Stuck Flippers in Politics

As housing continues to slow down sales have slowed down too. Rising interest rates and larger inventories on the market are forcing sellers who either need to sell soon or have a strong preference towards selling in the near future to lower their prices enough to beat buyer expectations of future price declines. This is a fairly nasty dynamic that should drive out potential sellers with a low preference towards selling (ie they are just curious as to what they could get and if their aspiration price was met, they would sell, but they don’t need to sell the current house to finance the house that they are closing on next month.) At that point, along with a drop in either interest rates or lending standards, a turnaround in the market can be expected.

Speculators and flippers have been one of the primary drivers of bubblicious returns on investment. As a whole they have made the following bet:

Cost of Aquisition + Cost of renovation + cost of carrying + transaction costs + time value of money involved in this entire process < Price Received for the house at sale

Now if I was a housing investor or speculator (DISCLAIMER: I AM NOT) I would have a made a kililng if I started my learning by doing flipping business in late 2000 to 2001. I would have hit full stride by 2002 when property in hot markets could still be bought fairly cheaply, renovate them, and release them on the market in an environment of decreasing interest rates and ever more creative lending practices. So by the summer of 2005, when the market peaked, I would be rolling in dough as value appreciation easily covers my carrying costs of interest, and taxes.

Now fast forward. Timing is important. If I was a speculator who looked at all the stories on easy money from real estate and I finally jump into the market for speculative purposes in March 2005, I’m in trouble. Unless I can find, close, renovate and sell the house in a couple of months, I will have missed the peak. And since I bought so high up on the upswing, very little downward price pressure, real or nominal, combined with carrying costs such as interest and taxes destroys any chance I have of making a profit on the property. And this situation looks to get worse for carrying costs are short term constants (electricity to the site, property taxes, security costs, loan interest etc) and the probability of a successful and profitable sale are decreasing. The speculator in this case lost the bet that I outlined above, and is in the process of getting creamed.

Rampant housing speculation and price appreciation have been localized events. And this is where it gets interesting. What effects will upside down speculators have on local politics?
Local elections are often disputes on land use, density, perceptions of desirability and quality of the school district as that feeds directly into land prices and demand functions, and property rights. For this reason, local elections tend to be strongly influenced by local real estate developers. Not a surprising event.

When there is a consistent and significant uptrend in home appreciation and property values, I hypothesize that most small speculators, investors and flippers are very unconcerned about generic local political issues UNLESS that issue directly pertains to their projects. They can get in, do their work, and get out with their cash fairly quickly. So why waste time, money, energy and the potential for a nasty fight in local politics that threatens your profitability.

However, what happens when speculators are forced to stay in propoerties that they were trying to flip because they are effectively upside down at current market prices. They have three basic choices; the first is sell now to minimize guaranteed losses due to carrying costs and find outside assets to make your mortgage holder whole, the second is a variation of the first, and that is to default and walk away with damaged credit. The final option is to hunker down, piss money down the hole while minimizing carrying costs and wait for the market to turn around at some undeterminate point in the future.

If this third scenario is the basic course of action adapted by a speculator, then the incentive to get involved in local politic goes up massively. Now if you live in Pittsburgh like I do, the crushed speculator demographic is miniscule and politically irrelevant. However if you live on the East Coast, in California or on the Florida coasts, this demographic is going to be fairly large, and fairly loud because they are in significant pain. So how will they respond in local politics.

Their first priority is to do whatever it takes to minimize local carrying costs. The most significant costs of carrying property that are under direct local governmental control are insurance requirements and taxes. I could see a coalition of Florida speculators push for lower required hurricane insurance coverage levels. More importantly, I can see a push for lower property taxes or instant re-assessments of unoccupied properties in order to reduce the tax bill. These speculators will argue that they do not use significant city services (police, fire, water, trash) so expenditures here should be cut. The only area of public expenditure that might not be in the sights of wrecked speculators would be public school expenditures as this would be the hope that better public schools would lead to localized comparative advantages that would lead to an increase in property values.

Now my second question is this — what is the probability of a signficaint localized political thrust representing upside down speculators actually forming and having localized political impact?

One Response to “Stuck Flippers in Politics”

  1. politics says:

    I live in Los Angeles and it seems the local politician here act like they are the President of the United States. Especially Villagoraiso. politics

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