THE GREATER FOOL THEORY HITS REAL ESTATE
Maxed out has a few first person remarks about the falling RE market in quite a few states and then bemoans the poor slobs who bought at low rates who now can't make the payments. Boo hoo. I wrote here several times that if you have a problem making payments at 1-1/2% how the hell will you manage at 4 or 5 percent? RE has been operating on the "greater fool theory"---no matter how much I pay today I'll find a moron to pay me more tomorrow---for the past six or seven years now, and for the last year or so as rates have been rising. Three things you have to know about RE investing: It ain't liquid, it ain't liquid, and it ain't liquid, BUT for the last several years speculators have been "flipping" homes, meaning they buy today and sell tomorrow at a higher price. The last people to buy homes they intended to flip deserve to get burned, they were speculating.
I'd add here the observation gleaned from real time: the Jane Lunchbuckets never know they are speculating, the Lunchbuckets think they are just smart and those who warn them are either envious or stupid. When I was a broker in the markets in the late Clinton years and warned people that they were speculating in a wildly overbought market, most prospective clients flat out told me I was stupid. Months before the crash Barron's ran a major article about the zero caps of most of the high flying tech stocks but the stocks kept rising like a hot air balloon from deep water.
What does the sell off in RE mean? It means that first time buyers will have to pay 5% interest on a loan for a house that is at least 25% cheaper than a few years ago, and in some cases 30% cheaper; in other words for many first time buyers it is a wash, only this time it's a reality wash. It is impossible to spot a top in the RE market because there are no charts or national futures contracts to guide you. So now the prices are falling. How far? Who knows, but it is a lead pipe cinch that they will fall too low and nobody will know it til afterwards.
5 comments:
Yeah, for some people it will be good. These markets where under 15% of the population can afford to buy were bound to slump once the speculation fever eased. I doubt prices will get very affordable around the real hot places though.
But I keep trying to figure out what's happening with the Gulf Coast losses, and I think we have a big shake-up coming. Banks aren't foreclosing on a lot of properties in some places because they don't want to get stuck with them. And they aren't lending either. Now it looks like we are going to have a bunch of walk-aways.
The dingbats at the Fed are intent on raising interest rates. We don't need a housing slump on top of the oil problem and the auto industry problem. This is very economically risky. I'm thinking that we may be looking at a recession.
What's going to be the lift up?
The dingbats at the Fed are intent on raising interest rates.
The Fed must raise interest rates, else the dollar will devalue further vis a vis the Euro, the Yen, and other major currencies.
-- david.davenport.1@netzero.com
What does the sell off in RE mean? It means that first time buyers will have to pay 5% interest on a loan for a house that is at least 25% cheaper than a few years ago, and in some cases 30% cheaper; in other words for many first time buyers it is a wash
Nop, it is more than a wash, Mr. Profound Economist.
The mortgage industry has been writing home loans for a lot of subprime customers, including illegal aliens.
The industry will start to enforce at least minimal standards for quialfying for a mortgage again. The net effect will be much more than a wash.
-- david.davenport.1@netzero.com
And? All banks have required a 20% down payment for a long time which means that "walking away" from a failed speculation won't happen too often. Lending to illegals? With no assets? No jobs? No cosigner? Jesus, get real. RE is still the only thing we buy that is non-recourse, meaning that the lender cannot seize other assets in order to satisfy the loan. Lenders ain't lending to anything other than a safe deposit box that pays interest.
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