United States Heading towards a Depression?

It would appear that new home construction is up 2.5% as of the report I heard this morning on the news. Certainly not shattering records, but up none the less.

 

I dunno, Mia. 2.5% above what? Last month, last quarter, above low recent totals.

Overall we are facing a huge inventory of empty homes. Its an ugly fact. As long as there is a huge inventory of unsold homes, new construction will be minimal. There certainly could be and are some pockets of growth, but in most places construction will be minimal and on a national scale low.

I know of home builders and prospective home builders who are sucking wind on land they own. They can't build. One of the largest national home builders announced they are no longer buying land but putting options on land. That means if they can't build all they lose are relatively tiny amounts of investment representing the option prices.

I'm not trying to burst a bubble, just trying to be realistic. IMHO, construction won't really expand and hiring of construction workers won't really take off until the inventory of unsold houses gets eaten up.

That could take a while.

 

I guess it could also depend where you reside Earl. I live in NM and we are not having nearly as hard of time as some are (but, NM is already one of the poorest states so I can't imagine we can get much poorer lol). My mom is a construction loan officer and, altough it's a little slower, they still have lots of business from people wanting loans to build new houses.

 

This is "new residential construction" which includes both new and OLD homes

Hope that clarifies.

 

From what I've read it definitely appears to be regional. I live in Virginia outside of Washington DC. Most of the area is pretty strong, but some pockets have been hit by lots of foreclosures. The foreclosures seem to be similar to those around the country; fairly recent variable rate loans, probably a lot of subprimes, mortgages at or around 100% of value, etc.

In September one county that got hit bad had its highest number of sales for a September EVER!!!. It had more home sales than a neighboring larger county with 3 times the number of homes.

Prices on the new home sales were way low. Lots of folks with cash swept up homes at way low prices and are renting them out.

hm....I did that in the past and it worked. I'm not doing it now. Its work, and I'm putting my time elsewhere.

It still leaves that county with a crazy market. Most homeowners are still in their houses with much higher mortgages. Now there is this new trend with dramatically lower prices. I'd guess there could be a couple of more months of that.

Then you might get this county with a crazy patchwork of high and low mortgages. I just wonder how the folks with high payments and home values that have radically dropped move forward.

I dunno. Its a challenge.

 

Actually, I know what happened on the commercial real estate side when this happened nationwide in the early 90's.

All values dropped to the lowest common denominator.

I woudn't want to be sitting on a home in that county that I had bought in 2003, 2004, 2005. Even if I had bought with 20% down...I think I'm looking at negative equity right now. UGH!!!

 

Only if you bought something that was overvalued to begin with. Not everyone did that. Even those that did are not going to be at a total loss given the appreciable nature of the investment they have made. Real estate like the stock market should be looked at from the long term in terms of investment cycles.

I drove by a brand new town home I looked at 10 years ago. It was "new" at the time, was what I mean btw. We instead choose a smaller condo. At the time that town home was around 2800 sqft, 3 levels (with the step down) and two car garage. $135k new. Today, you won't touch it for under $300k. Even if you chopped off another $100k, its still an appreciable asset that did just that, over time.

Very few people in the real estate market are sitting on negative equity unless they over bought, over borrowed, or over leveraged.

 

I was a professional real estate guy for about 2 decades, Mia. I own some property. I'm not going to dispute that, but I think the real estate stuff varies by region.

It all depends on growth. Some areas have crappy real estate markets. Take the rust belt region. Most of that region hasn't seen the kind of growth other areas have seen. Pretty dormant for decades.

Cleveland just lost one of its largest employers. Its largest bank was sold to a Pennsylvania bank. They employed about 7,000 in the area.

They are going to lose a big chunk of that employment. I doubt right now there are great employers running over to Cleveland. No new employers-> no big demand for housing.

If you are in an area that sees population growth, then yeah....I think real estate is great. Demand always increases. More bodies means more housing, more commercial space.

Overall the US sees population growth. A lot of that is a result of immigration. As long as population and jobs increase, real estate is a good long term deal. If it stops then I think you have problems.

That also means some areas are real boom and bust areas. Florida, Las Vegas, Phoenix. They have all been huge growth areas. They had massive building and massive price appreciation. They probably sucked up crappy @ss 100% loans on property in the last few years so they are in a huge bust period.

I'd bet on those areas long term though. People want to move where its warm, sooner or later.

Of course if I was living and owning and buying and selling real estate in Buffalo I wouldn't be so optimistic about it.

 

I have never understood the concept of your home as an investment vehicle.

Your home doesn't produce, nor hope to produce goods and services.

Job training/education.
Capital equipment.
Research & development.
Manufacturing

Really, this concept of real estate as investment is an artifact of Reagan's deficit spending mentality. It's why this country's finances are wrecked. It's why net worth in this country is going to crash!

I don't know. If oil/water becomes an issue, I don't see how it becomes more attractive to live in these spread-out/sun-belt/desert cities.

 

Its an investment just like stocks in the sense that it can make you a lot of money or lose a lot of money depending on when you get in and out. I know someone who bought a house right at its peak next door and its now foreclosed. I think they were illegals that bought it and they just walked away from it when housing prices went down. The value around here has gone down like 60% since that house was sold. Thats worse than the stock market!

But everyone that says that housing is this unbelievably good long term investment is lying to you because after TRUE inflation and property taxes you probably don't make that much more if any over what the stock market or even a bank account makes long term. I did a calculation on what my parents paid for their house in 92 and after inflation and property taxes they have now just broken even at the 130,000 or so the house would sell for right now. During the housing bubble it was worth about 315,000! . In other words if they had taken the money and put it in a savings account they would have had the same result. Plus thats not considering that prices seem to still be going down. So in the end it might turn out to be a net negative after 17 years.

Buying a house is nothing more than a savings account you just happen to live in.

 

Oh, but your home does consume.
It consumes oil, electricity, gas, cable tv, satellite, phone, internet, among other goods. People are employed as a result.

Your home produces taxes which in turn pay for city services, teachers and other jobs, and educating our citizens.

It's an appreciable asset that not only produces, it consumes, and over time is often the source of one retirement.

I've obviously left out all the other things that homes consume, like paint, siding, new roofs, fertilizer for the yard, flowers, trees, etc.. It produces a lot of these things to.

Don't discount a home because it is not a business. It works just as hard and produces jobs, tax revenue, and ultimately a return.

 

Which is exactly why it's not much of an investment

 

But a house that you own that rents for more than your mortgage, taxes, insurance and upkeep can be an investment instead of a liability.

The house you own and live in is more of a liability. I have one of those liabilities now that is keeping me from doing what I want to do. If I could sell it for a smaller, more rentable house, than I could use it for an investment.

 

I just explained to you that it IS. I even explained how. Using your logic then a business, which also consumes as well as produces, is not a good investment.

Again, a home is an appreciable asset. It generates revenue as a consumer, and it produces income as its value appreciates over time. Anything that appreciates over time IS an investment.

Rental income, is certainly an investment return benefit. So too is the asset that is appreciating while it is being rented.

The liability is the remainder of the debt owned on the home, not the asset itself. Rental income return on investment and the asset itself are two different things. Over the short term, the rental income pays off immediately. The sale of the home warrants a longer term return.

The only caveat with real estate based assets are the property taxes which you generally do not see with other appreciable assets until such time as you sell them.

 

Timing is a huge aspect of all this, exactly as you said in your first sentence. There are serious other considerations. I've bought, sold and own investment real estate.

Way back I learned that my interest in homes was too quirky for the market. In that regard I've stepped back and let others make decisions with regard to potential investment benefit, both for rental and homes I lived in w/ a thought to selling and moving elsewhere.

Clearly the loss in home values on a nationwide basis is unprecedented in recent times.

Regardless, long term demand and supply primarily supported by local/regional conditions drives housing prices. If your region sees population growth...you can see appreciation. No population growth...don't expect big benefits.

 

The vast majority of the "loss" is in the overvaluation, not the real value, or real market value.

I think it is unfair to say there is a loss on the value of a home when those homes that have a perceived loss did so upon their separation from any tie to that of the rate of inflation.

Real Home Values have not shrunk. They've increased.

 

If it consumes more than it produces, then it's not a good investment. For example my puppy, talk about something that consumes and consumes without producing anything (well, anything of value)!

This is the way I see it if I lived on the street, I'd be saving tons in mortgage. Therefore if I buy a house, it's not as an investment, its because I want a roof and a cozy bed etc, it's a 'luxury' (even though its basically a necessity in this day and age, its not really required any form of shelter will do)

Assuming the price does go up, here you have to pay Capital Gains tax on any appreciation on any investment property when you sell it. Yet another slog.

Most houses would probably run at a loss. By the time someone buys their $300,000 house, pay $500,000 in mortgage repayments, tens of thousands more on repairs, upkeep and improvements, then try and sell it they'd be lucky to get what they started with (remembering that money loses value every year, so to make a true profit you have to get your $500,000 + inflation back).

Not saying there aren't investment properties, places which are 'up and coming' are great places to buy, when it becomes popular the prices soar.

 

I agree 100% w/ rochow.

IMO- people in general have wayyy too much of their net worth tied up in homes.

 

Great point. Just to add. Limited supply and high demand drive prices up. So prices are never set by "reality". The perceived value of homes at their peak never existed, they were way overinflated, now reality to their real "normal" price is setting in after the bubble burst.

The same thing with the stock market. The stock market was never worth 14,000 it was just what everyone was dumping their money in on a big illusion. Driving the price up.


Its like if I was the only one in town for many miles selling food. I could charge a lot more even though someone could go a few miles and buy it for much less. It was never really worth the higher prices, just I was the only one around town so people were willing to shell out extra.

 

In our area the prices didn't go up as much as other areas such as s.Cal, Florida or CO. Housing sales are increasing again, but the prices are still dropping some.

Domainer you are right about supply and demand - here they kept building more houses than the real demand of people needing those houses, however, we are in an area that many from California run to, in order to excape. So demand will build back up and new housing starts will come back around as the supply drops..