Wednesday, March 31, 2010

Flesh eating fish and a dolphin

As I read about the developments in the national residential real estate market I am struck the images. First is the return of the flipper. Whereas five years ago every cab driver and school teacher in Florida and Nevada was playing the home edition of Monopoly and lining up houses on Baltic Avenue, today it is a more sophisticated and serious investor. Some might say vulture. They do their homework, look at distressed houses with a dispassionate eye and a full checkbook. Scores of investors with hearts of stone are nibbling like Chinchin Yu (the Chinese dead skin munching pedicure fish)on the housing market and cleaning up the dead skin.

From an economic perspective this is a good thing. Whereas the banks and government have played a game of extend and pretend with the financial side of housing, until prices reach a level for existing housing stock to clear, the pain will be prolonged.
The price of a house is that at which buyer and seller agree. It is not the price that the bank holding the amalgam of sub-prime mortgages wants it to be.

The foreclosure process forces banks to recognize an asset as worth much less than the balance sheet would like. Like the Japanese banks of the past twenty years, pretending that the underlying collateral of loans is worth as much as the debt outstanding when the market says it is not is the only thing that keeps the bank solvent and unable to lend in the interest of economic growth. There have been serious and workable solutions to the housing overhang, but they would require banks recognizing the pain and creating a "housing appreciation note." Such a vehicle would mean the possibility of the bank being made whole at some point in the future, but also of recognizing the diminished current value while trying to clear the logjam.

Rather like my wife saying to me, "you are never sick BECAUSE you never go to the doctor!" It is a system that has focused more on emergency triage than well banking care.