Trading Down All Around The Town

Barry Ritholtz takes a look at the housing market, and while there are signs of life at the low end, at the high end it's getting very ugly.

There is, however, little doubt that the upper end of the market has not seen improvement. Sales at the high end of the Real Estate market are soft. That is partially a function of limited availability of credit and buyer concern over employment.

In the typical housing sale, there is often a chain of transactions, from the starter home to the larger family house to the bigger move up, on and on to the larger luxury houses. When any part of the chain is dysfunctional, the problem works its way upstream. The upper end was going to feel these effects eventually, and that day of reckoning seems to be here now. (One assumes the giant mansions purchased for cash are less impacted by this).

The lower end of the market, with tax cuts, local incentives (i.e., California) and lots of distressed inventory driving prices down has seen an uptick in activity. But if we want to split real estate into two halves, I would suggest looking at the following pairs:

• Bubble States / Non-bubble states;

• Distressed/Non-Distressed Properties

• Underwater/Non-Underwater mortgages

I suspect this might provide a better read on the true state of local real estate markets.

I talked about this effect back at the end of May:

A 40-month supply of $750,000 homes on the market? That would be hysterical if it didn't mean these homes are going to continue to lose billions and billions in value. A bottom in the housing market? Please. The depression is raging.

As Barry says, the whole point of larger homes is that people trade up. They're no longer doing that, nor can they when they can't sell their old home and the price on their old home keeps falling, not to mention the price of the new home keeps falling. All that is delaying these trade ups, and breaking the chain that Barry described. As he said, people aren't trading up...they're trading down.

As long as that keeps happening, it's going to continue to depress the market. And it's going to be a damn long time before that part of the market stabilizes if there's a 3 year plus supply of McMansions on the market nationally.

We're not at the bottom yet. We still have a ways to go in housing and will for some time.