From our friend Nick at the wsj.com:
Falling home prices should give aspiring homeowners the upper hand this spring, but in a growing number of locations, it doesn’t feel like a buyer’s market.
Blame the nearly five-year slide of home prices. Those declines, which accelerated over the past two quarters, have left many sellers unable or unwilling to lower their prices. Meanwhile, buyers remain gun shy about agreeing to any purchase without getting a deep discount.
That dynamic has fueled buyers’ appetites for bank-owned foreclosures. Those homes often hit the market at bargain prices, but they are being snapped up by investors who are paying in cash.
At a focus group earlier this month, the mood among buyers was “nasty,” says Glenn Kelman, chief executive of Redfin Corp., a Seattle-based brokerage that operates in nine states. “There’s a shortage of attractive inventory,” he says. “Customers just keep getting outbid on the houses that they want.”
It took Susan Hunter just one month to unload her home in Redondo Beach, Calif., last fall. But she has been outbid on four homes at a lower price point in Eagle Rock, an emerging neighborhood in northeast Los Angeles. Some sold to investors who paid cash. Other listings, she says, are being resold by investors at prices that she says are too high.
“It’s the Wild West out here. It’s a daily, tireless search,” says Ms. Hunter, who works in television production and marketing. Demand is up because “we haven’t been able to find homes here below $500,000 since the 1990s.”
Last year, software engineer Young Hammack gave up looking to buy after being outbid on three properties. This year, he has his eye on a four-bedroom foreclosed house with a pool in Citrus Heights, Calif., that hasn’t yet hit the market. He hopes to pay about half the $492,000 it fetched six years ago.
But the 32-year-old, who is relying on a 3.5% down-payment mortgage backed by the government, is at a disadvantage against buyers who can pay cash. “It’s a false buyer’s market,” he says. “If you think prices are cheap, wait until you start putting offers in.”
Many buyers are looking for discounts because they lack confidence that prices have reached a bottom, and sellers won’t have much pricing power as long as buyers such as Mr. Hammack and Ms. Hunter are in no hurry. “It may take some time, but I’m willing to wait,” Ms. Hunter says.
The Wall Street Journal’s quarterly survey of housing-market conditions in 28 major metro areas shows inventories of unsold homes remain high but fell during the first quarter. Listings were down by nearly 25% from one year ago in Miami and Orlando, and by 12% in Phoenix and Portland, Ore., according to figures compiled by John Burns Real Estate Consulting.
Other markets, including New York’s Long Island and Charlotte, N.C., still face imbalances. At the current sales pace, it would take more than 16 months to sell all homes listed for sale in each market. A balanced market typically has a six-month supply.
Meanwhile, home values fell in every metro area for the second straight quarter, according to data from Zillow Inc. Prices were down by more than 5% in Chicago and Detroit, the largest quarterly drops, to levels not seen in more than a decade.
Values have fallen so far that many sellers with equity aren’t willing to drop their prices. Those without equity can’t cut the prices unless the bank agrees to take a loss in what is known as a short sale. Such sales can take months to complete and fall through at the last minute, deterring some buyers. Still, short sales hit a new high, accounting for 9% of all transactions in January, according to CoreLogic Inc.
“Frankly, until we start building some equity, the market is just going to sit here and do pretty much nothing for the next few years,” says Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles.
Homes that don’t need much repair work and that are located in choice neighborhoods near transit hubs or with good schools are in demand. “What’s selling is the cream of the crop, and they sell fast,” says Steve Capen, a real-estate agent with Keller Williams Realty in St. Petersburg, Fla. “If it’s not cream of the crop, it’s getting hammered.”
Mike Morea and his family have outgrown the 800-square-foot, two-bedroom home he bought eight years ago in Seminole, Fla. He hopes the bank will approve a short sale for about $85,000 for a $50,000 loss. In December, Mr. Morea saw first-hand why buyers are more attracted to foreclosures: he bought one for himself, a $200,000 three-bedroom home in a nicer neighborhood 10 minutes away.
“That’s what every seller is running into,” says the 31-year-old police officer. “Nobody is going to buy your home at retail price if there are 30 foreclosures available.”
While foreclosures are in demand, mortgage companies’ processing problems have sharply curtailed the flow of bank-owned properties onto the market in states such as Florida, New Jersey and New York, where courts must process foreclosures.
To be sure, some of the challenges facing the housing market are easing as the economy adds jobs, boosting demand and easing mortgage delinquencies.Depressed prices coupled with low interest rates have made housing more affordable than at any time since 1975, according to Zillow.
But the legacy of the housing market’s collapse has left two big structural problems. First, the huge erosion in homeowners’ equity has deprived housing markets of the all-important “trade up” buyer. Even those with equity often aren’t willing to sell at current market prices, exacerbating what housing analyst Ivy Zelman calls the “stuck factor.”
Second, foreclosures are still weighing on housing markets. While mortgage delinquencies are down from their 2009 peak, an all-time high of 2.2 million loans were in foreclosure at the end of March, according to LPS Applied Analytics.
Economists say the “shadow inventory” of another 4 million potential foreclosures will keep a lid on prices for years. Even in markets with rising demand and falling inventory, prices won’t go up because “there’s too much on the horizon, so nobody’s in a hurry,” says Ron Leis, a broker in Sacramento, Calif.
Tighter credit standards have also left markets with fewer buyers at a time when more would help. When he needed to move into a bigger home four years ago, Todd Loewenstein sold his Redondo Beach home and began renting. “Now, we want to get back in, but it hasn’t happened,” says the 44-year-old technology entrepreneur.
He fell out of escrow one week before closing on an $850,000, three-bedroom home in October after the lender turned down his loan. Mr. Loewenstein, who was prepared to make a 20% down payment, says he has never missed a payment in his life and has enough savings to last several years.
But he wasn’t able to meet the bank’s tight income-documentation requirements. The home, which sold for $1.25 million in 2005, is still on the market. Mr. Loewenstein says he scans listings every day and is still looking to buy.
If sellers weren’t allowed to live in their house for free by the bank there would be a larger number of houses on the market. More houses = less bidding wars.
That’s sort of like saying that if everyone who didn’t have to sell their homes suddenly decided they had to there would be more houses on the market.
If banks that own homes are willing to give away free occupancy to avoid having to sell them and the banks’ stockholders don’t seem to mind, the effect on inventory is effectively the same as individual owners who decide to let their kids or in-laws move in rather than sell at current prices. The prices willing buyers will pay don’t define a market value if there aren’t willing sellers.
GeneK,
If banks used their own money to purchase assets. I’d agree with you 100%. Why should banks be forced to sell at a loss in a down market if they have enough revenue to keep the business running until they feel more comfortable selling.
Unfortunately banks don’t work this way. They steal from the taxpayer through things like TARP and they steal from the American dollar via Quantitive Easing “aka money printing”.
Why do you think gas is selling for $4+ per gallon and gold just hit $1500?
Yes, the “market” is quite rigged. A patient, and disciplined buyer will be rewarded.
Are there any left?
Maybe They figured it out and this IS the best option for both the tax payers and the banks,
Anyway, this is what I was trying to say before.,
A market of Foreclosures is really a lousy market for first time home buyers,
“….in Eagle Rock, an emerging neighborhood in northeast Los An/geles.”
Eagle Rock is an emerging neighborhood? You’re kidding?! Wow times have changed in LA, thats for sure. If it can change there then I am cusrious to see what happens here.
Ah, jeez, here we go again. Shadash, I thought you were an economist.
Anyway, if prices are too high, then don’t buy. Some of you act as if there’s the obligation for homes to be priced lower. Truth is that prices are as much set by buyers than sellers — and plenty of stuff is selling, thus prices (on those places) must be about right. I’m sorry if some of you don’t like it (I don’t, on the places I like!!).
Foreclosures are bad news for everybody except cash flippers. Unfortunately we’ve got a couple more years of this weirdness to go.
If there were more houses foreclosed on like Shadash wants then the situation would just continue with every increasing expectations of lower prices but combined with total economic ruin for the average American.
” Eagle Rock, an emerging neighborhood ”
I remember when corona was just a pit, with nothing but Junkyards and cattle an such.
Now it’s one of the best area’s in RC.
Places that were nowhere suddenly become somewhere in the blink of time’s eye in SoCal,
They are projecting 400 million population by 2050 in the U.S.A.
Currently there are about 300 million, a good part of that growth will be in SoCal.
“Mike Morea and his family have outgrown the 800-square-foot, two-bedroom home he bought eight years ago in Seminole, Fla. He hopes the bank will approve a short sale for about $85,000 for a $50,000 loss. In December, Mr. Morea saw first-hand why buyers are more attracted to foreclosures: he bought one for himself, a $200,000 three-bedroom home in a nicer neighborhood 10 minutes away.”
I was bit surprised by this part of the story. If I was a bank I’d probably consider going after the balance on this one, but I have mixed feelings about it.
As for the housing market it’s been tough for both buyers and sellers for quite some time and I don’t see much that will change things in the short term. If commodity prices and especially gas prices persist at higher levels I could see potential for things to become slightly more negative but it hasn’t happened yet.
Aztec,
I’m still an Economist. Here’s a good article describing our current economic state.
http://www.nytimes.com/2011/04/24/business/economy/24fed.html
Whatever you believe I think we can agree that $4+ gas and a general increases in commodity prices isn’t something America can sustain long term.
Housing in much of America has become not a place to live but a place where people with cash or access to it go to play a game of buy, hold (briefly) and then unload homes for a higher price.
I separate the flippers from the the now much smaller group of traditional investors who buy one or more properties to rent out. The latter group will sell if the right opportunity presents itself, but they are mostly property owners, not flippers.
This might be harsh, but the flippers are like locusts. They’re not the only force destroying our neighborhoods, but they’re the most recent mutation to emerge from the housing bubble.
Guess there isn’t enough supply for the bottomfishers. More demand, less supply so far. Nothing that price (higher offers) won’t fix. Works both ways.
Who Dat
Prices are already much much lower … But on the inventory that you don’t want to buy !
For the desirable properties in good school districts … There is enough demand and very less supply
Everybody wants to have that ONE … Foreclosures or not … Trend continues
@4 -A patient, and disciplined buyer will most likly loose it to the one with a bit of less patience … This has benn the trend so far with ongoing bidding wars.
Market is set by the least patient and most ignorant
Been there done that with patience … still waiting even after 3 years … Kids will be completing elementry and still renting an Apartment and waiting patiently ;))
First, the huge erosion in homeowners’ equity has deprived housing markets of the all-important “trade up” buyer.
This is precisely why prices will come down further and stay there for a long time.
p.s.: Eagle Rock has been “an emerging neighborhood” for 20 years now.
Well with the money becoming worth less (aka Inflation), hard assets, if historically accurate, will appreciate in price.
Thaylor,
That’s only historically accurate when it’s accompanied by “wage inflation”.
Nobody asked me to sign off on TARP, and I wouldn’t have (my approach to the bubble bust, which I have previously posted, would have been to provide some direct assistance only to people who didn’t over-borrow but who were in mortgage trouble due to job loss or catastrophic illness and underwrite low interest loans for people with good credit and no defaults so they could buy the foreclosed homes of the deadbeaters and strategic defaulters). But since nobody asked me, the current situation is what it is. But I definitely think it’s time to tell any bank that is still holding onto TARP money and has foreclosed homes on its books that it’s time to settle up.