Friday, March 23, 2007

Homeowners and denial of market realities

From an article by JONATHAN R. LAING from 2005, quoting the author of the best selling book, Irrational Exuberance, YALE ECONOMIST ROBERT SHILLER.

"ADDING TO THE UNCERTAINTY: Homeowners often live in denial of market realities by listing their properties at unrealistic prices or simply taking their homes off the market to await better times.

Shiller worries that the market has become so overheated in many areas of the U.S. that any decline could pick up momentum in two to three years, when the adjustable-rate mortgages that have accounted for nearly half of all home loans in the second half of 2004 will begin to "reprice" at higher interest rates, potentially burying overly optimistic buyers sporting scant equity but hefty debt.
Low-to-no-down-payment and interest-only mortgages would only add to the possible mayhem of involuntary sales if home prices were to sag, Shiller adds."

It looks like we are now crossing the threshold Mr. Shiller warned about. The resetting of half a trillion dollars in exotic loans in 2006 has given financial markets the jitters in this first quarter of 07, and there is around three times that amount in these funny-money loans due to reset this year. It doesn’t look rosy.

Also Mr. Shiller mentions denial with people pricing their properties much too high for the market, which we saw a lot of in the second half of 06, and others taking their homes off of the market awaiting a better time to sell. I believe we are seeing that prediction play out now. I have seen unexplained falling inventories in some areas of the US, possibly due to this effect.

As a result I expect a new jump in housing stock this April, the beginning of the summer selling season. If my guess is right, a lot of people will see this as their last best chance to cash out. Reality however will begin to seep in around the end of July when the market proves nonplused and sellers will begin to lower their prices to match market realities.
We’ll see.


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