If you or someone you know owns a home is considering buying a home or is a real estate investor, this message is very important to you. I strongly believe the real estate market is topping out and is ready for a major fall.
I say this to you as someone who has invested at the opportune points in the real estate market cycle for nearly 30-years. U.S. markets such as Boston, Los Angeles, Miami, New York, San Diego, San Francisco and many other markets that have had a giant run-up in price in recent years, will be heading down.
This major fall will begin mildly, with tighter lending standards and a gradual buildup of housing inventory. At first, sellers will resist lowering their prices but inevitably, those who need to sell will reduce their asking prices to the levels the market will bear. As the pace of the decline increases, so will seller flexibility.
Why will this fall come? The biggest reason is that income levels have greatly lagged the sharp jump in housing prices so; many buyers can’t afford the prices they’re paying. To buy, what many of them have done is taken the profit from selling their homes, used creative financing and traded up to even more expensive residences.
This leaves them vulnerable to personal financial problems (such as from a job loss, medical problems or a divorce), rising interest rates or even the “creative” elements of their loans coming to an end. Unfortunately, many of these home buyers live paycheck to paycheck, and have little savings, which places them on the precipice of disaster.
To sustain the rise in housing prices would take much higher incomes or a drop in interest rates or require the lenders to come up with a new wave of creativity. But instead, the likely result will eventually be stratospheric foreclosure rates.
For the last two to three years, this market has been emotion driven in which people feel compelled to buy before prices rise again. Also, it’s been a quick and easy way to get rich, or at least live like the rich, by using the equity in their homes to buy cars and trucks, boats, big screen TV’s, furniture, expensive vacations, etc. with encouragement and assistance from lenders.
Much like the stock market in the 1920’s (which required only 10% down, versus the 50% down it is today) in recent times many home buyers have put as little as 0 to 5% down and borrowed the rest. There is now a vast portfolio of properties in which people’s only equity is the appreciation in their home values.
When the market begins to decline, many of these people will have no equity and in most cases, will soon owe more than their house is worth. In the 1990’s, homeowners in large numbers who were in this position gave their homes to the lenders who then sold them off at foreclosure prices.
This raises the question, what will happen to the U.S. Economy if my prediction comes true?
The answer is: people will no longer feel rich which will end their buying sprees and the impact will be widespread among businesses, including those geared to the real estate industry, who have been the recipients of all this plentiful money. Many people will also lose their sense of job security and will be hesitant to take on new financial obligations.
However, a tiny percentage of people will view this as a great investment opportunity and will save their money to buy what will become substantially discounted properties.
You may be wondering what buyers can do to prevent these catastrophic events from happening to them.
In this interim time, it is an opportunity for buyers to strengthen their financial position by aggressively saving a higher percentage of their income, by working overtime if it’s available, by taking an additional part-time job if possible and by refinancing their mortgages using the long-term low fixed interest rates available to them now.
They can also pay-off or pay-down any major variable rate obligations such as equity lines and credit cards. If interest rates continue to rise, every month these obligations will drain much needed cash from them.
I know many buyers have tightly strained family budgets and these are difficult solutions but if they act on them today, they’ll be thankful tomorrow when they avoid potentially ugly scenarios.
Readers of my former “Daily Breeze” newspaper column, listeners to my former radio shows (KABC/KMPC) and subscribers to this website (www.kazantoday.com) know I’m an enthusiastic optimist. They know I care deeply for their well-being and don’t want them to lose their homes or be financially compromised. This is why I offer my prediction and the logic behind it.
It is difficult to gauge the timeframes but not difficult to gauge the upcoming events.