Cut The Price Or ‘Learn To Chill’
A housing report from Maine Today. “The number of single-family homes for sale in Maine has hit record levels, industry figures show. More than 26,000 homes currently are on the market, compared to roughly 18,000 at this time last year, and 14,000 in 2004. Inventory has grown by more than 1,000 in just the past month.”
“This plentiful supply of homes has outpaced demand in many areas, and that is pushing down prices. In response, sellers are trimming their asking prices, and some real estate agents are becoming more creative to get their properties noticed, particularly in southern Maine.”
“An agent in Saco drew traffic to an open house, and put the home under contract, by slashing the price from $249,000 to $199,000. It’s no secret that home sales have slowed in much of the country. ‘Some sellers haven’t come to the reality that it’s a buyer’s market,’ said Realtor Cathy Manchester in Gray. ‘They’re still trying to get higher appreciations.’”
“Following appraisals from three real estate agents, Bruce Thistle in Windham listed his home last August for $259,000. He finally got it under contract this month, for $216,000. ‘A year ago, if you told me I’d sell the house for that price, I would have laughed,’ he said.”
“Thistle only had one showing during the first six months his home was for sale, even though he dropped the price $9,000 during that period. ‘I thought we’d sell it in days,’ he said. When Thistle’s listing expired in March, he switched Realtors and went with Manchester. She started the process at $240,000 and cut the price three times before finding a buyer.”
“In today’s market, (realtor) Noah Smith said, sellers need to be realistic about the condition of their homes and the asking price. That’s especially true in York County, where inventory has continued to grow in recent weeks. ‘Anyone who says the market is leveling off is in denial,’ Smith said.”
“Thinking about a condo in Center City? So are a lot of other people. But there’s trouble ahead, too, industry observers say. Rising construction costs and softening demand could deep-six many of the 2,500 condo units still in the development pipeline, especially at the luxury end of the market, where many experts see an oversupply.”
“‘Too many developers… want to build luxury from the ground up, and there’s a limit to the market,’ said Jon Orens (who) is converting 2200 Arch St. to mid-price condos.”
“The number of Center City and adjacent properties available for sale in those neighborhoods almost doubled over the last year. Just eight more existing homes priced at $1 million or more sold in the first half of this year versus the same period in 2005, 48 homes (17 condos) compared with 40 homes (13 condos), for an increase of 20 percent, even though the number of high-end homes for sale increased almost 60 percent (185 versus 116 in 2005).”
“HomExpert spokesman James Angstadt said it was difficult to pinpoint how long it took for those homes to sell. ‘Many Realtors take a million-dollar property on and off the MLS database a few times to make it appear like a fresh listing,’ Angstadt said. ‘In turn, this causes the days-on-market number to be inaccurate.’”
“Rumors are rife about condo projects or plans that have been shelved. Veteran downtown developers report being approached to take over projects. ‘Most developers are loath to ever admit they’re going to cancel a project,’ said Kevin Gillen, an economist at the University of Pennsylvania. ‘So they constantly talk about ‘how things are moving forward behind the scenes,’ when in fact they’re just waiting to see how the market shakes out before deciding whether to break ground.’”
“‘Buyers are saying, ‘I can’t wait five years. I could be dead,’ said Allan Domb, who has been contacted by developers about taking over their projects. Some city experts believe that fewer than half the condo projects proposed will be built. ‘The current psychology… is pushing a lot of potential buyers to the sidelines to wait to see what happens,’ said National Association of Realtors economist Lawrence Yun.”
Thanks to the readers who sent in these links.
It appears that some sellers in Maine are willing to chop 20% off the price to move their properties quickly. I started seeing a lot of for-sale signs in coastal Southern Maine in 2004 which means that some people there were thinking “market top” before it actually topped. I suspect that many of those willing to drop prices to the selling point are old-timers that take a pragmatic view that a big profit is a profit. Maybe not as big as a profit at the top but very few get the top.
Many have moved to northern Maine.
If that inflates the next stop may be Labrador.
If it inflated up to Caribou, Madawaska, P.I., or Fort Kent, I would be stunned. It’s hard to believe people are still surving up there (economy wise).
Yes, some innovative people have brought money into Limestone - like concerts of that group whose name escapes me now, and setting up a cross country ski area, but homes up there are truly falling apart. I’m from there. The people up there are tough but things hang by a thread.
If we really do plunge into a major recession/depression who knows how many small town places won’t make it. On the other hand, people in small towns are self reliant and have often ‘done without’. They could hunker down better than those who have lived the big life in the city. We will see…..
Phish.
It already has inflated up there. In fact, if you google “Maine Real Estate,” you can have a look at $250,000 houses “strategically located” 18 miles from Presque Isle. Unbelievable.
There is a realtor’s web site up there, I will try and find it again to post here, that includes PDF files of seller’s disclosures. I found an 80 acre parcel that had belonged, according to the disclosure docs, to a Virginia family for over 40 years until its sale in 2001. The property had changed hands three times since then. It is currently owned by, you guessed it, a real estate agent, who is trying to sell it.
I read about people buying land, sight unseen, over the internet in the middle of West Texas, a thousand miles from anywhere. That this sort of thing appears to have been going on in Maine, too, is really frightening. Who knows where else?
On the other end of the spectrum:
http://tinyurl.com/ejwzw
Bart and Jake realty? Come on!
LMAO!!!
“Bring your hammer and saw. This baby needs some help. 3 bedrooms, living room, kitchen, bath, 1 car attached garage. Intown lot. Owner says “Sell It!!”
Looks like the McKenzie Brothers meet Sanford and Son!
http://www.sitcomsonline.com/sounds/sanfordandsonlp.wav
These sellers need St. Joseph’s help:
http://victorystore00.stores.yahoo.net/stjosephstatue.html
I hear you can get your st. joseph sell-your-house statue much cheaper over at the store called “jesus christ super-mart”.
At first I thought you meant aspirin. Well, that might help, too…. at least for the headaches.
there was an article in the NYT last week about vacation homes in Maine starting at $800,000. people decided to buy one in canada- specifically around PEI.
sometimes price cut still wouldn’t cut it.
This guy bought a foreclosure property in April for $568,000 with the intention of flipping for a quick $100,000 profit. He has been lowering his price every single week $4-5000 at a time. Now he is down to the asking price of $618,000 and still no takers. Link
This Del Mar home is being sold at $175,000 discount from its prior purchase price of 1.2 million in 2/2005. But would that be enough to avoid foreclosure coming up in 2 months?
folks are reducing their prices out there, there’s still no sale. this market is sinking hard!
I snagged this off a Yahoo stock board, the Barron’s article some of us have been wanting to see:
Monday, August 21, 2006
The No-Money-Down Disaster
By LON WITTER
A HOUSING CRISIS APPROACHES: According to the Commerce Department’s estimates, the national median price of new homes has dropped almost 3% since January. New-home inventories hit a record in April and are only slightly off those all-time highs. Existing-home inventories are 39% higher than they were just one year ago. Meanwhile, sales are down more than 10%.
Although the stocks of new-home builders are down substantially, the stock market and many analysts are ignoring other implications of the housing news. In the latest Barron’s Big Money Poll of institutional investors, not a single money manager ranked problems in the housing market among the factors likely to lead to a sharp selloff in stocks in the next 12 months (see “Headed for Dow 12,0001,” May 1, 2006). Most experts still predict a 2%-6% rise in housing prices for the year.
These experts and analysts are basing their predictions on a possible increase in wages, inflation and GDP growth. They are overlooking the fact that by any rational valuation there has been no support for the run-up in housing prices since 2001, when the wealth of the middle class was battered by a bear market. Since then, inflation has been low, and wages practically stagnant. Housing prices, on the other hand, are through the roof.
Extrapolating housing prices from their current level based on wages and inflation is like saying a $100 Internet stock with no cash flow and negative earnings will rise as long as it is able to narrow the loss. The analysis ignores the fact that the stock never should have been trading at $100 in the first place.
By any traditional valuation, housing prices at the end of 2005 were 30% to 50% too high. Others have pointed this out, but few have had the nerve to state the obvious: Even if wages and GDP grow, the national median price of housing will probably fall by close to 30% in the next three years. That’s simple reversion to the mean.
——————————————————- ————————-
A careful look at the reasons for the rise in housing will give a good indication of the impact this drop will have on the stock market. They include, in chronological order: The collapse of the Internet bubble, which chased hot money out of the stock market; rock-bottom interest rates; 50 years of economic history that suggested housing never goes down, and creative financing.
The first three factors might not be enough to cause a crash, except that together they led to the fourth factor. Irresponsible financing causes bubbles. It causes individuals to buy houses they can’t afford. It causes speculation to run wild by lowering the bar to entry. Finally, it leads individuals who bought houses years ago at reasonable prices into the speculative borrowing trap. The home-equity credit line has supported American consumer spending, but at a steep price: Families that tapped into their home equity with creative loans are now in the same trap as those who bought homes they couldn’t afford at the top of the market.
The cost and risk of adjustable-rate financing can be devastating. Consider a typical $250,000 three-year adjustable-rate mortgage with a 2% rate-hike cap. If the monthly payment now is $1,123, after the first adjustment, the monthly payment is $1,419. After the second adjustment, the monthly payment is $1,748, a $625-per-month increase. That’s $7,500 more per year just to maintain the same mortgage. If you think high gas prices are biting the consumer, consider the cost of mortgage adjustments.
Thanks for posting this! The last line says it all.
Brad — thanks.
comes in 3 parts because Yahoo limits message size, here’s part 2:
Some more numbers:
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000
• 43% of first-time home buyers in 2005 put no money down
• 15.2% of 2005 buyers owe at least 10% more than their home is worth
• 10% of all home owners with mortgages have no equity in their homes
• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.
These numbers sound preposterous, but the reasoning behind them is worse. Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.
Now the house is the bank’s collateral for the questionable loan. But what happens if the value of the house starts to drop?
The answer, at least from banks, is already clear: Float the loans. The following figures are from Washington Mutual’s annual report: At the end of 2003, 1% of WaMu’s option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to principal). At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.
Every month, these borrowers’ debt increases; most of them probably don’t know it. There is no strict disclosure requirement for negative amortization.
This financial system cannot work; houses are not credit cards. But WaMu’s situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million.
part 3:
Negative amortization and other short-term loans on long-term assets don’t work because eventually too many borrowers are unable to pay the loans down — or unwilling to keep paying for an asset that has declined in value relative to their outstanding balance. Even a relatively brief period of rising mortgage payments, rising debt and falling home values will collapse the system. And when the housing-finance system goes, the rest of the economy will go with it.
By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week.
There are other possibilities: The housing market could strengthen; consumers could shrug off higher loan payments and declining housing values; the financial system may have anticipated a collateral disaster (though with banks holding a record 43% of total assets in direct mortgage loans that seems unlikely); the rest of the world could carry the United States for a change. But these are difficult bets to place. Anyone holding stocks, futures or stock-index funds in this environment is taking a tremendous risk.
What happens after the decline depends on our financial policies. When Japan went through a similar situation in the early 1990s, the right advice was clear: Bite the bullet and get the bad loans off the books. Eventually the Japanese acted, but it took them 15 years of trying everything else first.
If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan, we fail to act, the coming decade could be very bleak indeed.
——————————————————- ————————-
LON WITTER is a founding partner at Witter & Westlake Investments in Louisville, Ky. He can be reached at lon@witterwestlake.com2.
3% decline NATIONALLY? Wow, just imagine what will happen to those bubble markets like San Diego, Phoenix, Vegas, and NoVA where housing was ridiculously overpriced. Its going to be U-GA-LEE
“In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million.”
Umm…although my memory has grown foggy with time…I recall from my accounting studies that if an entity could not collect something …you know like interest, sales, etc…that the company had to book something called a “write-off” or a “reserve”. I am pretty sure that was what Dr. Waters said.
Uhh, oh yeah, didn’t Japan try that “negative amortization” game for about 15 years?
As an investor focused on the housing bubble, making money as the housing-related stocks decline, there was one crucial and very surprising point made in the Barron’s article.
If Lon is right, stock analysts and most of the STREET are essentially oblivious to what’s happening and it’s risk to the national economy and, of course, the housing and lending sectors.
I think that many professional investors read Barron’s over the weekend. I wonder whether this article will affect homebuilders and lenders on the open on Monday.
Right now looks like a good time to buy puts on MTG, which put in a good gain last week. Unfortunately, I bought puts before most of last weeks run up. MTG is a major seller of mortgage insurance, which insures that last 20% for people with little or no down payments. As we read on this blog, they are getting squeezed by piggy back loans and now the risk of loan defaults is looming larger. I have been buying the Mar 07, $55 and 60 strikes.
Caveat: Most Wall Street pros never advertise specific puts they own, calls they are short, or stocks they are short. Traders at well-capitalized firms are looking for short squeeze situations all the time.
Good call. Tactically, I would not use options. It will be quite a while before the blood shows up on MTG’s balance sheet. Sell shares and be patient.
“” ‘A lot of people were afraid to miss the boat,’ said Albert Perry, president of the Greater Philadelphia Association of Realtors, of the home-buying activity in the last year. ‘That fear of loss is a powerful motivator.’””"
And the fear of loss will drop all these high priced listings into panic mode. and the Real Estate Crash of 2006 will begin… Is there any serious buyers left after Labor Day?
The “Labor Day Massacre” is upon us. It is every seller for himself after that! The stickiness gives way to a freefall.
yea. most of us in this blog, but at our price level.
From the Barron’s article above: The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings.
If true, then the banks deserve what’s coming to them.
Just think of the scams to inflate earnings that are possible with that rule. Mind boggling.
“‘Too many developers… want to build luxury from the ground up, and there’s a limit to the market,’ said Jon Orens (who) is converting 2200 Arch St. to mid-price condos.”
wait, is it actually possible to build non-luxury condos? i didnt think they still made formica! i’m pretty sure mt everest was chopped down for all this granite.
Yep…and in CA, Yosemite’s Half Dome is probably now Quarter Dome.
Sorry…couldn’t resist.
BayQT~
those are cool backpacking tents from REI.
“HomExpert spokesman James Angstadt said it was difficult to pinpoint how long it took for those homes to sell. ‘Many Realtors take a million-dollar property on and off the MLS database a few times to make it appear like a fresh listing,’ Angstadt said. ‘In turn, this causes the days-on-market number to be inaccurate.’”
============================================================
Is anyone else sick of this sh@t?! Who polices this industry? It is literally run like a criminal organization that has no sense of honesty or credibility!
Re: the Barron’s article- Holy Sh_t! The banks will soon have so many properties on their hands that they’ll need a bailout again. Remember Resolution Trust Corporation? It’ll soon be back. When they take the properties from the lenders, there will be some REAL bargains, just like last time. Don’t buy at 30% below today’s prices. Sit tight, keep your assets in cash, and be ready to buy at 80% below today’s prices from RTC in 2008. Then the cycle can start all over.
Given the timing of this, does anyone think a Republican can be elected President in 2008?
No, and you have them to thank for the bankruptcy law changes too.
Bsmkruptcy, contrary to popular belief is not some option the rich choose when they decide they are tired of paying their Black AMEX card, but rather a release valve for those who for whatever cause are simply in over their heads with no chance of ever getting out. I have heard Bankruptcy rates are at an all time high, despite the new laws. I cannot see this situation improving any time soon.
>does anyone think a Republican can be elected President in 2008?
If Diebold voting machines are used again, then yes, I do believe so.
LOL.
How does this Bank repo thing works in the days of MBS.
In S&L days, banks actually held the mortgage anmd hence took the house back on default. Now it is the pension fund that holds the MBS , that goes inot default(large chunk anyway).
Will the banks be buying those MBSs back on default and hence take over the home also?
Will they be doing so, on behalf of the pension funds whose MBSs they wer servicing?
Ideally house should go to the holder of the mortgage/lender, isnt it? I mean who originally lent it.
Also what happens if the bank sold the mortgage to a hedge fund, who packaged it with some other investment and sold it so another pension fund and so on……
when the homeow(n)er, returns the key he should be returning it to the company servicing the loan. i.e the company collecting the check from the homeow(n)er and sending the check to the holder of the MBS after taking his cut/fee.
Isnt it possible that this servicing company MAY not have ANY ability to manage properties being returned?
what is the responsibility of the MBS holders(containing the home mortgage) towards the taxes, maintenance of the home?
it was very simple in the days of s&L . you return the keys to the bank who lent you the money. the bank sold it after forclosure.
now what? any ideas…..
With an FHA loan FHA takes the REO, although even there it’s the servicer who handles the foreclosure and then turns the keys over to FHA. With a private loan, it is generally the servicer, although if the loan has private mortgage insurance the insurer is usually involved in the process.
if Countrywide gets the key to the house whose loan it services for an MBS, where is the interest for CW to sell the house quickly?
IF CW was holding the loan, it is in their books and hence it is in its interest to get the home sold quickly. Now such an incentive is not there when the home is NOT in their books isnt it?
I have been reading and most of the other bubble blogs and have not yet seen a satisfactory answer to the question.
The best answer yet, is that the servicing of the mortgage is sold separately to a countrywide/ABN Amro or other.
They would eventually be directed by the out of the money MBS holder to foreclose.
>Things can slow down, but there is no bubble in suburban real >estate,’ said Jeffrey Orleans, CEO of Orleans Homebuilders Inc. in Bensalem. ‘I’d bet my life on it.’”
OUCH!
>“‘Too many developers… want to build luxury from the ground up, >and there’s a limit to the market,’ said Jon Orens (who) is converting 2200 Arch St. to mid-price condos.”
There isnt a limit, you can keep building higher and higher.
>“‘Buyers are saying, ‘I can’t wait five years. I could be dead,’ said >Allan Domb, who has been contacted by developers about taking over their projects.
what kind of immature mentality is this?
Check out this from a press release this past week:
‘Orleans Homebuilders revises its fiscal year ending June 30, 2007 guidance with respect to Revenue of $835 million to $875 million down from $1.03 billion to $1.07 billion. Challenging market conditions in the housing industry have continued to place downward pressure on the Company’s new order activity through the fourth quarter of fiscal 2006. The major factors contributing to these challenging market conditions include increasing levels of existing and new home inventory and increases in cancellation rates. In Florida, the Company experienced a 58% cancellation rate for the year as a result of significant investor activity.’
Bet your life indeed!
It’s easy to say “I’d bet my life on it” when your life is already at stake. His state of denial is comical. If asked about all of his homes which are languishing on the market he would probably reply “What homes”?
-
“watch what they do, not what they say.”
“Although places such as New York City and Boston look overheated by many measures, the Philadelphia region’s housing-price run-up hasn’t been nearly as fast and furious. ‘Things can slow down, but there is no bubble in suburban real estate,’ said Jeffrey Orleans, CEO of Orleans Homebuilders Inc. in Bensalem. ‘I’d bet my life on it.’”
Yikes. Not the best bet I’ve ever seen a man make with
…
HIS LIFE
…
yeah, I don’t want him to bet his life, it’s worthless to me . I want him to bet me $100K that the market isn’t a bubble and is not about to burst, lets get some skin in the game !
Mo Money - LOL.
The guy in maine who quickly cut his price and sold is a smart guy. No silly greed, he got out and will be a happy very shortly. Glad to see some folks have level heads, it’s not like that guy didnt make any money on the house.
Don’t we all wish that this fellow were typical, rather than the exception.
Story from Sydney 3 years in to the downturn. Their peak happened in dec 2003. First time I have seen the term ‘crash’ used. http://www.smh.com.au/news/national/housing-crash-puts-sellers-in-debt-crisis/2006/08/20/1156012414995.html
It’s what we can expect here, only much worse.
“There are some people around Liverpool who think that prices have further to fall, but I couldn’t imagine this type of house will fetch less in six months’ time,” said its selling agent, Ray Dimarco.
Wow. So real estate agents are in denial world wide. I would not bet your life on it, Ray.
‘Things can slow down, but there is no bubble in suburban real estate,’ said Jeffrey Orleans, CEO of Orleans Homebuilders Inc. in Bensalem. ‘I’d bet my life on it.’”
I’ve decided to go long funeral home and cemetary companies.
- even though he dropped the price $9,000 during that period. ‘I thought we’d sell it in days,’
-Oh boy, what a bargin … he dropped it 9k.
‘Things can slow down, but there is no bubble in suburban real estate,’ said Jeffrey Orleans, CEO of Orleans Homebuilders Inc. in Bensalem. ‘I’d bet my life on it.’
- Jeffrey Orleans just bought himself a one way ticket on the Midnight Train to Slab City. Bye bye Jeff … no one will miss you.
‘Things can slow down, but there is no bubble in suburban real estate,’ said Jeffrey Orleans, CEO of Orleans Homebuilders Inc. in Bensalem. ‘I’d bet my life on it.’
Yeah right Jeff!!!!
Now how would you spell MORON?