Bill Gross argued in his monthly PIMCO note that real asset prices must bottom before any sort of economic recovery is possible. At the core of this is finding the floor in real estate. Fortunately for us, the government is already pushing our home prices toward that floor.
While the “Subprime Cities” like Las Vegas and San Bernadino have taken their hit already, we are just at the beginning of the price drops in the Alt-A and Prime cities. I have argued this before and will just refer to this chart to help refresh that memory.
Home prices for the higher credit areas of the real estate market will be slow to fall. The owners mortgages will still reset higher and they will go underwater. However, these homeowners probably still have a few other assets they can sell to help stifle the eventual foreclosure. There is a better chance they still have their jobs as well.
The governments unfortunate job is to speed this process. The one way they have begun to do so is by having the Tax Assesor write down the value of the homes for the homeowner. By presenting the homeowner with this unfortunate truth the homeowner benefits by paying lower property taxes.
I saw a recent letter from the Tax Assesor for a Santa Monica condo similar to mine. The house was last assessed in 2004 when the property was sold for $900k. The assessment valued the house at $955k. According to Zillow’s estimates, the house appreciated over the next two years to be worth $1.2 million at its max. However, while Zillow still values the house at $1.04 million, the government estimates in this letter that the property is now only worth $716k.
The owner is faced with the unfortunate truth that their house is now worth less than 80% of what they paid in 2004, however they get to benefit by paying $3k less per year in property taxes.
In an interesting twist to what I have encouraged homeowners to do before, the government is actually writing down the value of the homes for the owners. I do not know where this initiative came from, but the process in incredibly important and is a brilliant move by whomever is in charge. The sooner these assets bottom out, the sooner our economy can prosper again.
No related posts.
The good news is that forecasts state California real estate prices will go back to levels not seen since 2007, but sales are expected to drop slightly. This may make it a great time to buy into LA lofts before demand outweighs supply and the price goes up.