The Dark Years

Real Estate: The Worst Is Not Over

Phoenix and Las Vegas may appear to be places to buy a home in the sun that will break even in five years or so, but that discounts the real problem of water supply and continued cheap gas based on continued cheap oil. I live in Orange County and am very unsure of continued inexpensive water supply despite conversation efforts at the sate and local level. Las Vegas, and Phoenix are in worse condition by a good factor of ten, so what will that do to home prices in five years? Can we innovate our way out of the water problem? What will we use for supply? The Middle East, at least has the ocean, and lots of money to convert salt water to fresh, Arizona and Nevada have Jack. Anyway, both are dependent on cheap gas to support their economies, so what happens when gas hits $7 per gallon. How quickly we all forget that America uses around 20% of the worlds supply of oil, but has only 300 million people, compared to the six billion elsewhere, all of whom want the wonderful things that cheap energy (in the form of oil) that has been brought here. There are many fine, well intentioned and thought full articles about the short term prospects for a housing recovery that ignore the underlying and profound realities of dwindling (cheap) oil and water supplies, without which there will be no housing recovery.

How Bloomberg Fabricates U.S. Housing Numbers

The housing market is dismal and despite the many commentators, pundits, forecasters, insightful gurus, and talking heads hinting at recovery I am not optimistic. They use dubious statistics based on false premises that are more wishful thinking than akin to reality. It is not getting better soon.

I do live in what could be called ground zero. Here in Orange County the boom was just great, until it was not. Our home was purchased in November 2001 for around 700K and rose to around 1.450k in fair market value in late 2006. It is 3400 square feet in a great gated community, but were we to sell today I would market it for 1.150, and take 1 million. If you could get the cash together today to buy a new home in Woodbury, a close proximity new community, 600-700k would buy you a 1900 to 2300 square foot home that was almost a zero lot line and encumbered with dual association fees as well as hefty taxes of 1% to the state, and another .08% in Mello Roos bond expense. We are staying the course, but many of our friends and neighbors have not been able to do so. Some had jobs with the mortgage and banking industry at excessively high compensation levels and lost much of the wealth they had acquired as they over invested in homes and rental units that were heavily geared. Some moved to the mid west and and began a new life with much less expectation of acquiring wealth through real estate ownership. Most do not discuss their personal situation, but you can sense their fears about the future. Looking around they appear to be justified.

We live near an Irvine Company development called "Orchard Hills" which WAS projected to have around 4000 or so homes and was anchored to a very upscale Shopping Center which was built. None of the houses have even been started although they could have been ready in late 2007. Signs announcing the project said they would be available in 2008, then 2009, then 2010, and then the signs disappeared. All of the paved primary roads are in place, as are the underground utilities and landscaping. Some of the communities entrances even have their fake Italian guard towers in place. The various builders who have committed to construct homes there and paid premiums as advances for rights to build must be in great fiscal pain. The anchor shopping center has many vacant building and the shops that are open are not doing well. The upscale, and expensive Von's Grocery is usually empty, and almost no one uses the CVS drugstore. It is no problem to get a table at the expensive and trendy Zavs' Restaurant. I would guess it could be several years before construction is restarted, if it ever is and all the while there are great carrying costs by the developer, and the home builders to participate in a project that might not come into being. The shopping center tenants are stuck with hard leases and have little recourse except to stay the course and tough it out.

These observations from the ground level, rather than from some cloud on which sit the anointed cognoscente leave me believing that we have not seen the worst of the great housing bust. Those who claim a recovery are just fooling themselves and those who believe them.

Fantasy Housing Numbers a Prelude to the Next U.S. Crash

I think that Alphameister has a good point. Some mortgages do go down in payment rates. W have a three year adjustable against our residence that just reset. At 6.15% it reset to 4.125% or so and the payment of the $300 k or so balance went from $1896 per month to $1537 per month. Of course that could all change next December as it adjusts every year there after, but we are prepared to deal with that.

An interesting question, not discussed is the TAX consequences of individuals being forgiven debt. Many years ago I lost a property in Alaska and had to pay capital gains on the difference between what it was sold for and what I owed. It was a big bite and I wonder if anyone is considering if this has an impact on the millions of citizens who have lost their homes and are basically broke, but have a debt to the IRS. What say you all?