The Death of the McMansion
by Richard
I sense that there has been a recent seismic shift in the way we look at housing.
There is hard data from the general slump in residential real estate, and a great deal of anecdotal confirmation. Optimists felt that the high-end market would be immune from the problems plaguing entry level housing.
Once the pipeline of Liar’s loans (stated income and assets) and Ninja loans (no income, no job, no assets) dried up, and buyers had to produce actual W-2 and 1040 proof of income, the entry pool of buyers virtually collapsed.
And herein lies the fallacy in thinking that the high-end buyer would escape the carnage. Think of real estate as a food chain. The entry level buyer frees the seller to upgrade, as does the next transaction up the line, and the next…..all the way up to the 5,000 square foot homes.
Once the linkage is broken, once lenders starting demanding actual jobs and down payments, the result was not one lost deal, but perhaps a half dozen. In order for the string of firecrackers to ignite, at least one must start the chain reaction.
Add to this mixture the $1,000 plus heating and air-conditioning bills, the out-sized property tax, insurance and homeowners dues, and the $500 per month landscaping and pool maintenance and all of a sudden the dream house morphs into a nightmare dwelling.
From Investment to Money Pit?
People thought of their homes as an investment. Investments grow as a result of total return…the sum of the yield and the capital gains. But if there is no income yield, and all your bet is on future appreciation, you are essentially a commodity speculator. Whether it is gold or art, or residential housing, the unifying theme is that your major cost is your opportunity cost.
Which is the investment you could have made, but were unable to do so, because your money was tied up in assets that eat cash, but do not generate income.
Worse, when you try to sell, you have to get in the queue. You’re not the only one with this dilemma. These big homes will be a drag on the market for years to come, as aging baby boomers all try to squeeze through the exit at the same time, intent on downsizing.
Much of this can be traced to the debacle in tech stocks in 2000-2002. Housing looked solid in comparison. Something visible, tangible, usable. The tech stock bubble was replaced with the residential housing bubble.
And once you are investing in a bubble, it does not feel like a bubble. It feels like you are 10 feet tall, invincible and omniscient. You feel like an idiot sitting on the sidelines.
And then the market literally started to feed off itself. Bloated valuations led to repeated raids on the equity, to finance the $300,000 kitchen and/or the $200,000 home theater.
And my favorite example of conspicuous consumption, the outdoor kitchen, a fleeting pleasure that is used maybe a few times a year, but saddles the owner with a slug of long term debt.
Buy in haste. Repent at leisure.
You can only play this game of trading invest-able dollars for static or depreciating assets so long, before you have painted yourself into a corner. You traded something of measurable value, fully liquid, for a speculative asset priced on a highly variable demand.
You have committed the cardinal sin that also brought down mighty banks and hedge funds. You borrowed short and invested long.
The global energy crunch will largely define every investment choice you make from now on. Where you live. What you drive. Whether or not you work from your home.
Back in the seventies, desperate drivers who could not find buyers, were setting fire to their gas guzzler land cruisers, hoping to collect on the insurance, because they could not deal with the pain of gas. Which had doubled in price from 30 cents to over 60 cents a gallon. Then all the way to a buck.
We are vastly over-housed and seriously under-invested for our retirements. This imbalance will correct over time.
You might want to get in front of this parade while you still can.
