As some of you may know, I'm picking up and heading back to Los Angeles around year-end with my wife and daughter in tow. I'll be heading back to Japan for work here and there but want to settle down back in California. I first figured I would buy a nice house for us, but have changed my mind. I remember when I came to Japan 15 years ago, a "normal" house in LA was around three hundred grand, now the same house is rubbing up against a clean million. That's right, three times! Now let me ask you, have salaries gone up three times? Something is out of whack and you better watch out because property prices are beginning to wobble as the news has been telling us.
Last week, the National Association of Realtors said that home sale prices are down from last year's levels in 26 major metropolitan areas. And the Commerce Department reported that housing prices are down by more than 15 percent from their highs and on top of that, the Mortgage Bankers Association reported that applications for home purchase mortgages have dropped by more than 20 percent from last year's levels. I've been doing a little research and this is what I have found:
As we speak there is $2.7 trillion worth of adjustable rate mortgages (ARMs) that will reset at a higher interest rate in 2006 and 2007. That means that homeowners are going to have to fork out more cash every month for their mortgage. Do you know how much a six hundred thousand-dollar mortgage costs you a month? Around $3,400 and it is going to cost more pretty soon. Inflation has not been tamed and is not going away, there is a good chance that the Fed will raise rates again. You also have to remember here, you can't even get into a decent place in a good area of LA for six-hundred grand, you would have had to put up another hundred grand or so on top of that. Add in insurance, school for the kids, gas, cars and credit cards and you are looking at a nation of people in debt over their head. A time bomb.
You also have to keep in mind that lenders have come up with all these wacky loan inventions to fuel the whole thing. There are these interest only loans, which means that your first loan payments only cover the interest and zero of the actual home. When these buyers have to start covering the equity, they are not going to be happy because they won't be able to make their payments and won't be able to get out of the house because people like me aren't biting. That is right, 10% of homeowners are paying mortgages and have zero equity in their places.
Prices are starting to fall and it has only just begun. There are still people who say things will get back on track next year. I really doubt it. My reasoning is simple: No middle class person can afford a million dollar home unless salaries change (which they haven't, matter of fact they are half of what they should be to justify the price of the average house) or Americans save money (which they haven't). If all construction of new homes stopped today, it would still take six months to sell off all the inventory. Americans have overextended themselves once again and the market is heading for the abyss.
No comments:
Post a Comment