Wednesday, July 26th, 2006 at 1:00 PM
Back to Normal? No Way
The latest spin on the market is that it’s ‘getting back to normal’.
The last eight years of real estate boom, combined with the internet, has changed everything forever, and we’re not going back to ‘normal’, unless you’re moving to Illinois.
(Normal, IL, population 50,485)
When I started selling real estate in 1984, we received our MLS books every Friday - detached homes one week, attached the next. Plus, the agents had a tight grip on the information - if you wanted to know what was for sale, you had to go through an agent. Because of these two facts, you could probably say that the slower dissemination of the market data was the reason it took longer to sell.
You can’t say that now, the data is available to everyone in an instant.
As a result, agents and buyers alike watch the ‘days on market’ as the first indicator of value. If the property has been on the market for longer than 30 days, buyers figure that it’s overpriced, and move on to the newer, fresher listings. Even with price reductions, it’s hard to recapture the urgency and enthusiasm created by a fresh listing.
That’s why the ‘days on market’ statistic is the most manipulated number on the MLS. Listing agents regularly ‘re-fresh’ their listings by cancelling the old one and re-inputting it as new, hoping to fool those who don’t check the listing history.
What does the longer average market time really mean?
It means that sellers (and agents) are TAKING LONGER TO GET THE PRICE RIGHT.
In other words, TO GET THE PRICE LOW ENOUGH.
I have yet to hear anyone explain what they mean when they say ‘back to normal’. It’s being used as some vague, general term – I’d love to see somebody explain it logically, and have facts to back it up.
Posted on Wednesday, July 26th, 2006 at 1:00 PM in Thinking of Selling? | 19 Comments » | 
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Tell it like it is, Jim!
Greenlander | July 26th, 2006 at 3:31 pmThis is a quote from an article written by a Prudential California Realtor by the name of Vay Ashby:
"In our transitioning San Diego real-estate market, buyers often feel that any offer will do. However, it does a disservice to the sellers and the purchase process to make an offer out of the value range or to come in substantially lower than the asking price.
Buyers must consider how they would feel if they were selling their home, especially in a changing market.
The number of ’short sales’ is on the rise. This is where the seller must bring money to the closing in order to pay back the bank loan, even after selling.
At times, there is a bottom-line number the seller cannot go below in a short sale, or financial hardship will be too severe. The market requires buyers to be especially considerate when making offers." pg A8
This is a quote from Jim The Realtor
" It means that sellers (and agents) are TAKING LONGER TO GET THE PRICE RIGHT.
In other words, TO GET THE PRICE LOW ENOUGH."
Jim, why do you think some agents are so against to lowering prices. Unless they are flippers themselves and are about to be or are in big trouble, shouldn’t they be pushing for more transactions – i.e, price reductions?
Anonymous | July 26th, 2006 at 4:01 pmI would rather hear that lending standards will go back to “normal”. A mortgage should be 2.5 to 3 times the borrower’s income, not the 10 to 12 times that we are seeing today. When this starts to happen we will see sales prices really drop to where they should be. This whole BOOM has been built on a lending scam. The shame of it is that in the end, as with almost every large corporate fraud case in this country, the people that end up paying for it were never even a part of it to begin with. The lenders sell the majority of their loans to government backed(aka TAX PAYER BACKED) Fannie May or Freddie Mac. So when the defaults start to happen in large numbers it will more then likely be cleaned up with tax dollars and higher interest rate loans to those of us with good credit.
For some reason in these bubble environments logic goes out the window. I don’t understand how it is even legal for lenders to give these outrageous loans. I had my mortgage broker’s license in the mid 90’s and there are basic fundamentals for qualifying someone for a loan. From what I read about today’s loans, good credit, job history, down payment, income verification and even the ability of the borrower to actually make the monthly payment, other then the interest, no longer matter. How can this formula create anything but problems?
SMC | July 26th, 2006 at 4:08 pmMr./Ms. Ashby has been licensed since January, 2005.
‘nuf said?
If you have only been the business for eight years or less, ‘normal’ is ‘booming’ to you. Newer agents have never been in this type of market place – they are like fish out of water.
We’ll see more ignorance as time goes on.
UPDATE – Ashby is the owner of the house I have featured in the category ‘Appreciation rate’, in the right-hand column (#14).
Jim the Realtor | July 26th, 2006 at 4:11 pmPaid $879,000 in July 2004, now on the range $775,000-$850,000. I’m sure she’s received some inconsiderate lowball offers herself.
My husband and I have moved several times and have only bought two houses – one positive experience one negative experience.
LR | July 26th, 2006 at 4:38 pmOut of curiosity I asked my mom how she did it while raising us; moving on the average every two years during the 50’s, 60’s, 70’s, and always buying a house? She said in those days you didn’t look at a house as an investment, when she sold the increased value usually equaled what it had cost to live there, i.e. we had lived there for free. She said that was the way real estate used to work.
I would also like to know exactly when the the qualifying standards for mortgage loans were thrown out the window.
Qualifying standards for lending changed when FICO credit scoring came into being. It was, and still is, the hardest piece of data to falsify, and is pretty conservative in nature in reflecting the credit worthiness.
Easier money combined with the two-out-of-five-year tax break escalated values rapidly, with banks and borrowers alike thinking they could do no wrong.
If the mortgage industry can devise a ‘mortgage-hangover’ cure, there won’t be a need for the taxpayers to save the day.
The FDIC and mortgage industry should work together on developing a refinance hybrid loan. One with lower payments for the next few years (or maybe no payments like a reverse mortgage) and no appraisal required.
It’s either that, or take back A LOT of properties in the coming years.
Jim the Realtor | July 26th, 2006 at 5:13 pmI got myself thinking LOL
LG | July 26th, 2006 at 5:23 pmWho would ever think of moving into an unknown town and see a few homes and buy one in a matter of a couple days – like my parents did over and over again.
They knew what they could afford, they knew where my dad worked (Mom didn’t work), kinda knew their SES.
Didn’t have to worry too much about the school system, I doubt my mom ever checked out the neighborhood schools before buying, I’m sure schools never played into the decision at all. Asked her why at times we went to private schools and she said that if there was something going on that she didn’t like she would put us in a private (not very expensive) school. Like when we moved to Florida she was shocked at the level of prejudice and didn’t want us exposed to that and the private school environment was a "little" better.
Real estate wasn’t such a big gamble when a house was looked at as a nice place to live and the market was moderated by making sure buyers were qualified for the mortgages and the only risk was for the buyers and the loan originators.
LG,
THAT’S the normal I remember – my folks did the same thing a number of times.
It will never be that kind of ‘normal’ again.
There is too much riding on today’s decisions to NOT put a lot of thought into them.
For those who refuse to educate themselves, sorry – you deserve whatever you get, the information is too readily available to stay ignorant.
That includes sellers who hire a lousy agent, that’s the biggest mistake you can make in selling. Bigger than getting the price wrong, because a good agent can fix that in a couple of weeks.
Jim the Realtor | July 26th, 2006 at 5:43 pm"The FDIC and mortgage industry should work together on developing a refinance hybrid loan. One with lower payments for the next few years (or maybe no payments like a reverse mortgage) and no appraisal required."
The FDIC needs to work on stopping the lax lending standards that undermine the whole banking system. To work on some "cure" for the past financing mistakes and loss of rationality without first fixing the issue that caused it will solve nothing. Stop the lax lending standards and everything will normalize. Yes, some people will lose their homes (those who should have never gotten loans to begin with), and Yes some people will not be able to buy homes (they arent qualified), and Yes some bank stocks will be hurt (because they were making dangerous loans, they deserve to be hurt).
Lax lending has increased the effective real estate population over the SHORT TERM, Real estate is long term, those short term borrowers will be shaken out of the system and after it is all said and done, however many years that takes, a healthy real estate market will resume its natural place in the economy.
Cal | July 26th, 2006 at 8:37 pmSMC relates: "The lenders sell the majority of their loans to government backed(aka TAX PAYER BACKED) Fannie May or Freddie Mac. "
Luckily, no. There certainly is some measure of implied backing but:
The Debt Securities, together with interest thereon,
are not guaranteed by the United States and do not
constitute a debt or obligation of the United States
or of any agency or instrumentality thereof other
than Fannie Mae.”
Fannie Mae, “Universal Debt Facility Offering Circular,” January 22, 2002.
Robert Coté | July 26th, 2006 at 10:28 pmhttp://www.fanniemae.com/markets/debt/pdf/udf_012202.pdf?p=Debt+Securities.
Cal,
Agree with everything you said!
CA renter | July 26th, 2006 at 11:37 pmNormal? If it is going back to a "normal" market what will all the people hired during the "abnormal" market do? The terms that the RE industry come up with are so detrimental in the long run. Normal will soon disapear just like "soft landing" (and just like all those "extra" people working in the "abnormal" market)
dESMO | July 27th, 2006 at 12:48 amCal and ca renter,
You admit that the lax lending standards have undermined the whole banking system. I agree.
Let’s turn off that spigot. No more lax lending standards.
But the existing problem (buried borrowers) could be far worse than we know, and could start a depression that’ll last a long time.
Would it kill the bears to offer a way for some of the existing bag-holders to get relief?
The way the bears want to bury the existing borrowers is vicious. Most of them will lose their houses anyway. Even with a new hybrid loan, the financial burden will be excessive.
We need to go back to the beginning.
I have never heard of any mandatory real estate/home financing classes, even in college.
Plus the existing loan documents are way too long.
If there were mandatory counseling classes and simple, easy-to-read loan documents, at least some people would realize what they are getting themselves into.
Secondly, the agent licensing is a joke. It’s about the same as getting a driver’s license.
The agent licensing should require broker-level classes and testing, plus mandatory apprentice programs, before agents are allowed to talk to people.
THEN, I could see being tough on borrowers who ignore sincere, qualified help, and get in over their heads.
Currently, buyers are told to sign 20-30 pages to get their keys. I’d guess 90% have no idea what they signed, let alone know the long-term ramifications.
The system is really screwed up, and until we go back and fix the whole thing, I don’t think it’s that bad of an idea to offer a solution to the responsible folks who might be able to dig themselves out of a decent loan, instead of being buried in a suicide loan.
There are homeowners right now who are in suicide loans, faced with their payments going up $1,000 to $1,500 per month just two short years after inception. But unless they can go back to their existing lender to obtain a "streamline" refinance, they CAN’T refi unless they can get an appraisal to cover their loan amount.
If they can qualify for the new loan/payments, shouldn’t they get a break?
Currently, without an appraisal to cover the existing loans, you can’t get a new loan.
I think this type of relief package is far superior to a taxpayer bailout, which you know is an alternative, and costly one at that – one the bears will have to pay for too.
If you have handled yourself responsibly, you shouldn’t have to pay for a taxpayer bailout program.
Jim the Realtor | July 27th, 2006 at 3:32 am"Would it kill the bears to offer a way for some of the existing bag-holders to get relief?"
N.B. I am the devil’s advocate here. I’m not this absolute nor am I this heartless.
Relief? NO! Was there relief to the tens of millions without Prop 13/Prop 2 1/2 protection? Was there relief from usurious finance charges for home purchase financing? These people need a half-lifetime of crushing servitude just in restitution nevermind punishment. Punishment is where even we realists, who you call bears, draw the line. We cannot punish them because we cannot sort out the guilty jerks from those caught in the tsunami. We have an admirable tradition of letting a dozen guilty go in order to spare the one innocent person.
Now, I want my CDs filled, I want my lumber futures contracts in the money. Thet made a deal, any "grace" is not without consequences. "Forgiveness" in a debacle of this magnitude actually means "spreading the pain." I need to hear why I need to suffer because I refused to be stupid and I refused to exspose my family to risk.
Robert Coté | July 27th, 2006 at 4:31 amBascially the way I see it – these people where happy enough to take on the debt – so they should service the debt.
If they default on the debt the bank should have to eat it – after all they where happy enough with the risk to lend the money in the first place.
As someone who earns well above median salary and can’t afford even a modest condo I don’t want to have to take a dime out of my poket to bail out either of the parties complicit in this ponzi scheme.
I waited out the bubble as I could not afford these prices – if you can’t afford it don’t buy it or suffer the consequences.
Uncle Git | July 27th, 2006 at 4:58 amJim,
You are getting some good action on this subject. Here is another thought.
You have to be over 18 to sign a contract to buy a home, so you are an adult. The problem with our society is that we let people get away with too much. The bag-holders have been getting relief for years. They charge up credit cards they can’t afford to pay and then declare bankruptcy. Now their buying houses they can’t afford and there should be exceptions made for them?
If I go out tomorrow and buy a 150K Mercedes and in 2 months figure out I can’t afford the 4K a month payment, insurance and gas, should I be able to just go back to Mercedes and say I can only afford a 700 a month payment and they should let me do this?
If I buy Intel stock and lose money, can I claim I didn’t understand their business model and ask them to return my loss?
Where do we draw the line? At what point should people be forced to face the consequences of their actions?
SMC | July 27th, 2006 at 5:25 am"If they can qualify for the new loan/payments, shouldn’t they get a break? "
The only break they should be given is the legal protection to walk away from the home if they did 80/20 financing. I believe the 2nd mortgage allows the 2nd mortgage holder to come after your personal possessions (as if you refinanced or took out a HELOC and defaulted) . The 20 of the 80/20 used to be PMI, the cost of insuring the "20" should be absorbed by the industry. If someone took on more debt after (HELOC or refinance), well then you get into the "fool me once.." scenario and that person has to take responsibility for their actions.
Outside of that, no other change should be made outside of tightening the lending standard. You would then have everyone responsible for their own actions. The homeowners who took no personally responsibility to learn about loans will sink or swim based on their actual qualifing characteristics and ability to pay (as it should be). If they cant pay, or sell, they walk away in what amounts to renting that home for the last few years. The industry is "fixed" by the new lending standard and only bears the brunt of lack of risk premium on some of its money (poor business decision is fundamentally what it amounts to, those are made all the time and cost companies money). And taxpayers aren’t sidled with a bailout.
It is clean and simple and the actual houses at risk go back what.. 3 years or so.. How far do you think it would actually decline?
Cal | July 27th, 2006 at 7:24 amJim,
Good question. I consider myself one of the "kinder" bears, but blame has to go somewhere. I primarily blame lenders (and the ratings agencies and all those who are supposed to oversee lending practices/banking). Problem is, buyers are guilty as well. I do understand how they got sucked in (my husband came along kicking and screaming when I **strongly** suggested we sell to rent). The thing is, when we were looking to move up, we had 40%+ down and 6-figure income with 800+ FICO scores. I still couldn’t figure out how to buy an older, modest home without stretching our finances uncomfortably. Of course, I wasn’t aware at the time how prevalent the suicide/exotic loans were. I did not expect prices to continue going up, so didn’t expect that to bail us out of a bad decision. I knew we had to look at things using logic and numbers. The numbers simply didn’t make sense. This lead me to look into what was causing the tremendous price explosion (I knew it wasn’t "supply and demand" as the only significant pop growth I’ve seen comes from poorer immigrants). I discovered UK housing blogs (the US ones weren’t really active at the time) and found out it was a global credit bubble causing prices to rise. The more I researched, the more amazed I was at how reckless the whole thing was.
Point is, I took time to do research on what’s likely to be the largest financial decision of my family’s life. It’s amazing that others don’t do the same. After all, we’re talking about **half a million dollars** here (or more). Buyers expected to be bailed out by greater fools down the road. I agree with Cal (I believe) who suggested non-recourse loans on all loans. That way, those who chose to lend to these FBs take losses, as they should. Hopefully, they will learn a lesson and not make the same mistakes in the future.
BTW, totally agree we need much better financial education in the school systems! It’s apalling how little students learn about these things. Also agree the loan documents could be reduced to fewer than 10 pages, IMHO. And the worst possible scenario (max payment a lifetime cap considering max LTV on shortest amortization period) should be spelled out in big, bold letters in the loan docs.
Sorry if I sound mean, but this bubble has made victims on the way up as well (financially conservative families). Didn’t hear anyone calling for tighter standards to keep the responsible from being victimized by speculators/lax lending during the run-up.
CA renter | July 27th, 2006 at 11:42 amI suppose "normal" in terms of prices would be to begin at 1997 (the inflection point) and increase prices at historical trend (3.5%+ yoy) to 2006. You could also measure "normal" prices in terms a return to the historical average price/gross HH income ratio (3x to 6x).
"Normal" in terms of lending would be harder to define at this point. The rational thinkers among us may yearn for a return of traditional underwriting standards and 20% down payments with a 30 year fixed loans, but I think this "normal" is less likely to return than the "normal" pricing referred to above…
alex | July 27th, 2006 at 6:07 pm