674 dollars, affordable housing means paying $200 dollars for rent. Does that even exist in Missoula?

In this post I linked to a NARPM report that put Missoula’s vacancy rate in the rental market at 3-5%, well below the national average of 10%. The report also indicated around half of Missoula’s households rent their homes, that’s 30,000 people, 10,000 of them being students of UM.

Right now housing is again making headlines in Missoula, but not whether it’s affordable. No, the big controversy is supposedly about the zoning of Additional Dwelling Units, but the more I follow this issue, the more I’m beginning to realize it’s not about ADU’s at all. Instead I think what this issue boils down to is what kinds of people live where.

I may be oversimplifying this, but it seems to me those who oppose ADU’s want to make sure city government retains the regulatory power to socially engineer neighborhoods to keep those trashy, irresponsible renters from destroying nice, upstanding, single family neighborhoods with their ugly couches in the alley and their un-shoveled sidewalks in the winter.

Another facet of this issue is the role of property management companies and absentee landlords.

Will relaxing zoning for ADU’s exacerbate the problem of properties that aren’t being taken care of because the people or entities that own them aren’t doing their part to maintain them? Will they attract the bad kind of renters that have apparently stigmatized the entire renting population in this town in the minds of many? Will they help address the tight rental market that desperately needs more AFFORDABLE housing?

Lots of questions, lots of uncertainty.

As a National issue, the question of housing is a big one, considering the most recent bubble to burst and ripple out global economic contagion was the US-based housing bubble. Owning a home may have sounded like the American Dream when Bush was pimping his Ownership Society, but the reality of unchecked greed—from casino banks to Americans using their homes like ATM’s—resulted in a cataclysmic economic meltdown we still haven’t recovered from.

Cue Obama.

To understand what’s been happening in the housing market since Obama took office, I’ve relied heavily on Mike Whitney, featured primarily at Counterpunch.

Today his piece was front and center: Obama’s Secret Plan to Prop Up Housing Prices.

If University District home owners think absentee landlords letting unruly college kids run amok is bad, I wonder what they would think about foreign investors getting dibs on bundles of properties for 40-60% mark downs.

But that’s not even half the story. Here’s the opening:

Private Equity firms are piling in to the housing market to take advantage of bargain basement prices on distressed inventory. The Obama administration is stealthily selling homes to big investors who are required to sign non-disclosure agreements to ensure that the public remains in the dark as to the magnitude of the giveaway. Aside from the steep discounts on the homes themselves, the government is also providing “synthetic financing to reduce the up-front capital required if they agree to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties.” (Businessweek)

In other words, US-taxpayers are providing extravagant financing for deep-pocket speculators who want to reduce their risk while maximizing their profits via additional leverage. The plan resembles Treasury Secretary Timothy Geithner’s Public-Private Partnership Investment Program, (PPIP) which Columbia University professor Joseph Stiglitz denounced in an op-ed in the New York Times. Here’s what he said:

“The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.”

The same rule applies here. Speculators are getting lavish incentives (gov financing, low rates, and severe discounts) in secret deals to buy distressed inventory which should be available to the public at market prices. If that’s not a ripoff, then what is?

A bit further in the piece, here’s Whitney bookending a citation from Michael Olenick from Naked Capitalism:

As we have noted in previous articles, housing prices are going up for two reasons. First, because the banks are withholding their distressed inventory (delaying foreclosures) to keep prices artificially high. And, second, because of Private Equity firms are buying up the available stock of distressed homes in special “bulk sales” deals that are pushing up prices on lower-end homes. Housing analyst Michael Olenick sheds a bit of light on these secret transactions in a recent post on Naked Capitalism. Here’s a clip:

“Besides lower foreclosure activity, the government is going all out to give away houses to private equity firms. Recently Fannie Mae sold 275 properties across metro Phoenix in one sale to a mystery buyer, according to a report by Catherine Reagor of the Arizon Republic. All Fannie disclosed is the buyer is an LLC, which Fannie apparently helped create, based at 135 N. Los Robles Ave., in Pasadena, CA. Google shows that is the US address of EastWest Bank, a bank whose tagline is “Your Financial Bridge,” presumably between Asian money and Phoenix real estate. Fannie’s decision to sell Phoenix to Asian investors keeps 275 houses off the local market, which drives up prices for Phoenix homes people intend to actually live in, rather than flip. (Update: Nick Timiraos points out by e-mail that Fannie’s address in Pasadena is the same as EastWest’s, and Bloomberg has reported that Colony is the buyer. But this still raises the question of why Fannie cooperate with what appears to be an effort to hide the identity of the buyer.) (“Still Looking for a Housing Bottom”, Michael Olenick, naked capitalism)

So, why all the cloak and dagger? Why is the public being kept in the dark? And, most importantly, why are taxpayers providing financing for moneybags PE firms on discounted homes that would sell on Day 1 if they offered to the general public? This whole operation stinks to high-heaven.

It’s important to understand why this is happening: the big banks are still insolvent. LIBOR manipulation and quantitative easing and China fanning the debt clock is just life support for what is ultimately unsustainable.

Speaking of that debt clock, we are officially at 16 trillion.

At Zero Hedge, a really good question: Did the Financial Crisis Start with the End of the Gold Standard?

Lots of questions, lots of uncertainty.

And for the rest of the week, choreography.

  1. Dave Budge

    You know the argument, Lizard, that propping up RE prices is good for the economy. The problem, of course, is that with enough government intervention those prices are synthetic and pose exactly the same problems that the great CDO fiasco created – which was at least in part government inspired..

    I’m painfully aware that many people actually believe that America has taken a huge hit to their net worth because of fallen RE prices. But the reality is that those inflated net worths never really existed. It’s all been an illusion caused by fiat money and the unholy alliance of government and finance.

    All that said, there are plenty of really smart arguments not to go back to the gold standard – not the least of which is the huge problem of implementation. But Ron Paul and Gary Johnson are on to something when, at a minimum, they urge a a rules based monetary system in place of a flexible money stock that is set by policy mandates that often conflict with each other. But think who gets fucked the most by these false valuation: the lower economic classes. Can anyone really argue that our government technocrats really serve the dream of economic class mobility? I don’t see it.

    • Big Johansson

      I don’t see a problem converting to a AU standard.

      Govt. sells all it’s public lands outside some national parks for millions of ounces of gold.

      • Steve W

        BJ, the fact that you don’t see any problem strangely fails to reassure me.

        • Big Johansson

          The Titanic has already hit the iceberg. You guys are arguing over which songs the band should be playing.

          New favorite quote: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises

      • JC

        Once you get the government to liquidate the public commons, BJ, then what is next? Sell the Capitol and Supreme Court buildings to the highest builder? Let some property management firm rent out the White House to the current president? Turn the Pentagon over to Xe? Let Carlyle own and manage all water rights?

        MIght as well just reinstitute a monarchy and let the king rule.

        • Big Johansson

          Convert to AU now and buy the more sensitive areas back when gold hits $10K/oz. in a couple years.

          Oh I forgot, we’re talking a govt. that saves money.

          • Steve W

            BJ OK. You and Mitt want to spend, I get that. But what do you want to spend it on? Romney care?

          • JC

            I detect more than a little self interest in your desire to move to the gold standard. How much you sitting on?

            • Big Johansson

              Definitely not enough.

              But what I’m really proud of is my Smith&Wesson And Ruger stocks.

              I know you’re not a capitalist JC but buy some. Obama, especially if he wins, will continue to be the best pistol and ammo salesman ever.

        • U Hope, I Keep the Change

          The government is liquidating the “public commons.” But maybe you missed all the wood smoke in the air.

          • JC

            Maybe you missed Forest Ecology 101?

            • Max /// Bucks

              Maybe you missed a recent article in the Idaho Statesmen, which essentially declared “forest ecology” to be a non-science. In effect, the Forest Service has “managed” to transform 1 million acres of the Boise Forest into ashes by pretending to understand the role fire plays in nature.

              Read and laugh until you cry: “Old burns slow new fires across Idaho” (Idaho Statesman, September 2, 2012.)

              The best Forest Service quote from the article: “The reality is the forests we love so much are changing. Our job as land managers is not to stop change but to shepherd the change so we still get the benefits we love so much.”

              Yeah, we just love that air pollution, all the dead and homeless animals, and of course we’d much rather have ashes instead of lumber for houses. So much for the public land trust. In a sane society, these Forest Service morons would be in jail.

              • Steve W

                Max, it is the insane Republicans who haven’t noticed the whole earth is warming. Wake up! Stop digging the hole deeper!

              • Max /// Bucks

                We are not talking about insanity, Steve. We are talking about criminal insanity, and this is criminally insane behavior: Being the trustee of millions upon millions of acres of public land, letting it burn to ashes while sending billions of tons of carbon into the atmosphere, then claiming we need more trees to halt global warming.

                The Forest Service is infested with new age charlatans who ought to be committed to an institution for the criminally insane.

  2. Chuck

    I agree with you Lizard. I’d also ask why the Missoula libs bailed out the Burn’s Common’s condos rather than letting them go to auction.

    • lizard19

      I don’t know why that project got a council-approved bailout, Chuck.

      but I’m sure there are other developers who would like a little debt forgiveness from their creditors.

      I have a question: is it misleading to call Burns Street Commons affordable housing? because I assume that’s part of the rationale for forgiving part of its debt—because it’s a well-meaning affordable housing project.

      the cheapest Burns Street Commons unit was $112,000 dollars for one bedroom and one bathroom. you can check out the income qualifications here.

      I’ll leave it at that, because I think one of my fellow bloggers will be writing about this soon

  3. Buzz Feedback

    A black helicopter just moved in next door. I hope it doesn’t party too loud.

  4. lizard19

    Dave, I’m going to respond to your comment down here.

    you claim that the net-worth people thought they had with their home value was just an illusion. why stop there? what underlies the value of any stock or financial instrument?

  5. Dave Budge

    Well, there’s probably something to that but at least most financial instruments can be measured in some case of the time value of money – a problematic as it is. But I think as well that’s kind of an apples to oranges comparison insofar as most investors understand the downside risk to securities. There isn’t the overall notion that securities will almost automatically increase in value (the late 90s is suppose is the exception.) The stock market is usually valued somewhere between 10 and 20 times the net income of any index. So there is volatility but the trend usually reverts to the mean.

    But with real estate the market got way ahead of itself. For generations the average price of a house sold at about 2 times the median income but by the mid 00s that had moved to an excess of 4 times the median income. It’s simply unaffordable.

    There are multiple reasons for this misalignment: much bigger homes, easier credit terms, inflated price expectations, etc. But if we view inflation as a kind of economic whack-a-mole – where it comes up in one market then vanishes and reappears in another market – then we kind of have to concede to Milton Friedman that “inflation is everywhere and always a monetary phenomenon.” .

    And that augers for either a commodities based currency or a strict rules based monetary policy.

    But, epistemologically speaking, do we really know that life itself isn’t just an illusion? Not withstanding the previous reductio, I think we should really look at average wealth in terms of things we have that make our lives better and not money. Money, after all, is really only an imperfect surrogate for measuring wealth.

    • JC

      Are you advocating a move to measuring gross national happiness, or some such? ;-)

      “Money, after all, is really only an imperfect surrogate for measuring wealth.”

      The problem with this is that for those that have monetary wealth, their surrogate measure of wealth would be power. And they would love nothing more than for the rest of us 99% to leave money and power to them, and to adopt a happy-happy joy-joy attitude (“things we have that make our lives better”) once we realize that monetary wealth and power are out of reach.

  6. Dave Budge

    Actually, I’ve done a great deal of reading on “happiness” and “life satisfaction” metrics. It’s a wonderful new social science. But given the problems we have measuring something as tangible as money it’s highly unlikely that we can divine a good measurement for aggregate happiness.

    The research shows us that, contrary to fable, money does buy happiness – to a point. But the research also shows us that we Americans are generally happy and part of that happiness comes from aspirational ideals of the possibility of true wealth. Oddly, we share a great deal of this with northern Europeans and not so much with southern Europeans. Accordingly, the drive to accumulate wealth is the best limiting factor of a permanent oligarchy. The great family fortunes of American history are as subject to Schumpeter’s Creative Destruction as any industry. Think about it. What dynastic wealth exists that has not been turned back to society in some form. Think of The Ford Foundation, The Carnegie Foundation, The Mellon Foundation, The Rockefeller Foundation and now the Gates Foundation. Great wealth does not just gather power. It can do great things. But we seem to forget that.

    • Steve W

      What the research shows is that using the phrase, “What the research shows” is highly suspicious. Of course, not all suspicions pan out. But some do. I only point this out because you {Dave Budge} have said this repeatedly without citing the research that presumably supports your assertions. Jus sayin.

      I’m not sure that money per se buys happiness. But the ability to exchange currency and coin for goods and services does in fact allow for temporal needs to be met, undoubtedly, which contributes to a good time for those so enabled.

      How this relates to happiness in the short or long term is poorly understood except in the context of nutrition and mental stimulation. I point this out because there are quite a few well fed and financially well off people who aren’t happy. As there are a lot of examples of financially deprived humans who experience ample happiness.

      People do great and horrible things. Some of those people had money and some had none. We seem to forget that people, whether they have money or not, can do great and horrible things.

      • Dave Budge

        I have no idea why you somehow think I put more stock in this than you do. Did I not open with saying how problematic it is? But I also think you dismiss the idea in toto that having money provides not just life’s necessities but the psychological benefit of perceived economic security. In every study I have read the rich are happier than the poor. I’m positive I haven’t read all the literature but doesn’t that instinctively make sense?

        And as you close admitting the long held conservative belief that good and evil live in the hearts of man would you care to weigh in whether the human condition is net good or net evil? Would you like to address whether average Americans who are several magnitudes wealthier than the average third world population more or less evil in comparison?

        • Steve W

          My experience is that there is enough happiness and despair to go around. I’m not sure how that quantifies, monetizes, or how it becomes useful politically.

          I do know that societies that concentrate wealth have more sustainability problems than societies that spread it around.

    • JC

      Well, family wealth is one thing, and philanthropy can be a good thing. But I would challenge that it always is a good thing. Family money via foundations can be used politically, and dictate policy on everything from the environment to social justice, to family issues; indeed shaping the character of nonprofit organizations worldwide. Don’t get me started on Pew (née Sunoco)…

      But look at the rise of corporate wealth. Apple, Inc. has a market cap over $600b, and on track to have $200b cash reserves next year. U.S. corporations are sitting on $1.7t in cash domestically, and over $5t overseas — more than the GDP of Germany. What good is all of that corporate “wealth” doing? Surely not buying happiness for any but those who stand to shuffle it into their pockets one way or the other. Corporations are not seeding foundations with their cash reserves.

      “part of that happiness comes from aspirational ideals of the possibility of true wealth”

      Maybe I should go buy a Powerball ticket or something… That’s the ‘merican way to wealth, in the new economy, right?

      “the drive to accumulate wealth is the best limiting factor of a permanent oligarchy.”

      Otherwise know as “class warfare.”

      “What dynastic wealth exists that has not been turned back to society in some form”

      Well, now that so much wealth is being exported, how are we going to retrieve it from, say, the Saudis and other royal families that just pass it down through the family? What’s Shumpeter got to say about trade deficits? $500b in 2010. That’s a ton of money lining some big pockets without any tangible benefit to our society.

  7. Dave Budge

    Well, family wealth is one thing, and philanthropy can be a good thing. But I would challenge that it always is a good thing.

    Are you putting words in my mouth?

    Maybe I should go buy a Powerball ticket or something… That’s the ‘merican way to wealth, in the new economy, right?

    Maybe, but from what I’ve read wealth gained by pure luck has a marginally negative effect on happiness where “earned” success (which I know is a highly subjective term) has a large impact in happiness. (again, not saying it’s true. It’s just what I read.)

    Well, now that so much wealth is being exported, how are we going to retrieve it from, say, the Saudis and other royal families that just pass it down through the family?

    Well, the economic math says that our current account deficit = net foreign investment. Read this.That’s what Schumpeter says… and Krugman and Goolsby and Brad Delong and Hayek and Keynes and Friedman and … I’m sure you get the point.

    That’s a ton of money lining some big pockets without any tangible benefit to our society.

    Are you saying that the energy we buy has no tangible benefit? That would indeed be a value judgement, no?

  8. Great piece, Lizard.

    With that said, I read it and thought, “How can this man not be — at least — a libertarian?” The bigger the government gets, the more this kind of corporate cronyism crap goes on… I feel like I’m reading Exhibit A for why we need to shrink the government.

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