How Banks are Single-handedly Destroying the Housing Market – And Themselves!

The crash in the housing market came suddenly, which should have been the first sign that it wasn't ordinary market forces at play. Almost in unison, homeowners began to default on loans; demand for housing slipped; home-price appreciation reversed course; Lenders began to tighten their purse-strings; homeowner default led to foreclosure; foreclosure led to Lender default; Lender default led to TARP; TARP led to several other bailout plans which led to the Dow hovering where it is today at 13-year lows.

It was reported last week that nationally, home prices declined 15% over the prior year. In Tampa Bay, our home-territory, the reality was even more grim: Values had fallen 30% over the last 12 months, and 41.9% over the last two years.

Something didn't sit right with us about these statistics. I receive weekly reports from our Agents that show without exception how every Seller in our book of business has slashed the equity out of their properties in order to attract a Buyer. When a sale closes, the Seller has inevitably sold for an amount equal to or less than what they owe, and they've done so by cutting an average of 10% off their initial asking price. Yet according to our analysis, home prices fell over 15% during the fourth quarter of 2008 alone.

It follows that if every Seller we represent has priced their property at rock-bottom in order to sell it and are dropping their prices no more than 10% during the course of the sales process, then someone other than the average seller must be causing a quarterly price decline of 15%

As we prepared to publish our report on "distressed" - or Lender facilitated - sales for January, it occurred to us that it is none other than Banks and Lenders who are driving down home values nationwide. In the same irresponsible way that they drove up home values during boom-times, over-inflating the market and funding the excess that caused the housing crisis, they're now directly facilitating the largest national home value decline in the history of the United States.

Fueled and motivated by TARP, Lenders have been feverishly writing off bad debt with the end result of dumping tens of thousands of foreclosed homes on the market at prices as low as 20% of market value. Would-be home buyers have deserted "conventional", market-priced sales for the unbelievably good "sub-market" foreclosure deals being offered by Lenders who - bailout money in hand - no longer need to make decisions that will maximize profits from the sale of foreclosed properties. Lenders are dumping these toxic assets on the market with not incentive to act responsibly and are cleaning up their books at the expense of home values nation-wide.

Distressed sales, which once accounted for only a fraction of the market, grew from 28% of sales in September 2008 to 46% in January 2009. Sale prices for distressed homes hovered at just over 60% of conventional sales prices for the fourth quarter of 2008 until January 2009 when they fell to 57% of conventional sales prices. And so in the last quarter of 2008, Lenders assumed their position as the most powerful force in the US housing market, with a controlling influence on home sales and values. Yet rather learning a lesson from the housing boom and acting in a responsible fashion, Lenders are now selling homes at prices so low that they're single-handedly destroying home values in America and further diminishing the equity positions of millions of responsible home owners.

What Dumping is to trade, these Lender's practices are to the housing market. Every dollar in TARP funds that they receive allows them to pour distressed properties onto the market in greater quantities at lower and lower prices, flooding the supply lines with so many properties that they're forced to take rock-bottom prices. Marketplace demand has absolutely nothing to do with the prices Banks are charging for their distressed homes; their only thought is what price will move their foreclosures in the least amount of time. They don't care about maximizing profits; they don't care about market equilibrium; they don't care about the effect that their sales prices have on the values of the homes around them. Their one goal is what is best for them - forget bourgeois concepts like "the greater good." Yet the irony is that because of the comparable method of real estate valuation - and Fannie Mae's mandate that appraisers treat all comparable sales equally and without regard to the "distressed" nature of the sale - the Lender's disregard for the intrinsic value of their assets is causing a cataclysmic decline in the value of their non-toxic books of business as well! This in turn increases the likelihood that non-toxic assets will themselves turn toxic. It's almost a law of nature - destructive behavior becoming self-destructive.

And so our housing values continue to fall. Spurred on, not by home-owners, not by investors, not even by speculators or greedy house-flippers, but by the Banks and Lenders who aided and abetted us into this mess to begin with. When the dust settles and the nation looks back over the last few years, Lenders may well be revealed as the destroyers of home values... and the sealers of their own fate.