Gauging The Gauges (Part Two)

As I stated in “Part One” of this series, the issue I believe that will determine whether or not bumps in the road will remain just that. Or, will a now complacent financial market realize not only are the gauges faulty but rather; will not be able to give any advance warnings other than an “idiot light.” For as anyone familiar with cars, once the light goes on – the damage has already happened.

Another one of the so-called market gauges that has been at the forefront of both the good, as well as the bad, is housing. Currently the financial media is once again all abuzz quoting anything related to housing. However, just as when you look at a gauge for tell-tale signs good or bad. You have to have the intellectual honesty as to compare one report, or one year vs another – truthfully.

Let me make my argument this way: A house for what ever the reason is always assumed to be purchased by a family and lived in. Regardless of earnings, loan terms, what ever. The next economic assumption is once they purchase, they’ll move into and live in it with their family. Immediately integrating into the community via schools, shopping, etc. The economic impact is to be felt throughout the micro-market surrounding them.

Multiply this for simple math by 10 homes in a surrounding area, and one can clearly see the multiplier effect. Anyone with some true business acumen can see (and try to gauge) what, where, why, or how things might progress further and both invest, or make plans in other businesses to support this market.

You would, as had been done for years, use previous data points, models, etc. as to try in computing risk or rewards. However, is this latest set of data points that everyone is now using as a “See..See! Sales are booming! Just look at the numbers.” even relevant to calculate the above’s example for economic impact? For my take: Absolutely not.

Currently the housing market is once again gaining steam. But – for quite possibly the worst of all reasons. Where once the money to purchase these homes (whether one likes who, how, or why) was ultimately for a great many families to live in. The most recent rash of purchases are being made by “all cash buyers.” At first blush this sounds wonderful. However, all cash buyers turns out to be a two-fold problem.

First, many of these buyers are not interested in anything else except some form of vehicle where they can place their money other than in a bank. Second: They more often than not don’t care who rents or stays in the home. While sometimes – being left vacant is all the better. They’ll just pay a management company to maintain it. The economic impact of such a purchase in a community? It can be argued the impact is negative rather than positive.

Next, it seems Wall Street has found a better way to slice and dice the housing market once again. This time? Screw slicing and dicing mortgages. Buy the homes outright at forced foreclosure sales and screw the existing owner out into the street. Or: Offer to rent it back to them at a figure above the mortgage price they couldn’t afford that put it into foreclosure in the first place.

Can’t afford it? No problem, here’s the Sheriff with your eviction papers. Many might say, “Well, they probably couldn’t afford it in the first place. Or, that’s the way of the world.” Yes, that may or may not be true however, there was one story on Bloomberg TV® about a couple being evicted under this scenario that just didn’t sit well with me.

The real issue that caught my ear was this: They had been trying to work through the mortgage modification process when all of a sudden during that process, they were notified that their mortgage holder sold their foreclosure where an “all cash buyer” bought it sight unseen then, abruptly foreclosed.

Yes, all legal, yet it just reeks of Mr. Potter in the classic, “It’s a wonderful life.” (Dec. 1946 RKO Radio Pictures) Could the timing actually be any more coincidental? But I digress.

Many of these “all cash buyers” are investment firms buying up real estate, then packaging the assets under an umbrella as to form some type of “investment vehicle.” Then they sell (or dump) those shares into a market fueled with a Federal Reserve funded printing frenzy of free money which is desperately (and usually quite foolishly) seeking anything with even the remotest of a promise of future yield. This is a recipe for disaster in my view.

Buying and slicing up the these assets that supposedly in the future will generate rental and price appreciation values based on the metrics that were used previously; is just the same as trying to say you have enough fuel in the tank to make it home because your old car went another 25 miles when the gauge read empty.

Problem is – this new car hasn’t been put to that test yet. And saying this gauge will work and read the same as the old one because, “They’re both fuel gauges and work the same way.” will get you in a lot of trouble. (Especially if her father is 6’5″ and works for the Sanitation Bureau.)

So my point here is this – today’s latest housing boon is not what we would have used to gauge further or more importantly greater economic impact to the overall economy as we did just a few years ago.

No, the impact of 10 homes in the latter scenario as compared to the earlier have two very different impacts. Not only monetarily but an even greater, more important social or psychological impact in the affected area.

For it’s not the robust sales that mean much to any given area as much as what those homes and families that dwell in them do to the area. For anyone with experience knows…
You don’t buy the house – You buy the neighborhood!

Seeing friends or family members lose their homes, or move out leaving a vacant, (or worse) rented property to people who could care less about the neighbors – is a recipe for failure. And that’s not going to do anyone any good now or in the future. For what it’s surely not – is some recipe for growth. You can have great neighborhood home sales – and still kill the neighborhood.

Quite possibly this is going to resolve itself as the latest gauge for an impending disaster.
That any idiot should have noticed was lit.

© 2014 Mark St.Cyr