Real Estate: Greenspan Is Right?

Alan Greenspan said falling home prices in America are “nowhere near the bottom”. Y V Reddy has been talking of an asset bubble for quite some time, but in our euphoria we chose to ignore him. Deepak Parekh has been shouting that real estate prices are far too high for about 2 years if not 3.

You may or may not agree with something these people have done or said over the years, but all 3 of them cannot be wrong, can they be?

This may surprise some, especially since the national media just reported the single largest year-over-year drop in U.S. home prices, May’s record 15.8% plunge.

From 1999 to 2006, we experienced the wildest housing boom in U.S. history as well as the Indian markets. Prices skyrocketed relative to building costs, personal income, population growth and inflation.

In other words, home prices didn’t soar for any sound fundamental reason. They soared because of low interest rates, easy credit and a $500,000 capital gains tax exemption. (Animal spirits, in other words.) – quoted from Alex of Oxford Investments.

According to Freddie Mac, U.S. home prices have climbed 6.2% a year over the past 30 years. Numbers are similar if data is seen for the Indian market – however no single index is available in India to make such a confident statement in Indian conditions.

For starters, the US economy is in the tank. That puts fewer consumers in the mood to make a big-ticket purchase. And homes are the biggest of them all.

Then there is the state of the housing market itself. Foreclosures are at record levels. And we will see new records in the months ahead as variable mortgages reset higher and prices drift lower.

Inventory keeps piling up. Nationally, lackluster sales have created an 11-month supply of unsold homes.

Ben Bernanke is converting all the wood he can see into currency – so you will see oil go to $ 200 and gold to $ 1200 . More than the demand for these products, the debasement of the green back is causing this.

Banks and other mortgage lenders have raised their standards, too. In recent years, even borrowers with spotty payment histories were able to choose among a juicy selection of no-money-down, interest only, adjustable rate, negative amortization, “pick-your-payment” mortgages.

In Indian conditions I have seen bankers accepting old life insurance policies mortgage with them as “owner’s contribution” and funded the full cash flow. However if this deal was done in 2005, the banker need not have worried – but if this deal was done in 2007, the margins are crushed, and the risk increased.

But now credit is tight. EMI amounts have gone up. Remember people who have borrowed for a 4 BHK flat have also borrowed for the cars, holidays, etc.

In short, it really is ugly out there.

Put all these factors together – a weak economy, declining home prices, higher mortgage rates, tougher lending standards and rising home inventory – and you’d think that home sellers would slash prices.

But they haven’t. At least, not enough. Not yet.

we are all waiting for it to happen….

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  1. The cocktail has the right ingredients to knock down one fooling around under the impression that it was a free dinner.

  2. I am waiting for the day the housing sector will show some weakness. As of now the builders are still holding on hoping that they will be able to ride this downturn without lowering the prices. And I sincerely hope that they fail 🙂

    Any idea when we can see the weak scenario being reflected in the prices especially Mumbai-Central Suburbs?

  3. Very difficult. Remember Hiranandani has bought Powai at Re.1 per s ft. The best price he has sold for is 23,000 psf. Also builders this time around (lessons learnt from the earlier gloom) are sitting on raw material (land) and not finished products (flats). This gives them a greater waiting power. So he who blinks first loses. However rents are indicating that there is only a demand for investing and not so much for usage. That means as a consumer you should wait or compromise on the location – play the geography arbitrage game.

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