‘Anybody Ready To Begin Lowballing’?
“One reader suggested a topic on when a housing market buy-opportunity may arise. “How about a general consensus on whether anyone’s ready to begin the lowballing? I mentioned, a week or so ago, that a co-worker of mine was going to make an offer on a ridiculously overpriced home in Telford, PA. Spoke to her today and, while she still made an offer, thanks to the advice I gave her she lowballed (and will list her home appropriately).”
“She won’t tell me how much she lowballed by yet (she doesn’t want to ‘jinx’ her offer), but she said it was a LOT less than the asking price (the home was listed at $309K and zillowed/ABCed in the low $200s - my hunch is she used this newfound information as a guideline).”
“So…feeling somewhat empowered, today I contacted my realtor (very nice woman - zero pressure since I’ve been looking for 2 years now and she still hasn’t given up on me) and asked her to tell me honestly how she feels about offering low bids. I found a home that might be nice for my son and I and, if after seeing it I still feel that way, am pretty sure I will toss in a low bid (which, based on when the people last bought the home, would give them the ol’ ‘1% above inflation’ appreciation). Anyone else thinking about it yet?”
Another replied, “If you have studied the bubble charts, you should know we are not going to see the bottom of this thing until 2010-2012. There is a pretty good consensus on that timeline.”
“However, if you cannot wait it out, your strategy is the best. Zillow existing listings and if they bought pre-2000, you can attempt some low balls. The fallacy is if they refinanced to ‘pull out equity’ which Zillow does not tell you.”
“You will have a lot of sellers scoff at lowballs for now. The winning strategy is to make a lot of lowball offers, and you might have a 5% chance at acceptance. You are picky about the house you want (which is a great thing). So if it is nice house that might fetch ‘FMV,’ chances of success are small. I applaud your efforts regardless of outcome. Good luck!”
From the recommended article. “Let’s just say, for the sake of argument, that San Diego is going to experience a housing downturn. Our task is to try to figure out what past housing downturns say about how our hypothetical bust might play out.”
“The duration of the price run-up, the tremendous growth in real estate employment, the prevalence of negative-amortization and other ‘exotic’ mortgages, the low levels of home equity, the sheer magnitude of the price increases, and the resultant crushing lack of home affordability; all of these elements are unique to this unprecedented housing boom.”
“Muddying the waters further, we have a new Fed chairman who was talking like an inflation hawk on Monday but who in 2002, when financial market prospects seemed a little bleaker, proposed monetary policies that he likened to dropping cash from helicopters.”
“The past two cycles are quite helpful in suggesting a duration for post-boom housing slumps. The accompanying graph shows that the prior two busts were very similar in duration, and that in each case, the bulk of the valuation decline took about six years.”
“What will be the effect on nominal prices? This question requires us to make even more assumptions. First, we have to figure out where the price-to-income ratio will bottom out. Again, the past two cycles are fairly consistent here. In both cases, as the graph shows, home prices found a ‘floor’ at about seven times incomes. That seems as good an assumption as any.”
“If 2005 marked the end of the housing boom and 2006 the first year of the downturn, another assumption, yes, but one I believe will be borne out by history, we end up with the housing market bottoming out in 2011. In order for the price-to-income ratio to get down to the level of prior market lows, and assuming the 4.6 percent income growth rate, San Diego home prices will have to drop by 36 percent.”
“So we should probably also run the calculation under the assumption that our Fed head does indeed fire up the chopper fleet..we find that home prices would have to decline by 23 percent within the allotted time period. So, the Ghost of Housing Busts Past says that home prices will drop roughly between 25 percent and 35 percent from their 2005 levels, and that they will take around six years to do so.”
“Will he be right? To answer that question, look back at the painfully long string of assumptions we had to make just to get this far. Put another way: who knows? There are certainly an awful lot of cross-currents that could cause this post-boom housing market to behave quite differently than those that came before it.”
I think Richs’ numbers are based on the relatively high pay scales in SD. In northern Arizona, prices in some towns went up 60% in the first half of 2005. And that was after climbing for years. The state did a study and determined a person would have to make $60/hour to afford a home. Almost nobody in this area makes that kind of money. The average in Flagstaff is at around $11/hour.
The duration is also tricky. Prices can fall and stay down, for years. Ask the folks in Houston.
Another consideration of over-heated markets with loose lending is the possibility for defaults and the pressure tha can put on prices. “Avondale had the biggest drop in average price, down 37.4 percent from 2001 to 2005 and nearly 20 percent from 2004 to 2005, to $100,478 last year. The price decline came as sales rose nearly 57 percent in Avondale in that period.”
“The high number of foreclosures in Avondale could be partially to blame for pulling down the average price so dramatically.”
I would argue that market influences will once again be dominated by local factors after the national bubble explodes. Some areas will recover more quickly than others, so the duration of the damage will be locally determined, as you point out with the example of Houston.
Areas that either have, or build new, globally competitive industries will recover first, while areas that have no industry other than real estate and service economies will be flat on their backs for the forseeable future.
Very True !
Are the pay scales in SD higher than those in Arizona Ben?? The reason I ask is that SD is notorious for low pay even relative to other non-bubble areas. When I moved from Chicago to SD 18 months ago, my compensation only increased because I took role with more responsibility.
That being said, I do think that whatever high earnings that exist in SD are disproportionately in the Real Estate arena and we all know what’s going to happen to those jobs in the next 6 to 18 mos.
Arizona is a right to work state. We’ve got tourism and RE, and the state serves as the main entry point for illegal aliens. Not the strongest three legged table, as you can imagine. BTW, gas prices are a killer when the population is so spread out. Most jobs pay by the hour with no benefits.
You’re 100% correct about the gas situation in terms of things being so spread out in AZ. My wife and I are spending $500.00/mo. on gas right now, plus $200+/mo. on electricity. The cost of living in AZ is much higher than people realize.
How many square feet? How well insulated? Totalcosts in addition to PITI?My wife and I in the OC think we may have to retire there one day, but it doesn’t seem like any real savings.
Sounds like Nevada. Tho Nevada has been working hard at attracting industry from Calif. The state would like for you to believe they have been successful. I’m not sure.
Negative Spiral
I have been involved master plan community development through several real estate cycles. A part of the cycle that often surprises people on the down side of the market, is a result of the real estate industry job loss. It is estimated that one newly constructed home correlates to 2.5 jobs for one year. A “balanced market” is estimated to be one building permit for each new job created. It is often assumed the 1 new job can buy one house, which in today’s world of affordability, is arguable.
In Tucson, Arizona, for instance, 15,000 new jobs had been predicted for 2006, along with approximately 15,000 permits. Marshal Vest and Gerry Swanson from the Economic & Business Research Center at the University of Arizona have recently revised this estimate to 12,500 for 2006, and under 10,000 for 2007.
Using these “rule of thumb estimators”, 2000 less building permits per year eliminates 5000 jobs, which would in turn eliminate 5000 home purchases. In addition to speculators dumping unprecedented levels of housing inventory, the job destruction associated with building permit decline creates a negative spiral as personnel in real estate related industries are forced to sell and /or relocate.
Job growth statistics need to be carefully analyzed on a city-by-city basis to determine what percentage of the past and future employment growth has been or currently is related to construction activity in order to determine the full impact of the potential housing over supply.
home prices found a ‘floor’ at about seven times incomes
Stupid question: Is “income” here what the property will bring in in rent, or is it the average income of the population, etc.
In southwest Florida The Prices are lower but the fear is strong, every road has signs all over its so bad a full time county worker just pulls them out all day long, Low ball offers just get the I Won’t give it away song from sellers, but like I said the fear is strong and a storm in the Gulf may change the song, http://www.nbc-2.com/articles/readarticle.asp?articleid=7460&z=3&p=
Pause on South Florida, D.C., SoCal, zona, they will all come down, but BOSTON is where you need to look, if you want to have a mold to base the rest of the country on. Everyone there is educated, or atleast thinks so…It will be the first to crash and the first to bottom out. Just read the boston globe article from last DECEMBER. If you are trying to sell in Boston right now, not only are you not going to catch a sucker at your price, you are not going to get an OFFER within any range of the price you are asking…
Coldwell Banker agent Egor Evsiouk said many househunters have walked through his client’s spacious 1970s Colonial in Tewksbury, which needs ”cosmetic updating” but abuts state conservation land. Since late July, the Willants have cut the price by $100,000, or 20 percent, to $429,000, barely above the town’s assessed value for the property.
The house is an ”albatross around my neck,” said Elsie Willant, creating so much stress she developed an inflamed sciatic nerve that has immobilized her. In the midst of separating from her husband and still grieving the death, years ago, of her oldest daughter, she is anxious to ”move on” and buy a place in Maine, closer to her second daughter.
But first they must sell. Willant said they received one ”ridiculous” offer of $380,000. ”There is nothing wrong with this house,” she said
“‘There is nothing wrong with this house,’ she said”
******
For her sake, I hope Elsie soon realizes there’s nothing wrong with a lot of houses right now - except their prices.
Roastbeef — I believe that quote is related to personal/household income. It could be misleading, though. In the early 1970s, when interest rates were reasonable, the rule of thumb for lenders was a morgtage loan (20% down, 30-yr. fixed) of 2.5X income — maybe 3X but they really scrutinized you for that. As interest rates climb, the ratio of debt to income will shrink — it’s pretty much just mathematics at that point because the monthly payment will drive the decision.
The latter…
We also sometimes discuss the sales price to rent ratio.
You could always lowball a bunch of places and you never know. After your offer is refused, they could come back in six months to see if you’re still interested.
You could, but IMO it is a waste of time right now. Homeowners have a serious sense of entitlement to appreciation. Now, what about distressed sellers? Not many have any equity. Even the banks aren’t cutting deals on defaults, yet, although Fannie Mae did do some 50% deals in Florida.
What will one do with the property? For instance, I know of one buyer who found a home of which the owner had recently passed away. It went into pre-foreclosure and he got it for about $100k less than comps. Now he is sinking $100k into renovations. He will end up with around $450k in the deal, but he can only get around $900-1,000/month in rent. Not a good buy, IMO. Also, there is an FDIC guaranteed bank that just opened locally. They are offering 5.7% on a 7 month CD. I understand T-bill have returned as high as 4.7% recently. Why roll dice on homes in an overbuilt market?
Yep, I agree. You buy weakness from weak hands. Right now, these morons think they still have the upper hand. A good dose of tough love is in order.
Lowballing will only come into its own when there’s blood in the streets, panicked FBs are in headlong flight for the exits, and offers have dried up. Sellers are still clinging to their delusions, but in a few more months the fear will be setting in.
i agree with that. at least here in los angeles county. it’s going to be a long hot summer (not so hot for real estate). IMHO we’ll start to see a real shift in about 3 months. During our last downturn, once it started sliding down and the foreclosures kicked in it dropped off significantly pretty fast. btw, the majority of the country wasn’t in a credit/housing bubble the way it is now. it will be interesting to see what impact the magnitude/size of this bubble has on our local downturn this time.
Agentjmf-
do you think that the article’s 6 year decline will apply in Los Angeles. If you say it dropped pretty fast last time, then what about the bulk of the price drop. people here have said that we should expect most of the drop in the first two years… do you think that’s still accurate?
Which bank?(5.7%) I am looking for a better return as I have CDs rolling over quite soon.
Here’s a link. keep in mind they are starting up to primarily make home loans, I think. http://www.deserthillsbank.com
“Also, there is an FDIC guaranteed bank that just opened locally. They are offering 5.7% on a 7 month CD. I understand T-bill have returned as high as 4.7% recently. Why roll dice on homes in an overbuilt market?”
Now that, to me, is interesting. Various of my investments (value stocks, CDs, Series I bonds, and municipal bonds) are in the 4% range on yields. 4% is great compared to the negative effects of R.E. leverage in reverse.
Emigrant Direct is currently offering a straight savings account (no minimum balance, no minimum term, complete liquidity) at 4.65%. Check them out on line.
I thought that the article was about people that needed to buy before 2010 or 2011. I personally prefer Treasuries to CDs. With CDs you have to sprinkle it around to a bunch of multiple accounts to get full FDIC insurance.
FYI, 180 day T-bills are 5.19% APY this week.
The number of condos coming to the market is incredible. Washington has another 50,000 on the way (http://www.washingtonpost.com/wp-dyn/content/article/2005/10/05/AR2005100501984.html). Miami has 25,000 under construction and another 25,000 funded and approved by the gov’t (not to mention between 50-100k conversions). I suspect there will be as many condos coming to market in the next year or two as SFHs!!! That’s incredible.
Excellent! Affordable housing is on the way!
(Cheap Condos for everyone! :))
Where’s SF Jack?
We put our house on the market in February (exclusive listing, and then in March it moved to Multiple listing). A few low ball offers came in right from the start.
We had a too laid back agent who was not aggressive enough inadvertising, holding alot of open houses, etc. But since we had no where to go — we didn’t find anything we loved — we sat back and waited.
Now, we found not 1 but 4 places we really like (one of which is priced silly but has been on the market for nearly a year). We dropped our price, got another low ball offer, and suggested that if they come up a bit, we would make a strong counter.
If they do so, we may make four (count ‘em: 4!) medium low ball offers, and the best counter will get out attention. I’ll keep you informed as to what happens . . .
Not trying to be snide here, but I have to ask…ypou’re trying to lowball (medium or whatever) but don’t really want to accept a lowball for your own house? I don’t see the logic there.
Well, I do see the logic but it sounds as if you’re deluding yourself like many other sellers out there…
Their house is ‘different’.
Their house is different. But they will wait to sell, just like the rest of them.
Why don’t people get it? In order to sell, you need to lower your price. BR has just described a situation where two sellers (BR and the other) are setting the price to high. The result? The houses are just sitting and no one is getting on with their lives. It’s not just a matter of “waiting until the right buyers comes along.” It’s a matter of setting the right price in order to attract a buyer.
Make the best deal you can. Best of luck to you!
BTW, why not sell and then rent for a year? Coordinating two transactions at the same time can be a nightmare, as twice as many things can go wrong. Imagine the powerful position you’d be in if you were in a rental with lots of money in the bank and no pressure to buy within a particular time range.
Anyway, that’s what we did, but it’s now been a year and a half, and we’re still happy as clams in our rental! And we can buy a house anytime we like.
Anyways, welcome to the blog, and let us know how it goes!
I think it is way too soon to think about buying now. Here in SoCalif we are just entering the downside of the peak. Based on past cycles, it could take years to hit a bottom. I don’t think anyone can predict the future regarding prices, even me with almost 30 years of home lending (and real estate investing)experience. So, no one knows how low prices will get, but waiting now is probably the best bet.
What I find funny is the increasing number of people calling me to get our bank’s REO list. It must be the all the informercials/books/programs on buying 30-50% below market. I try to explain how things work. If a loan goes to Trustee sale, the bank only gets the house if no one bids above loan balance+interest+costs. If no one bids this amount then it is not worth it. The house is then listed in the open market and the whole world can make offers. Hard to get a good deal here either. Too many people looking at too few properties.
The time to buy is when no one wants to buy….when you can barely give away RE. Remember 1995 in SoCalif? This was the case. Prices had been dropping for 6 years. My advise is to wait until the pain is so great that the thought of buying RE makes you sick. Then buy.
Good advice, Mr. Lender. I would just add one thing.
When RE tanks this time, it’s likely going to take some other parts of the economy down with it. So now is not a good time to take on a big load of new debt. Now is a good time to to build real net worth in preparation for better opportunities in the future.
Of course, very few people are lucky enough to time markets precisely. But right now, as the mortgage tout on the local radio adverts says, “It’s the biggest no-brainer in the history of mankind!!!”
>wait until the pain is so great that the thought of buying RE
>makes you sick. Then buy.
Yup..when the cab driver is telling you stories of how much he’d lost in real estate, and how he’d NEVER make that same mistake again…
When the cab driver is Suzanne, THAT’S the time to buy….
hilarious
When losses have swept the speculators out of the buying market AND when very tight and expensive money mean that most people CAN’T buy. Five years from now, those with no debts, 20% down and good jobs will be able to pick up property for a song. It’s not just the flippers, it’s the sucide financing.
It’s the suicide financing that enabled the flippers to exist in the first place.
IMO, flippers are always there, lurking under the rocks. They can’t do any harm until someone gives them the tools to cause harm. That’s what lax lending did. When a 20 year-old Sizzler waitress can buy a half-million dollar property (true story), something is up.
Yeah - as I always tell people,
“Like catching falling knives…”
Where and when is the bottom going to be?
Now is not the time to buy. Investors will be buying all the way down. If they keep speculating with borrowed money eventually they will lose everything. The longer people wait to buy, the lower the prices will be, IMO.
We got em right here. Lainvestorgal has been whining for 6 solid months about wanting to buy there. My guess is she’ll be on the first 5% reductions and all in, just in time to cool her heels for another 8 years waiting for things to bottom and start to come back up.
For her sake, I hope not. There will be plenty of schadenfreude to go around for the next several years.
One of the dangers of reading this blog is developing an excessive focus on one asset class. I’ve had enough losses in RE to know better than to get overconcentrated.
Now, if someone could just tell me what the next big thing is
Sm_landlord — while your advice is good for people who are well-off enough to be able to consider more than one property, versus alternative investments, I think many of Ben’s readers (perhaps a majority if the non-posters were included) are simply waiting to buy our one principal residence. There could be a strong correlation between the one-home types and intensity of interest here, since the biggest egg in our basket, by far, is that one home/purchase and we want the best information available (right here) in order to decide the right time to buy.
I would hope that the advice is useful for folks who are only looking to buy a residence as well. Many people in this country are financially overconcentrated in their homes. They would be better off renting and diversifying than putting all of their income into paying a mortgage, at least in today’s market.
I realize that the urge for homeownership is strong, but there are other ways to go. I have done pretty well by investing money that would have otherwise gone to pay a home mortgage into other assets, not all of them RE.
Maybe this will be useful for folks that are convinced that they absolutely must own a home ASAP. You should also consider the alternatives. Whatever you do, don’t try to chase this market down.
BTW, We rent. (with apologies to the individual who uses that screen name.)
No, no - don’t apologize, please! I make no claim on the phrase (besides, I use an exclamation point and a capital ‘R’). That is, of course, unless you make it a trademark and start selling bumper stickers and t-shirts on ebay - then I want a cut!
Whoa, wait just a minute. Did I just? Should I start…? Wonder how much money I could…? Nah - probably’d get lynched sometime in the summer of ‘07.
Amway.
Let’s see. What’s undervalued now? Hmm.
The US dollar? Could it be?
Ramen for RE Professionals?
thermionics, quatntum tunneling, borealis.com
I’ve been observing her ridiculous posts for quite sometime and I still maintain that she is a quasi-troll and doesn’t really think there will be a downturn.
If the ration he is using is correct (a ‘floor’ of 7 times per capita income), then the home values in the Tampa-St Pete-Clearwater SMSA are still undervalued. The per capita income is about $33K and the median home price is $187K. We have quite a way to go before reaching said ‘floor’. Local factors in California are pushing their ‘floor’ higher - not wages, but regulations on land use is my guess.
Show me a decent home in a decent neighborhood anywhere in Tampa/St. Pete for that price. I mean a place where your kids can go out into a yard away from prostitutes and meth dealers. Where you can cookout and not have people come up panhandling and begging for food. A place without bars on the windows and gangsta neighbors.
Show me.
He11, even in most of the bad places ( East of Nebraska ave and Central St. Pete ) they are asking 150K + for 2bdr/ 2ba shacks.
$100,000 - $150,000 is what they are asking for small condos, trailers and manufactured houses here in Polk County.
I dont know where these prices came from, Tampa median home price is 250,000 easy,
I agree with Sensible Lender 100%!
I can’t speak for other markets in the U.S., but in San Diego and Southern Cal it is way too early for people to get excited about buying houses at a reasonable price. I think that those who act too quickly and buy because prices have backed off maybe 10% or so will regret it in a couple of years.
Many of those who are now getting excited about the market changing and look forward to getting into a house will be absolutely terrified in a few years. I too remember the mid-90’s very well here in San Diego. Sellers were truly desperate, hoping and praying that someone would buy their home at just about any price. I know of many people who tried to sell then; in some cases, not only did they not receive any offers (not even low-ball offers), but their homes were on the market for over a year, with no one (yes, not even one!) even looking at their house. There were simply too many homes available and too few buyers, and people were too spooked to even think about getting into the housing market.
I believe we have a couple of years to go. We’ve barely begun to see loans start resetting, but watch what happens over the next 2 years. You think there’s a lot of inventory now? Just wait until the 90,000 or so people who used creative loans to buy in San Diego over the last 2 1/2 years start to see their monthly payments rise dramatically. Many won’t be able to make those payments, and will have to sell. Some will just walk away. And do you think lenders are going to continue lending at the standards we’ve seen over the last 2 years? Hardly! Eventually, we’ll go back to the traditional 20% down payment and 30 year fixed loan. And you better have good credit too. Lenders will be very cautious after getting burned in the upcoming bloodbath.
In a few years, the buying pool will be very limited. First of all, many will not be able to qualify when more stringent lending practices take hold. And second, even for those who do qualify, many will just stay on the sidelines. Very few people are courageous enough to buy in a falling market that seems to have no bottom. It truly is going to get very ugly, in my opinion. Be patient, you will be amazed how much power you as a buyer will have when the time is right. Huge inventory, desperate sellers and very few buyers gives the buyer an incredible amount of leverage. Buy when there’s blood in the streets!
Well said sdrealist. My sentiment exactly!
“In a few years, the buying pool will be very limited.”
——————————————————————
There is a certain kind of buyer willing to pay an exorbitant price armed with a risky loan. Most of that kind of buyer has already bought. A big percentage of those will get shaken out of the tree when the schit storm hits. Their credit will be ruined. The others will hang on and struggle to make the payments on the suicide loans. So this pool of buyers is mostly exhausted, cannot be drawn upon again. Add tightening lending standards to the shrinking foolish borrower pool scenario and the picture is multi-year price slide.
sdrealist, I was just reminding my wife about one of our experiences when we were buying our first house in Riverside in ‘92. Very few were buying then.
One house we looked at belonged to an older couple who had already bought their retirement home. They had their original house on the market for a year at the time we were looking at it. They practically followed us from room to room telling us how this house is keeping them from moving to their dream home and how they were willing to seriously negotiate, etc.
We weren’t showing much interest in it because it wasn’t looking right for us but that didn’t discourage them.
When it gets like that again, that’ll be the time to buy. It’s scary how much power a buyer has at that point.
“I too remember the mid-90’s very well…”
The end of the cold war spending brought hardship to the many areas; the Silicon Valley and Antelope Valley come to mind. The end of the baby boomer’s consumerism will likely be an order of magnatude worse on the economy. Thus, I see the bottom of the housing market much lower than the mid 90’s unless the 100-million Mexicans, that the Senate plans to import over twenty years, will have good paying jobs.
Good point. In 1995, my husband and I bought our first home — a two bedroom co-op on the Upper East Side of Manhattan. We were fortunute enough to be able to pay the $150K purchase price in cash. Over the 5 weeks between when we found it and finally put in an offer (it was on the market, we think, about 8 months before we closed escrow), we brought over all of our friends and relatives to knock on walls, run water, and give us their opinions. Our real estate attorney advised us “not to buy the place as an investment, but only because we needed a nice home”, and pointed to the fact that the Japanese had just gone broke with their Rockefeller Center investment. “Don’t expect to make money!” he warned.
Finally, scared to death, we decided to go ahead with the purchase, after figuring that, with the money we’d be saving on rent, we could afford to give it away for nothing in ten years and would still come out ahead.
Six years later we sold it for two and a half times what we paid for it — because we’d moved back to L.A..
IMHO — this is how it should be done. You buy because you need a place to live, and it will be cheaper and nicer than renting. You buy what you can afford. And you take your time making what may well be the biggest financial decision of your life.
One element of this bubble that gets little attention is the impact the Internet has had on the rise - and will have on the fall. You can compare it to the stock bubble. The Internet made it very easy for people to buy stocks, and the message boards added fuel to the fire. People were much more in tune with what was happening, and the E*trade’s of the world made it really easy to buy. But this led to massive speculation, and BOOM! We all know the rest.
The Internet has had a very simialr impact on real estate. First, getting the money couldn’t be easier. No need to go meet your broker. We have online approvals in minutes. And instead of finding a realtor and driving for hours, pull up any number of sites and browse the inventory and take a virtual tour. So the Internet is a bubble enabler. Of course, add the funny money, no doc loans, etc. etc. etc. and you can see how all the forces work together.
But the Internet helped fuel the rise and it will also FUEL the DECLINE.
In the old days you had to scout the neighborhood to see who was selling. Now you can get notified when prices drop in ANY neighborhood using online tools. Add the horror stories about IO loans, people losing everything because they didn’t read the loan papers, and you have the recipe for disaster.
I guess I am saying I think the Internet is going to help make this downturn work faster and more furious than in any other bubble we’ve seen in housing.
And this one goes world wide.
JMHO. We should know a lot more in 6-12 months.
I completely agree. I know a lot posters here think the the bottom will take several years (2012) based on the past RE busts. The internet is a major change in the variables involved in that. This blog is proof of that alone. The media has only recently started nibbling at this story, but when they really latch on to it like a pitbull (and they will, trust me, they will very soon), it will impossible for Joe Sixpack to not know about it and it will scare the crap out of old Joe.
I think the drop will remind us of being a kid on a bicycle going down a hill with no brakes. Odds are that markets driven by speculation and high risk loans will hit harder, and faster. Also, those who lose their homes will have a much harder time cleaning off the dust and getting back on… as Uncle Sam will now have them pay back a portion under the new bankruptys laws.
These are the same markets that have been growing economically from the mortgage ATM’’s. All the folks (retail, home improvement, auto dealers) who benifited from this “excess” cash will have thier income slashed, and lifestyle adjusted accordingly… and maybe they won’t be able to keep up with their mortgage etc etc.
It may be a VERY slow recovery, and a great wake up call for us in the CA, FLA, AZ, and NV markets.
Time will tell…
J
“…the drop will remind us of being a kid on a bicycle going down a hill with no brakes.”
Great anology!
Or worse, riding a bicycle down a hill thinking you have brakes, but when you apply them, they don’t work.
I did that once as a kid. Hit a tree. Learned a lesson. What’s gonna be the tree for all the screwed people?
I agree that it’s too soon to get any spectacular deals. People in my area, in Central Forida, are still in the denial stage - the “Oh yeah, well if I don’t get the money I deserve for my house, then I’ll just rent it out until the market comes back!” stage. Then, in a year or two, when that doesn’t happen and they’re sick of losing money renting the place out every month, and all those developers have slashed prices on the homes in the subdivisions and lowered the comps for everybody else, and all the ARMs are up and people can’t pay and foreclosures start going through the roof…THEN there will be some good deals. As they say, house prices, unlike stocks, are sticky. But that doesn’t mean they won’t go down - it’ll just take a while.
And for that matter, what you think may be a lowball offer now may still be more than you needed to pay if you had just waited a year or two.
sensible lender wrote…”The time to buy is when no one wants to buy….when you can barely give away RE.”
I totally agree with this comment. My home was appraised at $275k in 1990. By 1995 I asked a trusted friend and realtor what it was worth. He thought a bit and said “Right around $199k, if (long pause) I could find a buyer”. Trasaction volume completly died.
No one was buying, half the realtors left the business, no one even wanted to talk about real estate. I would go even further, the fact that we are here most everyday reading and posting about real estate means this is NOT the time to buy.
This blog will eventually die of disinterest as even the bubble bears are worn down and tire of real estate. Then will be the time to buy. I think at least 5 years. We are not even remotely close yet.
Solvingadream
Excellent post.
This mania has been so pervasive that even the bears are fixated on RE.
I have noticed the changing character of the posters here over time and the posters are reflective of the process you identified. I find myself reading posts in less detail and skimming the posts.
I realize that in typical times, buying a home should be a bit mundane and accessible to a broad swath of the population with a toxic mortgage, but not right now in CA.
What really concerns me is the volume of building going on nationwide. How can builders expect people to buy all the houses, townhouses and condos being built? Is the net inflow of people here (legal and illegal) that great to supply buyers and tenants? I suspect that the approximately 70% home ownership might be a limit and it was achieved with low lending standards and historically very low interest rates. To quote Jerry Sienfeld “something has to give!”.
I agree. Here in Sacramento they are building and building and building. I think they are smart why should they stop. If they can build a house for 175K and sell it for 400K last year and then sell the same house for 300K this year they still make a profit. Builders will build until they cannot make a profit. Then they will still build so they can cover their salaries. No reason to stop. This is all they know. What else are they going to do? Price of milk goes up and down, but they keep putting milk on the shelf. They will never stop building. I just drove down a street in Sacramento North Natomas and saw sixteen homes for sell and just a block further was sixty new homes going up in assembly line fashion. It is the re-sale market that is going to get killed. The people who actually fell for the housing myths and bought with exotic loans are the ones that will be hurt the most. Screw them they fell for it that is their problem. Like P.T. Barnum said there is a SUCKER born every minute.
DAVID — welcome to my neighborhood (N. Natomas). Honk your horn next time you drive through so I know another bear’s out prowling around.
How do you like all our FOR SALE and FOR RENT signs? They look great next to all the newly graded fields and freshly finished new homes getting ready for sale don’t they?
It is way, way too early to start lowballing. Prices might have declined vis a vis a year ago, but they are still WAY, WAY too high. Prices need to fall 50-70% to be reasonable again. My biggest fear with this bubble is that people rush back into buying before the decline is complete. I kind of doubt that will happen, however, because there aren’t that many people around to buy houses anymore. Pretty much everyone has one (or two !)
Quote: “What will be the effect on nominal prices? This question requires us to make even more assumptions. First, we have to figure out where the price-to-income ratio will bottom out. Again, the past two cycles are fairly consistent here. In both cases, as the graph shows, home prices found a ‘floor’ at about seven times incomes. That seems as good an assumption as any.”
My reply: the price of a home has NOTHING to do with the income of the potential owners. NOTHING. Although it is useful to see when people are in over their heads as far as making payments is concerned.
Do people price stocks according to how much they earn ? Of course not !
The price of a home should be set by its equivalent RENT ! Nothing more, nothing less.
But what drives rents? Among other factors, incomes do.
There are some big problems with lowballing at this stage:
1) Most sellers have not yet passed the denial stage, where they are ready to throw in the towel on their pipe dream of selling for last year’s comp + 10% investment gain.
2) Even if you can find a seller who is at the bargaining stage, the bargaining starts at last year’s comp price (or the most recent comp price for your area). Given that many are predicting a 30% or more drop in prices over the next several years in markets recently known as effervescent, would you rather be at the leading edge of the price decline, or wait a couple of years to see where the comps take prices by then?
3) It only makes sense to buy right now if you are in the “real estate only goes up, and the current market conditions are only a temporary correction in a long-term uptrend which will soon resume” camp. Maybe the commonly acknowledged slowdown off the most protracted period of high real estate price inflation in the history of the USA will result in a short correction. If you believe this, then by all means get your lowball offers out there today!
“…assuming the 4.6 percent income growth rate, San Diego home prices will have to drop by 36 percent.”
************************************************************************
We are headed into a recession that is likely to become a depression. Assuming 4.6% income growth is not wise.
I’m not going to “lowball” - I’m going to “throw math” at the problem. If the economics make sense, I will buy. This simple spreadsheet is what I’m using to find a reasonable entry point during the bloodbath.
http://www.files.bz/files/11251/RealEstateValuationMethods.xls
Please give me your comments on this. Surprisingly, I have posted this here a few times before and got no feedback. There are some very bright people here and would like some feedback. Thank you.
Gekko — I looked at the spreadsheet — in #1, is “existing price” the same as “asking price” or “asking or my-offer price?” If yes, I think one of the latter terms would make it easier to follow.
yes - it’s “asking or my-offer price”.
the spreadsheet contains three different ways to help you put a valuation on a property. I believe a Housing Correction is coming, and this tool is meant to HELP you find an entry point during the downturn. It’s supposed to *HELP* you “catch a falling knife” and find a *reasonable* entry point by “throwing some math at the problem” and seeing if the economics make sense.
IMO, comps are irrelevant in a correcting market - especially when interest rates continue to rise. I feel my valuation models are more accurate:
1. Existing vs. Build New (Includes Land Cost)
2. Cash Flow Rental
3. Appreciation Extrapolation via Historic Mean
Markets can be irrational, but the numbers (economics) never lie. If the economics don’t make sense, it’s a bad idea.
1. my spreadsheet is simply a tool to use to help you find an ENTRY POINT in a downturn/correction. it’s main purpose is not necessarily for a landlord to look at cash flow - but for a buyer to look at 3 different metrics to assign SOME logic/math to the question of “Is this property at all reasonably priced?”
2. The existing vs. build new model (as well the other 2 models) have blue cells which are inputs/variables. You have to plug your own numbers. the numbers in blue are simply dummy numbers.
3. I picked 3.5% since Robert Shiller says that this is the long-term appreciation of RE over time ( he says .5% above inflation rate of 3%). This number is also a variable based on location. It’s “WHAT ARE YOU WILLING TO PAY FOR - HOW MUCH APPRECIATION WILL YOU PAY FOR YOUR LOCATION?” For example, a potential buyer in Salt Lake City may say “3.5%! NO WAY! I will only offer 2% to the seller over X years for this area!” And someone in SF or NYC may say - “3.5%! that’s too low - I need to give the seller 7% given this location and historical appreciation.” - So it’s a personal decision based on what YOU are willing to pay and what YOU think is the appropriate appreciation %. Again, this tool TELLS you what you are paying in as much as it tells you what to pay. It’s telling you:
1. how much you are paying vs. building new
2. how much cash flow if you had to rent it
3. how much % appreciation you are paying since 19XX purchase(s).
so, you are not simply throwing a dart at a board - you have SOME metric(s).
make sense?
think of CSCO. on 3/27/00 CSCO traded at $82. as it fell -10%, -20%, -30%, -50% - there were people at each level who jumped in and bought it because it was a “bargain”. it traded at $10 per share not too long ago. stocks and housing is different, but my spreadsheet tool is meant to help you find an entry point in a correction - my tool is meant to help you look at the economics first and not jump in and buy a “CSCO house” at $64 just because it once sold at $82. the economics must make sense before you buy. corrections DO NOT HAPPEN OVERNIGHT. i think they usually take a few years to shakeout - hence you dont want to try to catch a falling knife without looking at the economics as opposed to “prices are 20% off so I guess it’s a bargain and I better buy!”
I realize that this is FAR from an exact science but i’m trying to come up with something to put prices in perspective as the market falls.
I think you’re making some good points, but unless you’re buying rental property, I think you’re doing too much work. As I see it, if the total cost (taxes, insurance, hoa dues, mortgage payment) of ownership is less than the cost of renting (rent, insurance) after taxes (if you take those deductions), you should own. Because you never know when you will have to sell and move, and because housing has chronically uneven rates of appreciation, factoring in overall appreciation makes no sense. If you scroll up and look at my previous post, note that we paid for our first place in NYC exactly the same price the previous owners paid - and they’d owned the place for ten years!
You should look at the methodology of some of the existing rent vs. buy calculators. The idea is that basically the question is “If I buy today and sell in X years, will I have more wealth than if I would have instead rented for X years?” Of course, this depends on your assumption about the selling price in X years and your rent over those years.
I don’t need a spreadsheet to tell me what a property is worth to me, relative to a) What I can afford; and b) what else is available. And if RE is trending down, that’s another factor I’ll mention to Mr. Seller to justify my offer when I make one (in 2007 at the earliest). No need to blind me with science or dazzle me with math.
but how do you know what to offer and when? that’s the whole point.
Gekko -
I’ve alway liked your spreadsheet. As well, I see where Sammy’s coming from, as apparently he’s willing to go more by “feel.”
I suppose I would say each has its merits and adherents.
Here’s the Spreadsheet Link:
http://www.files.bz/files/11251/RealEstateValuationMethods.xls
i ‘ve saved the spreadsheet. Just not time yet to play with numbers.
One of these days,I’ll post the feedback
Lowballin’
I think we have the potential for a great country song here — about lowballin’ or bein’ lowballed — lost my truck, lost my wife, dog is pissed, etc.
or…
Got his truck, got his wife, now I’m lowballin’ the SOB’s house.
I was thinking Tom Petty’s “Free Fallin’”
http://www.guntheranderson.com/v/data/freefall.htm
“And I’m low, low ballin’
Yeah, I’m low, low ballin’”
Not to be confused with freeballin, which is what happens when you’re so broke you can’t afford clean underwear.
Hand’s down, the anthem of the bursting bubble — call it “Balland of the FBs” — is “The World’s Biggest Fool” by The Tractors:
Never thought I’d ever be
Best in the world at anything
Like Babe Ruth with a bat
Or Muhammad Ali in the ring
But that was before you came my way
And made me all I am today
The bigger they come, harder they fall
And me–I’m the biggest fool of all
Next stop… just up ahead
A treat for all the family
The world’s largest broken heart
On display for all to see
Get the Guinness Book folks on the phone
It’s a new world’s record for bein’ alone
(and you know what they say…)
The bigger they come, harder they fall
And me–I’m the biggest fool of all
I’m the world’s biggest fool
Everybody knows my name
Folks all come from miles around
Just to see me hit the ground
Just to watch me take a fall
I’m the world’s biggest fool
That my claim to fame
From Tennessee to Tokyo
I’ve hit a new record low
I’m the biggest fool of all
From Tennessee to Tokyo
I’ve hit a new record low
I’m the biggest fool of all
(c) 1998 Warner-Tamerlane Publishing Corp.
Boy Rocking Music (BMI)
Lowballing may just be want we want to do right now.
Send a message our to the sellers/realtors that buyers want lower prices or they will not buy. Someone has to drag down the house prices, especially in soCA where every single house should be valued at half of what it’s worth. Wages do not go up, but house prices have and yet houses sold because of the convenience of “no down payment” and/or “interest-only loans” which is what will finally make this housing bubble burst so unlike the other bubbles of the past. You will see more foreclosures then ever — way too many people bought homes they could never have afforded if not for the creative loan designs by mortgange/bank officials. A correction is desperately need in soCA and it will happen and it will not take years — it’s going to be fast moving. Take a look at the newspaper today — Texas bubble is wobbling big time — remember what happened there in the last bubble — CA is next. Don’t let the media fool you, every day there is more and more news on the housing bubble — every single day.
Housing is much more fluid now than 10 years ago. Mortgages are bundled up and sold as securites that makes housing a commodity. There will be a sharp correction soon and then years of hurt.
Based on what happened the last real estate cycle I’m in the long and slow (five years) correction camp. But some of you have made good arguments for a sharp correction. I hope the “sharp correction” folks are proven right because I can’t wait five years!
The sooner you buy, the longer the bubble will last. It’s like voting with dollars.
My dollars are missing from the market, which has a ripple effect on the totality.
Yes, especially if that one transaction turns out to be the only available comp going forward. In a thin market it could be used to justify inflated asking prices for weeks or months.
Lots of us hope; I do. But there are reasons, too, for the hope. I’ve read Rick Toscano’s piece a few times now, and have gone from being somewhat impressed to wondering why he just skims the surface of historical precedent. What percentage of new 1979 mortgages were ARMS with 0 interest for the first X years and potential negative amortization? How did home prices compare to rents in 1990? The guy’s supposed to be a RE analyst, you’d think he’d bring a little more context to the discussion, or at least mention which variables he can’t compare, if past data is incomplete. I think for all the pessimism, even writers like Toscano pull back a little, because the unvarnished analysis would sound a bit too much like: “Armaggedon. 2 weeks from Thursday. Nowhere to run, babe.”
Actually, if go to his site you’ll see that he admits that he was being charitable and “conservative” from a bear perspective. The reason being that the message may not be taken seriously if it’s too unvarnished. Toscano probably gets a hell of a lot of nastygrams from San Diego FB’s. It’s amazing that his perspective is even being publised in San Diego considering the pervasiveness of the cheerleading for RE that goes on there.
I’m firmly in the sharp correction camp. I think we’ll see a bloodbath beyond what even most in here are anticipating. I think it will go on for years — at least five or more — but the greatest damage will be done in the first 18 months.
i’m in norcal,and do not expect to see anthing close to a rreasonable price for at least a year.i think it is going to be fast,hard,and long lasting..and vary a good deal among cities in this county…rohnert park could easily see 60-75% drop in prices,other cities 40-50%.based on rents/median income.
No bids until 2007.
None.
Tom Stone - I hope that the BAY area does take the sharp dive you are saying. Would be my vindication. But would have a lot of friends that turn FB.
To buy now would be suicide. Watching the biggest housing bubble in world history inflate year after year, only to jump in right at the top?
Now that IS stupid.
The only option now is to watch and wait, to see what happens next. I suspect the Internet is going to magnify the downside the way it magnified the upside.
This isn’t you father’s housing bust.
Agree it’s too early to buy if money is the only concern. It’s not too early to lowball though, we’ve been doing it and have softened up a few sellers, I’m sure. The houses that it will work best on are those that have been on the market for a long time - the one we’re buying has been on for a year. The sellers started at too high an asking price and reduced too gradually. Meanwhile they’ve gotten into a bit of a pickle. Upshot - we’re buying for 30% off last summer’s price. Still makes me nervous but at least it is better than trying to deal with someone who has just put their house on the market and expects full price.
See http://westchesterny.blogspot.com
Some great lowball offers in North Jersey the past few weeks.. I scan through the MLS and find the highest percentage lowball offers and post them up every week or so. When I first started, last summer, a 10% lowball offer was rare. Now 10% is so common, many don’t even make my list.
Lowball!
Caveat Emptor!
Grim
excuse me for a minute (smiley test…..)
:p
:artist:
:bowling:
:dizzy:
:nono:
:eyepatch:
:sick:
:uhh:
:wacko:
:yinyang:
:frog:
i just want the little green guy with the cake-eating grin
I hope the link below works - it is a study showing that the housing market will be just fine! There is no bust, so forget those lowball offers, you silly, silly people! Because we will be saved by adult baby boomers who will all need (and be able to afford) second vacation homes! So apparently, I am hallucinating when I drive through Lakeland, Florida, and see sign after sign shrieking “For sale! Price reduced! Buy this house, no money down!” And all those desperate newspaper ads saying “Motivated seller…new price…priced below appraisal…make offer…For the love of freaking God, make a freaking offer!” (Okay, I made that last one up. P.S. You may need to cut and paste the link below to make it work.
http://money.cnn.com/2006/06/13/real_estate/Harvard_study_housing_slow_growth/index.htm