Here’s what investment advisor Clyde Kendzierski from Orange wrote in his 70% Solution newsletter …No word yet from the real estate lobby on this one.
It will be several years before the current housing surplus is absorbed. Although nominal home prices will eventually bottom, inflation is likely to outpace home prices for decades to come. The idea that a home is your best long term investment will once again be relegated to the dust bin of speculative fads. By the time this housing bust bottoms, baby boomers will be selling their houses in high cost areas to fund their retirement. As with every asset, there will be periodic profit opportunities that last a few years, but for the next decade or two, homeownership is consumption, not investment.
If you can afford the luxury, enjoy it, but profits are no longer likely. For the past eight years, most stock investors (our clients excluded) would have been a lot better off in TBills and CDs. From the peak in 2005, real estate investors should expect the same. Prices will fall until the after tax cost of a 100% financed home is way below rent. Reliquifying the banking system has resulted in a surge of refinancing. As many as 25-30% of the adjustable rate mortgages scheduled to reset this year may be replaced with conventional loans. The stimulus package increase in Fannie Mae/Freddie Mac lending limits will provide a further boost. A significant number of homes in the jumbo loan category that were previously unsaleable will now trade. You may be surprised that the primary impact of all this will be to cause another drop in home prices. High mortgage balances made it impossible for sellers to drop prices enough to generate a sale. Homes that don’t sell don’t count when the statisticians calculate home prices. Now a more modest drop in asking prices will cause a bigger decline in the average sales price because more properties will actually change hands at these prices.
This also means that the increased loan limits for Fannie Mae and Freddie Mac mortgages will slowly decline since the cap is based on 125% of median prices in the area. Had it been in place a year ago, it would have permitted $730,000 Orange County mortgages. Based on the mid-December drop in the median price to $545,000 the cap will fall to $681,000. As prices fall, the cap will fall with it, reducing the median price further.
Given the minimum 10% decline I expect in OC home prices by the end of the year, the cap will fall below $625,000. If prices fall 15-20%, which I believe to be more likely, then the cap could be as low as $545,000. Each drop in prices will push the loan limit down. Each drop in the loan limit will put further downward pressure on prices. If you are planning to sell a home over $750,000, DO IT NOW!
Friday, February 22, 2008
Has Housing Lost Its' Investment Appeal?
Lansner reports:
