As I’ve said in many posts before, it’s still not a time to buy. Here’s why…
- Resistant Sellers
- These sellers are; not aware the market has crashed and continues to decline, are in denial that they owe more than their house is worth, are not willing to accept that they will not make a profit.
- After years of continued decline and more to come, these sellers will have no choice but to put down the Kool-Aid and drink the reality instead. As all the exact same homes around them are selling for 40% less than what they paid they will have no choice but to become a short-sale, or walk away from the home and let it go into foreclosure. Both of which will bring the house down to market value, finally.
- Short Sales
- RealtyTrac reports that short sales are up over last year and I believe this trend will continue for the foreseeable future. Each short sale sets the new comp for the area, and each short sale as time goes on will set that comp progressively lower, and lower each time.
- Short sales can take a long time to close. The mortgage is often owned by more than one bank and they all have to agree on the price. The longer they wait, the more the price drops. The more the prices drop, the lower the comps become, and so on.
- Shadow Inventory
- The government has allowed the banks to retain much of their foreclosed property from revaluation, so they have purposely kept these properties off the market. Their hope was to drip-feed these homes out so they could get a much higher sale price than if they flooded the market with the millions of homes they are hiding. Those days are coming to an end.
- Foreclosed homes are a liability to the bank. They get broken into, squatted in, burned down, damaged and they require upkeep. Banks are not landlords and they don’t want to be. The banks are realizing they will not be able to unload their inventory quickly and as such, the liability to them of holding these homes for any length of time is becoming a reality.
- In speaking to one realtor, he told me that last year Bank of America released 1M foreclosed homes into the market, but was planning on 9M this year. If that is true, you can expect all the other banks with shadow inventory to do the same since they will all want their home to be the one sold for the most money, before all that inventory devastates all Banks home inventory sales prices.
- Interest Rates
- Mortgage interest rates are affected by economic indicators that impact mortgage-backed securities including inflation indicators. Despite what the government reports, the real rate of inflation is currently around 11%. Interest rates on mortgages will begin to rise, and as they do, two things will happen.
- The first is that home prices will come down in proportion to the rise in interest rates, in addition to any free-market correction from other factors like increasing inventory, etc…
- The second is that with each tick up in interest rates, a large swath of potential buyers are kicked to the side and disqualified from the loans they need to buy a house. As the number of buyers decline, and the number of houses for sale increases, the prices will have to adjust down accordingly.
- Government Intervention
- For all the billions our Keynesian socialist Government stupidly spent (of our money) on artificially propping up the housing market, none of it worked…as predicted. You can’t take money from some of your citizens and make them poorer and then give it to others to make them richer and think that some how that -1 + 1 math equals more than 0.
- Think of it this way…the inflation rate is 11%, which is why gas is so high, among other things. Since the government could not raise your taxes, they printed the money they needed to pay for the bank bailouts and mortgage subsidies. Therefore, this money printing has caused gas to get more expensive through inflation. So next time you are at the gas station filling up, part of that $4.50 a gallon you are paying for is the government getting its money back from you that they gave to the banks and people defaulting on their mortgage. YOU are paying for the bank bailouts and the housing subsidies every single time you fill up your car with gas.
- As our socialist government rides the debt freight train off a taxpayer cliff, they will not be able to promote any more programs to prop up housing. Well, let me re-phrase, they should not offer any more programs because like all the programs before, it will only temporarily delay the inevitable…a massive price correction in housing. So if they want to kick the can down the road at a cost of $1M a day in wasted taxpayer subsidies and incentives, then I recommend you continue to wait until they stop, and the downward correction resumes.
- Through the FHA, the Government continues to be the largest mortgage lender and as their lending standards are not much better than those that were in place when the housing bubble was created, you can expect to see more FHA short sales and foreclosures as well, thus adding to inventory, setting new lower comps, and driving down prices.
- The Economy
- Now that the artificial props to the economy (just like the artificial props to the housing market) the government put in place through trillions of dollars of debt spending are collapsing, the economy can continue its much-needed recession.
- As we continue the recession, with increasing unemployment, continued destruction of the dollar as the government continues to try to “print” its way out of this mess which will only make the economy worse, economic indicators resuming their southern decline, we can expect to see all this bad economic data and sentiment slam into home prices as well.
- Unemployed people can’t make mortgage payments, so they will add to the list of foreclosures thus increasing inventory, setting new lower comps and driving down prices.
- Also, as the economy continues to get worse, people will become more conservative about their decisions and more of them will decide that taking on a home loan during a time of employment uncertainty is not a good idea, thus shrinking the number of potential buyers right as inventories are rising.
- Moral Hazard
- As all of these factors continue to crush home prices, more and more people will find themselves more and more underwater on homes, owing more and more than what the house is worth.
- These people will walk away. It’s the smart thing to do and I think everyone in this situation should do it.
- These homes will become foreclosures, continuing the cycle of downward pricing, which will in turn incentivize more people to walk away as their home continues to decline from the comps set by those who have walked away before them.
- Our Government and the Banks created this mess, the least we can do is ram the house back down their throats. So my vote is for anyone in this situation to walk away. You can probably rent for a lot less, you’ll be able to sleep at night not having a gorilla sized mortgage hanging over your head, and you can use the money you are saving by renting to send your kids to school, buy gold and silver or foreign currencies and make it turn a profit for you, or save it up to buy the same house you walked away from a few years down the road for half the price. Or, you can continue to sink every penny you earn in a stratospherically overpriced never-to-be-recouped
- Shrinking Pool of Buyers
- Home prices will now have to drop to levels that those in their 20’s and 30’s who are still lucky enough to be working, with stagnant incomes, rising costs, and limited downpayments, can afford to buy.
- This was a rather large analysis, so I did a separate post on this that you can find by clicking here.
Great article on home price futures here.
Did you ever wonder why the term “double-dip” is so common? I had to ask myself. The truth is, the only reason there is a double-dip in anything, be it housing, the economy, etc…, is because the necessary and natural corrective decline was prevented from finishing by some sort of government intervention, and that intervention has failed so often in the past that we now just use the term double-dip, never really asking ourselves what exactly causes that double…dip. Now we know. If Government stayed out of the free-markets efforts to correct the problem, we would not have to live through the government’s expensive and harmful “pause” in what is an absolutely necessary correction in order to get our economy back on solid ground. I think we should start calling it a “government imposed double-dip” from now on.
Categories: Housing Market