FormerSanDiegan, an excellent analysis. I obviously did not consider any of this, since I have no landlord or 1031 experience. Wise advice. Also, check with a CPA about the capital gains and other costs.
murray: I laughed at Thornberg’s report. I attended the May 2006 conference, and put a 3 part rebuttal on this site. You can find it in the archives. Thornberg has the right data, but his conclusions are flawed. The most important point, is so important, that I will write it again.
Thornberg said that historically, home prices have dropped only in recessions. Recessions occur when you have major job loss in 2 sectors, typically manufacturing and one more. There is no indicator for recession, and voila, no job loss and thus home prices cannot decline.
The weakness in the Thornberg analyis is that he does NOT ever mention, not ONCE, the exotic financing. Not one simple mention of 60% of recent purchases made at 100% financing with adjustable rate mortgages.
Thornberg needs to broaden his understanding of what drives home price declines. It is not limited to job loss.
Home prices decline when large groups of people are unable to make their mortgage payments and must sell, regardless of whether that inability to pay is due to job loss or their ARM adjusting. Thornberg omitted the impact of ARMs, which is the same as that of a job loss of recession.
There will be job loss of recesison magnitude; more on that below.
There will be 50,000 – 100,000 San Diegans who will need to sell in the next few years as their mortgage payment jumps 30-80%. The national figure is $2 trillion in ARM loans adjusting over the next 18 months, and I extrapolated to CA which has the highest amount of these loans. We sell 30,000 homes per year, and these homes set the price for the other 1 million homes. These ARM adjustments will be a home value killer.
Thornberg admits the loss in construction jobs, but is too conservative. As he said, the majority of hiring lately has been in real estate industries: construction, lending, and realtors. I got up and asked a question at the conference,and I led it with, “San Diegans have built an economy based on buying and selling homes to each other, financed with money from China”. Thornberg chuckled, and said, “You’ve just summarized our entire presentation”.
Where Thornberg fell short, and this is his 2nd weakness, is in stating the effect of MEW: 70% of GDP is consumer spending, and with flat wages, consumers got their money from MEW and HELOCs. Once housing prices stay FLAT, let alone drop, the gig is up. Rising home prices allowed consumer to go on a spending spree, increasing employment in car dealerships, home improvement stores, restaurants, all retail, travel agencies, nail salons, florists, etc. When the housing ATM is dried up, those employment figures will reverse. I made a thread a few weeks ago about the specific employment losses. Conclusion: with the projected outflow of 40K people/year, and the tens of thousands of job losses, our unemployment will be over 6%. But most of the people losing jobs will seek cheaper and greener pastures elsewhere.
So we will have a recession, because our 2 main sectors that are going to have MAJOR job losses are: construction and retail. Add to that realtors, title officers, appraiser, interior designers, retailers, restaurants, travel agencies, tourism (less travel), and I wonder who will even have a job left?
I got my employment data from Cheryl Mason at the Labor Department, but the conclusions are mine, not hers. I have the Excel file of the labor data, and have studied it for several days. There is no magic bullet for new jobs here. Even Ms. Mason told me the only promise was some hiring for homeland security, but we ended up not getting the grant money. My hope is after housing prices drop and we have huge population exodus, our governor will make a hospitable business climate, and we can grow our businesses again.