The New Homeowner Hallucination: "We'll Rent For A Year And Then Sell When The Market Comes Back"
Mark Hanson of the Field Check Group continues to write great analyses of the housing market. Mark remains extremely bearish, and he attributes the recent pick-up in sales velocity to seller capitulation rather than renewed buyer demand.
Mark thinks the next segment of the market to crash will be the mid- to high-end, where many smug homeowners are now telling themselves they'll just rent their houses for a year while they wait for the market to "come back." Needless to say, Mark thinks these folks are dreaming.
The mid-to-high end housing markets are on the ropes and taking a barrage of body and face blows. Entire communities are being re-priced lower, literally overnight. Sales transactions have increased over the past couple of months because sellers are finally capitulating.
Most of the properties being sold are from:
a) those with lots of equity who know they better sell now or they will lose their opportunity
b) those that know they will be able to steal the new house that they buy so it’s a wash
c) short sales being approved more often
d) foreclosure resales.
Prices coming down to a point where the market clears is key to finding the ultimate bottom of the market, but it before a bottom is celebrated the market has to enter a very dark place.
Remember, in early 2008 -- as prices were only about a third the way off of the highs -- falling prices was viewed by the pundits as a great thing and needed in order for the market to heal. But in reality long before a bottom can occur, the falling prices create a negative-equity loan default and foreclosure domino effect that does the real damage.
This overnight house price re-valuation freefall is exactly what we saw in 2007 and 2008. It’s simple -- as values fall, more go into an incurable negative equity position, which lead to increased loan defaults, foreclosures, supply and lower prices. Then this fall in prices lead to even greater amount of negative, loan defaults, foreclosures and lower prices - rinse and repeat. Prices then keep falling until supply and demand fundamentals neutralize. This is what we saw at the low end this year as a result of artificially low rates, foreclosure moratoria, mortgage mod initiatives and finally seasonal factors after prices were down 55% at the median.
And now, Hanson argues, the same price collapse is coming to the mid- and high-end of the market--where owners are now deciding that prices are about to "come back."
Check out the anecdote below:
Because of the epidemic negative equity across the mid-to-high end, a large percentage of high-leverage exotic loans still in place, and the belief amongst the upper-crust (or severely over-leveraged depending upon how you want to look at it) [that the market will come back] many are resorting to renting vs. selling. In every case, the homeowner or Realtor managing the lease says “we want to wait a year or two until the market comes back”.
Why in the world would there be such an overwhelming sense of hope among the mid-to-high end homeowners that the prices of expensive homes would come roaring back? If not for interest only loans, Pay Option ARMs, stated income and 100% HELOCs the mid-to-high end would have never got there in the first place.
Two years ago, a household income of $100k a year could legitimately buy an $800k home with almost nothing down and afford the payments using a Pay Option ARM. Now to buy the same house, you need $160k down and an income of $200k a year. The $800k home went from the majority being able to afford it, to only a few. Remember, in the upper price bands most have to sell a home for the down payment and debt-to-income ratios required for a new loan.
Even in San Francisco City , long thought to be safe-haven for house prices, owners are resorting to renting. A savvy money manager and real estate investor I know sent me this note yesterday I thought was worthy of sharing. He has been scouting properties for an associate moving to town from NYC.
“Mark, I walked through a beautiful home in Pac Heights yesterday. Was listed at $6M about a month and a half ago. Price has been cut three times now and it currently listed at $4.95M. The amazing part is that the owner is now trying to rent it for one year (and I quote the agent) “and then sell it when the market comes back.”
When I asked her what made her think the market would come back when rates were going higher, availability of credit was down, incomes were down, unemployment was up and willingness and availability of people to spend was down, she had no answer.
Even more amazing was that we looked at four places in a similar price range and almost all of them had a similar strategy…”rent it out for a year and then sell when things get better”…
All these high-end people think they’ll just keep burning through capital and that everything will self-correct in 12-months and then go right back to the idiotic pricing levels that they themselves were crazy enough to pay.
Are people really this clueless???? (that was rhetorical so no need to answer…)… J
... Looking at median household incomes in every mid-to-high end area in [California], I come up with the same conclusion…the mid-to-high housing bands are still 33% to 50% overvalued on average.
Bottom Line - I don’t remember ever seeing such a massive supply of quality SFR’s for rent in CA. Rents are falling fast. Why in the world would someone want to put down $500k cash and make payments greater than that of rent in order to buy in a falling market? Prices have much further to go on the downside.
Unload that McMansion while you still can.