February 7, 2011 - Years of Pain to Come in Residential Real Estate

Featured Trades: (RESIDENTIAL REAL ESTATE)

1) Years of Pain to Come in Residential Real Estate. Regular readers of this letter are familiar with my antipathy towards real estate of every flavor, with the exceptions of multi-unit dwellings (apartment buildings) and farmland .
So my interest was piqued when Ron Peltier spoke the other day, the CEO of? Home Services America, a national brokerage firm in the Berkshire Hathaway (BRK/A) fold. What better way to get a hands on, from the trenches read on this troubled market than Oracle of Omaha, Warren Buffet's personal agent?

He said that we may see the number of existing homes on the market climb from the current 4 million units to 5 million, versus a ten year annual trailing average sales of 2.5 million units. Record foreclosures are forcing reasonable sellers moving for demographic reasons (larger families, job changes, divorces, etc.) to compete against distressed sellers, driving prices down. Those suffering the indignity of losing their homes are seeing realizations at 25% to 50% below fair value.

At least 25% of American homeowners, or some 35 million dwellings, have negative equity.? While prices on average have fallen back to 2002 levels, Peltier doesn't expect further declines because of the huge support provided by mortgage interest rates at 50 year lows. So he sees a best case scenario of flat prices until this record excess inventory of 2.5 million homes is worked off, which can't occur until 2012 at the earliest.

Personally, I think Peltier is being optimistic because he doesn't address the hurricane force headwinds of the retirement and downsizing of 80 million baby boomers, the parsimonious attitude of banks towards new borrowers, and the harsh reality of continued falling standards of living in the US. Continue to rent, not buy, and let the landlord worry about the rats in the attic.

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