Month in Review, June 2009: Part 1, busted
[Previous Months In Review available here: May 09, Apr 09, Mar 09, Feb 09, Jan 09]
Who, me?
Busted things dominated June’s posts, a trend of which I was unaware until compiling the month-in-review. June was busting up all over, starting with the sad spectacle of properties less costly demolished than boarded up, in Plowing it under: Part 1, the why, and Part 2, the how:
The same walkaway – rational, you understand, and completely predictable – occurred by the Victorville developer because the arithmetic collapsed:
The developer of the Victorville project had hoped to sell the houses for more than $300,000 as they were being built last year, Forrester said.
That’s the completed and sold cost. Project (say) $50,000 apiece in costs to renovate.
But reality quickly diverged from that vision. Home prices have tanked faster in
Project (say) a 40% price drop, over $125,000 gone.
Project (say) $50,000 in fines to the cash-strapped town of
Money all gone!
But Victorville city spokeswoman Yvonne Hester said the bank decided not to throw good money after bad.
“It just didn’t pencil out for them,” she said. “They’d have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them.”
Not penciling out?
Curious how Ms. Hester forgets to mention the $1,000-per-day fines that she had the power to levy.
Empty houses aren’t simply a target of penalizing local governments, they are also conveniently clandestine places for atrocities such as that inflicted on illegal immigrants in Tucson, profiled in Dead-drop housing: Part 1, the value chain, and Part 2, the surcharge:
In Part 1 I derived an estimate of 54,000 immigrants flowing through
The arteries of a money-extraction system
Let’s assume an average surcharge of $3,000 – that’s only a 300% markup from the loss-leader price – so that the whole extraction is $4,000 per customer. Multiply times 54,000 immigrants a year and the Phoenix Pipeline is producing $200,000,000 annually.
The marginal Gross Operating Profit therefrom is staggering.
At the West Lumbee Street house raided twice in two months, the owners, Pablo and Ana Maria Sandoval, had moved to a larger home and were eager to find a tenant [for their former home, which they have obviously been unable to sell – Ed.] to help them pay the mortgage. They rented the house out for $1,200 a month.
At $1,200 per month divided by 15 hostages per month, the per-hostage holding costs are a mere $80, or $4,000,000 in annual rent paid. While that’s huge – large enough, certainly, to have a substantial impact on the
Such margins will pay for a lot of front couple cut-outs to rent empty houses, a lot of realtors scouting likely incurious or desperate homeowners, a lot of casual surveillance of police routes.
To the critical market-behavior insight of Hyman Minsky – that protracted stability creates its own instability –
Hyman Minsky never wrote that protracted blogging also leads to instability
– we must add an unexpected corollary – that sudden instability oscillates into even greater instability, in two-part pity-the-poor-appraiser post, Driving through the rear-view mirror: Part 1, info under the influence:
A typical single-family loan is the least of three numbers:
1. Coverage-capped. A percentage of the borrower’s income.
2. Price-capped. A percentage of the sale price.
3. Value-capped. A stipulated Loan-to-value (LTV) ratio.
This being a typical single-family, the lender’s is probably at 80% LTV. At an appraised value of $750,000, the loan will be capped at $600,000; at $700,000 appraised, the loan will be $560,000 –- $40,000 less.
So now we have three possible outcomes:
1. Seller takes $50,000 lower price.
2. Buyer comes up with $190,000 of down payment, $40,000 more than originally anticipated.
3. A new or revised appraisal miraculously rediscovers the original $750,000 price, and the sale proceeds as negotiated.
Which do you think the seller and buyer are rooting for?
We’re rooting for the appraisers’ home team
and Part 2, info over the transom:
In yesterday’s exploration of the changing appraisal world, using an interesting Wall Street Journal article, we’d identified the intrinsic challenge of appraisal – having to simulate a forward-looking market by using exclusively backward-looking evidence from past sales. Called upon to appraise a pending sale, the appraiser is in a really weird position:
· She has to simulate actions of hypothetical people buying and selling a property
· Somehow overlooking that there are, in fact, actual people who are buying and selling that same property.
“What you are doing is irrelevant,” says the appraiser. “I have to figure out what rational people would do.”
Who are you going to believe, your lying eyes or me?
Aside from disruptions in the use and tenure of owned homes, financial disruption also disrupts delivery systems, as explored in depth in Re-engineering the LIHTC value chain: Part 1, it’s broken, and Part 2, it may not self-repair, and Part 3, it’s fixable:
So far, in the two posts expanding upon my analytical essay Rethinking and Reengineering the LIHTC Value Chain [.pdf, and worth downloading in full – Ed.], originally published on my for-profit company’s Web site and its email distribution list, we saw that (Part 1) the US’s multifamily rental affordable housing finance ecosystem got disrupted by the capital markets, and that (Part 2) Congress’s solution – a combination of ‘buying back’ previously issued but unsold LIHTC and delivering gap financing for the lost value – will probably help the current pipeline but undermines the value chain’s ability to self-repair.
That’s not going to fix itself, is it?
[Editor's note: for a step-by-step primer on the mechanics of LIHTC allocation, click here.]
Why won’t the system repair itself?
A similar disrupted value chain, this one mixing physical property and the capital markets, arose in new York City as chronicled in Risks of soft equity when markets seize up: Part 1, the neatness of Section 421-a, and Part 2, the messiness of market crunches:
You wouldn’t think that delays in financing a downtown luxury tower would stop in its tracks an affordable property in the
I’m counting on you to know what the other hand is doing
While as a general principle I love market-oriented mechanisms for affordable housing – investment tax credits sold for soft equity, inclusionary zoning calibrated to deliver affordability in exchange for increasing density – it’s undeniable that they have one vulnerability: when the market seizes up, every link in the value chain can snap. (This problem is currently hitting the LIHTC, as we’ve chronicled.) The result of a credit crunch is a financial pileup in slow motion that hits everybody, including those who thought their financing immune, as illustrated by an intra-developer litigation highlighted in The New York Observer:
It worked great when we were all zooming along
Although it’s unimportant to us who is or might be right in the litigation, understanding it will take us into not just the capital markets but also the intricacies of New York City’s innovative approach to inclusionary zoning linkage (connecting market development with incremental affordable housing) via the Section 421-a program.
Section 421-a is a beautifully simple concept akin to Mumbai’s Transferable Development Rights. A form of inclusionary zoning, it requires that:
[D]evelopers roughly between 14th and 96th Streets (the “exclusion zone”) would have to contribute to affordable housing in order to receive a tax break.
[Extensive snip]
There we have it – disruption in the credit markets, coupled with Atlantic Development’s reliance on the sale of its 421-a certificates, puts not just this property but the whole company in peril.
We put all our eggs in one basket
Fortunately, not everything posted in June dealt with good things that are broken:
You promise the second half is less depressing?
[Continued tomorrow in Part 2.]
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