Thursday, September 27, 2007

New Home Sales plunge: Prices down 7.5% YOY

Well this was obviously not a surprise to anyone who has picked up a newspaper in the past 2 months. Median price of new homes was 7.5% lower in August 2007 compared to August 2006.

So anyone who bought last year with anything less than 7.5% down is now under water. Given the fact that a majority of loans in bubble areas (Las Vegas, Los Angeles, Miami, Boston, DC) were made with less than 5% down, it is a fair assumption to say that most people in those cities are under water. Add in 2-3% closing costs and the 6-8% selling costs and, man it starts getting ugly.

Of course the spin from the NAR (National Association of Realtors) has been this is a great buying opportunity. Listen to then at your peril. The NAR is a sales organization. Their interest is in selling. Whether prices go up or down doesn't really matter. They make money on volume. Listening to them for advice on the housing market is like listening to a car salesman's advice on whether you should buy a car.

It may look bad now, it will only get worse. Below is a chart from Credit Suisse analyst Ivy Zelman showing the ARM resets over the next several years.

These are the adjustable loans people got in the go-go years of 2004, 2005, 2006. Low teaser rates of 1%. Well now they are resetting to 7%, 8%, 9%, 10% and surprise surprise people can't make the payments and are foreclosing like mad. And as you can see from the graph this is not just a "sub-prime" issue. Plenty of people making good money with good credit are resetting as well.

We are just now approaching the peak of ARM resets. So look for foreclosures to peak in about 6 months from now as it usually takes that long to foreclose. Historically speaking housing markets bottom out 18 months after foreclosures peak. Quick math would indicate 2 years from now is when the market will bottom.

But you live in ____________. And in _____________ it is different because of _______.

In Las Vegas, Phoenix, Miami, Los Angeles, Orlando, Dallas it is different because everyone wants to live in _________ because it's a booming city with lots of jobs and good weather. So there will be no crash here.

In Atlanta, Dallas, Houston it is different because there was no boom to begin with. So there will be no crash here.

In DC it is different because the government is here so there will be no crash here.

In NY it is different because Wall. St is here so there will be no crash here.

In Seattle it is different because blah blah blah..

I think you all get my point. Every city is different and yet every city is exactly the same. Yes some areas will get slammed harder than others, but if you think your area is special and won't be affected, think again.

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