Market Prices: The Great Chasm

At first, I was going to title this post “The Great Divide,” which somehow sounds more catchy… but it just doesn’t have the right connotation. “Divide” suggests a gap that is difficult to bridge… whereas “Chasm”… well now, that’s a place things fall into.

What many folks are missing today is the huge disconnect between high-end properties that haven’t even corrected YET, and low-end properties that are selling at rock bottom anyway you slice it.

On the low-end:

  • Prices have dropped below the cost to buy the lot and build the home.
  • Net annual return on an all-cash purchase exceeds 5%.
  • You have to win seller acceptance over competing offers within a matter of days.

For homes currently valued between $750k and $2m:

The correction has not even begun in earnest. A huge percentage of these homeowners have ARMs. None have reset yet. They will. Its not the interest rate adjustment that will push them over the edge… since their fully indexed rate will still be low, at least for now… but rather, the fact that some of these loan programs force principal and interest payment re-amortization over the remaining 25 years.

Some marginal folks will need to sell. And when they do, since there is exactly zero market for making loans in this segment, people will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle. And that’s with LIBOR staying low.

We just saw the blueprint of how this plays out in sub-prime. It is not a socio-demographic thing, but rather a math thing. These homes will decline in value, 35-40% off peak prices, and the lower-end homes currently trading below intrinsic value will hold their own, or come up a bit to bridge the gap, as foreclosure displacement puts upward pressure on the rental market.

If you would like help figuring out how all this creates challanges or opportunities for you, call anytime with any questions.

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