Wednesday, April 05, 2006

Existential Equity Extraction and Six Months to Housing Hell

"Existential Equity Extraction and Six Months to Housing Hell." Here is a section of that article.

o Speculative buyers have stopped buying and many potential buyers are canceling orders and leaving deposits on the table.

o In many states, property insurance is up 25 to 30 percent, right up there with soaring heating and air-conditioning costs.

o The record rise in home prices has helped balance state budgets, but at the expense of property owners who are not capped on their real estate taxes. The Alternative Minimum Tax is also emptying homeowner's checking accounts!

o $2 trillion of ARMs were written in 2004 and '05 and are scheduled to reset in 2006 and '07 to much higher market interest rates, making them much less affordable.

o On the supply side for housing, sheer panic is beginning. As home buyers cancel orders, developers are taking their deposits, slashing prices 10 to 20 percent, and offering incentives such as free furnishings, granite countertop upgrades, wall-mounted TV's, closing costs, etc. In specific home developments and condominium complexes, price reductions of $40,000 to $100,000 are not unheard of.

Despite these new tactics, last month new home sales still dropped 10 percent and the supply of new homes for sale hit a new high of 550,000, nearly a seven-month supply. (The nationwide supply of existing homes for sale is up 40 percent over last year.) Adding insult to injury, new housing starts are holding up! This is about as silly as GM and Ford running their factories full tilt when it is clear no one is buying cars. As the supply piles up, the buyers take a vacation.
o Housing prices in active real estate markets have gone up so much that the costs associated with owning vs. renting make renting a far more attractive choice now. The situation is, of course, extraordinary. The flip side of this is household real estate assets that are rising as a percentage of GDP. In 1997, the percentage was 105%; today, it's 150%. The degree to which owning is so much more expensive than renting is the true measure of the extent of the housing price bubble.

So, welcome to Housing Hell. Now that buyers are willing to wait one or more years before buying, there are more sellers than buyers. Interest rates, in the meantime, continue going up. Let's also not forget the Existential Equity Extraction. With $700 billion of sub-prime mortgages written (of which 10 percent could default), $2 Trillion of ARMs set to reset, and mortgage delinquencies near 5 percent, equity to extract is vanishing.


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