Sellers, and their listing agents, have been manufacturing the double-dip experience.
Because the local real estate market had the illusion of being “healthier”, they figured it was time to push their list price to see what the market would bear. A few got lucky and sold too, but the backlog has been building all year, especially on the higher-end.
Buyers are paying close attention though, and you can see it in the trends below on the housingtracker.net graphs. Look at the last year, the only part that might matter to buyers.
Let’s be specific too – in the upper tier the graph shows that the median asking price was going down dramatically the second half of 2009, which could indicate that prices were actually going down, or that the mix of active listings was adjusting. A review of the mix didn’t show any remarkable differences, so most of the decline must have been due to actual price reductions:
Look what’s happened since February, when sellers started getting (overly) confident again. The collusion of higher pricing didn’t impress the buyers, and inventory has increased 30% since January, meaning that the number of wrongly-priced homes is rising:
Once the sellers (and their listing agents) who want/need to sell, begin to run out of hope and start lowering their price, it’s going to look and feel like the double dip.
A second note: The inventory between May, 2009 and January, 2010 was practically flatlined, in a tight range of 11,500 to 12,013. With list pricing adjusting steadily downward in the upper tier, we had fairly stable market, with listings exiting the system at an almost identical pace as they were coming on. A good indicator to watch for the trend of pricing accuracy.
The overall economy (especially the stock market) really does have a direct impact on the housing market – especially at the higher end where people have more equity investments. The “relief rally” (the DOW back from 6000 level to over 10K) helped the housing market (as well as government tax credits), but now the “reality retreat” of the stock market will slow things down again.
I think the answer to the question, “are we in a “V” recovery or an “L” recovery has been answered. . .an “L” is here. My predition is for a VERY slow 5 year “recovery.” I would agree with Jim, that housing prices will be in a “double dip” similar to the stock market.
Bring back Glass Steagall Act, make the banks mark to market and cut government employment by 25%-problem solved.
I think Jim’s point was that things are going to FEEL like a double dip because of over priced listings. It’s a self-imposed phenomenon. The list prices are looking like a “V.” I suspect that the actual solds will look more like the “L” as the second poster opined, so it will feel like a double dip to those sellers who were pricing high.
Like a bird in the Gulf, the reality of the first dip is still soaking into our feathers and keeping us on the ground.
Mark,
Roubini has posited for a long period of time that we are facing a U shaped recession of undetermined length.
While stimulus (even uprecedented, massive stimulus) can move the needle for short periods of time, there is nothing that can withstand the invisible hand of economics.
For example, when I hear of “2 million dollar houses” renting for 4k per month, there is no way, no how that an investment can even pencil out. We are living in a bubble economy, chasing excess to excess. It just happens that we’re in the early stages of our precious metals bubble (again).
The broader economy does not benefit from the stimulus in a meaningful way, but that doesn’t mean that all of this monetary stimulus won’t help out some metals speculators and nimble investors in the meantime. This is all part of the continued stratification of our society into a bimodal distribution of haves and havenots. You can’t invest in the next bubble if you’re working for a living (at least not in a meaningful enough way to make it count).
Chuck
My guess: The income tax credit cleaned out many of the lower percentile homes, so that dramatically pushed up the 75th percentile.
It should be noted that the distribution of sold homes is positively skewed. Thus the 75th percentile is very sensitive to small quantity changes on the lower end.
According to Case-Shiller, we are currently 11% up over April 09. By definition, that’s how far it has to drop to set a new low. I wouldn’t think there’s such a thing as a double dip on your way up, the phrase implies setting a new low. But if people are worried about a short term drop as prices move up in the long run, they’re being modestly optimistic.
The three main scenarios are a double dip setting a new low, relatively flat progression or historically slow growth, or another housing bubble. The least likely scenarios are repeated wild swings of greater than 10% a year in both directions, or a major spike in prices followed by a major drop. I think Captain Obvious would approve.
Let me be a little more clear about this whole situation:
The income tax credit cap was $8,000 (or 10%, whichever is lower); there was also the $6,500 for repeat buyers.
It should be 100% obvious that $8,000 is 10% of an $80,000 home and 2% of a $400,000 home. Ignoring some crazy discount rate issues, those in the market for a home close to $80k have a much larger percentage incentive to buy. Also if the value of an $80k home goes down by 50%, the first 10% is covered by the $8k tax credit. The remaining $32k is less than a year’s worth of household income, for many.
Using the $400k home as an example, the $8k is only 2%. Is this an attractive discount? Certainly it is not as attractive as 10%, even if it is the same gross amount. If a $400k home goes down in value by 50%, then the loss is $192k, net of the $8k income tax credit. For most households, $192k is a very significant sum of cash. It should be noted that the $192k loss is 6 times the $32k loss illustrated above, even though the cost of the home is 5 times as much. The annual household income of those buying $400k homes should be more than those in the $80k market, but is the annual income at least 5 times as much? I have no idea, but my guess is no.
So my basic claim is that as a result of the $8k cap on the tax credit, the distribution of sold homes is different than the distribution of new inventory, even if both are positively skewed.
Next I need to discuss the increasing inventory. Hopefully it won’t take much to suggest that the higher end homes take longer to sell, especially in light of the impact of the income tax credit discussed above. While I am not rigorously handling the time and price issues, hopefully no one will rough me up too much over such.
Moving forward, since the gross inventory is rising, homes are coming on to the market at a faster pace than they are coming off the market. Homes that come off the market may be sold or unsold. There could be homes that are off the market for 2-3 months and then are listed back on the market. Almost all homes, once sold, are off the market for at least a year.
Now let’s consider the distribution of homes coming onto the market. It could be that the number of higher valued homes entering the market is greater than the number of lower valued homes. This is in addition to the basic observation that more lower valued homes are selling than higher valued homes. Yes, there are sales on the upper end, but the number of newly listed homes are outpacing the number of sales. Thus the supply of newly listed homes does not match the supply of recently sold homes. The number of homes (re)entering the market is higher than the number of sold homes. The new supply (re)entering the market has a higher median value (as always, the distribution is positively skewed), yet the lower valued homes were selling.
Now I think I have sufficiently established that the inventory can increase and the quartile prices can increase, while the quartiles of sold homes are actually decreasing.
(Once again, please excuse this sloppy work–it’s Friday!)
Chuck
There is a new book just out called “Fault Lines”
about the housing and economic crash. It was reviewed a few days ago in the Financial Times, and elsewhere – one can Google it.
The author contends that poor income distribution is the underlying cause of the problem because income was replaced by borrowing for the masses. We have gone from bubble to bubble, and this time, we may be out of bubbles (except gold perhaps). The conclusion is that we are in for a long long slog of disinflation similar to Japan. . .can’t really argue to much with that from my perspective.
“According to Case-Shiller, we are currently 11% up over April 09. By definition, that’s how far it has to drop to set a new low.”
Case-Shiller uses “paired sales data,” which is subject to being heavily skewed by lower end sales that were impacted by the $8k tax credit. In other words, it’s relatively easy for a home to go up in percentage value on the lower end when 10% is funded by the IRS.
It dawned on me what the unintended consequence of the tax credit is (we knew there’d be one, just wasnt sure what it’d be):
the goal was to stabilize prices by bringing in more demand. which they did – but the demand wasnt increased, it was merely pulled forward (as we all know).
the unintended consequence is that they guaranteed the one thing they tried to stop… a decline in prices.
dafox- There is a critical point where a fire may be sustained by itself, but if the fire is not sufficient, then it will need tending to take hold.
The basic theory behind the tax credit was that the housing market needed to be stoked, and then it would heat up by itself.
I guess the possibility that the forest was already nearly completely burned to the ground was ignored?
It almost feels like the double dip will happen mainly because it’ll be a self-fulfilling prophecy with all this talk. Not that there aren’t a million logical reasons for it – but if buyers went by logic, there would have never been a bubble in the first place.
Blur – logic aside, there were new jobs and free flowing credit which were the cause of the price spikes…now there are negative new jobs and there is a credit contraction…
Its really that simple to gauge the direction the market momentum will be heading. I am speaking of the long run sine wave of the market, not the monthly static.
ITs like the difference between a trade and an investment in the stock world. I see it from an investor’s perspective, not a day traders perspective….but there is room for all to plant their flag with their own cash and go for it.
Follow jobs/income then place your long term bets…when real jobs improve, housing will improve, but not till then.
JP2, to the contrary that’s what prevents the overall number from being skewed by the low end. Sales volume of one demographic does not shift the weight of that demographic on the overall, like median price would. That’s the entire premise of Case-Shiller – to be independent of changes in the volume of sales of certain demographics (including but not limited to price range).
That said, the low end certainly has risen more than the medium and high end. If that’s the point you’re making, there’s no contradiction here. But it really isn’t relevant unless you’re saying that one end of the spectrum will set a new record low but others will *not*. Not sure anyone can make a strong argument for that narrow scenario.
Sorry, forgot to post the actual breakdown of Case-Shiller by price level:
http://www.voiceofsandiego.org/app/storyart/case_shiller_mar_2010-1.jpg
According to Piggington’s breakdown of Case-Shiller data, Low end is shown to have risen 14%, compared to 8% for medium and high end. From the bottom, the low end tracked medium and high end up until September of last year and then took off at a much faster rate.
Although the $8K by definition had an impact if it influenced at least a few people, there’s probably a lot more at play here especially since the credit has been around for much longer than since last September.
It’s worth noting that during the bubble the same thing happened – the low end grew much more than the rest of the market. This resulted resulting in pancaking of house values where spending a little bit more got you a much better house (size, condition, and zip). In a way, what we’re seeing the last year is a return to “bubble norms”.
After all, the average person cannot afford the average house in California, not by a long shot. The result is almost every first time buyer is looking at the “low end”! This asymmetry is the simple result of California home prices, which weren’t always this way.
sdbri,
I wonder (out loud), because I really don’t know and want to know your opinion. Will it be that way again? And I don’t mean “eventually” like in 50 years, but rather, will it be that way in the next 5 to 10?
The question on everyone’s lips is, is the bubble successfully reflated?
I guess that I’m expressing my doubt about using history as a gauge to the future (which would point to a double dip), and the more often correct contrarian philosophy that the masses can’t be right?
Or, have we entered an entirely new paradigm (it’s different this time?) where the old rules don’t apply because when everyone is a contrarian, there is no contrarian?
I don’t know, but I do know this, it’s cheaper to buy in 2010 than in 2006. Will it be cheaper in 2015 than 2010? Magic 8 ball says ask again.
California is launching the Keep Your Home Initiative with Federal funds to keep low and moderate homeowners in their underwater homes. How much cheese can they distribute before the masses revolt?
sdbri-
“Sales volume of one demographic does not shift the weight of that demographic on the overall, like median price would. That’s the entire premise of Case-Shiller – to be independent of changes in the volume of sales of certain demographics (including but not limited to price range).”
The problem is that Case-Shiller does not know, from the price data used, if the sales mix has changed.
Can you explain how the mix would be determined from the historic paired data that Case-Shiller uses?
Let me add the perspective of a home buyer.
We’re looking at new (maybe). We would be eligible for the $10k Calif tax credit (assuming there is anything left b4 we buy).
OF COURSE that wouldn’t offset paying say 5 or 10% too much for the house, BUT it takes ~$300/month off my payment for 3 years.
That helps me “feel” better about overspending a little and gives me a bit of REAL money in my pocket for a while.
It’s amazing watching homes in CV go on the market, sit there for 60 days, go off, come back, lower the price by $1 (not a typo), back up $1, add a crappy pic, etc.
The whole time the comps in the neighborhood are $50k less.
There ARE buyers out there. But few of us are going to be “scared up” to overpaying.
(And we’re one of thse highly qualified $600-750k buyers.)
Chai- Would you be willing to spend $10k more on a home if you knew that you would qualify for the California Tax credit?
Alternatively, if you suddenly became unqualified for the tax credit, would you be willing to spend that same $10k?
The point is, I don’t KNOW what the value of the house is.
EVERYTHING, including new Carriage Run @ $740k with $10 in upgrades, still seems like ~10% too much. But I’m not sure.
The $10k just takes the edge off. If I’m buying a house for $740k that is REALLY worth $690k, obviously the $10k isn’t making up that difference.
BUT, it sure helps me fell good (and at $300/month, lower my ~$3600/month payment by ~8%)
Look, if I’m keeping the house for 10-15 years, that $50k overpayment will not even be remembered when I resell. But the tax credit sure helps with the sting now.
Would I be willing to spend $10k MORE? No, because I still think things are too expensive.
Would I buy? Maybe. Probably. But I’m sure we’re a little less likely as long as we feel CV is still too expensive by that 5-10%.
Yes, I’m admitting it’s pretty psychological, but it DOES help.
Chai- What you do know is how much you are able and willing to pay. What you might not know is how much someone else is willing and able to pay.
So if you are able to pay $710k, but only willing to pay $700k. If you were given a $10k incentive, would you suddenly be willing to spend $710k?
Part of the problem with this question is that $10k is about 1.5% of the purchase price. When I go to buy items, 1.5% one way or the other is generally not a deal breaker.
The underlying point, however, is that if you suddenly qualify for a $10k rebate, you will be willing to spend more–up to $10k more.
QUOTE
“The underlying point, however, is that if you suddenly qualify for a $10k rebate, you will be willing to spend more–up to $10k more.”
ENDQUOTE
No, that’s where I disagree. As you correctly pointed out, $10k is only 1.5% of pp. If I feel that RE is still 5-10% overvalued, than that ‘free’ $10k isn’t going to “make” me spend $10k more, it’s just giving me some piece of mind and ‘pocket change’ until valuations come back around.
It isn’t so cut and dry as “I get $10k, I’ll spend $10k more.” It’s more “I’m nervous the market is still overvalued, the $10k helps get a deal done (stabalizing values) and helps me sleep better at night.”