Monday, March 30, 2009
Real estate woes just getting started
The consumer trend to just walk away from mortgages is now well-established. For those with no skin in the game, this usually makes financial sense (ignoring the moral issues) if a good credit score is not needed in one's daily life. But now, as anticipated, even banks are walking away from homes and refusing to participate in foreclosure proceedings!
Walking away also makes sense for banks if they can get away with it and the costs outweigh the benefits of going through foreclosure proceedings. Many banks may get away with this by playing the same games as homeowners facing foreclosure - asking for proof of who the noteholder actually is! Securitization has made this process less than straightforward.
The losers in this situation are not only people losing their homes (who may actually be better off if they can find a cheaper place to rent), but neighborhoods having to put up with empty homes and governments looking for tax revenue. Housing doesn't need more factors going against it right now, but these forces keep piling up.
Gold will far outperform real estate over the next few years and holders of gold will be able to purchase more land with their gold once the dust settles. A bottom in real estate is nowhere near and those hoping otherwise are doing just that. It is not possible for real estate to bottom until at least 2011, which is when the tsunami waves of option ARM and Alt-A loans that need to be purged from the system have passed.
A bottom in real estate in 2011-2012 is the optimistic scenario, by the way, and ignores the obvious psychological factors that will keep real estate low for 5-15 years after the bottom hits. The commercial real estate bust is now in full force and will decimate holders of this asset as well. Unemployment is soaring and has not yet even come close to stabilizing, retail is in big trouble, and banks are insolvent. Many banks don't know if they can make it to Saturday without a not-so-friendly visit from the FDIC (which is also insolvent, but our government will bail out the FDIC repeatedly during this crisis). Remain calm, all is well...