Real Estate Market / Inflation / Recession / Depression (mortgage, home equity, broker)

[multitrak]

...as the gloomers would have you believe? while the year over year decreased slightly from -5.1% last report (jan 07-08) to -5.5% this report (feb 07-08), the index only declined 1.2% from 128.98 (jan 08) to 127.50 (feb 08), exhibiting a lessening decline rate typical of bottoms. the low end market has had the steepest decline and that's where the best deals can be made now.

current release 04/29/2008: http://www2.standardandpoors.com/spf...ase_042952.pdf

updated denver housing index chart: http://www.papereconomy.com/CSI.aspx...d=1&showhigh=1

[Bob from down south]

Carramba...another bottom call.

I was doing my best to figure out what inning of the credit implosion we're in, but it was hard to think clearly with that lady singing the National Anthem so loud.

Median incomes still can't carry median house payments in Denver--they're not even close. Until those median incomes can produce savings for a down payment and then carry the median house payment (and all the other debt people are currently swimming in), all bets are off. The banks aren't playing that game any more--especially with the spores of recession now in the wind.

Is Denver going to end up dropping as badly as Miami? No, it won't. But the debt money spigot has been clamped to a trickle. It's going to be years before the typical debt-laden entry-level family balance sheet is cleaned up enough to qualify for mortgage financing using traditional underwriting guidance.

The just released Case-Shiller same house year-over-year price data still shows a prominent decline in Denver...5.5% down from last year, and currently that "only" 1.2% drop from the post above translates to a 14.4% annualized rate of decline (down from an 18% annualized rate of decline the month before). How many people want to leverage themselves up to their eyeballs (assuming they could find a bank that'll let 'em) for an asset that's losing value every day, and is likely to continue doing so?

Home prices do not always go up.

Leverage works both ways. A small percentage loss in an asset bought with borrowed money can result in a massively amplified loss of investment.

[jazzlover]

Let's distill this down and talk about the American middle-class--that would include most of the people reading this forum, I would guess. Why is what lies ahead going to be so horribly bad for them? Let's look at their balance sheets:

Assets:

Home--usually leveraged with a large mortgage--see mortgage, under liabilities

Automobiles--also often financed with debt

Various and sundry toys--boats, RV's, electronics, etc., etc.

401-K's, IRA's, Pension plans, Social Security (depending on age)

Cash, savings accounts, and other cash or near-cash instruments

Stocks, bonds, other real estate--if they are lucky enough to saved something to buy them

Liabilities:

Mortgage--a debt to purchase a home or real estate that must be repaid, with interest, or the property used to secure it will be foreclosed upon--repossessed--to satisfy the obligation

Short term loans--these can be for automobiles, RV's, and other short-lived assets. The loan is usually secured by the asset and by a personal guaranty of the borrower.

Credit card debt--usually unsecured debt, the money borrowed often used for consumption, expenses, or short-term rapidly depreciating assets.

Other debts--student loans, borrowings from relatives, etc.

Children--more about this one in a minute.

Now, here is the problem. In today's environment, just about everything on the asset list is DEPRECIATING in value for the average middle class person. Most short-term assets like appliances, electronics, etc. ALWAYS depreciate. If debt was used to finance them--as has been the common practice of late--chances are really good that the debt (liability) may have outlived the asset itself. Not good.

Autos, RV's, boats, etc. are also DEPRECIATING assets, even in normal circumstances. But now, with energy costs exploding, their market value is likely depreciating even faster. As an example, a new car dealer friend of mine told me the other day that they are no longer accepting large SUV's or diesel trucks as trade-ins--because there is almost no secondary market for them now. Really not good.

Real estate and homes? Even this seemingly sacred appreciating asset and cash cow is now headed down in value. Really, really not good.

Finally, investments. Many investments--stocks, bonds, etc., etc. are now losing value in declining markets. This is also hammering the value of IRA's, 401K's, pension plans, and the like severely. Really, really, really not good.

And cash, or its equivalents--even in insured savings accounts, etc.? Well, though the nominal value is obviously insured, the inflation unleashed by exploding commodity prices and Fed's loose money folly is now depreciating the REAL value of those dollars. Really bad, especially when the Fed (read: government) is doing it to you.

So, nearly every asset in the typical middle-class person's portfolio is now declining in value.

Meanwhile, their liabilities--of which there are many--remain constant, only reduced by the person's ability to repay the debt. Is it any surprise that many middle-class Americans are now "upside-down"--effectively walking bankrupts because their net worth is zero or less (Assets - Liabilities = Net Worth).

I'm sure someone is chomping at the bit--children as a "liability?" Financially speaking, yes they are, until they reach adulthood and can fend for themselves financially. They are an ongoing expense that must be paid for, no matter what. And that expense goes on, whether or not Mommy and Daddy are working or have any assets, income, or not.

Now, even walking bankrupts may be able function financially--IF they have enough cash flow to repay their debts timely and to meet their day-to-day expenses. This is where commodity price inflation, debt-service costs, and income erosion are conspiring to decimate the middle class. Anyone who thinks that inflation is under control in this country doesn't go to the grocery store or try to buy fuel these days. There is no question that inflation is now outstripping growths in incomes for the middle class. When layoffs and wage stagnation start really biting (my guess is by the 3rd quarter 2008), the disparity will become really stark. Interest rates will also start back upward, and that bind will gobble up more cash out of the debt-heavy middle-class.

What I fully expect by the end of 2008 is a severe "cash-flow crisis" within the middle-class that will send legions more people into default on mortgages, credit card debt, and other debt. That will lead to further deflation in the value of the assets most widely held by the middle class--homes, vehicles, stocks and bonds, etc.--and set in motion the kind of contraction that will be called the second Great Depression.

Unfortunately, the table has been set for this re-alignment of American wealth and living standards, and no amount of political posturing, hand-wringing, and blaming by the politicians is going to stop it.

Economically speaking, we are much like the unfortunate hiker in the Rocky Mountain forest being chased by a very agitated and angry grizzly bear that is only a few steps behind him. The bear is much bigger, stronger, and faster than the hiker. The hiker's only chance at survival is to fall to the ground, roll himself up into a ball, try to protect his vital organs, and hope to survive the brutal and ruthless pummeling he is about to get--and hope to recover at some well-into-the-future point. Some us won't financially survive this economic pummeling that's coming--and likely everybody who does survive it will have lifelong financial scars from it.

And nothing tells me that Colorado folks are better-equipped than other Americans to endure what's coming. In fact, in many ways we're worse off. Too bad it has to "go down" this way, but a couple of decades of overconsumption, over-leveraging, and lack of financial and fiscal discipline has made it unavoidable.

[Shuffler]

Where's that 'future's SOOOO bright' guy when we need him?? This is depressing otherwise...

[formercalifornian]

We're not quite there yet.

[jazzlover]

Originally Posted by formercalifornian

We're not quite there yet.

I've said numerous times--the real "fun" hasn't even started yet.

This is the kind of thing I'm talking about:

Could we really run out of food? - MSN Money

[Bob from down south]

Originally Posted by formercalifornian

We're not quite there yet.

If you take out the overproduction that led to a marked increase in inventories, the GDP number is negative. The NBER will take this into account when it calls the recession, which most of my trusted sources say began in Dec 07 or Jan 08. The NBER doesn't base that call purely on GDP data, at any rate.

IOW, we produced an increasing amount of product for which there was no buyer, which is phantom growth, and that inventory overhang will lead to an inventory-based overhangover later. Just ask your friendly local homebuilder...

[jazzlover]

The real tragedy off all of this is not yet understood by the general public. We have talked about speculative bubbles in real estate, stocks, commodities, etc., .etc., but what all of these of have created is a standard of living bubble for nearly all Americans, and it is going to have to deflate just like all the others have or will. That will mean smaller houses, fewer cars, less toys, less recreation, and less years of retirement. As the spoiled brats that we are, we get angry when we hear that, we don't want to give up what we are used to and think that we are entitled to--but that doesn't change the underlying reality that we have lived way beyond our means for far too long, and that has now caught up with us. Booms sow the seeds of their own bust, and the boom of late is no different. And, usually, the longer and crazier the boom is, the longer and more painful the bust is.

[multitrak]

nope, it's same denver housing bottoming action that i discussed earlier. i'm curious, at what point would you admit that you're wrong? i always have a plan "b" should plan "a" fubar. it's called being risk adverse. for example, some brokers recently have approached me with new house offers at $75-80/sq ft for a 2,000 sq ft house in the denver metro area (builders just want to dump the damn things). so you are telling me that a potential buyer that has the income, a sub-6% 30 yr fixed rate mortgage, 5-10% down ($7.5-15K), and closing costs covered by the builder shouldn't take advantage of that deal now in the "hope" for future lower prices? so how low is low enough? and what would you do when mortgage rates pop higher? by my estimation, blooding is running in the denver streets now...

[Bob from down south]

Originally Posted by multitrak

nope, it's same denver housing bottoming action that i discussed earlier. i'm curious, at what point would you admit that you're wrong? i always have a plan "b" should plan "a" fubar. it's called being risk adverse. for example, some brokers recently have approached me with new house offers at $75-80/sq ft for a 2,000 sq ft house in the denver metro area (builders just want to dump the damn things). so you are telling me that a potential buyer that has the income, a sub-6% 30 yr fixed rate mortgage, 5-10% down ($7.5-15K), and closing costs covered by the builder shouldn't take advantage of that deal now in the "hope" for future lower prices? so how low is low enough? and what would you do when mortgage rates pop higher? by my estimation, blooding is running in the denver streets now...

Geez, dude, you're trying to tell us that a change in spot price declines from -18% per year to -14.4% per year is a bottom. Bullpoopie.

If the deals you're describing actually become the norm, then median prices will reflect that, and we'll be getting there. But right now, median incomes still can't afford median houses.

I'm not fretting over what it would take to admit that I'm wrong here.