Hat tip to Cheese who sent this in, from Bard College:
Self-reported home values are widely used as a measure of housing wealth by researchers; the accuracy of this measure, however, is an open empirical question, and requires some type of market assessment of the values reported.
In this study, the authors examine the predictive power of self-reported housing wealth when estimating housing prices, utilizing the portion of the University of Michigan’s Health and Retirement Study covering 1992–2006.
They find that homeowners overestimate the value of their properties by 5–10% on average.
More importantly, the authors establish a strong correlation between accuracy and the economic conditions at the time of the property’s purchase. While most individuals overestimate the value of their property, those who buy during more difficult economic times tend to be more accurate; in some cases, they even underestimate the property’s value.
The authors find a surprisingly strong, likely permanent, and in many cases long-lived effect of the initial conditions surrounding the purchase of properties, and on how individuals value them. This cyclicality of the overestimation of house prices provides some explanation for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of interest rate increases—which could jeopardize their ability to live up to their financial commitments.
No problem…
I lowball by 10%-30%
That paper looks like it was published a year ago, and the data is much older. I would venture a guess you could add another 5-10% for a total of 10-20% for today’s climate.
I see numerous houses that were bought in 07-09 and now re-listed for more than they paid. That’s just insane!
They need to do a study of listing agents, I think they are probably off by similar margins.
I’ve done my own survey, and it is proportional:
The higher the percentage of sellers’ price over real value, buyers’s expectations move about the same – in the opposite direction.
When sellers are 5-10% too high, buyers offer 5-10% under value.
That’s why those who are at the extreme high end usually never sell because the gap between the buyer’s first offer (10-20% below value) and list price is so large that the sellers won’t even respond to such an “insult”.
Now that you’ve wiped away yesterday’s tears and begun to accept that sales of overpriced U.S. real estate have again slumped, Mike Riggs says it’s time to turn that frown upside down.
At the Daily Caller, Riggs, (a former Burton C. Gray Memorial Intern for Reason) swings one fist labeled “Tim Cavanaugh” and another one labeled “Jim the Realtor” and knocks the air out of calls for more government support to a housing market that is returning to balance after nearly a decade of hyperinflation:
“The mainstream media is addicted to spewing the most negative spin on everything that happens,” [San Diego Realtor Jim Klinge] said.
Here’s Klinge’s take: The bubble may have burst, but sellers and banks are acting like it’s 2006.
“There’s no shortage of buyers today,” he said. But selling a home in 2010 means facing facts: The first time buyer’s tax credit ($8,000) and the repeat home buyers tax credit ($6,500), which were much touted by the White House, and the hair-pulling perpetuated by easily shocked reporters, are simply signs that the country hasn’t adjusted to the post-bubble reality. America’s homes were never actually worth what easy credit and rabid consumerism led us to believe.
“Anybody who puts their house on the market today, for 5-10% less than other people are putting their home for, they’re going to find a buyer,” Klinge said. “Most sellers are 10-20% above where they should be.”
Includes my argument that — if you’re going to spend the public’s money to solve this “crisis,” which you should not do — a good foreclosure is a consummation devoutly to be subsidized by the federal government.
http://reason.com/blog/2010/08/27/affordable-housing-is-not-a-cr
If Reason is talking to you, you are legitimate.
JTR, you really seem to pounding the table lately on this seller’s being clueless and overly optimistic thing. Most high end houses have been overpriced in SD county for as long as I can remember. It is real estate 101 that as a buyer you look for a “motivated seller”. Why not just ignore all of the overpriced turkeys and move on? If half of the MLS listings are overpriced why not focus on the other half? I believe there are potentially some real smoking deals out there now and more to come but when reading the blog all I get is the impression that everything is “overpriced”, sellers are stupid, and buyers are too lazy to look for the jewels in the bluff. It seems to me that if a buyer thinks that “everything” is overpriced then maybe they should wait another year or two.
Sellers are always too optimistic. The only difference during the bubble was buyers took them up on it. Nothing else has changed, but sure take away the crazy buyers and the results look very different sure.
Jim,
I agree with you that the media is now focusing on the negative. But turn the clock back to 2005, and recall how the media were cheerleading and feeding the bubble, offering very little time and attention to those who were warning about the bubble. Unfortunately, most people look to the media to tell them what’s going on, instead of doing their own more involved research.
pemeliza you mean a century or two right? This is California. I guarantee you prices will never make sense here as long as you live. The reason is simple: People from other states bring huge life savings and buy houses here that normal people who grew up here can’t buy. So everyone takes a step down.
Well said, sdbri. And the beaches of Cali are the holy grail to east coast transplants.
And, Pameliza, I chuckled when I read the statement you made “Most high end houses have been overpriced in SD county for as long as I can remember.”
“Overpriced” in your world, that is. I’d bet that you’d probably make the same statement 10 years from now.
6.JTR, you really seem to pounding the table lately
Yes, only because nobody else is saying it. If Yun or another leader of the real estate community would step up and say something, it would help.
In 1990 and 1991 there were no clues either, and I didn’t know what to do. I told my sellers to just be patient, and somebody would come along. Nobody did, and I learned a hard lesson.
Lower prices are the only answer for those who need to sell.
Thanks JTR for that additional perspective on things. I think I see what you are getting at now. Yes, certainly if you have to sell you better price accordingly. I agree with that statement 110%. I guess I forgot that this is blog for sellers to learn as well as buyers.
In 1990 and 1991 there were no clues either, and I didn’t know what to do. I told my sellers to just be patient, and somebody would come along. Nobody did, and I learned a hard lesson.
Lower prices are the only answer for those who need to sell.
Jim the Realtor | August 27th, 2010 at 1:42 pm
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Thanks for getting it out there, Jim. Seems sellers aren’t capable of grasping the facts.
People say the words “housing bubble” but don’t understand what they mean. It means that housing prices were *too high* and were based entirely on speculation and easy credit, NOT fundamentals.
Toxic mortgage didn’t cause the foreclosures; high prices (pushed up by toxic mortgages) caused the foreclosures. If we want to avoid additional waves of foreclosures, we need to allow prices to fall further so that buyers’ finances won’t be stretched to the extent that future foreclosures become inevitable.
I placed my home on the market and subsequently removed it. I bought in 2007, with 20% down, and have continued to pay down principal. I was transfered thus no longer live in SoCal. I did the math, and priced my home well under the point where it could have been a postive cash flow rental for whoever bought it. My home got plenty of interest, but not at the price I thought was reasonable. Although I could have easily sold at these lower prices multiple buyers were offering, I chose not to sell. Why hand over my equity to make another rich? Why give my home to a FHA (3.5% down) buyer who thinks the government owes them tax credits for buying when I did so with 20% down, at higher interest rates & a much higher price?
I have become a landlord. If prices never go up again, 5-10 years from now I will own it out-right and will have a very nice SoCal vacation home. When buyers make angry comments about sellers pricing too high, they are forgetting one fundamental. Noone HAS to sell you their house. When buyers throw out numbers as offers, the seller does not have to accept just because the buyer thinks that what they want to pay for a SoCal home. If buyers want to complain about not finding a good deal while throwing their savings at rent that is fine with me. I am plenty happy taking their money to pay the mortgage on my beautiful future vacation home.
SoCal condo owner,
Buyers aren’t angry about people like you. If you can afford a house and you can afford to rent at a loss until paying off the property more power to you.
What sucks as a buyer is all the “homeowners” living in their house for free not paying the mortgage. These people are not being foreclosed on. Because they’re not being foreclosed on…
1. They don’t want to move because living for free is pretty nice. Also if you drag out the free rent long enough eventually the bank will GIVE YOU money to move out.
2. They can sit on unreasonable prices hoping for a miracle buyer to come along.
Before you say it’s the banks choice to let people live for free in their homes. Is it really? Banks were given taxpayer bailout money hand over fist to stay in business. If this didn’t occur do you really think they would allow all the free rent?
shadash,
Part of the problem is that buyers assume that ‘homeowners’ living for free off the bank is the majority of all sellers. This instills a sense of entitlement to buyers. The prevailing thoughts on several SoCal RE blogs is that the buyers think they were superior because they were smart not to buy during the peak. Yes, they may have made a good decision back then, but what about now? What is the smart decision today?
The thing is buyers don’t realize with the interest rates as low as they are, if they do the calculations buying is much, much cheaper than renting (at least for the SD condo markets). I am not talking about the type of ridiculous ‘cheaper then rent’ flyers that were passed out at the peak of the market. (Those flyers always had small print unreasonable rate assumptions and balloon-payments.) I’m talking about real fundamentally sound ‘cheaper-then-rent’ in excellent neighborhoods.
Is the smart decision for buyers to live in fear of future declines? Is the smart decision for current home-owners to suck up huge losses now? My calculator and checkbook say no.
Is there some risk to my strategy? Definetly. Do people become wealthy without taking some risk? Very rarely.