We all know that the subprime mortgage market created the housing bubble. Well, anyway, it made it worse at the low end.
Now it’s happening again. Only this time, there is no bubble. There is a floor. The lenders are playing a game of “let’s pretend.” Let’s pretend that the existing owners can afford to pay off the loans. Let’s pretend that if we lower the interest rate, they owners will keep prying. Let’s pretend these loans are still good. Let’s pretend we’re still solvent. They are holding properties off the market. They are covering up.
California’s “Mr. Mortgage” reports.
On the contrary lenders never sell any houses on the cheap because they don’t want to take the hits. We have seen the late stage default and foreclosure pipeline grow to epic size in the past two years and loan modifications — nothing more than new-vintage Subprime loans — take the place of the old exotic loan market in order to keep risky borrowers levered up and in their houses.
My conclusion: when owners have to move, they make deals. So do lenders who are about to lose their debtors. This is what to look for as an investor. Mobility is gone. This makes for deals.
This market is broken.
Now, look at DataQuick’s monthly housing reports. Due to pervasive can-kicking Foreclosures as a percentage of total sales keep falling month after month BUT SO DO PRICES.
So, the problem keeps getting worse for sellers. It keeps getting better for buyers.
He lives in California, a bubble state. On the one hand, median prices are down to $260,000. This is down 3.7%, year to year. “The median was the lowest since $249,000 in May 2009. The median’s low point for the current real estate cycle was $247,000 in April 2009.”
On the other hand, “Foreclosure resales – properties foreclosed on in the prior 12 months – made up 32.6 percent of resales last month, up from a revised 32.4 percent in December and down from 36.8 percent a year earlier. Foreclosure resales hit a high of 56.7 percent in February 2009 and a low of 32.8 percent last June.”
He draws two conclusions. First, this market will not get better soon. It is broken.
The fact is this housing market is structurally broken. It took 20 years of massive debt and leverage to create the bubble that collapsed and will certainly take more than 4 to stabilize. The repeat buyer — who over history has been the foundation to the housing market — is gone for good because the majority of homeowners don’t have enough equity to sell their house (pay a Realtor 6% and put 10% to 20% down on a new loan. This leaves all the heavy lifting up to the 1st time buyer and investor, both of which roam at the low end of the market and have been known to disappear from the demand equation over the period of a month or two.
Second, the rich are now going to take the hit.
The next phase to the US housing crisis is house price compression…the upper price bands compressing on the lower. It’s already happening. The data we watch closely every day are clear. This adds an entirely new dimension to the US housing crisis, one that pushes out an ultimate “recovery” a lot further into the future than anybody is forecasting, or can model.
For people with cash, they can get a good return on their money. The trade-off: housing [rices keep falling. But with bank interest at under 1%, it’s better to get a higher return on a rental home if you buy at a deep enough discount. That is what to look for: discounts.