Closed this week in Amelia Park
As the bulls pulled the Dow 102.32 points up yesterday to 10424.62, taking the S&P500 over the 1100 mark again (1102.66) and Nasdaq to 2269.47, widely regarded financial analyst Meredith Whitney joined the ranks of those who foresee a serious decline in housing prices in the second half of 2010. With many opposing expert opinions in the marketplace, we can only resort to factual information that gives a clear understanding of the actual situation.
While getting a hair cut yesterday, the conversation went of course to the economy and what I thought would be the best scenario to be prepared. Inspite of my doctorate in economics, my approach to economy and lifesyle is largely influenced by life experiences and the most effective event to shape my pro-active approach to hardship, came after hurricane Hugo hit on the island of St.Croix in 1989.
The devastation and destruction was so intense that most people needed weeks and months just to take notice of the reality around them. By the end of the day after Hugo hit, my team and I had scavenged the island for gasoline, non perishable foods, water and medications, cleaned out sleeping quarters, rigged a communication system through VHF radios, had our safety and security organized and had our meal of the day. In 12 hours of daylight we had gathered the facts, analyzed the situation and possible scenarios, made allowances for potential mistakes and positioned ourselves with action. The same steps are needed in today’s questionable economic future. Some areas and industries will continue to be doing fine or even grow; others are doomed to a long slowdown or even extinction. For example being a framer in Southern Florida is not a good job many years to come, unless another hurricane hits. Your options? Change profession, become a renovation specialist and market yourself intensely or move to an area that still has some framing needs and hope for the best. Oh wait, Obama gave you another option, collect benefits.
Get the facts, analyze the options and take action, that’s how we’re still alive to talk about the great depression of the 1930s.
Meredith Whitney’s reason for turning bearish come from the observation that Banks are starting to unload higher-priced homes in their bulging “shadow inventory,” and with sales dropping sharply now that the federal tax credit for homebuyers has expired, there’s a massive mismatch between supply (rising) and demand (falling).
Evidence for falling demand is plentiful: Pending home sales have tumbled 30%, hitting two records.
Mike Larson of Weiss Research recently said: “Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever.” The consensus is the sharp decline in home sales is the result of the federal tax credit ending, but few analysts have hazarded guessing where new demand will come from, absent the tax credit. Meanwhile, the supply of homes for sale or in default marches ever higher in all price segments.
To the surprise of those who reckoned that higher-end homes were holding up better than the rest of the market, the delinquency rate on investment homes with an original mortgage of more than $1 million is now 23%. And a staggering one in seven homes over $1 million is in default. Even the posh Beverly Hills zip codes have seen prices shrivel by 31%.
An Ever-Larger Shadow
Lenders are thus rightly worried that many of the 11 million homeowners who owe more than their house is worth – the 24% of homeowners who are “underwater” – will walk away from their mortgages, especially if the real estate market rolls over again. Such an increase in so-called strategic defaults would burden lenders with even more unsold homes – a category known as “shadow inventory” because lenders don’t always list a newly foreclosed home for sale immediately.
This shadow inventory could reach as high as 7 million homes by some estimates. Other analysts have calculated that it will take 103 months (about 8.5 years) to clear this gigantic inventory of foreclosed, distressed and defaulted homes, obviously creating the next stoppage in the pipeline as a growing number of these homes become outdated in terms of advancing technology in material use and operational savings.
According to the US Census Bureau, these are the numbers to put in context:
• 51 million households have a mortgage and
• 24 million own homes free and clear (no mortgage), and about
• 37 million households rent.
Sobering isn’t it and questions about recovery should have arisen when the total number of vacant dwellings in the US increased to a record 19 million in the first quarter of the year, up from 18.9 million in the fourth quarter of 2009.
Yet new homes continued to be constructed and our inventory rose last year by 1.14 million to 130.9 million, while occupied homes increased only by 1.07 million to 111.9 million.
Of course all these numbers create averages for a macro overview. In the nation’s capital area things are still fine and getting better as foreclosures are dropping and prices are holding. Short term thinking prevails here because Washington DC is a government stronghold and with all the money pumped into federal services, payroll is still up says investment banker turned real estate expert John Ronveaux.
Brendan Donelson who operates mortgages services nationwide out of his offices in Nashville, says that refinancing of high end properties is still a very much ongoing opportunity, while Nassau County realtor Lila Keim, who recently made the switch from Coldwell Banker to Prudential Chaplin Williams, admits that selling real estate takes a lot more marketing and creativity these days. With two of her recent sales located in Amelia Park, she also admits that like on a nation wide scale, even locally, certain areas and developments are more in demand than others. But all in all the market here in the county and on island is still moving, even though it is at a reduced pace.
