Housing Misconceptions
This post first appeared on Minyanville.
Washington is currently trying to sell the American public that its $700 billion bailout plan will help put a floor under falling home prices. And while the debate will rage over whether this is a good or bad thing, its not even true.
The most beaten down real estate markets (California, Arizona, Nevada, Florida) have thus far accounted for the lion’s share home price depreciation, specifically in the areas denoted as “subprime.” Those areas are now experiencing a final whoosh down, which will likely last months, as huge overhead supply and weak demand crush prices beyond normal levels of affordability. These markets will take years (if not decades) to recover. Entire streets are becoming vacant and will eventually become ghost towns. This is not something easily absorbed by already struggling communities.
This, however, is well known.
What’s less widely known is what’s happening to property values in middle and upper middle class neighborhoods. Cracks are beginning to form, sales volume is drying up, prices are starting to fall. Distressed sales in the “subprime” areas are masking this shift, which should show up in the data over the course of the next 6-12 months.
When the final whoosh of the hardest hit areas runs its course, as it eventually will, parts of town on the other side of the tracks will pick up where they left off. Homeowners who haven’t faced job losses and tighter budgets in years will start to become forced sellers, depressing prices. Years of artificially inflated values will come home to roost, as they have over the past two years for lower income neighborhoods.
The government bailout — in whatever form it takes — is aimed at the problem that’s already out of control. Right behind it, as evidenced by recent spikes in Prime and Alt-A mortgage delinquencies, are the loans that are yet to go down, borrowers who are still hanging on. Home prices started to plummet last summer after the credit markets seized up. This time around, since the government is focusing on what’s already happened rather than what’s about to (again), there is no reason to believe it will be any different.
Tags: Alt-A, arizona, bailout, bottom, california, distressed, florida, Housing, nevada, subprime, whoosh