Saturday, December 20, 2008

Gold Plated Ghettos?

Robert X. Cringely professional tech-geek extraordinaire and amateur commenter on the mortgage market has declared the Jumbo mortgage dead. Cringely thus notes that his home now has value slightly less than $730,000. Judging from the column he wrote that means that the valuation of Casa Cringely has taken a hit.

Some may have a hard time commiserating with a man who has the ability to purchase a house with a valuation of almost three-quarters of a million dollars. Still in some markets such houses were not all that special. Before the housing bubble popped many very ordinary homes went for that asking price or more in the Silicon Valley. Million dollar homes were very common and not very special in San Jose, California. That was then, this is now.

If the jumbo is truly dead the policy questions get rather interesting. Exactly what happens to all those McMansions built on the expectation of increasing real estate market? Theoretically the best asking price for those displays of possible wealth is now $729,750. Any price over that amount will not secure funding. Think about it Bill Gates palatial digs on Lake Washington are available at a fire sale price.

Now big Bill is not moving anytime soon so he is safe and snug up in Washington State but others are not so fortunate. The top tier of the housing market may become a fun-house reflection of the bottom. Both are going to suffer the same liquidity issues. The houses have no real value because they can not be sold. The dilapidated shot-gun shack in East Los Angelis and the mansion in the exclusive gated community are equally ill-liquid. Neither can be used for security for exactly the same reason they have no real value because they can not be sold.

Depending on how overstretched the owners of these houses are we could be looking at a very toxic situation. Refinancing these homes is a non-starter; there are no loans for them to be had. The option are take a huge bath and sell the house at a deep discount to get under the $729,750 cap or take a bath and let the house go into foreclosure. Either way the owners and the banks are both screwed. Again we may see a deep degradation of housing stock at the very top tier that is a copy of the very bottom. We may see numerous abandoned high-end houses that remain vacant for an extended period time. We may see the houses being broken up into multi-family occupancies by various means. High end home owners associations may be pushed into the stops and forced to choose a limited down-scaling of the neighborhood to prevent a complete collapse of homeowner value. Better to have boarders than to have bankruptcy may become a realistic assessment.

We have gotten used to blighted communities in our poor urban core, what may be on tap is an equally decayed infrastructure at the top end. Get ready for the phenomena of gold plated ghettos.

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