“My Two Cents”
By Andy Sutton

5/29/2006

Before the festivities begin, I wanted to take a solemn moment and encourage everyone to remember the true heroes of this Memorial Day. Men and women who have gone before us to ensure that guys like me can sit here and write opinion columns.

I read on average four or five columns a day. One of them is called "The Rude Awakening". The editor, Eric Fry recently solicited regional housing market information from his subscribers. He's trying to get his finger on the pulse of the market. It is clear that the bubble is starting to let go, but it certainly hasn't been seen equally across all markets. I couldn't resist throwing in my 2 cents on this one and voila, a column of my own emerged. I'll begin the week by weighing in on the housing situation with a note to The Rude Awakening..

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Hi Eric and the gang,
Caught the last issue of 'Rude' a little late, but hopefully you're still soliciting information
on regional housing markets. Here in Allentown, PA which advertises itself as 'one hour from the world'
we are starting to see the cracks in the wall. Local prices appear to be leveling off and the infamous 'P'
word has been heard around real estate offices. It appears the plateau is here. Water cooler conversations
seem to focus on one (or more) of the following questions :

1) Will prices even out or worse, start to drop?
2) How much more blood equity can be gotten from the proverbial housing stone?
3) What exactly is an 'underwater' mortgage? and
4) How are we going to pay for this lifestyle without another HELOC?

I wouldn't go as far as to say that people are hitting the panic button yet, but let's just say that one or two layers of the naivete have been removed and 'what if' seems to be resonating rather clearly. Supplies of homes are on the rapid rise, the number of sales is down in most school districts and the McMansions just aren't appreciating anymore. Supply and Demand will to that to a market, but try to explain that to average equity entrepreneur. Most of the folks here who have been doing the buying have become adept at doing everything with debt except paying it off. They can move it from one card to another, then to a HELOC, then to a HELOC with a lower rate, then to a HELOC with 12 months 0%, then they roll the whole thing into a fixed and get another HELOC and start all over again. They do everything except pay it down. I tried really hard to explain this concept to a neighbor of mine and all I got were glazed over eyes and the slackjaw look of somebody who has had a few too many.

It was humorous when the realization hit him that if his house falls to it's normalized value that he will owe in excess of $200K more than he will be able to get for it. He's so far underwater that he has to follow the bubbles to even see which way is up. I have a sneaking suspicion that this is more the norm rather than the exception. If that indeed ends up being the case, it will not be a soft landing as the FED is predicting, but instead a dramatic crash. Too bad these McMansions don't come with airbags.

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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