A few conclusions from the left coast.
1. Prices for houses are headed down, but even with the excesses documented here I don't think will re-trace the entire ride we have had on the way up. A lot of people are headed for negative equity, but in California, at least, the single-family owner-occupied market does not react rationally (in an economic sense). It is economically rational to stop making the mortgage and tax payments, stay as long as you can (generally a year or so), and move somewhere else when the sheriff serves the final notice, but most people who find them selves upside-down won't do that. They will scrimp, save, cut other expenses, and do whatever they can to hold on the the place as long as they can. As a result, the forced sales at the margin will be much less than would be expected based on pure financial reasoning, and the downturn in prices is much less dramatic than, say, the downturn in the stock market has been. The housing market also takes longer to reach a bottom, and stays there longer. If I were not a home-owner, I would keep my nest-egg somewhere safe, add to it through savings as rapidly as I could, and look to rent in the area I eventually wanted to live in.
2. Second/vacation home and rental property is where the crash will come first and will be most painful. Banks are going to wind up owning a lot of property around Lake Tahoe (again, just like they did in the late 70's and the late 80's. These guys should have to read Santana as part of credit training). A fair number of people have bought a new house using the re-financed equity in their old one (an unintended consequence of the tax law revision, I expect), and have been renting the old one at negative cash flow to enjoy the appreciation. Look for those to now come on the market, some voluntarily, some not. |
