September turned out to be a particularly ugly month for the continued erosion of the US property market.
This morning, the Commerce Department reported that the median price of a new home sold last month slumped by 9.7% from a year ago to $217,100. This came on the back of a 2.5% price decline in existing home sales last month, and was the biggest single-month drop since December 1970.
While overall sales did rise 5.3% from August (the biggest one-month gain since March), it came after three straight months of falling sales. And news that prices are falling is the latest piece of evidence that suggests the market is getting tapped out. The $217,100 figure is the lowest median price for a new home since September 2004.
But I’ve got news for you: The speed with which US house prices will fall in 2007 will dwarf that of this year. Here’s why…
• First of all, there is an oversupply of homes on the market.
• Second, builders have not yet finished projects that were begun six months ago when all was rosy.
• Third, sellers are still wishing and hoping they can sell their houses to the ‘right’ buyer for the ‘right’ price next week. Just like the Nasdaq collapse earlier this decade, homeowners are prone to overly optimistic projected outcomes in their personal situation.
By this time next year, home prices in places like Nevada, California, Florida and Arizona may not decline 5% as the experts are saying… they could fall twice or three times that number.
Overall, we may not see a full-blown crash in housing prices, but a fall of 20% to 40% from the highs in many areas will be the norm, not the exception.
That’s because right now, sellers aren’t selling. They’re in denial – still waiting for Santa to deliver their asking price… or close to it. But when homeowners finally adjust to the prices that reflect the marketplace reality, bolt the door – because prices will fall like dominos.
My advice: Take the first reasonable offer and count yourself lucky.
For example, my contractor is selling his house. He told me six months ago that it was on the market. Since then, he’s only had one offer – $5,000 less than his asking price. He said he’d wait it out. Given the market, I mentioned that he should sell at the lower price. He declined. The house remains on the market – and probably will be for some time yet. In the meantime, he’ll have spent a ton in mortgage interest, maintenance, insurance and taxes. Multiply that guy by several million – and the future of U.S. real estate looks ominous.
The Market’s Falling, So Why Is Greenspan Upbeat?
So imagine my surprise when I heard Alan Greenspan recently declare that the housing market has seen its darkest days.
I wonder if the former Fed maestro has fallen prey to the same ill-conceived thinking that is so pervasive on Wall Street? After all, it was only recently that a number of major investment firms breathlessly upgraded home building stocks… only to report the very next week that they saw disaster ahead in the housing market.
Take D.R. Horton, for example. This is one of America’s healthiest homebuilders – a very well managed company, with a stellar balance sheet. Yet recently, it said: ‘The company’s cancellation rate (homes cancelled divided by gross homes sold) for the fourth quarter of 2006 was 40%.’ That means almost half of all potential buyers backed out.
But I don’t need to see D.R. Horton’s numbers. I can just look down the street and see a ‘For Sale’ sign on every other house.
The ‘For Sale’ Signs Are Everywhere… So Why Are Homebuilders Still Building?
I’ve always wondered who owns all these houses on sale. Nobody I know has more than one house, unless they buy and sell homes as investments. But that hasn’t stopped homebuilders constructing an inexplicable number of new homes, on top of apartments being converted into condos. Earlier this month, the Census Bureau reported that housing starts unexpectedly increased.
I fear this situation is eerily similar to the Nasdaq slump in 2000. Back then, the regular guy got sucked into a market of low-float Nasdaq small caps, hyped up by irresponsible investment banks who wanted quick hits from IPOs.
Result? The regular guys ended up getting killed. And now, the lure of quick profits is sucking some people in again. And they’re quick to fall for irresponsible comments from people like Greenspan, the Commerce Department, the Housing Lobby, and realty companies.
‘Irrational Exuberance’ Revisited
Remember ‘irrational exuberance?’ This was arguably Alan Greenspan’s most famous speech. If you’d listened to him back then, you’d have missed out on huge gains in the market. Why? Because Greenspan has an impeccable history of being correct – but even more impressive is his ability to be right too early. He got it right – but at the wrong time. It was two years later that the market crashed.
When interest rates hovered around 3%, Greenspan never suggested locking in a fixed-rate mortgage and not speculating. Nope. Instead, he said adjustable rate mortgages make sense.
Result? With mortgage rates having risen throughout the summer, research group First American Real Estate Solutions predicts that interest rates will rise on about $300 billion in adjustable-rate mortgages this year alone. That figure is projected to jump to more than $1 trillion in each of the next two years.
That means an increasing number of homeowners could see their monthly payments more than double, fail to meet them, and file for bankruptcy.
So ignore those trying to make it seem that the worst is over for housing. While homebuilders’ stocks might be bottoming at the moment and represent dead investment money for a while, house prices aren’t bottoming just yet.
Bottom line: The housing bust is not today’s news. It’s going to be tomorrow’s. I think we’re about two years away from the seeing the bottom in the US housing market.
By Karim Rahemtulla, Chairman, Mt. Vernon Research for the Smart Options Report, www.smartoptionsreport.com