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Thursday, May 19, 2011

Extremely Bad Housing News: Abandon All Hope!

Some horrible housing figures released this morning indicate the huge housing collapse will get even worse.  This validates my earlier prediction from October 2010 (see "Housing Going To Zero," October 6, 2010) that the housing market would continue to sustain a major price decline. 

First, here's the price news...since all anyone cares about is how much value their house has lost. Year over year sales prices (April 2011 vs. April 2010) are down five percent. That may be a conservative figure in many markets. In any event, have no illusions about a recovery...for a long time!

However, two other figures from the National Association of Realtors report released this morning really stand out. All-cash transactions accounted for 31 percent of all April 2011 sales (and 35 percent in March). This number before 2008 -- when anyone could and too often did get a mortgage (and these are the same people who first defaulted and got subsidized modifications on taxpayers' dime) -- was 10 percent. 

The high all-cash portion of sales indicates strongly that banks are very reluctant to grant mortgages (particularly to those of us who own our own businesses and file Schedules C and get Forms 1099). Remember this the next time you hear someone spinning the news of four percent mortgage rates.

Who's buying? Lots of foreign investors, who take advantage of our weak dollar and who cannot get a traditional mortgage. (In fairness, these investors often do not know the true value of American real estate. Hold your envy.)  Furthermore, "distressed sales" such as foreclosures and short sales were 37 percent (down from March's 40 percent).

There is some overlap in these figures (meaning some of the short sales are all-cash deals) but the picture I paint for you is clear: many fewer "ordinary" home sales are being done today as they were just a few years ago. The deals that are being done are at significantly lower price points. 

The real lack of access to mortgage financing is impairing buyers' actual affordability...and just wait until mortgage rates skyrocket when the Fed stops quantitative easing and no one will buy Treasury bonds at current prices.   

Of course, the NAR's Lawrence Yun blames the banks for a 15-20% depression in buyer demand.  However, the banks' newly-adopted practice of requiring a downpayment equal to at least 20% of the purchase price is also having a major effect on reducing the buyer pool.  Many first-time buyers do not have $30,000 to put down on even a modestly-priced home of $150,000.  And in major metropolitan areas like the New York-New Jersey area, it is hard to find anything under $300,000 -- requiring a $60,000 downpayment.

Crime, Politics and Policy holds true to its earlier prediction that average residential housing prices may fall one-third to one-half from current levels -- or between 50-70 percent from all-time highs.

Eric Dixon
Eric Dixon LLC
World-Class Strategic Analysis

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