I found this great, long, article Lights Out in Georgia at the Vancouver Housing Market Blog. I skimmed over the Sonnypage posts and got the general feeling of it. It was interesting to see the real estate’s total shift of opinion from the beginning, “There will be no recession in 2006”, to the end “our worst second quarter ever in our twelve years.” I really liked Mish’s analysis at the bottom of the page. Here’s an excerpt:
The “strong economy” was (and still remains) an illusion. What we had was an economy totally propped up by homebuilding and real estate transactions. 40% of all home buying in both 2004 and 2005 was for second homes or for “investments”. In addition people were all too quick to spend that increased “wealth” from home price appreciation (and then some), going deeper and deeper in debt.
The economy has not crashed (yet) because homebuilders are still building. That supports jobs. But when those houses don’t sell (and they won’t – without enormous discounts) all this “paper wealth” of homeowners is going to vanish overnight. As soon as someone drops their price by $100,000 every house in the neighborhood will be repriced. Comps will drop like a rock. Consumers used to seeing nothing but rising prices are in for a rude awakening. Their house will no longer be an ATM. Consumer spending is 75% of the economy and it has only one way to go and that is down. There are going to be a lot of people hurt badly in the recession of 2007.
>>”40% of all home buying in both 2004 and 2005 was for second homes or for “investments”. ”
The ratio between homes occupied by homeowners vs tenants has always been around 2:1. 40% investment buying for marginal buyers is high, but that high. I think the market will likely stay flat instead of a major correction.
But if you just look at the house prices out there, then look at the income required to get a mortgage for 75% of the cost of that home, then look at the gross monthly income required to get approved for such a loan and it is insanely high. I don’t know how things cannot swing back, at least not without salaries suddenly increasing. I’m just expecting the worse that’s all, because that’s my nature.
I think the increasing press in the last couple years about the impending collapse of the real estate economy is a bit overhyped. Real estate trends in relatively long cycles and its pretty hard for it to bottom out immediately like naysayers seem to be predicting.
Remember, there exist alternatives to actual brick and morter buildings. For example, housing futures offer a way to put on regional spreads as a way to capitalize on the difference in growth rates of different regional housing markets.
No real alternatives to an actual brick and mortar building if you want to own a place to live.
Hey Mmm… Life…: I’m totally hoping for a crash in housing prices so that I can get a better deal on a place. But whether or not prices will crash big time or stay flat, I’m not really sure. I am guessing that they will have to come down at least some, even just based on the fact that interest rates are climbing meaning the average Joe won’t be able to get approved for the same amount that he could a few years ago.