The American newspapers are presently full of stories about declining suburban home values and the galloping foreclosure rates, mainly in the coastal markets. (The erstwhile “hot” real estate markets have turned bitter cold.) As more and more foreclosures get dumped onto an already over-saturated “buyers market”, there is a strong likelihood that prices will spiral downward. Anyone that bought a “spec” house is now trying to get rid of it, even if means taking a loss. The downward pressure on house prices is likely to continue for several years in the coastal areas, and in few inland markets like Phoenix and Denver.
The folks that bought “spec” houses at the top of the market are what I call contrapreneurs. They are holding an investment with steadily declining value. Most of them, sadly, used borrowed money to do so. Thus, not only are they riding a down escalator, but they must continue to service their debt on a house with a negative cash flow. Strapped for cash, many overextended themselves, and they are defaulting in alarmingly large numbers. Just as I predicted, some of them are starting to abandon their houses without so much as a fare-the-well to their bankers. This is a downright ugly situation. If the US economy noses down into recession (as I anticipate), with corporate layoffs intensifying the mortgage default numbers, then this could very well go down in history as a housing market collapse.
You may have bought your house a decade ago, well before the big run-up in prices. If so, even if prices decline 50% (as some predict), you would probably still be ahead. But what about your 20-something next door neighbor that bought his house in the summer of Aught Six? Odds are that he bought his house with little money down, via an adjustable rate mortgage (ARM), and at a peak of the market price. Now that prices are dropping, your neighbor is probably “upside down” in his mortgage. (Owing the bankers more than the current market value of the house.) It may be four to 12 years before the market pendulum begins to reverse and prices start to creep back upward. Don’t be surprised if you wake up some morning and find that your neighbor moved out in the middle of the night, unannounced. (What our friends in England charmingly call “a midnight flit.”)
The full implications of the housing market bust won’t be known for a few years–once we are closer to the bottom. I suspect that the psychological impact of that many people losing so many billions of dollars and in many cases the roof over their heads, will be devastating.It may be remembered in the same way as the stock market Crash of 1929. There will be a lot of “riches to rags” stories, and I suspect that this collective trauma will considerably affect the buying, investing, and saving habits of Americans for the first couple of generations in this new century.
One likely side effect of the correction of housing prices is that there will be a considerable lag in downward adjustment in property taxes. Local tax officials are always quick to raise taxes in a booming market, but they will probably drag their feet when it comes time to lower taxes.
Another side effect will come in the next couple of years, as savvy house renters start to hound their landlords, demanding lower rents. All they will have to do is threaten to move out–leaving their landlords with a negative cash flow and no prospect of matching the current rent. Some might consider this more ugliness, but it is actually one of the beauties of the free market. A truly free market eventually achieves price equilibrium. Nearly two years ago, I warned SurvivalBlog readers to jettison any urban or suburban rental houses that they might own. I hope that they heeded my advice.
As previously mentioned in SurvivalBlog, a small portion of rural foreclosures may represent a retreat buying opportunity. Monitor the market closely, either through a cooperative agent in your selected retreat area, and/or through Foreclosure.com. You may find yourself a bargain in the months to come.