The tipping point is here for residential prices

Implications: We’ve arrived at a crucial time in this cycle where foreclosures and defaults both existing and imminent throughout the country threaten to tip prices over to substantial market price reductions.

Analysis:

This is a time period that parallels the early 90’s where the lack of jobs in many areas provided the market problem. Now we are said to be fully if not over-employed, but the problem is we don’t make enough to afford the product. And there is no relief from other household expenses, but rather an acceleration of budget buster prices such as gasoline, healthcare and education costs. Many families are in financial crisis. The federal government is said by many to be controlling our way into this problem by seeding inflation, but I see them rather underreporting in order to avoid panic. In other markets, who ever heard of the government reporting an inflation number which did not include housing and energy costs? There can only be one reason for that and that is to kid ourselves as to the real effects of cost increases on the total components included in inflationary calculations. Further, our financial system for home financing must be more restrictive to avoid more of the recent practices causing foreclosures and the failure of mortgage companies and markets. Nor will we be able much longer to deliver interest rates at subsidy levels as the offshore sources funding our financial markets are seeking equity ownership rather than debt instruments to park their newfound riches until they figure out their economies. As a final thought, we are not unemployed in this market, but we are tremendously under-employed just like others in many worldwide economies.

By now this is not new news, since many analyses cite these indicators. To add an expanded thought, though, I notice that the media, particularly the printed media, are full of the notices of U.S. domiciled companies moving their operations offshore to meet growing markets and resolve cost pressures. Our companies increasingly are giving up on the high cost of U.S. labor and the competitive pricing here mastering the foreign markets. They figure a little political stability and immature B2B and consumer markets will beat years of near insolvency waiting for an unforeseen occurrence to bail them out here. Rather than sell out to the available private equity markets or the increasingly available foreign investor/operator, they have chosen to depart the domestic markets. In regard to the subject of housing, the import is that the successors to the market will impose wages comparable to world markets to meet import pricing here. That’s not good news for the value of the housing stock in many U.S. markets as a significantly lower percentage of the population will find home ownership to be affordable. We are planning to construct an average 2,200 square foot new house nationwide that the majority of potential buyers in this country will not be able to afford. It appears that the American dream of home ownership will not be possible for any greater percentage of the populace than in Western Europe or any other of the matured industrialized economies. Again, I believe that our investment in land scheduled for new communities is not well founded as our absorptions will be extended and our costs higher and our planning to date obsolete as a different market will be our future. We will suffer significant losses as yet unrealized in this inventory.

Our existing cities are old, the infrastructure installed 50 to 100 years ago is crumbling as well as inadequate. The costs to fix and retrofit are staggering and the results will be like fixing any old building or car, perhaps charming but always inefficient. That latter fact is not that alarming since man does not live by bread alone and less than ideal alternatives are not necessarily bad for the future of man. But the financial efficiency of the costs of public health, safety and welfare may impede our competitiveness in contrast with the emerging economies. They have in many cases a clean slate to develop if they can take advantage of and execute modern Green planning. A recent issue of Wired Magazine illustrates a new town being built on the border of Shanghai where the rules mandate a 100% self sustaining environmental community from day one. The rules here were set forth before the land plan was prepared and any architecture discussed. The only hole I find here is that the plan calls for 4 to 8 story buildings as the residential element. If you like the charm of New York or San Francisco or Vancouver, you may like this environment. You’ll be able to move in by 2010 if you want.

The point here today is that the U.S. housing market threatens to drop in average prices by 1/3 or more in the coming 18 months. Troubled conditions are increasingly the norm leading to sustaining this prediction. We will be facing all kinds of decreasing wages and increasing costs which will impose conditions making it much more difficult to profit from residential land development and homebuilding as well as sustaining values of the existing housing inventory for the foreseeable future. Re-investment in this arena is likely to proceed apace only when the perception of advantage and value is seen by investors. Not yet, my friend, and not tomorrow, the unforeseen must arise to bring market euphoria back.