Housing Market Fire Sales – Fingers of Instability Series Part Six
:: The Market Oracle ::
Little reported in this week’s news was the Fire Sale Hovnanian Homebuilders conducted over the weekend. Offering 30% discounts on their new homes as they headed for the sidelines before their peers do. It is an act of yelling “FIRE IN A THEATRE”. Please understand that prices are set at the margin, in other words, the value of your holdings are determined by the last price at which they were transacted. In this example with Hovnanian it works out this way: Homes were sold at 30% discount to reduce inventories and to satisfy creditors that were getting nervous and demanding payment.
But the result after the sales is that every homeowner in similar homes in the area just saw the value of their homes drop an equivalent amount. Imagine a homeowner who had 20% equity in his home before the Hovnanian clearance sale; he may be a prime-quality borrower and live in a personally-affordable home (had the income to support his purchase). Presto, he wakes up on Monday and his is now 10% underwater on his purchase, and since his and many other mortgages in his area have been SECURITIZED, those previously healthy AAA credits have been turned into trash with these sales.
This person’s wealth just suffered a CRASH, no different than if the value of his or her stock investments declined in the same manner. Homeowners and homebuilders in general had been holding their prices up through value-added incentives, such as special countertops or flooring sales tactics, are now between the proverbial rock and a hard place. This will no longer work. That sound you hear is the sound of crashing home values around the country as homebuilder after homebuilder will follow Hovnanian out the exits.