Here we go again (Low low down payment)

[Anonymous]

[quote=CA renter][quote=harvey][quote=CA renter]Speculators don’t provide any similar benefits.[/quote]

Then why does anybody transact with them?[/quote]

In many cases, it’s because they largely control the market.[/quote]

There is no market “controlled” by speculators, nor is there any market where speculators make up the majority of participants. (There have been a handful of historical, anecdotal examples of speculators “cornering” a market but it no longer happens in today’s connected world.)

I could ask you to provide a single example but you will fail, although you will likely talk around the question for years (BTW, what is that socialist country in Europe?)

The correct answer is that people transact with speculators because speculators are offering the best price for what the counterparty wants.

That fact that you fail to grasp this basic market dynamic is very compelling evidence that you don’t understand basic economics.

[scaredyclassic]

Speculate means to guess.

If they had control they wouldn’t be speculating.

[njtosd]

[quote=CA renter][quote=harvey][quote=CA renter]

…….They are providing a service because they make it more convenient for people to obtain the goods they need and also make it easier for the farmers/producers to sell in large batches to a few buyers vs. having to sell onsie-twosie to every individual purchaser. That being said, some would argue that it’s better for everyone to simply buy at farmers’ markets, but most of us like the convenience of having a grocery store that is open more hours/days. Speculators don’t provide any similar benefits.[/quote]

I find this interesting, because, as I recall, this description is almost identical to the reason for the “corn exchanges” and similar markets that grew into the mercantile/stock exchanges.

There will always be speculation with respect to things that are limited – and no one is making any more land. Almost every new tract house is built on spec. Is this really what you are talking about?

[CA renter]

[quote=SK in CV][quote=harvey][quote=CA renter]Speculators don’t provide any similar benefits.[/quote]

Then why does anybody transact with them?[/quote]

Taken together, these two comments are a perfect example of begging the question. The claim that speculators don’t provide any benefits in the real estate market is presumptive. They do provide a service. Real estate speculators both buy from a willing seller, and sell to a willing buyer. With very minor exceptions, real estate speculators have never controlled markets as, for instance, the Hunt brothers controlled the silver market 35 years ago. That doesn’t mean that they (speculators) have no effect on market prices. They do. Just as grocery stores and Costco have en effect on prices.[/quote]

The problem is that speculators often have an advantage over organic buyers and sellers. Take, for instance, the housing market when the bubble burst. Who had the best access to massive amounts of foreclosures? The speculators did. They even managed to limit the access to this inventory by requiring very high qualifications that very few individuals could meet in order to purchase REO inventory. There were many buyers (also speculators, to a large extent) who were fully qualified to purchase REOs from different sources, but were excluded because they didn’t have the right connections. At the tail end was Jane and Joe Sixpack’s access to affordable housing, always getting in and out AFTER the well-connected few have made their purchases and sales.

http://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Real-Estate-Owned-%28REO%29.aspx

http://fhfaoig.gov/Content/Files/AUD-2013-012.pdf

Speculators have advantages that regular buyers and sellers don’t — business networks (cronyism), access to capital (also largely because of their connections), access to privileged information, etc. If they didn’t have these advantages they wouldn’t make up such a huge part of the market, and the FIRE sector wouldn’t be such a dominant player our economy.

Cash buyers in RE (not all, but most of them are speculators) — over half of the market:

The majority of home purchases are now being done by cash buyers: Destroying the myth that cash buyers are a small portion of the market. 60 percent of homes sold in 2013 came from the all cash crowd.

————-

Speculators make up the majority of traders in the stock markets as well as the commodities and forex markets (~80% speculation in FOREX, IIRC), to name a few.

http://www.washingtonsblog.com/2013/07/big-banks-busted-manipulating-aluminum-and-copper-prices.html

HFT is supposedly retreating, but they were trading between 60-70% of the stock market volume in recent years; and that’s just HFT.

http://www.businessweek.com/articles/2013-06-06/how-the-robots-lost-high-frequency-tradings-rise-and-fall

———————–

To suggest that speculation doesn’t cause problems is like saying that concert ticket scalpers aren’t a problem. Nobody in their right mind would claim that. Both the sellers and the buyers are losing on almost every transaction in which a scalper is involved. Additionally, as with any market, the scalper/speculator is going to be most active on the buy side when they anticipate unusually high demand/restricted supply, which exacerbates pricing volatility. In markets where they can short, they move markets down when prices are already expected to go down, making the drops larger (and the rebound sharper/faster when they have to buy to close positions).

IMO, speculators might be buyers and sellers, but they do not provide any real benefits to society at large. Ever penny made by a speculator is lost to a buyer and/or a seller. That’s why I say speculation is zero-sum.

[CA renter]

[quote=njtosd][quote=CA renter][quote=harvey][quote=CA renter]

…….They are providing a service because they make it more convenient for people to obtain the goods they need and also make it easier for the farmers/producers to sell in large batches to a few buyers vs. having to sell onsie-twosie to every individual purchaser. That being said, some would argue that it’s better for everyone to simply buy at farmers’ markets, but most of us like the convenience of having a grocery store that is open more hours/days. Speculators don’t provide any similar benefits.[/quote]

I find this interesting, because, as I recall, this description is almost identical to the reason for the “corn exchanges” and similar markets that grew into the mercantile/stock exchanges.

There will always be speculation with respect to things that are limited – and no one is making any more land. Almost every new tract house is built on spec. Is this really what you are talking about?[/quote]

Creating a market infrastructure is different from speculation, though speculation is often better enabled because of this infrastructure. The exchanges are like grocery stores, and they charge a fee for service — providing buyers and sellers a centralized exchange, opening up the market to other buyers and sellers (genuine buyers/sellers as well as speculators).

That is different from speculation because speculators are not building and maintaining this infrastructure (though the fees they pay make the exchanges more profitable).

[SK in CV]

[quote=CA renter][quote=SK in CV][quote=harvey][quote=CA renter]Speculators don’t provide any similar benefits.[/quote]

Then why does anybody transact with them?[/quote]

Taken together, these two comments are a perfect example of begging the question. The claim that speculators don’t provide any benefits in the real estate market is presumptive. They do provide a service. Real estate speculators both buy from a willing seller, and sell to a willing buyer. With very minor exceptions, real estate speculators have never controlled markets as, for instance, the Hunt brothers controlled the silver market 35 years ago. That doesn’t mean that they (speculators) have no effect on market prices. They do. Just as grocery stores and Costco have en effect on prices.[/quote]

The problem is that speculators often have an advantage over organic buyers and sellers. Take, for instance, the housing market when the bubble burst. Who had the best access to massive amounts of foreclosures? The speculators did. They even managed to limit the access to this inventory by requiring very high qualifications that very few individuals could meet in order to purchase REO inventory. There were many buyers (also speculators, to a large extent) who were fully qualified to purchase REOs from different sources, but were excluded because they didn’t have the right connections. At the tail end was Jane and Joe Sixpack’s access to affordable housing, always getting in and out AFTER the well-connected few have made their purchases and sales.

http://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Real-Estate-Owned-%28REO%29.aspx

http://fhfaoig.gov/Content/Files/AUD-2013-012.pdf

Speculators have advantages that regular buyers and sellers don’t — business networks (cronyism), access to capital (also largely because of their connections), access to privileged information, etc. If they didn’t have these advantages they wouldn’t make up such a huge part of the market, and the FIRE sector wouldn’t be such a dominant player our economy.

Cash buyers in RE (not all, but most of them are speculators) — over half of the market:

The majority of home purchases are now being done by cash buyers: Destroying the myth that cash buyers are a small portion of the market. 60 percent of homes sold in 2013 came from the all cash crowd.

————-

Speculators make up the majority of traders in the stock markets as well as the commodities and forex markets (~80% speculation in FOREX, IIRC), to name a few.

http://www.washingtonsblog.com/2013/07/big-banks-busted-manipulating-aluminum-and-copper-prices.html

HFT is supposedly retreating, but they were trading between 60-70% of the stock market volume in recent years; and that’s just HFT.

http://www.businessweek.com/articles/2013-06-06/how-the-robots-lost-high-frequency-tradings-rise-and-fall

———————–

To suggest that speculation doesn’t cause problems is like saying that concert ticket scalpers aren’t a problem. Nobody in their right mind would claim that. Both the sellers and the buyers are losing on almost every transaction in which a scalper is involved. Additionally, as with any market, the scalper/speculator is going to be most active on the buy side when they anticipate unusually high demand/restricted supply, which exacerbates pricing volatility. In markets where they can short, they move markets down when prices are already expected to go down, making the drops larger (and the rebound sharper/faster when they have to buy to close positions).

IMO, speculators might be buyers and sellers, but they do not provide any real benefits to society at large. Ever penny made by a speculator is lost to a buyer and/or a seller. That’s why I say speculation is zero-sum.[/quote]

I guess, if you define speculator as anyone who buys property with the expectation that the value will go up, then you’re right. Speculators cornered the market. That would include those with intention of flipping, intermediate and long-term landlords and those acquiring property to occupy. So everyone who buys property is a speculator. Yep, they cornered the market.

As an aside, debt holders, including agency debt-holders and guarantors, didn’t bundle distressed assets to do a favor for investors. It wasn’t an inside deal to funnel profits to special friends. It was the only efficient way for them to liquidate distressed inventory. Those buyers are the Marshalls, Home Goods and Big Lots of the real estate business. Is Big Lots an evil blight on the retail market?

[FlyerInHi]

What about people who produce things on anticipation that there will be demand?

[CA renter]

[quote=SK in CV]
I guess, if you define speculator as anyone who buys property with the expectation that the value will go up, then you’re right. Speculators cornered the market. That would include those with intention of flipping, intermediate and long-term landlords and those acquiring property to occupy. So everyone who buys property is a speculator. Yep, they cornered the market.

As an aside, debt holders, including agency debt-holders and guarantors, didn’t bundle distressed assets to do a favor for investors. It wasn’t an inside deal to funnel profits to special friends. It was the only efficient way for them to liquidate distressed inventory. Those buyers are the Marshalls, Home Goods and Big Lots of the real estate business. Is Big Lots an evil blight on the retail market?[/quote]

People who buy owner-occupied homes should not be buying because they expect prices to go up. They should be buying because they want to have a home of their own — where they can paint, add-on, and change things to their own liking. They also buy because they want to control their housing costs and, if done right, so they can have a paid-off house when they retire so that they can have a lower cost of living. Additionally, they will usually want to pass something along to their heirs. That is not speculation, it’s what housing is supposed to be used for.

And you and I disagree about the need to sell REOs to these investors. It would have been far better for the REO/debt holders to sell to the highest bidders. The GSEs and other agencies should have auctioned these properties off via a website where pre-qualified bidders (Joe and Jane Sixpack) could bid for these houses. It would have accomplished multiple objectives: more owner-occupied housing, more stable neighborhoods, and more affordable housing for those who plan to actually live in these homes.

Having worked with Big Lots before as a vendor, they are great when you want to quickly get rid of inventory, but there is no doubt that the seller is getting far less than they would if they were to sell on the open market. With housing, there are other objectives than just getting rid of inventory, and I would argue that an efficient auction setup would have accomplished what they wanted — yielding more to the sellers while also offering more affordable housing to the end users.

[CA renter]

[quote=FlyerInHi]What about people who produce things on anticipation that there will be demand?[/quote]

Again, the distinction between speculators and investors, IMO, is that speculators do not produce anything, while investors expand productive capacity and/or improve productive efficiency. If you’re producing something in anticipation of demand, then you are a producer/productive investor (a net gain for the economy), not a speculator.

[FlyerInHi]

[quote=CA renter]
And you and I disagree about the need to sell REOs to these investors. It would have been far better for the REO/debt holders to sell to the highest bidders. The GSEs and other agencies should have auctioned these properties off via a website where pre-qualified bidders (Joe and Jane Sixpack) could bid for these houses. It would have accomplished multiple objectives: more owner-occupied housing, more stable neighborhoods, and more affordable housing for those who plan to actually live in these homes.
[/quote]

I have bought houses from Fannie, Freddie and the VA.

I understand that Fannie, being the biggest, has a website where realtors enter offers. There’s a 30-day window for owner-occupant to buy. That somewhat prevents the listing broker from steering the listing.

But as far as owner-occupancy, any buyer can say that he intends to occupy the property. There’s also a condition that the seller will not flip the property within a certain time, usually 60 or 90 days.

A lot of owner-occupants are not cut out to buy foreclosed properties. There is usually a list of problem that sellers will not and don’t want to fix. Most owner-occupants want move-in ready houses. They are not emotionally and financially ready to deal with little issues and to close quickly.

I bought a flooded house. The previous owner, who was foreclosed upon, left to water running out of spite to flood the whole house. I bought another house that had a roof leak. Jane Doe could not deal with that.

Prices have gone up and now the banks and GSEs are no longer “giving away” houses. They often ask too much and the houses end up sitting.

Real estate is very inefficient, local markets. Technology is changing things… but not that fast.

One example, there are so many title/escrow companies doing thing a little different. There needs to be standardization and automation to get things done faster and more efficiently.

Only few regular Joe and Jane Does have the resilience to buy foreclosures. They don’t even know the difference between “pre qualified” and “pre approved.”

I tried to get a friend to buy a foreclosure, but it was always one thing after another. First, he was loyal to the realtor who showed him all the houses, but she could not get him a foreclosure at a great deal. Second, he didn’t understand that you have to compromise for a great price. So he ended up overpaying for a house. Prices have gone up, so he’s OK. But he didn’t get bottom prices. He didn’t have the focus to get a great deals. Investors and speculators do. It’s a job and not a walk in the park.

Granted, hedge funds got killer deals. They got multiples their investments back. But they have to “build the infrastructure” to manage, refurbish and rent out the properties. They also have to go through to the legal process of clearing clouds on titles.

[spdrun]

Window for owner-occupants etc is 20 days outside of NV. The homes that I’ve seen usually pass that window without any buyers performing.

Pricing is fair but not stellar; agreed. I think there’s a $10k fine if you don’t occupy a place that you agree to occupy. Plus it might affect your future prospects buying from FNMA, so I wouldn’t risk it.

There doesn’t need to be automation and increased efficiency. That would just get more bums to come out and play and drive prices up. Far better to keep things arcane so every idiot won’t succeed in getting into the market.

Keep ’em renting — the last thing we need is every schmoe getting uppity like it was 2005 or something.

[CA renter]

I agree that many buyers are not cut out for foreclosures, but many were who were excluded from purchasing the best deals. That is what I have a problem with.

While I do not support an “ownership society” that is enabled by gimmicky mortgages, I do believe that it’s in society’s best interests to maximize home ownership by keeping speculators out of the market which enables more people to buy truly affordable homes.

And govt-backed loans have long been available for home improvements. We just need to educate the public more about these loans and how to go about getting the improvements done.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/title/ti_abou

But, as spdrun has stated, there’s lots of money to be made by keeping Jane and Joe Sixpack in the dark. Gotta keep those middlemen in business!

[exsdgal]

Lot of comments… during the course of the crisis my impression was many folks were not thinking about buying real estate. The reasons could have been lack of funds, lack of time/interest, lack of awareness, bearish attitude on housing, or something else. The turning point in house buying interest occurred, when media started writing about the money made by the hedge funds and serial flippers. During the crisis most of the reports were about how people walked away from their house by mailing their keys.

Even during the bubble years and long before the hedge funds came into picture, bank owned foreclosure homes were available for purchase directly from the bank’s websites (including bofa, chase, citi, jpmorgan, …). One had to just contact the bank representative listed for the property and buy it with finance (if eligible) or for cash. I can not say if all the listings were in desirable areas, but there were good priced properties in familiar zip codes. My observation was in early stages the reo homes listed were in decent shape, however as the years rolled the homes were in dire need of work (missing appliances, ripped walls, stolen copper, etc)

When it comes to real estate majority of the buyers want their realtors to provide guidance. There are some great resourceful realtors who are truly helpful to the buyer, but am afraid most are interested in just getting their slice of the transaction. With the technology and resources available mostly free or for the cost of an email address, Jane and Joe Sixpack can monetize without needing any insider connections.

[CA renter]

Yes, many REOs have been made available to Jane and Joe Sixpack, but most of the best deals were reserved for institutional investors with connections. This was a regular complaint heard from other investors — many with deep pockets — during the RE collapse.

[exsdgal]

[quote=CA renter]Yes, many REOs have been made available to Jane and Joe Sixpack, but most of the best deals were reserved for institutional investors with connections. This was a regular complaint heard from other investors — many with deep pockets — during the RE collapse.[/quote]

I can not speculate if the best deals were reserved for institutional investors with connections. I think it will be futile getting upset for having to pay $200 retail for a suit in a place like Nordstrom, when the garment was purchased for $20 from the supplier. IMO one can not contrast a consumer’s buying power to large entities. As a consumer if I want the $20 price I need to hit the ground (with sufficient cache) to identify the supplier or even better the seamstress (possibly in SE Asia). As for investors complaining about lack of deals may be they are groups (with deep pockets) who entered the market late in the cycle.

My earlier comment about bank reo’s was to clarify your statement that folks who were willing to work on foreclosures were excluded from purchasing the best deals. I have come to know some of the more adventurous six-packs who went to court houses, met people, joined lists, bid on auction sites, pooled funds to find their deals. During the crisis I was fortunate to purchase a bank owned move-up house through MLS (ty redfin!). If my purchase were the norm, I am least bit surprised that the lenders were willing to sell their properties in bulk to anyone who would take it off their hands. The property was listed as an as-is fixer w/ no appliances, when we saw the property it was rat infested and during the escrow the maintenance workers stole the heating and a/c unit, and ripped any visible electrical and copper plumbing/fixtures. Oh! I forgot the house was vandalized. From this description one might mistake the property is in a bad neighborhood, only it isn’t!

Any case I have reconciled to buying my suit at retail :-). I believe one can still find RE at discounted price for current market through one of many RE related forums on the web. Happy House Findings!

[Author]

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