Housing Bottom
Stocks jumped up 152 points today, and exhibited jubilation over the meltdown of commodity prices. Bonds continued to be a “safe haven” for the commodity money, and amazingly continued its rapid increase in value (decrease in interest rates).
Oil and gasoline have collapsed in the last 2 days (over $9), and who knows what tomorrow holds. Gold fell a small amount in concert with other commodities.
In the news today….
IndyMac bank is stopping its lending on mortgages – it has no capital. In fact, it is in really bad shape. It’s going to lay off about half of its employees. Fitch just downgraded IndyMac to CC – that just one level above junk. Just another example of the financial crisis working its way through all financial institutions. Drip, drip, drip…..
Sign of the Times….
The Dictionary has been upgraded to include new often used words. The new word now in the dictionary is “subprime.”
What about the Housing market???
Pending (under contract) home sales fell 4.7% in May over April. In April there was a lot of “bargain hunting” going on as some folks thought the market was stabilizing. They got smarter in May. On a year over year basis, pending home sales have fallen 14%. This trend must reverse before we can call the market, a bottom.
The National Association of Realtors (NAR) “predicts” a price fall of 6.2% nationally in 2008 and a RISE of 4.3% in 2009. The NAR couldn’t have any self interest in predicting an increase in 2009, could it? I generally avoid including predictions in the EconomyGuy, as most predictions aren’t worth the paper their written on. However, I am using this particular prediction to insure EconomyGuy readers always looks for the “self interest.”
All these statistics are confusing if you take them one at a time – the way the news outlets give them to you. Here is what I think is important regarding a turnaround in the Housing Market.
1. The inventory of existing homes plus new homes must get much shorter. It is currently around 11 months worth of housing (based on current buyers), and it’s got to get down to less than 5 months worth before “normalcy” can be declared. This will happen if foreclosures slow down significantly, AND if builders reduce the number of new homes coming on the market, AND buyers step up their buying. As you can imagine, all of these are a long way off.
2. A bottom must be reached in the median house price in the communities where the worst of the meltdown has occurred. By bottom, I mean at least 3 continuous months of stable prices – not falling, and not rising. These are areas like Miami, Phoenix, Las Vegas, Riverside, Bakersfield, Sacramento, etc. For the prices to stabilize, the pre-foreclosure purchases and REO’s must be reduced by 80% to 90% over current levels. Right now we have REO’s setting new bottom prices, and then future REO’s going lower – just to sell. What a great meltdown.
3. While Congress (bless them) are trying to come up with schemes to “help” the poor home owner, the adjustable interest rate loans are continuing to adjust. Some mortgage companies will help the home owner change his/her mortgage to a fixed interest mortgage, but most people just don’t qualify with the mortgage holder’s requirements. So, the inevitable will continue to happen – people will owe more than they can pay, and people will walk away from their homes (an increasing trend) as the value drops below their mortgage amount (this is called negative equity.) The trends outlined here will continue through mid-2009, so sit back, get a cool drink, and enjoy the ride.
Prices (as they drop) will over shoot the intrinsic value of the houses, so if you’re in the market, just wait, and wait, and wait. Only purchase a house that gives you a Significant Cash Flow – I’d want 20% COCR (cash on cash return) or better. And, you can be PICKY in the houses you purchase.
Here are today’s numbers:
Dow Jones 30 Industrial – 11384 (up 152 points)
10 Year Treasury Bond – 3.88% (down 0.05%)
Euro – $1.5666
Gold – $923 (down $6)
Oil – $136.04 (down $5.33)
Gasoline – $3.36 (down $0.12) – wow! Haven’t seen gas this cheap for awhile. How long will it last?
I couldn’t agree with you more. I’ve been going in asking for 15% to 20% off the new listing price, which used to be about 30% off the original listing price. It appears that now more aggressive pricing is being listed so the prices now are better than 1-2 months ago. I figure with short sales, 10% off the listing price (minimum) and then another 5-10% off if it’s been listed for about 2 -3 months. The REOs are going much faster though.
Thanks Susan,
I don’t know what area you’re in, but you must be in one of those old “hot” markets that are now going thru a meltdown.
My advice would be careful about the “listing” price. Do an independent valuation by looking at comparable SOLD properties. Look at the trend – better yet graph it out, so you can SEE the trend. Then insure you get a whopping discount off that price – one that makes sense including sales costs, holding costs, plus a big profit.
Your comment on REO’s is interesting. My experience was that REO’s were selling slowly because they were priced at a top market price by the BPO realtor. If that’s changing, then banks are getting smarter on how to unload these properties.
Tom