This Fall – A Doozy in the Housing Market

Mr. Mortgage outlined some great points recently on his Aug. 16 blog post regarding further troubles in the housing market:

Mr. Mortgage

Some interesting points he outlines:

  • With banks writing down assets, they further exacerbate their problems because write downs cause their equity levels to drop which begets further write downs to be considered “well-capitalized” and so on and so forth (basically a vicious cycle)
  • Defaults are moving from sub-prime and Alt-A (smaller markets) to Prime mortgages (a much larger market) starting with pay option ARMS
  • An interesting point – the foreclosure market is now THE MARKET in California and banks are becoming the majority seller. Having one seller heading into a weak fall market, with mortgage executives intent on shedding inventory will likely lead to another LARGE one month decline in house prices (repeating last year’s results)
  • He also points out something that I’ve screamed about at all my housing seminars – there are no more “move-up” buyers – if the guy below you can’t sell, then he can’t buy your house so if the guy at the bottom of the housing food chain is hurting (starter homes) then the fool who overbought his Mcmansion is up you know what creek.

Go to the Mr. Mortgage site for the full excellent analysis.

Rental Malaise

I had been talking for a while about an increasing rental market as people can no longer afford houses. My feeling was that rents would rise. However I haven’t discussed much (except in this recent post) the excellent points brought up recently in the Calculated Risk Blog:

  1. Many people are moving back with family and friends (I did discuss this in my blog recently)
  2. Condos that can’t be sold are converted to rentals
  3. Houses are rented instead of sold (perhaps we may see investors buying blocks of foreclosures at 50%+ discounts? – large investment block purchases may be rising – see HERE)
  4. Also (not in Mr Mortgage’s article) perhaps we will see more renter incentives (See here)

Until this inventory clears out (it may be some time), rents will stay flattish but I think, they will eventually turn up with inflation and rising demand (watch out for rent control as I touched upon in this blog entry).

What’s interesting is that home sales were up last month in many parts of the country – I can’t help but think when large investors went into the stock exchange just before the crash of 1929 and tried to buy stocks to prop up the market. It worked for a day but the plunge occurred anyway as we all know. I think these buyers, who got ok prices, may still end up as having paid as much as 20% more than they could have – we’ll see what happens…

Chris Grande

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