Home Auctions ‘Get Whatever The Fair Market Value Is’
The Boston Globe reports on the latest housing sales tactic. “A growing number of homeowners and builders, unable to sell homes or condominiums the traditional way, through an agent, are turning to Sotheby’s-style auctions like this 26-property sale last month in Newton.”
“With the housing market softening in US cities from Boston to Naples, Fla., to Utah ski towns, the National Auctioneers Association reported that residential properties valued at $14.2 billion sold in 2005 in live auctions, a 24 percent increase over 2003 sales.”
“Auction houses said a growing surplus of homes on the market nationwide is expected to drive more owners to auctions in the future. Maine-based J.J. Manning, which typically holds one-house auctions, said this was its first auction of properties owned by multiple owners since the early 1990s downturn. The firm plans more this year.”
“Sheldon Good & Co. also reports doing more auctions, including more on behalf of developers selling the unsold units in large hotel-condo projects, particularly in resort areas. ‘We think there’s a very high likelihood that trend is going to rise based on overbuilding in Boston, New York, Chicago, Houston, Orlando, and Jacksonville,’ said Steve Good, chief executive. ‘The slowdown is just beginning.’”
“Sellers ‘get whatever the fair market’ value is, Manning said. A less-than-stellar outcome at his recent auction may reflect the market’s ‘mood,’ he said afterward. Buyers ‘are waiting to see what happens, and I think the spring market is going to be somewhat of a bust.’”
“Auctioneers certainly hope so, since that would bring them more business. But despite a slowdown in home sales, it’s too early to judge whether the housing market has fully shifted toward favoring buyers after years of rapidly rising sales.”
“Before putting a house on the auction block, the owner selects a minimum, or ‘reserve,’ price, at which he or she is willing to sell. The auctioneer never reveals that price to bidders. In February, the high bids for 15 of 26 properties auctioned met their minimum prices. Numerous auction attendees gasped in unison when the high bid was $800,000 for a Cambridge carriage house with cherry floors and tiled fireplace that had been listed at $1.7 million after a year on and off the market.”
“Patricia Hekmatpour was surprised by the poor outcome for her pink Boxford house. Hekmatpour, who happens to be an agent, turned to an auction after it languished on the market a year. The high bid, $460,000, was half the $900,000 minimum value she and her husband had placed on the house. ‘I thought not only my property, but a lot of other properties would do much better,’ she said.”
“Some properties didn’t sell because owners set minimums unrealistically high in today’s market, Manning said. This echoes a complaint often made by real estate agents, who said some owners grappling with a softening market for single-family homes select asking prices that are too high.”
If they become wide spread, then auctions will “screw up” the comps. As research by Steven Levitt shows, Realtors (TM) generally sell for a higher price and take longer to do so when selling their own home, than when selling for a client. Sale by auction is an extreme converse, where the sale price is equal to the highest amount anyone in the market on auction day is willing to pay, which is generally below the market value, which reflects that a higher willingness-to-pay buyer might enter the market tomorrow.
P.S. If prices are dropping quickly enough, then the auction price could actually exceed the price a seller can achieve by listing high and waiting. In other words, whether he realizes it or not, Levitt’s result is sensitive to the price trend.
Let the acutions begin! Especially in new construction. The builders can sell all their units and get on with their next project…
I agree. Build your little hearts out, and affordability will reign..
Good point. Buyers who are present at an auction are only a small subset of buyers on the market. So there is likely someone who is not at the auction who is willing to pay more than anyone at the auction. It seems to me that auctions work best for specialty items where a limited number of potential buyers exist, and where all those buyers are well informed and participating (like with antiques).
“Before putting a house on the auction block, the owner selects a minimum, or ‘reserve,’ price, at which he or she is willing to sell. The auctioneer never reveals that price to bidders.
Well, here’s the problem. It’s not a true auction that is seeking highest bidder. These types of auctions will fail because the same people who set an unrealistically high selling price for their “lovely” little home will also set an unrealistically high reserve price.
To me, the best seller strategy is to simply lower your price methodically by about 5% every two weeks until the house sells. Hell, you could even create your own auction by advertising that you will do that! This will encourage people to pay attention and might even get them to make an offer bid before someone else!
Nope, price reductions are death. Just chasing the bottom.
Best method is price your home to be the next to sell.
Forget the sold comps and price your home for less than any other comparable property now for sale. Buyers don’t see the allready sold houses, they see the available ones. Just price to be the most attractive of those and you will sell.
This price reduction crap will stagnate a listing and agents will simply stop showing it. Sitting on the market to long stigmatizes a home and when it does eventually sell the price will less than the “priced to sell” amount would have been months earlier.
Holding cost are also more of an issue now than in the past. Once your loan resets you could be looking at big money ($3,000-5,000/mo in CA) holding cost while you dick around with little reductions.
Also, the chance of you deal falling apart is much greater in a down market. You may screw around for 6 months waiting for a deal only to have it fall apart in 3 more just to start the process all over again.
In the mid 90’s it wasn’t uncommon to see listings sit unsold for YEARS, not months. Pretty crappy to have $4,000/mo holding cost on a depreciating asset for two years.
“In the mid 90’s it wasn’t uncommon to see listings sit unsold for YEARS, not months. Pretty crappy to have $4,000/mo holding cost on a depreciating asset for two years. ”
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this is an excellent reminder that real estate is inherently illiquid. That fact is masked during run ups such as we have experienced over recent years but will be painfully obvious in the crash that is coming. Lots of homes will sit on the market for years before they sell.
You hit it right on the mark. I bought my house in early 99 in San Diego. It had been previously been on the market all of 98 with NO offers. Even though I had to offer a little over the asking price the weekend it was listed (another offer was on the table the same day), she sold at a 50K loss from when she bought it new in 1992. Even though she had no offers the year before, the seller ultimately was pissed at her realtor after selling to me because she starting thinking she could have gotten more.
From what I’ve read in the past, auction sale prices are usually above market value — the competitive air of the auction usually induces people to keep bidding on past the price they would pay with a cool head.
Which makes the extremely low prices all the more meaningful …
Does anyone remember the last recession, and how many auctioneers were employed? Perhaps it’s a good business for loan officers to get into, or for investing?
I heard an auctioneer at the downtown San Diego courthouse last Friday, selling houses. I caught only the last house, and no one wanted it, so the auctioneer said it was going back to the bank. I don’t know if these auctions are picking up in pace, or if they’ve been held at the courthouse forever. I made some calls, but couldn’t reach anyone who had answers.
Is anyone on this blog over age 50, and thus remembers the last recession and which businesses did well? I’m looking for some investment ideas. Auction houses, self-storage places, what else? People will lose homes and cars, so what does that mean? What will people buy instead?
Peanut butter sells well during recessions. However, the price is quite sticky.
Bubble Meter Blog
I’m not over 50, but I remember the last recession and the businesses that did well were the ones that bought RE cheap and re-sold a few years later. A friend of the family made a fortune doing it, the reason this worked opposed to the flippers of today , is the property was bought cheap to bail out the unfortunate. This property was then resold a couple years later at a relative profit unlike today.
Speaking of San Diego …
“County home prices bounce back from January slide
By Roger M. Showley
UNION-TRIBUNE STAFF WRITER
1:27 p.m. March 13, 2006″
http://www.signonsandiego.com/news/metro/20060313-1327-bn13homes.html
Among other dubious statistics, the article claims that it is taking an average of 68 days to sell a home; no mention is made of whether that is on the tenth or eleventh relisting.
Maybe there’s a new ETF for soup kitchens?
I think arson investigators will enjoy a career boom.
What to invest in? People having their homes foreclosed on will have to live somewhere. This will bode well for apartment owners. Personally, extraneous to owning a duplex and living in one side, you wouldn’t catch me in the rental biz. Too many deadbeats and laws protecting the tenant now.
At the moment I’m into guns, Colt pistols & AK’s mostly, ’cause when Bush moves, on the purchase opportunity window will close under a Democrat.
“What to invest in? ”
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IN general, stay away from the stock market. Exceptions are gold and silver mining and maybe oil stocks. Sell short home builders. Buy gold coins.
Just some thoughts….
I’m not over 50 but I did bankruptcy work during the last recession in the 80s-90s.
Distressed debt was a great place to be if you know what you’re doing (the priority schemes in chapter 11s) but the caveat is you MUST know what you’re doing.
yup, most everywhere you’ll see default sales on the courthouse steps or equivalent. Kinda fascinating to watch… specially since it’s all cash or cashiers. Cant draw any conclusions from one, but across a range it certainly tells you how the market is.
I’d expect you’ll see a great many going back to ‘the bank’ ie the noteholder. If it’s no-money down on original sale and folks won’t pony up @ auction, the noteholder can do a credit bid to take it back. At that point they can run it as REO in papers, w/agent, etc. & hope not to get taken to the cleaners.
I just noticed a beautiful house, that is apparently a foreclosure, up for sale by a realtor. There’s a padlock on the front door.
Looks like someone bought a million dollar house, and couldn’t handle the payments and $20K annual RE taxes.
How does this work, does the listing realtor work for the bank? The asking price is basically “market” value, but is the realtor up against the wall on this, and would take a serious lowball on the property?
Just curious how this works, now that the house is vacant, has already passed the ‘courthouse steps’ process, and entered the retail market.
Hell I’m 38 and I remember it. There are a few businesses that benefit, bankrupcies and such, but the best strategy is to invest defensively and buy assets near the bottom, whether stocks or real estate. Bonds will also perform well once the Fed starts cutting rates to juice the economy.
I am not over 50 but I think that cash checking and repo companies should do well.
Simmssays…
americaninventorspot.com
“Numerous auction attendees gasped in unison when the high bid was $800,000 for a Cambridge carriage house with cherry floors and tiled fireplace that had been listed at $1.7 million after a year on and off the market.”
LOL ! Their will be alot of “gasping” by some of these seemingly self-entitled owners of these overvalued homes before it is over.
“Carping” will be another adjective used to characterize their dying gasps. Like a fish out of the waters of excess liquidity, some of the flippers and noveau riche “homeowners” will squirm, wiggle and flop themselves against the reality that their houses aren’t worth what the sleazy Realtors, appraisers, and “get-rich-quick” evangelists told them.
I can’t wait for the auctions begin in earnest here in Central Florida. I have my cash and am waiting on the sidelines to pounce on the stupid mistakes these greedy flippers made around Orlando.
I will get my house, on my terms.
I was laughing… 800k, gee that’s about (punches numbers into a calculator furiously) … 50% price reduction. Wow. Exactly what everyone here was predicting. Look for a lot more of this in the future.
No, that was only a 50% reduction from an unrealistic asking price. I think we will see 50% reductions from actual sales prices eventually, and more in some places.
Thought I’d throw out some real time market observations from yesterday.
I played golf in Cape Coral, FL with a friend of mine who owns a mortgage company. His opinion is that realtors will start jumping out of windows about July timeframe. Sales have really slowed down and he is mostly doing refi’s. He admitted that most people seem to be using equity to pay for living expenses, not so much the plasma tv’s-this can’t be good. Several people in his office fit this profile.
We were playing at a public course north of the city. It had homes on it that were built 15 years ago or so up to new construction. I’ll bet we saw over 20 homes being built on spec in the course of 18 holes. He mentioned that a friend of his had listed her house on that course for 650K months ago and it is currently listed for 530K, no takers yet.
He lives in a nice neighborhood that is made up of single story stucco homes in the 2,000-2500 sqft range I would guess, don’t know pricing. Every 10th house was for sale, lots of them FSBO. Nobody seems to be turing off the supply spigot even with inventory dramatically climbing. This is going to be really bad by fall if not sooner.
I think a lot of realtors drank the Kook Aid. They really believed housing could only go up. So now that they bought as much as possible, they are going to feel some pain in the coming recession-or whatever you want to call a nation with tons of debt and major loss of jobs to cheap foreign competitors.
I agree with you but I think that it is only the newbies (less than 6 or so years of experience) that were/are foolish enough to be unaware of cycles and corrections. I know of one guy who bought between 20 and 30 condos over the past 3 years. Young guy - thinks he’s a real wheeler dealer.
He called me alot last fall trying to get me to buy some new construction condos downtown D.C. Claimed I could “take-over” some cancellations and have instant equity. Uh, right, more like save his commissions for him. I made it clear I was not a buyer and had not been since 2002.
I disagree. Many people in this country barely remember 9/11, let alone the last downturn in the real estate market.
Your average realtor is one of the most obnoxious, dim-witted species to have walked this planet.
The sooner they are all extinct the better this world will be.
If a RE agent believes his own hype and invests heavily himself, can he sue himself in court when he loses his shirt?
LOL. He can, but there’s no money in it.
Investing in a soup kitchen might be good. I’m hoarding 25 lb. bags of sugar. Good barter item and you can also convert it to likker, which is a great value-added product.
I’m using my gold to buy rice, beans and ammo.
sounds like another way to beat the racket the in the National Assn. of Realtors. That said in a slow market, an auction could be scary. But in the right auction, buyers sometimes pay too much b/c they get overzealous.
http://www.dcbubble.blogspot.com
In Australia about 25 to 50% of houses sell at auction. This has always been the case, through boom as well as bust. One of the very commonly referenced indicators of market strength (or otherwise) is the ‘Auction clearance rate’, which refers to the proportion of properties each weekend which met their reserve bid. It hot markets it might be at 70%, in weaker markets (like now) it can fall as low as 35 to 40%.
interesting, didn’t know that. This seems to be very common in New Zealand too at the moment (I heard that 5 years ago - before the bubble - it was far less common).
Is there any way to check the outcome of these auctions except the clearance rate statistic? Do the auctions generally result in a lower or higher sales price, compared to just listing a property for a certain asking price like we do in Europe or the US?
When the housing market’s rising, auction prices tend to be higher than fixed price sales, sometimes a lot higher. Indeed there have been articles arguing that this can help make bubble peaks higher than would otherwise be the case.
When the market’s flat or falling, auction prices tend to be lower than fixed price sales.
Seems to be playing out almost identically to the late 80’s boom and early 90’s crash in the Northeast.
In a Cooling Housing Market, Real Estate Auctions Are Hot
December 3, 1989, Sunday
By CHARLOTTE LIBOV (NYT); Connecticut Weekly Desk
AUCTIONING off property, a sales method common in foreclosures, is being used more and more to market houses and condominiums in Connecticut as the demand for real estate continues to slacken.
Residential Auctions More Popular
By JAY ROMANO
Published: October 7, 1990
RESIDENTIAL real-estate auctions, traditionally perceived as the last resort of desperate developers, are fast becoming an acceptable, sometimes preferable sales strategy, real-estate experts say.
In the midst of a real-estate slump that has left the state blanketed with for-sale signs, anxious sellers are more quickly turning to the auction block to lure cautious buyers to their properties. And according to auctioneers, real-estate agents, developers and the buyers themselves, the strategy is working better than anyone expected.
grim
Northern NJ Real Estate Bubble
Last Sunday, for instance, more than 200 prospective buyers attended an auction sponsored by Larry Latham Auctioneers for condominiums in two buildings in Belmar. The properties, which had been originally offered by the owner ”in the low 100’s,” had been selling slowly using conventional methods.
By the end of the two-hour auction, however, most of the units had sold, several for less than half the original asking price.
Brian Miller, a mortgage banker from Basking Ridge, bought two condominiums - one in each building. He paid $58,500 for one unit and $69,000 for the other; both were for ”investment,” he said.
”I definitely got a good deal,” Mr. Miller said as he signed the contracts after the bidding was over. ”When the market turns around, and it’s going to turn around, the people who bought here today are going to make a lot of money.”
I bought new condos at auction in the early 90s at less than 50 cents on the dollar– Very profitable for me. We will see this phenomenon repeat itself in the next year or so.
…Keepeth thy powder dry, maties.
‘’When the market turns around, and it’s going to turn around, the people who bought here today are going to make a lot of money.’’
how can he be so sure about this when the fun is just starting?
who knows what the auction discount will be in 1, 2 or 5 years from now?
Who says it won’t take more than 20 years to turn around .
History says.
According to a friend whose family owned significant real estate in the late 20’s, it took over 25 years for prices to come back to the levels in the late 20’s.
This pisses me off, free sales marketing data. I want to paid for participating.
“I’ll like to purchase a clue for $440,000 Robert.” “Okay, Patricia here’s your clue: Hang a piece of black crepe on your forehead, your brain is dead.”
I guess they learned this trick from Ebay?
In Australia it is quite common that, while not revealing the exact reserve, the auctioneer will reveal that it has been passed by the bidding by making a remark such as “we’re selling now”. Real Estate agents would also issue ‘price guides’ to prospective bidders, which in theory would be the price they expected/b> the property to sell for and of course would be above the reserve.
Legally sellers in Australia have the right to decide right up to the last second when any goods being sold by auction are actually on the market, but once they make that decision they must accept the highest valid bid.
This can be accomplished by having a set reserve, but can also be done by making a signal to the auctioneer on the spot, and from time to time during the boom sellers would significantly increase the indicated minimum on the day. This could lead to ugly scenes when, for example, bidders were given a price guide of 400K and then a high bid of 475K was rejected at the auction as insufficient.
The auctioneers and RE agents would be loudly accused of fraud by the disgruntled bidders, when the actual problem was the seller’s greed.
Oops
The high bid, $460,000, was half the $900,000 minimum value she and her husband had placed on the house. ‘I thought not only my property, but a lot of other properties would do much better,’ she said.”
Here’s a premonition of what the future holds for housing values.
The offer is pretty much spot on to what Sir John Templeton believes is a coming 50% drop in residential housing values world-wide.
But WTF…if 0% down/interest only funny money and cash-out HELOC speculators can drive the comp value structure “up” who is to say the market mechanism of an auction process can’t drive the value system in the opposite direction.
Definition of “Fair Market Value” for appraisers-The most “reasonable”
(not highest anymore-USPAP changed that) price, given all the prerequisites to an arms-length transaction, with both seller and buyer fully informed, and acting in their own best self interests.
With builder’s needing to unload, and w/ buyers are fully aware of circumstances by reading blogs like this, who is to say, that this isn’t an establishment of “fair market”, save for the greed-heads who are going to take in the pocketbook because of the shift to a new value paradigm.
Damn right those auction prices are gonna be analyzed and used for the future valuation process by a variety of connected concerns.
Look out below.
the 50% discount is interesting, because I’m told at auctions in my country (NL) the discount can also be that big.
Auctions are not used often here, just for some foreclosures and special cases (like more homes at the same time, vacation homes etc.). Trouble is that a normal citizen has no chance to buy at such an auction, because the buying is strictly controlled by a cartel of RE professionals. There is even an official investigation going on about this, because the banks are pissed off than these guys buy up foreclosures way below what they consider ‘market value’. But maybe the bank just has a very wrong idea about ‘market value’, just like the people in this US auction story.
Some of that was going on here in Northern Virginia in the 80’s and early 90’s. The “regulars” would meet for breakfast the morning of the auction and decide who would buy which property and then, at the auction, they would not bid against eachother. Indictments and arrests followed.
yes, that is exactly what they do here. But although it has been going on for many years, the courts are not interested at all and there has never been an indictment.
Probably we are now hearing about it because the banks are getting bigger losses because of this than some years ago.
nhz-Not sure what you mean about “RE cartels”.
Banks are usually the final bidder, because they will refuse to unload at bottom-feeder prices , unless the auction is deemed “no reserve”.
What they are “pissed” at, is the foreclosure appraisal they got from some previous high-flying, number-hitter hack-shop,
(who their loan officers previously used to “pump” values) who gave them a sky high “fair” value number, which prevents them from collecting a deficiency judgement in court against the foreclosed party.
You’d be amazed at different culture which exists between the originator and “work-out” divisions of a lender.
As far as I’m concerned every LO who has a deal go “re-po” out to be made to clean the 6 month old rotting food out of the frig, and scrap up the piles of accumulated animal excrement in the basement just to gain an appreciation of the lifestyle of the dirt-bag people they lend someone else’s money to.
the banks usually don’t bid on the auctions here; I don’t know too much details about how it works. Everything is purchased by the ‘cartel’, local people who own hundreds of homes and have been doing this for many years.
And yes, there always are the warnings like ‘inspecting the property at your own risk’ (angry owner), ‘buyer has to pay all cost for removing the former owner’ (don’t know the english words for that …) etc. etc. That is already enough to scare the average buyer.
Ohhhh, I just thought of something. The auction price $460,000 for Patricia’s house is a fair market appraisal! If she ever sells for anything much higher there’s going to be a fraud investigation into the lending practices that got the mortgage written.
This is too funny…
3/12 in the Union Leader:
Experts in NH say there was no real estate bubble
“Delay said another indicator — foreclosure rates — also shows a vibrant market in New Hampshire.
New Hampshire has the third-lowest rate of foreclosures per household, just behind Rhode Island and Massachusetts.
In Georgia, there was one foreclosure for every 422 households in January.
During that month, there was one foreclosure for every 42,000 households in New Hampshire, he said. ”
3/13 in the Portsmouth Herald:
Officials: Home loan foreclosures on rise
“A growing number of homeowners in New Hampshire are being forced out of their homes by foreclosure.
Foreclosure filings in the state jumped from 188 in February to 263 in March.
In Strafford County, there were 19 foreclosures in January and February, compared to 40 during all of 2005.”
Yup. And both were posted on this blog. Just goes to show you that the industry itself doesn’t know what it’s talking about.
here is some auction news from the last bust — california specific.
Thanks to google groups search
The improving outlook for housing is consistent with a moderately upbeat
view of the economy. The plunge in mortgage rates will do much to revive
this important sector. Housing starts fell 3.2% in June. [Business Week]
Kennedy-Wilson will auction 7 new classic homes and 19 large homesites at
the Rosewalk Estates. Original asking prices from $179,900 to $209,900.
Minimum selling prices now from $100,000. Sealed bid sale for homesites.
Originally priced from $45,000. Minimum selling prices now from $27,500.
[San Francisco Chronicle]
Kennedy-Wilson will auction 28 new single family homes at Brentwood Homes.
Previous asking prices from $135,750 to $165,750. Minimum selling prices
now from $70,000. [San Francisco Chronicle]
Grubb & Ellis will auction 7 custom homes and 2 residential lots in
Portola Valley, Hillsborough, and Redwood City. Opening bids slashed up
to 50%. [Wall Street Journal]
search google groups– gold mine of information. current bust is on track.
Public new home auction. 42 Exquisite golf villas in the most prestigious
country club. Starting bids $199,000. Original asking price up to
$649,000. [Pacific Citizen]
.New single-family home sales fell 1% in September after a revised 1.6%
increase in August. The August figure was previously estimated as a 6.1%
decline. Low interest rates have not lit a fire under home construction
or sales, which have only moderately improved from last year, when home
construction was the weakest in more than 4 decades. [Wall Street Journal]
Housing in California isn’t likely to become a quick money-making
investment again any time soon. The California Association of Realtors
expects the statewide median to decline 1% next year, on top of a 2.1%
decline projected for this year. [McClatchy News Service]
The above posts are from 1992/3 — misc.invest.real-estate - Jan 6 1993
Unsold condo conversions are already hitting the auction as detailed in yesterday’s Sun-Sentinel. I did a story on one property where 200 out of 275 units are still owned by the developer almost a year after going on the market.
The auctions will be an interesting lot. Someone better do a LOT OF HOMEWORK before participating in anticipation of making money, just to make sure that they are not overbidding in a falling market. True, most of these people are wishing for the pie in the sky pricing that they had seen earlier, and reality will be hitting them square in the face. Great buys can be made by those that do research, get something below market, and then even relisting where they are not desperate, and still make some nice money, or hold and rent. Good luck to those on this blog that take that approach.
It sounds like that auctions of today bring price levels down in a way that foreclosures once did but no longer. Foreclosures, at least in my area, are a joke that don’t shave that much off of prices.
In 2003 I took a trading course from a wealthy guy who told me about how he bought a condo in Houston at the bottom of the oil bust in the 80’s. Yep, he bought it at auction. It was low enough, he said, that he was able to put the purchase price on a credit card.
OT: UK Times on the US home mortgage tax deduction scam. I wish more US papers would cover it. Policitians in both parties are afraid to touch this third rail. It’s time to end it.
I agree that the mortgage interest deduction should be ended, probably through a gradual phase-out. And I agree that the subject should be honestly debated. Perhaps after or during the coming down cycle it can finally be addressed.
However, this article makes a few dubious claims. I hardly think that the mortgage interest deduction is “little known” in America. Heck, it’s the first thing anyone says when discussing home-ownership. I also doubt that the recent slowdown is related to a fear that the deduction will be eliminated.
Well seeing that the Republican base is most likely to have the homes w/large write offs I hardly think this would be taken away. W’s got enough problems with his base lately. Also as much as this article was skewed against the top 10% crowd, losing the write off would hit young families pretty hard. It truly is a political 3rd rail. Could start rioting in the streets amongst those soccer Moms that usually don’t turn on the news.
similar to the situation in the Netherlands, although the tax deduction in NL is FAR bigger than in the US.
Many wealthy citizens who don’t need a mortgage take the maximum mortgage anyway because of the 50% income tax deduction - and then they simply put the money on a savings account or use it to buy stocks.
Every politician with at least half a brain (just a few I guess …) understands that it cannot continue, but just mentioning the subject is political suicide. Up to now all the big parties choose to ignore the warnings to the Dutch government from the likes of OECD, BIS, IMF etc.
The mortgage deduction helps recent buyers the most, not the most wealthy. After you begin to pay off the mortgage you pay progressively less interest. I’d bet both parties have equal interest in keeping this gravy flowing.
The wealthier you are the less need you have to borrow. Even if they do “benefit” from it the most in abolute dollar amounts the wealthy are the least inclined to fight to keep it because it has way less effect on their standard of living.
Young families with a new house and big bills are the ones most addicted to this juice.
don’t think so except if you define ‘wealthy’ as people with a lot of money but no job income.
The tax deduction is higher for people with higher income; as long as one takes out the maximum mortgage (which is what most people do) the wealthy profit more.
On top of that, a 50% tax deduction simply means higher home prices which is great for existing owners, especially people like the wealthy who have more than one home (or if you look from the other side: removing it would force a 50% price correction, all other things being equal).
Of course, the wealthy don’t need to borrow - but the point is that this stupid system makes it attractive to borrow anyway, even if you put the money on a savings account (which many wealthy people do here - you just get 1-2% extra gain on your capital without any risk, thanks to the tax office). That explains why the conservative parties (our VVD) are strongly in favor of this system.
But I do agree that young families living beyond their means are a group that is severely addicted to this HMD. That explains that the center right parties (our PvdA) are also in favor.
in general: the winners of the HMD are all homeowners; the loosers are all people who don’t own a home yet because they pay for the homeowners’ benefits (through taxes and a higher ’starter price’ if they buy as well).
oops, the ‘center right’ (PvdA) above should have been ‘center left’.
Just two passing thoughts: (1) in the late 50’s in San Diego renters were given great rates because property without tenants had to pay very high fire insurance or couldn’t get fire insurance. With all the vacant homes in Phoenix will these owners be forced into higher insurance payments.
2. Condo prices can always go down but HOA fees can always go up. With high vacancy rates in some of these units, how are taxes and HOA fees distributed? If enough property in a conversion is repo’d could you loose your unit because of unpaid back taxes incurred by the high vacancy rate?
I was living in Olympia WA in the late 70’s. I worked at a print shop and I woman came in to have a flyer printed. This was long before the color copiers of today. She was going to have an essay contest and the winner would get her house. I think the entry fee was $100 dollars or so. It didn’t work and the house did not sell. But it was pretty creative.
“I’m not over 50, but I remember the last recession and the businesses that did well were the ones that bought RE cheap and re-sold a few years later. ”
Exactly. Buy RE based on cash flow and way below replacement cost and you can never go wrong. I think the cut off age for folks who remember and probably already had a vested interest last downturn is about 40. 1990-95 was pretty ugly unless you were a buyer of distressed RE.. I doubt we get to that point of bargains galore for years to come. Way too many folks with cash ready to pounce.
John,
I really question if the are “too many people with cash ready to pounce” relative to the number of propertys that will be for sale. Perhaps that will be true in your area? In my area they still building like crazy even as inventory goes up and rate of sales goes down. Because of the mania we have had, the “mood shift” could drive RE down like the Nasdaq in 2000/01
You are sure right that buyers the last time that stepped into good positive cash flow did well.
Chris
Most people will be afraid to invest on the first downturn. They’re afraid of downturns to come. Just think of the tech bubble. When those stocks took the first dive, how many people jumped in to get a piece “hoping” that it would go back up again?
If there is an enormous amount of surplus, you’re competing with everyone else. Unless you plan to buy/hold/renovate, you’re not going to make $50k in a year on appreciation. And don’t let re-runs of ‘flip this house’ entice you; it’ll cost you twice as much to do the renovations they do. They fail to mention any labor costs in their projects, not to mention it takes more then 7 days to get a permit for construction in most areas.
-Richie
I agree that many will be afraid to buy if prices drop significantly. They will continue to rent. I will buy when cash flow, with 20% down and a fixed-rate mortgage, is positive. I am long-term and see little risk at that point. I’ll just sit back and let my tenants pay off the mortgage. Same thing I’ve been doing for over 20 years.
BTW - bought most of my rentals at foreclosure on the courthouse steps. Even bought my personal residence at foreclosure.
Tons of very well off folks from this boom ready to pounce. I’ve been in the biz a long time and anyone in a bubble market that was aggressively investing has more cash than they know what to do with. We need an avalanche of distressed property to overhwhelm these deep pockets for the real deals from illiquidity to surface. While most of us cashed out the newbies took over bought overpriced stuff and are leveraged to the hilt. I do think the great opportunities this next cycle (till 2008-09) are away from the often talked about bubble markets.
I agree and I think this will slow the unraveling of the bubble.
In Europe there are many people who have played the game several times on different levels: first leveraging up in their own country, after that with an extra vacation home in France, a few investment properties in Spain, 10 apartments in Turkey, a whole new development in Rumania etc.
Because of the age of the EU bubble they have tremendous amounts of capital available. I think much of that capital is still invested in RE (with high leverage) but they will only have a serious problem if all these markets crash at the same time (very unlikely judging from history, and if it happens someone with a savings account is probably in even worse trouble).
Deep pockets want to loan you money and charge you interest for it. They do not want to own a lot of houses, houses are losers. Why do you think the builders and banks want to dump their properties, even at a loss, as fast as they can? Do you know of any really rich people who bought 100 houses? Of course not, they don’t want the headache. Bide your time and prices will snap back to reality.
I don’t know about that. When I was growing up in the early 70s my boyfriend’s family owned a very large portion of our town. The interesting thing was their own home was little more than an oversized ranch. For them it was about the future, not for show. Fast forward 20 years, his son never did buy a big shiney new house as all the yuppies that discovered our little ocean side town did. He owns an old victorian and loves it. His business partner btw advised my parents when the last downturn was coming. And was absolutely right. Owning homes really did work for them. Not to mention the power it brought them in the town over the years.
Anyone who has read “The Millionaire Next Door” understands this concept of “guns or butter” or “all show and no go”.
True. But many invest passively in pooled entities. The point man shows up at the auctions with all the funds. The objective is turnover with a profit. You buy your 100 homes a year perhaps averaging 8 a month and continually flip. In the early to mid 90’s the big boys were buying up commerical on the cheap. It seemed if you had $50k -100k you were like royalty buying up bargains the big boys didn’t have time for. Today you need a million it seems just to play the game and the margins as well as risks are pitiful that it is not even worth the bother IMHO. Yes patience will pay off for all down the road as many in the game and those now ready to pounce as we head into this down cycle wear out themselves, losing patience and money in the process… If this quickly deteriroating and illiquid market keeps up it might be sooner than I thought..
I’m amazed how people think relatively minor things should have such a huge impact on a house. For instance, people gasped because the house sold for cheap because it had a tiled fireplace and cherry floors? Admittedly, they may have gasped because it was a “Cambridge Carriage House,” unfortunately I don’t have the slightest clue what a Carriage House is (this coming from a west coast guy, though I did live a year in NYC).
But really, how much value should cherry floors and a tiled fireplace ad, or how about our favorite add-on, the granite countertops? The answer is, the cost should be the cost of adding the items on, plus the premium of not dealing with the inconvenience during the installation. The fact that people are adding 100s of K’s for such minor items is mind-boggling.
Location, square footage, size of lot, layout, quality of construction and exterior design, and major conveniences like central air (this is not a given in all areas) should have a huge impact on prices, not idiotic flipper add-ons like granite countertops.
It would cost me about $8,000 to put granite counter tops in my average size kitchen. I don’t consider that small.
It isn’t small, but would you want to pay a flipper $25K for that $8K upgrade? That’s just how these guys are inflating the value of their properties.
You are right and that type of flipper thinking/math is illustrated on shows like “Flip this House”…HGTV, etc. They make minor improvements then pronounce statements like, “New Garage Door…cost $2,000, VALUE added $12,000″. It makes absolutely no sense. The buyer is expected to pay some huge premium over the actual cost of the improvement and doesn’t even get to choose it himself. I would rather pay less for a fixer and choose my own upgrades.
The value should be discounted for personal tastes/preference. Sure- you don’t have to deal with the inconvenience- but on the other hand you have to deal with somebody elses choice. I’d rather have the cash in hand (lower price) so that I can pick the floors/counter-top I personally would choose. To me, this more than offset’s the hassle factor.
You are not the “average” buyer. They want turn-key move in condition. Most think it takes 6 months of dust and loss of use to redo a kitchen. They also think it costs about 3x what it actually does. Having flipped about 20 foreclosures, it got to the point where I knew pre-auction exactly what the remodel costs would be (down to the powerwashing the deck and, even the fresh mulch).
When we first started out buying houses in the early 80’s, anything advertised as “fixer-upper” or “decorating allowance” drew our immediate attention. IMO 90% of buyers won’t even consider this type of property - therefore, no competition and way below market deals.
When shopping for homes, there’s nothing I hated seeing more than really nice carpet, or a new paint job… in a color I hated. You end up paying for it; but are then left with the choice of living with it; or throwing it away. Give me ratty carpet, nicked up sheetrock, and ugly colors any day :-). But you’re right; I have to recognize that we’re probably atypical.
If you are atypical, then so am I. I’m shopping for a home next year (summer 07), but looking already and nothing turns me off more than things like “freshly painted” or “new carpet” etc. Chances are they will expect a premium on the price of the house and I will end up wanting to rip it out and do it over. Same with hideous wallpaper, window coverings, etc.
I agree, I’m clumsy, so I don’t like granite countertops or tile floors. I not only wouldn’t pay extra for them, but I’d pay more for a house without them. Ever drop a jar of pickles on tile? Ever chip a nice plate on granite? I like a nice, new vinyl floor and prefer the formica contertops given a decent color choice.
And I thought I was the only one who preferred carpeting, Formica and linoleum!!! Don’t forget tile is cold, hard on the feet and dangerous for kids (and clumsy adults who slip and fall — raises hand). These “flipper” houses absolutely turn me off. I would discount the price just so I could re-renovate with traditional, family-friendly flooring and counter tops.
Couldn’t agree more — I’m stunned at people paying absurd prices for dressed up ranches with zero architectural style.
In February, the high bids for 15 of 26 properties auctioned met their minimum prices. Numerous auction attendees gasped in unison when the high bid was $800,000 for a Cambridge carriage house with cherry floors and tiled fireplace that had been listed at $1.7 million after a year on and off the market.”
“Patricia Hekmatpour was surprised by the poor outcome for her pink Boxford house. Hekmatpour, who happens to be an agent, turned to an auction after it languished on the market a year. The high bid, $460,000, was half the $900,000 minimum value she and her husband had placed on the house. ‘I thought not only my property, but a lot of other properties would do much better,’ she said.”
These auctions sound like a dream scenario to me. Unrealistic and stubborn buyers enter an arena that forces the sale at what people are willing to buy, not their fantasy price, or it continues to languish in obscurity. To see those properties that are auctioned before theirs go for 50% below asking price, garnishing gasps from the crowd, must give them a lump in their throat. But since they can’t just take it off the market or incrementally lower the price themselves more realistically, they have to let it go at the high bid price, which is a price they would have found insulting on the open market. I picture them getting grabbed by the back of the neck and having their noses forcibly shoved in the steamy pile of their ridiculous asking price. Bad Seller!
I hope they have a nice bath when their minimum was more than double the bid price. I don’t want a granite countertop. I was under the impression everyone wanted marble (or is that the grand entrance way?) of the $HITBOXES.
Hey I do think the granite looks nice…but we don’t want it either. Since so many people have done it over the last 5 years, we are worried it will soon look very dated. Not sure what we do want, but not granite (maybe polished concrete or something unusual).
As in other area, the internet undoes the information monopoly on residential RE auctions. These are two internet auction sites I frequent. Prospective sellers usually have ample time to visit the properties prior to the auctions, assuming serious interest.
http://www.auction-works.com
http://www.williamsauction.com/ca_all.php