Archive for January, 2008
Sell Now or Risk Losing 30%+
Good article over at BusinessWeek on their front
page called, “ Housing Meltdown ”.
“But it’s considerably more likely that the storm is still gathering force.”
“The Standard & Poor’s/Case-Shiller 20-city home price index fell 7.7% in November from the year before, the biggest decline since the index was created in 2000. And that could be just the start. Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That’s even with the Federal Reserve’s half-percentage-point rate cut on Jan. 30”
“While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. “We now see potential for another 25% to 30% downside over the next two years,” says David A. Rosenberg, North American economist for Merrill Lynch ( MER ), who until recently had expected a much smaller slide.”
“Shocking though it might seem, a decline of 25% from here would merely reverse the market’s spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There’s a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.”
“Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. “A down market is getting baked into expectations,” says Chris Flanagan, head of research in JPMorgan Chase’s ( JPM ) asset-backed securities group. “People say: I’m not buying until prices are lower.’” He predicts prices will fall about 25%, bottoming in 2010.”
“Still, if the national average decline is anywhere near 25%, the entire U.S. economy is in for trouble. Keep in mind, says Merrill’s Rosenberg , that the relatively puny price decline to date has already pushed home-loan delinquencies to their highest level in 20 years. The plunge in residential construction reduced the economy’s annual growth rate by a full percentage point in the third quarter of 2007. A bigger decrease would wipe out even more jobs—carpenters, real estate agents, mortgage brokers, furniture salespeople.”
“However things unfold, the changes are likely to be wrenching. The bigger the boom, the harder the fall.”
(emphasis mine)
This is the main article from this weeks BusinessWeek, and its 5 pages long so what I posted are only a few snippets. Now it seem that the mainstream has woken up! I’ve been calling for a housing correction since early 2004 (only my friends and family could confirm this) and I’ve had this blog up since 2006. Back in 2004 I though we needed a mid to high single digit percent decline to correct the housing bubble, but I was also perplex at how prices keep rising. I underestimated the lax lending standards which drove the market from 2004 – 2006. Back in 2004 I almost purchased a starter home from a friend (at a huge discount of $100K), but decided to use my money to pay for an MBA instead of a home. I think my MBA was a better investment as I’ll make drastically more money over my lifetime than I would compared to a homes appreciation.
Now that everyone doesn’t think I’m just some kook on the internet claiming that the sky is falling, I warn you to sell you house for whatever price you can TODAY because you are quickly running out of time. Once the spring season starts, expect to see almost double the inventory on the market with everyone thinking the same thing. The slippery slope has begun and there is no turning back. No rate cuts, government intervention, etc.. can save you from what has been set in motion. I expect at least a 30% price correction in the Baltimore Metro area and maybe even 50% in some area further North of here like Bel Air and southern PA. The reason I expect more drastic price declines further out you might ask? Well its simple, all real estate costs more the close you get to the center of the business center ( Inner Harbor ) as it is most desirable. You pay less money for a home, but trade it for a longer commute, and you pay more money for a home for a shorter commute. This is basic real estate valuation.
Cut your losses now and sell your home for whatever you can, your kids and grandkids will thank you one day.
And Another Rate Cut
Yes, he did it again. Bernanke cut the Fed Funds Rate by fifty basis points, bringing the benchmark rate to 3%. Now that the price of credit is officially below inflation, could the economy finally recover? I don’t think so. Although I’ve read some analyst opinions that some – very, very slim – chances exist that the Fed’s policy will succeed, the reality is that too many problems in the financial and housing sectors need to be solved. Home prices are more than 30% higher than they should be by historic standards, with California median prices 60% above the reasonable level. Until those come down, and that will be a slow, painful process for many a household, bank, lender, and investor, the Real Estate market will not begin to operate properly. With all the mortgages that are about to fail will come huge writedowns and losses at banks all over the world, slowing U.S. economy, higher rates of inflation and unemployment, and all the doom and gloom that those bring along. I don’t really see how changing the interest rate can warp the reality and all the inevitable processes that are slowly unwinding, but the Fed has a job to do, and they’re doing their best. Who knows, it might just work. And by the way, I’m not really keeping score but isn’t it funny how for three meetings in a row, there’s always one – and only one – member of the Fed that votes against a decision. It’s always a different person but I’m beginning to feel there’s a reason why they appoint someone to disagree with the majority. Perhaps it would “scare the markets” if everyone voted for the rate cut? Well… I think they’re quite spooked already; could it really get any worse?
A different perspective on the UK buy to let market
I read a magazine today that is available free and extremely informative, it is called the Jet To Let Magazine. Despite its title it also covers the UK property investment market. Look them up on Google and get your copy on order!
The people who write the magazine also run investment courses and clubs. I have been on one of their courses and it was very good and also reasonably priced. I have got to know the people behind it a bit and I believe I can trust their judgement.
Well, their judgement is that the UK property market will NOT crash or see significant price reductions as people are saying generally. It is their advice that you should be looking for good deals out there but buying in places where you have a USP on a property so that it stands out from the rest in case you want to sell it in a slow market. They still support the UK buy to let market as an investment vehicle over the longer term but recognise that the capital gains associated with this investment are over for the short term at least. For capital gains they are recommending investing abroad…but again carefully finding the best areas that have USPs (Unique Selling Points).
Other things are covered in the magazine such as some of their property deals and also article son the present state of the UK mortgage market.
Anyway, I hope they are right about the short term future of the UK property market…I am sure they are!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any ‘advice’ on this Blog purely as information and not a substitute for professional advice.)