Thursday, September 9, 2010

The Desperation in the Housing Market

I talk to a lot of people about housing. Many that I speak with are frantic to buy a home. Also when I check the current housing stats, I see some buyers biding over the asking price on homes that have been on the market for months.

There is desperation in a number of people that are looking to purchase a home.

When I talk to people about real estate I will spend ten minutes explaining how our banking sector is insolvent and many of our nation’s households are insolvent.

How there is a historically high inventory of homes listed with an equal size shadow inventory held by the banks that are not even listed yet.

Also, there are tens of millions of families that will put their homes on the market once prices stabilize. We have double the amount of any previously recorded inventory levels, while home sales amounts are at historic lows.

I explain how buying a home in many areas doesn’t make sense because rents are historically low compared to house prices.

We are in the most unsound economy in our nation’s history as interest rates and markets are being desperately manipulated by the government to force many people into buying homes that will absolutely go down in value.

I will sometimes be honest and say that most of the people today that are buying houses are not financially qualified to own. The government has created another bubble that is allowing many people through government subsidized loans to stretch to buy a home. These are people that have no concept of budgeting or saving or anything other that living paycheck to paycheck. They are renters that are being pushed into buying overpriced real estate. So if we consider that their 3% down is wiped out with purchase costs, these glorified renters are starting out home ownership with less than zero equity.

If I have time I might say that as a nation our savings rate and taxes must go higher making it harder for families to afford a higher priced home. And that our nation’s debt is mathematically impossible to pay off.

There are the demographic issues of our aging population that must sell their homes to fund retirement. They will exit the market and won’t be back.

There are the mathematical issues that state that as interest rates rise home prices decrease proportionally.

So interest rates will be a severe headwind on home prices for many years in the future.

Owners will learn that the buying and closing costs for a home are at historic highs. They will come to realize that it could take 8 years of mortgage payments to repay enough principle to be able to pay the round trip purchase and selling costs in a stagnant market.

So many people in the future will be surprised when they are required to write a large check when they sell their home.

There are the funding issues that suggest that as home prices decline there will be no money for move up buyers to purchase higher end homes. For the next ten years people will have to save for home improvement costs instead of robbing from their home’s equity.

So the move up market is dead for ten years and the home ATM is gone forever.

Honestly there is nothing that could possibly drive the housing market significantly higher above its present overvaluation. But there are thousands of events that will force prices back to the fair value that was the normal trend before 1999.

The fact of the matter is that assets will ALWAYS come down to fair value after a bubble and many times they can trend below fair value for a while. To think that this time is different is utter delusion. To make a highly leveraged bet on a delusional assumption is madness.

The people will listen for about ten minutes with a glazed expression.

When I am done they become animated and tell me how excited they are at the prospect of buying a home. Sometimes it almost seems like desperation.

They say that they must buy now. Everyone says that it is the best time in history to buy a home.

I love to go on the Housing Tracker website. I can follow the listing prices of homes in most major metro areas. Listing prices everywhere are still falling lower. Every month like clockwork they go down.

Every week we get closer to fair value. Every week desperate people are less likely to buy an overpriced home.

Every week there is a new person that might look at the data instead of the salespeople. And honestly decide if owning a house makes sense compared to renting.

Honestly decide if they want to lock themselves into 30 years of debt payments with absolutely no chance of escape once interest rates start to rise.

And acknowledge the fact that home prices are still historically overvalued in many areas compared to rent and household income.

As a nation we need to question how long the government can continue to desperately rob money from our children to prop up overpriced housing.

There will be a point in the future where people start looking at what is best for their family, for our children and for the nation in the long run.

I am not anxious for a housing bottom. That will take many years. I am looking for the emotional bottom.

I am anxious for our nation to stop looking at the real estate market with desperation.

Like we did before 1999,

and the previous 200 years before that.

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