Alejandro Lazo from the L.A. Times is doing his best to sort through the excuses about why homes aren’t selling, but it’s not easy. He found the usual psycho-babble was to blame – ‘economic woes’, ‘tax credits’, ‘household formation’, and ‘job creation’.
Except one guy had a thought you rarely hear:
San Diego real estate agent Jim Klinge, who maintains the popular blog Bubbleinfo.com, said the key behind the sales slowdown last month was simple: Prices are just too high.
“Sellers are too optimistic on price. They think the market is better than it is, and they think they deserve more money,” Klinge said. “The buyers are smart. The Internet has leveled the playing field, and buyers are paying attention — they are checking the comps closer than ever, and they are not going to overpay for a house.”
Klinge credited those cautious, well-informed consumers as partially to blame for the October sales slowdown. Escrow closed on only 16,744 properties last month, down 24.3% from the same month last year, for the second-worst October since 1988, when DataQuick began its tracking. Sales of newly built homes posted their worst month on record.
So whats it going to take for phsycology to change in the housing market?At some point people are going to be buying again when they see prices rise.Greed will kick in and well be off to the races again.Will it simply be prices rising over lets say a period of a year?
joe, I think you’re going to be waiting a long time for psychology to change. It will remain a buyers market until the excess inventory has been depleted – which is anywhere from 5 to 10 years, depending on jobs and new household formation.
The laws of supply and demand are what they are. Right now, there is a lot of supply and the demand is for well-priced premium properties. I’ve been having this same argument on another blog with a seller who is claiming that there are no buyers for her “bargain” house that is 35% off peak. She’s pretty pissed at me for continuing to point out that there are plenty of buyers out there, just none that agree that her property is a “bargain.”
I keep saying this – had prices been lower in the next level up, I would have been a buyer instead of a refinancer a few months ago. Move up buying is just not going to happen until mid-range drops more.
There could be some kind of regional thing driving up demand – like new aerospace or something. Lots of money coming in could also lubricate the market.
Actually I think there is demand out there but people are scared to buy when prices are falling.They think they are going to lose money so they are tepid.At some point this will reverse and people will be buying again because they see people making money.
When people say that owning is stoopid then it time to buy.Waiting for cover of TIME to say how lame it is to own a home.
Some people are worried about their jobs. Job-loss insurance coverage may help:
http://abcnews.go.com/Business/wireStory?id=12135498
Art Eclectic-Depending on the property, condition, and location, 35% off peak might very well be very over priced. In some areas, discounts of 60-80% off peak are not uncommon. The world record, as far as I know, is this Palm Springs house, which sold recently for 95.6% off peak:
http://www.redfin.com/CA/Palm-Springs/398-W-Palm-Vista-Dr-92262/home/6044258
Makes 35% off peak seem insignificant, doesn’t it?
joe, that was last year. Go look at a pricing ans sales charts for SoCal real estate from 1992-1999 and you’ll see that it takes more than a change in psychology. It takes market clearing prices to find a bottom and it takes significant economic growth to create a sustainable upward trend in transactions volume and prices.
If the pandering politicians would stop all this endless pressure on lenders and servicers to delay foreclosures and modify defaulted loans, and if instead they would force lenders and servicers to make a mod decision within 60 days and speed up foreclosures to be completed in less than a year, and offer gov’t cash for keys to get the deadbeats out, then we’d get some true price discovery and find a bottom within 12 months, and all those new homebuyers would invest money in remodeling, redecorating, furnishing, etc. which in turn would create residential real estate related job growth and we might hope for a sustainable recovery in housing with slow, steady appreciation to start by 2013.
Instead, with government and banks conspiring to limit inventory and continue the free rent for deadbeats who they hope vote, we’re gonna be stuck in this standoff until 2015.
Jim, great post !
I guess knife catching is not a popular sport these days unless there is some free cheese.
Some of those older houses you showed are just way overpriced. Even after one spent a ton of money on the inside , most houses still look really dated on the outside. Buyers these days are more aware of design and trend due to popular media;so they are more picky on what they want. I predict slow sale and declining prices especially on old, mediocre houses.
Sean, comment #7-I so COMPLETELY agree with your entire post! If I could just find that REO that needs a ton of elbow grease and fix it up dollars, I’d probably be contributing in the order of $70-80k to the economy in the first year! But getting the bank to understand it’s not 2007, beating a flipper to it, and winning bidding wars against cash buyers/flippers is a challenge for the average Jane. Appliances, paint, carpet, hardwood, lighting/plumbing fixtures, some labor, landscape materials, furniture, the list goes on! I call it a labor of love and rebuilding a home, not an investment.
I disagree that there are lots of people afraid to buy because prices might be lower next month.
They also might not be lower next month. Either you find a property you want at a price you both afford and consider a fair deal, or you aren’t really interested in buying unless it is a screaming deal.
People who are afraid of more price drops aren’t shopping for a place to live, they are shopping for a money-making opportunity. Not the same thing.
Geotpf – I’m pretty certain that this seller’s “35% off” is overpriced. It isn’t selling, so it kinda must be. If it was priced right, a buyer out there would be on the hook. That seller thinks 35% off bubble peak is “giving it away.” That need 10% drop is going to hurt, but it’s not my problem 🙂
“I disagree that there are lots of people afraid to buy because prices might be lower next month.”
Art, I think that this poster is essentially correct that people are less likely to buy when prices are dropping and have dropped for a sustained period. They are much more likely to buy when prices are going up.
For example, suppose prices are going up say 3-5% a year and you can afford on the beach, where you really want to live, is a condo. Well chances are that if you got the money and are going to stay for a while you would go ahead and buy the condo because you know that you are making a good investment and perhaps you can make some equity and upgrade later.
Now, on the flipside, suppose prices are going down like 10% a year for the last couple of years. Suppose once again that all you can afford is a condo by the beach. Are you going to buy it when there is a chance of getting a real house down the road. Are you going to take the plunge only to see what you really wanted come on the market a year later? I think the answer for most is no.
When prices are dropping they are simply going to wait until two things happen. The first thing is that they can get the property they want and you know as prices keep dropping the aspirations of a buyer start to increase exponentially. The second thing that could happen is that as the original poster says prices could start to climb for a sustained period. That might get you off the fence and inspire you to “settle” with what you can afford rather than wait for better opportunities in the future.
You all have valid comments but I am bullish on real estate.These are the times you buy and then sell into the next boom.I dont think anybody likes being a renter.Renters didnt make a dime in this last real estate boom.You are not going to pick a bottom in this cycle.If you can cash flow on a propety then it can make sense to buy.I’m not going to sit around and wait till prices are on the rise again and get into bidding wars.As much as I’m for free markets I can say that if the govt hadnt got involved we would be in the most hellest depression you have ever seen.
pemeliza – if all you are looking at is numbers, then sure you might think that way. But there is more going on when buying a house than just numbers, there’s a lot of emotion that sometimes trumps numbers. A anxious spouse/partner can supersede numbers pretty easily. Trying to time the bottom never works for stocks and it’s all just guesswork when it comes to houses as well.
If you are always waiting for something better or a better deal, you’re going to miss out on a lot of things in life.
Joe is right. Feels a lot like February 2009 right now doesn’t it?
Let’s all now watch inventory go way down and sales hibernate until spring.
I hope the banks execute more foreclosures to end this silly short sale and loan mod process. But, they should also hold back on releasing more supply into the market.
This would scare people into having some backbone now and start paying again instead of gaming the system. The timing is right, the economy is improving, low rates and an end to massive layoffs. Any homeowner who has made it this far is going to survive this cycle. Should be a good winter for deals before the cash flippers jump in again.
Mozart!!!
@art electric
+100
joe, you said: “Renters didnt make a dime in this last real estate boom.You are not going to pick a bottom in this cycle.”
There are plenty of “owners” who lost their shirts in this last real estate boom. I bought this past year, but I am still bearish for another year or so. I bought because the most of the rundown on my property has occured and there isn’t much downside left.
Overall, I just don’t see a driver for house prices, except for hyperinflation, which can keep house prices nominally flat.
More likely, we are going to see biflation…increases in food and energy costs, decreases in real estate costs…stagnant wages. That bodes bad for the current median real estate multiplier(which is 4X income right now?)
As a result, my advice to my friends is get out there and look, but don’t rush into a property that you think is “overpriced”. They will eventually find something at 2002 price or earlier.
“Prices are too high” and “overpriced” are the obvious short answers. Psychobabble and calculations about regional incomes and job prospects kick in when you try to talk about *why* prices are too high. Looking at the usual list of “reasons,” it seems to me that the quick answer to which of them is “the one” is “all of the above,” because it’s going to be different for every buyer and seller. Once you exclude REOs and short sellers and buyers who are being pressured by SO’s to get the family into a house, what’s left is a standoff between a relatively small group of might-be buyers who can afford to buy but are in no rush to jump into something and a seemingly large percentage of might-be sellers who are not under any urgent pressure to sell, and neither of those seem about to blink anytime soon. So what’s left is those people who are in a hurry to do one or the other. My realtor up north (retired before the bubble burst) would have told me that these people don’t define “fair market,” but if they’re the only ones buying and selling, who else is there?
As a commercial RE investor, we are just now starting to slowly move into the early innings of a bottoming process…finally. Everything else since 2008 has been spring training and preseason (and everyone has been wrong so far as commercial fundamentals have continued to weaken).
However, we are starting to see fundamentals begin to mirror the mid/late 90’s levels as it relates to the combination of rents/vacancy/yields/cap-rates.
This is noteworthy as we’ve seen it before and were in the middle of it last time. At the Wall St. fund I worked for in the mid/late 90’s we were able to buy over $1B of commercial property with highly reduced rents, large vacancy, priced to yield a 9%+ CURRENT all cash yield. Thus, they paid for themselves plus a good yield with lots of upside when things turned around.
By the early 2000’s we had doubled our portfolio net operating income and cap rates dropped 150+ basis points. On a leveraged return we more than tripled our equity in < 10 years.
The point is that we are beginning to see pricing heading south coupled with the same fundamentals of the time so its worthwhile to begin edging back in (but don't go all in yet).
Buy a bit before the bottom, a bit at the bottom, and a bit after. Just ensure that you are not over leveraged (we are fond of 50% ltv) and have stable current cash flow along with a 7+ year hold.
Our view is that there is a 3 year window to slowly stock up on highly discounted commercial assets that you will look back on in 10 years and be very happy.
GeneK – the DO define fair market because they ARE the market. Everyone else is only willing to move if they can get their price (high enough for the seller and low enough for the buyer.) The people who are actually looking to get a deal done are the ones who make the market.
In sales, that is called that focusing on prospects, not suspects. The real prospects are the ones who are actively looking for the product/service and can afford to buy it. You want to focus your time and energy on those potential customers are in the market and ready to buy, not so much the looky-loos….
Joe, you said no one is happy being a renter. I think plenty of people are, they just aren’t on this blog! For many, renting is the better choice. They can move easily and aren’t responsible for any repairs, maint, landscaping, etc. I’m a homeowner myself, but I can see the appeal of renting.
Keep renting and be on the sidelines kicking yourself as other are making money and you sit and b@tch about what could have been.
“Keep renting and be on the sidelines kicking yourself as other are making money and you sit and b@tch about what could have been.”
I haven’t seen this type of comment since 2005. Must be time for another big decline in real estate prices.
I’m a happy renter 🙂
So am I… beats overpaying for a tract house. Sellers need to come to grips with reality if they are serious about selling. Otherise, take your damn OPT off the market!
JtR- I couldn’t stay away. You’re blog is way too entertaining and insightful.
Happy renter here too. Will change that status if and when the numbers make it advantageous to do so in a place I want to live.
Comments 7 and 17 (among a few others) are awesome.
Well done Jim…thanks for being an honest, ballsy Realtor and standing out amongst the charlatans and liars.
If only more Realtors were like you.
It’s hard for sellers to let go of free money they never even earned. The feeling of self-righteousness and entitlement run high in this society right now.
Compound that problem with the sharks and crooks out there in the brokerage and banking businesses and you have an incredibly strong platform that is forcing prices to remain high.
What current sellers don’t understand that while they are trying to screw everyone out of more money, they are going to end up screwing the next generations as well. Most of my friends’ children stand absolutely ZERO CHANCE of ever owning a home…ever.
But who cares right?
JOE SAID:
“Actually I think there is demand out there but people are scared to buy when prices are falling.They think they are going to lose money so they are tepid.At some point this will reverse and people will be buying again because they see people making money.”
No people aren’t scared of falling prices…people are waiting to get good deals and let prices go back to normal.
The fundamental problem is that housing shouldn’t be a money making game…it’s a place for people to LIVE and have a family grow. The mentality you’re promoting is that we should all cannibalize each other all the time.
What would be the point of prices rising again at a rate where no one will be able to afford it….AGAIN?
So who’s going to be left buying homes? The next generation? The generation after that? No it’s going to be the people who made money out of nothing and keep upgrading to the next level.
Are you taking enjoyment out of the fact that now the average family has to spend 60% or more of their income to buy a decent home? You think that’s healthy?
For me, having the ability to personalize my own space in terms of decor, layout, fixtures, etc is worth paying what may end up being a few extra dollars. With interest rates and prices where they are right now, it would be an easy decision. Maybe some of us are just more willing to take a financial gamble to satiate our aesthetic inclinations.
I too am a happy renter! My rent is way under market with ocean view here in D.M. and the wife is happy with the place! Just saving more and more for 30% plus down when we do decide to buy!
I like clearfund’s answer in terms of investment. As far as primary residence, if you want to buy a property and you don’t care about it declining 30%, then be my guest. It’s not about “making money” on your primary residence…it’s about having decent enough cash flow on your household income that you aren’t eating top ramen to feed your family. The argument is then made to not buy a house at all for that price if that is the case.
The best metric is to find rentals in that area and multiply the monthly rent by roughly 216 or 240 to get a house price. That is what *should* be the bottom of that particular market. Then you decide what kind of premium you want to pay for THAT house at THIS time and what won’t keep you up at night 3 years from now, should that premium evaporate.
Nobody is saying don’t buy now…just don’t go all crazy thinking that 20% yearly appreciation is around the corner. Expect the best but prepare for the worst is the best advice.
I live in Sonoma County and if you price your home right it will sell quickly,usually within days. I went on the local broker’s tour today (Small town) and looked at 3 places. One was a short sale and priced well enough to bring offers at close to asking. The two others were at May/June pricing, too high for today. Buyers do their homework these days,sellers not so much.
Houses aren’t selling because they are priced too high. I love it. Why people always look for esoteric explanations for prosaic happenings is a mystery to me.
It reminds me of all the articles a few years ago about why GM was doing so badly. You’d read articles about how it was because of pensions, unions, or lack of an educated work force. Anything, except that it was because 90% of their vehicles were terrible. If you build a bad product, of course your business doesn’t do well. Duh!! Fortunately, there is some little sign their products are getting better now. One can hope.
Remember that guy from the New York Governor’s race…the older black guy with the distinctive beard of the “The Rent is Too Dam High Party”?
Well Jim should be the leader of the “Prices are just too high Party”.
@Jim: Where are the T-shirts?
Houses aren’t selling because they are priced too high. I love it. Why people always look for esoteric explanations for prosaic happenings is a mystery to me.
Occam’s razor. Jim’s all over it of course.
I also like his take on the growing division between the haves and have nots as it relates to premium real estate pricing.
Jeeman-There are lots of places where house prices are much less than the 216-240 times monthy rent you suggested. I bought my house in Riverside last year. I could easily get 1% of my purchase price in monthly rent (that is, I only paid about 100 times monthly rent). I believe I got an above average deal, but lots of houses in the city of Riverside would sell for less than 216 times monthly rent. Multi-unit properties here are even better deals.
Geotpf,
In that case, not buying is definitely the worse decision if you plan on living there or plan on investing in real estate.