The Coming Train Wreck to Avoid
The Coming Train Wreck to Avoid
The Coming Train Wreck to Avoid

The Continuing Collapse of the US Housing Market to 2013

What would you do if you saw a train wreck about to happen and there was nothing you could do to stop it? You’d get out of the way. So why don’t many Canadians do that with their investment decisions? Simply, because we can’t help ourselves – we have the sun in our eyes.

The sun will be shining when the snow begins to fly up in Canada. That alone is a big draw to buying property in the U.S. Yet those who purchase today will look back at that decision as just another poor ‘holiday influenced’ decision. Prices will have dropped, expenses will have escalated and that piece of paradise will no longer be a place of peace and relaxation – and will definitely not be the bargain it may look like today.

Although many Canadians are looking south for bargains, the fundamentals of the US housing market, especially in key states, indicate that the bottom is still nowhere in sight. The key sun-belt, snowbird states have already been hit the hardest and are poised to perform just as poorly for years to come. For example, according to the Case-Shiller Index:

Phoenix is down 54% LA area is down 42% Miami is down 48%

Las Vegas is down 49% Tampa is down 41% San Francisco is down 46%

This would lead one to believe that these, and other sun-belt markets, are trading at a massive discount and couldn’t go any lower. Well, unfortunately that is not what the analysis is showing. Future real estate prices are driven by many key factors, including job growth, population growth, income growth, along with simple supply and demand. Lower prices do not mean good deals, if prices are going to move lower.

When analyzing the key economic fundamentals of these regions a very nasty picture emerges. Continued job losses, average incomes slipping, higher taxes, companies closing or moving to lower cost regions because of government incentives, all of these fundamentals are showing negative signs.

The whole R-rated picture comes into view when you factor in the coming foreclosure wave about to hit. Let’s take a look.

Many predicted that the foreclosure peak would occur in the heart of the recession, in 2008. Yet here we sit in 2009 with record numbers of US foreclosures being declared. A whopping 1.5 million properties in the U.S. received foreclosure notices in the first 6 months of 2009, a 15% increase over the same period in 2008. This occurred despite the US government stimulus package and mortgage incentive programs.

It is even worse when you dig down to the typical ‘snowbird’ states. A full 6% of all housing units in Nevada received a foreclosure notice in the first half of 2009, the worst of any state, followed closely by Arizona, Florida, California, Georgia and Colorado.

These numbers indicate that the market is about to be flooded with much more supply, softening prices even further.

Some would interpret these numbers as ‘a time for bargains,’ which may be true, if there were any fundamentals showing this trend coming to an end. However, we must look at the precarious financial situation of those who still own their own home. A full 23% of mortgage holders in the US owe more on their home than the property is worth as of the 2nd quarter of 2009. It is estimated by Deutsche Bank that this figure could jump to 48% of mortgage holders owing more than their homes are worth by first quarter of 2011.

They should be able to hold on, as long as their job or income situation doesn’t change, or their neighbourhood isn’t filled with some of the millions of empty properties that blanket the US, or their mortgage payments don’t move upwards. In other words, the prospects don’t look very good for many of this 23%. We will witness many of these properties become part of the coming tidal wave of properties for sale.

How about the remaining 77% who owe less than the property is worth and are still making their monthly payments diligently? Are they out of the woods – or are we going to see them also hit a brick wall even if they keep their job and income? Sadly, it doesn’t look overly positive for many of these homeowners either.

Why? Because we cannot ignore the pending re-set of hundreds of billions of dollars of Adjustable Rate Mortgages (that don’t even peak until May 2012). As these mortgage payments are adjusted up to market rates, from the low introductory rates that allowed people to purchase properties they couldn’t afford, an increasing number of homeowners will not be able to meet these new monthly obligations forcing them to either sell or ‘mail back the keys’ in foreclosure.

In the months of March to August 2009, payments on approximately $135 Billion of A.R.M.s were re-set and we’ve already witnessed what that has done to the foreclosure numbers as they hit new record highs. In the same period in 2012, there will be another $221 billion of A.R.M.s being re-set. This will be the peak period of these types of mortgages being adjusted, which should also lead to the bottoming out of the property values in the US, which will occur in early 2013.

These mortgage payment adjustments will have a major impact as we are already witnessing how close to the edge many American home-owners are. In the 2nd quarter of 2009 a new record was set when almost 1 in 8 homeowners were either delinquent in payments or in the process of foreclosure. Add the new higher payments that are coming for many of these and you can see how delinquency rates will soar.

The re-setting mortgages are no longer just the sub-prime mortgages that are being blamed for the current crisis, the next 3 years of ARM mortgages were provided to higher quality borrowers (prime and Alt-A) right along side the sub-prime market. Meaning these re-adjustments are going to begin hitting the heart of the US housing market… middle America.

The train is hurtling down the tracks. Do what you can to avoid being hit by it.

Conclusion: Canadians who can take the sun out of their eyes should make money in the Canadian real estate market, then use this money to rent their vacation home in the US every year for as many weeks as they’d like. Rents will be very low for years to come AND you can choose your vacation location every year and not be saddled with having to go to, and maintain, the same spot year after year (unless you choose to).
Don R. Campbell

President, Real Estate Investment Network™

The Coming Train Wreck to Avoid was last modified: April 26th, 2010 by admin
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