Please stop asking if there any way we will hit bottom this year? The answer is NO, NO, NO! There are just way too many factors working against this market for it to stop imploding. Here’s just a few of the reasons we are in for another rough year (well, rough for some but not for us potential buyers).
1. There’s that small foreclosure problem. There are still a bazillion subprime loans facing resets over the next year. Not to mention the Alt-a and prime loans that are in the same boat. Most of these homes will go back to the banks and end up for sale as REOs.
2. The subprime market has vanished making it nearly impossible for low income families to purchase homes. Subprime loans have gone the way of the VCR. Just try to find a subprime lender these days, especially in Ca. This will put tremendous pressure on the low end of the market. People with decent salaries and good credit are not going to buy in Subprimeville. The poorer areas will seize up until prices make it attractive for investors who will then buy up the properties as rentals. Right now prices are way out of whack with rents so the investors are not even looking yet.
3. Getting Prime loans is harder than ever. Banks have labeled California as a declining market. They are requiring larger down payments to cover the value of the home in case it decreases ( I think they mean WHEN it decreases). Most Americans are up to their lip implants in debt. Scraping together a 20% down on a $500K home is no easy task. I sure can’t conjure up $100k. FHA is probably the way most folks will get into a home in the coming years. So the homes need to be under the FHA limit.
4. With the demise of Subprime and Alt A loans getting harder and harder to get, good old fashioned lending standards will return. Meaning, homes will have to be…what’s the word I’m looking for….Oh Yea, they have to be AFFORDABLE. Homes that are 5X or 8X someone’s income are not affordable. Since that’s just about every house unless you happen to make $300k a year, they will obviously need to come down in price.
5. The oversupply of homes continue to put downward pressure on prices. You cannot have a 2 or 3 year supply of homes and expect prices to remain flat. Until that inventory is worked off prices will continue to fall. Foreclosures continue to add inventory at record rates. In addition home builders are continuing to build new homes adding to an already bloated supply. In some cases they will just stop but in others it makes more sense financially to just build out the remaining homes.
6. Inflation is reducing the purchasing power of the buyers. I know the Gobment keeps telling us that inflation is at record lows, but us poor worker bees know the truth. Gas is $75 a tank full, a lunch at Quiznos is $8, a dozen Titliest cost 50 freakin dollars, a gallon of milk is like $4, etc etc etc. Real inflation is probably 8% to 10% regardless of what JW would like me to believe.
7. Consumption is starting to decline indicating the consumer (that’s us) is spending less. When people spend less other people lose their jobs this feeds back on itself and the result is recession. Auto mfrs and dealers are already seeing this. Furniture stores and electronic stores are starting to feel it. Any one notice Levitz is going out of business? Circuit City is hurting so is Home Depot and Lowes. If it gets ugly we will see many of the businesses that cater to discretionary spending go under. All those little golf shops, boutiques, pet spas, paintball shops, pool builders etc will vanish. Plenty of places will do fine. We will still need our haircuts, food, medical supplies and of course bars will do more business than ever. Beer consumption always goes up during a recession. Also credit card defaults are starting to rise. I saw a report that said the average American has almost $12k in credit card dept. YIKES!
8. Job losses are building. Again, the numbers thrown out by the government don’t fully reflect this but it is happening. Actually the last report was bad, much worse than it should have been for a December as the employment usually goes up due to the extra help stores need over the holidays. Many of the trades being affected by the housing bust do not show up in the employment numbers. Most construction workers are independent or under the table. We could lose a million construction workers and the employment report would not show it. It’s not just construction workers, it’s anyone that is tied to construction directly or indirectly. You might be the secretary for an executive at a lumber mill in Podunk NorCal and you could lose your job. You might drive a cement truck, or work in the building permit dept at for the local city or drive a roach coach that goes to construction sites. As you can see the threads of construction knit a very large sweater. If you start pulling too many of them you can quickly wind up with a big mess.
9. The secret is out. Joe Q Public has read the paper, seen the news reports or talked with some crazy internet blogger and is concerned about the housing market and the economy. Until the public perception turns around it will be hard to move houses.
10. Sales will remain sluggish because most of the buyers are on the internet reading bubble blogs. Well, the smart ones are anyway.