Buying a house with Monopoly Money

(Castle Rock, CO 5/30/09) The Weekly Homebuyer's List in the Denver Post catalogs residential real estate sales in Colorado. The Homebuyer's List for the week of May 24th totaled only 62 sales for all of Douglas County. The low number of sales may not surprise many in the current market, but a closer examination of the problem reveals a strange disparity in housing prices. It may be easier and a little more fun to think of today's market as a Monopoly game.

The most expensive property conveyed last week in Douglas County was for $1,050,000. That would be Boardwalk in Monopoly terms. The property, on Longsbluff Lane in Parker, had previously sold for $1,120,000, so the reduction in price was only $70,000. Not terribly bad.

The most inexpensive property conveyed was for $139,000 for a new condominium on Cutter's Circle in Castle Rock. That would be Mediterranean Ave. just past GO, COLLECT $200 on the Montopoly board..

Again this week, bank-owned foreclosure properties have taken the biggest hits. Things are not doing so well on the middle of the board, at St. Charles Place and Marvin Gardens. A property in the Cherokee Ridge Estates section of North Douglas County sold for $730,000. The sale would not be remarkable except for the fact that the foreclosed property had previously sold for $1,549,000. That means this million dollar home sold for less than half what it fetched two years ago - a loss of $819,000. That is a big pile of gold $500 monopoly bills taken off the board.

Where did the money go? Could it have just "evaporated" out of our financial system? The real truth of where this money has gone and is going is so grim that it is beyond the scope of this real estate article.

What is happening right now is that the Federal Government is artificially propping up the Real Estate market to prevent a housing price free fall. It is using taxpayer dollars to do so. Currently the only entity buying up mortgages is the Federal Reserve, and the only kinds of mortgages it will purchase are those that meet FHA limits. The current FHA limit in our state is officially $406,250, but for this year only, the Fed will buy mortgages up to $417,000. The Fed is printing up the money it uses to buy those mortgages. Monopoly is once again instructive - the government prints and hands out money according to certain rules. However, in this case, there are rules that make the game unwinnable for everyone, except perhaps those who are receiving the newly printed money. In the end, if you are playing this game you must leave the playing board with your playing piece in the safe jail and try to ride it out and hope you don't roll doubles and have to come out.

Here in the real world, the perverse $417,000 limit results in bizarre foreclosure sales with thousands of dollars in equity disappearing. The money simply comes off the board.

One example of the continuing price collapse is a home in the Sapphire Point section of Castle Rock that previously sold for $1,195,000 in 2007. This year, the lender took the property back in a foreclosure and resold the home for $500,000. Thus, another $695,000 has magically disappeared from the board. Why the low sale figure? The buyer got a government backed loan, the only type that is actually available.

And how much was the mortgage? Why $417,000, of course.

The federal limit has created a defacto ceiling for loans and home prices, regardless of the home's previous sale price or the value of property it sits on. Whether it is the poor section of the Monopoly board with Mediterranean and Baltic or the high priced section with Boardwalk or Park Place, home values are being defined by the ubiquitous $417,000 mortgage. This FHA Mortgage Plan stinks.

With this rigged game of Monopoly, it may be hard to find players and that is what is happening now. The end result of this artificially constrained, government controlled market is a drastic reduction in home sales. Even as the Fed frantically prints new money, it cannot match the private sector financing that existed only a few years ago. An examination of historical data from the Homebuyer's List quickly shows that the housing market has dried up. It is impossible to continue to take Monopoly money off the board, force values to be equalized, and then expect a player to buy Ventnor Avenue when he lands on it.

In Douglas County, Colorado, for the period from January 1 to May 31 of 2006-2009, the actual sales were as follows:

In 2006 - 3,400 homes sold

In 2007 - 2,800 homes sold (a reduction of 600 from 2006)

In 2008 - 2,250 homes sold (a reduction of 1,050 from 2006)

In 2009 - 1,000 homes sold (a reduction of 2,050 from 2006) i.e. a 70% drop from 2006.

For Castle Rock's 3 zip codes of 80104, 80108 and 80109, the drop off has been even worse:

In 2006 - 1,138 homes sold

In 2007 -840 homes sold

In 2008 - 670 homes sold

In 2009 -300 homes sold, a 73% drop.

To achieve even this meager level of sales, the Obama Administration has spent over $2 Trillion of taxpayers' dollars pumping up the Wall Street banks, AIG, Fannie Mae, Freddy Mac, etc.

There has got to be a better way. Everyone knows it; even President Obama.

Certainly the towns in the Berkshires know it. Right now in the Berkshire Hills of Massachusetts, residents are exercising self help: they are printing their own money, which they call "Berkshares". Individuals get their Berkshares from the local bank for 90 cents and spend them at local businesses at the rate of a dollar a Berkshare.

Here in Douglas County, CO we can all sit on our hands, waiting for Washington, or Wall Street or "Somebody On A White Horse" to fix everything. It might be a long wait. Or we can start fixing things right here in our own neighborhoods. I am ready to start right now and brainstorm a new answer. Are you?

Mike Robinson is Senior Partner at local Castle Rock law firm Robinson & Henry P.C. Mr. Robinson was assisted by Ryan Wood, an associate at the firm.