For those of us that grew up on the water, Davey Jones’ locker is a well-known reference to the bottom of the sea. It’s cold. It’s dark. It’s dangerous. It’s inhospitable. It’s the last place in the world you’d want to be because you’d be dead.
And that’s exactly where home values and mortgages are right now.
According to the recently released paper by Zillow, the housing data provider, 31% of all homes with mortgages are worth less than the mortgage outstanding on them. This is a far cry from the 23% of homes underwater that CoreLogic (another housing data provider) reports.
The difference between the two reports lies somewhere in the mix of estimating all mortgage debt outstanding on properties (first mortgages, second mortgages, equity lines of credit, etc.) and the “value” of homes.
Currently home prices are all over the place. It depends on whether or not a home for sale is distressed. Is it a normal seller or a short seller? A bank selling real estate owned (REO) property?
At some point the answer is, “Who cares?” The value of the home must encompass all types of sellers for one simple reason: there is only one type of buyer – a person willing to hand over his cash or credit to take ownership of the property.
Of course, an argument over whether the real number is 23% or 31% of all homes with mortgages are underwater is a lot like arguing over placement of deck chairs on the Titanic. Both numbers are awful.
It is four years after the credit crisis erupted. It is six years after the peak in housing prices… and Zillow’s housing data gets worse. While 31% of homes across the nation are underwater, the rate in Phoenix and Atlanta is 55%. In Las Vegas, it’s a whopping 71%!
With unemployment over 8%, wages failing to keep up with inflation, and no real program available for widespread refinancing of underwater mortgages, this downward pressure on home prices won’t let up anytime soon.
That’s why we roll our eyes when we hear announcements from the National Association of Realtors about how home prices are “about” to go higher and things are “about” to improve. These types of pronouncements have been around since 2008, and have yet to be right.
Things Will Improve, Of Course, Just Not Yet
The key thing to understand about real estate is that, just like the axiom tells us, “it’s local.”
While there are tremendous national, and even international, economic headwinds working against real estate prices, there are also local factors that might work in its favor, such as rising populations, or new industries (think natural gas fields in the Midwest), or even scarcity like waterfront.
This means that buyers and sellers have to do more homework than simply listening to big, national statistics and housing data… and then trying to apply them to the home down the street. The real estate market may have some opportunities you can take advantage of now, but it is jam-packed full of land mines.
Now’s not the time to rush in blindly. Be careful.
P.S. We have already put one of “safer” opportunities in the real estate market into our Boom & Bust portfolio. And there is still time to get in.
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