Report
from the Front chronicles the experiences of iTulip.com members
living through the evolving economic crisis that is just
beginning.
Their
reports will make us more attuned to the changes that are
taking place around us and help us better prepare and make more
informed decisions in response. The report
below
comes from an iTulip.com member who is experiencing the Housing
Bubble
Correction
now taking place in many rural areas of the U.S. The lesson
in
her
story is that a single event in one part of the nation can have a
profound impact on a region far
away, change can be much more rapid than anyone imagines and even the
most capable and
well prepared can be
seriously set
back.
To submit a Report from the Front, either send a written report by
email to Report from the
Front
or send us an email requesting an interview. We will schedule
an
interview, transcribe it and post it to the site. All reports
are reviewed by
the author for their approval before their report is posted. Reports may
either be
anonymous or credited to reporter by name.
Index March
25, 2006High Commuting Costs
Push Rural
Property Owners Past the Tipping Point April 12,
2006 Housing is correcting in
northern
California. How far will it go?
Or
April 12,
2006 - Housing is correcting in
northern
California. How far will it go?
by
Sean O'Toole and Eric
Janszen
Our last Report from the
Front
came from a property seller in rural Midwestern U.S. who was struggling
with a rapidly declining property market. Latest update from
her
is that she has a new agent and is getting more interest, but at much
lower prices.
Today’s report is from a different perspective, real estate
investor
Sean O’Toole in northern California. Rather than be
interviewed for this report, Sean wanted to interview me, to put some
of his theories on housing prices to the test. He’s hoping to
get a better
understanding of the correction’s degree and
timing. The
result is the Q&A below.
First, brief background on Sean and conditions in his area.
Sean generally believes a correction is occurring and is currently
focused on reducing inventory. He has put about $5M of his
own
deals into escrow in the last two weeks as a seller, and another $1.5M
for friends. Deals ranged from a $199,000 modular home to a
$2
million industrial property. He states,
“It’s definitely a
different market than six months ago, but for now there are still
buyers if you price properly.”
Sean also offers some of his recent experience near Stockton, CA, about
1 hour east of Silicon Valley, where he primarily invests:
“At
the high end of the market, almost nothing is selling above
$1M.
There was a reasonably brisk market in this price range through
November 2005. In the upper middle market we had a 3,000
square
foot, six bedroom home that would have quickly sold for $650,000 in
late 2005. Just put it in escrow at $550,000 after leading,
not
chasing, the market down for three months. In the lower middle market
prices are more stable, though time on market is longer.
Recently
put a three bedroom, 1200 square foot, $450,000 home in escrow at
asking price, but days on market have increased from less than 10 days
last year to 45 days. At the low end, we set a new price
record
for a home in a marginal area, getting $300,000 for a 55 year old,
three bedroom, one bath home. Sold in less than a week, with
multiple offers. Comparable past sales were closer to
$275,000.”
Janszen: Justifications
for abnormal price increases are themselves a symptom of an asset
bubble. Ones I’ve been hearing to justify housing
prices in
recent
years are similar to those I heard here at iTulip.com in the late 1990s
about the stock market. The more a person had invested in the
stock market, the more strongly he pushed the justifications for absurd
prices, and the closer we came to the end the more rabid the defense.
PaineWebber's Steven Cadoff in March 2000 insisted that prices were
rational just before the stock market bubble popped. Janszen
Crying Wolf? Not so Fast is a textbook example of the
“lady doth
protest too much” asset bubble apology common then, fueled by
a growing
sense of dread of the impending collapse. Fear at the time
was
palpable. Unfortunately, I sense a similar level of anxiety
and
defensiveness today among over-stretched home owners who bought late in
the cycle.
Given that you are a real estate investor, I appreciate you taking a
critical approach to these ideas rather than mounting a defense of them.
O'Toole:
Great. I look forward to the discussion. Let’s go!
Impact
of Interest
Rates O'Toole:
I
currently assume that for each 1% increase in interest rates we will
see about a 5% decrease in prices. This is based on my belief that
people buy based on payment, not price, and for a given payment this is
roughly the correlation to price. What are your thoughts on where
interest rates are headed? Janszen:
I expect
interest rates to rise much more quickly than most expect. The reason
is that this isn’t your grandfather's credit cycle.
We were
enjoying a virtuous circle of falling rates, increasing asset prices,
increasing borrowing against those assets to fund consumption,
increased lending
from foreign creditors to keep interest rates low to fund
consumption, and so on. But the cycle can run in reverse and
turn
into a vicious cycle of rising interest rates, declining asset prices,
less borrowing against those assets to fund consumption, less lending
from foreign creditors to keep interest rates low, and so on.
I
first proposed such a cycle in Ka-Poom Theory
in
1999.
Rising
Rates Keep
the Housing Bubble Alive O'Toole: One
counter intuitive impact of the rate increases so far is that they have
also helped keep the real estate bubble alive. Many people
that I
talk to who are buying now are doing so in order to lock in
historically low interest rates because they believe rates will soon
increase and stay there for a long time. As we see more news
about rising interest rates, do you think this will continue? Janszen:
The Re-Fi
email spammers have been playing this game for several years: Every
time rates rise, they send out “Rates are going
up!” spam to play on
the fears of buyers that rates are going up for good. They
get
bunch of people to take on new loans for that reason. When
rates
fall back again, they send out the “Rates lowest in 40
years!” spam and
rope in a bunch of new borrowers for that reason. Then it’s
“Rates are
going up!” again. I get fewer of these, so maybe
the audience for
this kind of nonsense is finally exhausted. The Re-Fi based
part
of the economy will wind down in earnest sometime after rates rise
above 7% or 8% and no one is buying ARMs and the banks are no longer
selling Suicide Loans, and the Flipper Bonus has been repealed because
the government needs the tax revenue. Monthly payments will
rise
and home sales and finally prices will decline.
Housing
Appreciates
at the Rate of Inflation O'Toole:
Will home prices truly correlate more or less to the rate of inflation
as Yale Professor Robert Shiller asserts in his recently updated
“Irrational
Exuberance”? Janszen:
According
to Shiller, home prices in the U.S. have over the past 100 years
increased at more or less the rate of inflation. Given that
prices have increased much more than that over the past several years
due to market psychology, prices will decline to revert to the rate of
inflation and probably overshoot on the way there. In an interview
in June 2005, Shiller stated, "a real price decline of as
much as
50% in U.S. Home prices over the next decade isn't beyond the realm of
possibility."
O'Toole:
You
predict a short period of deflation, followed by a long period of
inflation. If we have 50% to 100% inflation over a five year period,
isn’t it possible that we could see nominal home values
actually
increase while also seeing real values revert to the mean? Janszen:
You’re
referring to a piece I wrote for Always-On Network, Inflation
is Dead! Long Live Inflation! in which I show how a
100%
inflation over five years might look to a homeowner. The
obvious
benefit to a government that allows this kind of inflation to develop
is that millions of insolvent voters get bailed out of dire
circumstances. They’re already broke anyway, so the
loss in
purchasing power isn’t as relevant as the value to them of
adding
another zero to the end of their nominal income to help them pay off
that 30 year fixed rate mortgage in a hurry. How likely is this to
happen? At the end of March, Fed governor Donald
Kohn said
at a speech in Frankfurt, "If real estate prices begin to erode,
homeowners should not expect to see all of the gains of recent years
preserved by monetary policy actions.”
We’ll see. Ka-Poom
theory suggests that our foreign creditors will create this inflation
merely by
sending back the dollars that have already been printed, so guys like
Kohn can blame it on them, unless he has in mind voting to raise
interest rates to something like 15% or 20% to keep those dollars
overseas. The Fed may do that but a large and sudden decline
in
real estate prices has the potential to create a lot of unemployment,
and governments when faced with a choice between unemployment and
inflation always
choose the latter.
Post
WWII Price
Anomaly O'Toole:
I have
not read all of Shiller's research but I have seen some
highlights. His analysis still leaves me thinking other
factors
might be at play. Specifically, Shiller has said that real
home
prices have been flat or declining with two exceptions: the period
after WWII and post 1998. As I understand it, the period
after
WWII was not a bubble and did not correct, thus there is a precedent
for home prices not reverting to the mean. Thus my hunt to
see if
some portion of the appreciation since 1998 is real, based on the kinds
of factors that drove prices after WWII and allowed them to remain
there. Janszen:
Referring
to the interview above with Shiller, “the rise in real prices
since
1997 has already dwarfed the surge after World War II, when
long-pent-up demand for homes overwhelmed supply for a time.
Though in 1997 real U.S. home prices went up 2.1%, by 2000 the rate of
increase had accelerated to 5.8%. Last year (2004) it hit a
torrid 11.2%, and Shiller believes it exceeded 15% in this year's
(2005) first quarter. The housing-price chart has gone nearly vertical,
in seeming defiance of the gravitational drag of inflation and more
subdued growth in personal income and gross domestic product.
As
a market behavioralist, Shiller takes a dim view of what he calls the
glib fundamental explanations offered by the housing bulls to justify
home prices' moon shot."
Stock
Bubble Morphed
into Housing Bubble O'Toole:
I believe
that the bursting of the stock market bubble together with the
systematic elimination of pensions forced families to look for
investment alternatives. As of January 1, 1998, the tax law
changed to allow couples to take $500,000 in capital gains out tax free
every two years. This seems to be a powerful incentive to invest in
your primary residence, and note that the date correlates well with the
start of the current boom. Isn’t this tax law a structural
change that
should result in a sustainable price increase? Janszen:
Indeed,
if you were to try to design the pre-conditions for a housing market
bubble, you couldn’t do much better than what the U.S.
government has
given us: the $500,000 tax-free capital gains Flipper’s Bonus
you
mention, the tax-free interest Re-Fi Bonus that has the greatest value
for new loans when interest represents most of the payment, short term
Free Money via Suicide Loans on top of the lowest rates in 40 years,
turn-the-other-cheek non-enforcement of appraisal laws, lack of any
licensing requirement for mortgage agents, to name a few.
Stir
into this pot a steady stream of soothing remarks from the Fed about
how there can’t be a bubble in real estate, and, hey, what
could
possibly go wrong?
New
Homes Now Have
More Amenities and are Better Values O'Toole:
Seems to me that most new homes now feature home movie theaters, game
rooms, bars, and other nesting features that have increased their size
and cost vs. homes of the past. Even older areas have seen
unprecedented upgrades as evidenced by the success of Home Depot and
Lowes. While some of this upgrading is due to speculation,
anecdotally the majority of people seem to be allocating additional
income to improve quality of life. Shouldn’t this
unprecedented
increase in home size and features result in a "real" increase in home
prices that would explain part of the post 98 price increase? Janszen:
Putting
aside the extravagant Dream Kitchens and other trendy stuff, many if
not most homeowners fix up their homes because they believe that on
resale they will at least get back the cost of the improvements they
make.
Here are the home improvement return
on investment facts: minor kitchen
facelift: 81%; additional bath: 72%; bathroom remodeling: 84%; family
room addition: 71%; kitchen remodeling: 70%; master room addition: 91%;
attic bedroom: 65%; two-story addition: 62%; siding replacement: 60%;
window replacement: 56%; deck addition: 54%; home office:
65%.
Best case you lose only 9% and worse case up to 46% but in no case are
you going to make money. Oh, by the way, these data were
collected when housing prices were rising.
Loan
Products
Support the Market O'Toole:
Won't
finance companies continue to offer new loan products that lower
payments in an effort to generate revenue and refinance borrowers
rather than face potential losses and foreclosures? Janszen:
At the
top of Japan's housing bubble in 1992, banks offered government backed,
99 year, 2.25% fixed rate mortgages. So, yes, the creation of
nutty credit products with government support can go to incredible
extremes. But that doesn’t make an endless
summer. Japan is
now in its 15th year of real estate deflation. So far, U.S.
banks
have been lenient with borrowers, and foreclosures have not increased
much yet, except in Denver and a few other areas. But
eventually,
after prices decline for long enough, if a bank cannot afford to carry
the borrower, they will chose to take the property.
It is important to note that outside of housing, we are experiencing a
credit driven inflation generally. The price of cars, for
example, keeps increasing while the monthly expense has declined
because
interest rates have remained low. Besides low interest rates,
we’ve seen a behavioral and cultural change that has
consumers using
credit for purchases of automobiles and other depreciating assets
instead of using cash. The credit markets keep inventing new
ways
to allow consumers to leverage smaller and smaller slices of disposable
income to take on greater liabilities net of assets, giving us the Frankenstein
Economy. This is an old fashioned credit inflation
as described in No
New
Era that will end badly, but not the same way as
the last one in the 1920s. I have believed since 1999 that
this
one will end with a massive inflation ala Ka-Poom Theory
versus a
deflation as occurred in the 1930s. The main reason is that
we
were net creditor then, and our major borrowers like Great Britain
defaulted on us -- which by the way was one of the main reasons we
dragged our feet going into WWII. This time we’re
the debtor and
we’ll default on them, but in the modern floationg fiat
currency way,
via currency
depreciation.
It’s
Different this
Time O'Toole:
Are there
any other any reasons to believe "it's different this time," that
something new is operating in the housing market to drive prices and
will sustain them so that they don’t decline? Janszen:
There are
always many justifications invented to explain bubble prices. The web
site that probably offers the most comprehensive and detailed pros and
cons analysis
of housing bubble justifications is http://patrick.net/housing/crash.
There are nine key plausible but wrong "it's different this time"
arguments most commonly used to justify housing prices during the
bubble: 1) low inventories; 2) modest mortgage rates that will not rise
high enough or fast enough to end the price expansion, 3) favorable
long term demographics of boomers and retirees, 4) growing demand from
immigrants, 5) the Internet has eased the cost and time needed to buy
or sell properties, 6) banks and mortgage companies have automated
mortgage underwriting, making financing a shorter and simpler process,
7) financial innovations have created new mortgage products to make
homes more affordable to more buyers, 8) low-income assistance programs
will continue to boost the level of U.S. home ownership, and 9) the
2000 stock market downturn and 9/11 attacks motivateed investors to
avoid the risky stock market and put their money
“safely” into real
estate.
Taking on the nine key justifications one at a time: 1) inventories
are
rising just about everywhere and rapidly in some areas such
as Denver,
Colorado; 2) interest rates are now rising
fast
making not only monthly
payments too expensive for homeowners with barely affordable ARMs but
also making a switch to a fixed rate mortgage unaffordable for many; 3)
baby boomers and retirees made up 40%
of all home purchases in 2005 so
they’re probably full up; 4) immigrants can only afford homes
if
monthly payments are kept inexpensive via low interest rates and
Suicide Loans, but these are going away; 5) the Internet will be just
as efficient as a mechanism for transmitting price deflation in a
declining housing market as it was at transmitting price inflation when
the market was rising; 6) banks are tightening lending standards as
foreclosure rates rise, making loans less available; 7) Suicide Loans
are behind the first wave of foreclosures in places like Denver, so
banks and mortgage companies are taking them off the market and there
is proposed legislation by banking regulators to place severe
restrictions on them, 8) new legislation
to control predatory lending
will decrease sales in low-income areas, and 9) investors bought stocks
in 1999 because they thought that stock prices only go up.
The
same psychology was allowed to develop in the housing market.
The
same reversal in psychology will occur in the housing market as home
prices start to fall, fueling further declines and eventually a loss of
interest in the housing for investment purposes.
When
will the Credit
Bubble End? O'Toole: I
like
the No
New Era article and agree with the general premise that it
has
to end at some point and when it does it will have huge implications
for the economy as a whole. What I can't get my arms wrapped
around is whether or not there is anything in the near term that will
trigger it. Some are pointing to the "housing bubble" as the impetus,
but that seems to be a bit of a chicken or egg question. Janszen:
No one
has any idea what will end it or when. My best guess is
sometime
over the next five years. But bubbles always go on longer
than
any rational analysis predicts. When they are government
sponsored,
there is a lot vested interest and money trying to keep free market
forces from asserting themselves, so they tend to go on until the
bitter end because the end means a new system, complete with new
government leadership and a whole new cast of characters in the
financial markets.
Own
versus Rent O'Toole:
Has there
been a fundamental increase in prices due to societal pressure to be a
homeowner rather than a renter? Janszen:
Not so
much societal pressure as the perpetuation of a myth, similar to the
myth that the cost of fixing your home pays a return on
resale.
The myth is that rents and mortgage payments are nearly equivalent
costs for similar properties, but a mortgage builds equity while rent
pays to build someone else’s. Many people bought
houses when
monthly rates
fell below what they believed was a threshold where monthly rent plus
the benefit of building equity made buying a better financial
decision. But counting all the fixed and variable costs of
home
ownership versus renting, the total cost of owning a home with a $3,000
monthly mortgage is probably at least twice the cost of a $2,000
monthly rent. As variable costs rise, including energy and
maintenance, the total cost difference between buying and renting will
become more obvious to marginal buyers.
My
Home is my Castle O'Toole:
Emotionally, buyers don’t think of homes the way they do
stocks. I have
good friends that are home shopping and I spent most of the day today
laying out Shiller's arguments for them. Had we been
discussing
stocks I'm 100% convinced they would not have moved forward. Instead
they are putting $450k down on a $900k fixer in a market which is still
rising and likely at its peak. They, unlike most, understand the
risks. But, like most, they are buying their dream, not an
"investment". Janszen:
Shiller’s
prognostications suggest that your friends 10 years from now may find
that they still have 20 years left on the 30 year mortgage on a house
worth 50% of what they paid yesterday. If they’re
ok with that,
then there’s no problem with the price they paid.
But I suspect
most people simply lack the imagination to foresee how that might feel
and would not buy if they did have a clear sense of that
possibility. Also, if they need to sell it sometime within
those
ten years, they may find themselves wishing they’d
rented.
"I’m
Part of the
Ownership Society" O'Toole:
While
every ounce of common sense I have agrees, emotions run strong. Being
involved in foreclosures I have met many people struggling beyond
reason to pay for a house they can't afford because being a homeowner
is "who they are,” and the alternative, renting, is a failure
they
simply cannot bear. I'd go so far as to say it’s a
fate worse
than death to some. I know this sounds dramatic but no matter
how
hard the upcoming lesson might be, I doubt it will be learned. Janszen:
Yes,
you’re being too dramatic. One of my favorite
positive features
of U.S. culture is its creativity and adaptability. Remember
the
hippy movement? Its key features were anti-materialism and
anti-consumerism. Flaunting wealth was very
un-cool. The
pursuit of wealth
was considered boring and shallow. This was a convenient
credo at
a
time when capitalism wasn’t doing very well and no one had
much real
income or credit to use to buy anything. Look for a new
social
movement
that makes being downwardly mobile not only socially acceptable but
cool, including renting versus owning. In fact, the movement
may
have
already arrived in the concept of “downshifting”
and will accelerate in
the
future. Many people will be forced to lower material
expectations,
but a
whole social movement will support a move away from working 80 hours a
week to pay the mortgage and I expect most people will be relieved, and
will find themselves
much happier with more time for friends, family and
themselves.
Psychologically the change won’t be as
painful as you expect. As usual, you heard it here first!
March 25,
2006 - High Commuting Costs
Push Rural
Property Owners Past the Tipping Point by
Down but not Out in
Rural U.S.A.
What is happening here
is not
unique but is occurring in other rural areas like mine as well, or will
be soon. This is my Report from the Front.
Hope it
helps fellow iTulip.com members.
I live in a rural area about an hour and 20 minutes north of a major
U.S. city. I moved here in 2000, selling a home in the
suburbs
for a
$55,000 profit after living in it for three years. I trained horses for
other people and was looking for a place to hang my own shingle rather
than work out of other people's barns and pay to board my own horses
there. Having once owned my own successful retail business, I
ran
the
numbers and concluded I could stay home, board and train horses and
earn more than I could by working off the farm. My husband
could
continue to work in his present job and commute.
I paid $140,000 for a fixer-upper house on 40 acres. The
house
needed
work, but the land was everything I dreamed of. Pastures,
meadow,
woodland. Plenty of room to build the barn and arena, and
long
trails
through the woods for my boards. I put $45,000 down on the
property
and spent a year cleaning it up: building fencing lines, a new indoor
arena with attached horse barn, and so on. I paid for half
that
building with my own money and financed the other half with a home
equity loan. To save money, I did a lot of the work myself,
including
installing the water and electric, building the stalls, swinging a
hammer to build the barn and arena. Lots of sweat
equity.
In no time at all I had horses here for both boarding and
training. I
was doing well. Better, in fact, than I had
projected. Life
was
good. That was in 2002.
Family Challenge
A year later, our troubles began.
A member
of my family became
disabled. He requires enough daily care that I had to give up
boarding
and training.
Last year, in 2005, we decided to sell the place and move closer to
family and doctors. I spoke with real estate agents and
others
who had
property for sale. It was boom-time for our
area.
People were moving
into the area in droves from the suburbs. Land prices had
more
than
tripled from the time I bought my property in 2000.
“This is
good,” I
thought. Everything the agents, bankers and friends said was
encouraging, that I’d get several times what I paid for the
property,
especially if I fixed up the house.
The construction was solid but the house needed updated windows,
flooring, and siding to let it sell for top dollar.
No
problem. I
did the work myself. I spent the summer fixing the house,
with
just a
little hired help with the siding as I needed another pair of
hands. I
was able to put in oak lam floors, all new windows, ceramic tile,
siding, lighting, paint, all for about $8,000. Probably saved two or
three times that by doing the work myself.
Everyone I talked to
figured the place would sell in 30 to 60 days. On the advice of my
agent, I decided to split off 20 acres of the 40 and make 4 parcels and
then sell the house and barns on the other 20 acres. The
listing
price
was $390,000 for the house on 20 acres, with the remaining lots priced
at $60,000 per five-acre lot. I figured I would be able to
sell
for
near asking price -- that's what the market was doing at the time
Regional Tipping Point
Then Katrina hit in 2005. Gasoline prices skyrocketed. Most
of
the people in
the area commute to the city for work. The cost of gasoline
made
that
commute much more expensive. When I moved here gasoline cost
about $1.20 a gallon. Recently I filled up at
$2.69.
When I moved
here, $400 a month was my budget for gasoline. The same
amount of
fuel would cost me close to $900 a month. Just to
commute.
Because of the
added commuting cost, people are not buying property out this far
anymore. Real estate sales slowed to near nothing.
Soon after, the house of cards really started to fall. One
local
builder went bankrupt, unable to sell over 20 homes he built in a
development. Those 20 houses in foreclosure fed the buyer's
market,
driving prices of other homes for sale down farther. Then
another
builder went bankrupt, then another. In the past three
months,
six
builders have filed in the area. The number of houses in
foreclosure
is staggering. They can be had for next to nothing.
Banks
are jumping
through hoops trying to find people to buy them. The local
newspapers
all have classified ads reading "Builder's inventory Reduction Sale."
Land prices started to fall. What had sold a few months ago
for
$10,000 an acre is now sitting dead on the market at $2,500 an acre.
Land and property auctions are popular in the area.
A year
ago, many people chose auctions rather than list with an agent because
they were selling for more by auction. I spoke with two
property
auctioneers recently. They've both had auctions where
property
doesn't sell at any price. A recent auction featured a three
year
old home on 30 acres on the river, a beautiful four level home with
vaulted ceilings and two fireplaces, decks, barn, fencing, all the
bells and whistles. They got one bid for
$169,000.
A year ago that home would have sold for $450,000 in a matter of days.
The auctioneers are scared. People looking to sell are scared.
According to my real estate agent, they recently had a number of people
close on houses where the buyer had to come up with money to sell their
house. He told me he has a number of clients telling him to
drop
the price $2,000 every week until it gets sold.
Right now, I will be fortunate to find a buyer for my property, even if
I drop the price to $250,000 for the entire farm on 40 acres, an
incredible contrast to the total $890,000 my agent thought we could get
a year ago. At least I didn’t borrow against
it.
Debt Amplifies Distress
A friend of mine had her 10 acre hobby farm appraised last year
$390,000. She took out a home equity loan. The bank
was
happy to give her a revolving line of credit for $100,000 on an
Adjustable Rate Mortgage. She drew on that
heavily.
Recently the bank called her and said they could re-fi that loan to for
a better fixed rate. They asked for a new
appraisal. She
wasn't worried as they'd remodeled the home and updated
it.
When the appraisal came back it was for $250,000. Her banker
called wondering what the heck had happened to the property.
She
feels that she got sandbagged by the bank. How can this
be?
No way the bank will re-fi that loan. She is now upside down
on
her mortgages. They had counted on being able to sell that
place
and to sell lots off of another 80 acres they own to finance retirement.
Last week three houses on the end of my road recently put up
“For Sale”
signs. These places are all about one and a half years old,
on
five-acre lots. I asked the owners why they are selling and
they
all said the same thing: they can't afford the cost of fuel to commute
this far to work.
The falling price cascade started with higher gasoline prices and the
doubling of the cost of commuting, that led to a drop in the number of
buyers, that led to one builder after another not able to sell homes,
that led to further supply, and the bankruptcy of one builder after
another, that led to more supply, and so on. Another aspect
to
consider is the ripple effect these builder bankruptcies have had on
other local businesses. It's not
uncommon in this
area for people
to sell land to a builder for greater than market value. The
kicker is
that the builder pays them after the home is
sold. So now
there are properties built on spec that will contribute to the glut of
property on the market.
Homeowners put money
into fixing up a house, hoping for best price, but are now beginning to
understand that investment will not bring them the return it used to.
This real estate slide toward the pit has impacted small local
companies - everything from carpet to landscaping businesses.
Given the glut of unsold
houses,
many of which are brand-spanking new, it will take some time this area
to recover.
Surprisingly Rapid Collapse
People here were totally blindsided by how quickly
property values
declined. Even those of us who were aware of a
housing bubble
thought the decline would be slow. That's probably
still
true in other regions, at least for now. The larger cities
and
suburbs have regional real estate economies that aren’t
feeling the
demand pressure rural areas get from the cost of commuting.
But
for areas like mine where the sudden increase in the cost of commuting
pushed people over the edge, once that price decline cascade gets
started there is no stopping it.
This pattern is happening in rural areas of other states as
well.
A friend of mine has a farm in Iowa, about the same distance from Des
Moines as my property is from the city nearest to me. Her
place
went on the market about a month before mine. They are
experiencing the same difficulties. She's dumbfounded that
she is
not getting any showings, no sign of interest. She has a
lovely
place that a year ago would have been snatched up quickly.
A Community Set Against Itself
Sellers are now petitioning the tax assessor board on property
valuation. They want the higher value to show potential
buyers. But those who are not selling are banding together to
get
taxes reduced because they can’t afford the high
taxes. But lower
property values means less tax revenue, and that will hurt the school
system, and that will further reduce property values.
Not Only Gasoline but other Expenses are
Rising:
Less Money for Mortgages and Rents
People here are trapped by the economic realities of more than higher
gasoline prices but a general rise in the cost of living. Go
into
a grocery store and you'll see prices far higher than they were two
years ago. Especially if you have a family, food together
with
heating costs and insurance costs impacts what size mortgage a family
can take on. I am hearing, as mentioned on the
iTulip.com
web site, of more and more people who have been living off the equity
in their home and are now strapped because no more equity is
available. They've taken loans to pay off credit card debt
but
that credit card that has crept back up to where it was
before.
Now they have little equity in their homes, no more access to home
equity loans and maxed out credit cards. People are selling
things to pay off debt. Not just people in my area,
but
people in the city as well. If the number of people
in this
position reaches critical mass, it's going to impact regions were
prices seem to be holding now.
Rents closer to the
city are falling. My plan has always been to sell this place,
move
into a nice apartment, and simply regroup and get my bearings before
purchasing another home. So I have been watching the price of
apartments for some time. The price is falling for one and
two
bedroom
units. I have also noticed an increase in the number of
advertisements
for “rent-to-own” and
“you-don't-need-to-qualify” properties and an
increase in the number of ads from companies telling people to pick the
home they want and that the company will purchase the home and set them
up with a “rent-to-own”
contract.
Prepared is not Enough
I thought I was smart. I have no credit card debt.
Both
vehicles are paid for. The debt I took on in the form of a
home
equity loan was taken not for toys, vacations or expensive cars, but to
add value to my property. The only debt I currently have
isfrom
medical expenses. I never allowed the debt secured by my
property
become greater that 50% of what I thought the property might reasonably
sell for, based on the information I had at the time. I had
enough savings that I was able to carry the family for something like
nine months without any income. All in all, I was in better
shape
than a lot of people are. Being a good country girl, I grew a
fair portion of my own food and raised chickens so grocery bills were
vastly smaller for me than for many people. I saw heating
costs
could grow to be a real threat to my family budget down the road so I
installed a woodstove large enough to heat my entire home and burn wood
from my property. I have not purchased propane in four
years. When my friends were experiencing sticker
shock on
propane, which for many people rose from $300 to $600 for 4-6 weeks of
fuel, I could simply toss another free log on the fire.
The point of all this is that I had made wise choices at the time,
worked hard to insulate my family from problems I saw coming down the
road, and I am still getting hammered by the real
estate
market.
I am also reminded -- painfully so -- of tipping points and trigger
events that can impact a local area. Readers need to look at
not
only the big picture nationally but also carefully consider their own
local economic microenvironment. I missed some important cues
and
responded too slowly.
Lesson learned. I refuse to be bitter over all
this.
Disappointed, surely. Being a resilient woman, I will take
what
I've learned, put it to good purpose and move on. I hope my
story
helps some iTulip.com readers to assess their position and make
intelligent choices.
The Real Estate Bubble is bursting and Recession will likely follow.
Protect yourself now while there is still time with the powerful information in
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