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Sunday, June 26, 2011

Home Prices Will Crash As Long As Banks Don't Give Mortgages

Homebuyers' ability to finance home purchases has always been crucial to supporting the prevailing real estate market values (a point I have made several times over the last 18 months in prior posts on the housing bubble and its causes).  The anecdotal evidence the last four years linking banks' unwillingness to issue mortgages to anyone but the safest credit risks -- in essence, the polar opposite of the prevailing standards between 2001-06 -- to plunging real estate prices is now showing up in hard data.

There are several major markets in which cash buyers are a near-majority of all buyers.  Such circumstances depress prices.  If and when the dollar strengthens against other currencies, the flood of risk-taking foreign investors from Europe, Asia and South America, buying American properties with cheap dollars and no mortgage, will suddenly recede.  At that point there will be few to no buyers, on any terms, and the effective then-prevailing market value of some properties will approach zero

Real estate values can be tricky and sometimes prone to understatement on account of their illiquidity.  However, there are some markets in which there are far, far too many properties -- condos come to mind --  lacking any redeeming distinguishing feature from multitudes of similar, milquetoast units.  The overhang of unsold new units, unsold existing homes, homes yet to be foreclosed upon because banks don't want to recognize losses, and other homes not yet offered for sale because their owners are waiting for a market rebound to put them on the market, all produce a perfect storm. 

Combine these factors with the move towards mandated down payments of at least 20% of the purchase price, higher mortgage rates and generally stagflationary or recessionary economic conditions, and it is very hard to see how real estate prices will not continue to move steadily downward...or plunge sharply downward at any moment. 

Eric Dixon is a New York lawyer, strategic analyst, management and business consultant in the real estate and energy industries, and political consultant.  Mr. Dixon may be reached for further comment or consultation (for a fee) at edixon@NYBusinessCounsel.com.




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