The Fate Of The US Housing Market Is In The Hands Of Indian Real Estate Agents And Satellite Photos

US home prices have never been more unaffordable.

A little over a year ago, home prices finally surpassed their prior all-time highs, reached during the heyday of the housing bubble back in 2006.

But with home prices in 80% of US cities are growing twice as fast as wages, working-class families across the US are finding it increasingly difficult to support their families - let alone afford a home. But fortunately, this hasn't been a problem for institutional investors like Blackstone, which are presently enjoying the luxury of a controversial valuation assessment known as a Broker Price Opinion - or BPO.

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As the Wall Street Journal  explains, Congress prohibited the use of BPOs to underpin traditional mortgages as part of Dodd-Frank. But, fortunately for private-equity firms and their limited partners, that prohibition doesn't apply to investors buying tens of thousands of homes.

Blackstone and its lender, Deutsche Bank AG, settled on a sort of drive-by valuation done by real-estate agents that are more cursory and cost far less than traditional appraisals.

Congress outlawed the use of such assessments, called broker price opinions, or BPOs, to value properties for traditional mortgages. But the prohibition, enacted as part of postcrash financial regulation, doesn’t apply to investors buying tens of thousands of houses.

Now these perfunctory valuations abound, underpinning tens of billions of dollars of home deals. Sometimes the process is outsourced to India, where companies charge real-estate agents a few dollars to come up with U.S. home values by consulting Google Earth and real-estate websites.

That's right: Shoddy satellite photos and workers at call centers in India - thousands of miles away from the homes they're evaluating - are making up prices for homes that are then used to value collateral used in bond offerings. In fact, BPOs have been used to value collateral in the more than $20 billion of bonds sold by institutional landlord. They're also the fast-growing business of lending to individual house flippers. Banks request them when considering whether to foreclose or negotiate repayment plans with delinquent homeowners.

Their popularity shows how Wall Street is finding ways to adapt to government efforts to crack down on some of the excesses that contributed to the housing crisis. While authorities in Canada and Australia have passed laws to curb speculation in their respective housing markets, US regulators have been unwilling to challenge BPOs - though the SEC is investigating whether certain rental-home companies used these shoddy valuations to distort the value of bonds tied to the deal. Critics say BPOs are ill-suited to gauge home values and could leave debtholders with less collateral than they thought.

So what are the risks, exactly? Well, inaccurate pricing information could result in abrupt and unexpected losses for investors when a more thorough appraisal is sought.

“BPOs are a creature of financial institutions that want deals to close fast, and so they don’t have to use an appraiser,” said Donald Epley, a retired University of South Alabama professor who helped write national appraisal standards after the 1980s savings-and-loan collapse. “You’re just dumbing down the standards to make the loan.”

Some credit rating firms have realized that these valuations aren't reliable, and have stopped accepting them, or sought a second opinion.

When Fannie Mae last year guaranteed about $1 billion of Invitation Homes debt, it accepted BPOs for the 7,204 houses serving as collateral. Assuming a typical appraisal price of $450 and the $95 that Invitation Homes pays per BPO, the company saved about $2.6 million.

Credit-rating firms usually discount BPO values when grading rent-backed bonds. Kroll Bond Rating Agency has trimmed them by about 10% and uses the lower of the reduced BPOs and the amounts spent buying and renovating the homes.

“We’re never taking BPOs at face value,” said Kroll’s Daniel Tegen.

With many institutional investors expect, as Goldman Sachs put it, "a strong and synchronous global expansion" during the coming year, housing bears are difficult to come by. But Bloomberg managed to find one: James Stack, an investor who manages $1.3 billion for high net worth individuals, says that his "Housing Bubble Bellwether Barometer" is flashing red again. Stack predicted the housing crash back in 2005, just as home prices were reaching their peak.

His assessment of the market should send a chill down the spine of foreign investors who have poured money into New York City, San Francisco and other hot urban housing markets that have led the recovery in home valuations.

"It is 2005 all over again in terms of the valuation extreme, the psychological excess and the denial," said Stack, whose fireproof files of newspaper articles on bear markets date back to 1929. "People don’t believe housing is in a bubble and don’t want to hear talk about prices being a little bit bubblish."

Despite the torrid rally in home prices, Stack is one of the few real-estate market observers who foresee a sizable correction in prices. Indeed, as the vital spring selling season approaches, there are plenty of reasons for buyers to be optimistic - not the least of which is the "wealth effect" stemming from gains in equity prices. A backup in home building following the recession has left a paucity of inventory just as the housing needs of two generations - millennials who are buying their first homes and Baby Boomers who are downsizing in retirement - are shifting.

But there's a structural mismatch between different tiers of the housing market that are poised to create problems for homebuilders.

There are plenty of reasons to be optimistic. The housing needs of two massive generations - millennials aging into homeownership and baby boomers getting ready for retirement - are expected to fuel demand for years to come if employment remains strong. Sales in master-planned communities, many of which target buyers who are at least 55, reached a record last year, according to John Burns Real Estate Consulting. Last month, a gauge of confidence from the National Association of Home Builders/Wells Fargo rose to the highest level in 18 years, and starts of single-family homes in November were the strongest in a decade.

“As soon as homes are finished, they’re flying off the shelf,” said Matthew Pointon, Capital Economics Ltd.’s U.S. property economist.

Homebuilders, which have focused on pricier homes since the market bottomed in 2012, are now getting ready for a wave of first-time buyers left with little to choose from on the existing-home market. Investors are rushing to builders of starter homes, because lower-priced homes in the U.S. are in the shortest supply. Shares of LGI Homes Inc., which targets renters with ads that trumpet monthly payments instead of prices, rose 161 percent last year. D.R. Horton Inc., the biggest builder, powered by its fast-selling Express entry-level brand, gained 87 percent.

Homebuilder stocks rallied 75% last year, outpacing the S&P 500's best performance since the once-in-a-generation return in 2013. That gain made homebuilders one of the best-performing subsets of the market.

Homebuilders

While demand for low-income homes remains robust, homebuilders have so far been fixated on housing stock for high-income earners - particularly in hot markets like San Francisco, New York City and Washington DC. Meanwhile, the SEC requested information in May from Radian Group about the BPOS it provided for rent-backed bonds.

Of course, its premature to say that this will have any kind of tangible impact on the market. But it should certainly make investors think twice about valuations.

Comments

Pool Shark Boris Alatovkrap Tue, 01/23/2018 - 18:22 Permalink

Hey Boris, do the Russians find it just as funny as I do that the SR-71 is defunct, but we're still flying the U-2; a plane designed by Lockheed in 1957?

Wright Brothers 1st Flight: 1903

Russian, Yuri Gagarin, 1st Man in Orbit: 1961

Neil Armstrong 1st Man on Moon: 1969

Last Space Shuttle Flight: 2011

58 years from 1st airplane to landing on moon

50 years since? Not much...

[Edit: Who's the sub-moronic fruitcake that down-voted Boris???!!!]

In reply to by Boris Alatovkrap

verumcuibono stizazz Tue, 01/23/2018 - 18:40 Permalink

Not only that... but people on the verge of retirement and fixed incomes of the generation that started the trend of retiring with no retirement savings.

THIS is a perfect example of the ongoing transfer of wealth that drove the S&L crisis, dot com meltdown, the mortgage+securities fraud that drove the largest global financial meltdown of '08... they ain't done yet.

Anyone who studied the previous mortgage securities crisis that drove the housing crisis can read multiple red flags here--and there are many hidden ones:

"But the prohibition, enacted as part of postcrash financial regulation, doesn’t apply to investors buying tens of thousands of houses." --buying in bulk = exponential risks in bulk

"They're also the fast-growing business of lending to individual house flippers." --house flippers, a primary segment of the previous housing crash that caused MASSIVE, widespread defaults

"Their popularity shows how Wall Street is finding ways to adapt to government efforts to crack down on some of the excesses that contributed to the housing crisis."  --Wall Street is the king of workarounds but in reality, the architects of legislation like this carefully craft a very negotiable system.

“You’re just dumbing down the standards to make the loan.” --this is a very worn path in the mortgage industry, perfected with NINJA loan strategies entirely ignored by the regulatory agencies and ALL of the financial industry.

"It's 2005 all over again"--Stack, the lone voice of reason. Except these nefarious lending practices and complete denial of how the mortgage securities were being over-engineered and securitized started long before 2005

"Structural mismatch between different tiers of the housing market that are poised to create problems for homebuilders. --Homebuilders filed bankruptcy and CEOs made hundreds of millions. They'll come out even better 3rd, 4th time around. As ALWAYS happens in these schemes, it's the American economy and you and me who will get hit by this.

"Homebuilders, which have focused on pricier homes since the market bottomed in 2012, are now getting ready for a wave of first-time buyers left with little to choose from on the existing-home market...lower-priced homes in the U.S. are in the shortest supply... ads that (target renters) with monthly payments instead of prices rose 161%...Homebuilder stocks rallying, outpacing S&P's 500... --we know how this ends.

In reply to by stizazz

Whoa Dammit verumcuibono Tue, 01/23/2018 - 20:19 Permalink

There is a short supply of lower priced homes because:

1. Fannie Mae was allowed to guarantee home purchases by giant investment corporations by entities such as Invitation Homes, when they should not be allowed to guarantee any investment home. The investment  companies then artificially created a short supply by scarfing up a large percentage of starter homes that they could rent out, often times with government guaranteed Section 8 renters.

2. Artificially low interest rates set by the Fed have resulted in artificial price gains in homes, which have priced out most of the move-up market, as the current owners of starter homes cannot qualify to buy a move up home, as they do not have the income to do so.

When interest rates do go back up to something close to historically normal levels, this real estate bubble will burst so badly it will make 2008 look like a picnic. 

In reply to by verumcuibono

Stormtrooper Justin Case Tue, 01/23/2018 - 18:24 Permalink

"The Chinese have all the money and all the jobs."

Correction.  The Chinese have printed more fiat currency than any other nation on Earth and gullible Americans are willing to accept that funny money in return for valuable assets such as real estate (just like Federal Reserve funny money and ECB funny money and ........).

The game will continue until finally it doesn't.  In the aftermath, I don't think that many Chinese will want to try to claim "their" properties in America.

 

In reply to by Justin Case

Stormtrooper Justin Case Tue, 01/23/2018 - 18:24 Permalink

"The Chinese have all the money and all the jobs."

Correction.  The Chinese have printed more fiat currency than any other nation on Earth and gullible Americans are willing to accept that funny money in return for valuable assets such as real estate (just like Federal Reserve funny money and ECB funny money and ........).

The game will continue until finally it doesn't.  In the aftermath, I don't think that many Chinese will want to try to claim "their" properties in America.

 

In reply to by Justin Case

Pool Shark Tue, 01/23/2018 - 18:09 Permalink

Median Home Price to Median Income Ratio at All-Time Highs:  Check

Equity Market Cap to Gross-Value Added at All-Time Highs:  Check

Crypto-Currencies Exceeding Tulip Bubble Peak:  Check

 

[Sitting Quietly in Cash, Bonds & Gold with my case of Act II Butter Lovers, giggling at Ray Dalio...]

 

verumcuibono Tue, 01/23/2018 - 18:12 Permalink

I've heard only one financial analyst talk about this so I don't have more info - but in addition to the Texas oil lands bought up by Chinese in '14-'15, earlier this year, a private Chinese company was able to buy homes in TX through a Chinese cryptocurrency.

old_cynic Tue, 01/23/2018 - 18:14 Permalink

Why in the serious fuck does the US allow foreign ownership of its land??

And while we're at it, why does the US allow foreign majority interest in US corporations??

 

adr Tue, 01/23/2018 - 18:33 Permalink

If it was a bubble in 2007, how is it not a bubble now? Especially when health insurance for a family of four now costs more than a mortgage on a $350k home thanks to the interim period of the Magic Negro.

Drop-Hammer Tue, 01/23/2018 - 18:41 Permalink

What do Indian street-shitters know about American homes?  We have indoor bathrooms.  That should confuse those turban-heads.  Oh well, thank you.  Come again.

 

BTW, if you have a home and have enough equity, sell it and bank the money.  A house is a money-pit of taxes, insurance, maintenance, and repairs, not to mention the mortgage and jew interest you pay.  Home-ownership is no longer The American Dream.  The Christ-killing kikes saw to that with their financialization/commoditization/monetization/corporatization of home-ownership along with everything else good and decent in America. Jew cunts (you can tell that I do not care for the Juden).

SubjectivObject Drop-Hammer Tue, 01/23/2018 - 19:31 Permalink

while i respect your opinion

i find a separate home to be more appropriate for enjoyment and convenience of life.  i lived in apartments for all of my early adult life, and miss nothing about it.  ]

prospective home owners should just accept making the 20% down payment and call the rest a "rent" of sorts, and get on with the rest of life.  i realize that 20% thing is a killer for the current mindset.

In reply to by Drop-Hammer

CultiVader SubjectivObject Tue, 01/23/2018 - 20:30 Permalink

I also respect Drops position.
My wife and I bought a home so that we could raise a family in it. I refuse to put my kids through the intinerant lifestyle my parents raised myself under. I want some place my kids can really call home. I don't want to move them time and again, leaving them with nothing but memories of multiple schools and neighborhoods. I can live with the taxes and usury. BTW, I bought in a white town, far from the liberal bullshit.

In reply to by SubjectivObject

RAT005 CultiVader Tue, 01/23/2018 - 21:31 Permalink

All things considered with a little inflation, prop. taxes, maintenance, tax benefit, etc. a single family home costs close to $0 to occupy after at least 20% down and then every 5-10yrs you have the chance to relocate, upscale or something simply by moving your equity into the new place and continuing to live at close $0.  If appreciation covers the prop. taxes, and tax credit covers most of the interest, you just move money from your right pocket to your left pocket.  The cash flow is more than renting but the annual real cost is close to $0.

In reply to by CultiVader

a Smudge by an… Drop-Hammer Tue, 01/23/2018 - 20:11 Permalink

ONOZ the dreaded double post. OMG  i have the double post plague. UNCLEAN UNCLEAN COME NO CLOSER!

Now consider this. Here I am a mop bucket. And now I am the smudge. What a conundrum. An existential crisis if you will. The only thing that can help me now is a poster named "bleach". Not bleachbit the digital file wiping software made famous by Hillary Clinton, we're talking like actual chlorine solution. Lemon scented preferably.

Because sometimes you need more than a cloth or something.

In reply to by Drop-Hammer