Got Insulation?

Hey, some bad news for a change… in today’s North County Times, the headline in the printed version of this article ran: “Coastal housing market cracking”. I simply cannot believe this is going to come as a surprise to anyone. My call is this: 35%-40% off the peak across the $750k – $1.9m market over the next 1 to 3 years. We just saw it happen in the lower end markets. Is it not like a honking neon light flashing? What am I missing?

As things stand today, 90% of these people whose loans have not begun to reset yet, cannot even qualify for a loan today. The 10% who can qualify will pay about $1,000 more per month. 6mo libor is now at 3.7%. Add the typical 2.5% margin to calculate the new adjustable rate, and you get 6.2%… not too bad, but still about .7% higher than the typical 5.5% rate, which many A-paper folks got a few years ago.

Still on a $1m loan, that’s $583 more per month… (and libor averaged about 5% over the last 20 years). Not good, especially when we throw in the few lost hours or few lost accounts by one or both income earners per family due to the slowing economy… all time high credit card debt… all time low consumer savings… and sweeping losses of average stock portfolios.

$583 is not a lot of money to many folks, but it is to some marginal folks who are overleveraged… enough to put downward pressure on prices in “good neighborhoods”… enough to start the spiral that will not stop until prices are back in line with healthy debt-to-income ratios.

Its not that people will rush out at once… but rather one marginal family at a time, who won’t be able to get a buyer to pay the price equal to the mortgage owed plus closing costs… because the buyer will not be able to find a lender who will lend at that sales price.

The government and/or banks can maybe cut everyone’s losses faster this time around if they act quickly, by voluntarily writing down loans direct to consumer and then by re-locking consumers’ loans voluntarily or by consumer request… but they would need to do it well before the consumers’ credit is dinged from missed any mortgage payments, otherwise the incentive for cooperation is lost. And this will still result in an inevitable price correction. Not good.

Bottom Line: If you own a home in this price tier and you have enough insulation to hold on for the next 7 to 10 yeas, my take is that inflation and population growth will eventually lead prices higher than their previous peaks… but if you are not sure about the next 3-5 years, think about acting now to avoid catching a falling knife later. Please don’t hesistate to call for help in assessing where you stand.

Meantime, there is bound to be more foreclosure displacement, so if you looking for a place to park cash, think lower-end rental income and call a good broker.

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