The story is the same. Too many distressed sellers (REO) and a total shortage of buyers. Sure rates are low, but not many contracts are getting signed. Liquidity has dried up. This is especially true for high-end homes. There are many owners that have been looking for a bid for two years now. Case had this to say:
“I don’t think anybody is predicting that it’s going to go up very much in the next couple of years unless we see a resurgence of economic growth,”
That’s just polite talk. Case knows full well that there is a “0”% chance of a resurgence in economic growth. We will be lucky if growth stays positive at all. So what Case really meant was: “There is no upside”. And that is why we have a buyers strike.
A question to ask is, “Where might the rock solid bottom of housing be?” If you could answer that question you could ask, “How far from the bottom are we?”
I will put a number out that I think will hold for house values. My number is 10X’s annual rent. At that number you will find financial buyers. My bottom side estimate assumes we do not fall off a cliff into a deep recession. If that happens my bet is off. Some numbers that express rents and values at the 10Xs ratio:
Looking at it the other way:
Question: Are single-family properties priced higher than 10Xs where you live? (Be fair on your rent estimates)
From what I see the lower numbers in the charts are in the ballpark. But there appears to be a disconnect at the higher levels. For example; north of NYC you can buy a home for $1mm or you can rent it for $5,000 a month (implied value of $600K). The suggestion is that high end RE has farther to fall. That would take us back to price levels of around 2000.
There are quite a few areas around the US where RE values have fallen by 40%. But I am quite sure that property values have not fallen to anywhere near 10X’s rent. Many areas in the country (California) have values close to 20X’s rent. My guess is the average is about 15x’s.
10Xs is a worst case number. It would probably be a good deal for a buyer. But absent any other class of buyers stepping up, the market will probably gravitate to where the demand is.
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I walked away from a mansion on a hill in the Pacific Northwest. It was a multi acre, high modern fence, with an electric security gated paved drive way you could race a car on, to a hidden 3 story house with 17 fruit trees around it.
ReplyDeleteIt was down 40% and not purchased at auction, last I looked. We left it in nice shape, and it would show well, with out any funds invested.
In our area 1.5+ MM homes imploded. A 5000 sq ft home with a pool house and a studio house (7000+ total sq ft), on 5 manicured acres lost as much 70% in auction land at foreclosure...
There is no reason to believe prices will return to pre peak periods in a normal rebuild cycle. We need a generational change before we return the old prices we saw.
The world is a wash with cheaply made, no craftsmanship track homes that look like mansions. They wont age well, and their prices will not be as strong as real buildings 100 years older, made of quality material.
The new status symbols;
ReplyDelete1. How big your foreclosed house was,
2. What years, makes and models your repossessed cars were,
3. How much debt was wiped out by the bankruptcy judge.
4. (hat tip to Bruce) How much income your portfolio used to generate.
and probably
5. The dollar value of plastic surgery your now ex-spouse/domestic partner had.
In Ann Arbor, MI, the inventory of homes under $400k is consistent with a neutral market....around 6 months. Once you get over $500k, that jumps to around 13 months, and over $1mm it is around 25 months! This results in little upward price pressure on the lower end because the higher end homes keep falling down to the lower levels. In other words, BK, you are correct in saying high-end RE has a ways to fall...at least in AA. GO BLUE!
ReplyDeleteI live in Sonoma, Calif in an over 55 upscale development I sold my home in the Bay Area in 2005 and moved here with the idea of renting for a year or so and getting to know the area etc. Still renting....
ReplyDeleteThe home I am renting today was sold in 2005 for 505K and I am renting @1575.00 which includes $138. in HOA dues Plus a gardener once a month. This spread is very common here and the Bay Area.
Calif home investors have been living off appreciation and taking negative cash flow as the norm. Its my opinion that as the Calif housing market continues to decline (price) that thousands of investors will be so far upside down that it will create another REO wave downstream.
I doubt that any property is renting on a 10x basis in the Bay Area and probably most of Coastal area's Central and Southern. Property along the coastal area from far north to far south still in big bubble. Inland areas around Riverside East with extreme foreclosure rates are probably more in this range but otherwise property is significantly overpriced.
ReplyDeleteI do feel very bad for the younger generation that has been buying this overpriced housing at the urging of the President and various business leaders they will be saddled with huge debt loads and no real recourse other then BK or foreclosure, very disappointing!!!!!!!!!!!!