Real Estate Has Hit Bottom? Not Even Close

Correct me if I am wrong, but hasn’t real estate hit its bottom? According to CNBC, TV, Cramer said that real estate hit its bottom, ‘early’, in June and all other reports yesterday said everything is fine and prices will go up,up,up! However, as usual, CNBC.com has conflicting stories.

For example, CNBC TV says it' bull market with hot economic growth and there is no risk in this bull market, but CNBC.com is awash with stories saying the global markets are in trouble and real estate is in pretty bad shape. This is what makes me question the integrity of CNBC commentators, who I once respected.

Regardless, real estate is a mess and July was no exception with foreclosures setting yet another record. Remember this is ‘another’ record meaning it was worse than June which means more pressure on the residential market when or if banks put those homes on the market. That is the crux of the matter, banks are holding properties, often referred to as the shadow market, and we have no idea exactly what their inventories are. Therefore, the sales numbers and inventory numbers mean nothing as there is hidden supply out there, unless they continue to destroy foreclosed home, yes banks are doing that.

All of the programs in place are simply not working and I would chalk this up to a waste of time and money considering most modified loans still defaults. As hard as this is to say, we need to let these homes be foreclosed upon, yes I am serious. This is one way of cleaning up malinvestments and people need to understand how to live within their means instead of trying to keep up with the Jones’s. Now, before you call me cold hearted or insensitive I need to let you know that I did have a family member lose their home with horrible consequences, but it was a matter of too much house without enough resources.

The foreclosure rate for July was up 7% month-over-month and up 32% year-over-year. What this means is more moratoriums are on the way and more federal rescue plans which are merely a waste of money. These programs only postpone the inevitable and will make future reports look OK in the short-term, but longer term it will simply create more bad data points. The market is telling us to let housing depreciate and propping it up will only prolongs the pain moving forward.

This data also feeds into my belief that the markets are overbought to such a high degree that I fear the next leg down will be horrific. This is why I moved mostly to short treasuries, non US dollar assets and cash only keeping 35% total in equities, enough to let me participate if I am wrong, but if I am right it will not destroy my portfolio. Either way you feel, I would strongly suggest you invest defensively for the short-term. As usual, do your own homework and invest according to your goals and needs.

Comments

[CautiousInv...:]

With 25% of owners with mortgages underwater and the likelihood of this growing to 50%, more foreclosures will follow.

Much of the recent improvement in both new and existing sales can be attributed to the combined effects of the tax credit and foreclosures.

With prices continuing to decline and foreclosures accelerating, it's hard to make a case that housing has bottomed.

Aug 14 08:10 AM

[socrateazz:]

To judge real estate properly one only needs to look at people's alternatives. How many houses are out there which are not needed by those who own them? How likely will those houses be needed in the near future? Will people buy those homes as investments concidering the tie up of wealth needed just to purchase? Concidering taxes? Concidering need for housing? Concidering personal income? What can be expected in the future? Concider the comercial real estate in the same way. What can one expect? See any new or expanding businesses lately? Why? What businesses do you expect to thrive enough to expand?

Aug 14 08:46 AM

[TommyG:]

It has been shown that loan to value had little effect on ability to pay a mortgage. I would support a government program that allows a re-fi if payments are current but the re-set will bury the payor. As for the rest, clear out the market and stop flushing tax payer dollars on programs that fail. And somebody stop Barney Frank and his ilk from continuing to push Fannie, Freddie and FHA into supporting bad loans.

Aug 14 09:10 AM

[Pearsonpc:]

Unrecognized losses in REO. Same stuff happened in Texas in 1985-1992. Took all of our S-L's down and most of the Banks.

This time they are trying to intervene up-front and not later. Hopefully it works out this time.

Good Article. Good comments above.

Jim

Aug 14 09:38 AM

[Thomas Smic...:]

I have a piece today on SA regarding the upcoming investment opportunity in apartments.

I agree completely with the above article regarding single family housing. Increased taxes, defaults (again) for the many who were given a break on their mortgage who shouldn't have had a mortgage in the first place, the preference to rent rather than buy from Millenials, a decrease in traditional familiy units creating a continuing surplus of 20th century-style homes on the market, the inability of big box builders to adjust to the size and taste of buyers who want less space and more energy savings...the list goes on.

And don't foget the forced lifestyle changes the Obama administration is pressing on many fronts.

Housing will continue to take a beating.

Aug 14 09:51 AM

[Miamah Boy:]

Do you not have spell check???
Consider with an s not a c!!!!


On Aug 14 08:46 AM socrateazz wrote:

> To judge real estate properly one only needs to look at people's
> alternatives. How many houses are out there which are not needed
> by those who own them? How likely will those houses be needed in
> the near future? Will people buy those homes as investments concidering
> the tie up of wealth needed just to purchase? Concidering taxes?
> Concidering need for housing? Concidering personal income? What
> can be expected in the future? Concider the comercial real estate
> in the same way. What can one expect? See any new or expanding businesses
> lately? Why? What businesses do you expect to thrive enough to
> expand?

Aug 14 09:58 AM

[CautiousInv...:]

From the WSJ:

By STAN LIEBOWITZ
What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.



On Aug 14 09:10 AM TommyG wrote:

> It has been shown that loan to value had little effect on ability
> to pay a mortgage. I would support a government program that allows
> a re-fi if payments are current but the re-set will bury the payor.
> As for the rest, clear out the market and stop flushing tax payer
> dollars on programs that fail. And somebody stop Barney Frank and
> his ilk from continuing to push Fannie, Freddie and FHA into supporting
> bad loans.

Aug 14 10:33 AM

[ewing:]

Our government/school systems have for years been selling this idea that homes are an "investment" when in fact they are a lifestyle choice. Homes are not an investment they produce no income and in fact tend to be money pits. It seems to me that this has become a nation of business illiterates. We want our government to "supply" us with jobs so that we can gleefully have it taxed away in a never ending cycle of service. We no longer as a nation produce anything and yet somehow think we can have a constantly rising standard of living.

At least commercial real estate people understand that a property needs to produce income. How that income is going to be produced going forward remains to be seen.

Aug 14 11:27 AM

[notsosmart:]

a house is not an investment .it is the roof over your head that costs money to maintain.a car is not an inveatment.in fact its a guaranteed loser piece of junk that gets you from a-to b as you lose a fortune by driving away from the dealership.the dumb-dumb sheeples that manage to finish high school should be taught this instead of algebra.they should be taught budgeting,avoiding fees & interest,the basics of insurance & how it works.never happen as the wall st scoundrels & bankers could not fleece anymore.get a magnifier & read the ever smaller print. thats where all the" catches "are.

Aug 14 11:51 AM

[eldora:]

What I don't understand is why banks will foreclose if there is no market for the houses or the mortgage principle is higher than the value of the house. Why isn't smarter to allow people to pay at lower rates rather than foreclose and sell at a loss?

Aug 14 05:10 PM

[Hmm?!:]

eldora,

The defaulters generally lied heavily on their mortgage applications, hence the term "liar loans". If the banks do as you suggest below....funded with tax dollars mostly from honest buyers......then shouldn't the honest buyers receive a break???? Your idea could get really messy!

Most of the walking away is because of non-qualified investors. Think about it........you don't REALLY qualify for squat, you can buy a large house with a 3yr teaser 2% rate and hopefully sell out for a big profit in a few years. Since you have no money and no real credit...... it is your only investment opportunity and walking away really costs you nothing......since your credit was terrible in the first place and you have no real money or significant income!!!


On Aug 14 05:10 PM eldora wrote:

> What I don't understand is why banks will foreclose if there is no
> market for the houses or the mortgage principle is higher than the
> value of the house. Why isn't smarter to allow people to pay at lower
> rates rather than foreclose and sell at a loss?

Aug 14 11:29 PM

[Kunst:]

First ya gotta care.


On Aug 14 09:58 AM Miamah Boy wrote:

> Do you not have spell check???
> Consider with an s not a c!!!!

Aug 15 02:05 AM

[Fred W:]

The Dumb money is after housing again--greedy fools...should have waited until late 2010 or early 2011.
Buying distressed land holdings (that have certain "attributes") from the "hangers on" is the best way to play this game.
Building and selling homes right now is only for a select few "qualified" people.
--and I am not one of them.

Aug 15 11:41 AM

[Tobby:]

When did you respect CNBC "journalists"?

CNBC has been an entertainment channel since before the tech bubble burst. To wit their newest comedian Dennis Kneale. Ten years ago they tried to be a Bloomberg by interviewing a wide variety of opinions from market players, but they could never get the heavy-weights to participate. Oh for the days of Luis Rukeiser!

Aug 15 01:20 PM

[sethmcs:]

I recall correctly calling the housing market top with one statisic. When the median income cannot afford the median priced house we hit the top. As with all things economic trade offs and opportunities will occur. Housing will become more affordable. Perhaps much more affordable when interest rates go up. One good rule of thumb in real estate is the value of a house is 100 times the monthly rent. If a house can be rented for $1,000 a month than its worth $100,000. I believe I read that the median price of a house is currently $172,000. Can you rent that median priced house for $1,720 per month? If not than your property is probably worth less regardless of what you actually paid for it.

Aug 16 12:04 AM

[Burton A. J...:]

I can understand why you've come to question the integrity of CNBC commentators.
I can't undertand why you ever respected them.

Burton A. Johnson, MD, JD
BAJvalueinvesting.com

Aug 20 01:04 PM