the visible hand

it is the theory which decides what can be observed – einstein

Housing market fire sales…

Posted by ecoshift on September 18, 2007

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.

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4 Responses to “Housing market fire sales…”

  1. gulo gordo said

    OK, this is UK, not US. But I’m guessing it won’t be long before we have the same story coming out of the Southlands. And how exactly is this kind of story not s’posed to inspire at least mild panic?

    If you want us to stay cool, maybe you need to find some more upbeat material. (I bet the Repeater has some…) If, OTOH, you think we maybe gots problems, what would you suggest reglar, non-investor-grade folks do? Rent for the next decade? Eeek!

  2. ecoshift said

    Actually I believe the Hovnanian sale (see below) was in the US. There is a DR Horton condo auction coming up in San Diego as well.

    Looks like home prices are getting marked to market. The point I wanted people to get was that this is going to be a serious equity hit for existing home owners. Naturally that’s not what the builders press releases or the majority of the financial press is focusing on. So I linked to a blog that said it pretty clearly.

    Yes I think we maybe gots problems. If you are thinking about buying a house, I’d wait at least a year, maybe three.

    With today’s rate cut, I’d actually think about buying something denominated in a currency other than dollars. The dollar index is down today and the euro is up 3/4 percent. Looks like an oil field might be a good choice. But this is kind of simplistic. We need to think more strategically about what we can do on the north coast given the conditions we are facing. Suggestions?

    “D.R. Horton, the nation’s largest home builder, has chosen to auction
    remaining units at two of its San Diego projects, becoming the first
    major builder here to use the sales technique in the current market
    downturn. The sale, scheduled for 1 p.m. Sept. 29 at the Doubletree Hotel in
    Mission Valley, involves 35 units at La Boheme in North Park and 21 at
    Esperanza in Encanto.”
    http://www.signonsandiego.com/news/metro/20070916-9999-lz1h16auction.html

    “Hovnanian said on Friday the sale, held amid a slumping U.S. housing market that many do not see recovering before 2009, will be held Friday through Sunday in the 19 states the home builder serves, including California, New Jersey, Texas, North Carolina and Virginia, and will include live entertainment and prize giveaways.”
    http://www.reuters.com/article/businessNews/idUSN1425390120070914?feedType=RSS&feedName=businessNews

  3. ecoshift said

    Gulo,

    An afterthought:

    Your point about being upbeat is well taken. I don’t mean to be piling insolvable crisis on top of insolvable crisis.

    I’m cynical enough to believe that us average joe’s are not likely to do well in either the coming economic correction or the coming economic recovery – whichever it turns out to be. But, perhaps, if enough average joe’s get a sense of the mechanics we can actually recognize potential solutions that will give us a chance to change dynamics of capital as it flows through our lives, our ecosystem and our economy.

    I’ve got a post coming up that I hope will help provide a way of looking for possible solutions — though not on a individual level.

  4. gulo gordo said

    suggestions?

    mmph. Looks like it may be a little late to move to Canada, with the loonie moving to parity on the greenback. Ditto Europe, except that was last year.

    The policy I geek on has relatively little to do with this meta-finance stuff, so I’m pretty much at a loss to see what these signals suggest at the level of the individual, or even the community. The suggestions that resonate with me: get really good at solving problems; specialize in doing more with less.

    One of the quiet fears I’ve been trying to keep buried in the back of my mental closet is the Argentine meltdown, which I understand to have pretty much wrecked a lot of their middle class, and of course everyone below that. Now, one of the observers I’ve come to really respect is pointing to the Saudis edging away from the dollar, and whispering “Argentina.” That scares the crap out of me.

    I actually don’t believe in happy talk. I think we’d all be a lot better off if people had long ago stopped believing in the Tooth Fairy, Jesus, and a benevolent Fed. But the catastrophic loss of more-or-less constructive illusion seems to me one of the great dangers of our cultural moment. People seem to need to believe, and if the Easter Bunny evaporates with the easy mortgage rates, well, there’s always the Big Man to fall back on.

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