Steadfast Finances
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No Doubt About It: A Double Dip in Housing is Certain
When one of the few banking analysts who correctly predicted the financial crisis (aka debt crisis) and the subsequent popping of the real estate bubble takes the time to speak, you should make the time investment to listen.
Based upon weak economic fundamentals across the board, Meredith Whitney is still bearish on the U.S. housing sector.
To paraphrase a 10 minute interview:
I have no doubt we’ll see a double dip in housing.
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Doesn’t get more telling than that…
Highlights
Specific talking points worthy of mention:
- State and local governments are cutting jobs. (0:58 min)
- Consumerism is up because homeowners stopped paying their mortgages. (2:28 min)
- Banks accelerating short sale & foreclosure programs, which will increase inventory at a 20% discount to current market prices. (4:45 min)
- Unequivocally, I see a double dip in housing. There’s no doubt about it. (5:03 min)
- Fannie Mae and Freddie Mac (aka U.S. Taxpayer) provided 95% of all mortgages issued in 2009. (5:25 min)
Bottom line: if you’re hoping for a bounce in real estate any time soon, you’re out of luck, because prices will once again test the 2009 lows or break through those lows altogether.
(Although, San Francisco is bucking this trend presumably due to a fairly strong local economy and the entrepreneurial spirit of Silicon Valley.)
Prospective Home Buyers & Real Estate Investors
From my (nonprofessional) vantage point:
- Do not expect existing homeowners to believe the double dip in housing thesis. Many homeowners are already underwater, so they have a vested interest in trying to get top dollar, and owe as little money back to their lender after closing (if they can’t get a lender approved short sale). If buyers were delusional and followed the herd by buying into the bubble at overvalued prices, you can bet many will be delusional trying to get out at prices above what the market is currently paying.
- If you’re looking to score a good deal on real estate, you can probably afford to sit on the sidelines for a few more months. Bottom picking is risky and it’s a gamble, but if that is your forte, keep your eye on the short sale and foreclosure lists.
- Mortgage rates will probably stay low for the short term. This could shift at a moments notice, so it’s probably a good idea to program your lender’s or mortgage broker’s phone number into your mobile phone.
- It will take time, patience, and discipline to find the “perfect home” if you’re holding out for short sale or foreclosure pricing. If you’re excessively picky, you may never find what you’re looking for so don’t forget to check the Realtor listings as well.
- Obviously, local markets will be affected by the double dip in housing differently, if at all. For example, San Francisco might not be as negatively affected as Gulf Coast states because San Francisco has a booming entrepreneurial culture (like Silicon Valley), while the Gulf Coast has sunbathers in gas masks. Pretty easy supply & demand math.
As always, this is pure speculation and I could be completely wrong, but if you’re looking to jump into the real estate investing game, it’s in your best interest to weigh all of the negatives along with the positives.
7 Comments
Jun 21, 20104:00 pm
Remember your blog on half of all mortgages being underwater by 2012. Do you still agree with your summation?
Jun 22, 20109:42 am
Yes, I would say that is plausible based on the current numbers, although, it doesn’t mean it will occur. With the U.S. Government is doing everything in it’s power to prop up the housing market (First Time Home Buyer tax credit, super low interest rates, etc.), I’m not sure if half of all mortgaged homeowners will be underwater by end of 2011.
The current policy seems to promote a slow pull of the “Band Aid” rather than ripping it off quickly. Whether that is supposed to allow a slow wind down to calm deflationary fears or to prevent vulture investors from swooping in all at once, is anyone’s best guess.
Jun 22, 20109:49 am
That is an astute observation Khaleef.
I’m of the rare belief that a person should read twice the amount of ideas/conclusions that they disagree with, rather than just follow along with ideas they perceive to be true. It promotes questions and analytical thought, rather than being a lemming.
Jun 23, 20101:47 pm
We have come to believe that double digit increases in real estate prices are normal. They are not. Real estate prices barely keep up with inflation in the long run. We still need a drop of about 15% to get to the long term average. And this does not include an overshoot on the downside, which usually happens in a bust.
I think you give great advice in your first response. “A person should read twice the amount of ideas/conclusions that they disagree with, rather than just follow along with ideas they perceive to be true.” Doing this will either increase your resolve or find the faults in your own thinking. It is a strategy to which I also subscribe. I have done the best trades in my life when I looked to talk to people who disagreed with my investing idea.
Jun 27, 20107:14 pm
If I disagree with the double dip idea it’s only because I don’t think we’ve recovered from the first dip–if it continues it’ll all be one big dip.
In regard to your (Matt’s) first point about homeowners not believing the double dip theory–I think they actually might based on actions. In my neck of the woods there are relatively few houses on the market, leading me to believe that a lot of perspective sellers have abandoned hope of selling their homes.
They MAY be holding on waiting for the price spiral to move upwards once again, as it always has reliably in the past OR they might have decided that trading up to a more expensive one with a bigger payment is too risky.
Either way if the market is on life support with fixed rate loans below 5% the situation is very fragile and subject to major disruption should rates rise substantially.
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2:25 pm
I agree with her assessment. I actually can’t see how an unbiased economist could come up with a positive model! but these are the same economists that told us that everything would be fine a few years ago! I’m glad there are a few (like Mauldin, Roubini, etc) that will still speak the truth!