‘I can see the bottom!’
That was the giddy cry from many real estate commentators in October 2006, followed by recommendations to buy housing stocks, because the bottom was in sight.
Not quite. Although both the PHLX Housing Sector Index (^HGX), which represents the nation’s biggest homebuilders, and Dow Jones Equity REIT Index (^DJR) both rallied towards the end of 2006, they’ve since slipped all the way back to where they were in October.
Five reasons worse is to come for the US housing market
At the time, I wrote that the worst for the housing market had not yet occurred – and the fact that both the HGX and DJR have reverted back to where they started is hardly surprising when you consider just a few of the factors weighing on the market:
– The fallout from the sub-prime mortgage mess.
– A slump in mortgage REITs.
– A rapid increase in the number defaults and subsequent foreclosures.
– Housing starts (the number of new houses being built) and building permits have steadily fallen over the past year.
– With more houses on the market, prices are falling – even in some of America’s fastest-growing states like Florida and Nevada.
After one of the most explosive real estate booms in history, a cooling off period won’t happen overnight. And if adjustable-rate mortgages rise, you could see many more foreclosures.
The weak housing sector has the Federal Reserve in a spin over interest rates, too. So what’s next for this pivotal market?
US housing market: the good, the bad, and the myth-busting
First, a dash of good news: If you’re not trying to sell your house, don’t worry. You may only be in for a 10% to 20% trim in value.
Now for the bad news: If you are trying to sell your house, the market will not lose 3% or 5% when this is all said and done. In my opinion, it will face write-downs in value of 20% or more from the top – maybe even more in some areas.
But it doesn’t seem to matter how bad things get, the so-called experts routinely trot out the same old, tired myths…
‘Housing market values aren’t the same as stock market values.’ No. But when you lose 20% or 30% on your home, can you still say that housing prices don’t collapse like stocks? You have to experience it first.
‘Home prices don’t crash.’ Really? When you have excess supply of anything, prices will correct – regardless of the market. And that becomes even more potent when you mix it with other factors: Slowing growth… tapped-out buyers… speculators who need to get out of the market… rising rates, insurance and property taxes.
Speaking of taxes…
The cost of homeownership keeps rising
Last year, I can’t remember seeing a single home on my street for sale. This year, I’ve seen at least 12. Granted, I live on a big street, but when I see ‘new low price’ and ‘lease purchase’ and ‘price to sell,’ I can tell that the environment has changed.
Worse still, you have the double-whammy of insurance and property taxes. Let me give you an example…
Take a $300,000 home in Orlando – about as safe a distance from the coast as you can get. At that price, you can expect to pay about $1,200 for your monthly mortgage payment with 10% down. Not so bad – you could pick up a nice three-bedroom, two-bath house on about one-eighth of an acre.
But on that same house, you’d pay $500 per month in property tax, and another $250 per month in homeowners insurance, with a 2% deductible for hurricanes. And this is even after the much-ballyhooed (but yet to materialize) property tax and insurance reform promised by Governor Charley Crist, who has turned out to be just another politician at heart.
So do the math – you’re paying about $2,000 a month for a three-bedroom house in Florida that isn’t really close to anything. And the median income in a place like Orlando is a mere $25,000 because of the huge services industry. This means that half the population cannot afford the median priced home (about $260,000 in Orlando), even if they are a dual-income family.
I use Orlando as an example because it has an extremely healthy, growing economy. But take this scenario and apply it to somewhere like manufacturing-heavy Detroit or parts of Ohio (both of which have already endured mass layoffs) – especially if we head into a recession.
It’s time to get out your renting shoes
My advice: Rent, don’t buy. You could rent the same house in the example above for about $1,200 per month – without the hassle of home ownership on a strapped budget.
And for my friends in Canada, the same advice still stands: If you’re seller, take the first reasonable offer and sell now. If you’re a speculator, get out now. There is a real estate bubble in Canada, too – and they’re saying the same things north of the border that America was saying just a year ago: ‘Prices can only go higher.’ But when sellers realize that they’re simply not going to get top dollar for their homes, prices will adjust… and fall. This is a piece of history that you really don’t want to repeat.
The recipe is in place for a painful correction. I predicted last year that it would take a couple of years before we saw the bottom of the housing market. So despite what you hear in the media, we’re only about six months into the correction.
I liken it to catching a cold. For the first day or two, you feel rough – but often just chalk it up to a one or two-day bug. Then it wallops you and you can’t get out of bed for a week.
Simply put, if you’re looking to bargain-hunt, sit tight and wait till next year. Right now, the market is feeling rough and prices are correcting… but the suffering has not yet begun. This correction is still in its infancy.
By Karim Rahemtulla, Investment Director, Mt. Vernon Research for the Smart Profits e-Report, www.smartprofitsreport.com