Saturday, July 23, 2011

Pssst; Wanna Buy a Cheap House?

The housing market is the last economic driver in this country.

Why? Because it is the only one they cannot ship offshore (although I am sure plans are in the works for Mexican house builders to ship completed sections north).

And why is that a problem?

Housing has not hit bottom yet, and may not for 3-5 more years.

Housing will soon only have the value that cash money can buy, as lenders will not lend long term on a depreciating asset, will they?

And housing is still depreciating; a fall that will only accelerate when the Federal money from Freddie and Fannie dries up completely.

And the bank owned homes will be the first to fall. A house to the owner is not an asset to be liquidated; it has a value as shelter that creates it's primary value. When the cost of that shelter becomes more than its worth, it becomes a drag on the budget, but never should it be considered an asset.

But the bank has to liquify the asset; they deal in liquidity, not in real estate.

And when the banks own a sizable percentage of the real estate, that liquidation will be costly to home values.

It was the idea of the last ten years to make your home an asset to be liquidated.

Re-fi and take the cash, right? Home Equity lines to pay for the trip to Disney World or pay off the credit cards that were run up at The Gap and Target; turn your Home into CASH.

And then interest rates rise a little, and housing values fall a little, and now your cash cow has dried up. Instead of being able to take another 10k out of your home to pay off the Visa, the bank is calling in your credit limit.

And so the bust began. To many leaks in the credit dike, and not enough fingers. Everybody who was strung out at the end of their credit line went bust.

Which was apparently quite a sizable percentage of the country.

If you have ever seen video of a sinkhole beginning and developing, that is the exact way the housing values are progressing. The houses that seemed safe at first are now starring down the abyss, and the guy next door is planning on taking a hit as well.

Home value is about two things; what someone will pay, and what someone will lend. A bank doesn't care what you are paying for the place; they will tell you what they will lend. if you can make up the difference, then everybody goes home happy. When you can't...

And values fall again.

You want to know when housing has hit bottom?

When the banks stop sitting on piles of liquidity, and start investing in mortgages.

Without Fannie and Freddie (READ: US Taxpayer) to bail them out.

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