Month in Review, September 2011: Part 1, Big battles
As the Great Recession drags on, threatening to rename itself into the Lesser Depression, many of the stories are dismal ones, including the long-drawn-out financial collapse of Jefferson County, Alabama, and because this one is both large and a harbinger of further financial implosions to come, I analyzed it in great depth at The perfect dung storm: Part 1, falling into the muck, Part 2, messing up the revenue streams, Part 3, cleaning up the mucky finances, Part 4, scraping the bottom of the barrel, and Part 5, getting the dirty end of the stick:
Did this come from Jefferson County, daddy?
There’s one final reason that Jefferson County may, and perhaps should, go right down the drain into bankruptcy – it’s the only way to clean out its political stables.
When Eurystheus ordered Hercules to clean up the world’s filthiest stables in a single day, the strongman changed the rules – he diverted a mighty river and let it do the work. Then he went back and killed the man for making him do it.
World’s first major infrastructure project: Hercules cleaning the Augean stables
“Forget it,” said David Mowery, a Montgomery political consultant, summing up the general attitude toward the county. “There’s nothing you can do about it.”
Remarkable choice of personal image: David Mowery
“In Alabama, Jefferson County is Chinatown.”
In Roman Polanksi’s Chinatown (fantastic movie by a loathsome individual, the Benvenuto Cellini of film), this was a place ruled by power, greed, and incest, a place where law and order were forbidden entry.
That’s not a bad description for Jefferson County’s last ten years.
We should know by the end of today.
Greatest city in Alabam’
You can travel ’cross this entire land
But there’s no place like Birmingham
It’s Birmingham, Jake; Birmingham
In a discouraging postscript, I reported in November that somehow the deal that had been agreed became un-agreed:
You were nothing but a pack of jokers anyway!
The real problem, as always, was division among the debtor’s members.
The Jefferson County delegation to the Legislature could not reach any agreement on how to fill the void in the county’s budget, and also could not reach agreement on supporting legislative action that would have been needed to enact a settlement with the sewer-debt creditors.
When parties are squabbling, bankruptcy can be a refuge, if only because it substitutes the decision of one person – a judge – for the cacophony of competing interests, many of whom may be inexperienced in negotiation.
The bankruptcy filing said, “… the county needs to resolve its outstanding liabilities comprehensively and in a single forum. Accordingly, the county has filed the instant case under Chapter 9 of the Bankruptcy Code as a last resort and in a good faith effort to adjust its debts for the benefit of its creditors and citizens.”
In a way, this bankruptcy is an admission by the Jefferson County commissioners of their inability to come to agreement among themselves.
We have met the enemy and he is us: Jefferson County manager Tony Petelos and the country’ lawyers
A borrower’s insolvency, you see, hurts not just the creditors but also all those who have relied on the borrower, either to deliver a product or service (like water and sanitation in Jefferson County) or simply to pay his or her share of group expenses, like insurance or condo fees. As these are ongoing obligations, not satisfied at the closing, multi-owner properties like co-operatives or condominiums are fully justified in putting their new applicants to the test, as I explored in Prove yourself worthy: Part 1, complicated economic words, and Part 2, simple economic actions:
Yes, this is part of our credit review process
We bond in tribes, and before we admit the stranger into the tribe, he must undergo a trial – a test both to prove himself worthy in our sight and to demonstrate his commitment to our tribe.
Are you good enough for 215 East 80th Street?
Thank you sir, may I buy another unit?
Is, then, the ritual of having one’s finances scrutinized in extreme detail by multi-owner structures like New York City co-ops or condominiums rituals of tribal initiation, or is it simply obstruction for its own sake, to keep the tribe’s blood pure? That question lies, unanswered, underneath a New York Times piece that takes the initiate’s side against that of the tribe:
Meanwhile, when failure becomes epidemic, it becomes in the government’s larger economic and ecosystemic interest to develop means whereby the assiduous and virtuous can grope their way back to the financial surface, but this raises a surprising number of challenges, as we discovered when Navigating the submarine:
How do you navigate underwater?
Cap’n, ah dunna know whur we arr
As we will ee from this New York Times article, possibly one quarter of all American homeowners are doing just that:
The national average of underwater properties is 28.4%.
If your loan is owned by Fannie or Freddie, you may qualify for the Home Affordable Refinance Program, or HARP.
It’s hard to play the HARP
Some 2.5 million to 3 million homeowners may be eligible to use HARP, according to government estimates — provided, among other things, that they have not been late on their payments more than once in the last 12 months
By backstopping Fannie Mae and Freddie Mac, the Federal government has shifted their missions from purely profit-making (as they previously were, management’s sanctimonious protestations notwithstanding) to having a concern for the larger national interest. Thus, were it not for the Federal government, HARP could not exist, because of borrower-friendly provisions like this:
See how friendly our language is?
Can one man’s foreclosure become another man’s flip? That’s the premise we explored in Flipping in slow motion:
The Main Street guys [who are investing in foreclosures and renting them out – Ed.] may not be able to deliver the returns.
At the same time, the country’s home ownership rate has fallen, to 65.9% in the second quarter of 2011 from its peak of 69.2% in 2004, according to figures released by the U.S. Census Bureau last month.
With hindsight, that runup in homeownership looks suspicious, doesn’t it?
That drop has produced millions of new renters and helped push the vacancy rate for rental housing down by about two percentage points, to 9.2%.
Yet the arithmetic above obscures the core fact – housing demand being elastic, the total number of American households has shrunk dramatically. If 3,500,000 households had moved from ownership to rental, then rental vacancy rates should have fallen by nine and a half percentage points. [ (69.2% – 65.9%) / (100% - 65.9%) – I'll leave it to you to figure out why that's the right arithmetic -- Ed.]
What’s missing is the shrinkage in households
Instead, as the graphic shows, apartment vacancies have dropped less than two percentage points – because so many formerly independent households have consolidated or stayed together past their time, all in the (extended) family or otherwise.
As the dollars shrink, so do the households
Further complicating any assessments of the level of foreclosures or underwater loans, or the potential to revive markets by buying foreclosed homes and renting them to aspirant future homeowners, is the presence of a huge volume of The shadow inventory:
And we live in shadow housing, too
Beyond the immediate casualties of the foreclosures, when home prices are in reverse we have the walking wounded: properties that are neither foreclosed nor even in default, but nevertheless are holding back the market, like this sample property, in California’s tony Bel-Air neighborhood, featured in a thorough if gratuitously nasty post on August 21 from Dr. Housing Bubble:
Is it suffering?
Even prime locations are having a tougher time in this market.
Though Dr. Bubble is anonymous (and may well be a committee of many), I’m making an exception of my normal prohibition against citing anonymous posts because with the vitriol edited out, there’s an important primer on the shadow market:
Part of what has held up the housing market in many areas is the building up of shadow inventory to control supply and try to increase home prices.
Although Dr. Bubble never bothers to define it, the shadow inventory represents those properties that are presumed to be in arrears if not in default or foreclosure, and therefore that someone would like to sell, and would sell the moment prices started rising.
The 56 homes Dr. Bubble looked at
[Continued on Friday in Part 2.]