Here's a tough-to-read story from Money about Steve and Carol Daimler. It's an object lesson in the perils of counting on a single hot asset class to carry you through.
To supplement their retirement savings of $260,000, they figured they'd buy fixer-upper homes to renovate, then sell at a profit in the state's hot housing market. "We thought we'd make $100,000 without batting an eye," says Carol.
But when the housing bubble burst, so did their dreams of a real-estate funded retirement. The properties have been on the market for nine months without a serious offer, and the carrying costs are killer: The Daimlers pay more than $65,000 a year on their mortgages (including loans for their primary residence and a vacation house in North Carolina), plus tens of thousands more for property taxes, insurance and maintenance.
The couple are pulling out $15,000 a month from savings to cover their expenses, and they've already run through more than half of their nest egg. The irony: On paper they seem to be in great shape, with a net worth of $1.6 million. But since most of that money is tied up in real estate - assets they can't easily sell - it doesn't ease their current cash crunch.
Then today: More news of weakness in residential real estate, with new home prices falling precipitously (but sales picking up in response to lower prices).
New homes sold at an annual pace of 981,000 in April, up 16.2 percent from the revised 844,000 pace in March. Economists surveyed by Briefing.com had forecast an 860,000 rate in April.
The gain in sales compared to March is the biggest jump in 14 years. But even with the April spike factored in, April sales came in 10.6 percent below year-earlier levels.
The median price of a new home sold in April plunged 10.9 percent from a year earlier to $229,100. The new price reading was also down 11.1 percent from the March reading.
It was the sharpest year-over-year drop in median new home prices since December 1970 and the biggest month-to-month drop on record.
Paul Kasriel, chief economist with Northern Trust in Chicago, equated the strong sales to the strategy of the Detroit automakers, who cut prices and offer other sales incentives to counteract weak demand for their cars and trucks, sometimes taking a loss on the sales.
"The builders are clearing out the merchandise," he said. "They're doing a Detroit here. When you have excess supply, the quickest way to move supply back into balance with demand is to cut the price, and finally they're doing that. I would not say this is the bottom of the housing recession."
It's an interesting dynamic here. Slack demand created excess supply in the housing stock, excess supply forced builders to slash prices, and lower prices finally pulled buyers back into the market. Where does housing head from here? What does that imply for Fed policy? Given today's action, it's obvious that, after earnings season and in the absence of significant M&A news, expectations of Fed policy are going to move the markets.
Sources
Donna Rosato, "Retirement Interrupted," Money, May 22, 2007
Chris Isidore, "New homes prices plunge, sales soar," CNNMoney.com, May 24, 2007
"Wall Street Closes Sharply Lower on Rate Worries," Reuters, May 24, 2007
