Guest Post: How To Cripple The Real Estate Market In Five Easy Steps

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

How To Cripple the Real Estate Market in Five Easy Steps

Central Planning has crippled the real estate market to "save" their core constituency, the banks.

If you were head of Central Planning (howdy, Ben!) and were tasked with crippling the real estate market, here's what you would recommend.

1. Choke the market and banking sector with zombie banks. Central Planning creates zombie banks in one easy step: it allows insolvent banks to mark their impaired "real estate owned" to fantasy rather than to market. This enables the banks to survive in a deathless state, propped up by free money from the Federal Reserve and lax regulations that enable fantasy accounting and all sorts of off-balance sheet trickery.

Zombie banks have no incentive to auction off their holdings of real estate with defaulted, underwater or otherwise impaired mortgages, for having the market discover the price of these properties would immediately reveal the insolvency of the bank as properties it held on its books at (say) $400,000 were actually only worth $200,000. Since the mortgage is (say) $350,000, then the bank would be forced to recognize a $150,000 loss (actually more with transaction fees, repair of the derelict property, etc.).

If the bank's entire portfolio of phantom-value properties was auctioned off or its price discovered by the market, the bank would be declared insolvent and closed.

So instead the zombie banks' impaired properties clog the market, unlisted, unsold, indefinitely held off the market until unicorns arrive and valuations return to bubblicious 2006 levels where the bank can unload them with no loss.

Since those valuations haven't arrived, millions of properties are being held off the market. This "shadow inventory" is well-known (tens of thousands of people are living rent and mortgage-free in homes that the banks have yet to even put in the foreclosure pipeline), so no one has any confidence that "the bottom is in." Confidence cannot be restored until the market clears the inventory and a real bottom is established.

This destruction of confidence undermines the entire market. Zombie banks create zombie valuations. Who can say valuations won't decline once the shadow inventory finally hits the market?

Keeping zombie banks alive via bogus valuations and shadow inventory of derelict and defaulted homes has another consequence: banks themselves cannot be confident that prices won't decline further, so it makes no sense for them to put capital at risk by issuing mortgages on real estate.

2. Have the central bank (the Federal Reserve) buy up $1 trillion in toxic, impaired mortgages. If these mortgages were such a great deal, then why didn't private buyers snap them up? Exactly: they were fetid garbage no private buyer would touch except at steep discounts that would have sent the banks into insolvency. (That isn't allowed in crony-capitalist State-run economies.)

The market was thus denied the opportunity to discover the price of all this mortgage debt, and this effectively destroyed the private market for mortgages. Literally 99% of all mortgages in the U.S. are guaranteed by the Central State. Suppressing market price discovery works just as well in the mortgage market as it does in the housing market.

3. Lower the rate that banks can borrow from the Fed to zero, and then pay the banks interest on all funds deposited at the Fed. I wish we had this option, don't you? We could borrow $1 billion from the Fed at zero interest, then deposit the $1 billion with the Fed and skim risk-free interest.

But the real-estate effect of ZIRP (zero-interest rate policy) is to lower the mortgage rate to such a low level that it makes no sense to take on the risks and unknowns of real estate valuations for such a paltry return. After all, what if the bank loans $300,000 on a $400,000 home, the value subsequently drops to $300,000 and the buyer defaults? The bank will lose capital it can't afford to lose dumping the property at auction.

Better to avoid the mortgage market altogether by refusing most applicants as risks--and given the high debt levels of most households, they may indeed be poor risks.

4. Try to prop up the housing market by giving poor credit risk buyers loans with only 3% down. This generates a new pool of ready buyers, but since the government is guaranteeing the loan, qualifying is easy and the buyers only have a few thousand dollars of skin in the game. This means defaulting is not very painful, especially if it takes the lender a few years to foreclose on the property.

The net effect of subsidizing poor credit risks to buy houses is that another pool of uncertainty is created, as these buyers are defaulting in droves, dumping inventory that had just been cleared back on the market. (The default rates of FHA loans is skyrocketing, and now the taxpayers will have to bail out the FHA.)

This is what happens when you try to prop up the market with unqualified buyers and 3% down mortgages--those buyers bail out in huge numbers and the homes return to the inventory. The clearing of inventory was as phantom as the real estate valuations on the banks' balance sheet.

5. Load young people up with the equivalent of a mortgage in student loans. That insures that the majority of potential new homebuyers won't be qualified to buy a house--they're already indentured to the banks for student loans. Those fortunate few who get good-paying jobs will qualify for a mortgage when they're getting grey hair; most will never qualify, having been buried by impossible-to-default student loans.

OK,let's see how our Organs of Central Planning are doing: check, check, check, check, check: a perfect score! they're doing everything possible to cripple the real estate market.

Do they care? Of course not; the only goal is to keep the zombie banks alive, regardless of the cost to the nation. Great work, Ben, Barack, Timmy and the rest of the gang at Central Planning: thanks to your policies, the real estate market will never clear and therefore it can never be restored to health.

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Flakmeister's picture

The real estate market commited collective suicide over a 10 year period starting in the late 1990's..

The above is the equivalent of a seance, an attempt to communicate with the dead......

chumbawamba's picture

This is nothing less than a global takeover attempt.  The culmination of a 6,000 year game of Risk.  Barack just traded in a set of cards.  He has North America, Europe, Australia, so he got extra armies for those.  He's piling them all up onto the Middle East and he's going to make his final push to secure Asia before he sets his sights on Africa to win the game.  The dice are rolling.

I am Chumbawamba.

economics9698's picture

Sad but true.  Central planning always fails.

kito's picture

it seems to work for God. ;)   ................

faustian bargain's picture

'work' being a relative term...seems more like 'God' is playing, instead of working.

redpill's picture

The housing market is undoubtedly a clusterfuck and will be for many years to come.  However given the world we live in, where sovereign debt backed by intangible government promises is viewed as a "financial safe haven," even an asset like real estate that could continue to decline in value but that is real and has actual utility (you can live there, and in the case of arable land, grow food) is more attractive than many alternatives. 

HardlyZero's picture

20 years to come if we are lucky.  If population does not keep rising then there may be "Peak Real-Estate".

bobola's picture

However, for a 1st time house buyer, there has probably been no better time to make the purchase.

Interest rates and property prices are rock bottom right now.

Can either go lower..??

ChrisFromMorningside's picture

Yes, they definitely can. Maybe not if you're Montana or South Dakota. But if you're near a metropolitan area ... Yes.

Miss Expectations's picture

His sights are already on Africa...his advance celebrity support team includes Brad Pitt, Angelina Jolie and George Clooney begging for attention/intervention in Africa "for the children."

kralizec's picture

10 years?  Try 30!

It all started with the liberals and their mandate that the American Dream must be extended to everyone regardless of risk!  They gave us CRA and told lenders they cannot discriminate on socio-economic status...and more regs followed, and the lenders went along because Dodd & Frank gave us the toxic waste dumps known as Fannie & Freddie to stash all the garbage in, so easy money = easly lending = American Dream for all!

30 fricken years ago, thanks largely to liberal goddamned democrats and their dreams of utopia!

Fothermucking fothermuckers!

WestVillageIdiot's picture

Once Wall Street figured out how to turn shitty mortgages into gold, via MBS, it was a given that we would get an ocean of shitty mortgages into the market.  Thank god Wall Street had government to do their bidding and mandate all of those shitty mortgages.  The sausage grinder then had plenty of meat.  And then Wall Street got bailed out on their sausage making enterprise.  None of this could have been a coincidence. 

dick cheneys ghost's picture

Isnt this (real estate bubble) a function of the debt based money system on its last legs?

How can u blame one party over another when the blame should be placed squarely on a fiat/fractional lending debt based money system that needs ever expanding debt/credit creation to keep growing?

Hippocratic Oaf's picture

I think your evaluation of mortgages in example 1 is off quite a bit. 20 cents on the dollar is more like it.

Dugald's picture

And in Australia too, the Big four banks offering low deposit loans....all to help the poorly performing real estate charitable and couragous of them! No wonder they deserve large bonuses and luxury trips for the staff on cruise ships....

Flakmeister's picture

Yeah, maybe you are right...

It started in the '80s when everybody got a carte blanche to game the system and unfettered greed became a desirable trait....

Other than that, your post is word salad and somewhat ideologically myopic....


MarcusLCrassus's picture

Yeah, noted liberals like Ronald 'borrow and spend' Reagan, or George W Bush who told all Americans that we live in an Ownership Society and should all own houses. 


Yep, thanks, I didn't know Bush was a Democrat.  Thanks for the update!

Omen IV's picture

Complete propaganda and nonsense - the ONLY cause of this debacle was Bank Fraud - end to end - show me where the government told the banks to syndicate  - AIR - that is totally worthless MBS that began with phony cut and paste mortgage apps and never in the respective trusts properly documented and transferred with the note   


Hobbleknee's picture

And every time the conservatives were in office, they undid everything the Democrats messed up. 

Oops, no they didn't because they're all the same!  Don't fall for left/right paradigm trickery brother.  That's what they want you to do to keep you distracted.

Dr. Engali's picture

The U. S. committed suicide in 1913 when it instituted the Fed. We are just waiting for it to be pronounced dead.

WestVillageIdiot's picture

I believe the suicide began in '61.  That is 1861.  Lincoln is the villain in all of this. 

Flakmeister's picture

Living up to your name I see....

WestVillageIdiot's picture

Thank you for adding so little insight.

Please trace the rise of the central government, and central planning, in the United States.  It leads right back to Lincoln.  That was his entire goal for subjugating the south. 

Maybe you should read more and post less.

Flakmeister's picture

I really recommend you review your history and examine the deal that Lincoln offered the South...

The South gave the North the finger, partially because they thought the could rely on the U.K. since they were captive cotton buyers....

Seems the U.K. didn't like the bad taste that slavery left in its mouth....

WestVillageIdiot's picture

Who cares what deal Lincoln offered anybody.  The south had every right to secede if they wished. 

Flakmeister's picture

Get over it...

You fired the first shot and lost the war....


WestVillageIdiot's picture

You just won "The Stupidest Comment of All-Time" award on ZH.  Thank you for playing. 

Flakmeister's picture

Its amazing the denial you guys can muster....

malek's picture

You are avoiding to respond to his key fact: "they had the right to secede"

Everything else you are spewing is just distraction...

Flakmeister's picture

And Lincoln demanded that Federal property be respected...

It wasn't....

malek's picture

No matter what excuse you come up with, it was the demise of "a republic, if you can keep it."

Since then we are a democracy, characterized by steadily increasing 'tyranny of the majority.'

The Alarmist's picture

"Had" is the operative word here. It is now ingrained in American Jurisprudence that a State has no right to secede, and you can bet your last dollar that the next one that tries will see itself brutally subdued.

njrod's picture

I'm MF brown as can be, and i'll rep the confederate flag all day!

Freedom, bitchez!

LowProfile's picture

I'm partial to the Gadsen, less baggage with that one.

tmosley's picture

Just how old do you think he is!?

Oh, you didn't mean him personally?  You were just attempting to conflate his arguments against federal aggression with slavery, because you possess no strong arguments of your own, and as such must constantly resort to ad hominem?

LowProfile's picture


Seems the U.K. didn't like the bad taste that slavery left in its mouth....


Yeah, I'm sure it didn't have anything to do with pushing a renegade colony into civil war so they could profit off it.

LMFAOSTFU ur killin' me

WestVillageIdiot's picture

Because we all know the Brits were treating all of the people in their colonies so well.  Thank you for your comment.  The stupidty of the slavery comment was just asinine.

Of course public schools still brainwash our kids into believing that The Civil War was all about Lincoln's desire to free slaves.  Bwahahaha.  What a bunch of bullshit.

Thomas Jefferson died at Fort Sumter.

Flakmeister's picture

The UK did not push anyone....

The Southern political intelligensia (now there is an oxymoron!) did it all by themselves...

Dugald's picture

Well you could have washed out the taste with a mug of tea, but no; some prats went and chucked perfectly good tea in the bloody oggin, bin all down hill since then, and getting worse at record speed....will it end with a crash, or another splash?

Silveramada's picture

yep... and the uncostitutional IRS same year!

JohnKozac's picture

All mortgages should be kept local. That way, the bank loan officer has "skin in the game." The local banker knows better who is qualified and who is not. Mortgage companies and the FHA should be forbidden and/or abolished.

I've given up on the housing market since I see no signs of change or improvement for at least 10 years. Plus, there are too many other ways to make money with lower risk.


Woodyg's picture

Local counties and cities should install a "vacant house" fine......

Those houses sit there empty,not on the market, no maintenance, getting trashed by rats, the homeless and partying teenagers.....

Further decreasing the value of the house, the value of the other properties in the neighborhood, etc

Any house that sits vacant for 3 months - not on the market - no utilities, etc should face a monthly fine and be foreclosed on by the locality - and then sold.

LowProfile's picture

Also vacant rental property.  Otherwise the banks can just say "can't find a suitable tenant".

TeresaE's picture

Many, many cities around here are doing that.

Guess what?  Law of "unintended" consequences abound.

First the squatters don't notify the bank that they left, then the banks don't notify the city because of the regulatory nightmares and fees, so the cities HIRE MORE PAID FOR LIFE workers to drive around and find the houses, now they have instituted code enforcement in that if your house is empty for ONE day, the sale cannot proceed until the house is brought up to code.

Which results in FEWER sales as the repairs are many times more $$ than the house.

With the exception of the new thing of government cash "buying" foreclosures then lending the money to their cronies to buy them up in lots.  These will be turned into Section 8 housing, with government dollars, then paid for in rent with GOVERNMENT dollars.

Any solutions we come up with that start with the thought/words that "government should institute a law" are doomed to failure as is evidenced by the entire country right now.


disabledvet's picture

and herein lies the only problem with the housing market: no accounting. this was the instrumental in the "great recovery" of the 80's: accounting firms stepped front and center to declare "their piece of your forgotten pie." we've now been whittled down to it big 2 now? Anderson got gleefully taken out with Enron. Now no one even knows what an asset is anymore...other than the fact that it is being stolen by those who have no concept of law to begin with let alone any interest in it. we need an inventory of vacant properties...properly titled whether whoever claims to own it or not likes it or not...and then it needs to be auctioned off. And then AND ONLY THEN can actual banking resume as by then an asset will finally be owned to be "rehypothecated."

HardlyZero's picture

There are a few more possible outcomes which could cause a more significant downdraft.

1) make private property law suspect to the point that if you are surrounded by property owned by the banks or governments then you have no rights to any support (water, gas, energy) or rights.  This becomes a real problem when discussing property taxes.

2) determine the best way forward is to "give away" distressed properties to people who are otherwise unemployed or disenfranchised.  Ask that they upkeep their property, based only on their government supplied stipend and foodstamps.

3) develop new prison rules and prison-law to allow for many who are leaving their "adopt" distressed many affluent neighborhoods.  This is a type of reverse gentrification but will lead to many interesting outcomes.

4) make sure everyone is happy about the new arrangements, including the banks, counties, and municipalities.

In case the above new setup does not work, make sure there are special land-grab rules included or exclusions, to ensure there are deep clawbacks into the landowners.

It is looking more like all the land will go back to the city-state.

The Alarmist's picture

The Soviet Union had nothing on the USA ... They had massive shortages of housing because they adopted communism before building all the houses.

HardlyZero's picture

Magna-Carta no more.  Its been a great 1000 year experiment in private ownership.  The new land barons will be the Billionairs or the government buddies.

I hear many of the wealthy are buying up land all around the globe.  They will form oligarchies and real-estate cartels to offset the taxation and land-grabs. 

There might even be more room for private land-estates that are ex-country.  Who owns anything or the rights will be interesting questions once you are surrounded by federal or banking owned, or corporate owned, or Billionare owned lands.

Jason T's picture

Don't forget to increase the property taxes every year too.