I went to see an open house yesterday (Sunday), where a 4300 square foot house was up for sale for $975,000. The appraisal was a cool mil, and the owners generously took $25,000 off the asking price. Of course, the poor owners bought the house, with a stunning view of Reno, for 1.2 million dollars!
I personally think that this empty house could not be worth more than $850,000. And that is assuming about a 30 percent decrease in house value in Reno since the peak. Of course all of Reno, on average, has decreased by 37 percent. And this price decrease of 30 percent is based upon interest rates remaining low. They are higher for jumbos, but we hear that interest rates could rise in the near term, i.e., 2010, making for fewer qualified buyers of this house.
So in effect, this house, after the interest rate vigilantes get through, may be worth only around 700 thousand dollars. We know that Reno is much slower than Las Vegas in a stubborn denial of necessary declines. When will these people learn?
And about the house, sure, the view was great. And sure, the floors are travertine tiles throughout. But the cabinets, and there are a lot of them, are really cheaply made, and are not worthy of the house. Other shortcuts appear to have been made regarding the construction of the house.
I have argued that foreclosures are the solution. And certainly in Reno they are a big solution that has been thwarted by shadow inventory and by government perks at the bottom of the market, giving folks a false hope. We are facing inflation, or deflation and these don't affect the housing depression well. Inflation will just force interest rates up, as well as the Fed stopping mortgage bond purchases. House prices will have to drop. And on the other hand, deflation will reduce demand for houses, forcing fire sales.
While I hate to be the Grinch who stole New Years (or is that a mixed metaphor?), I am warning that things are not all right with the housing market. Mixing in the intractable unemployment numbers and I see a continued housing depression in many key areas. Certainly, there could come a day when the foreclosure sharks will be under water. 2010 will certainly be a year of continued uncertainty.
Disclosure: No position in housing stocks
