Saturday, April 8th, 2006 at 12:05 PM
50% to 80% off?
The prognostications are increasing. Did you hear that guy suggest that prices are going down 50% to 80%? Please notice that these remarks are said by people trying to sell you a book. The more hysterical, the more book sales.
These guys aren’t realtors. They’re statisticians, at best. They don’t add in the emotional factor to their equations.
At 80% off, houses would be selling in Carlsbad for $120,000. We would have to be well on our way to a Mad Max/Road Warrior environment for that to happen.
At 50% off today’s median sales price, houses in Carlsbad would be selling in the $300,000′s. This is probably the lowest it could ever go, without a major catastrophic event. Houses seling in the mid-$300,000s will break even with a 10% down payment – the rents will cover your PITI payment
If houses in Carlsbad were selling for $300,000 to $400,000, would you buy one? How about $400,000 to $500,000? I think there’s plenty of buyers who’d jump to buy the right house in Carlsbad under $500,000.
Who’d be tempted to buy, if they found the right house?
Sales are down 23%, but there were still 248 closed sales in March - who are these buyers? Who has the guts to buy in the face of the bubble?
PEOPLE WHO WOULD BUY, IF THEY FIND THE RIGHT HOUSE
First-time homebuyers. Affordability is tough, but for tenants who have the ability to buy and are still renting will still want to get in at some point – they’re not in yet.
Today’s sellers who then rent. They experience the emotional tug of home ownership, have money in the bank, and will want to get back in.
Transferees. The bio-tech industry, for one, brings high-income people here. Usually they bring the equity from their last house with them.
Recently-successful businesspeople. You’ve been working your whole life to build a business that is finally paying off, and you’re flush with dough. It could be because of the high-income producing nature of the business, the sale of the business, the selling of stock options in a business – however the success comes in accumulating capital, they are buyers.
Newly-married people, especially the remarrieds. There’s not a more motivated buyer than the guy who just married his second wife, and they’re living in the first-wife’s house.
Inheritors.
Grandparents. Time is running out, and they want to be near the grandkids. Think they care about the bubble?
These are the people that are willing to buy now, if they find the right house at a decent price. They have wants and needs that surpass, and overcome, price issues.
The question that nobody can answer with certainty is this: Will there be an overload of desperate sellers?
And will buyers hesitate if they start hearing horror stories? Not for long. I think any stories of desperate sellers dumping on price or getting foreclosed will cause fascination, bringing everyone out to watch. Buyers will buy just to say they took advantage of some poor guy, or because they got a foreclosure.
Because of the boom over the last 6-8 years, there is heightened awareness about real estate investing. When real estate is going up 20-30% per year, it’s easy to play the game – it’s hard to make a mistake, really. But when prices go flat, you can make big mistakes and get hurt, financially.
But it has also taught a whole generation of how beneficial real estate investing can be, when bought at the right price. There is no drop off in demand here, it’s just a price issue.
That’ll cause people to proceed with caution, but there’s still plenty of buyers. We’ll see more focus on finding the house that suits your needs perfectly. That’s where good agents can really help buyers, by searching out and finding the right houses for the right buyers. With the huge inventories, it is NOT EASY to keep an eye out for all the good deals, get some good-quality help!
Posted on Saturday, April 8th, 2006 at 12:05 PM in Thinking of Buying?, Thinking of Selling? | 6 Comments » | 
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Hi Jim, I appreciate your blog and feel it is as "objective" as a realtor could possibly be. But as a potential buyer (if the prices of homes were to come down), I take offense to your characterization of the type of buyer who is waiting for lower prices:
"Buyers will buy just to say they took advantage of some poor guy, or because they got a foreclosure."
There is much going against Real Estate (especially in the hot markets) right now. No matter what Bush says (or the numbers say) about our economy, the average Joe’s spending power has lost ground.
Sure, I could buy a $600,000+ overpriced home, but the question is will I be able to maintain it, pay the property taxes, and all the other expenses too, until I can sell it. What if I’m unable to afford it after retirement? That’s the biggest question in my mind – As a family who has taken a couple rough financial hits in the last 6 years, I am not willing to risk it all.
I feel for people who will lose in real estate, but at the point when peoples’ homes became part of investment strategies, like all other investments, there is always a risk.
Would I buy a house in Carlsbad for 300-400,000 – probably, but I wouldn’t gloat about the fact that the previous owner didn’t make the big profit, or lost money, – I would just be happy that I waited until it was a sensible financial decision for me.
L. Ryan | April 9th, 2006 at 5:54 pm"But it has also taught a whole generation of how beneficial real estate investing can be, when bought at the right price. There is no drop off in demand here, it’s just a price issue"
Not neccesarily. Nobody really knows for sure. We could really be in the middle of the biggest bubble in history and not realize it, since we are a part of it.
vstan | April 9th, 2006 at 6:50 pmInvesting is all about buying things that represent value & selling them when they don’t. In that, real estate investing is no different than stock market, except for the fact that its highly leveraged. Living in silicon valley, I have seen people buy .com stocks & then some more on margin, Make one mistake in timing & the whole thing blows up. Its funny that none talks about pets.com etc. or the value that they offer since they are so cheap – in $ terms as well as P/E.
Homes are for living. For people to become families, have kids and have a society. This nonsense has destroyed the family. Its not possible for a middle class employee to buy a home and enjoy a normal family life with kids anymore.
It doesn’t take vulture buyers to "take advantage" of foreclosures. Home get priced on the margin, you can get a better price next door to a foreclosure.
What was nagging me was your "some poor guy, or because they got a foreclosure" comment. That’s every bit as judegemental as saying everyone who loses their house deserves it. There’s a mix so rather than attach good and bad to the event just call it a foreclosure and forget whether the last owner was an overleveraged flipper or hard working construction worker with a bad back.
Robert Coté | April 9th, 2006 at 8:15 pmI appreciate your points.
I mis-spoke, and failed in making my intended point.
It’s a reflection back to the mid-1990′s, the last time we had foreclosures.
I meant to say,
Buyers will buy just to say "they took advantage of some poor guy", or because "they got a foreclosure".
I’m not sure if that helps much, but my point was that these are two more buyer categories.
The last time around there were people who reveled in the misery of others. I thought it was disgusting – didn’t represent any of them, just heard them bragging later. The irony was that many of them paid full retail at the time, seemingly just to be able to brag about it.
I’m saying that once we hear about increasing foreclosures, there will be a few more bottom-feeders added to the buyer pool.
Wait and see – don’t be surprised if every once and a while you hear somebody really bragging about their smoking deal they got because of somebody else’s misfortune.
I’ve never been foreclosed on, thankfully, but I know people who have, and it’s HUMILIATING. There will be more good people, than bad, that go down if we have another foreclosure run, and it’s likely to cast a pall over the business.
vstan – you’re right nobody knows for sure but I’ll submit my additional evidence. I still hear from at least one buyer a day who calls off one of my for-sale signs, and I’ve been having 25-50 people coming by each day of my open houses the last few weekends. True, nobody’s throwing money at me, but at least people are inquiring. I think if prices were a little lower, 5%-10%, we’d see the same amount of sales as last year. (March was 23% fewer sales, Y-O-Y)
I hope that clears it up a little, no offense intended. I appreciate your participation!
Jim the Realtor | April 10th, 2006 at 3:05 amJim, I appreciate your analytical look on the market and frankly am thankful that someone with your years of experience is giving an objective theory to how the market can turn. I have considered buying a home. At least reading your blog can give me an idea what I may or may not be up against. History is real whether it repeats itself or not. Thank you for the continued updates. I’ll keep coming back! Blondie
blondie | April 10th, 2006 at 6:49 pmIt seems I keep hearing all the time "Prices won’t go down 50%- unless there’s some kind of big shock".
What’s interesting to me is: have we, in recent memory, ever had a time when the possibilty of a "big shock" seemed more Likely to happen?!!
Let’s see:
HUGE deficit that looks like it’s got to be covered by rising interest rates.
IRAQ
IRAN
consumer wracked with tons of bad debt
Al Queda
China and India poised to whoop us economically
Looks like we have any number of "bad shocks" in the offing.
seattle price drop | April 13th, 2006 at 11:00 pm