Watching the housing market and listening to the media is like watching a baseball game as you listen to basketball. The audio portion is completely disconnected with the visual. How many times have you heard that the housing market has bottomed since 2007? Here is a question: how much is that house for sale down the street really worth? Why would anyone make such a big purchase if they cannot make that determination?
We’ve all heard about the middle class or working class Jones overbuying and underwater in the mortgage who are about to be foreclosed on, but there is another class of buyer in much more trouble.
I first met one of these people about 25 years ago. At the time, I’ll call her Karen, owned 25 houses and was in the process of buying 3 more even though she was a divorced housewife and owned none 3 years earlier. How did she build her real estate empire? Buy a house, rent it out, use the equity to buy two more and pay herself a nice wage on the side, then repeat again and again. By the time I met her, she was driving around in a Porsche. Then the Bay Area housing market went into a temporary decline and of course she was bankrupt. Her strategy only worked when housing prices increased; a decrease was a calamity for her personally and I don’t think it did her renters or the bank any good either.
You would think the financial community would do all they can to prevent such a thing from happening. Currently, my neighbors down the street are small time compared to Karen but still they managed to accumulate 5 houses and neither of them ever had a full time job, but the bank and the FHA aren’t going to extend them any more credit. Now it is just waiting for the inevitable, things didn’t turn around like the media said it would even though they said it over and over again.
There are several people who own more than fifty homes each on the West side of town here and they are in trouble. They are trying to sell their homes, but for too much so they remain rentals. Homes on the West Side have held their value better than other parts of town, so it has been a slow death and there are builders still building houses on lots that they paid $100K for 7K square feet. It costs another $35K to prepare the lot. They make about $3K if they sell the house for $300K. My landlord, who is also a developer, told me he is leveraged to the hilt. They are all just trying to keep going while they wait for the inevitable; I think he’s going to raise our rent.
So, how much is a house worth in my neighborhood? Do you think we are at a low here? Down South, housing prices have doubled in the San Francisco Bay Area during the last 11 years due to an Apple and soon Facebook fueled bubble. A crappy 2000 sq ft ranch style house on a small lot in a medium priced area goes for $1.5 million there. The banks have to be praying that bubble does not burst. Still, it isn’t over until the price of a house reflects it’s actual value, which can be determined.
There is a wild card lurking out there. The wild card is gasoline and diesel prices. They are temporarily going down but they will go back up because fuel supplies are set to tighten further in 2012 and will be 10% short in 2013. As fuel becomes more expensive, many of the still desirable neighborhoods will become less desirable. It is a spiral as far flung suburbia is abandoned in a flight toward public transportation hubs. Just another variable in the impossible jumble that make up the true value of a home these days.
It isn’t over, it hasn’t bottomed and no one can say where housing is going. Now I’m going over to listen to the basketball game on Bloomberg.