Tuesday, April 28, 2009

Real Estate Market

The Case-Shiller home price indices were released today: 10 City Composite down 18.64% year over year, 20 City Composite down 18.63% year over year. The rate of decline slowed from the previous month's respective 19.43% and 19.00% drops. Could this signal a reversal? I don't know and I will not spend much time thinking about it.

What I do know is that home prices are the same level they were during the Summer of 2003. This is important because of the massive amount of mortgage debt in our economy. Housing has carry costs. The most prominent one is the mortgage interest rate. A homeowner also has to pay property taxes, electric bills, heating bills, water bills, sewer bills, repair bills, etc. These all add up to create the hurdle rate for owning property. If your home does not appreciate by more than the hurdle rate, you are losing money. I have mentioned this before: homes are depreciating assets. Therefore, this is a losing game. The best one should expect is to keep up with inflation.

So, even if home prices were flat for the last year or so, defaults would still be a major problem. Speculators needed to have markets going up, at least as much as the hurdle rate.

What this leaves us with is an upside-down nation. On average, the entire nation owns less of their homes than the mortgage holders do. This is crippling to disposable income and savings.

Increasing debt and falling prices have reduced the ability of homeowners to use the home equity ATM.

Lastly, the real estate inventory has much more wood to chop. There is still a large amount of vacant homes for sale, highlighting the point that net household creation should determine the housing supply (not cheap money).

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