Thursday, April 12, 2007

The darkest hour...hasn't gotten here yet.

(Click to enlarge)

I downloaded this chart, to which I added the trendline. The trendline is quick and dirty, and actually makes a couple of overly optimistic presumptions: that the WWI-Great Depression-WWII deflation of home values didn't count, and that historically, since WWII, houses have actually been a tiny bit undervalued.

And the results, as you see, are still fairly dreadful.

Home prices have a long way to fall to reach equilibrium - somewhere in the neighborhood of 40% according to this trendline. In reality, it's probably more like 50+%. We can only hope that the artificially inflated values of homes will not fall as far as they really should - and I don't know right now how realistic an idea that is.

After reading this article today, I fear most of us who intended to rely on the equity in our house as a buffer against poverty in retirement and before will be sorely disappointed. St. Petersburg is a typical American metropolitan area.

Even a Realtor will tell you: Glut is huge - The "staggering" home inventory erases hope of a recovery in 2007. By James Thorner, Times Staff Writer Published April 6, 2007

To jump to the end, there is at least, minimum, an 18 month surplus of homes on the market. That means no more listings would have to appear for at least a year and a half to prevent home values from sliding further than the 2-10% they already have in various areas - and what is the likelihood of that? Zero-zip-nada.

The number of homes that will end up on the chopping block due to ARMs alone in the next 18 months will probably double the number of houses on the market, if not worse. That means in order to actually sell your house, you're going to have to come way, way, way down on the price because you have way, way, way too much competition.

Great if you can afford to, but can most people? No. Most people have little if any equity in their homes, and will have to either sell it for what they owe or walk away in bankruptcy. The latter is far more likely than the former, now isn't it, class?

And that certainly isn't going to help maintain current prices, is it?

The good news is that it has to stop somewhere, sooner or later. The bad news is that even people who don't have to move or sell will find that they owe about twice for their house what it's worth, and it will take a decade or two (or three?) for home prices to creep back up. Either the trendline has to move naturally forward (which will take a long time), or a new cycle of inflation will occur to artificially raise the prices back up. Neither prospect is a good one, class.

If you live in an area where the down-bust has not yet hit, I advise you to downsize immediately. But for most people it is too late. The market in their area is already pretty glutted and is only going to get worse. Their only option is to stay put and pray for job security. Or maybe take in boarders, if they have any spare rooms. Or something, I don't know what. I wouldn't count on being able to get a second or third job, either. But that's another post, class.

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