Hey Doc, My Spec House Isn’t Selling

This was the comment I recently had from one of my loyal Road Warrior readers and seminar attendees.

His property was a spec house near a growing Midwestern city. The questions centered on whether he should sell the house at a discount now or wait for the housing market to improve.

The housing market nationwide has moved into stage one decline, that is, from a seller’s market to a buyer’s market in most areas. Why? This is more than an interest rate induced slowdown. The combination of excess homes, too much inventory and demographics are playing their cards.

Home inventory listed for sale is at approximately six months and increasing at a steady pace. How will this slowdown impact the economy? Approximately 10% of the overall economy can be linked to the housing market, including construction, banking, landscaping and realtors. This group of individuals and institutions has represented much of the job growth since the dot com meltdown.

In the last two years the housing market has been the consumer’s ATM. That is, utilizing the home equity loan to provide cash and pay off consumer debt and the purchase of consumer items. However, these home mortgages may be on variable interest rates that will be reset from teaser loan rates this fall. Rates could increase as much as 2%. This would reduce spendable income by about $500/month.

Next, demographics are coming into play. As more boomers move toward retirement, incomes will level off and actually decline. Higher priced homes are particularly vulnerable. Also the savings rate is pitiful with a negative figure. A closer look finds that the rate is -18% for people under 40 and -21% for people who use home equity mortgages. Bottom line: Houston, we have some serious home price problems.

My response to the gentleman was that this housing slowdown might last for three to five years. Yes, with the price of his property there will be demand and if he has the cash and liquidity to wait it out, he may be okay. Otherwise, sell.

The Road Warrior of Agriculture

My e-mail address is: sullylab@vt.edu

Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.

To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.

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