The Hard Truth About Residential Real Estate

[FarCenter]

Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the numbers I dredged up for my spring lecture and luncheon tour.

There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes.

Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers.

Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents.

<SNIP>http://www.zerohedge.com/article/hard-truth-about-residential-real-estate

[ixion]

1. k/r

Not to mention the fact that the next round of loan resets are primarily Option ARM and Alt-A loans, and the projected peak is actually larger than the first wave.

[flamingdem]

2. Not good news for sellers nt

[Phoebe Loosinhouse]

3. I think many seniors are rethinking the whole "downsizing" thing anyway

And they'll have to whether they want to or not if there are no buyers for their homes.

Since many of them own their homes outright, they can always just pull out some equity of they need help with housekeeping, mowing the lawn, etc.

Or, they can owner finance all or part of the transaction if they really want to move elsewhere.

Or they can become landlords and turn it over to a property management company and collect rent as extra income.

Or they can open up their overly large homes to friends or relatives to expense share.

I agree completely with you that we are about to see a major shift in residential real estate. Many people feel that because of job insecurity, they are better off maintaining the flexibility to move that they have as renters. If the mortgage interest deduction went away, or if the same deduction were offered to renters, the housing market would sink like a stone.

I would hate to see my own equity vanish, but the unassailable fact is that home prices have far out-paced incomes for way too long and either incomes have to rise or home prices have to come down.

[proudohioan]

4. "home prices have far out-paced incomes for way too long.. "

You get it!

It's amazing to me how few people can see this glaringly obvious point!

[Phoebe Loosinhouse]

7. Thanks. I also get that this phantom equity based on artifically low interest rates

was the only thing propping up our economy. No raise, crappy salary? At least your house is inflating by double digits evey year and you can pull out that equity and live on that since your income isn't doing the trick.

The big boys like Greenspan kept the housing boom and housing inflation going long after its real life span.

Many people are already living the reality of what happens when artificial demand based on goosed returns comes to a standstill. I have no idea how long and gruesome the unwind is going to be.

[FarCenter]

8. The rise in home prices created a huge new money supply that the economists seem to have missed

When house prices went up, lots of people arranged Home Equity Lines of Credit on their homes.

Then you could write a HELOC check against the HELOC balance -- not a lot different that writing a check on a DDA account or making a withdrawal from a savings account.

So the home price inflation really is an expansion of the money supply.

[Dappleganger]

21. Using your home like an ATM

It helped people buy cars, college educations, room additions, expensive vacations and most importantly--financed many small business startups or expansions.

Not all are necessarily a bad thing in and of itself, but when the values of homes plunge you are down the river in a leaky canoe, no paddle and the waterfall is just inches away.

[proudohioan]

10. That's exactly what was happening....

and people were desperate enough to fall into that trap, while at the same time, desperate enough to be able to accept lower and lower wages.

That aspect of the housing bubble was able to mask a lot of income inequality and fundamental flaws with our economy. The silver lining of all of this may be that we have to come face to face with those truths. But it doesn't make me feel any better for the poor homeowners who are desperate right now.

[jobendorfer]

12. bottom line: median house price / median income

If the median house price is more than 3 x the median income for an area, over the long haul, housing prices in that area will drop.
Most of the new housing I see in the Portland area is around $240K. So I think it's about $90K too high, given our median income of about $50K.
Really, I don't know who the hell they think is going to buy a $500K house, anywhere. That limits you to about 1-2% of the potential market.
Scratching my head ...

J.

[proudohioan]

13. Well, I guess that explains the housing market in Cleveland...

:rofl:

Seriously, I'm scratching my head on those $500K houses myself!

I think the only way that folks were actually able to qualify for loans were because of the 'exotic' (read predatory and immoral) new finance packages. And at some point, if folks wanted to buy a house, those prices BECAME the market price, which had absolutely NO basis in reality for the area's median income! WTF????

And of course, that kept the rental prices fairly high as well. We the consumer pretty much got screwed.

[Capt. Jack]

15. The seed..

...is the "outcome-based "appraisal".

Americans are splintered on the foreclosure issue.

Let's scientifically reappraise ALL homes delinquent or not.

That will establish your new principle balance. Where to assign the deficiencies?

Stuff them right in their TARP Funds.

That will put us all on the same "team" to fight against the Wall Street foreclosure machine.

If anyone wishes to get involved and stop griping to ourselves (which has no significant impact) please join us!

It is FREE, advertisements are prohibited, and I will be there to greet you personally!!! .... wow aren't you lucky ;-)

http://www.foreclosurehamlet.org

[proudohioan]

16. Now that sounds interesting!

I am no longer a homeowner, but I still feel very passionate about the rights of those who are.

Thank you for the link, and yes, I guess this is my lucky day!

[AnArmyVeteran]

20. I wondered where everyone was getting money too.

All during the late 90s and the last decade I wondered where everyone was getting enough money to buy half million dollar houses. Huge houses kept getting built and bought and I wondered where everyone was making all that money. I have 3 degrees and a great job paying an okay salary, but any time I looked at want ads I didn't see enough jobs to allow so many people to buy such expensive houses. But now I know. They didn't have the money. They were buying something they couldn't afford or they were duped by predatory lending practices by shady lenders.

I've been debt free for over ten years because I never pay interest. I have never lived beyond my means so I have a house that is paid for and I am comfortable. Everyone around me is in debt and some are in deep financial trouble. I remember when a person couldn't buy a house if their house payments exceeded 25% of their take home pay. But then Reagan came into office and all kinds of new, corrupt lending scams were introduced. Variable interest rates would often sink a homeowner. In Texas, there was a huge battle to allow homeowners to have second mortgages on their homes. The bankers won and the law was changed allowing people to borrow against their homes with 2nd or 3rd mortgages. And soon after foreclosures skyrocketed.

If you give businesses any rein at all they will abuse others, every time. The regulations that existed before Reagan would have prevented the economic disaster we are facing today. But conservatives are always opposed to all regulations because they believe corporations and the powerful are somehow godlike. It is baffling how anyone could be so stupid, but conservatives actually believe corporations act in their best interests.

[FarCenter]

5. I don't think we'll see the same movement of people out of the Midwest and Northeast

A lot of boomers will be stuck in property in those areas.

Plus, they no longer have defined benefits pensions to support the move to the "active retirement life" in Florida, Arizona, Nevada. They'll be hanging on, making do, helping out the kids where they are.

[Dappleganger]

22. We're already down here in this miserable state

of FL, may as well make the best of it, LOL!

[Ned Bro]

25. Who would want to move to Arizona?

Well, I guess maybe if you're an albino. But wouldn't you then die of sunburn?

[eridani]

11. House sharing is a great idea--many cities and towns have programs promoting it n/t

[nichomachus]

6. And this doesn't even consider

commercial real estate which is poised for a disastrous plunge. Store front after store front in our area are going vacant. The Chamber of Commerce in the city next to mine is now in a newly dead strip mall. The C of C is the only thing in there. How sad!

[corkhead]

9. Not necessarily sad, but certainly ironic

considering the types of big business lobbying they do at the expense of mom & pop businesses.

[Liberal_in_LA]

17. same in los angeles. So many vacant stores

[zazen]

14. k&r

[Greyhound]

18. And this is still just scratching the electroplate off the fake Rolex.

The current "management" of the housing crisis, like everything Obama & Co. have done, is to preserve the richest people's wealth first, last, and always, by propping up artificially inflated valuations. It is doomed to fail of course, but every month they can delay it more suckers will hand over more of their cash to the parasites who benefit so greatly from this confidence scheme.
:kick: & R

[SmileyRose]

19. All real estate (and job markets) are local

I live in a south metro Atlanta area untouched by the housing bubble. Our homes - few over 1500 sq ft and nearly all in the 1000-1300 sq ft range - increased in value by a modest 1-3% a year for the last 30 years and the average homeowner here has lived in their house 15 years or more. And yet the foreclosure rate here is one of the highest in the country. Why? Because of job loss. My house is worth less right now that I bought it for 32 years ago. Nearly all of the value loss was in late 2008 and early 2009.

[Dappleganger]

23. What a shame.

I cannot fathom that kind of discouragement, SmileyRose.

:hug:

[SmileyRose]

24. I just think we need to stop blaming this on "the bubble"

My neighborhood will be fine, and when the job market improves and the houses here sitting vacant are eventually bought up by the folks losing their much larger and more expensive homes, then we'll return to normal. There are an awful lot of different forces involved in creating and in solving this mess. When news is reported about the state of affairs in California or Detroit in a way that makes it sound like this is a country wide situation, and people in places not affected by those conditions change their behavior and sabotage their own housing markets because of it, it is frustrating to say the least.