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Delusional real estate prices? - Where you from, Kansas?

Dec. 10th, 2007

12:33 pm - Delusional real estate prices?

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Hmm... the two-flat a couple of doors down from our place is still on the market. The price has been reduced by $50,000, but I don't know if that will help it sell. The real estate market has changed dramatically over the past year.

Meanwhile another two-flat on the next block east of us is for sale for... $849,000. Are they delusional? This is a modest, blocky building from the 50's or early 60's. It was sold last summer and presumably rehabbed. But they didn't have time to do a total gut job... most likely the new owner added some granite countertops, refinished the floors and thought that would do it.

Calling it delusional thinking is perhaps unkind. The new owner would've bought it at a fairly high price (considering the general prices in the neighborhood), and then had to come up with the money for labor and materials for the rehab... just as building material costs were shooting up. The current price for the two-flat may reflect necessity as much as greed.  (ETA: I think I saw this property listed for something like 450K before the rehab.)

Still. I'd be amazed if (s)he actually gets that price for it.

The decline in housing prices may seem like good news to those of us who haven't been able to afford to buy property up to now. Not to mention home owners who've been hurt by the rising property tax burdens that accompanied the run-up in property values. But. There are many downsides. First of all, the rise in real estate was one of the few sources of growth that our economy has had in this decade. With values now declining, there's little incentive to build new housing. So the construction industry, a major employer in this country, suffers and there goes a lot of people's incomes. At the same time, the demand for building materials will decline and the companies that make, distribute and sell the materials will suffer gravely. We may see outfits like Lowes and Home Depot going bankrupt in the next few years.

Likewise, our financial system will be experiencing a lot of sand in its gears as the economy slows down. Bloated and overextended after years of economic growth that (arguably) was largely illusory, the banks and financial systems are ill-prepared to go into reverse. Mortgage lenders like Countryside are in the worst shape now, but the trouble will spread far beyond them. Already there's a serious liquidity problem in the higher levels of the economy, and before too long this will affect the ordinary consumer. Credit card companies, no angels before now, are resorting to increasingly absurd excuses to soak their customers. If this continues, credit will be harder and harder to get, and many people who were counting on being able to finance education, cars and homes will be out of luck.

Which of course will exacerbate the housing crisis, as mortgages are hard to get... so home prices fall... so mortgages become even harder to get... and so on.

You get the picture. I think I'm going to go make a snow angel and not think about this for a while.