May 4, 2006

‘Market Is Theirs To Manipulate’ For Boston Home Buyers

A Boston TV station is reporting on the ’sea change’ in that housing market. “Say goodbye to the inflated prices in the housing market. There’s a sea of change in the real estate market in Masschusetts. Median prices are down and so are house sales and inventory is up, so it’s a buyer’s market. The landscape has changed a lot, even in the past few months, so if you’re in the market to buy, how low can your offer be?”

“The Duffys just closed on a four bedroom home in Norfolk. Compared to last summer’s asking price, their dream home is a bargain. ‘We were looking at houses that were more expensive, knowing we could go in there and offer less,’ Danielle Duffy said.”

“In July, the home listed for $729,900. ‘We ended up buying it for $630,000,’ Duffy said.” “With prices dropping and inventory high, many buyers feel the market is theirs to manipulate. For the first quarter, sales of single-family homes were down 8 percent, and the median sales price was down 2 percent from last year.”

“The industry calls the soft market a correction, not a bubble burst. Sellers can still make a healthy profit, but those fat sale prices must slim down. ‘For the seller, I would say price the property according to the market. Don’t have an inflated number. That doesn’t work. What happens is you carrying the property, and 99 percent of the time you end up having less,’ Realtor Dee LeBlanc said.”

“Gail Peckham is hoping to make the most of this new real estate reality. She’s been shopping for a condo in Waltham for 12 months. ‘I wouldn’t offer asking price today as I would have last year, because I know I could get less,’ she said.”




RSS feed | Trackback URI

73 Comments »

Comment by Ben Jones
2006-05-04 07:43:32

The TV station changed the text from the first link; the initial paragraph is from what they had up earlier.

Comment by seattle price drop
2006-05-04 07:53:49

Blows my mind that people are buying even when they themselves can see a correction is underway.

Has “money” become an abstract concept to people?!! I guess years of “credit” could do that.

 
 
Comment by Craven Moorehead
2006-05-04 07:50:16

The Boston area real estate market is a hopeless clusterfuck of dilapitated, overpriced garbage and pathetic greedy sellers.

The crater will be visible from space.

Comment by hd74man
2006-05-04 08:57:51

The Boston area real estate market is a hopeless clusterfuck of dilapitated, overpriced garbage and pathetic greedy sellers.

The crater will be visible from space.

LMAFO…So true, so true…

 
Comment by Nikki
2006-05-04 09:15:23

I’d say The Baltimore area real estate market is a hopeless clusterfuck of dilapitated, overpriced garbage and pathetic greedy sellers. The sad part is at least you guys get publicity about your faltering market, which increases awareness for everyone…in Balto, we have one newspaper and they have no editorial RE section. They won’t touch RE with a 10 ft pole anymore lest they scare away their ad revenue. There are no stories about the huge increase in DOM, the 13% drop in sales, the 180% inventory jump. The only thing they ever report is the YoY increase, that are slowing but are still there. This leaves people with a false sense of security that they can till get their price because they have’t heard any bad news, and also implys to buyers that this is still the time to buy. The Sun doesn’t even mention the faltering DC market…like we all agree, the press contributed tremendously to the run up (the Sun did as well) and will help on the way down. But I fear that will not happen here and the bubble will take longer to unwind because our paper is a shill for the MAR.

Comment by jim A
2006-05-04 10:25:12

Judging from the Washington Post a real estate section doesn’t improve bubble reporting. The people who write for the real estate section tend to be pretty bullish on RE. It’s in the Business section that you find Bearish articles on RE.

Arguably, the Baltimore RE market is the tail on the DC dog. Like condos the swings tend to be more extreeme.

Comment by Nikki
2006-05-04 10:44:43

Yes, all of our articles are in the Business section as well, when there are any. I did not mean to imply anything about a specific section alone–we do have an RE section, but it’s all ads. Agree that Balto is the tail end of the DC dog, and they already have YoY price drops according to MRIS. You’d think that would be worth at least a mention in our paper after DC was all they could talk about as prices went up.

(Comments wont nest below this level)
 
Comment by shel
2006-05-05 13:30:41

wait…is there a real estate section anywhere that reports negative stuff about housing?! lucky to get even bearish reports in the business sections, as far as I understood it.
I just established (been meaning to for ages) that the RE section of the Ann Arbor Observer monthly, which has a homesales map and accompanying little article on local RE issues every issue, is written by a realtor! Never ever would you be able to tell from his pieces!
He is listed on the writing staff, so for years I assumed he just covered RE for the mag, but naive me….I should write a letter to the thing complaining/commenting on it.

(Comments wont nest below this level)
 
 
 
 
Comment by TRich
2006-05-04 07:51:38

$730K to $630K? Sorry, just because someone lists the house at $730k and then drops it 100k doesn’t mean much to me. They could of bought the house in late 2004 or early 2005 for around 500k for all you know.

Here’s how you gauge prices: look at the price pre-bubble or comparables pre-bubble, grab a financial calculator and plug that price in as the present value, plug in the number of years from the pre-bubble price until now, put in 5% appreciation (for argument sake, but I think this is accurate), and then hit the future value key.

Chances are this house back in 1999 or 2000 was something more like 250k-300k. If it was 300k in 2000 and assuming 5% appreciation you would be looking at 400k now as the real starting point of what to ask.

These are all total ballpark numbers I’m throwing out by the way. But, why people assume prices should double or triple in six years is beyond me. Have rents and wages increased at the same rate?

Comment by CA renter
2006-05-04 07:59:07

Funny, TRich. I just made the same point before your post came up. Guess we RE bears just see what SHOULD be obvious…

 
Comment by peterbob
2006-05-04 08:25:22

Here’s how you gauge prices: look at the price pre-bubble or comparables pre-bubble, grab a financial calculator and plug that price in as the present value, plug in the number of years from the pre-bubble price until now, put in 5% appreciation (for argument sake, but I think this is accurate), and then hit the future value key.

This is a sound strategy. I would look at the individual markets before the P/E ratios started to climb. For my area, that was in 2002.

Another strategy to get the “correct” price is to ask how much prices would have to fall so that the P/E ratio is equal to the long run pre-bubble areas. In my neck of the woods, THE MEDIAN PRICE WOULD NEED TO FALL BY 45% TO RETURN THE P/E RATIO BACK TO ITS LONG RUN AVERAGE.

I can’t believe I just typed that. 45%!!!!!!!!!!

Comment by CA renter
2006-05-04 08:52:25

Don’t know where you are, peterbob, but it’s the same number here (San Diego). I truly believe this is the correct percentage drop for many bubble areas to get back to normal (we may well overshoot). In some areas, it’s worse!

 
Comment by hd74man
2006-05-04 08:56:56

PeterB.

Why be surprised with your 45% number. Pretty good deduction figuring Sir John Templeton came up with 50%.

That dude who bought @ $630k will be underwater triple digits in 2 years.

But Mazzholes don’t really give a crap. Their RE has been inflated for so long they’ve lost track of reality.

 
Comment by arroyogrande
2006-05-04 09:19:32

>I can’t believe I just typed that. 45%!!

About the same decline needed to bring prices somewhat in line with renting…hmmmm.

 
 
Comment by KillBubble
2006-05-04 09:31:33

Nice reasoning. What goes up, it will go down. That is a nature. It has been a while for 10% YOY price increase. Now it is time for 10% YOY price drop for another while (say 3~5 years). After everything gets back to normal, it will heat up again and then cool down. Timing is the king.

 
Comment by Housing Wizard
2006-05-04 10:02:12

TRIch…Right on on how you determine value . Your method is exactly how I determine value . On the house I bought last year I
figured on the downside I could only loose 50K for what I paid for the place . I plan to live long term so it didn’t matter much so I went ahead with the sale . I’m glad I got rid of my overpriced turkey in L.A. however in mid 2005 where the downside would of been alot more . The guy who bought my property bought it for cash and said it was going to be his last house . I feel a little better that he won’t get hurt . At the time I didn’t know anything about the bubble and I thought it must be population increases that were driving up the prices along with the low interest rates .Boy was I happy when I discovered the housing blogs .

 
Comment by Dont know nothing about buyin no house
2006-05-04 10:13:48

What bullsh*t spin. The realtors are trying to gain credibility by talking up the bubble, but only to the degree that work to gain some credibility, while holding back on the truth. This part almost even makes sense to me:
“The industry calls the soft market a correction, not a bubble burst. Sellers can still make a healthy profit, but those fat sale prices must slim down. ‘For the seller, I would say price the property according to the market. Don’t have an inflated number. That doesn’t work. What happens is you carrying the property, and 99 percent of the time you end up having less,’ Realtor Dee LeBlanc said.”

If I were some uninformed Sap looking for a home and heard this rhetoric, I might actually trust and believe in this person. But it is pure spin and a play on saying the right things to gain credibility.

Another good example of this: Anybody catch Brad Inman on CNBC monday morning? He has that realtor blog with realtors posting annonomously and saying bearish things. On CNBC Brad highlighted the “largest rises in inventory by market”. By doing this, he to some maybe gained a degree of credibility trying to ‘pose” as a more unbiased realtor analyst. Until I saw he avoided and SAID NOTHING about Phoenix - which is a market that has near crash levels of inventory. I think he has Los Angeles with 149% increase in inventory as the biggest rise in iventory. That number is milk money compared to Phx. So lots of deceving spin out there from realtors who “pretend” to position themselves to sellers and buyers by talking up the bubble, but in a purposely benign way as to try to control the spin. These are the most dangerous people in my mind.

 
Comment by Drop the bubble
2006-05-04 14:16:01

I heard the CEO of ConocoPhillips mention when considering the price of a barrel of oil $20 is due to Political Risk. It got me thinking how much of today’s housing prices is due to the risk of missing the home owner opportunity and being priced out. If I had to put a price on the Sheeple Risk it would be at least $100K for homes less than $400K and at least $150K for homes over $400K.

 
 
Comment by anoninCA
2006-05-04 07:55:09

“Don’t have an inflated number. That doesn’t work. What happens is you carrying the property, and 99 percent of the time you end up having less,’ Realtor Dee LeBlanc said.”

Can’t wait ’til they’re all singing this same tune. It will be a fine raucous chorus indeed!

 
Comment by CA renter
2006-05-04 07:57:42

‘I wouldn’t offer asking price today as I would have last year, because I know I could get less,’
_____________________
IMHO, here’s the faulty reasoning, and it’s why we have a bubble. Buyers keep making the mistake of letting sellers determine price (basing decisions on **sellers** asking prices, even if one is getting a discount from **asking price**). BUYERS are even more important in determining prices, as they neverhave to buy, while some sellers will always have to sell.

Buyers should determine what prices should be based on the fundamentals (income for the area, property type and condition, current rental rates for equivalent housing, and historical ratios and price trends)…and THAT’S what they should be offering. Sellers will either take it or leave it, but at least the buyer will not be on the hook for more than the property is worth.

Too many emotional buyers trying to get into the market for all the wrong reasons. IMHO, when making what is likely to be the most expensive purchase in one’s lifetime, it is reason that should win over emotion every time. Use emotion to determine which house you want to buy (color, type, location, etc.), but use reason when determining price and timing.

Goofy-headed buyers…

Comment by shel
2006-05-05 13:52:56

amen! my ‘but suzanne researched this’ husband (sexist bloody commercial…) sees the new crop of asking prices and says ohmygod look at these prices! I have to point out that these are merely what the greedy sellers are hoping you’ll be willing to pay…even now that the market is clearly tanking, all the sellers have to do is raise their prices like all is well and it continues the worry that we’ll be priced out forever. the psychology at work here is as ’sticky’ in his case as the prices are. There is nothing at work behind the pricing but the greed (and possibly the plasma-tvs bought with HELOCs) of the sellers, and still it is the ‘price’, so all you can hope for is a ‘discount’. Well, that and the realtors who say that now’s the time, because soon interest rates will rise and you should jump on anything that’s not ‘overpriced’ right now. So, we should take a “discount” off the desired profit level for the seller?! I don’t see the hordes beating down the doors of this town scrambling to get in, rents are stagnant or dropping for a long while now, what makes it necessary that I spend 50% of my post-tax income on a house payment? It’s the well, it was ‘priced’ even higher last year, so this is a good deal now, under asking and all, thinking that I guess is that dead-cat bounce folks speak of…but prices would have to drop to levels from like 6-8 years ago for affordability to be anywhere near reasonable again. Never mind any additional fallout from a ‘bust’ psychology or a serious economic downturn.

 
 
Comment by salinasron
2006-05-04 07:58:08

“In July, the home listed for $729,900. ‘We ended up buying it for $630,000,’ Duffy said.” Wow,wow,these people think they’ve just hit the jackpot with $100,000 equity as soon as prices take off anew. I’d like to see them re-interviewed in 6mo. when they are down another $50k or more.
As some of you know CA has disclosure laws on the books such as do sexual predators live close by, did anyone died within the property, etc. Then I watch Dateline last night and see that the state with the largest population of sexual predators is Florida…wow, hurricanes and sexual predators lead the list for things that will effect your living experience in Florida. Then I saw something (I think around Chicago) of a former mental institution being converted into condos…wow, how are you going to sue further down the road when you bought in under full disclosure.

Comment by Bearnanke
2006-05-04 08:51:48

Exactly. So if I move in next door, I’ll be damned if I pay more than $630,000. Bye bye 100K equity.

 
Comment by NickV
2006-05-05 11:50:36

Mental Institution –> Condos is (also?) happening in Danvers, MA.

http://www.dailyhampshiregazette.com/realestate/story_homes.cfm?id_no=40600642006

 
 
Comment by Meshugy
2006-05-04 08:00:44

$730K to $630K? Sorry, just because someone lists the house at $730k and then drops it 100k doesn’t mean much to me.

I agree, what you really have to look at is the median price. People here in Seattle are “going for the gold” all the time…pricing their house so far beyond reality that even a 100K price reduction is still a huge profit.

What’s interesting is that the median price in Boston is dropping…so far that hasn’t happened here in Seattle. In fact, it’s been rising rather fast. March had a 14% yoy median price increase…

Not sure why it has slowed down here yet…still waiting to see what happens.

‘m

Comment by greenlander
2006-05-04 08:08:56

You don’t know what you’re talking about! Suzanne researched this, and she said that housing prices in Boston are going to go up forever because everyone wants to come here and live with all the tax-and-spend liberals.

Comment by The_Lingus
2006-05-04 08:30:03

Comment by greenlander
2006-05-04 08:08:56
You don’t know what you’re talking about! Suzanne researched this, and she said that housing prices in Boston are going to go up forever because everyone wants to come here and live with all the tax-and-spend liberals.
_____________________________________________

Or one could always go to fly over country to live with the borrow and spend neo-cons who have a video camera in everyones bedroom.

Comment by Upstater
2006-05-04 09:27:52

“neo-cons who have a video camera in everyones bedroom.”
OT but I have to respond:
Oh Lingus….they only act that way for the show….to maintain the status in their churches or political circles which they’re entitled to as civic leaders….when you’re here awhile you get to hear the whispers about the “Key Clubs” and the business trip escapades and you realize they “sin” like the liberals they love to slam.

(Comments wont nest below this level)
Comment by The_Lingus
2006-05-04 10:11:11

Upstater, I do realize that but I speak the truth for the blind who support a failed socio-economic ideology called neo-conservatism.

 
 
Comment by Oaktown
2006-05-04 09:37:46

Lingus, that is just sweet.

(Comments wont nest below this level)
 
Comment by AmazingRuss
2006-05-04 10:53:31

Sure they sin…and they like to sin while they watch you sin too…and there are probably ones who like to sin while watching the other ones sin while watching you sin…

The more righteous somebody is, the freakier their secret kinks.

(Comments wont nest below this level)
 
 
 
Comment by seattle price drop
2006-05-04 08:46:12

As you know Meshugy, it was printed in the Seattle Times a couple weeks back and posted on the Seattle blog: median price has gone down in 3 areas of Seattle: in one area YOY median went down 30%. Yes, 30%.

Your little neighborhood may still be hot. But you cannot ignore what is happening in the rest of the big, big, city.

Comment by Meshugy
2006-05-04 09:32:40

Hi Price drop…I’m not sure what #’s you’re looking at. If you look at the March MLS data you’ll see that only TWO areas of Seattle had median price reductions:

Area 700 (Queen Anne/Magnolia) had a .2% loss
Area 380 (Leshi/Madrona) had a 4% loss.

The whole city had an average of 14.65% YOY gain.

Not sure where you got that 30% loss from….it’s not in the records.

I’m sure we see a slowdown at some point. But it’s not happening yet…

‘m

Comment by robin
2006-05-04 17:04:11

It actually is, but so is a 47% increse. Small sample size?

(Comments wont nest below this level)
 
 
 
 
Comment by PasaRenter
2006-05-04 08:10:29

Actually, I’d say the best way to gauge a price is to look up what the owner paid for it pre 1998 and give them a generous 3% appreciation per year. You can get this data easily from zillow.com - NOT the Zestimate- that’s totally misleading and bogus. Go the 10-year home history and look at what the price trend was like in the late 90’s.

Comment by Housing Wizard
2006-05-04 10:09:58

I think you can give 5 to 6% appreciation per year and be on the safe side for the last 10-15 years in more robust housing markets IMO. Going forward that amount might change however IMO.

 
 
Comment by Oscar de low Renta
2006-05-04 08:11:24

Side two of the boom/bust cycle has begun, and it has a few more years to go. If these new buyers can hold for a decade, then good for them. But I pity any first-time home or condo buyer who gets in today and then has to try to sell in 2009.

 
Comment by nnvmtgbrkr
2006-05-04 08:12:08

“The industry calls the soft market a correction, not a bubble burst.”

My bet is this is still the quote after 30% - 50% corrections.

Comment by Bearnanke
2006-05-04 08:56:07

If the quote works for foreclosures… “housing prices are normalizing back to historical affordability norms. A 45-50% correction is seen as a normal healthy market.”

-haha

 
 
Comment by Upstater
2006-05-04 08:13:21

“We were looking at houses that were more expensive, knowing we could go in there and offer less,’ Danielle Duffy said.”

Sounds like buyers are still reaching for the most expensive home they can get too. They don’t see the storm coming.

Comment by House Inspector Clouseau
2006-05-04 08:50:24

and this is one reason why median prices aren’t dropping anywhere despite slow sales.

Buyers are buying a price point, not a specific house. So as home prices drop, they don’t buy their previous “dream home”. instead, they buy the next level up. Thus, actual home prices are dropping, but median prices aren’t as families are getting more for their money.

And the lowest end stuff isn’t moving. NOT because people can’t qualify for the lowest stuff… it’s because the people who qualify for the lowest stuff can now afford to go up one level… so the lowest quality garbage sits, the nicer stuff sells for a discount.

Put another way:
if you are “qualified” to spend $600k on a home, why on earth would you buy your old dumpy dream home that used to be $600k and is now $500k, when you can buy an even better dream home that used to be $700k for $600k. (sarcasm off)

clouseau

Comment by sfv_hopeful
2006-05-04 09:10:37

I agree with you - 100%…. the problem is that the vast majority of buyers out there in hot markets (SoCal for example) are not “qualified” at all. Far from it (based on average and median incomes) Yet they still do it. It’s as if all SoCal homebuyers are “way-above-average” income compared to their peers - a statistical impossibility, yet made into reality thanks to suicide loans bridging the gap between stupidity & greed.

 
Comment by Upstater
2006-05-04 09:16:44

“And the lowest end stuff isn’t moving.”

except in my town where entry level homes R not lasting more than days on the market.
Doesn’t matter the location, or shape its in they’re sporting SOLD signs w/in a week! The interesting thing I just started to realize is the sellers must be leaving town (or the state) because I haven’t seen any movement at all in the next level up. Maybe they’re all part of that NY population downsizing.

Comment by Housing Wizard
2006-05-04 10:16:28

I agree that the real lower end stuff is selling just because its affordable ,not that it isn’t overpriced also .

(Comments wont nest below this level)
 
 
 
 
Comment by Ben Jones
2006-05-04 08:27:28

An interesting thing about this is the TV channels running buyers market stuff. The big change in Arizona started last fall when the Phoenix stations started running similar reports on the 6 o’clock news, with sad looking people standing next to their for sale sign.

Comment by Upstater
2006-05-04 09:34:41

“sad looking people standing next to their for sale sign.”
Oh Ben…this visual just made me laugh so hard.

 
 
Comment by Bigdaddy63
2006-05-04 08:28:00

Silly me .. I used to value a house base on price/sq ft., amount of mortgage vs. rent of same house, assessed values, and maybe 5-7% appreciation depending on location and amenities.

I refuse to by houses at $250 a sq ft. that are worth $150 a sq ft.

Comment by Housing Wizard
2006-05-04 10:24:43

Alot of the used houses were built for under $150 a square foot . Now its getting harder and harder to build anything for under $150
a square foot and more for quality construction . My painter told me you can do it for $100 a square foot , but that’s pretty cheap constrution .

 
 
Comment by nobubblehere
2006-05-04 08:31:21

OT–Liereah has become a downright doomer these days. Here he is in a USA Today article on high energy costs:

By Barbara Hagenbaugh, USA TODAY
WASHINGTON — The U.S. economy has digested surging energy costs in the past few years with little more than a hiccup.

But now, some economists are warning, energy prices have gotten so high that the economy could lose steam. Not helping is the fact that the latest gains are coming as some economic cushions for consumers that have been in place for several years, such as a strong housing market, are slipping.

“At some point, we can’t absorb it,” National Association of Realtors chief economist David Lereah says. If oil prices stay at current levels, or go higher, “confidence is really going to come down. … It is possible that this economy can get hit.”

Comment by hd74man
2006-05-04 09:03:00

The U.S. economy has digested surging energy costs in the past few years with little more than a hiccup.

Oh yeah?

Then how come the blurb on another Bubble thread which noted people were hawkin’ their DVD player’s and various other assorted personal possessions in order to buy a tank of gaz to get from Ft. Meyers to Naples.

More Joe Goebbels styled propoganda.

 
 
Comment by bad chile
2006-05-04 08:35:00

My parents sold their home in the southwest two months ago, and decided that they wanted to buy again (don’t know why…) So, driving around with a broker yesterday, he said, “prices are appreciating at 2%* per month here, and that will continue for another two years”.

Three long emails from me later, I think they see my point. Why would this guy be selling houses if that is how he really felt? My parents are smart people. But they’re getting sweet-talked by a used home salesman, so it seems they just forget the reality.

* Yes, that translates into a price increase of over 60% in two years. Sure. If the investment is so great, tell him you’ll loan him the money at 10% APR for two years.

 
Comment by Judicious1
2006-05-04 08:36:27

The past 6 months: Inventory increasing, interest rates rising, ARM resets continuing, lending standards tightening, RE related industry job losses, oil/gas prices escalating, etc., etc.
Sorry Kelly, it will be some time before buyers are truly able to “manipulate” the market.

 
Comment by Mike_in_FL
2006-05-04 08:36:44

Off-topic, but don’t miss the latest salvo from the regulators on the high-risk crap lending banks and subprime companies are doing now. Too much commercial RE/construction lending … too much option-ARM-ing to borrowers who don’t what the heck they’re getting into, etc.

http://www.federalreserve.gov/boarddocs/speeches/2006/20060504/default.htm

As usual, they’re a day late and a buck short. These loans are going to blow up in the banking industry’s face no matter what. But it could get the ball rolling towards tighter lending.

Comment by peterbob
2006-05-04 09:22:30

From the statement:
Lenders should recognize that certain nontraditional mortgage loans are untested in a stressed environment; for instance, nontraditional mortgage loans to investors that rely on collateral values could be particularly affected by a housing price decline. Investors have represented an unusually large share of home purchases in the last two years. Past loan performance indicated that investors are more likely to default on a loan when housing prices decline, than owner occupants.

 
 
Comment by After the Fall
2006-05-04 08:49:42

Many factors will keep the collapse of the bubble going for years. The biggest factor, however, is that down payments have to rise because they are almost at zero. Lenders who get hammered by short sales and foreclosures on partially uncollateralized properties are either going to start insisting on 20% down payments or be swept away with the tide. The Fed will be forcing things in this direction anyway. How many 20% short sales do lenders need to see before they realize larger down payments are the only way for them to be safe?

But 20% down payments would eliminate first-time buyers in this market altogether, and keep them out of it for years to come. This crash is like none before it because the turnaround in downpayments is going to be brutal.

Comment by House Inspector Clouseau
2006-05-04 08:55:03

Many of the lenders don’t care about the 20% down issue, because they sell the loan off anyway.

It’s not until the INVESTORS start seeing losses that we’ll see a turnaround. Once INVESTORS (of the MBS) start losing out, they’ll demand a higher risk premium or refuse to buy MBS, and may even go after the primary lender if fraud can be proved…

Once there’s nobody to buy the junk off the lenders (or if the price to sell the securities rises too high), THEN the lenders will care.

I’ll bet you the primary lenders have already raised their lending criteria for all loans that THEY intend to keep…

clouseau

Comment by After the Fall
2006-05-04 08:58:43

Agreed. Whoever hold the bag on the last 20% of home value will be the ones who stop the game because they are facing wipeout. Surprisingly, in many cases this is the banks because they are big holders of MBS, believing that the pass-through made them magically safe.

 
Comment by After the Fall
2006-05-04 09:04:26

By the way, investors in subprime MBS are already getting burned. That market started to deteriorate some months back. And the Chinese and other foreign holders of our MBS are . . . nervous. All this bubble talk makes them . . . nervous.

Comment by Upstater
2006-05-04 09:46:56

After the Fall,
I’ve been wondering about the Foreign investors a lot lately. I’d assume they’d divest slowly. Does anyone think there could be a dramatic dumping of US holdings?

(Comments wont nest below this level)
Comment by After the Fall
2006-05-04 16:04:15

Sorry for the delay. I was gone. At some point foreigners will dump in a big way, but it could be years before that happens. The “great foreign fear” is that the dollar will go over the cliff because of our current account deficit. Our current account can continue to swell for a while, but eventually deficits of this size end only one way - badly.

 
 
 
Comment by CA renter
2006-05-04 09:04:32

I’ll bet you the primary lenders have already raised their lending criteria for all loans that THEY intend to keep…
_________________-
Yes. When I spoke to someone at Countrywide a few months ago, they said their rates were not really competitive because they were holding more of their own loans in their portfolios.

Says to me that the secondary market was already shrinking/getting tougher because they had to hold more of their own production. Also, they perceived the risk to be higher than the MBS buyers did since their rates were higher than those who sold off their loans. Hopefully, that will change very soon.

Comment by After the Fall
2006-05-04 09:09:59

There’s a historical fact that is helpful here. In 1929, everybody knows that stocks were being traded on 10%. Not so with real estate. Lenders viewed real estate to be a risky investment because of earlier recent crashes - especially the one in Florida. Bankers were fully aware that real estate went down more than 10% - they just didn’t think stocks did.

(Comments wont nest below this level)
 
Comment by turnoutthelights
2006-05-04 09:20:31

Maybe the Ameriquest problem? No more market for sub-prime bundles, and long-term falling profits and out-right losses if they keep ‘em. Just disappear and hide out.

(Comments wont nest below this level)
 
 
 
 
Comment by bearmaster
2006-05-04 09:13:33

So when the buyers have more of an advantage, they are being “manipulative” but when the sellers have more of an advantage, it is “healthy price gains”.

I wonder how the Duffy’s will feel in a year if comparables in their area are about 15% lower than what they just paid for their “bargain”.

 
Comment by mad_tiger
2006-05-04 09:39:22

“manipulate the market”???? WTF????

The way to manipulate market prices DOWN would be for appraisers to kill deals with fraudulently low appraisals and for mortgage brokers to conspire to deny mortgages to credit worthy applicants. Don’t see that happening.

 
Comment by Rental Watch
2006-05-04 10:15:13

I don’t think you can simply take a look at what home prices “should be” by slapping a 3-5% rate for inflation and not pay any attention to interest rates. If you look back in the late 90’s for a home value, look at what the mortgage payment would have been at then prevailing rates. Now take that payment up 3% per year and back out a similar mortgage today at today’s rates (all 30-year fixed mind you, not these crazy mortgages).

You are not going to get to a 50% differential looking at monthly payments. But who says we won’t overshoot the bottom? And who says we are going to have such low interest rates for the next 2-3 years?

The sidelines are a comfortable place right now.

Comment by TRich
2006-05-04 11:47:43

I agree wholeheartedly with this method, and if I would have thought about it more maybe I would have come up with it. Fact is, people don’t look at the total price of the house, they look at what payments they can afford. You take the payments from 1999 or 2000 and then do a future value analysis at 3% to 5% a year (if someone could actually provide the actual stat on real estate appreciation I’d like to see it- I’ve heard 6, 5, 4 even only a few decimal points up from 3%).

Then plug the payment you get into a financial calculator and use today’s interest rates. You would certainly not get a 50% deduction. But as interest rates rise, the price should continue to head down. In 1999 and 2000 the rate was 9% and I think it’s around 6.5% right now. That’s still pretty big. The market already made up the difference in prices- a person could make the same payment on a 360k house in 2003-2004 that would have only sufficed for a 240k house in 1999. But in bubble markets the appreciation has far exceeded this ratio. I think it’s safe to say in many places in Southern California, prices have tripled.

Obviously there is a benefit to locking in a low interest mortgage and for people looking at the long term maybe spending a premium is worth it to a certain extent, since as interest rates rise so will a potential payment. For the example from the article, perhaps 400k is a bit low, but if the person is paying much more than 450k than I think they might be overpaying. Nevertheless, I think they’re roughly 180k off the mark.

 
Comment by tj & the bear
2006-05-04 12:45:39

But who says we won’t overshoot the bottom?

This is a point I’ve been trying to hammer relentlessly. Prices won’t just correct, they’ll overcorrect. Credit standards won’t just correct, they’ll overcorrect. Housing-related jobs won’t just correct, they’ll overcorrect. You just don’t have a bubble of these immense proportions and then just “return to normal”; it simply doesn’t happen.

IOW, houses will be cheaper than 1996, credit will be tighter than 1990, and housing-related jobs will be fewer than 1996. That’s nominal and absolute, not inflation-adjusted.

Payback’s a bitch.

Comment by mrincomestream
2006-05-04 19:32:38

Ok so I saw someone here who said based on their calculations prices are or should drop by 45%. Which too me would be dramatic although I do see the possibilities. If the market overshoots the bottom how much are you predicting prices are going to drop 50-55%

Comment by tj & the bear
2006-05-04 22:39:34

We’re both in LA, right? It’ll take at least a 60-80% drop to overshoot here. Sounds huge, but the condo complex I’m in has appreciated 200-250% just in the past five years… and that’s after virtually no appreciation for the prior 20.

(Comments wont nest below this level)
 
 
 
Comment by NickV
2006-05-05 12:16:59

I’m an economics newbie. I can follow along sometimes, but I can’t do the figuring on my own. That said, how does the devaluation of the US dollar affect these calculations? (Or is that just a ludicrous question?)

 
 
Comment by MoonJour
2006-05-04 14:27:11

Good grief! From the original linked article (thanks for the link), this is what the *Massachusetts Association of Realtors President* David Wluka has to say:

> The market’s returning to what it was in the early to mid-90s.

This from an industry cheerleader who is probably charged with putting a pretty face on any and all data: “a return to the early to mid-90’s”?!

Mr Wluka, if history is any guide it will get *far* worse than that last downturn. Let’s compare the situation we have now with what prevailed in the late 80’s. The lending excesses have been much worse this time around. And the macro situation with our economy, debt load and currency appears much worse, too. If all we get is a “return to the early to mid-90’s” - era of the Savings & Loan debacle and Resolution Trust Corporation - I shall be eternally grateful.

 
Comment by Randy
2006-05-05 10:18:12

If you guys want to know where Boston prices will land, just look at its sister city in NY State, Buffalo, once the darling of the industrial age, now a rust belt town.

And here are the similarities… in 1970, both Boston and Buffalo had 2 million metro region population. Boston’s hi-tech industry, led by DEC and Wang, was taking off and the city was experiencing a renaissance like no other place in America. In contrast, the industrial age was ending, factories were leaving metro Buffalo for abroad, and young people were leaving town for greener pastures all over the country. Now, fast forward to today, Boston’s got 3 million persons, Buffalo 1 million. Buffalo’s market had fully reached it bear market bottom and is now slowly picking up, thanks to the lower costs of living. Boston’s experiencing a silicon “rust” belt effects of hi-tech companies leaving the region for greener pastures. Buffalo’s average home range is $100-200K, Boston’s $300-500K. So, it Buffalo’s a leading indicator then I think we know where housing prices will land.

 
Name (required)
E-mail (required - never shown publicly)
URI
Your Comment (smaller size | larger size)
You may use <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong> in your comment.

Trackback responses to this post