“The Fizz Has Gone Out Of The Real Estate Market”
The Daily News reports from Massachusetts. “Home builders in MetroWest are re-evaluating the real estate market now that housing prices are decreasing, adjusting marketing tactics and even delaying construction to wait out the cycle. The inventory is increasing because prices are too high, said Laurie Cadigan in Concord, who is president of the Greater Boston Association of Realtors.”
“‘It takes sellers about six months to catch up to buyers’ expectations,’ Cadigan said. ‘Sellers looking to sell at last year’s prices aren’t going to be happy.’”
“Framingham Acquisition LLC changed plans for its 290-unit Arcade project in downtown Framingham because the condo market softened, according to Michael Gatlin, an attorney for the developer. The original plans called for condos to be built in the building but the units were later changed to apartments.”
“‘When you do any kind of project like this, you have to justify it to your lender, the prices you’re getting for the units,’ Gatlin said. The developers ‘found that there were some condo prices that were soft and it seemed like a difficult market to justify to a lender.’”
“Toll Brothers Inc. is building an over-55 development in Marlborough, called the Regency at Assabet Ridge. The developer is using a different approach to moving its homes: getting them on the market as soon as possible, according to Jason Witham.”
“Builders creating more homes for the market are creating even more supply, according to Terry Egan, editor-in-chief of the Warren Group. ‘Any new home built that comes on the market right now is facing a lot of competition,’ Egan said. Not only from other new homes but from an expansive supply of existing homes for sale.”
“‘Right now, buyers have clout that they haven’t had for a long time in Massachusetts. They’re driving hard bargains, and it’s something developers are aware of,’ he said.”
“Lumber yards that supply home builders have also been affected by an increasing supply of homes and downward pressure on home prices. The cost of lumber has declined $35 per 1,000 square feet of board according to David Lamson, chairman of Lamson R.S. & Sons of Hudson. He said it’s because developers aren’t building as many new homes.”
“‘They are not building as much, and they don’t have the demand,’ Lamson said. ‘There’s a glut of houses on the market right now, and all our builders are cutting their prices for the houses to move them. Most every builder has got houses in inventory.’”
“Lumber sales have declined about 15 percent to 20 percent in the Northeast, and particularly in Massachusetts this year, he said.”
From the Record in New Jersey. “It’s a lesson home sellers are learning all over North Jersey. The fizz has gone out of the real estate market, both nationally and in North Jersey.”
“For sellers, all this adds up to one question: How to sell in a buyers’ market? The first answer is probably the most painful: Price it realistically. Just because your neighbor got $600,000 a year ago doesn’t mean you’re going to get $650,000 — or even $600,000.”
“‘A lot of sellers haven’t accepted reality,’ said (agent) Nick Tselepis in Clifton.”
“Nilsa and Edwin Santiago have heard the message, and cut the asking price on their three-bedroom home in the Lakeview section of Paterson. They first listed it in January at $359,900; now it’s listed for $329,900.”
“Although the Santiagos got offers for the house last winter, the best one was for $306,000, well below what they were willing to accept. ‘I guess people don’t want to buy houses now,’ said Nilsa Santiago. She speculated that would-be buyers are scared off by high prices and the fear that house values will continue to fall.”
The Journal News in New York. “A sharply higher number of people in the Lower Hudson Valley this year are finding themselves so far behind in their mortgage payments that they face the loss of their homes. For the first three quarters of this year, compared to the first three quarters of 2005, Westchester actions are up by 21.7 percent, Rockland are up by 49 percent, and Putnam’s are up by 24.9 percent, according to county clerks’ records.”
“Industry observers say they’re not surprised at the trend. Adjustable-rate mortgages that were used by consumers several years ago to buy houses are starting to lock in at higher rates this year.”
“Matthew Ziccardi, a White Plains real estate attorney, said some adjustables can call for new rates of prime plus 2 to 5 percentage points. With prime currently around 8 percent, a borrower who took out a mortgage with an introductory rate of 5 percent or 6 percent interest can now be looking at rates of 13 percent or more, Ziccardi said.”
“‘Equity is a problem now,’ Ziccardi said. Some sellers who took out interest-only mortgages have no equity in the property; ‘They might as well just rent the house,’ he said.”
“Attorney Jessica Bacal of White Plains said she expects the problem to worsen in the year ahead. ‘During periods of inflated values on real estate, many people obtain mortgages that they are unable to meet,’ she said.”
“About five months ago she represented a buyer for a house in the area. The closing nearly didn’t go through, she said, because the seller had trouble raising enough cash to cover closing costs. The seller had to make good on the mortgage, plus a home equity loan, plus a third private loan, ’so he was already in trouble,’ Bacal said.”
- “Although the Santiagos got offers for the house last winter, the best one was for $306,000, well below what they were willing to accept.
- ‘I guess people don’t want to buy houses now,’ said Nilsa Santiago.
- Sorry Nilsa … I guess that you don’t want to sell your home.
People still want to buy houses, but rational market value is quite a bit lower when prices are falling by, say, 10%/year with no end in sight than if they are, say, rising 10%/year with no end in sight. How much of a difference does this make? For a crude estimate, compare the effects of 10% real appreciation for 7 years (roughly the duration of a real estate boom) to the effect of 10% real depreciation for 7 years (rough projection of the effect of the collapsing bubble on prices in bubble zones like Boston).
– 7 years of 10% real appreciation => 100% increase in price
– 7 years of 10% real depreciation => 50% decrease in price
– Drop in market value needed to rationally price in paradigm shift from irrational exuberance to realistic future outlook => 75%
I realize this is a bit stylized and nonsensical, as there is scant evidence many market participants these days are very rational.
I think the market will stabilize and people will want buy, when incomes and prices are aligned in a manner that the old 28% of gross for PITI can be attained. A BIG issue with this is the downpayment and taxes. The funds required for a decent downpayment at prices even after a modest correction are staggering. The taxed have gotten so high that the last T in PITI cause the denominator to be large, thereby requiring the PI to be even smaller..the T is not going down, because the budgeTs are already stretched and spent. Even the second I is becoming an issue.
I am glad I am writing this on Ben’s Blod, because my comments would be lost on those, most anywhere else.
Tax revenues and insurance company profits (ie ExcellusBCBS) in New York State were at record levels last years. I agree that for the general public, the movement of cashflow from our pockets to their coffers is just another nick in affordability index. We are starting to hear in our state about making public the correlation of budget earmarks w/the originating legislator (There are attempts to block this) I’d still like to hear more demand from the GP for insurance to pursue fraud rather than just passing costs onto us.
For a lot of people this bubble was about greed, but for a whole section of society it was about no other options. (Some areas have good rent/buy ratios but many areas saw rents skyrocket too or watched their apt get turned into conversions for 3x the value) Now the latest crop of 1st time buyers see the forest thru the trees and are going to make sure the numbers work for them. It’s gonna mean changes all across the board not just housing.
What’s a downpayment?
Pen — can’t resist pouncing on a tempting typo:
“The taxed have gotten so high…”
Cool. San Francisco, right?
Pen, thanks for the post. From time to time my wife gets impatient and says she just isn’t seeing the price cuts I’ve promised. I use posts like yours to show her the math yet another way, and that’s very helpful.
-
Arithmetic on the way down and geometric on the way up. Say you bought a $1,000,000 house at the peak of the market and the house lost 50 percent during the downturn. That left you with a $500,000 house. Then, over the next few years, your house gained 50 percent in value. So now your house is worth $750,000. In order to recoup your full original $1,000,000 the house would have to actually appreciate 100 percent. 50% Up will not offset 50% Down.
50% down will offset 100% up, though (see my example above).
Trader Reality= A 30% loss on a $10 equity requires a 43% return just to break even. Good luck to the starry-eyed specuvestors catching that falling knife.
my high school math is a little fuzzy, so it’s difficult to understand this terminologly. Isn’t it geometric on the way up and the way down, because in both instances you’re applying a ratio (or percentage, whatever you wanna call it)?
i’ll be in the remedial math corner, waiting for my rebuke.
This winter they better lower their price 10-12% if they want to sell it?
“About five months ago she represented a buyer for a house in the area. The closing nearly didn’t go through, she said, because the seller had trouble raising enough cash to cover closing costs. The seller had to make good on the mortgage, plus a home equity loan, plus a third private loan, ’so he was already in trouble,’ Bacal said.”
Glad to hear it…#$%@ the seller…
Buyers got zero sympathy when they had to struggle to get down payments, borrow from their 401Ks, out closing costs on credit cards, then take an 80/20, and maybe borrow from family after having been “lucky” enough to have outbid some other GF, to buy some POS that had been priced way too high by some jerkoff r/e person who was forced to price it that way, because some @$$wipe appraiser valued a similar POS across the street last month, setting the whole self-perptuating COMP valuation process in motion.
FYI..I do not wish bad things on people, but what goes around eventually comes around…
FYI - I wish bad on people who are greedy and lied and helped fuel this run up in prices with their endless crap of sayings (”no more land, good time to buy, re only goes up, in the bag…”)!
But I’m not sure the truly greedy and evil will pay the price. The ones who are last to hold the bag (or house in this case) will get screwed, but what about the owner before them who bought the house in 2000 for $200K and sold it in 2005 for $750K. They’re the ones who are making out like bandits. I guess we can only hope that they took that $750K and bought a McMansion for $1.5 million. And I really doubt any of the greedy executives at the home builders will pay the price assuming that they diversified the enormous bonuses they been getting over the past few years.
because some @$$wipe appraiser valued a similar POS across the street last month, setting the whole self-perptuating COMP valuation process in motion.
Hordes of @zzwipes appraiser’s out there at the moment.
They’re the only thing keepin’ the wheels on the wagon at the moment.
I think the last residential appraisal I did was for a broker employed by a C-21 franchise.
I’d known the woman for a fair number of years from previous work assignments.
In making small talk at the home, she inquired how biz was.
I made some comments about the glut of appraiser’s to which she remarked that I should make the attempt to get on the “approved” list of C-21 Mortgage so she could “REQUEST” me for “HER” appraisals.
And so I”m thinkin’ to myself-Like I’m stupid enough to appraise for the mortgage arm of a sales brokerage outfit.
And what if my number doesnt’ do YOUR DEAL some day?
You’d be the first on the horn screamin’ to underwriting to deep six my azz.
What a f*cking conflict of interest.
Sell him an overpriced house, rubber-stamp the number with “YOUR” appraiser, and then screw him with a I/O ARM suicide loan from the mortgage rep.
All under one roof!!!!
If shit likes this were goin’ at NYSE the SEC would have everybody in jail.
A family of 5 (3 kids under the age of 5) just moved out of my apartment building yesterday. They bought a townhouse in York, PA (2 hours from here). Had to go that far out to find something affordable.
They got a 3BR, 2.5BA townhouse for $130,000 ($140,000 was the final bill with closing costs). According to the wife, these are now selling for anywhere between $150 - $190,000 (which I find hard to believe if they got it for $130,000 just a few months ago).
Anyway, they had zero money to put down. Had to go no doc. Had to do 80/20. The 80 is financed at 8% because of their poor credit. Their mortgage payment (including taxes) is $1400/month.
Their rent here was ~$775/month and they could barely pay that.
I guess this comment is pretty much OT, but I just had to shake my head after talking to them yesterday. I think all the hoopla surrounding real estate in the past several years is largely to blame for many people doing whatever they have to do to buy. It’s sad. I hope they don’t foreclose.
I’d say foreclosure is a slamdunk for these morons!
“According to the wife, these are now selling for anywhere between $150 - $190,000″
The wise skeptic will say “PROVE IT”. Those clowns bought a condo 2 hours away clearly drank the koolade. It’s these same imbeciles that will keep the charade going until it dies a painful death under it’s own weight. Nevertheless, it is extremely disturbing that there are still profoundly stupid people like this still out there.
What kind of a realtor and mortgage agent would put a person on a ARM loan that could adjust up to 13% in a short amount of time .Did these people even read the loan docs? These are foreclosures loans waiting to happen from day one and it’s just taking advantage of people blinded by a mania .
..but the buyer can always sell or refi and real estate never goes down….
“people blinded by a mania”‘ you got that right, plus you can’t fix stupid…
“Nilsa and Edwin Santiago have heard the message, and cut the asking price on their three-bedroom home in the Lakeview section of Paterson. They first listed it in January at $359,900; now it’s listed for $329,900.”
“Although the Santiagos got offers for the house last winter, the best one was for $306,000, well below what they were willing to accept. ‘I guess people don’t want to buy houses now,’ said Nilsa Santiago. She speculated that would-be buyers are scared off by high prices and the fear that house values will continue to fall.”
Fear? Uh, no. They “know” house values will continue to fall. This is just another example of a stubborn seller who is going to get screwed in the long run because they do not want to accept current market conditions. People are seriously fooling themselves if they think prices will rebound anytime in the near future (~within 5 years). Prices will not rebound for at least 15 to 20 years if they do at all. This is what history tells us, just take a look at the Nikkei Bubble in Japan. That downturn has been ongoing for 14 years and is still not over. In this boom, what has happened is that first and second time buyers were replaced by investors and speculators which in turn priced out the former. Now the investors and speculators are gone and so the top of the pyramid is in the stratosphere while the bottom of the pyramid (1st & 2nd time buyers) is still on the ground. It will take a long tome for the top to return to the ground. In the meantime, greed will cause people to lose a lot of money because, by refusing to lower their price, they will just follow the market down. People who are not greedy and who know how to price their properties correctly or accept the best offer they are given will make out OK. I think it’s time buyers educated sellers in this regard …
ditto
Re: Japan
They are fundamentally ‘Savers’ - putting away regular amounts of money that Americans would not even dream of. When there interest rate was ‘zero’ … they could of borrowed and invested in our treasury notes for a ‘guaranteed’ return and they would not do it.
They have ‘become’ savers just as most Americans during the depression became savers. I still know a few who are alive. They are shrewd and frugal and hoard everything, especially money.
Sobay — that’s an intersting comparison that gets to the root concept of saving. I remember marveling in the ’70s and 80s at Japan’s vitrually zero inflation rate. At the time, because I understood much less about American politics and power, I wondered why we didn’t hold Japan up as a model to emulate in that regard.
It looks as though people in Japan long considered saving to be accumulation of money as nothing more than that — they wanted zero risk, which they got then, they didn’t care about the zero return, and their government didn’t screw them out of their money by inflating the currency’s value.
Where we get taken to the cleaners, by those whom people other than myself elect, is that our politicians allow the Fed to inflate our currency. If a savings account pays 3% and the Fed inflates 3%, it looks like I’d be even with the Japanese — except that the 3% interest income is then taxed and I can’t find the line for deducting the 3% inflation.
For the gold bugs, yes, I believe abandonment of the gold standard was the kiss of death for inflation-prevention, but my point was just meant to deal with what happened afterward.
I don’t know anything about Japanese foreclosure law, but I do know that saving face is tremendously important in Japan. Is it possible that the Japanese bubble took so long to unravel because people didn’t just walk away from their homes? Because somehow it would be seen as dishonorable?
This is a good question. I have studied the booms/busts in the US, Japan, and other countries and it is a weird thing but the ratio of boomtime/downturn is always within the same range: .6 and .625. The US 1970 and 1980 numbers are 3yrs/5yrs = 0.6 and 5yrs/8yrs = 0.625. And Japan’s is 11yrs/18yrs = 0.611. Take a look at Schiller’s graph the Nikkei Bubble graph:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
http://www.stock-market-crash.net/nikkei.htm
The ratios are the same because what affects the timescale is market psychology (which is a constant) not any of these other factors like interest rates, easy credit, etc. These factors just affect how high the market goes, not timescale. You can already see how long it will take sellers to realize that the market has changed and also just how drastically it has changed. The bubble prices are still too fresh in their minds for them to accept anything less.
I made this same comment to a group of investors yesterday in an email without the mathematical support. Thanks for your insight. Here was my comment to my friends yesterday regarding some economists calling a bottom:
I don’t understand how some can be calling a bottom already. Sheer logic shows us that cycles take longer than one year. Wasn’t the peak in the major bubble markets just last year? What has changed so drastically in one year to have the bottom in place? Has affordability changed? Have incomes improved in one year?
Cycles take longer. Look at the past cycles in real estate. Look at the stock market. The down part of the cycle will be long enough for peoples’ memories to forget how awful it was and to be able to be enticed again to buy. Are you guys ready to buy in CA, FL, NY, NV, AZ etc., for investment? At today’s prices, those places are still too scary for me. We are still creating the bad memories in the real estate market in the bubble areas, so forgetting about them won’t be any time soon.
I think part of had to do with the Japanese banking system. There was an enormous amount of corruption in the late 1980’s in their banking system - a lot of non-performing loans made to buddies of the bank executives. It was a delicate operation unwinding the bad loans without bringing the whole system down. I think that’s part of the reason Japan was in deflation for so long.
Prices will not rebound for at least 15 to 20 years
I totally agree with that duration as demonstrated by US age demographics and attendant debt levels.
Pax Americana is dead-we’ve become nothing more than a glorified banana republic.
The 21st century belongs to China.
I don’t know that I’d go that far, hd. The US survived the 30’s and will likely survive what’s ahead. Plus, China has serious issues. Massive bad loans, serious corruption, overinvestment in plant and capacity, and a rapidly aging society because of the 1 child policy that may make them grow old before they grow rich.
Jim Jubak for one (at MSN Money) thinks China may take it on the chin after the Olympics in 2008. Plus, if they are to become a mature and successful economy, they’ll have to cut out all of the piracy and protect intellectual property, which they have not even begun to do.
“Nilsa and Edwin Santiago have heard the message, and cut the asking price on their three-bedroom home in the Lakeview section of Paterson. They first listed it in January at $359,900; now it’s listed for $329,900.”
“Although the Santiagos got offers for the house last winter, the best one was for $306,000, well below what they were willing to accept. ‘I guess people don’t want to buy houses now,’ said Nilsa Santiago. She speculated that would-be buyers are scared off by high prices and the fear that house values will continue to fall.”
Paterson is a real s*** hole. It amazes me that a house in Paterson could be worth $300,000+. Their house is more than likely only worth about 150K, if that. Paterson has serious problems, not the least of which is crime. They should have taken the 306K and ran with it. If you just look at the median income in Paterson you’ll see why.
I 100% agree with you. I keep having arguments with my father on why real estate in Los Angeles will drop.
His argument, its a nice area and people will buy here. Mine?
1. Homes are above 8X median salary, every time they’ve done that they drop to 6X. (Of course then I point out how they’ve never been higher…)
2. Or did we become a resort destination like Hawaii (obviously not…)? Then the next recession we can expect homes to drop 50% as everyone moves back home to “take care of business?”
He’s smart. Very smart (invented a few minor math equations). But… people are still in denial.
I’m not expecting much until 2Q2007. Then the little Dutch boy isn’t going to survive the dam break as this house of cards comes tumbling down. You see, by then I think we’ll have a bond default by the builders. That’s going to wake up the market.
Neil
I didn’t know you could “invent” math equations. Is your name Neil Pascal??….
Have you ever heard of
- Euler’s formula?
exp(i theta) = cos(theta) + i sin(theta)
- The Gaussian (normal) distribution?
f(z) = 1/sqrt(2pi) exp(-z^2/2)
- E = mc^2? (Invented by guess who?)
I think he means that they are ‘discovered’ rather than invented. They were there the whole time.
“I think he means that they are ‘discovered’ rather than invented. They were there the whole time.”
Not sure how you know this, but I suppose we are off topic again, so sorry Ben…
Melissa, I am with you, but at least here in OC, we hear endless stories of how “immigrants” are going to keep the market afloat for the foreseeable future. It is true that illegal immigrants can buy a home, but it usally involves even shadier lending and requires at least four families with 8 working men to live there to afford the rent. In fact, go to santa ana, you will see lots of “immigrants” who “own” their own homes (no doc, 0 down, fake SSN’s) watch them walk away without a thought when prices drop.
Other than that, I have a hard time seeing how people would pay twice as much per month for the illusion of owning without the assured double digit appreciation each year.
“In fact, go to santa ana, you will see lots of “immigrants” who “own” their own homes (no doc, 0 down, fake SSN’s) watch them walk away without a thought when prices drop.”
I wonder if there is any legal problems with foreclosure and other process when the lender can’t even prove that the person they lent to even existed since they have no documentation that will hold up in court. Especially when the original lender sold the loans to someone else who then turned them into bonds and then sold them again. Seems to me that this opens up the original lender to fraud charges from the people holding the loans since they can’t point a finger at the borrower because they don’t even know for sure who the borrower was.
If things turn to sh-t, the mortgage company is bk and closed, the agents who originated the pos loans are gone (no forwarding). The only people standing are the tax payers.Great scenario, eh?
In past real estate cycles I have noticed that many “immigrants ” were good buyers that were very prideful about having a home .
This real estate cycle seems to of brought out fraud and strange living arrangements .
Wizard –
D’ya think it has anything to do with the NoDoc lending concept?
That clown Casey Serin is featured in my local newspaper. How much exposure does that a$$ clown need?
Just think Karma
Someday he will get his, painfully.
Maybe in prison
Maybe in a dark alley
Maybe in the afterlife.
“The original plans called for condos to be built in the building but the units were later changed to apartments.”
Hey, a few days ago we talked about F’d resellers having no choice but to rent instead of sell and that would weigh on rental price appreciation. We neglected to explicitly add re-partments and failed condo projects to the supply of available rental units.
“‘Equity is a problem now,’ Ziccardi said. Some sellers who took out interest-only mortgages have no equity in the property; ‘They might as well just rent the house,’ he said.”
Maybe Zacardi is a regular on this blog…
Not maybe, every journalist that does a housing story lurks here for a period of time and probably calls Ben Jones.
Over the last 18 months, I have seen ideas/concepts introduced here, that within 30-60 days get into the MSM.
Didn’t Ben once produce a list of domain names that cruise this blog? It was full of news organizations and lending institutions.
I found out about it from an article in Barron’s, so I’d say the HBB has received pretty wide publicity among the financial/journalistic crowd.
Finally some real info about the housing market in Springfield, MO.
A story in today’s local paper (News-Leader) with facts about the housing market in Springfield instead of just “happy face” quotes from realtors.
Ozarks housing more affordable
Springfield’s average home price is lowest in Missouri and well below national average.
Didi Tang
News-Leader
10/29/06
“In 1989, the median household income in Springfield was $24,204, and the median value of homes was $59,800, according to the U.S. Census Bureau.
Ten years later, the median household income increased by 22 percent to $29,563, while the median home value went up by 33 percent to $79,800.
Between 2003 and 2005, the median price of Springfield homes saw a 22.5 percent increase, but personal income in Springfield grew by 5.9 percent.
This year, the median home price through August was $122,000, up from $119,400 in 2005, Rhoads said.”