Nothing Can Fix Housing
The government could force mortgage rates across the board to 2%, it won’t matter. They can re-introduce a tax credit worth $15,000 for anyone buying a house, it still won’t matter. Don’t you get it? You can’t fix housing with artificial demand. Tell me where you can find enough buyers of homes that have money for a down payment and who can purchase a home without government incentives, and then have the job and income security to not be at risk of not being able to afford to live there. Sure there’s a handful of those folks running around these days, but don’t you think they are already in homes? Where are the new buyers? Hint: there are none.
If you read past the headlines, you know that even though there was a flurry of activity in April due to the expiring tax credit, that foreclosures and delinquencies were at record highs. Look for the trend to continue through 2010 and probably 2011 as well.
Where is this going? Well, it’s not going to be pretty. I think the following trends will continue to increase over time:
- More vacant homes – It’s incredible how some of the nicest neighborhoods in my area have vacant homes scattered throughout the neighborhood. They’re easy to spot since they usually have dead grass with weeds everywhere. Some homes have been vacant for multiple years! Some with no power so the air inside is stagnant and disgusting. The longer these homes sit, the more money it takes when someone does buy it just to get it into liveable conditions. Compounding this issue are the stupid home owners associations who will prevent a sale until they collect back dues. Rather than encouraging someone to take over the home and starting paying dues to the HOA, they will block the sale in an attempt to collect thousands in back dues. Ridiculous.
- More people living in their homes and not paying for it – This trend is going to skyrocket for two reasons. First, the economy will continue to struggle and people with a lack of income simply won’t be able to pay their mortgage. Second, the people who have money are fed up that their neighbors are living in the same home as them, yet not paying for it, so they figure, screw that, I’m not paying. For more on the strategic default option, click here. What the end game is for an increasing trend of people not paying their mortgage when banks are already overwhelmed with foreclosures, it’s tough to say. I honestly think eventually it could get to the point where people live indefinitely in their homes without paying, I’m talking 5-10 years or more. The lack of resources to force these people out or do anything about it might enable such a situation. Wow.
- Continued weakness in home values – If we’re talking real values, home prices will continue to drop. Guaranteed. If we’re talking nominal values, they will probably decrease but could eventually increase. How’s that work? Well with enough inflationary policies and incentives, government could possibly stabilize housing in a nominal sense, but they would be creating pure inflation. Consider the following extreme example: if government decided to print enough money to pay off every single person’s mortgage, home values would skyrocket. But, the policy of this would be purely inflationary and cause your purchasing power to get crushed. So how do you determine the true value? While not perfect, consider determining how many ounces of gold it would take to buy your house. Now track that number and the change in that number for the next ten years.
- Abandoned areas of cities – Detroit recently announced that they will be bulldozing 15,000 vacant homes. In cities like Detroit where the economy is in shambles, this is a situation that will likely pop up in the near future and people move out of the city, get foreclosed on, etc. Look for this trend to expand outside Detroit. Perhaps a post-Lebron James Cleveland??
Pretty extreme, yes? Well, there’s my opinion on housing for you. For the record, I own a house and have lost money on it. I’m not too worried about it because I didn’t overextend myself and I can pay the mortgage. Was it a good investment? Heck no, but I have a house I like so I’ll live with it. I’ll probably be in the house for a long while.
If you haven’t bought a house yet, and are considering it, I’d say continue to be patient. There’s no rush as this bubble took years to build and will take years to unwind. Negotiate aggressively with landlords and rent something nice for pennies.