"Downfall;" Hitler explains the real estate collapse

By now, everyone has a "Downfall" movie parody relating to the issue of the moment. (I even saw a "Downfall" parody about the vuvuzelas that have annoyed so many soccer viewers recently.)

So I would be remiss if I did not include a copy of a "Downfall" parody that explains the real estate collapse.

Harrisburg incinerator; Stickney sewage plant analogy.

To those in Central Pennsylvania that are familiar with the Harrisburg incinerator boondoggle, this story from Illinois should sound familiar:

Local officials acknowledge that a giant sewage-cooking machine in west suburban Stickney is a waste of money, but they have decided to move ahead anyway with a project that could cost Chicago and Cook County taxpayers $217 million.

Once billed as an innovative way to turn the region's sewage sludge into fertilizer, the project is a decade behind schedule.

The Harrisburg incinerator took even longer to complete, has worked only intermittently, and has saddled the city with hundreds of millions of dollars in debt that sits at the heart of the city's financial woes. Public debt related to the Harrisburg incinerator has fueled recent discussions about raising city real estate taxes.

Tax sale challenge based on improper notice; Northumberland County Tax Claim Bureau

I wrote previously about properties that have been sold at tax sales and how those prior tax sales constitute title defects, requiring investors/owners to expend attorney fees to clear the title:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

An example of how such a prior tax sale can create problems for the current owner was recently provided in the case of Steinbacher v. Northumberland County Tax Claim Bureau (decided by the Commonwealth Court in May 2010) (510 C.D. 2009). (I will not bore you with all of the legal details.) The appeals court decided that a prior owner could challenge a tax sale if the tax claim bureau had searched only a "single directory" to find the prior owner before selling the property at a tax sale. The court held that a single directory search was insufficient.

This ruling is not exactly groundbreaking. Tax sales are overturned often for notice-related issues. This case is simply a recent example. Former owners have many arguments to use as they try to show a court that they did not receive proper notice of a tax sale. (This decision applies statewide and is not limited to Northumberland County.)

Who should be interested in decisions like this?

1. Any investor that is tempted to buy properties at a tax sale and who wants to know what legal challenges he might face;
2. Any city government that is tempted to impose greater fees, costs and duties on non-owner occupied properties, without realizing that title defects like this one tend to make it impossible to finance repairs, regardless of how strong the city building code or inspection ordinance might be.

Tax credit bubble pops; May housing sales collapse

AP today reports record weakness in the housing market:

Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.

The tax credit caused a temporary bubble in housing prices, during which buyers paid too much for real estate. Recent buyers must now ask themselves if the tax savings outweighed the amount of their overpayment in price.

The price drops were broken down by region. AP reported a 33% drop in the Northeast from April's levels.

Click here for my thoughts on the real estate tax credit in October 2009.

Deflation and gasoline prices.

This article indicates that the U.S. money supply has declined rapidly in recent months, despite runaway government spending.

How this could happen would be the subject of a full length textbook. Suffice it to say that the money supply is composed of many elements, including bank loans. When credit is tight, the money supply gets smaller, regardless of government spending.

A major indicator of the direction of inflation is the price of gasoline. The price of gasoline fell during and immediately before Memorial Day weekend. The price has not moved back up since then. It is unusual for gasoline prices to fall before and during a summer holiday. It is unusual for any prices to fall during a period of runaway government spending.

It is possible that the credit bubble that begin its collapse around 2007 is still collapsing - that the government stimulus bill (and related spending) is merely delaying the collapse. If that is true, the deflation we are experiencing is, ultimately, a good thing. The economy will not turn around until prices get to where they are going, even though the ride down will be painful.

If this scenario is allowed to play out, it would mean lower prices for real estate (accompanied by pain, foreclosures, bankruptcy, etc.), but, ultimately, an increase in sales at the new lower price levels.

Harrisburg; statistics on abandoned and condemned buildings

I wrote earlier about Harrisburg's use of the National Guard to board up abandoned houses in the City.

The same news story that discussed the National Guard operation also revealed interesting information about the state of housing in Harrisburg.

Harrisburg apparently contains the following:

• 1,500 abandoned buildings
• 835 of which have been condemned by the City
• 324 of those buildings are scheduled to be torn down
  

(The National Guard boarded up 15 homes last week).

I know from prior discussions that the City owns roughly 500 properties that could not be sold at various prior tax sales. These buildings now suffer from title defects that hinder any potential sale. I do not know whether any of the abandoned and condemned buildings are included in the 500 city-owned properties.

The destruction of large numbers of abandoned buildings sounds like a small scale version of what is happening in Detroit. No plans have been announced to convert large areas of Harrisburg to agriculture.