Thursday, August 21, 2008

Think the Housing Crisis is Over?

" It ain't over 'til it's over "
- Yogi Berra

We’ve been hearing every week for some time that the credit crunch is over, that the banks have come clean on all their bad assets, the economy is averting a recession, housing prices have stabilized and everything is rosy again.

Time to buy a house! (There are a few banks that would love to sell you a house).

Trouble is, we’ve been hearing the same thing every week for a year and in spite of the increasing repetition, it is no more true now than it was then.

If you are thinking of buying a house, wait. They will be cheaper next year. There’s no feeling like watching the equity shrink in a house you just purchased. If you have to sell the house you own now first, be prepared to wait for a buyer and be prepared to slash your price.

Here is a chart I borrowed that is based on federal government statistics. It portends a total drop in home values of 34% to get back to the historical price trend line.

Yikes!

There are lots of other scary charts out there illuminating different facets of the same point: housing prices are not sustainable and have to come down (further). This is true in other countries too – easy credit made the leap across the oceans. Mortgage foreclosures are on the rise all over the world. Banks aren’t in the business of owning real estate – what will they do to get rid of the homes they’ve repossessed? Slash prices until they find buyers. What will this kind of price pressure do to the prices of other homes on the market? Yes – prices are going down.

It ain’t over yet. Just ask Yogi.

Questions? kimm@sweetwaterinv.com

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