I think that there is some disconnect in the psychology of the market. Or at least our understanding of the psychology of the market.
We tend to think of they dynamic of what is happening now, not what the future portends… The idea that most homeowners have tons of equity and they can afford to never sell, and it doesn’t matter to them, to me seems absolute rubbish…
Lets look at reality. Most people who have equity due to the increased value of their homes, have refinanced to support a new type of lifestyle, one which has been increasing along with the equity…. Why has the economy done so well and why is the DOW at 13+K? The US consumer. As we all know the average person in this country has a negative savings rate! We don’t save! We spend! It’s what keeps the roller coaster going. Where I used to live in Carmel Valley – as peoples houses went up in value, they bought vacation homes, they bought new cars, boats, went out to eat all the time, etc. New kitchens, remodels, granite everything, timeshares, European vacations…. All with borrowed money. With huge income taxes, 6% sales commissions, and supporting an ever increasing lifestyle quality, many of the same people who claim that they have this fictitious equity have lived comfortably because that was their nest egg… As interest rates were so low, they refinanced – into ARM’s, etc.
Now if the pain stopped now – no problem for most…. What happens if prices go down 10-20 percent over the next year… Or even just 7%? What happens if this happens in 08, 09, 10, and 11?
Think about it! Everyone said there would be a new top each year for 10-15 years…. and it came true… But now that the sentiment is going the other way, everyone calls the bottom by late ’08!!!! There won’t be a bottom for a long time. It’s in the cards – because as it gets worse and worse, as credit tightens, buyers are scared, sellers are scared and this pretend equity which has been spent in the economy gets smaller and smaller… Till – only the real savers, the people who live within their means will be ok… That is NOT the vast majority of the southern California lifestyle!
One more point about rubbing it in…. When we were still going up my cousin (in real estate in Malibu and Calabassas) crowed about how well the market was doing. When the tide turned I spent a lot of time trying to get him to understand what was happening and what was going to happen. Now that the tide has turned, and yet the real pain hasn’t even begun to start (it really hasn’t yet!) I no longer talk to him about real estate… He won’t really get it until it gets worse, and I don’t want to make him feel bad. My sister owns a 1M house in the OC… She owes 940K on it because of a remodel. I don’t talk to her about it either… Why? Because she isn’t going to sell, but I don’t want to keep saying I told you so…
The mob will start selling in earnest next year, or the year after. There won’t be any buyers, and the ones that need to cash out will wish that they sold out this year.
p.s. My realtor cousin has his house at 1.5M for a year now. He has only slightly dropped it’s price and can’t understand why no one will buy it. By the time he sells, he will have surrendered all his equity…. This will be a very common story – it’s the fear of losing the equity which will keep houses off the market now, and will bring them on in droves next year when the fear will be losing ALL the equity.
