Tuesday, August 12, 2008

The economy II

What's the answer to our economic problems? We are seeing one encouraging development in the price of crude oil and gasoline. The bubble in commodity pricing appears to be bleeding off some of its pressure. This will help us all cover our obligations and hold tight to our undervalued homes for a while longer. We can hope that a bit more money flowing into the till at Kmart rather than into the gas tank will support more economic activity that will provide a broader benefit to the wage earners in the US and around the world.

But we are still left with the pesky problem of a owning a severely depreciated housing asset. An asset that we have pinned a lot of hope to. Regardless of our personal status, own it free and clear or mortgaged to the rafters we're frozen in place. We're shocked at the decline and unwilling to acknowledge the loss by immortalizing numbers in a closing document which becomes a public record. "Can you believe what Lester sold his house for? If he'd just hung on we could get more for ours." We can hang on a little longer until things get better. Who wants to upset the neighbors and lose a lot of money at the same time?

Here is my prediction, things will get better when:

  1. The foreclosure inventory stops growing.
  2. Big money investors start buying single family homes at deeply depressed prices in really nice neighborhoods and renting them for a song.
  3. People with mobility and reliable incomes, maybe they have been foreclosed on, or did not own a home, or sold at a loss to escape a bad mortgage but they start renting these homes.
  4. Other investors will see this activity and begin to buy single family homes at not so deeply depressed prices and renting them out too.
  5. Home prices will begin to rise responding to this demand.
  6. Individual buyers and small investors not wanting to miss out on the housing bargains will enter the market.
  7. Home prices will begin to rise more rapidly.
  8. At this point people like you and me will wonder when to sell? Do I sell at a small loss, hold out for a small profit or sit tight and wait for the big score?
The answer to question 8 will depend on personal income growth and the financial resources available to your prospective buyers at the time. The answer will be different in different segments of the the housing market and in different parts of the country. I am thinking if you have a $5 million house you don't have much to worry about. If you have a $500,000 house your potential buyers may be somewhat scarce. There will always be a market for the "starter" home that part of the American dream isn't going to die any time soon.

As we see this recovery in the housing market we will see a broader based improvement in the over-all economic environment. Housing drives pretty much everything in this country.

So, my guess is 5 to 10 years for all this to shake out. We have 5 to 10 years to think about whether to sell at a small loss or hold out for a profit. My advise for you is don't even think about the payments you'll be making between now and then. You have to live somewhere and hopefully you like the place you chose. I know I do.

You can be comforted knowing this post comes with the Lester Sez guarantee firmly established when my kids were little. If I don't know anything about the question at hand I will gleefully make something up. You be the judge on this post.

Thanks for reading.

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