Keepin' It Real Estate: Collapse in Luxury Market More Revealing Than It Appears
Broad measures suggest recovery; submarkets tell a different story.
Yesterday's Wall Street Journal chronicled the plight of high-end housing markets, as formerly wealthy homeowners are falling behind on their mortgages at an astounding rate. Defaults and foreclosures are increasing in the Jumbo Prime mortgage space -- big loans made to borrowers who were supposed to be good credits -- at a faster clip than in any other segment of the market. This is causing distressed or otherwise forced sales, resulting in the type of Price Discovery that can send vulnerable markets reeling.
Meanwhile, cheaper markets have, by and large, experienced the worst of this vicious whoosh down and are now groping for a bottom. Some of these distressed areas -- the fortunate few that were allowed to experience a legitimate correction before government-sponsored foreclosure moratorium set a true stabilization back months, if not years -- have laid the groundwork for a long, arduous recovery. Others, prevented from finding a bottom on their own, will be suffering from a years-long slow bleed of inventory, crushing the hopes of local real estate investors and first-time buyers and sending capital elsewhere.
As Wells Fargo (WFC), Bank of America (BAC), Citigroup (C), and JPMorgan (JPM) -- the biggest holders of property in the country -- continue to bow to White House demands to keep housing inventory off the market, a legitimate sustainable recovery in housing will remain elusive. This matters little for high-end markets, however, as prices are screaming downward whether the government likes it or not.
What few media outlets are covering is how the upwards spreading of the housing infection will affect widely reported home-price data, and thus the psyche of the American home buyer. This is a subject I mentioned back in April, but now that the trend is becoming reality -- as the Case Shiller Home Price Index registered its first monthly increase since 2006 -- it warrants revisiting.
As defaults and foreclosures bleed into the high end of the market, buyers gain the upper hand in price negotiations as sellers become desperate. These forced sales will turn illiquid markets liquid as buyers that have been locked out of these expensive markets begin to scour the landscape for opportunities. As sale volumes pick up, so too will the average price of the homes eventually sold, since this will shift the distribution of transactions included in the broad averages towards more expensive homes.
This isn't just some statistical anomaly: As broad measures of housing data show recovery, behind the curtain, individual submarkets will be telling a vastly different story. To be sure, the Jumbo market makes up less than 3% of the total housing market, but if it's your market, that makes it 100% of the housing market that matters.
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter