Quote from Pa(b)st Prime:
I'm curious about the situation in North Carolina. Can you elaborate on what you're seeing there?
I'm not at all ST bullish on prices but the fundamentals don't support a crash scenario. 2 million vacant homes sounds huge but what does that number really represent? A half years supply? There's 300 million people in this country. Are not 1 in a hundred entering the market as first time buyers?
North Carolina was hit hard by textile industry woes. China has basically destroyed their manufacturing base (tube socks, underwear, outerwear).
You can buy lots in new subdivisions in nice areas of NC right now for $35,000 to $40,000. Developers will let these lots go for cost or less - they won't admit it, but I know it's true - because there's a lack of demand.
The problem is there are few buyers except for the very coastal areas.
The suburbs of Atlanta are deteriorating now, too. Very high foreclosure rates - lots of subprime lending there.
I drove through all parts of AZ and Nevada for the last three years, and I can tell you that right now, builders are giving away homes for cost or below in former hot areas like Chandler or Glendale, as an example - they are doing through a combination of 'extras' and rebates, and even outright discounting. They have to get that unsold inventory, that is just sitting there, off the books, because of the high carrying costs.
They prefer to do it through extras and rebates (after closing) because it doesn't drop comps down in the neighborhood, which makes mortgage lending harder for subsequent buyers.
You can literally buy homes in Glendale and Chandler right now that were selling for $330,000 last year for $280,000 - plus get free pools and granite counters and sprinklers and everything else - I know, because I went into the same subs the last three years, posing as a prospective buyer, and talked to the salespeople and got the literature.
As far as you not being bullish on prices, you're right. But here's a subtle but critical point that Shiller makes, and few people absorb: A crash in pricing can happen in terms relative to general inflation. In other words, Shiller says that if prices in residential real estate rise by 1% on an average per annum basis for 8 years (look at Japan - flat - 0% - for 15 years), but general inflation is at 3%, then 8 x 2% differential = a real loss of 16%.
Of course, that number can be much larger and more protracted, depending on a variety of factors.
And then, Shiller says his bet is that it will be much worse, because prices will decline in all but the very best markets
in real terms. So nominal prices will actually drop. So, that differential is more likely to be 3% per year, rather than 2%, for example. 8 x 3% = 24%.
But even if they don't, simply failing to match inflation will lead to major pain for homeowners and residential investors.
I say these things in the context of this hurting me - and a career that I was enculturated into.
I also see commercial at a peak right now, because residential is a leading indicator of commercial, which lags. Commercial depends on, and follows, rooftops.
All the bulls on real estate can tell me I'm wrong, but these things I speak about come from my seeing them in bright color, at ground level, in person. That's the only way the reality can be discovered.
Now, I nothing about Chicago or Manhattan. I haven't seen those areas in person, and until I do, will reserve comment.
