Monday, July 28, 2008

Housing Crisis

Brett Steenbarger took a first hand look at the housing market around his area. Very well worth the read!

Beneath the Housing Crisis: Variation in Housing Inventory
It was clear from our drive that there is no single housing crisis. Much of Naperville real estate is in slow-down mode: prices are holding reasonably well, but taking longer, on average, to sell. In the formerly hot areas of development, however, the overexpansion is mind-boggling. Not even free cars and large rebates can move the inventory--particularly with the tightening of mortgage loan criteria for would-be buyers.

This is not an intensification of the slowdown in the general market; it is many standard deviations from the mean. I have significant doubts that many of these subdivisions are viable at any price. From the pricing of the regional bank stocks that have loaned to these developers, I don't seem to be alone in this opinion. C'mon: are you going to jump in and buy a home in a half-filled, half-built development, when it's not clear that the builder will ever be able to finish the work? Are you going to buy a condo in a partially filled building and hope that the remainder of the units will sell, so that you won't have to cover the shortfall in maintenance assessments?
this is like tech stocks in early 2000. While many sectors back then were overpriced and experienced a significant but normal bear market, a host of internet-related companies were brought to market with no underlying demand or value whatsoever. The bust wasn't over until many of these roundtripped to zero.

The difference, of course, with housing is that, when developments fail, contractors don't get paid; their suppliers aren't paid; bank loans go into default; mortgage-backed securities are threatened; homeowners lose value in their homes; municipalities lose property tax income; and on and on. Just as surviving the 2000-2003 period meant staying out of the formerly hot areas, I suspect that those who get through the current crisis will insulate their funds from the many areas touched by the collapse of developments that are forced to resort to increasingly desperate discounts and come-ons.
When I looked at the homes that were selling for $1 million and over, however, there was six years or more of inventory on the market. Is anyone likely to pony up that kind of money for what looks to be a depreciating asset? With tightening loan conditions, where are these buyers going to come from?

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