Housing Crumbles - What's the Meaning? - 5 / 26 / 2009

Housing Prices fell 19.1% alone in the first quarter 2009 and is now down 32% from a peak in 2006. The noted "20 City Index" fell by 18% in this quarter. These numbers all came from S & P. What's going on? You all know the answer. You all became real estate experts during the boom times of 1999 - 2007, right? Your homes are all worth more than you paid for them, right? Your mortgages are all less than they were 10 years ago, right?

Congratulations. You are one of the very very few brilliant real estate investors.

There are two ways to look at a home. One is as an investment, the other is as a savings account. My view is the latter. It's one of those assets that you can use without diminishing its value, generally speaking. But that assumes you have purchased it with more equity than debt or at a low in the housing market. It is unlikely that you were able to do both. Why? Because homes are almost always purchased when you need them, and when there is a need, market dynamics take a back seat. The housing markets do not care what stage your family is in, growing, contracting, making more money, making less.

A home is a savings account that grows in value by at least 5% year over year, even with the recent housing value slide, buyers of homes pre-2006 are up in value across the board. That's actually better than a savings account because as the value of the dollar decreases, creating inflation, assets like homes increase in value relative to the dollar. The proper way to look at your home is to pay it off as soon as you are able to. Now the savings compound over time, and you get to use the asset every day.

For you real estate investors, these concepts may seem conservative, or maybe a bit nutty. You select your home, size, location, based upon your belief that the price of it will increase, and based upon that your equity value will increase with it. The bank offers you credit to buy the home and you leverage that credit into creating value that exceeds the rate of value growth in the area you own the property. Its a great model, except when hosing prices drop.

See the Federal Reserve convinced home owners to dip into their savings by offering cheaper and cheaper refinancing rates. That led to lower monthly payments and more free spending cash into the economy. Banks then churned this cheap money and instead of building their reserves they too, like consumers, leveraged their balance sheets with an eye to increase profitability. We all know what happened, the value of these real estate assets purchased since 2007 fell by 30% or more across the board and by October 2008 we had our 2nd major financial bankruptcy (Lehman) and a world financial crisis caused by the rapid contraction of asset values as speculators and investors ran from real estate investment securities. But this is old news.

So now we are left to search for answers. Increasingly, "expert minds" in finance are suggesting that the size and scope of the problem can only be addressed by the government. This weekend, Alan Greenspan said the same. I won't be fooled by this esteemed gentleman again, and I hope neither will the US government. Now is the time to allow the $1.6 trillion of our tax dollars to go to work. Stimulus must begin with the banks holding the access to the money, and our solution is a simple one..ALL BANKS NEED TO BEHAVE LIKE WELLS FARGO AND ITS WACHOVIA BRANCHES AND REFINANCE AS MUCH OF THE HOUSEHOLD DEBT ON THEIR BOOKS AS THEY CAN. This act alone will stop the mortgage crisis, will stop the foreclosure crisis. No more government stimulus is necessary, nor should it be requested. The World Economy will support the Dollar well enough now, but calls for an additional trillion in stimulus will crater the dollar an additional 25%.

Unfortunately the US government (BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER) is not predictable in its selection process and its bail out process. That in itself is a real issue for the economy. Businesses which should have been bankrupted were not (Citibank, Bank America, AIG, GM, Chrysler) and businesses that should have been saved (Bear Sterns, Countrywide, Lehman) were not saved. Had the government (yes the names BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER are all the same government to the US economy) saved Bear, Country, Lehman at the cost of $300,000,000,000 this crisis would have been very, very different.

Instead we are left with a housing crisis that has no end. Expect deeper and deeper housing price losses until this government forces refinancing to those who need it. Bring Fannie and Freddie back to do just that. Let the Banks ride their coat tails out of the forthcoming housing market depression.

Build Value Every Day.

Brad van Siclen