Will speculators prevent a housing recovery?
Sunday, January 11th, 2009Kathleen M. Howley wrote an interesting article recently. Check it out on Bloomberg.com. Howley’s thesis, built in large part upon interviews with Nobel laureate economist Joseph Stiglitz and co-creator of the widely used Case-Shiller housing index Robert Shiller, submits that speculators are largely to blame for the current housing recession and these same flippers/professional investors will keep prices down for some time to come.
How did this happen? Flippers bought more than they could afford thanks to no-documentation loans and other risky mortgage products during the housing market bubble in the late 1990s and early 2000s. When many of these loans ultimately went into default and the homes were foreclosed on, the bubble burst. This has been happening for four years now, and prices are still rapidly dropping.
These same speculators have been buying up foreclosures at auction and directly from lenders, which has prevented the housing market from collapsing completely, but Professor Stiglitz contends that speculators may cause a double housing recession. He said, “We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve.”
The problem is huge, and banks (who own at least $11.5 billion of homes, according to the FDIC) also continue to contribute to it. How do you feel about banks, Professor Stiglitz? “…the same banks that created the problems by mismanaging their risk are mismanaging the disposal of their assets.”
There is no easy solution to this murky issue, but states will soon receive money allocated from the Housing and Economic Recovery Act of 2008 to purchase & renovate foreclosed homes, then sell them to families who intend to occupy the homes. States have 18 months to use their money or they will lose it. Hopefully this program will be run well by states and community groups so that potential buyers, mostly low-income, can occupy their own home, which will improve communities and settle the housing market. I have seen no indication that this money has been sent to states yet, but it is likely to be soon. Florida, Nevada, California, and Michigan, those most widely affected by foreclosure, need to act quickly and rationally.
What’s your view? We would love to hear from you. Call 800.25.BUYER (ask for John) or email me.