No economic recovery until "true value" is more than smoke and mirrors ... by gimleteye

The Miami Herald published an excellent report on Sunday, "Miami-Dade tax notices likely to spark appeals by homeowners." (Sunday August 16, 2009). The report notes our blog and points we have raised concerning the M-D Property Appraiser, Pedro Garcia, who fails to include foreclosures in property assessments. In recent posts I have questioned why Florida's most populous county understates the extent of harm to property values in the worst economic bust since the Depression. One reasons I proposed: that the true extent of real estate market declines would put enormous additional pressure on government budgets. Garcia responds to the Herald, "We don't talk to the commissioners. We don't talk to the mayor or anybody. I was elected to establish the right value on Miami-Dade properties and that's what I have been doing since day one. Nobody has called me or told me what numbers they need,'' Garcia said." Garcia also tells the Herald that foreclosures aren't included because "foreclosed homes are almost always stripped of appliances and fixtures or otherwise vandalized. Consequently, they do not reflect the true value of better-kept homes in the neighborhood."

Here is an interesting concept: true value. We are not used to it, in Florida. The snatch-and-grab development that accounted for most economic growth in the state depended, to a very large extent, on mispricing risk: risk to communities and to taxpayers from unfunded mandates of growth that are built-in to the massive, industrial-scale land development projects. Put another way: if Florida's wetlands could speak for themselves, they too would be in foreclosure: "stripped and vandalized" of what gives them-- and us-- true value. The price for routinely miscalculating risk-- and embracing Chamber of Commerce values of growth-at-any-cost-- defies imagination. The place to begin is true accounting.

The stock market is up nearly forty percent from its lows earlier this year, which means that the net worth of most Americans who do not trade daily but have been holding 401K's and other equities are still down twenty five percent or more from their highs. There is good reason for ordinary Americans to believe that the stock market fluctuations benefit primarily financial institutions trading mainly for their own (shareholders and executives) accounts. It is that feeling of sea-sickness, of real indebtedness, that accounts for flu-like symptoms in consumer confidence.
Mish's Global Economic Trend Analysis, "Brace for a wave of foreclosures, the dam is about to break" cites a statistic as riveting as the one reported by the Herald last week, that 49 percent of mortgages in Florida are underwater. With nearly a trillion dollars in residential property value, Floridians have a 94 percent loan to equity ratio.

If Florida was a bank, it would have been shut down by the Feds a long time ago.

This brings me back to the point about "true value". Earlier this year, Congress approved new rules that allow banks to hide true value by not "marking to market" the debt represented by mortgages and other forms of debt of questionable value. Were they required to do so, many more banks like Colonial and Bank United, would be forced to shut down. The next story by The Miami Herald or the New York Times should investigate which speculators and bank shareholders are being given "holidays" from debt repayments because the banks, themselves, are not being held to the true value of their capital ratios by federal regulators. (cf. US Century Bank)

The Obama administration made a strategic judgment that Americans need to see "green shoots" in the overall economy and that public morale after 8 long years of George W. Bush needed propping up. In this respect, top economics advisor Larry Summers has poorly served the White House. Long before our national economy visibly cratered, I argued that the avoidance of true cost accounting of growth has been a nasty game with devastating results to taxpayers and the public interest (read our archive, 'housing crash'). This manifested first in Florida, where the origins of the economic crisis showed through matching Wall Street greed to local and state politics synching the gears of the Growth Machine. Contrary to the belief of perpetrators, the outrageous oversupply of development was not because it was "what the market wanted" or "lending practices": it was what generated the most fees and commissions and executive compensation to the principal actors.

There will be no recovery until true value is established and a new foundation for consumer confidence.