‘Sellers Aren’t Sure What Houses Are Worth These Days’
From New York Magazine. “It’s been a funny sort of summer in the real-estate world, as the July and August doldrums have felt less like the usual quiet and more like the beginning of something bad.”
“Ask broker Lisa Wong, who admits to a little survivor guilt. Though she’s been able to buy and sell properties for a steady trickle of clients—a big difference from the deluge a year or two ago, she does admit—many of her colleagues have found themselves with more time on their hands to agonize over the flattening market. Will it get better? Or worse? ‘I’ve heard that it’s dead,’ she says.”
“Many agents say it’s September that’s make-or-break time for them. ‘It’s a litmus test for what the rest of the year will be like,’ says Christopher Mathieson, managing partner at JC DeNiro. ‘This one’s really important because we want to see if the market’s going to continue to plateau.’”
“A recent Halstead Property report showed that prices dipped 12 percent from June to July this summer; brokers say August was even more sedate. To make deals stick, ‘you have to work two or three times harder,’ says Wong. ‘You’re getting lowball offers and calls you’d never get before. For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.’”
The Times Herald Record from New York. “The bottom hasn’t exactly fallen out of the Orange County housing market, but the top appears to be firmly capped. Orange County’s median sale price for single-family homes fell to $323,000 in August, down 5 percent from July and 2 percent from August 2005, according to figures released yesterday by the Orange County Association of Realtors.”
“The August report provides the latest evidence of an emerging bear market. ‘What I think actually needs to happen is for the buyers and sellers to adjust to the market,’ said OCAR CEO Ann Garti. ‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing. And sellers have not adjusted to the market yet. They think the name of the game is still ‘higher and higher,’ which it is not.”
The Wall Street Journal. “My younger sister Melissa and her husband Joe want a three-bedroom, single-family home near us in Monmouth County, N.J. What we saw was bleak news for sellers in our region, but good news for buyers: block after block of open-house signs.”
“In fact, we were hard-pressed to find a street that didn’t have at least one home for sale, and many had more than one. What’s more, most of the 20 or so homes we visited were vacant, a sign that homeowners have moved on and are motivated to sell, or that speculators are looking to unload properties before prices go any lower. Asked why one home was vacant, one agent said frankly: ‘This was a ‘flip’ that flopped.’”
“Though some of the agents we encountered continued to promote their ‘charming’ homes as ‘a steal,’ a surprising number were more candid. ‘The owner way overpriced this home,’ said one. ‘I bet if you offered $30,000 less they’d jump at it.’”
“Another sign of a turning market: We saw very similar houses with prices all over the map, ranging from the low $200,000s to $270,000. That’s evidence that sellers aren’t sure what houses are worth these days.”
“‘They look at home-price comparisons from a year ago when there was far more demand than supply,’ says Pat Lashinsky, VP of ZipRealty. Now that there’s excess supply, he says, sellers need to be more willing to negotiate.’”
“One agent on our tour encouraged Melissa to look at homes ‘in the $270s or $280s,’ well out of her price range, and make lowball offers. We encountered a husband and wife going the ‘for sale by owner’ route, with an asking price of $315,000. While his wife pointed out the home’s features to my sister, the husband gave me a wink and whispered, ‘Don’t let that $315 scare you, we’re extremely negotiable.’”
“To get an expert’s take, I asked Robert Shiller, a Yale economics professor, for his insight on where the East Coast real-estate market may be headed. ‘We don’t know exactly what’s going to happen because we’ve just experienced the biggest housing boom this country has ever seen,’ he says. In addition to homeowners struggling to sell existing homes, construction is at near-record levels: The last time this much inventory entered the market was 1950, when builders were building suburban homes for soldiers returning from war, he says.”
“Prof. Shiller suggests that the Japanese housing bust may provide a precedent. Home prices there remained depressed for a decade before the market recovered. He says: ‘The real question is, ‘Is this the beginning of a major period of decline as we saw in Japan, or will we see a kind of sharp and sudden correction?’”
“Despite evidence of a cooling real-estate market, Melissa and Joe decided they weren’t quite ready to wade back in: They’ll take the market’s temperature again in the spring.”
Let me clear up the mystery for you, sellers: Houses are worth WHAT SOMEONE’S WILLING TO PAY YOU FOR THEM!!!!!!
Not quite. A home (or any other asset) is what someone is willing to pay for it AND what someone is willing to sell it for.
So does your definition of market value mean that if nothing is selling, then homes are worth nothing?
it’s not as if nothing is selling….that’s an exaggeration. Some residential real estate will always be trading somewhere. We can argue about what we think intrinsic value is or where market prices may go in the future, but today’s market value is the price where buyers and sellers meet.
Garcap, I hope you understood my critique of your definition was meant to be tongue-in-cheek. But there is a serious question here. You are right that “some real estate will always be trading somewhere.” But that does not mean that there will necessarily be any recent comps for a particular house when the market is in severe slowdown mode. For instance, earlier in the year, when the SD market was clearly in cooling mode, there were several months in a row when virtually nothing in my zip code had sold since before Christmas 2005. At this point, nobody knows what the prices are, and a risk-averse buyer would be wise to wait on the sidelines and let more fearless buyers test the water.
I hear you, GS. I’m just trying to point out that we can’t say a property is worth x because that’s all we’re willing to pay for it. Personally, I’m waiting for the day when someone sells me a place for less than I think a house is truly worth, but we’re not there yet.
You are right: in a market like the one we’re in now where liquidity is drying up it is hard to assess “market” value. But we’d be wrong to simply say that its market value is the value of an unaccepted lowball offer.
In recent years the flippers, appraisers on the take , unqualified buyers with no money ,and people with fear and greed that knew no bounds established the market prices . Do you really think that market was accurate,or some short term anomaly.
Market value is an empirical, observable value. It may diverge materially from intrinsic value and be ridiculously expensive (or cheap), but it is what it is.
You’re both wrong (and bad and probably not too bright either!)
Houses are worth the value you get from using them.
Since many of the recent real estate purchases are by flippers that get as much use out of the house as they did from their Enron stock (maybe less so as you didn’t have to pay annual taxes on your Enron stock), a value based on use would be near zero. Housing value has to be a combination of market price (buyers vs sellers) as well as some replacement cost (land as well as contents)
“You’re both wrong (and bad and probably not too bright either!)
Houses are worth the value you get from using them.”
Thanks so much for the insult and the conceptually worthless definition of market value. Try again when you haven’t been drinking, feepness.
Sorry, let some words out of my post. A home’s market value is the price that someone is willing to pay and that someone is willing to sell….
Another interesting finding with respect to prices:
“We saw very similar houses with prices all over the map, ranging from the low $200,000s to $270,000. That’s evidence that sellers aren’t sure what houses are worth these days.”
Definitely seeing that here in Ashland. Some folks (few) seem to be getting it, others (most) remain in denial.
For example, I just saw a decent 1860 sf house going for $360 (down from over 400, I believe), while we still have a 725 sf cottage going for $425k and bunch of 3/2 mediocre homes in the $500k-700k range.
This is definitely getting interesting.
I am not sure a seller asking considerably over the amount any buyer is willing to pay should even really be considered as a “seller” at all. I own a pound of gold, and could have sold a few months ago at over $700 an oz, but today only $570. I COULD still “keep my gold on the market” and shop it around at what I believe it to be worth at $700 but who would buy since you can go to any coid dealer and buy the same at market. Should I then be considered a serious seller? I think not, so in reality, it is the buyer and the buyer alone who sets the price and the seller only sells for what a buyer is willing to pay.
“… it is the buyer and the buyer alone who sets the price and the seller only sells for what a buyer is willing to pay.”
I concur. Any meaningful definition of market value has to be based on buyer willingness-to-pay (WTP), as owner-occupied housing is a luxury good, not a necessity. Seller willingness-to-accept (WTA) is thus somewhat irrelevant, except to the extent that it influences buyer WTP. Purchase budget constraints are ultimately binding, implying that WTP trumps WTA. Too bad that abandonment of lending standards recently allowed (effective) purchase budgets get so far out of line with affordability…
it takes 2 to tango. More power has shifted in favor of buyers in today’s market relative to the bubble days, but they don’t hold all the cards. Real buyer power exists where there are distressed sellers…that’s where we’ll find good value as buyers.
B.I.N.G.O. !!!!!
or to quote Jay Leno: Exactly!
I agree, and it is a real pity that in recent times this lax lending has placed us in a position of either paying more than we can afford (well I mean borrowing more than we could possibly ever pay back) or not buying at all.
I will be happy to buy your “pound” of gold for $700, if you sell me the whole pound….
Yeah, nice try!
Will you give me a house today for a hamburger tomorrow ?
I bet alot of the “younsters” didn’t get your reference Wiz. I think Wimpy is the reason that hamburgers are my favorite food to this day.
My kids, ages 2 and 4, love popeye!
Read the small print $700 an Oz
Point is, what I think, hope or conjecture it might be worth is irrelevent. It is worth what a buyer is willing to pay, just like a house or any other asset.
If you’ll gladly pay me Tuesday, maybe you’ll get a PayDay Loan? -
GH — I think you are describing what in Robert Cote’s lexicon would be “wishers.”
Well, in an emerging buyer’s market, sellers must eventually line up to them–not the other way around.
“For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.”
Crazy is right; expect more “crazy times” ahead.
To make deals stick, ‘you have to work two or three times harder,’ says Wong. ‘You’re getting lowball offers and calls you’d never get before. For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.’”
Why are the realtors quoted in the media so stupid? Surely they know that buyers set prices, not sellers, and certainly not the RE cartel. Someone should smack Ms. Wong across the kisser, for she is the crazy one. I think she is also upset by the delta for a $1.6M commission versus $1.9. Not surprising since she probably hasn’t gotten paid in months and her “investment” properties are probably killing her.
Why is offering 1.6 on a 1.9M list price “crazy”?? I never understood why these people get so emotional and offended over offers below list price.
And what about the option to counter-offer?
Usually, around LA anyway, the listing agent will tell you “the seller was so offended by your offer” or “your offer was so far out of the range the seller is considering” that “the seller will not counter you”.
“A home (or any other asset) is what someone is willing to pay for it AND what someone is willing to sell it for.”
And what the people who want it can afford to pay for it. Unliike most other things, people’s income puts a cap on home prices, regardlless of what they are willing to pay.
Not in the glorious age of stated outcome loans! Working at the Quik-e-Mart only pullin’ down $250/week? No Probalo! Senor Cardgage will hook you up with whatever you need to “afford” that $3.5 million “starter” in lovely downtown Camden, NJ!
Don’t let all the playa-haters and Chicken-Little Eeyores stand between you and your dreams –bend-over today for our special lubrication-Optional ARM!
What someone is able to borrow…
But this is the crux of the problem: Houses are illiquid in a slowing market, because sellers generally can’t or won’t lower the prices enough to figure out what Mr. Market thinks they are actually worth. And Mr. Market tends to dish up low-ball figures during times of great uncertainty such as the current slowdown, as buyers are rightfully risk averse, and they have pretty much figured out that there is no big risk of waiting to buy at some indefinite point in the future so long as prices are falling anyway.
It was a housing boom/mania ,greed and fear that knew no bounds ,false market .Now the question is….”what is fair market value ” market .
And people seriously underestimate the potential illiquidity of real estate. Sometimes - like now - you need a time horizon in years, not months. And sometimes, such as during the Depression, there were no buyers at any prices in much of the U.S.
Getstucco — exactly. And the potential buyer - c’est moi. No stress, comfy rental, lotsa time.
Houses are worth WHAT SOMEONE’S WILLING TO PAY YOU FOR THEM!!!!!!
No…houses are worth what someone is willing to LOAN…
Buyers have no money. Loan officers I know say that 20% down buyers today are like dinosaurs-they don’t exist.
Some financial blog said 80% of the people in this country couldn’t raise $10k cash in 24 hours, without securing a note against their property holdings or pullin’ out a credit card.
Of course if you want to go to cash equivalency, you can throw the coming 50% value loss out the window.
Better put up 75 and 80% declines.
I completely agree with hd74man re loans.
Some financial blog said 80% of the people in this country couldn’t raise $10k cash in 24 hours, without securing a note against their property holdings or pullin’ out a credit card.
So true.
I’ve heard most Americans are two paychecks away from poverty, or was it bankruptcy? Either way, it’s a frightening thought.
Better to have money under the mattress than no money at all.
24 hours is a pretty short amount of time.
If I needed $10K in 24 hours or less I would write a check against my HELOC and then pay it back out of a brokerage transfer which takes three days.
So lump me in with those who couldn’t come up with $10K (of their own) within 24 hours.
While the purchase price gets all the attention, it is not the only ingrediant in a RE transaction. The condition of the property, the timing of closing, the ability of the buyer to close and other factors come into play. I always like to bid based on ‘this house in this condition at this time at this price”. A change in any one component can cause a change in any of the others. If I take the house as-is, then I set my offer price as such. If I want a quick closing but the sellers want a long closing (school year factors), then I adjust my offer price accordingly. Price is not the sole measue of value.
WOOHOO!!! Next-door neighbor just put her HELOC’ed townhome up for sale! Realtor is there :/
Anyone moving to NM and want to buy? Lowball! 88007
if she’s HELOC’d up the wazoo, doesn’t that mean she CAN’T afford to sell for less than some absurd “wishing price” (thanks RC)? Personally, I’d rather wait until she’s evicted, then buy it off the lender as an REO.
I track the Las Vegas Real Estate Market in real time using MLS. I punch in zip codes that I have researched for possible investments. I look for houses over 1400 sq ft, built since 1994.
Everytime a new listing comes online as the cheapest house in that zip code, using my 1400 sq ft, 1994…it enters contract within days, while others in the same zio code have been listed for over 6 months.
To me, the value of these similar properties is what the newest contracted price is, that any qualified buyers
left are bottom feeding. Determine your perameters for a certain zip code, and ask your realtor what is the cheapest house that sold recently.
He is right. The $ value of anything, is the amount of $ somebody is willing to pay for it. If it was true that nobody was willing to buy a house for any $ price at all, which of course is rediculous, then it wouldn’t be worth a cent.
If sellers would drop there price quickly enough until they found a buyer, they would know what there house was worth.
A Dutch auction is the only way to determine how much a house is worth at any given point in time.
If September is the litmus test for homes in the coming year, as the RE agent in the story says, people better get ready for bad news. There is not one thing that points to September looking better than August.
-X
BubbleTrack.blogspot.com
I predict October will be the new litmus test. Then I predict December will be the newer litmus test. Just like we all had to wait for Spring Selling Season in Winter. Then we had to wait for End of Summer Rally in Spring. And now we’re waiting for the NAR’s Inverted Selling Season of 2006/07 to materialize as well.
I think 2011 will be the new litmus test for the upcoming selling season.
And now we’re waiting for the NAR’s Inverted Selling Season of 2006/07 to materialize as well.
“Inverted Selling Season”, LOL. Talk about pulling a prediction out of their arses.
Appropriate though — pretty soon everyone will be “upside down”, after all.
It said September is the litmus test for the REST of the year, not the coming year.
I was just giving the Realtors a head start. They never accept any line drawn in the sand. The past is only prolog if prices and sales were booming. If not a return to boom times is just around the corner.
There won’t be any good news for a long time…particularly in areas where the prices are far out of whack with local economies.
When you can buy an average 3-2 or 4-2 house for 20% down and run a 25% postive cash flow on rent over the mortgage and basic expenses…then we are at bottom.
Word of mouth, real estate agent told a SELLER that the R.E. market (in NJ) will pick up again in February!!! I guess that’s typical (tongue in cheek) RE always picks up in NJ in the DEAD OF WINTER! Open houses are inindated, especially when there’s a BLIZZARD!
- I saw the ‘Property Ladder’ last night. The couple bought here in So Cal - El Segundo. I said the word ‘dumb ass’ 35 times.
- They bought at 599k. Planned an 8 week renovation of the 800 sq ft crap hole. Planned to list at 775k.
- Mortgage cost was 4,800.00 per month.
- At the end of the show it had been on the market for 4 months. They apparently had several ‘low’ offers but they were going to wait for ‘That Special’ buyer!!!
Not to worry - they were happily on to their next ‘FLIP’.
Special, meaning a bucket full of money and a box full of stupid. Sheesh, not too many boxes of stupid left I guess. Any one see the December contracts on stupid? My comex quotes aren’t showing any open offers.
“Property Ladder” has actually had some great shows like this lately, with the flippers getting burned in the end. I saw an episode recently with a “faith healer” in Long Beach, CA who was unemployed, and tried to flip a bungalow with an initial asking price of just under $800K!! The end of the program said something like, she still has not sold after 4 months, despite dropping her price to $695K, and she will be lucky to break even on her flip even if she sold immediately at the new price…. Well I checked realtor.com, and the house is still listed today, for $690K!! (MLS #P514847) (You can easily tell the house, because she painted the exterior a ghastly shade of bright yellow.) Moreover, according to Zillow, the flipper bought this house in Feb. ‘06, so it’s been sitting unsold for 7 months now — imagine the carrying costs!! What was great about this episode, was that this unemployed loser, who calls herself a “faith healer”, talked at the beginning of the episode so derisively and contemptuously about her former “office job” and how she wanted to flip houses to rake in lots of money and allow her to pursue her real passion of faith healing…. It’s symbolic of what our society has come to after the dot.com and housing booms. No one wants to do REAL work … every loser wants to make fast, big money through some scheme.
‘I saw an episode recently with a “faith healer” in Long Beach, CA who was unemployed, and tried to flip a bungalow with an initial asking price of just under $800K!!’
What kind of financing did he get to buy the bungalow? I am guessing fabricated income loan…
I don’t know what type of financing she got … She bought it for, I think, $590K, then they showed her going to the bank to get a $20K additional HELOC when she ran out of money in the middle of the renovations…. I’m sure she borrowed everything, because she kept complaining that she had no money at all and she used credit cards for major purchases at Home Depot. The woman seemed like a total disaster. Believe me, I was wondering who the h*ll would give her any money to buy that POS.
I was wondering who the h*ll would give her any money to buy that POS.
All you need is a pulse (if that?) to borrow an obscene sum of money these days. Lenders basically have zero risk, so why not? (Thanks Fannie & Freddie MBS bagholders –er, U.S. taxpayers!)
“Lenders basically have zero risk, so why not? (Thanks Fannie & Freddie MBS bagholders –er, U.S. taxpayers!) ”
Exactly, and there is the scam staring you strait in the face. I don’t believe this is an accident, not for one second. And a warning to those behind the scam: if you make all my hard work worthless by making my money worthless I have made the necessary preperations for the righteous spilling of your blood.
Nah GS……..that one’s a pre-fabricated income loan
She’s going to be dreaming of a nice office job when she’s working retail or food service.
It’s funny how many people see working in an office or cube as some sort of loser way to earn money. But, you know, a job where you get a regular paycheck, some benefits, and maybe even to check your email and the phone every once in a while sure beats being physically dead tired every night from being on your feet. And it definitely beats stocking shelves in the early morning. Or driving truck.
I agree with you that we should be grateful for whatever we have. Making a living in a cubicle is just as dignified as any other work. BUT, that said, I have worked in many an office and I did die a little every day in those beige warrens of makework and office politics.
I saw that flip with the faith healer . It was interesting how she would channel the answers to what the house needed .Needless to say she ended up spending 70K I think in a neighborhood that didn’t warrant it .It’s called “over improvement “.
Further ,this full grown women admitted that she didn’t know anything about flipping a house ,but like a little girl she felt that it was her ticket to paradise.
Alot of construction guys that know what they are doing only expect to make a a 10% to 20% margin ,yet these flippers want the world .
It’s interesting to note that flippers like this show have been determining the market vlaue for the last 3 years by increasing sales and demand .
Luke 4:23. Physician, heal thyself
LMFAO … Perfect.
There are two upcoming epsidoes, is it “Amateur flipper relies on her family” or “Weekend Warrior’s Home Wrecker” ?
Doesn’t sound like it. Oh well, I will keep an eye out for that one.
This must be it, doesn’t seem to be any upcoming shows though:
That’s it!! They rerun these shows all the time. You have to watch the spiritual healer episode… It’s hilarious.
While trying to find that show I found this great article:
http://radio.villagevoice.com/screens/0527,press1,65550,28.html
Note that the article was written in July 05, at the apex of housing when these shows first came on the air …. Any of these shows taping episodes now should have more and more bad endings for the flippers, if the shows are honest.
“Property Ladder” has actually had some great shows like this lately, with the flippers getting burned in the end. I saw an episode recently with a “faith healer” in Long Beach, CA who was unemployed, and tried to flip a bungalow with an initial asking price of just under $800K!!
Dang!!! I’m in the wrong business. A faith healer has a $800k house. Where did I go wrong?
Great post, TG. I saw that show and tried to look up the listing, but couldn’t find it.
“No one wants to do REAL work … every loser wants to make fast, big money through some scheme”
Couldn’t agree more. Only question is, how much of this attitude can a country tolerate before it starts to have serious consequences for everyone.
Thanks for posting this- I saw the beginning of that episode but missed the end. I’d been hoping she didn’t sell it because she made so many stupid decisions. When she bought custom cabinets from Home Depot on her credit card I wanted to throw something at the TV.
The show would never do this, but I think it would be awesome if they would follow one of the deranged flippers for months after the deal went bad. We could witness the desperate attempts to raise additional money and ultimately turning over all of their assets to the bank. I think people would watch that kind of show, don’t you?
Sort of like a very “dark” comedy…. I would definitely watch. Maybe they could also interview the loan officer or mortgage brokers who approved her credit applications, after she defaults, to ask them WTF they were thinking!!
Million Dollar listing on Bravo is going for that angle.
All kinds of people acting bat-sh!t crazy.
Grant,
Uh….. I would! Like TG in Norfolk has shared, the “boom” with it’s promise of fast, loose and easy money has drawn types from all “walks” of life. I realize this isn’t going to make me Mr. Popularity but I am considered “the cold call King”. I’ve cold called basically all 50 states and spoke with 100’s of thousands of people over the years. If I’ve only learned one thing it’s simply that just being self employed doesn’t necessarily mean you’re the best at what you do. (It may just mean that every employer has given you a chance and you couldn’t make it work out!).
When all else fails……. (there’s always real estate)!
RE speculation seems to be the “lowest common denominator” that doesn’t exclude anyone! (this accounts for all of the deeply disturbed “landlords” we’ve all had to deal with at some point in our lives). It’s the “Lourdes” of the financial world.
We sold our house in Sacramento in Jan. 05 in part because I heard such house flipping shows were coming on the air. Seemed a sign of the top. That and the fact that every conversation with my neighbors eventually found its way to real estate.
These shows are really getting good now!
Mortgage cost was 4,800.00 per month
Weeeeeeee Dawgies…
And I remember sweatin’ w/ a $150k note @ $1088.00…
Hope these people bought stock in whoever makes Maalox.
They’ll be drinkin’ a ton of the stuff…
“And I remember sweatin’ w/ a $150k note @ $1088.00…”
So do I. That’s the part, relatively, that baffles me. After a successful career and no financial hiccups other than non-government schools and college, I have enough for a paid-off house and a modestly comfortablee lifestyle without extras. I’m flabbergasted to see the monthly payments that so many people seem to be making. None of our five houses were above 2.5x gross family income (1 earner). I look at these multi-thousand dollar payments and wonder how many of these people (the number in my mind increases daily) can only make the payments by borrowing the money in some fashion, whether through re-fi, HELOC, credit cards or other. It’s sort of like, “The blood-alcohol level in that fella is going to test out waaay more than his weaving would at first indicate.”
Trademark Property of Flip This House fame *still* has that Folly Beach property listed:
http://tinyurl.com/n4b5s
This is the waterfront property from which Richard flies away from in a helicopter at the end of the episode. If I remember right, the company had decided to keep the house until they found the ‘right buyer’…this with a $9K or so per month carrying cost. I forgot what they bought it for (Zillow shows a sale in 2005 for $1.22M), but it’s currently listed for $1,675,000. I think they originally wanted $1.9 for it last year.
I guess there are alligators (the house) in SC as well…
Under the “status” section for this listing, it says “Contingent”. Does that mean they’ve received an offer on the property? It will be interesting to see what someone pays for this.
In most areas, contingent means that an offer has been made and accepted, subject to the satisfaction of contingencies that almost always of the buyer’s making. The most common contingency is a inspection of the property satisfactory to the buyer; the next most common are obtaining financing and the sale of the buyer’s currently-owned home. That last is probably getting rejected more and more, as sellers are stiffed. “Pending” usually means there are no/no remaining contingencies and all that remains is the closing.
I find the location “Folly River” very appropriate…
“In fact, we were hard-pressed to find a street that didn’t have at least one home for sale, and many had more than one. What’s more, most of the 20 or so homes we visited were vacant, a sign that homeowners have moved on and are motivated to sell, or that speculators are looking to unload properties before prices go any lower. Asked why one home was vacant, one agent said frankly: ‘This was a ‘flip’ that flopped.’”
Looks like we found another member of the REIC lurking here and “borrowing” the language.
“REIC”
Shouldn’t that be Real Estate *Financial* Complex (REFC)?
I had been using it as Real Estate Industrial Complex. I had seen others use REIC and I think it is easier to connect the dots to the truly subversive Truman speech that coined the term Military-Industrial Complex.
it was eisenhower not truman.
‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing. !?!?!?!?
Oh, far be for a someone to be an informed buyer and not blindly trust the opinion of their real whore.
Go ahead everyone - read the headlines - and never offer more than 40 cents on the dollar - at least!
They bought their tickets…I say let ‘em crash!
edgewaterjohn,
“They bought their tickets…I say let ‘em crash!” LOL!
Isn’t that from the original “Airplane” movie?
It should be the “sub-title” to this blog!
“‘What I think actually needs to happen is for the buyers and sellers to adjust to the market,’ said OCAR CEO Ann Garti. ‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing. And sellers have not adjusted to the market yet.”
What a moron. I guess he doesn’t realize that buyers set prices and that sellers set the amount of supply. He also doesn’t realize that prices are set at the margin.
foobeca,
I would bet that this dipsh*t realtor wouldn’t even know what “prices are set at the margin” actually means. CLEARLY, Econ 101 is not a required course in RE “school.”
‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing.’
“Buyers have overadjusted”????? Oh My God what a TOOOOOOL!
You HOPE they’re reading headlines and lowballing, Ann.
Guess what, hon? I think a lot of them have found the amazing Internets, and they’re DEAD SET ON NOT BUYING UNTIL XMAS 2008 AT THE EARLIEST. How does that grab you, Ann? YOU and your Realtor(tm) crew take your inevitable painful medicine, and WE sit on the sidelines on comfy cushions of ca$h* and watch the show! How’s THAT grab ya?
*note: not so comfy, really. righting this corrupt, debt-driven, fubaralicious ship of foolz may make capital preservation a tough row to hoe for the next decade or so…
‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing.”
That’s part of what we as Americans call, FREEDOM.
‘You’re getting lowball offers and calls you’d never get before. For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.’
Okay, I’m at a loss for words here. I can’t come up with something sufficiently snarky to cover this. Help me out here, folks.
you aren’t alone, I’m at a loss too. For some reason, most realtors think they are the guardians of house prices, that they set them for the market and the market should listen to them.
It’s that word “worth” - ie, “something worth 1.9 million.” Back to Econ 101 - what the market will pay, not what the appraiser says, or what the house next door sold for last year, etc.
Ever notice how often people say stuff like, “The house across the street sold for $875K and mine is bigger? Mine has a better kitchen? Mine has a slate entry?” Mine is always better, thus “worth” more.
That’s odd. $1.6 is generous. No resever auctions have proven market prices are 40% off or more for instant liquidity.
I read that and thought, bush league buyer.
-
Fair price is 1997 price + 3.5% annual appreciation. Take it or leave it.
Gekko,
God love you Sir!
That’s been my “line in the sand” from Bubble Day One! This is what homes normally appreciate at. I’m real sorry that you ran out and put your kids in private school, got a new Suburban (and mom some “elective” surgery) but that has NOTHING to do with what I as a buyer am willing to pay!
In a lot of cases the “home improvement” projects were just a hasty afterthought! As in; OMG, we burned through 75K of our 100K equity extraction scheme and haven’t done ONE bloody thing to the house. Uh….. quick, slap in some new cabinets, schlock down some fake “hardwood” flooring and roll some paint out! There! All better! Now the our home is “worth” another 100K!
10 years of 3.5% annual appreciation is 41% over 1997 prices. I think it’s probably higher, since real inflation (rather than the fake CPI) has probably been closer to 5% over the last 10 years. That’s 71% over the last 10 years.
So something between that would be about right.
In SF Bay, California, that means that a 350k home from ‘97 would go for 600k (highend) and 500k (lowend).
That’s no where near as low as I was hoping, but there you are. Right now, they’re going for 750k - 800k. But, obviously, not for long.
And, I should note, this is in one of the most seriously overpriced areas of the country - renting this same fictional house will cost you $2200 or so nowadays. Which, at 200x rent, means that it should go for $440k.
Hmm - an $800k house could drop to either $600k, $500k, or $440k.
I’m going to guess $525k or so, with rents increasing to match, over the course of the next 3-5 years. (Note: I’m going to assume that most of that change will be due to inflation a couple years out after a recession).
How’s this for snarky.
Selling a house for double the price it should be, that’s something crazy!!
kind of makes you want to keep smacking them across the face with a large trout or something, huh? hopefully some of the omega-3 oils will absorb through their skin and nourish their brains enough so they will no longer be called stupid by the other kids on the short bus.
Omega-3 oils aborbed through the skin?!!!
SFV, you are hilarious! I’m busting a gut here!
Maybe a northern pike would do the trick. X)
http://tinyurl.com/k8ogh
‘You’re getting lowball offers and calls you’d never get before. For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.’ said broker Lisa Wong.
If you think that offer is crazy Lisa, you’d best prepare yourself for the completely deranged offers in six months followed by the absolutely demented offers after that.
We just want buy houses at a fair price. Is that so Wong?
Hey, your back Rainman . Glad to see it . Need some jolts from the funny man ………maybe a song and dance .
Funny? Funny how? Do I amuse you? Am I a clown to you?….woops nevermind.
gol! = groaning out loud!
ROTFG
ROTFG - good one.
Rainman-
Send Bubbles the Clown our regards and tell him we miss him.
There’s that word “Worth” again. They still don’t get the concept of “worth”. It’s worth what it sells for!! period.
“Japanese style correction”…if that doesn’t make the ol sphincter tighten I don’t no what will!
Too bad the journalist didn’t paste in a graph of the Japanese market decline in order for the readers to appreciate what Shiller is referring.
“Prof. Shiller suggests that the Japanese housing bust may provide a precedent. Home prices there remained depressed for a decade before the market recovered.”
The journalist actually was far more deceptive. Notice how he threw in the line about the Japanese recovery right after citing Shiller’s opinion, thereby insinuating that Shiller had announced a Japanese recovery? In fact, Japan’s prices are still falling as I type, sixteen years into their real estate bust. (See my post below for the citation.)
But don’t worry, because that can’t happen here.
Good catch GS! Though even the Economist data is a bit deceptive in that by 1997 Japanese home prices had already cratered dramatically!
A journalist has to get up pretty early in the morning to pull the wool
I also like the way Shiller brings up the 1950’s housing boom .
During those time this was truely a situation in which there was limited housing but big demand after the war .Alot of those 50’s tracts were built during that time.
In the 50’s there was a true shortage ,not this 4 houses for every flipper situation we have today that’s behind the over building and prior demand .
I think in some areas of Japan, it finally bottomed out. My wife (who is Japanese) tells me that parts of Tokyo have finally stopped dropping and made a tiny inch upwards.
‘The buyers have overadjusted. They’re reading headlines; and they’re probably lowballing.’
Far worse than reading headlines, the buyers are probably reading blogs!
Or perhaps just doing in the math in Quicken without magically assuming 20% appreciation per year.
Good point. Without even firing up Quicken, just do a little thought experiment: Compare what you would be willing to pay for a home if you thought the appreciation would exceed 20%/year for another decade (when you planned to sell it) versus if you suddenly realized 0% or less was a more likely prospect. The home that appreciated 20%/year (like the ones in Gary Watts’ neighborhood) would be worth over 4X as much after 1 decade compared to the ones appreciated 0% or less (like Japanese homes, for instance).
So I guess if a buyer’s expectations for future appreciation dropped from 20%/year for the next decade down to 0%/year, he should drop his offer price by 75% or more?
Oops — I checked the math:
1.2^10 = 6.2, which means a decade of 20% annual appreciation would result in a price 6.2 times as high as with 0% appreciation (and I am not going to go to the less conservative case of falling prices, as happened in Japan for the past 16 years).
So to restate my conclusion, a buyer who planned to sell in ten years whose expectated appreciation fell from 20%/year down to 0%/year should adjust his offer price downwards by
(5.2/6.2) X 100% = 84%?
I know this is a crude back-of-the-envelope approximation, but it makes me want to be rather precautious before buying. Does anyone have a better recipe for factoring the effect of a drop in expected future appreciation?
You are assuming A LOT by implying that most Americans, let alone a real estate agent, can perform a thought experiment. 90% of our population doesn’t know how to balance their checkbooks - asking them to perform a thought experiment about home appreciation is dissertation defense time for them - no way.
The fact that there is only a 30% drop in the number of sales since last year and very little price decline suggests you are quite right that my thought experiment is irrelevant to the purchase decisions of 90% of the population. I was actually aiming it at the remaining 10%, as I realize we have quite a few well-educated folks who read here
Off topic a little — is there a way for a non-RE professional to find recent comparables in a given neighborhood, using the internet? I’m trying to dig into the details here in NYC, because I keep coming across contradictory stories that make me want to investigate further. When a neighbor boasts, “my place is worth $3 million,” I would love to be able to say, “but a similar place on the same block just sold for $2.3.” Any help?
Zillow. But you have to pick several houses at different Zillow prices to really know what things have been selling for. For instance, if you pick a house they say is worth 300K, they will only list houses they think are comparable in the comps. Then if you pick a house they say is worth 500K in the same area, they will give you the comps in that range, etc.
Zillow also shows houses on their neighborhood map and you can click by house. There’s other info on Zillow.com like previous sales price and tax assessment. There seems to be a couple of months lag in their data. I think they must get quarterly closings, so July and August aren’t available yet.
I’m not in your little town (;-) but I’ve heard often that Zillow’s really weird for NYC as well as others.
Try asking the neighbors, once you see that a sign says sold on it. I know it sounds crazy and obnoxious to yak folks up, but people know, and like to talk about it. I got some good ones at a church flea market in one neighborhood one Saturday morning, and I always ask our librarian when I go into our local library. A total stranger a few weeks ago in line at 7-11 just came out of the blue and told me, “Oh, we just closed. We bid $30k under asking and no prob.” Never know, you might get the comps you’re looking for - fresh ones.
Propertyshark has data for New York, but I think you have to pay to get access to complete records. Streeteasy also has some information, but spotty. You can always search ACRIS if you are looking for a specific building.
propertyshark.com
Try PropertyShark.com. It is awesome. Quite good data. I’m looking at transaction prices in my building on the UES, and it already lists two co-op closings in June.
Wall Street Journal. “My younger sister Melissa and her husband Joe want a three-bedroom, single-family home near us in Monmouth County, N.J….
Check out the blog link. Somebody needs to tell that guy Marshall (obviously the guy hired by the NAR to sit around all day and spam blogs) to be sure to take out his paragraph insert instructions when he’s working.
Hi Terri,
My wife and I …
While some people try to avoid Realtors and the associated commissions, others find that buying and selling the most important and valuable asset they will ever own can be better accomplished with the help of an experienced professional with access to a vast array of resources not easily accessible by the general public. If you negotiate Real Estate deals every day, and if you are intimately familiar with real estate contract laws and requirements, inspection procedures, contengencies, etc., then you are prepared to go it on your own.
Hey, you can hire a RE lawyer for far less than a RE agent, and they will handle all the contracts etc, for you. The one we have used a couple of times charges less than regular lawyers.
Not only that, but there is a pretty good choice that anyone who survived law school is quite a bit brighter than the real estate licensee. Of course, the old joke applies equally well to both professions:
Q. How do you know when a (Realtor (TM) / attorney) is lying?
A. His lips are moving.
Q: What do you call a thousand lawyers at the bottom of the ocean?
A: A good start
Q: What do you call a thousand realtors® at the bottom of the ocean?
A: The latest Real Estate Investing Convention.
All you need is a good lawyer, and a title/deed search and escrow.
You can line up your own financing.
The days of the Realtors(tm) and their unneeded middleman participation are over. All they bring to the table is talk, gladhanding and puffery. They have no skin in the game yet they skim a 6% commission. Its wrong.
The gravy bowl is empty, Realtors(tm).
“All they bring to the table is talk, gladhanding and puffery.”
Don’t forget the referrals to the lending shark who can get you in with a 0% downpayment I/O Option ARM, to the appraiser who will sign off on an appraisal which is 25% over fair value, and to the dishonest inspector who forgets to mention the termite problem he noticed under the kitchen sink.
GetStucco,
Every time I read some of your comments I’m reminded why I’m a JBR and no longer a JBO (Jealous Bitter Owner!) Just look at all of the parasites that attach themselves to the “home owner”? Do you think for a minute that realtor would agree to the same financial package they got a kick back for slamming you into? Would the appraiser pay on a loan based on the number he just penciled out for you? Would the “inspector” turn a blind eye to the standing water in the crawl space?
There was a time when being a home owner MEANT something! Those days are forever gone. Thanks for reminding me from time to time!
My experience with RE attorneys is that they are just thieves. I sold a house for a girlfriend quite a few years back when I was still in the RE business. I by-passed any commission and she wanted to use a lawyer.
He charged several THOUSAND dollars for his opinion of title and closing the sale.
If you can write the contract, go directly to the title company. They have an attorney on staff that writes the title opinion as part of the cost of the title insurance policy.
The Title Company is your best protection for loss, and the rest is haggling over price/terms and personal property.
The lawyer we used told us up front what he would charge us, it was less than 1K (5 years ago). I guess it depends on the lawyer.
Here in the Bay Area and in Seattle there is a cool new business called Redfin (www.redfin.com). They handle all the paperwork a realtor normally would for the buyer, but only take a 1% commission. As a buyer, you fill everything out with Redfin on their website or over the phone, but you get to pocket 2% of the sales prices yourself. (I believe it’s the same sort of deal if you’re selling and use Redfin as your listing agency.) To me Redfin represents the future of real estate transactions.
Plus, the website has really cool maps, search features, and some prior sales price info. It’s great just as an online property search engine (again, sadly, only for those two areas at the moment.)
[If you negotiate Real Estate deals every day, and if you are intimately familiar with real estate contract laws and requirements, inspection procedures, contengencies, etc.]
And what percentage of all those young bright-eyed newly minted realtors does this describe?
Marketer language, ugh.
“In addition to homeowners struggling to sell existing homes, construction is at near-record levels: The last time this much inventory entered the market was 1950, when builders were building suburban homes for soldiers returning from war, he says. Prof. Shiller suggests that the Japanese housing bust may provide a precedent. Home prices there remained depressed for a decade before the market recovered. He says: ‘The real question is, ‘Is this the beginning of a major period of decline as we saw in Japan, or will we see a kind of sharp and sudden correction?’”
Gulp! This is the first time I have seen Shiller bring up the parallel to the Japanese situation (although I admit to having done so personally many times). Notice that his list of possible scenarios does not include the soft landing which media-preferred real estate experts routinely mention.
There are some notable differences:
1) We do have a war on at the moment. So in principle, ending the war could possibly stimulate some demand like the end of WWII did, as troops return home to start households with the potential help of a new GI bill. But the end of war is not currently in sight, and I don’t believe there is nearly as large a share of America’s youth involved this time as in WWII.
2) I believe that Japan had a larger runup in prices (in percentage terms) towards the end of the 1980s compared to that in the US since 1998.
3) However, I doubt that Japan had anywhere near the massive building boom which the US recently had, as they have no more land to build on. I believe the startling magnitude of our McMansion and luxury condo construction boom to have been effectively masked by second-or-more home demand (flippers, investors, vacation homes, retirement homes, etc). Not only do we currently have very high inventory, but we should anticipate
the inventory flood to be further swollen by on ongoing flow of investor-owned homes returned to the market over the next several years, as real estate investors learn the same lessons about the perils of waiting for capital gains to cover your negative cash flow that the dot com firms learned a couple of years ago.
P.S. “Home prices there (Japan) remained depressed for a decade before the market recovered.”
I don’t believe Professor Shiller said this, as it is patently false. The most recent edition of The Economist shows that Japanese home prices fell 31% from 1997 and 3.9% since one year ago — hardly a recovery. Check the chart which accompanies this article (Japan is down there at the bottom of the list):
http://economist.com/finance/displaystory.cfm?story_id=7891311
I am deeply disgusted that our news media has turned into a propaganda machine which spews more half-truths and outright lies than Pravda did in its heyday.
If you read the orginal post that part about the recovery is not in quotes while the line before it is, so I suspect the decade thing is the reporters doing.
Right — I put it in quotes to set it off from my own comments, but perhaps that added unintended confusion…
Japan did overbuild. If you haven’t been to Japan, then you have no idea how built up that country is. They just built and built and built in the suburbs until an hour outside of Tokyo looked like mid-town Manhattan. They had so many condo towers in the pipeline that they are still building them every year. My wife is Japanese and every time we go there, the newspapers are stuffed with inserts of more and more buildings coming to market.
The Economist has Japanese home prices down 31% from 1997 to 2006 however wasn’t there a massive decline from the peak around 91/92 to 1997 in excess of 50%?
Yes — my point was not that Japan’s decline was limited to the 31% drop since 1997, but rather that its market never recovered as the journalist suggested. I don’t recall how much it had already fallen off the peak by 1997, but if we assume the 50% you suggested, then that would be an overall decline of 66% since 1990 (and still falling!). I don’t think you would get a much different answer by inserting the actual pre-1997 drop.
You are right. The journalist completely misled the reader and it is enough to say that the Japanese housing market has been falling for 16 years and counting.
I just wanted the magnitude of the fall to be captured from Peak to present time in order to dispell the “RE only goes up” crowd. Don’t want them thinking that they may escape with a paltry 31% haircut over eight years!
The US has had a big RE boom, but not nearly as big as the 80’s in Japan. From what I remember, at one point Tokyo was worth more than all of the real estate in the US.
I mentioned above that Japan’s price runup was larger. But I am also pretty sure that Japan did not build a bunch of soon-to-be McMansion ghost towns out in the middle of the desert. So I will have to defer to the Fed’s opinion that the magnitude of bubbles are very hard to gauge until they burst.
Bill,
I don’t know whether that is a more obscene market dislocation than what I heard regarding the Japanese boom: The Imperial Palace in Tokyo was worth more than all of Canada. Both are likely true.
Generally agree with your post but one quibble:
We do have a war on at the moment.
Yes but Shiller is comparing to WWII, which was a completely different scale for number-of-people-returning-home. I think it’ll be only a blip in demand.
“WWII, which was a completely different scale for number-of-people-returning-home.”
Didn’t I say exactly that above?
Yes, not to mention that a fairly significant portion of the troops in Iraq and Afghanistan are reservists or national guard. Alot of those people already own homes, so their effect on demand will be nil. I’m just stunned by all the building still taking place in CA, despite the fact that ownership is at an all-time high and many people “owning” several properties. How long will it take for the market to absorb all these units, and what will be the clearing price? A long time, and a lot less.
Yes, I misread America’s youth involved this time as in WWII.
(home (or any other asset) is what someone is willing to pay for it AND what someone is willing to sell it for. )
I think that once the market locks, and there are no comps worth using, another method will have to be found.
A friend has moved to California. Another has expressed an interest in buying. I advised the former to dump the house ASAP, the latter to wait at least a year. What if they wanted to cut a “fair” deal?
Without some measure of what such a deal is, the market could shut down for a long time, and that would be bad.
Larry-
I agree, the market will become highly illiquid for a while, but when things start to trade they will likley be at far lower prices than we saw during the heady days of the bubble. The market correction is going to take an express train (not a local) but the the ride will take some time.
“Though some of the agents we encountered continued to promote their ‘charming’ homes as ‘a steal,’ a surprising number were more candid. ‘The owner way overpriced this home,’ said one. ‘I bet if you offered $30,000 less they’d jump at it.’”
If the SELLER’s agent tells you his client would “jump at” an offer $30K less than asking … That probably means you should offer at least $100K less!!!
Not only did Shiller raise the precendent of Japan’s bubble in the second edition of Irrational Exuberance, he mentioned the possibility that it could be worse:
If you haven’t read this book carefully, now is a good time to do so.
Thanks — I forgot that passage…
“You’re getting lowball offers … For something worth $1.9 million, you’ll get an offer for $1.6.”
This is what she CONSIDERS low-balling!!!!
These real estate agents are clueless.
That’s exactly what I was thinking. 15% below what she “thinks” it’s “worth” is a lowball? She needs to adjust her attitude and definition of “worth” and “lowball.”
“sellers aren’t sure what their houses are worth”
Their houses are ‘worth’ exactly what the market will offer. Think it’s a half million. Maybe save the $30,000 realtor fee (do you really believ what they think it’s worth anyway), spend 10,000 instead advertising the crap out of an upcoming auction , and you will soon know exactly what your house is worth.
That’s evidence that sellers aren’t sure what houses are worth these days.”
There was a time when this was the function of the appraisal profession.
However, with the legions of poorly trained, incompetant, cut-rate fee, 24-hour turnaround hacks that have been churned out by the state licensing mills, the public hasn’t a clue which way to turn.
And good luck to anyone attempting to find a legit appraiser
No way I’d want to be putting my name on a report, when values are literally about to go over a cliff.
Nothin’ but potential ugly homeowners out there, with their personal ATM sitting empty, waitin’ to play the blame game to find someone else to hold responsible.
Good post and spot on hd74man . All the more reason for buyers to back off . Try to get a accurate appraisal in a declining market . Try getting a accurate appraisal when you got a inventory and foreclosure glut .
I caught an episode of “Million Dollar Listings” last night….boy, oh, boy.
The seller’s agent made the fatal mistake before a proper assessment of saying ‘oh it’ll go for 2 million’ (this is in Malibu, so he may have had a point a year ago). Needless to say, when the assessment came in, the figure was more like 1.3 milion….but the seller had heard 2 million, and ‘wouldn’t take a penny less than 1.995 million’.
So, the sellers agent, rather than trying to argue with the seller (she was kinda scary, so I can see why he folded), just put it on the market at 1, 9995,000.
4 weeks later, he manages to find some acquaintances who would actually be interested, if the price was right….they put in an offer for 1.3 million.
Oh, the look on her face!
She starts going on about how she doesn’t ‘need’ to sell’ and ‘can wait for the Right Buyer’, and after a lunch with the sellers agents reluctantly counteroffers at 1.8 million. The buyers come back with 1.6 and she throws a fit and decides that she won’t sell after all, ‘unless she can get what she wants pricewise’.
Amazing…OK, the show was probably filmed several months ago, but the sellers agent even mentioned that the market was ’softening’, but she would have none of it. Moreover, she’d had the house for a while, and it had been bought at about half the price she was asking for it.
Rather than selling it for a small loss, she now has a Malibu albatross around her neck, can’t move, and has strained her relationship with most of the agents in the area who would have been able to sell it foe her, had she not been so stubborn.
If anyone else has see this episode - I don’t suppose you know the MLS for that Malibu house??
All Malibu needs is a nice big mudslide this winter. That’ll help the price softening!
I saw the episode.
Every situation was a train wreck.
There are a lot of bat-sh!t crazy people in Malibu and W LA.
I saw that episode. I seem to remember it was actually 2.95 million, not 1.95 million. Maybe I’m crazy, though.
1 in 248 homes in Palm Beach County Florida are in some form of foreclosure, up 225% from August 2005. Inventory is more than double. Sales are down some 30- 50% YOY. Prices presently are 30% above historical trendlines. The stated percentage of FB’s using toxic loans is 25%.
Regardlless if you are a specuvestor or a plain Jane seller, prices are going to come down significantly from current levels.
It’s only been a little over a month since Floridians received their new home owner’s insurance rates and their new tax bills that take into account huge increases in assessed value. It looks like people are leaving Florida in droves. I would not be surprised if Florida home values went below 2002 values in the next few years.
97′ prices or BUST!
“‘Is this the beginning of 1) a major period of decline as we saw in Japan, or 2) will we see a kind of sharp and sudden correction?’”
well, if i’d plunked down $200K on a $1M pad in manhattan anytime in the last few years, and was faced with the prospect of (maybe, luckily) selling at $800K tomorrow — and losing my $200K invested — i’d probably vote for “1″.
people are funny that way. i consider it particularly ominous that prof. shiller’s direst predictions should be again highlighted — in a discussion of the manhattan co-op/condo market.
There are some questions one must ask when considering Shiller’s Japan anaology -
To what extent was there specualtion in residential property in Japan in the 1980’s?
What mechanisms exist in Japan for the discharge of debt?
I suspect that, legally, in Japan, it is far more difficult to walk away from a mortgage obligation than in the United States. We also know that there are powerful, cultural forces in Japanese society that work against, ahem, “premature discharge” of debt. You can’t drop the keys to the house off at the bank and walk away over there - you would endure unthinkable shame and be ostricized because of it. People will generally pay their debts, even if it kills them.
The question I gotta ask is whether a 15-year real estate deflation is really a possibility in the U.S. My gut says no - we will go down the tubes quickly and then go sideways for a long time. Our legal, financial and cultural structure is different than it is in Japan. Same outcome, different speed, that’s all.
“People will generally pay their debts, even if it kills them.”
so true! even though i may think i think i think i think i think i think i think i’m turning japanese, let’s not carried away here — there’s no reason to think that americans are gonna start paying off huge debts. NOT. our culture prefers crash, burn and turn around. and then do it again. ironically, the japanese scenario may apply especially to manhattan, because sellers are less likely to need to abandon or sell at huge discounts; the sublet rental market often provides sustenance for many owners in prolonged downturn. the 90s downturn was a doozy, and there wasn’t anywhere near the overhang of new construction inventory that is presently flooding the market. so it could be kind of a tokyo moment in manhattan. or maybe a tokyo decade. or two.
Oh, I remember the early ’90’s in NY - I’m a transplated Manhattanite myself - people walked away from an awful lot of property in those days.
A contractor buddy of mine loves to tell a story, circa 1991, of standing in the lobby of a co-op on the Upper East Side while some guy puts the last of his belongings in a moving van, then walks up to the doorman, hands him the keys to the apartment, and says, “Please give these to the guy from the bank when he comes by.”
It’s been a long time since we’ve seen real financial despair in this country. It can be just as irrational as the euphoria on the upside. The closest recent experience is Summer ‘02 when people sold shares because “it will never get better.” We shall see.
Japanese banks carried bad business loans until Koizumi forced the banks to finally write the off. There were a lot of zombie companyies that limped on because the banks were’nt willing to break them up. I don’t know if personal loans were treated the same way, but it helps explain why the Japanese bust has lasted so long.
A friend of mine lost his multigeneration house and land a couple of years ago. He was in the construction business and put the house on the line to try to save the buinessess. The family lost the business and the house but have adjusted well afterwards despite all the changes. Fortunately, the in-laws parents had money.
Anyway, I doubt our banks will be willing to be proud owners of alligators. They will sell for whatever they can get once they come to reality, probably starting toward the end of next year.
not to worry, our banks have already sold their bad debt to hedge funds.
hehehe…people are upbeat about savin’ 30 cents a gallon on gaz, while their home values are droppin’ by thousands each month.
http://news.yahoo.com/s/ap/20060915/ap_on_bi_ge/ipsos_consumer_confidence_1
Ride on Joe-Six Pack…next time read the fine print and know WTF it is you’re signing. A few pennies more or less for gaz ain’t gonna save your azz.
The entire American economy is based upon the assumption that asset prices backed by lending institutions will always go up in price while commodities and all items cash and carry will be kept at a low price or inflate at a lower rate than asset prices. Real things that are consumed MUST be kept in control so as not to spiral upwards, asset prices can bubble all they want because another asset bubble is easily blown, as shown by the experiences of the last two decades at least in this country. Thank you world reserve currency!!
How come it’s crazy when prices drop $300K on a $1.9M house, but no one things is absurd when prices climb like they did the last few years.
I think it’s completely normal, and I see more significant price drops coming.
A little more than 18 months ago, in an event that would up causing my induction into Ben’s Army, I made for the fourth time in a year, an offer on a house. My offer was rejected and, again for the fourth time, a GF bought it for more that I would pay. That’s the moment I realized something was broken about the system. Thankfully it was after not having bought anything and after having sold my prior home.
This week, a house my wife and I really loved was sold to someone else for 10% more than the most we would have been willing to pay, including a strong one-of-a-kind premium on our part. Yet this price that we were willing to pay was a full 25% below the amount we had offered a year and a half ago; part of the difference is because they[re in different states, but we valued this last place more highly.
My is that, without consciously thinking about it, we have lowered what we are willing to pay for any property by at least 25% in 18 months, and all of the properties are in the same general range of quality, attractiveness, relative location, etc.
While just one example, I think this speaks to the title of Ben’s post, “Sellers aren’t sure what houses are worth these days” because buyers aren’t either, and the latter have the wheel.
At first I thought that estimates of post-bust prices at 40% off peak were pretty optimistic. Now I don’t, though it could take a lot of patience over the next couple of years, to get there.
Chip:
Are you me?
Couple of months ago, maybe May, I put 99 or 50% off on a blog prediction and could just HEAR the intake of breath out there in IP land. Now, it’s the norm.
All I was doing was basic tracking back on the rental equivalent slighty higher profit margin than sales price using 10 median homes (including two I bid on and lost). I started to lose faith in the simplistic nature of my prediction.
Pat — I suppose we are indeed kindred spirits.
Chip…
After 22 in the appraisal biz, the one axiom which I have seen demonstrated in the RE world, is…patience will be rewarded.
In the early years when an appraiser’s rep was worth something, there was the occasional buyers who took the value someone was evaluating for his lender, seriously.
If the property under-appraised they’d either walk or tell the seller the appraised value than was all they were going to pay.
Invariably, when people walked, I would come to find out they later found homes which were far better than the one which they didn’t buy.
Without trumpeting my own horn-I have saved people hundreds of thousands of dollars over the years from things like buying in bad locations; contructing functionally obsolete houses; to the simple fact of overpaying.
Of course once the legions from the state licensing mills got in the door, this type of professionalism all got flushed-and the public has reaped the whirlwinds.
HD74man — it is a shame that there aren’t people like yourself available, when the time to buy next comes around, for an independent appraisal. How in the world do you sort out the honest from the posers? All I can guess is to go for the one with the longest experience.
At the risk of stating the obvious, don’t walk, run, from an appraiser recommended by a real estate agent. Get a professional, third-party house inspection first and make sure the appraiser you end with gets the report.
Whoops, phone rang, sorry. The bank will pick the appraiser - run from an inspector recommended by the agent. You can bet the bank’s guy will be incredibly negative in a “bust” environment - the bank will be scared silly to lend anyone a dime for real estate - a really bad investment, don’t you know….
In one major respect, I am fortunate — I won’t be needing a loan.
I can not help but think that a reduction in home prices is good thing. For those of us with children, a reversion to the mean would be a good thing. I, for one, have no clue as to where this will end but would hope that my children may be able to purchase a house at substantially lower prices. The last few years have been an anomaly and a reverse of this nonsense does have some positives.
Here’s a concept, lets build better quality homes at a fraction of the cost. These homes are energy conscious and smaller(this keep costs down). They come with all the amenities (granite,s/s etc.) and the materials are green and renwable (radiant, solar, turbine,passive).
Been thinking about that, too. Today, in another search issue, I found a Powerpoint presentation by the Chicago realtors regarding affordable housing in Chicago, and why they should be allowed to use cheaper materials. Here, you can read more about some of the arguments they state, like materials must be cheaper, because plumbers make more than teachers and realtors, so we need to build with cheap crap.
http://www.realtor.org/HousOpp.nsf/files/Chicago%20presentation.ppt/FILE/Chicago%20presentation.ppt
http://www.globalinsight.com/gcpath/1Q2006report.pdf
Probably the best and most complete estimates of under/overvaluation even though the data is a little old (Q1).
I think a good place to start at trying to determine a house vlaue is to start with cost to build plus a lower standard margin for the builder . With older houses your would have to make adjustments . Course this all goes out the window when you have a inventory and forclosure glut that forces homes below building costs .
With the price of land going down it’s also hard to determine what new homes should go for and will go for in the future .
Bottom line …..not a good time to buy .
I expect a global slowdown in a year or two, and fully expect building material prices to go *down*…so if I was willing to pay cost to build +, I’d have to use my future expectation of cost to build.
And with the housing boom ending for a while, I fully expect building labor to take a hit as well, potentially lowering building labor costs.
good point .
Anyone that takes out an option arm after all the bad press is crazy. Period. Option arms are meant for the extreemly wealthy who could pay cash but prefer to leverage assets elsewhere. So, if people were using option arms to leverage themselves into higher priced houses than they could normally afford (by 20-50%) and people aren’t crazy enough to take out these products any longer, what does that translate into in terms of price declines?
I’d add that it isn’t a question of “crazy.” If there are losses on these things the regulators will swoop in and limit there availability. The whole ‘affordibility’ thing will then have to be recalibrated to 30-year fixed at prevailing rates. Ouch.
does anyone else notice that the consensus of this board seems to be getting (even) more noticeably bearish in the last few weeks?
maybe it’s time for another “how deep and how long” thread……
“does anyone else notice that the consensus of this board seems to be getting (even) more noticeably bearish in the last few weeks?”
Yes, definitely. It is pushing ever lower the amount I think I will have to pay for a home I want — a good thing indeed. I see nothing, nada, so far that points to any sort of rebound. Renting has turned out to be an incredibly comfy holding pen. I think that it will not be long at all before sellers/their agents begin bring offers to potential buyers. I sure would, if I were an FB.
Well, I won’t be waiting for “bottom” but for rent/own to be reasonable AND the seller will have to lose money. No flipper, specuvestor will make a dime on my purchase.
I violently disagree with the statement someone made above that “Houses are worth what someone will pay from them”.
As Buffet never tires of reminding us - there is Price and there is Value. Price is what you pay, Value is what you get. The statement I dispute assumes that price equals value always, which would imply the market is Efficient, which implies market participants always act completely rationally and are capable of computing the “value” of the asset. Which of course is complete nonsense.
For housing, there are may ways to compute value (imputed rent, discounted to present value less carrying costs), Price/Rent ratio, Price/Median wage ratio etc.
Just about every measurement you can use tells you that there is a huge divergence between Price and Value today. Markets (including housing) are inefficient in the short term and quite efficient in the long run. In the long run, price and value usually converge (otherwise, the act of investing would be completely wasted).
“violently disagree”?? Oh my.
how about..”a house can only sell for what someone will buy it for”? yes?
“In the long run, price and value usually converge (otherwise, the act of investing would be completely wasted).”
Markets in perfect competition tend to drive price towards value, but I suspect that many have made their fortunes over the years (and especially in the current investing climate) through repeatedly driving a wedge between prices and fundamentals in a way that vastly favors the driver. Look at the NAR as a leading example — till last year, it was all about how “real estate always goes up.” Nowadays, the new mantra is “Prices will probably fall until the middle of next year, then pick up again.” There is no historical evidence to back up anything Lereah and the other “experts” say, and they know it — it is all just a bunch of patently false (mis)information intended to lure fools into buying overpriced homes.
“You’re getting lowball offers and calls you’d never get before. For something worth $1.9 million, you’ll get an offer for $1.6, something crazy.”
And who says it’s worth $1.9?
The Hamptons are starting to really dip - and it’s only the very beginning of the grand unravelling out there.