We saw the numbers in the last post – people are still buying houses.

A day or two ago, a commenter went off with a couple of rants, mostly same stuff we’ve heard for years, like:

In the long term, can a state which is hemorraging jobs, income and people; which is still building houses; and which has a huge shadow inventory of REO and squatter occupied – waiting to be REO houses, expect prices to rise or fall?  Just wait till the flood gates open and the REO’s hit the market.

In response, I suggested that prices could go either way, which caused TJ and the bear to politely ask me to make the case.  It’ll probably turn into a series of posts as the violent objections roll in, but if the market were to somehow survive, here are some reasons why: (at least in limited areas):

1. The banks have choked off foreclosures, and hoping for sellers to eventually short-sell.

This chart shows how the foreclosure machine has slowed to a crawl. There may be millions of borrowers not paying their mortgage, but they are getting away with it, at least for now.

San Diego County Trustee-Sale Results, Weekly

The cancellations are a result of sucessful short sales and loan modifications – I doubt that there are many defaulted mortgages actually being paid current.  The old-school folks who want to believe that there will be financial or accounting pressure on banks someday, causing them to unload – that is so 1990s. The banks are just servicing the bulk of paper for a myriad of investor groups around the world.

They sure are giving borrowers a lot of slack too:

Average Free Rent, days

If the servicers continue to not put much pressure on the delinquent borrowers, then this will drag on for years.  I think the government will be very lenient on the servicers, creating a zombie atmosphere where you won’t know which of your neighbors are paying their mortgage, and which are living for free. It’ll only be the squatters that’ll put any pressure on the sheriff to evict.

2. Investors are everywhere.

Sure, they will ebb and flow with the prices and once they get burned once or twice that’ll be the end of them, but the numerous big groups buying multiple properties per month are improving their efficiency with each success. This extra demand is competing with the owner-occupant buyers, making both more frustrated. The owner-occupiers should win the battle, but because they are more willing to pay a higher price.

Here are examples:

If investors are going ga-ga in the marginal areas now, once there are more bank deals in the good areas they’ll be jumping all over them. In the higher-end areas, the comps are fewer and farther between, making the valuations more challenging, but the thought of hitting a home run should entice many an investor.

3. The clock is ticking for buyers.

Those with families want to find a house to raise the kids. Logically you can argue that it shouldn’t matter if you rent or own the family house, but if you’ve been bounced around once or twice by a deatbeat landlords, have sufficient income and down payment, and are comfortable with your job security, you’re going to step up the effort to buy. There are emotional benefits too, and they don’t figure on the calculator. People with means want to know that their housing is secure.

Where is the money coming from, you ask? Most of the buyers I work with have brought money from past real estate deals – either recent or sold at the peak and squirreled away. The baby boomer generation is fueling the market too. Those in their fifties and sixties have always been believers in real estate, they have had their success in business, and they are looking for the final home. Many have inherited from their families too.

Naysayers want to point at unemployment – if we have 20% unemployment, there are still 80% employed, and many of them are doing fine. All we need is about 2,000 sales per month in a county of 3 million people, and we’ll keep this thing afloat.

I might as well predict the first reaction. “Jim, you’re nothing but a realtor, you obviously don’t know anything about economics or statistical trends or averages.” True, but I’m on the street every day, and the demand to buy houses in North San Diego County Coastal is OVERWHELMING – and many people have been waiting for years to buy a home. If there were more quality homes for sale at current pricing, they would be selling. It may takes more price dips to bring in the skeptics, but many more buyers have been waiting silently, and they’ll probably jump in first – that is what’s been happening the last 15 months.

I’ll touch on more positives, and negatives, in future posts. Thanks for considering.

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