Housing Ownership Crisis

Problem #1.

The FED announced yesterday their Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2010 showing from 2007 to 2010 the median family income fell 7.7% and median net worth was reduced by 38.8%.

Problem #2.

Negative equity in housing is a major cause of home owners with mortgages not allowing families to get out of loans they now can’t afford since they may not have the funds to pay the difference between the selling price and the balance on the loan(s) (1^st and 2^nd mortgages).  Therefore they are financially stuck unless they walk away in foreclosure situation which thousands have done.

What About the High End Market in Real Estate

Talking with a Realtor specializing in second homes in resort area he said, “every sale in the past two years sale he has made has been a cash deal. Not one financed deal.” This is highly profound in my view. There are just so many people who can and will pay cash for a $900,000 home.  As counties try to raise property taxes to make up short falls in their budgets and as their homes age, requiring more repairs, even the high-end market will be affected as a lagging and more long term drain on the economy. If the high-end market, continues to stop spending on consumables and big ticket items, it could create even more headwinds for the US economy.
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In Summary

People bought houses expecting their income to rise but it’s on average of 7.7%. In other words, this really means people that are having trouble have experienced a much higher percentage loss than that due to a probable unemployment or under employment situation. That combined with a negative equity situation in their biggest expense means they are having to eat into their retirement and savings just to stay afloat. It’s a sad vicious cycle.

Since so many can’t afford to sell and are trying to be foreclosed upon, this is causing a reduction in the housing inventory in some markets. Las Vegas is a prime example. Their inventory is down to less than two months. Could this be a sign that the housing market is near the bottom? With the historically low interest rates and as the prices of houses rise more and more distressed home owners will be able to afford to sell their houses at close to a breakeven point. This will free up inventory along an upward sloping economic curve as the prices increase.

So, How Does This Affect My Stock and Mutual Fund Decisions?

With the low end of the socioeconomic consumer market struggling for years to come (unfortunately) you will need to understand that they are operating on a limited disposable income if they stay in their houses. If they are foreclosed upon, it’s my thinking that some percentage will rent a small place and be consumers with little savings. Hope I’m wrong. However, if I’m right, the latter will be the consumers with the disposable income. They will be consumers of small ticket items and consumables since credit issues will keep them from property purchases. People with a $1 million to $3 million net worth will certainly complain about cutting back but will try to keep their lifestyle. If they do cut back significantly that may be another economic shoe to drop.

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