The real estate market tends to lag behind the rest. Unlike stocks and bonds, it’s too hard to qualify if a good deal went bad while in process, unless a low comp out of nowhere pops up across the street.
Interest rates have the biggest impact, so we’ll see how they end up over the next few days, but last week they were around 4.5% for conforming 30-year fixed-rate mortgages. If there was a big spike to 5.0%, we’d survive, but if mortgage rates got into the mid-5s it would be troublesome – we’d see cancellations.
We are a nation of gawkers – expect that there will be a lot of standing around this week, wondering what to do. It would be impressive to see sellers react with lower pricing, but it’ll be more likely that they’ll stay numb.
As we’ve been discussing in your recent Bof A post, one of the big questions is how are the banks going to play in this game now? REOs and shorts are a significant piece of our local RE market, and clearly the banks do not have their act together. Will their irrational behavior scare more buyers out of the market?
I agree that most “regular” sellers will be in shock and numb for a while and not lower prices quickly enough.
Banks are probably the biggest wild card. Voluntary sellers will definitely lag in lowering prices if that’s where the market takes us.
BofA actually looks like it might be in some trouble, so I suppose there exists a chance that they might be forced to liquidate REOs rather than letting them just trickle out like they have been. The stock price is reflecting some capital problems. I suppose if bank starts liquidating they might all start liquidating but I’m getting a little ahead of myself. Need to see how things play out over the next couple of months.
With all the talk about banks in trouble I smell QE4 around the bend.
Sorry, Jim,
Rates are headed LOWER, not higher.
Consider this… according to S&P, there are now many housing debt backed bonds that have a HIGHER CREDIT RATING THAN THE US GOVERNMENT! Just take a look at 30Yr this morning… under 4 3/8ths, and in some areas, clearly below 4 1/4.
I would be surprised if we didn’t see even LOWER rates than ever before. Sub 4% 30 yr fixed by the end of the year.
The real problem is demand, and that’s getting worse, not better. Unfortunately for SoCal sellers in high priced areas, much of the housing prices are closely correlated to equity prices. This latest dump, unless quickly reversed, will fuel lower housing prices.
Chuck
“The real problem is demand, and that’s getting worse, not better.”
Isn’t that a matter of perspective? As someone who would, in principle, like to buy a residence, I tend to see it as an issue of price and quality. What are the price-income and price-rent multiples like these days?
I think we’re seeing it the same way, Chuck, but can we avoid saying “the real problem is demand”?
Demand is NOT the problem, pricing is the problem.
And Nate, for the standard residences which we focus on here, the price-rent multiples have as little to do the decision-making as ever.
Most buyers see house, like house, buy house, unless they are throughly engaged in the investigation, and have quality help.
Jim,
In Economics, demand is a function of price and quantity. So, I stand by my statement… no offense intended, but seeing it only as pricing seems to me to be too narrow.
There was a substantial left-shift of the demand curve since 2006 throughout SoCal. We’re now below 2001 pricing in many OC neighborhoods, despite interest rates being halved, and average income increases in the meantime.
Confidence in the future plays a great deal into that. At this point, generally only 2 kids of people are moving: those who bought before 1999, and foreclosures/short sales. And, there’s a lot of overhead pressure on sales for the foreseeable future without a much improved jobs market.
Saying it is a pricing problem looks at the issue only as a function of how to increase the number of sales. When purchases are cash-flow positive, demand is more driven by sentiment than affordability.
Those currently awaiting buying are hoping for even worse sentiment; speculating on worse conditions. This is just the other side of the coin of bubble era buyers, and not a sound investment philosophy.
Chuck
It’s hard for the arm chair quarterback to judge real estate demand because there’s no list of people saying I’ll buy a home at this price. Jim probably has a decent handle on it just from knowing how many buyer side clients he has and talking to other Realtors. We can see there’s demand at the listings that are priced fairly. Maybe if a bank comes in with a bunch of well priced inventory we’ll see demand lighten, but for now it’s still a stalemate.
I’m sure your economic thoeries are accurate Chuck, but I have livinincali backing me up today!
See house, like house, buy house is the reality.
OK, Ok… you win this round.
If it weren’t for those meddling kids!
The way I look at it is this. Say we have an car auction. At the auction we have a room packed for a car buyers that are willing to bid, but every car is started at a point that’s 10% than market rates. When the auction is over and hardly any cars have sold the auctioneer is going to say man if those sellers had just priced their cars right we would have had a ton of sales, we had a packed room of people willing to bid. Jim is the auctioneer.
We’ll never know if theory and reality will cross paths – it would take a house to be put up for sale with no reserve and it not sell, to say there is no demand.
I think we are going to come to a point (soon) where real estate might be a better option than what we have right now. Treasuries are not worth it, bank CD’s are not worth it and commodities prices are in a bubble and will burst. The only thing left might be to go after real estate.
Oh no…
Realogy Corporation, a leading provider of real estate and relocation services, today announced that it has sent a formal request to President Obama and his Administration calling for a White House Summit on Housing.
“Housing has an enormous impact on our nation’s GDP and given its substantial influence on all aspects of the economy, we believe it warrants special attention from the White House,” said Realogy CEO Richard A. Smith. “The key to the proposed White House Summit on Housing would be its emphasis on bringing together real estate business leaders to make actionable recommendations designed to stimulate the growth necessary for a sustained recovery in housing, which would have an ensuing positive effect on job creation and the broader U.S. economy.”
“We believe that frontline business operators from the residential real estate industry would add a valuable perspective to the process, and this summit would give the Administration the benefit of unfiltered, real-time market feedback from business leaders who are residential brokerage operators, real estate franchisors, homebuilders, mortgage lenders and other related industry groups,” added Smith.
In his letter to the President, Smith concluded by stating, “Your leadership on this issue would bring together the top business minds of the residential real estate industry at a time when practical business experience may very well offer the guidance necessary to stimulate housing, and thus, the U.S. economy.”
“See house, like house, buy house.” JtR
Yep, I completely agree with Jim. After years of renting, I bought a home last November with a 4% fixed 30-year mortgage. I have absolutely no buyers’ remorse. In fact, it’s on my top 5 list of best life decisions…
I have to agree with Jim on this – I bought two years ago knowing the price of my place would go down, but it has gone down less than the stock market, and I LOVE waking up each morning in my own place. As I have mentioned here before, people buy 60K (and up) cars because they love and want the car, even though in 10 years they know the car will not be worth much. People are not always rational when it comes to personal decisions.
I am with Susie on this one. We also bought a house in Nov. We got a great deal as well and are not house poor after years of renting. Moving here in 04, we never thought we would be able to buy in SD (within what we consider, a “reasonable” amount).
There are pros and cons to owning, but so far owning has been fun the more I get used to it.
“I think we are going to come to a point (soon) where real estate might be a better option than what we have right now. Treasuries are not worth it, bank CD’s are not worth it and commodities prices are in a bubble and will burst. The only thing left might be to go after real estate.”
That’s certainly possible although expect to see quality multi-family go first if people get into the mode of income producing investment property.
What a roller coaster. I think the key is not stressing about what we don’t control. Find house wife likes. Buy house. Ignore daily real estate news. (Then tell me how.)
So the earliest we can say that this is a Double Dip is in December after the Super Committee gets back with their proposal?
livinincali – multifamily (aka apts) are already priced through the roof due to investor/renter demand. Usually 10+ offers on quality multi family deals these days.
They are yielding around 4%-6% +/- these days but with very little logical appreciation to come.
On the other hand, industrial/etc can be had at 7%-9% current income plus a good 50%+/- of upside potential.
Multi-family deals pencil out so well, you can actually build a new project and make a serious profit. That cannot be said for other product types.
In fact, we are breaking ground on an 80 unit student housing deal that already has a wait list to rent and we haven’t even graded it yet.
This recent drop in the stock market has to have the Boomers shaking in their boots, they can’t take another massive hit to their retirement funds at this late stage. Many of these same folks may be the “deer in the headlights” sellers out there, will this shake their confidence and get more real on their asking price? If I was that late in the game and watching the downgrade of debt and scarey stock market I’d be going to cash quickly and downsizing where I live. Just my opinion though.
“Those currently awaiting buying are hoping for even worse sentiment; speculating on worse conditions. This is just the other side of the coin of bubble era buyers, and not a sound investment philosophy.”
In fact, buyers who have waited have been rewarded and so they are likely to continue to wait because it has been the “winning” move. This works until it doesn’t.
When folks “feel” rich, they buy (like when their house was ‘worth’ 1.5m and they bought SUV’s and electronics like there was no tomorrow).
When folks don’t feel rich, they don’t buy.
There’s a lot of folks feeling less rich than they were a few weeks ago.
Personally, I just lowered the price on my La Jolla Village listing today. Not because of the market tumult, but because of timing. Its getting toward the later part of summer so now is “go” time.
It will either sell or Fall will role around and I may take it off the market and rent it out. Right now the upward pressure on rents changes the equation and raises the floor of what I would sell it for. Not dramatically, but it makes it a little bit more likely that I just convert it to a rental and hold off buying in my new market.
My situation of course is not the same as others. Healthy equity, selling because I want to buy a much more expensive albeit smaller place in my new city, and financially able to float both the mortgage and rent simultaneously for a while. The main factor I think about is if and by how much values go down in the next year or two and if rent profit would mitigate the equity loss.
“One mortgage broker in Philadelphia told me that 30-year mortgages he is pricing today at 4.375 percent (no points) will likely go to 4.125 percent tomorrow. Fifteen year mortgages priced today at 3.5 percent will likely go to 3.25 to 3.375 percent. ”
This should help move a few properties. We don’t seem to be getting the massive inventory increase that we got this time last year (at least in my neck of the woods).