slamlander | The freefalling buck, where will it land? (Reply)

Against the Swiss Franc, the US Dollar is now down to 83.4 centimes and dropping fast. This follows closely on news of the double-dip in the housing market and it is a not an inconsequential corollary.

The reason that it is called Real Estate is because land is the only real value. Given a sufficient a amount, you don’t need anything else because you can live on it. It is the ultimate commodity. Yes, it is subject to market prices but the market has been trading at well over the real value of the property (many multiples of the real value) for decades.

In the US West, the raw land shouldn’t be much more than $2K-$10K per acre. The houses that are put on it can ALL be built for less than $100K. Remember that these are all stick-built houses and they are not very durable. In fact, most have trouble lasting even 50 years and some become unlivable within the first 25 years. Yes, I realize that the reason for that type of construction is earthquakes but let’s face it folks, it is only a temporary construct. It adds nothing to the value of the land and I don’t care how big it is. It might as well be a double-wide trailer and arguably, a double-wide might last longer. At least, it is easily replaceable.

Most folks in the US West live in housing tracts. These are developments where a cheap stick-built house is planted on a patch of land, called a lot, that is barely larger than the house. You can’t drill for water, you can’t mine it, it’s too small for a grove of trees, and in many communities you aren’t even allowed to plant a vegetable garden or raise animals. That house is good for one thing and one thing only; to sleep in. You can’t even do that for more than 25-50 years without major renovations and repairs. These repairs will often vastly exceed the original construction costs.

The result is that most houses in the US West, on their own, are barely worth their construction cost plus the price of the lot that they occupy. A very sticky point that; the lot price. Lots are typically 8,000 square feet, much less than an acre. It’s not much good for anything except to plant a building on. The only mitigating factor is it’s location and since the land isn’t sizable enough to earn its keep and the recent tight job market works against home-workers, the lot needs to be close to available jobs. If there are few to no jobs within, roughly, an hour’s distance than the lot becomes essentially, worthless. This is essentially the problem of the folks in North Las Vegas, for example. They are stuck in the trap of sunk cost and no more jobs.

The real problem is that these folks should never have paid as high a price for those houses in the first place nor should the banks have funded those high prices. They were all caught in the massive house price inflation of the past 50 years, the most recent of which was led by bank and realtor speculations that was enabled by a too readily available money supply (NINJA¹ loans and the like) that let anyone bid up the prices of housing, to unreasonable values, with little to no repercussions.

However, there is a safety valve built into the system and it works much faster than the foreclosure process. It was originally put into place hundreds of years ago under fears that the banks would put the entire country into improvident debt. At the same time, debtor’s prisons were outlawed. You are not obligated to pay an impossible to repay debt, which is probably a debt that shouldn’t have been incurred in the first place. This safety valve is called bankruptcy.

Unlike almost anywhere else in the world, Americans can simply walk away from improvident debt with few, if any, repercussions. If an American commits to a $100,000 house for the improvident price of $500,000 and that house falls back to $100,000 then they can simply declare bankruptcy and walk away, leaving the bank to hold the unsellable over-valued property. It puts the onus on the bank to make sure that the price paid for the house is not out of reason because the bank is out the larger part of the losses if the deal fails. The bank is supposed to be smart enough to know better. The bank is supposed to be on the buyer’s side in these things and that is by design.

The bankruptcy process allows you to keep the tools of your trade, 401K, your job, your car, and enough cash for you and your family to live on. If your property is Homesteaded, then you may even be allowed to keep living there for a token rent payment² At the end of that process, you won’t be rich but you will certainly be debt-free (except for child-support and certain tax debts). The important thing is that you will be rid of that upside down white elephant and can now rent a place for a lot less money. You will also be free to move to an area with more or better jobs, or better business opportunities.

If you are older, like I am, there are complications to hitting the big financial reset switch that is US Bankruptcy law. For one thing, I have less than 10 years of working life before I hit 65, mandatory retirement age. The trick there is to become self-employed in some manner. If you have a business, it’s incorporated (Delaware and Nevada preferred) , and you’ve managed to keep from co-mingling funds then you might be able to separate the business from your personal bankruptcy (IANAL so really go and see a lawyer on this one).

Too many folks get conned into continuing to pay on improvident debts. This is only to the benefit of banks which have already been indemnified against those losses by the TARP. Essentially, your actions let them collect double from your mortgage; once from the TARP and again from you. They should already have written down your mortgage to current market conditions. That they haven’t is only because they think that you are fool enough to pay them a second time (after their TARP bailout).

As an aside, the main reason that CDOs and CDSs should have never been rated above B is the presence of US Bankruptcy law.

No Income, No Job or Assets [↩]
Although I have been through this process twice, I am not a lawyer (IANAL) and you should REALLY have an attorney that is competent in the bankruptcy laws in your state. This will typically cost you approximately $2,500-$4,000 in up front cash. There are lots of them out there. [↩]

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