Sunday, June 28, 2009

High-End Housing Has Significant Headwinds

Henry Blodget, formerly the hyper-bullish analyst and now realist-bearish financial writer and interviewer, has an article titled The New Homeowner Hallucination: "We'll Rent for a Year and then Sell when the Market Comes Back". Here is the intro:

Mark Hanson of the Field Check Group continues to write great analyses of the housing market. Mark remains extremely bearish, and he attributes the recent pick-up in sales velocity to seller capitulation rather than renewed buyer demand.

Mark thinks the next segment of the market to crash will be the mid- to high-end, where many smug homeowners are now telling themselves they'll just rent their houses for a year while they wait for the market to "come back." Needless to say, Mark thinks these folks are dreaming. . .

The article provides Bay Area examples. I checked in with a realtor in a super-prime community on the Central Coast to see if this article resonated with her. The answer was Yes, for sure, no doubt about it.

It sounds as if there are too many sellers, or potential sellers, all wishing and hoping, and waiting, for a price rebound. Sounds like uncounted, shadow inventory.

In the meantime, even if jumbo mortgages are becoming available, how many people would borrow $2-4 M at 7% interest plus principal paydown (this is "in" now!) to live in a lovely area that is fantastically expensive relative to the alternatives? It's one thing if they have the spare cash, but most of those sorts of buyers already own all the houses they need.

Not that the Fed cannot engineer an inflationary recovery, but if your financing cost is 7% and your purchased asset is rising 2% a year in value, and you could rent at an annual cost for 3% of the worth of the home ( which is market rent in this community), renting is less costly.

And if Mr. Hanson et al are correct, luxury home prices have lots of deflation ahead, not inflation.

A house should primarily be a place to live, with financial gain a secondary motive and preferably no motive at all.

Copyright (C) Long Lake LLC 2009

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