The Future is Bright… Eventually (1of2)

Disclosure: I will warn you straight away this post is a bit of a cop out, it is mostly hearsay and subsequent opinion. Although the hearsay is from sources who based their statements on data and actual projections, and who are actual experts.

INTRO: The now late Jim Rohn had a good seminar piece on positive vs. negative. His point in brief, we need both in their appropriate time. If negative things are happening, or will happen it does little good to pretend all is well rather than to prepare accordingly. Likewise, if outlooks really are positive, it does little good to act like the sky is falling.

NEGATIVE: Though there have been some positive numbers in the housing market of late, especially in our area (DC Metro), I run with the crowd that believes we are not in the clear just yet. There are far too many factors teetering on the brink of decline and in large part they are being falsely supported by government infusion (I am not saying I am against the government support per se’). The latest infusion being the blank check Fannie Mae and Freddie Mac were just promised this week. Any one economic area going over the edge could be the “tipping point” for any other given area, or areas.

So far the market recovery is more about a PR campaign for consumer confidence than it is a real return to economic stability. The hope is that the government can prevent disaster long enough so that the consumer (you and I) will become confident enough to spend money we still don’t have in order to build more confidence so we spend even more money we still don’t have, and so on. Just the other day I heard a report stating that economic recovery appeared to be on it’s way because consumers were using more credit cards again. I could be in the minority, but when we correlate leveraging debt (again) with recovery I get a little nervous. It tells me we may have learned precious little in this season.

Here is what I see out there. In short; I see commercial real estate folks who are nervous. Insiders see their industry on the brink with building owners who have over sized loans, and tenancy rates that are plummeting, leaving a profit and loss gap that will not fill any time soon. From what I understand the majority of small bank failures this year have been due to commercial loans going delinquent, not consumer loans. I also see the full spectrum of homeowners who are still upside down on their homes and will be for some time to come even after a true recovery begins. Many of these home owners will remain one income reduction, medical emergency, broken down car away from delinquency on their mortgage, until prices recover.

Finally; If, in fact, we do see additional declines in home values, which I believe we will when it is all said and done, more trouble is on the way because it would likely deepen the cycle of delinquency and the number of buyers willing and/or able to soak up that inventory is shrinking. Why more decline? Many reasons, but the simplest is this: We have yet to lose all of the falsely inflated value in the housing market. Example: just down the road from where I sit right now there are 3 bed 2 bath townhomes that would have sold in 2003 for about $430,000 or so at best. Those same town homes are still selling anywhere from $550,000 to $600,000. Why is this a problem? In 2003 $430,000 was already an inflated price that was hard to believe since a rough median price for 2002 was $370,000, while in 2001 the highest price overall was shy of $320,000 (still high for its time given then recent history). A healthy housing market grows at an average 3-7% a year. To this particular neighborhoods credit, if it made gains of 7% a year for those last 8 years since 2001, the top homes should be fetching about $515,000, which is at least in the ballpark. However, at 3% gains for the last 8 years running, the top homes should only be fetching about $395,000. My pessimistic self suspects a balanced market is found somewhere in the middle.

POSITIVE: that is for next time, but the future is bright for real estate in the DC Metro area.

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