June 12 Analysis

June 12 Weekly Analysis

The loss of home equity with a continued slide of home values will further diminish the ability of the rest of the economy to recover, and simultaneously the ability of the rest of the economy to recover diminishes the ability of the home values to stop sliding.

Admittedly, the ability to take second trust deeds both fueled a strong consumer economy and at the same time placed homes underwater as prices started to slide.

Apparently, borrowing against equity was overdone – but there is no economic yellow light to indicate when so much is too much.

The continued home value slide places still more homes underwater – even homes that had reasonable value remaining just a few months ago. Now, there is no room left to take a loan against many houses to keep a small business alive, and more and more vacancies appear in local shopping centers. That translates directly to more homes going on the auction block because as businesses fold, the business owner is unable to repay the trust deed he or she used to secure the loan to open the business.

The amount of surplus one has in their home determines to a huge degree the feeling a family has about their financial worth – and that is reflected in the confidence they have in the economy. Almost everyone sees their home equity diminishing along with their confidence in the economy, and that feeds upon itself.

Obviously, an outside force needs to be instituted and quickly, because housing markets, like all markets, tend to overcorrect. In the Great Depression, FDR tried pump-priming without success, but a World War was sufficient to do the job, at a very high price.

Both exuberance and fear are contagious. Entropy has set into the system, and a shock of considerable magnitude will be necessary. Working around the edges will not do the job.

Heuristics

There is a saying in real estate that the cheapest you can buy a house is the day before a second offer is made on the same house.

That obviously has more credence in a rising market than in a falling market, but it is still possible to miss out on a favorite home by delaying too long. I know that Buyers believe that Sellers are so anxious to sell that they will accept anything, and that there is no competition – but that does not always hold and particularly for exceptionally desirable properties.

Well priced, clean properties in nice locations will always draw a crowd.

On the other hand (I feel like a lawyer), not all Sellers can count on getting a single offer, much less multiple offers.  It is a judgment call, and gambling can add months to the length of a sale and loss of thousands of dollars in a dropping market.

Obviously every situation differs because all situations are different, but the rules of thumb hold. It is much like I have always preached in computers – there are industry standards, and it is possible to deviate from them but you had better have a damn good reason, know the downside and be willing to accept them.

There are rules in every industry – not rules written in stone and handed out on the top of mountains but natural rules developed from many years of experience – much like typesetters learned from years of experience their rules which desktop publishers didn’t ever learned and produced, and still produce what is known as “laser crud.” You probably don’t know that there is a cultural difference in what Europeans and Americans expect to see as a typeface in Headlines and body copy, but typesetters do.

The real estate industry has heuristics, or rules of thumb as well. Buyers and sellers don’t sell or buy often enough to learn the Rules of the Road, and, in truth, neither do inexperienced Realtors.