Interest Rate Roundup

Thursday, January 10, 2008

Homes worth 40 cents on the dollar?

There's an interesting story at Bloomberg today about the value of homes in this down market. Here's an excerpt:

"Lennar Corp.'s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

"That's how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That's also what some investors say they would pay for distressed land, condominiums, homes and whole developments, whether it's now or later this year.

"'If you're an opportunistic buyer with enough cash and credit, it will be one of the best opportunities for acquiring property in our lifetime,' said Jack McCabe, whose McCabe Research & Consulting LLC in Deerfield Beach, Florida, advises hedge funds and other investors on real estate sales.

"As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described 'vulture investor.' Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that's left is the waiting."

This quote is particularly telling:

"We're very aggressive right now because the homebuilders are in survival mode,'' said Ken Sheer, chief executive officer of Santa Monica, California-based Covington. "Like any other business group that has some softness, everybody is scrambling to survive. The guys left standing are the guys who are going to be kings of the hill."

Now even I don't think we'll see a nationwide peak-to-trough price decline of 60%. We're currently down about 8.7% from the peak using the National Association of Realtors' median, existing home price gauge. It topped out at $230,200 in July 2006 and was $210,200 in November. A 60% drop from the July highs would put us around $92,000, low enough to essentially wipe out the entire banking and financial system and return us to the days of foraging for food and bartering for mates. I'm looking for more of a mid single-digit decline in home prices in 2008, on top of what we've seen already.

But we ARE seeing some markets and some property types fall in value by 40%-50%. An older condo complex near me was selling and listing units for the $190s and low $200s at the peak of the bubble. Similar property is now listing for the $110s, and one unit recently sold for $115,000. And as the Bloomberg story notes, if you gotta sell and you're sitting on relatively illiquid real estate (like raw or partially developed land), you have to slash prices to get the deal done.


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