Residential Real Estate in a Death Spiral

The Decline and Fall of Western Civilization post is painting a picture of a residential real estate market in a death spiral.

Housing Market

Housing Market

The following article from Mark Hanson of the Decline and Fall of Western Civilization post is painting a picture of a residential real estate market in a death spiral. With some states seeing a sizable majority of potential homebuyers frozen out of the housing market by negative equity, there will be effectively no move-up or organic homebuying.

Folks with less than 25% equity in a house that can be sold today cannot even move laterally, much less trade up, without adding capital that (for the most part) they don’t have to spare.

So mid – to high -end homes become completely illiquid assets at anything like current prices and illiquidity will drive prices further south as supply overwhelms demand. Just look around our beautiful Amelia Island. You will see this effect everywhere.

Negative Equity

Negative Equity

From Mark Hanson: “Let me frame this‚” in the bubble years existing sales $500k and over were common. In CA alone, from early 2005 to late 2007, the average house price was over $450k. Total sales were huge then too‚ over 700k nationally in many summer months.

In July 2009 there were only 460k single family (ex-condo) sales by the way that was down from June’s 465k, but that got lost in the housing bottom headlines. Of the 460k houses sold, only 12k or roughly 2.5% had a purchase price over $500k. I don’t have inventory numbers on houses for sale over $500k but even at 5% of the total inventory that is 1.75 years of supply. Oh, and by the way in CA alone last month there was close to 12k NODs on props over $500k.

This 2.5% sales rate goes to underscore how insignificant (and ruined in many cases) the organic move-up/across buyer has become due to epidemic negative equity and absolute lack of affordability through exotic finance. Unless he can sell and re-buy he will remain gone.

But what really is negative equity? Unlike the bubble years when zero down or a 100% HELOC after the purchase in order to replenish savings was the norm, today’s buyer has to sell for enough to cover the Realtor cost and the 20% down needed to buy most mid-to-high end houses using new vintage loans. Most analysts look at the reported negative-equity figures as the tipping point, it’s not.

If homeowners can’t sell for enough to pay a Realtor 6%, extract the down on the new property, and pay for moving costs they are effectively in a negative equity position. Homeowners know this, a homeowner that has only 15% equity knows they are trapped in their house. We are still learning what this realization does to spending habits, as the focus for many becomes “how do I earn or save my way out of this”?

When looking at neg-equity if you move the bar down to 90%, 80%, or even 74% (6% Realtor fee + 20% down) then it changes everything. The vast majority of homeowners in the nation become stuck (see chart). Without these existing homeowners active in the real estate market, we will never find a true bottom.

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3 Comments

  1. walterryan

    And to think we are told night after night by the evening news, things are better and the recession is over. I guess having the band play music on the deck of the RMS Titanic had a certain soothing calmness for those enjoying the cloudless sky and bright stars. Market Man, I think once again you have brought nothing but the raw truth to your readers, thanks.

  2. John Wheelwright

    Equity is much like a Mirror on a Stick. In the bubble it became so wildly speculative that everyone forgot that the picture is reversed when looking in the mirror. Equity is the first thing to deflate when ownership changes hands.

  3. John Wheelwright

    Equity is much like a Mirror on a Stick. In the bubble it became so wildly speculative that everyone forgot that the picture is reversed when looking in the mirror. Equity is the first thing to deflate when ownership changes hands.

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