by David Stanowski
25 March 2007
As prices decline from the highs that they reached at the peak of the Housing Bubble, the obvious question is; how low can prices go. Conventional Wisdom holds that real estate prices can't drop more than 10-20%, but anecdotal evidence from some sections of the country shows a different possibility.
The areas that enjoyed the highest run up in prices, during the Bubble, such as California, Florida, Phoenix and Las Vegas, are the most extended beyond levels of known value, which certainly sets up the potential for larger declines than most expect. At the same time, places that did not enjoy massive price appreciation seem to have their own reasons to expect much more pressure to the downside.
This story from the Gartman Letter gives a hint of what is already happening in some places.
"Knowing when something has gotten cheap is an art reserved to either the very wisest among us, or the very lucky, or at times the very stupid. It is not an art we are given to, although clearly we have some acquaintance with the latter. But sometimes even we can know when something has gotten cheap.... even very so, and it would appear that housing in Detroit, Michigan has gotten very, very cheap. Allow us to explain.
"We were sent an article yesterday from Yahoo! News detailing the levels to which housing prices in Detroit have fallen, and they have fallen very far indeed. Apparently last week, a Texas auction firm was commissioned to sell off a number of homes there. The prices were unbelievably cheap, with 'house after house [selling] for less than the $29,000 that it costs to buy the average new car.' The auctioneer became so exercised that he enjoined the audience with the simple statement that 'Folks, the ground underneath the house goes with it. You do know that, right?' Several houses that went by the boards sold for less than $10,000... some even for less than $7,000. As one participant said, 'You cannot even buy a good used car for that!'
"He's right. One gentleman, who a year ago thought he was buying a series of 'bargains' when he paid $70,000 for a number of houses, only to watch as houses of the same relative value in the same neighborhood sold over the weekend for half that. The gentleman in question apparently was not prepared to average down.
"Sadly, these 'bargains' are not only in seedy, run-down depressed portion of the city. We read where a house in Bloomfield Hills, an area of the city we've been to several times in the past two years and is really very, very nice indeed, which had been listed for $525,000 sold for $130,000! Five years ago, at $525,000 the house was a bargain; at $130,000 it is even 'bargain-er.' However, when nice, tidy, small houses begin to sell for less than the price of a nice, tidy, used car, either cars are expensive or houses are inexpensive... or both. Now, how do we do the arb?"
It may be easy to dismiss this report as an anomaly in a declining Rust-Belt city, but a recent auction in upscale Naples, Florida, brought bids that shocked the sellers.
Cuyahoga County Ohio (Cleveland) had 15,000 foreclosures last year, which has created a plague of abandoned houses. They have wisely implemented a program of installing alarms, and doing basic upkeep and maintenance, to keep the squatters and drug dealers out of them; but how many more houses can they care for?
For the most part, the unfolding post-bubble story must be told on a local basis. That makes it difficult to get the news, in a timely manner, since local newspapers having been trying to ignore the story that will hurt two of their biggest advertisers; Realtors and home builders. This means that it is primarily being told on the Internet.
After the most massive credit expansion in history, those who are trying to actually report on this story are being forced to imagine potential price declines far larger than Conventional Wisdom will allow!
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