Report from the Front

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, 2006   
High Commuting Costs Push Rural Property Owners Past the Tipping Point
April 12, 2006     
Housing is correcting in northern California.  How far will it go?

Nice House

Or

Run Down House
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!

Discuss this Report...

Farmhouse
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.

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