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2008-12-10 23:03:16

Hard Re-Set Of The American Dream

Remember when owning a million dollar home was seen as the birthright of only movie stars and royalty?

Well, that all changed during the loosey-goosey credit years. It seemed like it was every American’s national duty to be in debt, have a huge mortgage and maxed-out credit cards. At least that’s what millions of Americans were lead to believe. Everyone was ‘rich’…at least on paper. This paper-wealth gave permission for people to embrace their post-manufacturing based economy label…as a “consumer”…And boy do Americans ever know how to consume!

Now, everyone is asking…”Where Did All The Money Go?” The truth is it went nowhere because it was never there in the first place. Just because a home ‘appreciated’ 30% from 2005-2006 didn’t mean more money was created. That appreciation…or added equity…was only realized if the property was sold. 

Americans have an insatiable desire for homes. It’s part of the American pathology to always want a bigger, better home…heck, owning a home is ‘The American Dream’…owning a $1,000,000 home just seems…somehow…dreamier.

So, Americans went on a buying spree. Its seems that for millions of Americans the new definition of saving money was shopping at Saks vs Neiman Marcus because Sacs was slightly less.

We felt rich, had access to easy credit...nothing was out of reach. It was all psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn't really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable. After all, that newly leased BMW had to be housed in a new garage of the newest, must-have community. 

Drive through the post-boom housing markets across the US and one thing becomes clear. The party is over. Las Vegas was the prototypical housing boom story. New developments were announced nearly every week. People would stand in line to toss down their hard borrowed cash for a place in line for the right to ‘invest’. Luxury condo buildings are now nearly vacant. The gold-plated, golf course laden communities with tree lined streets are now being supplemented with endless “For Sale” signs…now those signs are all adorned with the ominous subtitle “Foreclosure, Bank Owned” or “Short Sale”. In Riverside county California there are literally acres of ‘Master Planned Communities’ that have been left to decay. 

Other asset prices are returning from orbit as well. In the credit induced, consumer drunk boom times, what were once considered to be luxuries became mandatory house hold staples. In Southern California’s seaside ‘Gold Coast’ which comprises some of the most beautiful and expensive real estate in the world, it was common to see oceans of ultra expensive exotic cars. Matter of fact, the top selling Lamborghini dealer in the world was located in this area. Even this elite financial class of consumers are subject to the crash. Exotic cars, luxury ‘assets’ are now selling for 40%+ less than they were just 90 days ago. To put that into perspective, that Lamborghini dealer, the #1 selling Lambo dealer in the world, closed its doors recently. Crawl through the Craig’s list ads and you’ll observe countless, high-end designer Gucci purses and Rolex watches for sale for up to 80% less than their previously hyper-retail prices.

Housing became the de-facto place to splurge. Home priced skyrocketed. In less than 36 months some real estate markets doubled in value. 

Now that has all changed. 

In 2006, that $1,000,000 house that had 14 offers in the first day it was offered for sale…is now languishing on the market. The current asking price is $575,000 with no takers. Because those sellers re-financed and spent all of their equity, they are now hopelessly ‘upside down’ in their homes. Only a skilled short sale agent will save these sellers from a foreclosure. Of course, agents who have taken the time to learn how to help sellers with a short sale are in huge demand. 

While certain pockets, such as Manhattan, San Francisco and Boston, remain somewhat insulated, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable. Yesterday’s $1,000,000 home is todays $500,000 home..and falling. 

Until recently, sellers in wealthy neighborhoods were somewhat protected from the sub-prime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.

Case in point. In La Jolla, California where the average sales price is still around $1,000,000, it’s common to have international buyers in this market who are investing in their 3rd or 4th homes. After the AIG collapse there were dozens of ‘In Escrow’ homes falling out of escrow. In other words, even the most well heeled buyers weren’t willing to close on homes in this economy. Many walked away from huge earnest money deposits. 

Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.

Most economic forecasts are now calling for this seemingly endless housing correction to bottom as late as 2013. The original forecasts of a housing bottom in 2009-10 didn’t take into account the global recession and massive job losses. 

Barron Rothschild said, "When There Is Blood On The Streets, Buy Real Estate".

With that said, its probably not a great time to buy real estate unless you plan on staying in the home for at least 5 years. It will take at least 5 years for any sort of sanity to return to the housing markets. Smart buyers (and investors) are looking for bargains. As prices for homes continue to fall, a new breed of buyers is entering the market. Buyers with significant down payments, good jobs and credit. Buyers who aren’t buying to ‘make a fast buck and move up’ but, buyers looking to settle into a community and make it their home.

What happens over the long haul? Over the next couple of decades, housing economists expect prices to rise again — however, on average, no where near what happened during boom-times. Of course, some micro-markets will experience booms (and busts). The experts say you should generally expect house prices to rise slightly more than inflation and roughly in line with household income.

Economics professor at Wellesley College, Karl Case, whose name adorns the S&P Case-Schiller home-price indexes, has studied U.S. housing prices going back to the 1890s. Long term, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5 percent to 3 percent a year, or about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent volatility.

Several other experts make similarly modest predictions. Professor of economics and real estate, William Wheaton, at the Massachusetts Institute of Technology, says he expects home prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's, a research firm, expects house prices to increase an average of around 4% per year over the next 10 to 20 years.

Experts do agree on one thing. A home should be considered a place to live, raise a family, and to maintain the lifestyle you enjoy. It’s a faulty idea to bank on your home rising in value at all. The investment potential of a house should be seen as a ‘bonus’ rather than a ‘guarantee’. Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley advises that home mortgages do provide tax benefits, and most homes appreciate over the long run, but there is always risk.



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