Real Estate, Housing, and Dynamite...

Now you are probably wondering what these three things have in common, so you can will the Prize on "The Million Dollar Pyramid" (if you don't remember this show, I am probably dating myself). To have won the top prize you better have answered: "Things capable of exploding". And of course, we here at Urbanomics hate to be ahead of the public on things but, damn we did it again. Check out an article from over a year ago, BEFORE...the Subprime (aka Interest Only Mortgage) meltdown began and tell me if the crystal ball was working that day: http://urbanomics.blogspot.com/2006/02/huff-puff-blow-houses-down.html

See in that article we were telling you ahead of time that the numbers just don't match. And I know we hate when someone wants to historically prove things with numbers but what's better than learning from the past. But putting that aside what about the common sense element of things. Over a year and a half ago I thought I was the only person left in America that didn't understand how everyone could afford a home except for me...and at that time I thought I had a good paying job. So for your Urbanomics Rule of the Day, please remember, "If It Sounds to Good to Be True, then Run the Other Way". So read on as I explain in an uncomplicated way why real estate isn't as fun as it used to be. First, the problem was the math wasn't working out correctly with a lot of these new loan gimmicks out there on the market. The last time I check paying only interest only works in the favor of one individual...and thats the owner of the loan. So let me get this straight, I continue to pay all my interest off and get no added value of my principal going down, yeah what a steal of a deal. The only time this great plan works is if you plan on selling your place in a few years and don't care about obtaining any income from your home except for the appreciation on what you sell it for. And that would be a great plan if everything in the world was perfect. But unfortunately for most of us the world isn't perfect and that strategy worked for only a few people. Also, even if this strategy does work, the great Warren Buffett teaches us to have a risk premium calculated in every investment we make. So in plain English here were peoples two problems:

1. People didn't treat buying a house like an investment and never factored in a risk premium (Even plainer: Too many damn things can go wrong with those loans for you to actually benefit from them).
2. Unless your an expert, houses should be treated as a long term investment.

Now I chose these two things because it points that most people didn't think about a house being an investment and truly weigh their options on if it was the best investment for them at the point in time. Basically, if interest only was your "only" option you should have been putting your money to better use. Secondly with the risk of interest rates rising (note at that time rates were at historic lows)you will get crushed if you can't sell your house timely.

Here is the ending result folks...the perfect storm happened. Rates being so low for so long began to rise, although they are still historically pretty low. Your interest only terms expired and peoples very low payments increased because they were now paying interest and principal (what they should have been paying in the first place). Secondly, people didn't treat their homes as an investment and realize that homes are not the most liquid investment. This means that you can't sell them very fast...like you can a stock in seconds. So the outcome: 1. people with bigger mortgage payments they can't afford, so they want to sell -> 2. Now we have too many houses on the market and not enough buyers -> 3. If you can't sell your house then the forclosure man comes a callin'.

The banks and mortgage companies aren't in the business of owning homes. So they are attempting to sell these properties as quick as they can. But one last problem...builders such as Pulte, Toll Brothers, and Beazer are continuing to pump out new homes. So with all these people sell old homes, and builders putting new homes on the market, prices for houses can only go in one direction: DOWN. And the numbers don't lie:
1. Median Home Sales Declined drastically from last year to this year
2. New Home inventory levels are very high
3. Existing home inventory levels are also very high
4. Roughly 30 lenders have gone bankrupt

I'm out but if you or someone you know has experienced the headaches of the housing market...please share.