A fundamental issue is being ignored when discussing any future housing market recovery.  That is the impact of going from a highly deflationary marketplace where we are now to the other extreme of high inflation.  When the effect of government borrowing comes home to roost the costs of imports will greatly increase because the actions of our government to save the economy will destroy the value of the dollar.  In turn this will increase the cost of imported manufactured goods and raise the hard costs of construction before the economy recovers.  These economic facts will further delay any significant recovery in in construction until late 2014 at the earliest. 

Unlike the last 60 years where buying today using future inflated money for payments actually reduced the cost of purchases, we are facing the opposite situation where cash today will have more value than future cash.  Saavy investors with patient money know that now is the best time to reinvest - ‘Buy when economic blood is on the streets’ - is an old but invaluable adage.

Just as with the last four great depressions of our history the recovery will not be well underway until at least eight years have past which translates in housing to 2015 and in the commercial segments 2016-17.  However niche opportunities will always be present which will buck the overall recovery with the energy independence and green segment leading the way.

Dennis Donovan, RECS

We have been hearing about the fundamentals of the economy, and the housing market recovery. Let’s talk about the basic two… Consumer Confidence and Ability. We all know the consumer’s confidence to make any type of large, long term purchase is at an all time low. Even if there were confidence and desire, there is no sense of urgency. Without that feeling of urgency, most purchasers will not pull the trigger. Ability is the most critical of all. With the restructuring of so many of the lending programs (a good thing) to require even more equity or down payment of the purchase amount, many if not most consumers find themselves lacking ability to make the purchase. No I will add yet another factor to the equation. With the housing market experiencing over four million foreclosures to date, and another wave of option arm, and other creative notes coming due over the next few years the inventory continues to increase. With increased inventory, and lack of urgency home prices and values will continue to drop. With the property values dropping, over 12 million homeowner are behind the equity curve. Even if they are holding their own, they can not sell, and clear the existing encumbrance(s) against the property. In a normal real estate market with normal lending conditions, about 12 to 15% of buyers are entry level first time buyers that had to put a minimal down payment together, and rely on lending programs or other supports to make the transaction work. For most of the other 85 to 87% of purchasers, they needed to depend on the equity in their existing home to have the ability to buy up, sideways, or downsize. As mentioned earlier, with 12 million (and growing daily) homeowner with negative equity where does the down payment and closing costs come from to make the deal? With just a required 10% down on a $300,000 property, that would be north of $34,000 needed for down and closing. This is not an interest rate or even a price driven market, it is more of an ability market.

Charlie Rens
Associate Broker - GRI - Gen. Building Contractor

Charles,
The fundamental issues that you are speaking about are niche markets now, Unfortunately overbuilding was driven by greed from novice investors, who in turn got fantasy financing from the Wamus driven by greed, who in turn were unwritten by Fannie and Fredie a quasi government group whose big wigs wanted bonuses etc etc etc and etc.

Now we will face other fundamentals: 1st money is going to safe havens and banks are who lent on home loans are not that. 2nd Construction financing is behind that.  Third inventory financing and payroll financing in the production sector are non existant because banks cannot attract money.

This is deflation at its best (worst for many).  Cash is and will be king for sometime.  The government intervention will only extend tha time to recovery because it it is recapitalizing the banks without them requiring to take on new assets (more loans). 

Ironically the same government that wants the banks to loan more money while its indendepent regulator (the FDIC) is closing banks down for writing loans because they are undercapitalized for bad loans written earlier.

The result is government borrowing which will drive the value of the dollar down against other currencies and the price of imports up - which is the next cycle of the depression we face.

Consumer confidence reflects many things but it is always about six months to two years behind what’s actually occuring but just ahead of the government.  Ability to purchase can only change when people learn to save (as they are now) and pay cash which in turn slows economic recovery.