Understanding the Current Housing Market Crisis

Understanding the Current Housing Market CrisisThere is plenty of positive spin out there about a tentative recovery of the real estate market. To be sure, any upward trend is better than the alternative. Yet the reports we are receiving are akin to a movie’s claim to be the #1 comedy in America when it may very well be the only comedy playing. While sales may have more momentum than they’ve had in the last two years, the largest sector of the economy is still in the doldrums.

Just as those of us in the profession knew the bubble would burst years ago, we also know that there will be a recovery. The common theme among those that follow the industry is that once the current empty stock has been absorbed we will again be in need of new housing units. This will in turn jump start the construction industry and we’ll then be on the road to recovery. Hardly. That line of thinking is based on an assumed intrinsic value of the empty units that may not exist.

Some of the currently empty units will not sell, or may sell and remain unoccupied, due to the undesirability of the unit. In the heyday of the boom market houses and condos were designed to attract investors not residents. Any number of bargain hunters have found out that the wealth of units currently on the market don’t meet their needs. The designs are poor and almost unlivable. Even at bargain basement price there is no way to add-on to or improve these units so that meet the needs of those actually looking for a place to live.

The other problem is that some units that were prohibitively expensive before the meltdown, due to their price point, remain expensive due to insurance and maintenance costs. Where the acquisition cost of the house is now within reason, the monthly maintenance fees and special taxing districts of these communities keep potential buyers at bay. The mortgage itself may be half or less than the previous owner was paying, yet the maintenance fees and assessments have gone up. So, too, have the taxes in numerous areas as the local governments need to make up for revenue shortfalls.

Appealing the taxes may buy a temporary reprieve, but sooner or later the taxes will jump up due to a change in millage, not assessed value. This will mean the amount in maintenance and taxes can equal the monthly mortgage amount. While the prospective buyer may be able to afford the mortgage, the extra $1000 per month in fees and taxes might still keep them out of the house.

For some potential owners the thought of paying that much in fees and taxes on top of the mortgage is a deal breaker, even if they can afford it. Those are sunk costs that do not yield a tax write-off since it is not mortgage interest. The potential buyers would be better off finding a location that had a better property tax policy, in a municipality that wasn’t perilously in debt, and where more of their monthly housing expenditure went to build equity in their investment. If that math doesn’t pencil out then they may actually come out ahead just renting.

There’s one last bone of contention. Some potential owners are finding out some hidden costs of owning that they didn’t anticipate. Once into their new neighborhood they get nickeled and dimed to death. The Home Owners Association (HOA) is on a rampage to raise revenue and are doling out fines left and right. The HOA also may not allow them to park their work truck, boat, or RV at their house. These need to go into storage somewhere which tacks on another monthly expense that was not accounted for. All these minor expenses add up to a major pain.

The dream home in the dream neighborhood can quickly turn into a nightmare. Some potential buyers will find this out when they review the financials and choose not to buy. Others will find out after they take ownership. The latter group may be leading the second wave of foreclosures as the hidden costs and reduced tax benefits catch up with them.

While housing prices search for their bottom don’t forget the other factors affecting sales. It is very likely that a good number of the units in the five states deep in the crisis may never find a buyer for the reasons outlined above. This does not mean there is no demand for housing in those areas, just that what is on offer isn’t palatable at any price.

While some may find this depressing, the writing on the wall actually shows a very strong recovery in a different direction. This is where opportunity lurks. Those in a position to buy are voting with their wallets and pocketbooks. Listen up or lose out.