‘A Quiet Way To Cut The Price’
The New York Times reports on the collapsing housing bubble. “In California, the Northeast, South Florida and parts of the Southwest, deal sweeteners are playing an increasingly important role in supporting home prices. From large national home builders to individual homeowners, many sellers are offering thousands of dollars in perks, including straight cash, so they do not have to slice deeply into asking prices.”
“The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.”
“Economist Mark Zandi estimated that incentives might now be equal to as much as 3 percent of the effective prices of houses across the country. But he and other economists said there was simply no way to know for certain. ‘We don’t have any house price indexes that get it right,’ said Todd Sinai, at the Wharton School. ‘Sellers are..not willing to lower prices enough in downturns; they don’t do it very quickly.’”
“Incentives are most common in the new-home market, where builders are under financial pressure to sell empty homes and have the ability to absorb the financial hit. Executives at the nation’s biggest builders say the giveaways can equal 3 percent to 8 percent of a home’s sale price. If builders instead reduced asking prices by that much, it would be enough to wipe out the year-over-year price gains in many markets.”
“‘If you were going to sell the house exactly the way it was before, you would be looking at a price decline,’ said David Seiders, chief economist at the National Association of Home Builders.”
“Consider a three-bedroom house not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000, or an equal amount toward lease of a car.”
“‘Location and value will give the buyers a reason, this will give them a sense of urgency,’ said Tom Wessling, who owns the house and is being transferred to Atlanta. The Wesslings have cut the price of their house twice, by a total of $160,000, since they put it on the market in May. Mr. Wessling believes the home is now ‘competitively priced’ and hopes the perks, which also include a $10,000 reward for referring a qualified buyer, will be enough to clinch a deal.”
“On the west coast of Florida, builders are advertising incentives totaling $40,000, or 6.6 percent to 8 percent of the sales price, on homes that sell for $500,000 to $600,000, said John Dew, a real estate agent in Naples. Builders tend to choose discounts because they worry that reductions in the list price would send a clear signal that the market is in trouble.”
“‘They already sold the same product to the guy next door and if they reduce the price he is going to scream,’ Mr. Dew said. He added that many builders were also offering agents bonuses worth tens of thousands of dollars in finders’ fees for bringing in buyers.”
“Mr. Zandi said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993. The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts.”
“‘The reason the Realtors’ data has never showed an outright decline’ before, he said, ‘might be that they’re not measuring the effective price.’”
“In effect, the incentives have become a quiet way to cut the price of houses without further damaging the market. Sellers ‘don’t want to create this environment of fear in the market that prices are going down, so you should wait to buy,’ said Dean Baker, co-director of the Center for Economic Policy Research in Washington, who believes that prices will fall in coming years.”
‘ Lenders do not want to finance transactions where the sales price exceeds the true value of the home. Fannie Mae, the large buyer of mortgages, requires disclosure of perks and it caps them on a sliding scale from 2 percent to 9 percent of selling prices. The concerns of lenders will eventually limit the size of incentives in home sales, said Anthony Hsieh, president of LendingTree.com. Many buyers may also balk because their property taxes will be based on the sales price listed on the contract. Eventually, buyers will realize ‘there is no free lunch,’ he said. ‘There is a reason it’s being given away.’
Nice to know the taxpayer is supposedly guaranteeing loans on cars and vacations just so home prices don’t have to show declines.
Yes, it is something that really pisses you off when you think about it. With FNM’s and FRE’s ‘implied’ govt. guarantee it is simply incredible to ponder just what taxpayers could be potentially paying for…
Well, we paid for hookers, luxury vacations, sports cars and lined the pockets of politicians down in New Orleans. Did anybody see the Sopranos episode when Tony Soprano said, “FEMA’s throwing Krugerrands around in New Orleans”. I’m guessing we’ll be throwing Krugerrands at the shithead lenders, builders and borrowers. That’s the way the system works. It sucks.
On the plus side: IMHO, stick a fork in it cuz housing is done.
Both the NYT and WSJ have done daily sequential articles. As usual, the smaller newspapers are now going to follow the leaders, so there will be a bunch of secondary articles to follow these in the more local papers.
The only questions in my mind is how far down (auger-inn’s 97 number looks possible to me) and whether there’s a govt bailout.
[apologies if this posts twice...]
Oh no. It’s FAR from done. Mark my words. Three months from now TIME will have “HOUSING CRASH!” on its cover. Future generations will look at that cover like we look at the newspaper headlines of the 1929 stock market crash. Once that cover appears in grocery store checkout lines the real panic will begin. There will be some sappy article where the stupid bubble house buyer says, “How could this have happened? This is America.”
“The Wesslings have cut the price of their house twice, by a total of $160,000, since they put it on the market in May. Mr. Wessling believes the home is now ‘competitively priced’ and hopes the perks, which also include a $10,000 reward for referring a qualified buyer, will be enough to clinch a deal.”
Why wouldn’t you just lower the price by 10k?
My thought exactly!
The Wesslings not lower the price because the 10k is a “reward for referring a qualified buyer” Just read that back to yourself a couple of times pumpkin. Or, put another way, the Wesslings would pay a non buyer 10k if the non buyer referred teh eventual buyer to the wesslings…
I’m an idiot, so I apologies in advance. I can understand why buidlers don’t want to cut the prices and prefer to go with incentives but why does the average homesellers want to do this. If I’m selling my house and have it listed for $400,000. Why wouldn’t I just cut the price $20,000 rather than offering $20,000 worth of incentives? I just don’t get it.
I work in land development - builders, like car makers, try to match price profiles. They don’t want to lower the price of a house in a subdivision because it will result in downward pressure in future deals. Like a car, its better to sell at a high price and throw in lots of incentives so, next year, you don’t have to raise your prices (just eliminate the incentives which don’t show up in statistics).
… builders, like car makers, try to match price profiles. They don’t want to lower the price of a house in a subdivision because it will result in downward pressure in future deals. Like a car, its better to sell at a high price and throw in lots of incentives so, next year, you don’t have to raise your prices (just eliminate the incentives which don’t show up in statistics).
Except that, for builders, the prospect is that they will have to drop their prices next year. The notion that they might be able to raise them is pie in the sky, in most areas.
It’s all about comps. If you sell for a lower amount your neighbor will have a harder time justifying the price they want. Incentives allow you to effectivly lower the price but still appear to sell at a higher price keeping a higher comp value.
This is just the first step in the bubble burst. Sellers think they can bargin their way out of homes and maybe get rid of that declining asset car they purchased on credit 1 year ago off the deal lot.
The people with $$$ sitting on the sidelines are smart. We know that sellers are screwed. We know that the rent being paid is MUCH less than the mortgage they bleed out every month.
As soon as sellers come to grips with what’s going on and quit playing games and just lower their prices the sooner they can sell.
I always thought that a Realtor’s commission should be based on a function of both the selling price and the DOM, or at least the DOM w.r.t. the average DOM for the zip code.
When it comes to your Average Joe selling a house, a lot of RE agents convince sellers to offer perks instead of lowering the price to keep the RE agents commission as high as possible. I used a RE agent to sell my home and this is what he tried to do. I ended up getting just under full asking price, but when I brought up the possibility of lowering the price the agent was always against it. When I told him it needed to be done he would pull out a bunch of numbers on why it’s better to offer closing costs instead of lowering the price. Of course, he was wrong. He was just protecting his commission.
“When it comes to your Average Joe selling a house, a lot of RE agents convince sellers to offer perks instead of lowering the price to keep the RE agents commission as high as possible.”
I think you’ve hit the nail on the head. I can’t imagine why an individual who has to sell a house at this moment in time would possibly care about messing up his/her neighbors’ comps. This is an altruism beyond anything in human nature — even Mother Theresa wouldn’t have been so giving. After all, the wannabe seller is moving — who cares what the neighbors left behind think? But the agents have a stake in the higher price, and the more clueless sellers may buy their line about “attention-grabbing” incentives being better than a lower price.
This is an altruism beyond anything in human nature — even Mother Theresa wouldn’t have been so giving.
Ha!!
Yes, but if the house doesn’t sell, you still have to live among those same neighbors.
Is this a policy in a RE office or just agents behaving this way? If they have been instructed on this, I think the agency is ripe for a class-action for all sales they’ve made. That is an obvious breach of fiduciary duty and punitive damages wouldn’t be out of the question, in my view.
I sold a house in Laguna Beach a number of years ago. The buyer wanted a deduction for termite work. The amount was around $30,000. on a home over a million dollars in value. I said to reduce the price. The realtors said this was not allowed. Stupid me. Instead of reducing the price the realtors took off the $30,000. amount in the calculation of our check. The result was a phony higher price and $1,500. more in commission to the SOB’s. One of the realtors was supposed to be our friend so we trusted his judgement. Never tell a realtor what your plan is. Even your realtor can not be trusted due to the obvious conflict of interest.
Yep, pressure from Realtors is my guess why an ordianry seller would offer kick back incentives. A buyer would have to be stupid to go along with it, given that not only do you pay interest on your cash kick back for 30 years but also property taxes and fire insurance.
I can understand why buidlers don’t want to cut the prices and prefer to go with incentives but why does the average homesellers want to do this.
The avg homeseller is not yet so desparate that they are ok with screwing their neighbors by lowering comps? That’s the best I can think of. And they don’t mind throwing an extra 1K to their realtor, too.
This situation will change soon enough with the individual home sellers. Naturally, that will put pressure back on the home builders, if the builders haven’t already cut out their incentives by that time.
Plus the bragging rights. “I sold my house for $xxxxx!”
Oh please. Who gives a rat’s ass about screwing the neighbors by selling lower?
Why incentives? Some private sellers are trying to create a buzz that distinguishes their home from the mass of competing product. Cutting the price doesn’t do that, offering a Harley does.
Also, a buyer might think this gives him the Harley cheaper because its price becomes part of the house price, financed at (say) 7%. If he paid less for the house and bought the Harley on the side, the consumer loan might cost him more.
Then there’s the lust factor. Some people hunger for a Harley, or a jet-ski. Dangle one in front of them, and they bite. Sure, people want a price reduction when buying a home, but unless it’s huge it probably doesn’t create “desire” per se.
Another reason why a seller might want to offer “incentives” instead of cutting price:
If they succeed they effectively sell their toys with the higher home purchase price. It’s a two-fer: at the same time you get rid of the crippling mortgage payment you also unload the Hummer that is slowly bleeding you dry.
It’s quite a stunt if you can pull it off. Though I don’t think many will.
“its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000″
This is great. Not only am I locked into a mtg for 30 years for an overpriced house, now I’m locked into dealing with some cruddy weeklong timeshare vacation for the rest of my life.
“‘The reason the Realtors’ data has never showed an outright decline’ before, he said, ‘might be that they’re not measuring the effective price.’”
I don’t think sooooooo. Just maybe, ahem, this time it’s because of the internet and people like Ben and the people whom post here that expose the lies that the MSM cannot now hide for them from a gullible public.
“Concesssions” are common in commercial real estate. At the commercial real estate data company where I work, data is collected on both asking rents and “effective” rents to adjust for them.
At first this may have been a way to fool lenders into believing that an investment property was worth more than it is. They are no longer fooled. In New York, concessions were a way to avoid cutting the rent during the early 1990s, which would have established a lower base from which future rent regulated gains would be calculated. Now concessions are just institutionalized as part of the negotiation. Kind of like options and trade-ins with the sale of a new car.
Too bad this has now spread to homes. It’s just a complication.
Bottom line, someone at a lending institution — or a regulatory agency — is going to see these incentives as fraud, vis a vis the amount of the loan.
You are right. The plasma TV and new car are unsecured debt that were purchased with borrowed funds.
I think that it is the other way around. The car and plasma TV is secured debt with the house. The same as when you refi all your CC debt into a HELOC. Now that Plasma TV and the car are part of the mortgage on your house, and if you stop paying on it you will lose your house, albeit you might keep the car, if the lender is feeling generous and does not feel like coming after you for the deficiency…
Wrong, in most cases. The car is not secured debt, and not (usually) mentioned in the loan papers. The lender has no lien against the car, nor against the plasma TV, as they do when you finance a car, for example. Hence, the lender cannot repossess them like they can your house; they are thus UNsecured debt.
In my last house purchase years ago, there were a lot of things included in the sale, and our attorney raised eyebrows at all that. But the appraisal was so much higher than the price of the house that it was non-issue. There was, though, a clear-as-day section in the mortgage document stating that the money for this loan was based on the price of the house alone and no chattels.
Plus the car and plasma TV now become part of the non-recourse 1st mortgage loan instead of the recourse HELOC, so it actually has some tax advantages for the buyer in case of default (assuming he wanted the car and plasma TV in the first place).
Wouldn’t the car, trips, cash, plasma etc. be considered income as far as the iRS is concerned? (being it is not part of the house papers)
The car and the plasma TV’s debt has been secured with the house. It is secured debt (in the strict definition that the debt is secured with an underlying asset, Vs a CC debt that has no underlying asset backing it up).
It is absolutely the worst way of getting a loan to buy a car and a plasma TV. If you default on the car payment, they will only take your car. If you secure the debt by buying this neat little bundle, you have the car free and clear, but its debt is secured with a nice 30 year mortgage on your house. Default on the payment and they will take your house.
We are not even adding the additional property taxes that you will pay over the life of the loan on those toys, and not to mention the dismal reputation of Plasma Tv’s, and a car is going to be a pile of rust in 30 years when you finally pay it off.
But the appraisal was so much higher than the price of the house that it was non-issue.
Oh, how f*ckin’ nice…
Musta had one of those bucket shop trainee appraisal hacks workin’ for chump change handed down from an appraisal management company who did the report.
And you believe the number? LMFAO!
Oh, I know…seller’s and their broker’s just love to give away instant equity to a buyer. Here, here take this $50k, I have no use for it!!!!!!
“But the appraisal was so much higher than the price of the house that it was non-issue.”
Oh, how f*ckin’ nice…
Nice, but true, my friend. This was all long before the days of the bubble, and our attorney remarked that it was unusual for an appraisal to be that much higher; they usually come in pretty close to the sale price, whether they are being pushed up or legitimate.
We had a FSBO selling what they did not know they had, and I won’t go into the details since you’re not likely to care anyway, but yes, the house was worth more at the time, and our attorney even raised an eyebrow at that number and suggested we not even tell the sellers. Sigh.
But ignoring whether the appraisal was right nor not, what mattered is that the bank though it was right, and that they were thus loaning less than 80% of the appraised value, chattels thrown in or not, and that’s what counts to them.
It’s unscured because the house will not appraise high enough to cover part of the mortgage and none of the free stuff and the house will be sold at auction, the bank takes a hit(original mortgage) and the FB keeps the free stuff.
Is anyone “fooled” by getting offered a $5000 TV on a $450,000 house? I don’t understand how a buyer mentally “decouples” the house price from the incentive.
Do buyers think that a $100,000 mortgage with a $5000 incentive is any different than a $95,000 mortgage. Or that it is somehow better?
Do they realize that every extra dollar on a mortgage is a dollar out of thier pockets?
Baltimark-Was thinking the same thing. It is just not possible that there are so many knuckleheads in the population. If there are, I worry about the future.
Worry, baby, worry.
Well start worrying then.
Well even if there is a large population of knuckleheads, when the “newspaper of record” in the U.S. starts calling the practice out and pretty much calling it a gimmick, even the knuckleheads will start to wise up.
The shocking truth is, that 50% of the population is below average intelligence.
You are assuming any buyer at this stage of the game is rational, and they are capable of doing additions and substractions with 6 digit numbers… that’s a big assumption.
Agreed. Anyone buying at this point is a moron. They deserve the beat-down they are about to get.
Is anyone “fooled” by getting offered a $5000 TV on a $450,000 house?
I think the logic runs like this:
“In the long term — i.e., after my first monthly payment — my home’s value will rise, which means it is actually free, except for the first payment. Plus I can HELOC it. Furthermore, I already want that plasma TV, so I can assume I’ve already spent $5k for it. Now since $5k is greater than my first mortgage payment, them paying for my TV means my first month in the house is effectively free as well. Therefore, I am getting the free house I deserve. Take that, pessimists.”
The logic runs like this: Dude! I got this 52 inch plasma and a Jag for $1,259.29 per month and the seller threw in a house to boot! Cool!
Yes and you and your neighbor’s comps are higher then they should be. This practice results in a higher property tax for all over the years. Should have taken the equivalent in a lower price, dude.
Car dealers have many zillions off of such gimmicks for years. I’m actually kind of surprised there hasn’t been more of this in the housing business.
And yes, there are plenty of knuckleheads out there who let short-term emotional reactions guide the two most important purchases they make.
“Do they realize that every extra dollar on a mortgage is a dollar out of thier pockets?”
Isn’t that two dollars - one that must be paid back and the other one in interest charges accruing until the time it pays back? (interest on a 6%/30yr loan comes to about 100% of principal)
The only explanation I can figure is that joe sixpack uses a discount rate of near 100% - dollars today are worth SO much more than dollars tomorrow.
Actually it’s about three when you add in thirty years of interest. And that doesn’t even include the higher property taxes you are paying.
Further to dublin212 and SD_RE_Bear, lost opportunity cost. This doesn’t apply to me however, since I don’t recognize opportunities until at least a year after they are gone…
We sold in Northeast Ohio last year in October and had to offer incentives to bring the buyers to the table. With all the incentives, the sell price was $10,000 above the purchase price two years earlier, but we had to bring cash to the closing.
I think that the sell had more to do with the psychology of the incentives and that simply lowering the price would not have brought the buyers in. It is something that we have been conditioned to respond to.
Probably right. I remember a story of people waiting in line for hours at a casnio to get a “free” radio clock, trading precious vacation time for a piece of junk.
People are funny about “free” stuff. Ever been in a bar where a terrible band is playing, and nobody’s watching, and then when the singer says they’re giving away their CD for free, people line up to get one?
Getting real about the Real Estate bubble
http://money.cnn.com/2006/08/24/real_estate/pluggedin_tully.fortune/index.htm
Americans wanted to believe, and they did. Now, the giant popping noise you’re hearing is the sound of yesterday’s myths exploding like balloons pumped up with too much hot air.
Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It’s time to examine the clichés that the “experts” - chiefly analysts and economists from realtors and mortgage associations - used to convince Americans that what they’re seeing now could never happen. Here are the four great housing myths - and why they never made much sense in the first place.
Myth #1: As long as job growth is strong, prices can’t go down
Far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.
Myth #2: The builders learned their lesson in the last downturn. They won’t swamp the market with new houses when the market turns
Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. “Buyers” are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount.
The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do
Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices
As for what matters - real rates - what goes down later goes up, and housing prices go in the other direction, namely south.
Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices
America’s housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses.
A year ago, the reigning cliché was that real estate had entered a new world of “no supply.” Now, a record 3.85 million homes are up for sale, and buyers are getting scarce.
No, the world hasn’t changed. And the myths haven’t changed either. Next time, don’t believe them.
Excellent article…all the legs that have been propping up the GF’s stool are systematically being hacksawed…
The best part about that article is after the last line. There’s a link to “Find mortgage rates in your area.”
Also in the times today, Paul Krugman has an editorial called “Housing Gets Ugly”.
He probably doesn’t add much that anyone here hasn’t read, except he opens with this gem, “Bubble, bubble /Toll’s in trouble!”
I’d link, but it requires Times Select, and if you have that, you know how to find him.
Thanks Ben,
I posted a question in yesterdays catchall about how median prices have not declined when i know that comparable home prices are down (as much as 10% here in the NY area).
Now we know one factor.
And this quote
“The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.
They are as unethical and dishonest as we thought.
Please help! I am having trouble parsing housing double-speak in this post. Will someone explain exactly the difference between the 1993 price drop and the “never reported a” price drop in the following paragraph from this post?
“Mr. Zandi said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993. The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts.”
One is looking at the median price for one month in 1993 compared with the same month in 1992, the other is looking at the median price for the entire year 1993 compared with the entire year 1992.
Tried to post this earlier, but the blog site went down:
My guess would be that in 1993 there was a period of a month or two where prices were lower YoY than the same month in 1992, however the sum total of the year 1993 showed a slight increase vs. the sum total of 1992.
The same may end up happening for 2006 vs. 2005 - I suspect it will end up being a real *huge* debate next year. The reason why is that prices still were very much still really on the way up at the beginning of 2005, so the median for all of 2005 is pulled down by the relatively lower prices at the beginning of the year. So after 2006 is over - the median for all of 2006 may end up being higher than the median for all of 2005, and realtors will *still* be able to say “See - the prices are still going up!!!” when in reality they stopped going up about mid last year.
So with respect to this particular statistic - it won’t show a price decline until after the *2007* numbers come out, which is a full 2.5 years past when the real declines started!!!
Thanks dwr. So the next question is, is it really true that the median home price has NEVER decreased when comparing one year to the next? Or should I read something in to the word “reported”, as in, if there was a decline, NAR did not “report” it? Just wondering.
If the time frame is post-1940 or so, the answer is yes, prices have not got down nationally when you compare one year to the next.
should be “gone down” rather than “got down”.
The caveat which so often gets overlooked is;
“since the NAR started collecting comprehensive statistics in 1968″
Home values can drop relative to inflation, without their prices actually going down. That was in essence the plans Realtors had for this “soft landing.” Housing prices in a locality can also drop without them falling nationwide. There are all kinds of ways to spin the numbers.
Still, in economics, one cannot gauge the future by looking at the past because there are always too many random variables including group psychology to know for sure what the future holds. That history of increasing prices was just another defense mechanism to preserve the fantasy of money for nothing.
Off-topic, but important: If you haven’t seen it yet, check out the news from H&R Block this morning. Some people don’t realize it, but HRB is a big subprime lender by virtue of their ownership of Option One Mortgage. They are taking a big charge of more than $100 million to account for the impact of rising loan losses, increased defaults, etc.
Link:
http://tinyurl.com/zu64h
You want to know what’s going to help tighten the lending market? More losses like this. If secondary market buyers of Mortgage-Backed Securities start balking at snapping up junk paper, you’re going to see primary lenders “turn off the taps” and tighten. I’ve posted about other companies who have made similar warnings recently on my blog at http://interestrateroundup.blogspot.com/
I too caught that this morning. That’s one giant pin being stuck into this baloon and it seems nobody’s watching.
What percentage is this? $100M to a $500M company is HUGE; $100M to a $5B company is slightly less of a problem.
Just one more thing that shows how irrational and inefficient the residential real estate market is. All the insiders work hard to keep it that way, and the clueless, atomized buyers don’t know how to cut through the smoke and mirrors.
I think the Internet is changing this somewhat, because most of the cartel’s tricks have to do with hiding, hoarding, and misusing information. But we’re still a long way from the day when housing prices in a given area accurately and flexibly reflect actual supply and demand, and the day when various middlemen aren’t able to chisel big pieces of transactions without adding commensurate value.
Can anyone get access to Paul Krugman’s article in today’s times entitled “Housing Get’s Ugly”? Looks like the paper of record is making a more concerted effort to accurately report that decline of our beloved housing market.
My wife had a good story for me yesterday. She went to her substitute teacher orientation near Boise and was suprised to find a RE agent at the session. The agent told my wife that houses weren’t selling and needed to subsitute teach to “supplement her income”.
Classic!
Wouldn’t presume to advise on the matter of copyright and conscience, but a search on “Krugman housing gets ugly” on technorati.com (the blog search engine) will yield you a lot of hits.
Is this the beginning of the bad news for the Financials in the stock market? H&R Block’s stock is down 9% today because their sub-prime mortgage business is seeing an increase in deliquencies and defaults. H&R Block has set aside $100 million to cover the coming losses.
Another piece that should get some good attention. Krugman has been calling the bubble for years.
Housing Gets Ugly by PAUL KRUGMAN
New York Times, The (NY), August 25, 2006
http://tinyurl.com/golvf (you’ll need NYT access)
“Why the sudden crackup? When prices were rising rapidly, some people bought houses purely as investments, betting that prices would keep going up. Other people rushed to buy houses, or stretched themselves to buy houses they couldn’t really afford, because they feared that prices would rise out of reach if they waited. And all this speculative demand pushed prices even higher. In other words, there was a market bubble.
But eventually prices reached a level beyond what even optimistic potential buyers were willing to pay, especially after interest rates rose a bit. (They’re still low by historical standards.) As demand fell short of supply, double-digit price increases declined into the low single digits, then went negative everywhere except in the South.
And with prices falling in many areas, the speculative demand for houses has gone into reverse, as people try to get out with a profit while they still can. There’s now a rapidly growing glut of unsold houses. This is a recipe for a major bust, not a soft landing.”
I’m thinking of buying David Liarrhea’s book with the house high in the air and the family standing on the sidewalk looking up at it, because I think someday it will be one of those classics.
Nah, probably not. Nevermind.
at $19.95? I’d say that is a bubble price. Wait until 2007, and I think you will find that book in the bargain (”discredited”) bin for $5. Kind of like the housing market…
This is dumb tact because the difference in what he/she gets is small compared to not making the sale at all - they do have an overall vested interest in keeping prices up… to protect their own assets.
Looks like the freebies aren’t working in S. Fla. The latest trend numbers for Palm Beach county are ugly.
http://iprecom.tempdomainname.com/trendg/images/palsld.PNG
22,286 units for sale and only 612 units sold for the month of July. In July 2005 the number of units for sale was 7071 and the number sold was 1782. For June of 2006 it was 22184 units listed and 2186 sold. A HUGE drop off. At the current level there are 36 MONTHS supply- 22286/612. NO amount of spin can change that.
“The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.”
Ahh — Keeps commissions for real estate agents higher. Can always count on the agents to use whatever scheme required to keep the dollars rolling into their pockets.
“‘The reason the Realtors’ data has never showed an outright decline’ before, he said, ‘might be that they’re not measuring the effective price.’”
Too bad there’s no rule forcing the real estate business to record transactions at the effective price, net of discounts.
I guess it’s also part of personal ego gratification to one to say “I sold my place for $1 Million” (and leave out the part that he also gave the buyer $800,000 rebate and only netted $200,000 — and mortgage is $250,000, so he’ll also write a check at closing for $50,000)
testing
Yeah, I really dig the idea of paying for that $rappy H2/swimming pool/Mercedes/Country Club membership in my 30 year fixed mortgage, for ..erm …30 years.
Long after the Hummer has gone to the Great Scrapyard In The Sky, I will still be paying for it, 10’s of dollars a month, until 2036…
I really hope buyers will see this for the scam it is. All this non-lowering of the selling price is just delaying the inevitable. When my time comes to buy, if the seller’s won’t simply lower the price, then I’m moving on to the next property.
You know what they want, don’t you. They want to sell THEIR place at last year’s price and then go lowball some other poor bastard who’s trying to sell now. Then, of course, being a hardass is okay.
Because the other people who bought in the development at the older, higher price, will find excuses to SUE the builder if their “property values” fall.
We should start a Buyers organization, The BAR. bar vs.nar
There’s a “Boycott Housing” blog for the bay area. A local spokesman said that if buyers unite to bring the price of housing down, that would be a monopoly and legal action would be taken against any organizers. This is the level of idiocy we are up against; on the other hand, money buys “truth and justice.” At least that is better than the Chinese government which shut down the Chinese boycott housing blog.
Incentives are fraud to the lender ,and they inflate the property tax base . Paying for closing costs or giving a carpet allowance etc. is pretty acceptable , but the current incentives in effect are forcing the lender to lend more than a1 00% loan and it inflates the property tax base .On a zero down loan you are paying the buyer to purchase the property . This is fraud to the secondary market .
And if the realtors and builders think that if they call a commission a bird dog fee or a referral fees so they can avoid disclosing that they paid a realtor a commission ,that a deceptive practice also . If used re-sale sellers are wondering where all the buyers are going ,you realtor is bringing them to new home tracts instead of your listings .
Screw the builders , they aren’t entitled to be deceptive ,inflate tax bases and be fraudulent to the lenders . The loan amounts should be lowered accordingly based on the incentives .
Do they really think we’re this stupid? Anybody with more than 50 brain cells firing has to notice that these little extra perks were not necessary to sell a house several months ago. I heard on the news last week that some guy in orange county CA was offering 4 plane tickets; 2 to buyer and 2 to realtor ,to Hawaii if they could unload his million dollar POS. I’m so glad the newscaster quipped at the end of the story- if a person can buy a million dollar house, he can afford his own plane tickets! DUH! I hope all those who are selling and refuse to cut the price because they are just plain greedy (not those
who will be underwater) get what’s coming to them!
The incentives are really like, the, how shall I say it politely, the Vaseline that the seller and broker use to ease the pain for the buyer. Hopefully it distracts him from what is really going on “back there”. It’s like a virtual lollipop like they used to give to kids at the barber shop.
Now that I think about it, those who do manage to get out underwater WILL have gotten what’s coming to them !!!
Right. And then there’s the politics of marriage. Maybe one partner is thinking “This is my chance to get the expensive car or tv that he/she wouldn’t let me buy if it weren’t part of the package.”
The partner lusting after the tv may not be thinking this consciously, but it may give the deal a special glow.
Test
Aha! Another dunce who has just seen the light. That explains why realtors are always so willing to talk sellers into covering “closing costs.” It is very convenient when the “bargaining” also happens to line the agent’s pocket!
Sheesh, the levels and layers of deception appear to know no end. However, I don’t think any kind of “nudge, nudge,… wink, wink” is going to convince someone that a three br house is “competitively priced” at $1.54 M! …
I predict a haircut with a Husqvarna!!
[posting problems this morning-apologies if this is a duplicate]
They’ve started doing this in San Diego. Open the Sunday UT to the real estate section, and BAM! Mexican cruises, Trips to Vegas, or my favorite so far; a VW Beetle. Most of these offers were on condo conversion in La Jolla, but seriously how bad must business be if you have offer a free car to sell a POS condo?
A friend told me he has had his condo on the market for a year here in San Diego yesterday, he is very upset it is taking so long. I told him, why not drop your price, he looked at me like I was from Mars.
I was also walking the dog on Mission Bay and 3 joggers came by talking about refinancing. The woman said to the guy in the middle, “why don’t you just refinance again” to which he replied “I can’t refinance again…. while its on the market”. Sounds like rough waters for sellers right now.
oops, that posted in wrong place — sb higher up.
I certainly am no expert but I would think that their agents may also have a hand in these incentives as well. The agents are the ones that have something to lose if prices go down so I would imagine that many of them are persuading home sellers to offer these incentives in leiu of a price break. Just a thought.
“… Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000….”
Conservatively, let’s say that the buyers have only 20 years left to live. That makes this timeshare cost $500 a week. What kind of person that would buy a $1.5M house would vacation in a $500/week timeshare unless it were in Thailand??
Why not just spend a few extra bucks for a hotel, cabin, or an apartment and travel wherever and whenever you want?
Oh, one more nail in the coffin in San Diego. Mayor Jerry Sanders announced his plan for massive city layoffs to pay for the pension scandal and Petco park boondockle. As if the housing market couldn’t get any worse, job losses coming.
Hmmm Sounds like some fraud going to to me. First, lenders are lending on other than the property sold, and second, there is a clear attempt to obscure true market valuation.
These tricks will end soon enough once things get to the point sellers realize the truth of supply and demand, and once buyers realize the same truth and demand lower prices.
It’s a good day for puts on lenders. Corus Bankshare (CORS), the lender to condo developers is down almost 4% to $20.5. I am selling some of my Sept positions and using some of the profits to buy March 07 puts. Coutry Wide Financial (CFC) is down 2.6% today. I also have puts on FMT (Fremont mortgage, at 52 week lows) and Lend (accedited lending) which has dropped nearly 30% in the last two weeks. MTG, the mortgage insurance company is also taking a hit (down 2% today).
Notice that William Sonoma (WSM) and Bed Bath and Beyond (BBBY) gapped down yesterday and are still falling today (about 4% and 2% repectively).
The stock market is gradually pricing in problems in housing and the overall economy. Just because stocks don’t go down every day, does not mean that there is some conspiracy to hold them up. However, IMO, the market has a long ways to go before prices will reflect a severe housing-lead recession. That’s where I am putting my money.
It’s been an usually long time since the S&P has shown a 10% correction. Perhaps the index put buyers won’t have to wait too much longer. However, the first few days of the month are bullish, so I am keeping some cash ready for after that time.
In Ma they can take your car to cover for the shortfall, even if they do not have a lean on it…
“Mr. Zandi said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily.”
The incentive game brings out a point about the *buyer* - if the buyer were to buy the house for a lesser price without the incentive, he would not be able to finance the incentive later.
Why would I, as a buyer, buy a 10,000 vacation share or a car along with the house? That’s what I am doing, buying both the incentive and the house. I would rather buy the house alone, and pay 10,000 less for it, That makes me better off in many ways, for eg:
(1) I get to pick which car to buy, rather than accepting the sellers pick
(2) I decide when to buy that car - maybe at the year end sale, for less.
(3) I have to pay less in property taxes, since I bought the house at the lower price
Point (1) especially irks me - why should I live with the sellers choices? Isn’t my wealth about *my choices*, about how you spend your money for what *I* like?
All this leads me to conclude, that the people who buy the incentives, cannot really afford that incentives, other than through the mortgage fraud involved in it.
If they cannot buy a car or afford a vacation after paying for their house, they are buying a house they cannot afford.
Which means that this is no way near the bottom yet - fools are still jumping in.
Exactly. A $10,000 timeshare is NOT worth $10,000 to the buyer (otherwise the buyer would have ALREADY BOUGHT a timeshare!). All of these incentives are worth FAR LESS to the buyer than what the seller could have paid for them.
I guess that all of these incentives are worth less than half of what the seller paid for them. A far better strategy for the seller would be to simply lower the price. If a seller wants to offer me a $40,000 car, I’d reply that a better incentive would be to keep the car and lower the price by $20,000.
Off topic but good tip, I found out if you buy a timeshare you are disqualified for first time buyer financing with a bank.
Consider a three-bedroom house not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million
Consider that neighborhood has three very similar homes–and closely priced. See who blinks first–time to undercut the other guys!
But just think how close it is to the beautiful Golden Gate Bridge… only about a 15 minute drive to be able to see it whenever you want to… without traffic.
San Rafael is a nice place but that number is a’ comin’ down.
The appeal to the Bay area has decreased so much. Who in their right mind would pay $1.4M for some piece of molding POS - even in a pretty setting?