Market Outlook, July 2009

Back in March I began helping a client execute a search for homes under $325k in the Carlsbad, Oceanside, and Vista areas. We had 20% down, plenty of reserves, solid credit, and great income. We ultimately negotiated the successful purchase of a great home that fit their goals and budget… but not before viewing literally 150+ homes, spread across a 25 mile radius, and making 10+ offers on different properties before our bid was finally accepted after three months of aggressive searching. In one case we were outbid even after offering 20% above list price.

Talk about a seller’s market.

Largely based on this type of anecdotal evidence, there is a sentiment brewing on the street that “the real estate market” may have reached a bottom. Also sprouting up lately are bullish media driven statistics like this one:

“The pace of decline in residential real estate slowed in April… Furthermore, (nearly all) metro areas… recorded an improvement in monthly returns over March”

But here’s the thing…

In my last post, entitled “Here’s a Statistic I dare you to challenge”, I conclusively present how our local MLS database reflects an artificial short supply of inventory in this hottest selling, low-end market segment.

Furthermore…

  • 73% of all sales this year have been under $400k
  • 11% were from $401k to $500k
  • 11% were from $501k to $700k
  • 8% were over $700k

So while this market bottom sentiment is based more on wishful thinking than fundamentals, at least its thought process is understandable. However, folks who point to this type of statistic as some sort of a bottom are being misleading at best and ridiculous at worst. To take a low-end-specific, ultra-short-term statistic grossly out of context to self promote a lame argument that the overall “market” has bottomed is preposterous.

Not only are these types of statistics misleading because they make it seem like “declining at a slower rate” is a good thing… or because one month does not establish any real trend… or because they apply exclusively to the lowest end of the pricing spectrum… but they are deceptive too, since they do not reflect a functional free market.

It’s a seller’s market alright… but only because roughly three quarters of the inventory is being artificially held back. While the supbrime re-set waves are behind us, the problem has not been fully digested. So far, 25% of all US mortgage holders are upside down. This number is just gaining traction.

Many good folks have been working extra jobs to pay their mortgage on time, creating no room for excuses. They have been pleading for loan modification aide. But the aide has been going to the wrong subset of consumers… the ones who have already missed payments and therefore have no credit profile left to defend. Aside from sending the wrong message to the folks still hanging in there… it is pretty safe to say this insipid plan is failing, since over 50% have already re-defaulted!

Even as we lick our subprime wounds, a new time bomb is imminent… and its impact looks to be three times the magnitude. The big thing people are missing is this: its more than just taboo terms like ‘Option Arm’ and ‘Alt-A’ that need to be baked into the market… the very best “A-Paper Prime 800 FICO Fully Documented Income Loans” that were written during the last five years… should also be placed in the same category as “subprime”. We do not have a socio-demographic problem. We never did. It has always been a math thing.

Leverage up = fun.

De-leverage down = not so fun.

If the measly little subprime crisis brought the financial world to its knees, what will happen when the real hammer drops?Let’s see how many “good credit risks” hold onto their homes when they’re upside down by $200k.The idea of a bottom is nothing short of preposterous.

Bottom line:

If you own a $700k to $10m home, and realistically expect to hold onto it for the next 10 to 12 years, then you’ll probably make out very well with anticipated inflation and demographic explosion. However, if you think you will be selling anytime between now and the next four or five years… I would seriously think about an immediate, aggressive price drop… before your neighbors do. Prospective buyers of this segment are better off waiting to lower their cost basis regardless of their cash position.

Prospective sellers in the $500k-$700k market should recognize how quickly this market is deteriorating. Cut your losses as quickly as you can. On the buy side, this market really needs to be approached with caution. If you are financing a lot of your purchase then proceed on a case by case basis. A minimum down payment of 20% is strongly recommended because FHA pricing and/or mortgage insurance fees are cost prohibitive using this high of a loan amount. This market is deteriorating rapidly so good deals are starting to sprout up… but there is a good amount of downward pricing pressure expected. Rates are anyone’s guess, but if they stay low there is no hurry to buy right away. If they start ticking up, you may want to consider how your monthly payment will go up even as prices come down. If you are paying all or mostly in cash, then time is on your side.

In the $350k and below market segment, prospective sellers who still have equity are actually in a great position to sell but the appraised value will limit the price they can obtain. Buyers in this segment can’t go too wrong. There is a lot of demand for these homes. It is possible that an inevitable flood of inventory can outpace demand, but even prices drop substantially, the intrinsic value at $325k exceeds the risk of downward pricing pressure… even substantial pressure.

A good way to measure intrinsic value is by using my market bottom triangulation principal.

A good way to determine your budget is by using my awesome housing payment calculator.

A good way to get immediate, personalized, meaningful advice is by contacting an agent committed to customer service excellence.

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One Response to Market Outlook, July 2009

  1. Hey,
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