Saturday, September 22, 2007

Housing III

Everybody is still buzzing about ‘sub-prime’ mortgages. But sub-prime mortgages are only the start of the problem.

The bigger issue is real estate investors.

From 2002-2005, there were two types of home buyers; (1) families looking to live the American dream; and (2) investors, many of whom with little equity, whose plan was to get a home in their name, collect rent to cover the mortgage payment, and get rich on the 10% annual appreciation of the real estate market that would go on for ever and ever.

In my market, home prices are now off up to 40% (actual sales prices, not asking prices).

So put yourself in the shoes of a businessman, holding an asset worth $150,000, on which you owe $225,000. You are $75,000 in the hole.

You look at foreclosure numbers; 168,000 in July and 244,000 in August. You look at census data for historic housing starts, and find that 100,000 houses were started in a typical month throughout the ‘booming’ 1990s. You look to reactionary lending standards and recognize that demand is restricted. You scratch your head as to why anybody is still building houses, and come to the conclusion that it is inertia.

Supply up and accelerating. Demand down. Bad combination. Prices going further down. Sell now.

Probably half of the houses we sold in the run-up were to investors, not families. This will get worse more before it gets better. The lenders are the ones on the hook.

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