The Looming Mc(Mansion) Attack

For many financially challenged owners of a “McMansion,” the theory of renting it out until the market comes back may not hold substance.

Consumers are still frozen under the weight of substantial debt as credit from financial institutions remains extremely tight, foreclosures and delinquencies are high, mortgage modifications have been a relative bust, wages are on the declined, jobs are being lost, taxes are poised to rise and too many houses still remain on the market.

It would appear that even after the significant correction in the housing market — approximately a 30% decline from the peak — house prices are still too high. Up until now the McMansions’ mid-to-high-end homes in prime markets have not suffered like the subprime markets. So far, these homeowners who invested more than $1 million for their houses have been able to remain relatively immune until now.

However, in Southern California for example, inventories of low- and mid-priced homes have declined considerably. While this may be a good sign, the supply for $1+ million houses is still 13 months of inventory.

This would most likely translate into substantial reduction in the price of McMansions over the next several quarters. This could result in additional writedowns and losses for institutions such as (but not limited to) Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and holders of what was considered “A” securitized paper such as Goldman Sachs (GS) and AIG (AIG), etc.

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