Wednesday, February 27, 2008

Squatlords - "Professional" Squatters "Renting" Out Foreclosed Homes

Flippers. Floppers. Floplords. Now Squatlords.

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25 comments:

anon1137 said...

I saw that segment on KCRA about Land Park. It was odd that they called it a bubble area and then interviewed all these people who implied that the price rise was permanent and real and justified due to demand for older neighborhoods. Maybe KCRA doesn't understand what bubble means.

I'd be interested if there are any other similar neighborhoods around the country that have the same prices as Land Park and East Sac with a wage base as low as it is in Sacramento and public schools as bad as they are in these neighborhoods. My feeling is that these neighborhoods are going to fall along with the rest during the next 2-5 years.

mechanico said...

Land park and East Sac are beautiful but I shy away from antique homes. I grew up in a craftsman in a more moderate climate than Sacramento. Still the energy bills were high. Maintenance is also an issue.

I'll take stucco, insulated windows and walls, and concrete tile rooves anyday.Ugly yes, but easy.

anon1137 said...

I read something recently about concrete tile roofs that kind of surprised me since I thought that they were supposed to last 20-30 years. It seems that on some types of concrete tiles the coating that is used to seal them wears off, allowing the tiles to absorb moisture, which not only causes the tiles to crack but also greatly increases the weight of the roof, putting stress on the trusses and other frame members. That's what I read anyway. The writer said that high quality composition tile (which is most common on older homes) is still the way to go.

sacramentia said...

typical conversation...

"The market is really bad, but my neighborhood is ok because 'insert unique features'".

Everywhere has gone down, some more than others, but any homeowner that thinks their home hasn't fallen in value is delusional.

Except for me of course, my home has actually gone up in value because it is super-special and I like it! :)

Patient Renter said...

The new term is Bando! Squatter is so year pre-bubble.

Ignorant Opinion said...

I continue to be interested in the commentary made on this blog and have been reading with interest over the last few weeks.

Seems to be some tendencies toward group think, which is understandable based on the current market dynamics.

However, everyone needs to keep three things in focus: 1) relatively new global forces, 2) long-term trends and 3) market dynamics. Things could indeed be a little differnt this time and the pain will likely be more significant:

1) Global supply demand dynamics are different now than anytime in history. The self correcting mechanisms that typically pull the U.S. out of recession are no longer present. In the past, when consumption slows in the U.S., Global market and commodity prices come down. Typical commodity peaks occur in the first quarter of a recession (what we are in now). Now, even if the U.S. slows consumption, that will not impact the thirst for oil, raw materials and agricultural products in emerging and high growth markets of China, India, Brazil, Russia and the Middle East. No self correcting mechanism = higher inflation for a longer period of time.

In order to deal with higher inflation, long-term rates will rise (10 year yield is closely tied to 30 year fixed mortgage rates). This increase will reverse the multi decade decline in interest rates.

2) Over the long-term, housing demand has slightly outpaced supply causing price appreciaton of around 1% per year over inflation (more demand in desirable areas = a 5% premium to inflation). This general trend is reversing with demographic changes. Unless the borders become more open, we will see housing keep pace with inflation or slightly underperform (desirable areas will increasingly outperform due to the income gap).

3. Market dynamics are fickle and booms tend to overshoot fundamentals (shouldn't have sold tech stocks in early 1999 - would have made much more by holding on until April of 2000). Busts also overshoot fundamentals significantly. Historical boom bust cycles tend to move outside of 2 standard deviations from the norms. This is significant and the implications are enormous. The markets have only begun to unravel (consumer is tapped out, CDOs and CLOs are unwinding as corporate debt trades below 80 cents on the dollar, auto loans, credit cards, etc.) The distressed environment is not actionable yet. The pain hasn't fully hit and the housing market is only in the third inning of unwinding. The housing market will likely correct below inflation adjusted 1997 numbers (thats what busts do) and going forward, appreciation will slow. But, there will always be speculative booms, in 2015 (or probably later) I may be saying the same things again.

Good luck, make sure to look at all the dynamics at play when making a buy decision - higher rates, lower prices, changing long-term fundamentals.

Diggin Deeper said...

Saramentia...

I bought my first home in Ontario, CA, the smog capital of the world. Neighbors explained it away as some mystical vortex that pushed the problem around and away from the community. Ask someone in Missoula, Mt what the winters are like. Many will say that the Okenagan belt swings down and protects them from severe weather. All the while it's 25 below outside.

mechanico said...

Concrete tile isn't perfect.On a high quality home they usually use terracota tile which last forever. In this climate composite shingles just don't last.

Diggin Deeper said...

ignorant opinon....

Excellent contribution....

And what yearly inflation factor would you apply over the last 10 year period?

anon1137 said...

I guess if you have some trees shading your house the comp tiles will last longer.

smf said...

"Global supply demand dynamics are different now than anytime in history."

Seems plausible, but the fact remain that the US market consumes a lot of the products and services manufactured in other countries.

Would China be in the position they are now if the US did not purchase that much from China? Is it in China's interests that the US consume less?

Has outsourcing from the US not affected India greatly?

Does the US not consume 25% of the oil produced still?

Regardless of our opinions, the fact remains that the US consumes plenty of the world resources.

And in my opinion, plenty of other countries benefitted from the bubble by being able to ramp up their production to meet up our insatiable demand in the last few years.

The world should NOT be so dependent on US consumption for their economic well-being, but it still is.

This is a sense is the larger problem. Right now, most assume that the housing issue will only affect the US.

This is not true. The scope is global in nature. Once the house of cards comes down, ALL areas will be affected.

I have relatives throughout Latin America that have confirmed to me that Real Estate has gone thru the same cycle as it has here.

Diggin Deeper said...

The last time I looked oil was pushing $100 per barrel, wheat was over %12 a bushel, corn and soybeans are at all time highs, gold and silver are on fire, and the US economy is limping along at basically zero growth over the last 3 months with real estate and other paper financial assets leading the way down.

Now wouldn't one tend to think we'd see some sort of a demand breakdown in these "speculative bubble" commodities by now?

Ignorant Opinion said...

diggin...

Thanks for the comment, your insights continue to positively differentiate.

With respect to inflation gauge, I merely suggest inflation as a rough proxy on the costs, and a decent long-term indicator.

Specifically I would use CPI-U excluding the 15% contribution of Food. The Core Rate is truly misleading to omit Energy costs. Using that proxy will raise eyebrows. Median Price in Sac County should = around $180K today (caveats discussed next paragraph). unfortunately, impact of tax benefits (really big benefit when top rates were 50% or more prior to TRA of '86) and impact of government fees on construction are difficult to predict and model. Additionally, Land values are not universally tied to CPI - particularly along the coasts or highly desirable areas, but in most of the central valley and certainly in the middle of the country, land costs behave more like a commodity over long periods.

This reversion to the mean can be misleading depending on how you look at the data. Median pricing data is merely reflective of current sales dynamics and not necessarily reflective of true home price changes. While the median may drop by 50% (possibly more) peak to trough, that doesn't mean the average house drops by 50%. some will drop by more, some will drop by less.

SMF... you may have missed my point - I agree with yours. U.S. is still the biggest engine, but the world dynamics have changed (largely thanks to the consumption, ingenuity and growth of the U.S.) which has enabled other countries to advance.

smf said...

"Now wouldn't one tend to think we'd see some sort of a demand breakdown in these "speculative bubble" commodities by now?"

With the $$ losing value, we can quickly see the effects in higher oil prices. Higher energy costs also translate to higher produce prices. The Fed's attempts to save the banks are causing higher consumer prices. We just saw what happened to oil prices with the hint that the US may lower interest rates again.

"which has enabled other countries to advance."

Agreed. But we have no measure as to how much their growth was derived from the housing bubble. If housing related product demand went up by (SWAG) 30%, this has a great effect on other prices.

I don't think there are direct figures, but most other growing economies have grown not by servicing the needs of their own citizens, but by servicing the consumption of the US.

If (finally) the US brings down its demand to real requirements, the effect will be noticeable in other countries.

Diggin Deeper said...

ignorant opinion....

I'm using 3% inflation and back checking it against the devaluation of the US dollar over the same 10 year period. Both equal approximately a range of 1.38-1.40 on top of the "median" price since 1997... It's fun to postulate it'll be interesting to see the outcome.

I agree with your market tendancies with respect to overshooting fundamentals in both directions. The low water mark should be abnormal and shortlived due to emotional rather pragmatic factors. But I'm not foolish enough to predict when that will be.

Diggin Deeper said...

"With the $$ losing value, we can quickly see the effects in higher oil prices. Higher energy costs also translate to higher produce prices. The Fed's attempts to save the banks are causing higher consumer prices. We just saw what happened to oil prices with the hint that the US may lower interest rates again."

And you're suggesting that will change anytime soon? If you bought your first home during the "Greenspan" wonder years, I completely understand why you feel the way you do.

Ignorant Opinion said...

Diggin...

The 1.38 to 1.4 inflator seems to be in line. I would edge toward the bottom end of the range. I was assuming a 1997 Median price in Sacramento-Arden-Arcade-Roseville of $135,000 and a current adjusted value of $185,000 using CPI-U ex Food. This would yield 1.38x 1997 Median.

The Median point to start from is also debatable, but 1997 seemed to be the last trough and represented the approximate mid-point of the last cycle.

Certainly will be interesting to see where it falls out, I don't think my crystal ball is better than anyone else's...

smf said...

"And you're suggesting that will change anytime soon?"

No, but any suggestions that we have an inkling how this will end will be off the mark.

The world economy has taken care of that. We have no info as to how many things in the world are really connected to be able to correctly figure out how this will end.

But if you already accepted that a bubble can bring prices far above what they should be, it should be easy to at least speculate that other commodity prices could have done the same.

Without all the relevant information, most people could have justified the high home prices in 2004. You and I could be doing the same with high commodity prices right now.

I am certain that home builders in 2004 were building to meet anticipated demand. Their pricing reflected this higher (now patently false) demand.

The same forces could be affecting oil prices right now. It is my understanding that all you need to lock up an oil order is 4% of the final price. I certainly see the parallels with housing then.

Diggin Deeper said...

"You and I could be doing the same with high commodity prices right now."

You can, I won't.

I subscribe to the Peak Oil theory based on constrained supplies falling faster than the world can conserve demand. With over 30 years in the business, I've seen both sides and have carefully chosen to take this position.

SacramentoCrash said...

Boy, it's 1929 all over again. Time to hunker down in the bunker.

alba said...

ignorant, interesting points. 1) don't you think the short-term includes intrest rates that initially follow both the ffr and 10-yr bond down? Banks are having trouble raising cash, managing reserves, and finding good avenues for loaning money, but that ought to change for while. That's Uncle Ben's job right now, then worry about inflation. Agreed, long-term, starting in 2009, the rates will follow inflation.

2) market dynamics...are truely different. But there has to be a pause in the demand for housing, with an overbuilt situation. I think we did more than slightly outpace demand, which will take a few years to correct. Even though I believe that, I still wonder about the trends of building design during this overbuilt period. Too big (cheap McMansions), too small (condos), too far (burbs), must all have some factor in the recovery for building. Additionally, the US seems like it takes a respite from being a place to invest in land and housing by foreigners...bad bet. I also see the commercial side having similar issues; all impacting the normal rise/recovery in demand.

Cmyst said...

wow. ignorant --
Who was that masked lurking commentator???
What a great read today.

PeonInChief said...

Patient Renter--

The term "bando" is only used for what used to be called squatters--people who take over abandoned properties and live in them until forced out.

Some of what's being described here is a variation on an old theme--claiming to own a property and renting it out to unsuspecting tenants.

Lander said...

'Bandolord' just doesn't flow as well as squatlord.

norcaljeff said...

"The market is really bad, but my neighborhood is ok because 'insert unique features'".

Everywhere has gone down, some more than others, but any homeowner that thinks their home hasn't fallen in value is delusional.

Except for me of course, my home has actually gone up in value because it is super-special and I like it! :)


Hilarious! You should have been a scab writer! :)