Hinting at a nightmare

Walk with me a bit – I’d like to show the outlines of a potential nightmare.

In 1999 – a very good year economically speaking – approximately 16% of all “home” sales were for second homes. And almost all of them were for vacation homes.

By 2004 – and maybe 2003 – the number of home sales that were second homes was over 40%. Vacation homes were still in the 16-17% range – almost all the excess were “investments”.

In other words, for three, maybe four years a full quarter of new homes purchased in the United States were NOT owner occupied, not even for part of the year. Some were rented, some were flipped, some are being held for their returns.

Now, conventional wisdom about housing prices is that they decline slowly – they’re sticky. And in normal times that’s true. There’s a significant factor that causes this, though, which isn’t applicable. That’s the fact that cutting the loss – taking what you can and getting away thinking you’re lucky to only lose that much – is difficult when it also means you lose the roof over your head. So as long as you can, you make ends meet and try very hard to keep the price up so you’re not homeless.

But 25% of homes purchased over the past three or four years aren’t roofs overhead. They’re money-traps. They’re commodities. And I strongly suspect they’re going to act like commodities.

As long as there’s some suspicion that the commodity price will stay fairly high, people will hold on. But as soon as it’s obvious the price is falling, herd instinct takes over. And the majority – more than half, less than 3/4 – of those holding the commodity sell at “Just get this off my hands” prices. Which in housing, with the loans out there and the way the laws are written, means “If I can’t get my floor, I’m mailing in the keys and taking a foreclosure.”

There were around 1.2 million homes sold in each of the years mentioned. That’s around 300,000 homes per year, or a bit over a million homes altogether, purchased as investments. Assume it’s “only” half that toss the house for foreclosure. Half a million homes selling at foreclosure rates. Half a million households flirting with bankruptcy.

There’s a current inventory glut of between 500 and 600 thousand homes – an estimated 8 months of inventory. This doubles that. And you can add in the folk foreclosing on their own homes because they took suicide loans (no-doc/stated income ARMs) and the current rates are a rude surprise.

As I stated already, we’ve begun the recession. The question in my mind is where the tipping point might be – at what point do the housing investors flee the commodity?

And that’s one facet of the nightmare. I’ll disturb your sleep another night with more.

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