It's the inventory STUPID!
Take for example this article in the OC Register. I'm sure some of you saw it yesterday, but it was called "Is median price drop a blip or an omen?". It is worth reading if you haven't read it. I just don't get why nobody will touch the 'inventory' issues that are being seen in every major bubble area. Check out this excellent site that does nothing more than track the inventory in the bubble areas. One other point I want to make here:
Fact: In January, 72 percent of Orange County's homebuyers chose adjustable-rate loans to finance their deals. That's the lowest use of these loans since May 2004.
Only a blip: Lower adjustable mortgage use means fewer buyers who'll be subject to payment shocks if interest rates rocket higher.
72% of the people used an ARM mortgage to finance their deals in January, and that is the LOWEST rate in 20 months?!?!?!? So it is save to say that 75% or more of the loans the past 2 years have been ARMs, and nobody sees a problem with that?!?!? The fixed rate mortgage is all but dead for many of these people because they can't afford it in the long term!!! Yes, I know it is Orange County, and there are some sophisticated people there that are leveraging their money, managing their cash-flow, and making investments in and out of real estate, but those are not the majority of people in Orange County. If you look at the affordability numbers, it is no secret why 3/4's of the people are not getting fixed rate mortgages...they can't afford it!! If you look at PIMCO's research, they said that from Nov 2004 to Nov 2005, that 82% of the purchase loans were either interest only, or neg-am (option-ARMs).
Back to the inventory numbers....
This is simple supply and demand. I know that people still think they are entitled to the 'appraised' value of their property, but they are going to have to realize the important fact that property is worth what somebody will pay for it, not what a 10-20 page appraisal says.
I think prices will be sticky for a few more months. I have talked to quite a few people who are still holding out for things to 'pick up' in the spring "like they ALWAYS do". Once all of the 'spring sellers' get their spring 'surprise', watch for the media to start covering the issue. I don't think it is a secret that real estate has become very popular because it has been associated with 'easy money' in books, infomercials, and the news. The increased inventories will eventually lead to falling prices (yes, I know it is already happening so some extent), this will eventually lead to media coverage that will inevitably include a realtor 'expert' who will rationalize things, but the end result will be a change in the market psychology. Throw in a few trillion dollars of adjusting ARMs, some foreclosures (which increase inventories), and more media 'piling on' the coverage...and you will finally have your widespread price declines as the masses realize they have been bidding up overpriced assets with funny money. The problem is that the bank and the IRS doesn't think the money is all that funny. In fact, it is quite real to them.
Making an interest only mortgage payment that is 2-3 times what you could be paying in rent gets old extremely quick when your property is not appreciating at double-digit rates of return. Look for the fundamentals to return to not only the real estate market, but the mortgage market as well.
Sorry if I sound like I'm beating a dead horse. Sometimes I just feel that I'm saying the same things over and over. Let me know what you think.
I look forward to the comments and feedback!
I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...
...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!