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“HOUSING - SOFT LANDING OR ???”

JANUARY 26, 2007

 

 

Note:  For readers not familiar with the concept of our “Melmania” section, this is where your editor can take any subject and develop arguments regarding some ultimate conclusions.  Since some of those conclusions might sound extremely radical, the name of “Melmania” seems appropriate.

 

Few topics have generated the intense interest over the past five years as has real estate, particularly rising residential values. Millions upon millions of words have been written under three general headings:

  • The enormous growth in prices for homes in various parts of the United States and Canada (and other parts of the world as well)

  • The staggering additional increments of money taken from those rising values which have had such a positive impact on consumer-driven economies.

  • Now, more recently, the likelihood of an important reversal in residential real estate prices which would negate many of the benefits which have accrued in the past few years.

Many economists, most particularly those employed by or associated with the real estate profession, have been offering reassurances that, if there is a reversal at all, it will be short lived and followed by a resumption of rising home values, albeit perhaps at a more modest rate than was seen from 2001 through mid-2006. In effect, a “Soft Landing.”

Other analysts, your editor included, suspect otherwise. We suspect that the reversal will not be quick, but longer-lasting, and the damage done to residential real estate prices will be much more severe than many suspect.

One of our friends and long-term readers was kind enough to forward an article from the Sacramento Bee which provides substantial information in support of our position. The article informs us that Sacramento has suffered, “...the most dramatic rise in home foreclosures since the 1990s during the fourth quarter of 2006...” And the rate is rising rapidly as we are also informed that, “...865 capital-area homeowners surrendered their houses to the bank in October, November and December - nearly double the region’s 450 third-quarter foreclosures.” As a comparison, the 865 fourth quarter foreclosures compared to only 63 the same time last year.

There was another piece of information in the article that has particularly ominous implications and read, “...More ominous, the number of people who receive such (foreclosure) notices and then lose their homes to banks reached 32% in the fourth quarter. That’s up from 8% the same time in 2005.”

As I wrote my friend, “Back when I was in that business (mortgage lending), when we sent out our first notice of foreclosure, most homeowners would find a way to scrape up their deficiency and keep their homes. However, today that is obviously not the case. A multitude of homeowners are buried in debt so deeply that without huge and rapid increases in home values - which, in my opinion, are NOT going to happen for some long time - they are doomed to lose their homes, which will collectively further exacerbate the situation. I truly believe, as the famous song would put it, "We've only just begun..."

That’s still the way we see it. Millions of homeowners purchased property knowing in advance that they could not meet the monthly mortgage payments, but believed they could hang on long enough for rapidly rising prices to rescue their situation and enable them to actually make a huge net profit. That isn’t happening, and the reality that they may actually have to pay for their homes is just beginning to dawn on them.

One can only speculate on how many will eventually default. Our best guess is that the number to be huge.

 

 
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