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Minyan Mailbag: A Proud Homeowner vs. the Homie Bears


This cage match rides on one's debt position.


Prof. Zuc,

Just a general question/statement: You (the Site) constantly put a negative spin on housing. It seems that a statisitc is taken and magified to the the nth degree. Now, Im not a economist nor am I as smart as the professors, but I would think that these stats and comments do not represent all housing markets. I can understand that if a General Motors (GM) plant shuts down and most of the employees had a 1-3 yr ARM, a problem will occur. I can understand that people could get burned flipping condos. Let me share an example of housing in my area...the north shore of LI.

My house and the house next door to me went on last June. Very similar houses. My neighbor put it on for a very high amount as compared to comps. So, we put ours on for a little less.
They had a deal in September and it sold for what is should have (1.7mm from 1.9mm). We went into contract for a little less. I actually WALKED away from my deal after the buyers signed...wasn't geting the right vibe. I took it off on Dec 1, and put it back on 10 days ago...Im already in contract (for a higher amount than I was going to sell it for).

Now...why were these 2 houses sold? My neighbor was in the house for 30+ years...empty nesters in a big house. They now own a apt in NYC and a house in FL. We sold (we are a young family) because we are moving out of state and will buy there.

Neither falls into the commentary which you tend to promote. So, I my situation (people moving for a variety of reasons) the exception or the rule? Are familes who own a home (as opposed to a house...a family makes a home) going to just sell..and rent...and upset their balance in life? Does your Denver statisitc the other day fairly represent all markets ? What about the RAPID price appreciation in Crested Butte for vacation homes ?


Proud Homeowner

Proud Homeowner Minyan -

The short answer to the question of whether you and your neighbor represent the exception or the rule, is, in my humble opinion . . . both.

You are the rule in the sense that still far more homeowners buy and sell homes to live in them as they move from place to place or families grow. You are the exception in the sense that over the last three years the percentage of people in your shoes – relative to overall number of home purchases – is much smaller than ever in the past.

According to the National Association of Realtors, approximately 35-40% of all homes purchased between 2003 and 2005 were second homes. Approximately 2/3 of those were investment properties as opposed to "second-homes."

How may this matter to you? As I wrote a few months back in response to an almost identical question:

"while the speculative flippers may be a minority of the real estate buyers, they represent the price inelastic buyers which inflate prices across the board. They dictate the price for speculative and non speculative buyers. For valuation purposes, comparables do not exclude speculative transactions, indeed the whole real estate services industry - from realtors, to mortgage lenders, to appraisers, to lenders, has a vested interest in focusing on the highest possible price point. And today's flippers-driven price increases are beyond reason - literally - because at the very core of their modus operandi, is the assumption that there will be a greater fool to bail them out in short order. In their framework the intrinsic value of the asset is irrelevant. Since the prices of all of today's buyers are being hijacked by the flippers, regardless of whether you are a "flipper" or not, everyone is paying speculative prices."

Let me make something clear: by excessive valuations I am not thinking "yeah it's a little pricey but. . . " According to USA Today, CNN and a recent study by John Talbott, a former Goldman Sachs banker, in the next decline, America's top 40 cities are likely to see average price plunges of 47%. And if this is not scary enough, you can read a whole lot more gory statistics in this excellent piece by John Mauldin. The valuation train-wreck will not discriminate between conservative homeowners and "condo flippers."

The saving grace for some will depend on their debt position. Those who did not extract the ephemeral value increases by way of cash out refi's, and are currently sitting on fixed long-term mortgages, probably have little to worry about. But those who pulled out some $1.5 trillion from their homes, at least half of it in the form of short term ARM's, are probably going to get smoked, sooner than later.

Incidentally, the fall-out from the ARM's, which are likely to create a spike in foreclosures or forced sales, the current overbuilding of inventory, the fall in demand from disappearing speculators (remember they were more than 1/3 of the demand for the last three years), the puking of properties by those speculators, and rising interest rates, is combining to create a rare perfect storm that makes a 50% fall in values perfectly realistic.

So "know thyself." If one is putting a roof over his/her head and making a "home" for a family, good for them – it is the American dream. But if one has borrowed and spent the value of the home over the last three years, I'm afraid no sense of "home" is going to shelter him/her from a nasty financial squeeze.

Prof. Zucchi

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