Thursday, April 8, 2010

Where Did All this Shadow Inventory Come From?

Thursday at last! I get Friday off from the boxing training and thus there will be Friday night Entertainment. Get your requests in, we had quite the mixed bag last week and it was fun.

How You View Things
There has been a flurry of talk about a possible Value Added Tax coming our way. I am going to probably blow some minds right now and maybe generate some nasty comments, but I am actually not against the VAT overall. Now do not get me wrong, I am against taxes in all forms at all times (and I am well versed with all the negative aspects of this tax), but at least this one is going to target everyone that buys stuff, including the 50% of the country that pays zero income taxes. At least I can work with that. Add to this businesses will have to pay at all steps of the process and think how those amazing profits during this V-shaped recovery will be able to handle just that. I say go long tax accountants if it comes true.

That said, how you view things fits here because in it's simplest form the VAT is a subtle, tricky tax that goes unseen for the most part. That is why governments love them. Consider the following:

The Government spends too much and wastes way too much. We cannot expect them to change and we cannot vote them out because the next set of people do the same thing

How you view things puts you into one of two camps (I am simplifying, but in the end this is all there is to it):
A - We need to support various programs and if that comes with the price of the waste and corruption we must lie, beg, steal, and tax to get the money the government needs

B - The only way to get change is to starve the fools into default and we will start over

Where are you?

Where Did All this Shadow Inventory Come From?
Today brought word that retails sales were making a killing and blowing away expectations (who does these estimates anyway?). While rates of change make zero impression upon me (all that matters is what the final numbers are, not the rates of change) all the spending seems at odds with high unemployment and falling wages. From Yahoo Finance we get this dandy of a headline:
Shoppers hand retailers a basket of Easter cash
Poetic, just, and perfect for our times. Even better material in the story:
"There was a lot of talk about the frugality of the American consumer and that the recession taught people to save more," said Sherif Mityas, a partner in the retail practice at management consultant A.T. Kearney. "But U.S. consumers have short-term memories."
Never a more apt description of what ails us.

So where is all this cash, plastic, or whatever coming from? I really have no idea. I would guess unemployment checks that run for all time help, but that does not seem quite right. Home equity extraction? Ha, kidding. Maybe an alternative form of mortgage money extraction? Like, not paying your mortgage:
Are Strategic Defaults Fueling Consumer Spending?
It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.
There is more in the article.

I have to say I cannot believe that enough people are not paying their monthly mortgage to goose auto/electronics/other retail sales very much. I just do not think the numbers add up. I could be wrong.

And it appears that I might be.

If this story has merit, suddenly the numbers do start to add up:
Bank of America to Increase Foreclosure Rate by 600% in 2010
You did read the title right. How's that for a rate of change you rate of change fetish freeks out there!

From the story:
I attended a local Building Industry Association conference on Friday 26 March 2010. The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.
After his surprising statement, two questioners from the audience asked questions to verify the numbers.

Bank of America is projecting a 600% increase in its already large number of monthly foreclosures.

This isn't unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America's OREO department (yes, that really is what they call it). It appears they have too many properties already.
Wow, just wow.

Of course there are many that have argued the "shadow inventory" story was way overblown. Try that now.

There are many saying housing has bottomed. How does that look?

I have heard time and again that banks are on the mend and their books are not as bad as I would portray them. OK.

It is obvious that banks have been sitting (squatting?) on homes in foreclosure, without the foreclosure part. The tales of 2 years payment free may well be very true. Could this possibly help things like sales? I could be persuaded at this point!

Along these lines, an example. If you have not been reading the comments section, you are missing plenty. Loyal reader Gawains is an experienced real estate professional that knows the ins and outs of the business. From the last comment thread:
Today was repo day. There were probably, oh I don't know, 500 foreclosure sales on the courthouse steps. So we should be getting a lot of new assignments over the next few days. What fun that will be.

Want to know what I did this afternoon? Well, we got a request for a full interior price opinion and repair addendum on a repossessed home listed with another company. The company is thinking of transferring it to us because it hasn't sold. Current list price, $175,000.

Now, this house happens to be in one the nicer, established neighborhoods in north McAllen. Great location, good schools, easy access to main roads and shopping. 5 bedrooms, 4 baths, 3500+ sf, wood fence, in-ground pool. So I went over there to check it out.

Oh, my God. It's been completely stripped! All the lights, all the interior doors are gone. So are the appliances, the a/c unit and the pool equipment. The granite counters in the kitchen are ripped out, and all the cabinet doors are gone. Same for the built-ins and bathroom vanities. But this is what really gets me. They took all the drawers too.

Drawers? Why would you steal drawers? I mean, it's not like you can just slide them into another cabinet. You'd have to build new cabinets specifically to fit the drawers! It doesn't make any sense.

If there's one thing I hate more than a thief, it's a stupid thief.

So, I'm looking at about $35,000 in repairs at least. A typical homebuyer cannot purchase this house. It's not fit to live in. Only a professional investor with a lot of capital can buy something like this.

Calling all flippers, calling all flippers. Oh, sorry, I was having a flashback.
I cannot believe $35k makes that house whole again, but maybe he gets deals.

This is what is going on folks. You will not see it in CNBC. You will never, ever see Ben Bernanke have to address something like this at one of his dog and pony shows at the Senate. Want a glimpse at how bad things were at the top? Gawains offers:
I see this all the time. Here's how the scam works.

No credit? No problem! You too can buy a house. No down payment? No problem! We can give you a 0% down, interest-only ARM, and roll over the closing costs. It will cost you practically nothing.

Oh, and you'll need furniture. No money? No problem! You can completely furnish your new house with no down payment and no interest for a year.

So what these people do is fill out some paperwork. They can even lie bald faced, since no one really cares. They move into the house and furnish it. They do not make a single payment. What does it cost them? Utilities and food for a few months.
Then, when they get the first default notice, they just rent a moving truck, load up the furniture, strip the house, and disappear.

Great way to renovate and refurnish a house in Mexico, where you cannot be prosecuted since the crime occurred in America.

You guys have no idea what I deal with. And frankly, to tell you the God's honest truth, I'm more than disgusted.

Two years ago I got this assignment on a ranch house out in the middle of nowhere. It had been completely gutted of course, but here's the thing. They left the back door open and the goats got in and shit all over the house!
And I have to walk through this mess, while taking pictures and making notes.

Then I get this phone call from a contractor who wants to get into the business of cleaning repossessed homes. Oh, really? You want to clean a home? I got a home for you to clean.

After he had shovelled all the goat shit out of the house, it was a four-foot mound in the front yard that had to be hauled off.
Needless to say, he never called me for another cleaning again.
Talk about closing the barn door after the goats have left!

Going back to my intro question, where are you now?

Have a good night.


Lurker said...

I'm in an 80's mood. My requests are "Big Log" by Robert Plant, and "Like a Prayer" by Madonna.

getyourselfconnected said...

the Madonna song may be a stretch! I could maybe go with "Crazy for You" or "Live to Tell".

Lurker said...

"Live To Tell" would be great. Hope I didn't offend.

getyourselfconnected said...

Oh no, just Madonna has a range and it does extend to "bad" IMO. "Live to Tell" of course comes from the film "At Close Range" (classic!) and I have featured it before. Maybe again?

Lurker said...

Another Madonna choice would be "La Isla Bonita". Have you had that one before?

Lurker said...

BTW, you might want to check out this blog:

au soleil levant said...

Or one of my Madonna faves "Cherish." Probably too happy and upbeat for you though :)

I think most of the additional spending is more credit card debt. Americans love our credit cards, we love spending money, and I can tell you for a fact that all those new spring clothes in the stores make women want to spend some money. So when you're short on funds what do you do? Pull out the plastic and think about it some other day.

The problem with a VAT is that it places a disproportional burden on the poor and middle class, who will all of a sudden have to pay more for their basic needs, like food, and as a consequence have less money to pay the electricity bill, etc. I'm not totally opposed to a VAT, but there are troubling issues that come with it that would need to be addressed. I prefer a luxury goods tax.

Have you guessed yet that we come from completely opposite sides of the political spectrum? :)

GawainsGhost said...

Yeah, well, GYC, I ought to send you pictures of the house I inspected today. But I can't because I don't own it, thank God.

Seriously, you would not believe the condition of this house. It had been winterized in 09, so it must have been abandoned and vacant for, what, two years. Uh huh. But it hadn't been repossessed until now. This is what we fondly call the shadow inventory.

The oval window on the front door was broken, and some idiot had nailed an closet door onto the inside of the front door. I know this because the back door was wide open. The same idiot had nailed plywood over it, but only on the top half. So I ducked my head and went inside.

Let's talk about a disaster zone. Goat shit is one thing, but this was a whole nother level of filth. It looked like someone exploded a nuclear garbage bomb throughout the house. There was trash and junk all over the place. Pile after pile of garbage everywhere in every room. The garage should be rezoned into a dump site. I'm not kidding. Oh, and the in-ground pool, toxic sewage waste.

I spent five hours in this house of trash. That's how long it took to make notes and take pictures, and for the locksmith to rekey and secure the house. I didn't get home until 9:15 PM.

I tried to explain to my mother what field assets can expect when they go to clean up. "Is there a lot of trash?" she asked. I said, "Tell them they're going to need a dump truck."

For Friday Night Entertainment I would like to request something heavy. Black Sabbath, "Lord Of This World."

Oh, and as far as the VAT goes, I'm against it. Especially if it doesn't involve eliminating the income tax. I favor a flat tax. 15% across the board, no deductions, no exemptions, no exceptions. Everybody, regardless of salary or position, pays the same. And the government spends only what it takes in as revenue.

But I'll never live to see that happen.

getyourselfconnected said...

now what makes you think I am downbeat? Sarcastic, yes, but downbeat I would say no.

I have seen the VAT idea that it may target lower income types, but consumption is consumption we all have to pay (allegedly). A luxury tax gets tough as to what constitutes "luxury" goods.

We can be polar opposites politically but I "Cherish" your time and thoughts. Thanks for stopping in!

the 15% flat tax makes so much sense you will never see it.

watchtower said...

Retail Sales Rise
BY MIKE SHEDLOCK | april 8, 2010

"State Sales Tax Collections Tell The Real Story"

"State tax collections are a far better measure of spending than same store sales."

GawainsGhost said...

As much as I harp about mortgage fraud, appraisal fraud, stripped, gutted, and trash-filled homes, some of the houses we list actually sell quick.

Take this one. As far as repos go, it's in good condition. 1280 sf, 4-bed, 2-bath, utility room, 1-car garage, large living with pillars, dining, kitchen (no appliances, but you can't have everything). Clean, well maintained, and priced to sell at $58,500.

I put this house on MLS Monday morning. By Thursday we had five offers. So it's a multiple-offer, highest-and-best situation.

It's the location, the condition, and most important the price. This house will sell in a week, at over list price.

But then there's realtors. Some of them are incredibly stupid. Dozens of phone calls on this house. Here's just one example.

"I'd like to show this house at 5:30 [Thursday]."

"Ma'am, we already have five offers on that house, and we're in a highest-and-best situation. The deadline for all offers is 5:00."

"Do you think I would be wasting my time if I showed it at 5:30?"

DUH. "Ma'am, you can show it if you wish. But we would need a complete offer--signed contract and addendum, signed multiple-offer letter, proof of financing or proof of cash, and a check for the earnest money in our office by 5:00."

"Okay, let me talk to my buyer."

Fine, talk to your buyer. Waste your time, money and gas showing him a house that he's more than a day late and probably a couple thousand dollars short to make an offer on.

Good grief.

getyourselfconnected said...

sounds like tons of fun!

Moneta said...

You will find delinquency rates.

Delinquency Rate (Residential RE):
4Q2009 = 10.80%
2Q2008 = 4.15%
2Q2005 = 0.07%

Let's say there are 110 million housegolds in the US and 40% are mortgage free. That means 66M have a mortgage.

If 11% are not paying, it's probably those who have a huge mortgage because the others would want to keep their house.

So 1500$ * 12 = 18K per year + 3K in taxes = 21K in new found money per hh.

7.25 million * 21K = 150 billion ore for consumer goods.

Plus don't forget the thousands per household that were being spent on real estate and going into private fixed investment. Now a lot of this money is probably going into consumption... who would anyone want to put more money than they need to in a depreciating asset?

Let's say 25 million households are putting 5K less towards fixed investments, that would give them 125B more to spend on consumer goods.

getyourselfconnected said...

thanks for the great numbers break down. Outstanding estimate. Ok, I did say I could be convinced this was a big factor....

Just don't tell Barry Ritholtz, he insists all is getting wonderful. I will have a rant up in a bit on that.

S. Gompers said...

I to am a fan of the flat tax, it would beat the hell out of the Alternative Minimum Tax I get hit with...

How is 50% of the country not paying taxes, I have had more legitimate deductions than many earn in income, and keep meeting the AMT, and paying more taxes.

I do not see how it is possible