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Years of Pain to Come in Residential Real Estate.
Regular readers of this letter are familiar with my antipathy towards real estate of every flavor, with the exceptions of multi unit dwellings (apartment buildings) and farmland (click for “The Hard Truth About Residential Real Estate” at http://www.madhedgefundtrader.com/may_26__2010.html and “More Hard Truths About residential Real Estate” at http://www.madhedgefundtrader.com/july-22-2010.html ).
So my interest was piqued when Ron Peltier spoke the other day, the CEO of Home Services America, a national brokerage firm in the Berkshire Hathaway (BRK/A) fold. What better way to get a hands on from the trenches, read on this troubled market, than Oracle of Omaha, Warren Buffet’s personal agent?
He said that we may see the number of existing homes on the market climb from the current 4 million units to 5 million, versus a ten year annual trailing average sales of 2.5 million units. Record foreclosures are forcing reasonable sellers moving for demographic reasons (larger families, job changes, divorces, etc.) to compete against distressed sellers, driving prices down. Those suffering the indignity of losing their homes are seeing realizations at 25% to 50% below fair value.
At least 25% of American homeowners, or some 35 million dwellings, have negative equity. While prices on average have fallen back to 2002 levels, Peltier doesn’t expect further declines because of the huge support provided by mortgage interest rates at 50 year lows. So he sees a best case scenario of flat prices until this record excess inventory of 2.5 million homes is worked off, which can’t occur until 2012 at the earliest.
Personally, I think Peltier is being optimistic because he doesn’t address the hurricane force headwinds of the retirement and downsizing of 80 million baby boomers, the parsimonious attitude of banks towards new borrowers, and the harsh reality of continued falling standards of living in the US. Continue to rent, not buy, and let the landlord worry about the rats in the attic.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Thank you for your perspective.
I agree unless the administration supports demolition via tax credits as a way to thin inventory and spur new starts.
Blah blah blah ...
These kind of articles think everyone lives in one of the bubble markets that went up 20-30% a year during the go go housing market days or that they used their home a speculative investment/ATM.
Well in my local market things are just peachy. We didn't have any RE bubble. I guess because Texans have more common sense (p.s. I am not a native Texan - I just invest in RE here). Sure the macro environment creates a drag but I couldn't be happier than a pig in mud at the moment. Granted it's harder to sell and my existing portfolio has taken a small hit but there are lots of great deals available if you know where to look and the real icing on the cake is that there are more tenants than ever! I don't invest for capital gains anyway - I invest for cashflow - and rents are on the rise.
I noticed a foreclosure in my neighborhood so I decided to check it out. I was there early and was talking to the homeowner and then the bank rep. During the conversation with the bank rep she told me she was there to bid on behalf of the bank. Huh? Say What?
Having worked for an auctioneer (OK different country) I know that’s a big no no and told her so. Can someone clarify that for me?
Apparently she does this a lot. First Horizon is the bank. Mass is the state.
The note was for $401K and taxes were probably due as well. approx $5,600 per year.
Bid by the bank who already owned it $370,100.10
Reason they will get a kick back from the taxpayer to cover the losses.
MERS was used to represent the bank in the foreclosure proceedings.
After it was done I knocked on the door and told the homeowner to get a lawyer as MERS has been discredited in many states.
The house is worth 325-350 retail.
Fucked up
If there are any Lawyer types here point me in the right direction here as this so wrong on many. many levels.
It's a shame more people don't buy their homes to live in and enjoy....Then, the next few years won't hurt in the least.
What?!?!? There is a problem with real estate?!?! Holy shit, Batman!
Or should I say "No Fu*cking shit!".
Broken record, old news, nothing new, why not just link to calculatedrisk blog or somewhere else that gives you your ideas.
How do you mark a story/author as junk????
When does the housing "recovery" begin? Simple. Once we run through all the REO & soon to be REO inventory, once we see Fannie & Freddie dismantled, once we see ZIRP disappear, once we see a floor at mid to late 1990s prices, once we see pigs fly.
My money's on the last coming true first.
Yo, Madman, looks like a bunch of folks here have not warmed up to your articles. Perhaps more depth and exposition would help. Spend more than 5 minutes in the write-up?
Bitch, Bitch, Bitch, Bitchez!
LOL!
Perhaps we use the Amish system, the men help to build each others home when they are first married. Do you think this system could become common? Cutout the Mortgage industry alltogether.
Where is it written you have to have a mortgage to live in a House? It is Not.
This is a true paradigm shift.. from where a Home is debt based and an 'investment' to a source of shelter and community.
we're going to be getting around by horse and buggy soon anyways, so why not. (PS. When my brother was little, he called them "the squeamish people")
Good suggestion. But, that would under mind the system in place that prevents one from accruing wealth. The usury system works well for them, even in times of decline.
You know if the the two rouge States of California and Florida (The Greece & Spain of the United States) would force their banks to clear their sour real estate loans than maybe things would calm down in the Real Estate world.
and close most bad banks underwater on interest derivatives and loans...
To madhedgefundtrader
Your continued superficial analysis doesn't meet the standards of this blog. Please find clients elsewhere.
To MHFT: I'm very surprised that you haven't explored the latest under reported scandal involving GMAC (and probably lots more) re "who really owns the paper" in foreclosure hearings. This could be a real game changer, abrogating perhaps millions of foreclosures that have occurred to date. "title, title, in the flows, who really has it, nobody knows"
Ally/GMAC spokeswoman said three days ago:
Foreclosures won’t be suspended and will continue with “no interruption,”
http://www.bloomberg.com/news/2010-09-21/ally-financial-says-gmac-mortga...
The high-end (jumbo loan, 20% down) of the housing market where I live has a 30 month inventory. Spec houses that were offered at $1.2M in '08 are now under $500K, with no takers. Pain? The real pain hasn't even started yet.
Hmm...Cuomo rhymes with Jumbo!
Hmm...Fannie rhymes with Freddie...Is there a correlation?
http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/
Blah blah blah,
Me me me me me me me me me me me.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
IMO, observations of sales in the Bloomfield Hills area (North of Detroit) suggest prices from the mid 1980s. Only houses with special features (architecture or setting) are going at 2,000s levels. Larger "big uglys" are not selling. Older construction selling at $115,000 to $250,000 levels when they sell.
I think there was a 60 minutes or 20/20 a while back that showed the brutal decline in the North-of-Detroit (Bloomfield Hills, Rolling whatever) real estate. The local country club had a waiting list FOR PEOPLE TRYING TO GET OUT! Apparently you can't just leave the country club, someone needs to replace your spot. During the boom auto years these neighborhoods (& Auburn Hills) were THE places to live and the country clubs had queues for people trying to get in. What an about-face! I heard you can buy blocks of Detroit city for less than a Hyundai these days.
"I was living in Chicago and a friend told me that houses in Detroit could be had for $500," said Brumit, a financially strapped artist who thought he had little prospect of owning his own property. "I said if you hear of anything just a little cheaper let me know. Within a week he emails me a photo of a house for $100. I thought that's just crazy. Why not?
Drive through Detroit neighbourhoods once clogged with the cars that made the city the envy of America and there are homes to be had for a single dollar.
http://www.guardian.co.uk/business/2010/mar/02/detroit-homes-mortgage-fo...
"It had a big hole in the roof from the fire department putting out the last of two arson attempts. Both previous owners tried to set it on fire to get out of the mortgages. So there's a big hole about 24ft long and the plumbing had almost entirely been ripped out and most of the electrics too. It was basically a smoke damaged, structurally intact shell with a snowdrift in the attic."
Deep value play!
....the City would no doubt throw in free property taxes for a decade, too. But the termite/cockroach exterminator bills would be outrageous.
Thanks to all the 125% Loans to Value, we may see 1880s Victorian prices before this is over.
The archetype of the haunted house began then with empty Victorians in the longest depression of the 19th Century...
TOLL BROTHERS
http://williambanzai7.blogspot.com/2010/09/vintage-toll-brothers-ad.html
$99.00 - where do I sign ?
how much to upgrade to a Viking stove and Subzero refrig ?
Deflationary death spiral anyone?
http://www.calculatedriskblog.com/2010/09/housing-starts-and-unemploymen...
Nice chart re housing starts leading unemployment 16 months.
The company that can build houses faster may lose less money...
Yeah and tomorrow is the last day to close a deal for first time home buyer....buckle your seats ladies and gentleman This roller coaster is at its peak!
Finally, an agreeable informative MHFT article with somewhat less personal hype.
DRV>11?
http://stockcharts.com/charts/gallery.html?s=drv
How about Commercial?
RE that is...
I am amazed at his obsession with mentioning the tickers of his own investments in the podcasts. Like every freaking 30 seconds he finds a way to get it in the conversation. It's like just make a damned list we can link to anytime, and then maybe MHFT could have a natural conversation with someone.