CR GREATEST HITS©
You can expect more rosy news in the media about the housing market and real estate in general. Many pundits are now saying that real estate is better than stocks or bonds. If this is true, that would be amazing as most indicators say the opposite. Let’s look at the current health of the housing market and see if it looks that great. Prices on homes are still 50% higher than the levels they were at in 1999 – 2000. The government sponsored re-fi programs were a failure, as not many people got one and if they did, many defaulted a second time. Fannie Mae needs another $8.4 billion to cover losses. That brings their total bail out amount to $84.6 billion and the losses are still coming. The XHB, the SPDR home builder’s ETF, is falling in price. “Walkaways” those who abandon their home because they owe more on it than it’s worth, are up 45%.
(NEWS proof) It will become chic to walk away from your property and once the neighbors see you do it, they will consider it also. There are many more people unemployed who will not be able to make their mortgage payments. The banks own 7,000,000 foreclosed homes and there are about 300,000 being foreclosed on each month. That is a total of about 4,000,000 more in the foreclosure pipeline. If the phrase, “Never go long in a downward-trending market” was ever valuable, it is now. People seem overjoyed to find great real estate bargains and snap them up thinking they got a great deal. They will be shocked when they discover the market is not done falling and how much money they lose again on real estate. We would repeat, “Do not invest in any depreciating asset, including real estate no matter how much good news or who tells you that the bottom is here.” The only real estate market growing will be the rental market. We predict the new hero of real estate will be the landlord who has a 3 or 4 bedroom house to rent.
QUESTION: What caused Jim Cramer to make this incorrect prediction, calling the bottom of the housing market a year ahead of time in 2008?
ANSWER: Jim Cramer went under the assumption that his charts foretold the future. When all the top home builder’s stocks peaked in July 2005, the housing market topped out exactly one year later in July 2006. Therefore, he predicted that when the top home builder’s stocks bottomed in July 2008, housing prices would bottom out a year later in July 2009.
QUESTION: There are many experts in the media telling people that real estate has hit bottom, prices are going up, home builder stocks are going up, and that the market is on a positive swing upward. Is that the true picture?
ANSWER: Most of the experts in the media have something to sell. They are selling their funds, their newsletters, their opinions as an analyst, or they represent associations in real estate that have something to gain if you believe the market is in an upswing. Associations like the NAR or ReMax have much to gain if you go out and buy a house.
QUESTION: So, what do you mean that it will become “chic” to walk away from your property and when will that occur?
ANSWER: It will become fashionable to walk away from property you owe more on than it’s worth. If you have the determination to abandon a losing situation and save the thousands of dollars a month you were pouring into it while your neighbors and friends are still paying on a depreciating asset, they will call you smart. About a third of your friends will do the same. This will become chic by the summer and will last as long as housing prices keep falling. The bottom will not come until bank inventory is cleared and prices begin to stabilize. Banks have several years worth of inventory to sell.
QUESTION: It seems that more people will be walking away from their real estate and just giving it back to the bank – what about short sales?
ANSWER: Short sales have double-exposure. The lender can come after you for a shortfall and even if they don’t get it, the government looks at the amount of the shortfall as taxable income.
QUESTION: So, it sounds like people would be better off just walking away from their property?
ANSWER: A short sale could cost you tens of thousands of dollars in income tax. The reason you walk away in the first place is that you can no longer afford to pay on an asset that is falling in price faster than you can pay it off.
QUESTION: With 300,000 houses going into foreclosure each month adding to inventory, about 4,000,000 over the next year, would you call this a “foreclosure tsunami?”
ANSWER: The pace seems to be picking up on foreclosures. Soon lenders and counties will not be able to process paperwork fast enough and people will be living in their homes and not paying anything.
QUESTION: Are you saying that banks will not pursue negligent borrowers?
ANSWER: No, we are saying they will when the get around to it. There are only so many people staffing the foreclosure departments and the county recorder’s offices where papers have to be filed.
QUESTION: Recap the most important points in your message today?
ANSWER: Watch the trends and not the “experts” when it comes to the health of the real estate market.
QUESTION: What impact will this information have on people at this time?
ANSWER: Many are too busy to hear any “bad” news and will continue buying at a time when they should be selling.
QUESTION: Tell our readership the best way to apply this information to their life right now?
ANSWER: Always look at any asset as an item that goes up and down. Real estate used to never go down if you held onto it. However, now it is like any other asset and does move up and down in price in a wide range.