Housing Crisis: US Property Values Plummet as Cheap Credit Ends

“A fresh blow to the housing market ,” is how the Financial Times describes it.
The Daily Telegraph comes up with a more bodacious headline:

“US housing market in freefall as prices crash”

And follows up with this:

“Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession…

“Total sales dropped 8.3% on the month and are now down 21.2% during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people.”

Both papers give us new data on house prices:

“The median home sale value fell 7.5% from US$246,200 to US$225,000, its lowest since January 2005,” says the FT.

Two and a half years of price increase – wiped out.

But in go-go areas, even bigger gains have gone-gone. Miami was one of the hottest housing areas in the nation. Now, its condos are being marked to market. Here’s the report:

“There are at least 50 buildings under construction or nearly completed in the downtown Miami area alone, consisting of about 20,000 units,” reports David Sutta from CBS4.com in Miami.

“To move inventories along, developers have gone to the auction block to get them sold.

“On Thursday evening, at the Miami Biscayne Bay Marriott Hotel the gavel struck as auctioneers sold about 20 units in the 119-unit Platinum development owned by Alex Redondo.
“When it was all over, [one bidder] walked away with a two bedroom unit on the 19th floor. To put the price in perspective, a one bedroom priced at US$350,000 sold on average at auction for US$176,000, almost half.

“A two bedroom unit that sold for about US$600,000 last year, sold on average for US$295,000.”

Yes, dear reader; if you are thinking of moving to Killeen, Texas, you better act soon. Those big housing gains are disappearing. In Miami, prices are being cut in half.

You might be thinking…well…one man’s loss is another man’s gain. But think again. While the bidders got apartments at half-price, the owners of other apartments saw their assets lose 50% of their value almost overnight. A week ago, they may have had an apartment worth US$600,000. Now it is worth only US$300,000 – and falling.

What happened to that US$300,000? It vanished. Poof. That’s what put the ‘d’ in deflation. Money d-isappears. Wealth d-issipates. Values d-ecline. The economy d-egenerates. People get d-epressed.

Meanwhile, stocks held steady yesterday. Stock market investors seem to think they’ve got a “Bernanke Put” on their hands – an option that will always protect them from losses; if stocks begin to go down…Bernanke will just cut rates.

But Robert McAdie, head of credit at Barclay’s Capital, addressed the issue yesterday.

He noted that though the Fed may cut rates, and may bail out a few large speculators, there is no guarantee that money will find its way into the hands of the people who really need it. A bank can borrow from the Fed at the Fed’s rigged rates, but that doesn’t mean it isn’t going to be careful with the money. Rates dropped after the Fed funds cut last week, but long-term finance rates actually went up…and the gap between the Fed’s rate and the banks’ own interbank lending rates remained unchanged. What gives? Lenders are still worried. They’re afraid they might let out some money…and not get it back. So, they demand a little extra return, as protection. In July, the spread between commercial paper and the fed funds rate was only four basis points. Now, it’s 62.

Money is cheaper, generally, but as McAdie put it:

“Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralised loan obligations] market that financed them is effectively closed.”

Oh my… The homeowners can’t sell their houses. And the Wall Street hustlers can’t sell their deals. How d-isappointing. How d-iscouraging. For example, the Bank of Montreal – Canada’s fourth largest lender – announced that it couldn’t get rid of its asset-backed paper. And the global mergers and acquisitions market got hit in the head with a brick. After setting a record in the first nine months of the year, the deals declined 42% in the third quarter.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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