As dozens of bloggers have been predicting for over a year now, yours truly included, the housing market is entering its double-dip phase of dropping prices, as reported in today’s WSJ.
Despite the lowest interest rates since 1971, home inventories are increasing and demand is evaporating. And isn’t this the summer selling season? What’s the winter going to look like?
When loans are so cheap, how can that be? It’s so simple, yet seems to escape everyone in the mainstream media and the housing bulls…
We STILL HAVE a price problem.
It doesn’t matter if interest rates go to zero, when home prices are unaffordably high, nobody can afford them. Period.
For example, in Orange County, CA the median listing price is now $460,000, down quite a bit from $650,000 in 2006. The median household income as of 2007 is $72,000. Don’t kid yourself, incomes haven’t gone up much since then in this recession, if at all.
Using the time-tested and proven rule of not buying a house more than three times your gross income, the most a family in Orange County can afford is $216,000. If they had a 20% down payment, maybe they could afford $260,000.
$260,000 is nowhere near $460,000.
So homes in OC are almost 60% higher than what the average income in OC can afford. Again, very simple…PRICE PROBLEM.
MY FUTURE PREDICTIONS
Interest rates must eventually rise and this will put tremendous downward pressure on prices. For each tick up in interest rates, home sellers will have to drop their price.
Home inventories will continue to rise as foreclosures rise driven by high unemployment as continued job losses will cause future home owners to go into foreclosure.
As prices drop, more and more homeowners will go underwater on their loans and strategically default, adding even more homes to the current inventory through foreclosure. This vicious cycle will continue on and on and on…
Potential home buyers will stay out of the market due to fear of becoming one of the unemployed and fear about the economy overall and a feeling that home prices are too high and not wanting to buy a house “on the way down” in price.
Other potential buyers who would like to “trade-up” to a larger house will be trapped in their current house by owing more than it’s worth and unable to sell it.
The banks are not lending to anyone anymore because they will not loan money to someone who can not afford the home price. That alone should be ringing alarm bells, but instead, our government stepped in and will make loans to anyone with a pulse. Our government went from making less than 3% of home loans pre-bubble, to over 90%!
As the government continues to lend to unqualified borrowers through the FHA, Fannie and Freddie, and has become the new subprime lender, these home owners will continue to default in large numbers on a continuous roll-forward basis as the government can never go bankrupt and taxpayers will always be available to pay for the losses.
This will add more foreclosures to the market and continue the downward pressure on prices.
AND OUR GOVERNMENT
….ah, the ones who brought us this mess. They will continue to suspend the accounting mark-to-market rule for banks so they don’t actually have to value homes on their financial statements at these new lower prices, thus avoiding bankruptcy and avoiding selling foreclosed homes for what they are actually worth. FYI – that is akin to what Enron did, but it’s okie dokie this time because the government told them it is. It’s not illegal if the government does it. Didn’t you get the memo?
They might even try another “tax credit” for home buyers which would be a tragedy and a waste of your money, just like the last one.
They are already starting the worst thing they could do, which is use your tax dollars to help homeowners pay down the principal on the houses they bought at the top of the market. Oh yeah, the government’s decided your money gets to help someone else stay in their house by helping them pay it off. Lucky you! I did a post on it, here.
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