muses of the moment

June 6, 2014

Housing Update

Filed under: Housing Market — totallygroovygirlfriday @ 1:07 am

Peak Prosperity had a great post this week on the US housing market. Click here.

Groovygirl is posting this link for the same reason that Brian did: housing is in a long term decline. What happened in 2007-2008, will happen again. Do not get caught upside down in your primary residence. Brian from Chris Martenson’s website highlights a few of the reasons and backs them up with charts.

Remember what happened when people were upside down in their house last time? They just walked away or lived there without paying anything. Mortgage Securities had assets on their books, but no interest income. Mortgage Banks had tons of empty houses that were costing them money, not bringing money in. Because of the large amount of foreclosures, banks couldn’t sell all their assets at once, it would have tanked the market (not just caused a decline). So houses stood empty.

We have the certainty of this happening again, but this time hedge funds own a lot more houses than they did in 2007. Whether the government chooses to “bail out” the owner or not, the debt must be taken down. The steepness of the decline will be determined by the government’s policy reaction. The US housing market for the last 60 years has been built and sustained on higher debt, higher prices, and debt availability. Investment in housing is sustained by income exceeding expenses/loan payments and then selling higher for a profit. These are the long time models that are breaking down. 2007 was just the first leg. That doesn’t mean you shouldn’t buy. It means the investment plan and exit strategy are different.

The most dangerous words ever spoken are: “This is how it has always been done.” And in this paradigm shift of everything and on a global scale, that mindset is extremely dangerous. Beware of anyone saying that to you, especially someone who is handling your money. They must explain to you why “doing it this way” will work if the economy/trend goes up, down, or sideways for the length of the investment.

But some other reasons not mentioned for the housing decline are:

  • lower income/higher expenses equals less qualified mortgage apps
  • banks demand higher down payments, which require time to save additional money
  • investors, foreign and domestic (i.e hedge funds and REITs), are driving up prices with cash deals. This will not last.

groovygirl says: not all housing markets will drop severely, like Detroit. The national average is just that: a national average. That is why you must know and watch the local real estate market of your residence/investment. How much are houses selling for in your area and to whom? Are they all cash sales? How many are first time buyers? What is the average age? How many rentals are in your area? Is your local school district improving or declining? Are good jobs coming or leaving your area? And do not ask a real estate agent. They are salesmen, not investors.

For instance, in my area(s) in the last six months, real estate agents are listing houses for 15-30% more than what they actually end up being sold for. (List vs. sold price for houses going thru an RE agent.) And this is in a market with low inventory. They are assuming low inventory will drive prices higher. That is not happening. So just looking at list prices on your block may not give you the complete picture. And if you are buying, this is good info, so that you do not overpay for an investment. 

There are more and more for sale by owner, short sales, auctions, and private sales before anything gets to real estate agent systems. Agent data is not necessarily the complete current market. Watch your local trends completely and closely.

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