patrick.net

In the Bay Area, the common perception is that there are enough people who can afford to buy at inflated price using creative financing. As a result, the sense of invincibility develops. However, "eventually, realty always asserts itself over wishful thinking" (Kohn, 2005)

Most people on this blog can probably "afford" a high-end Vertu cellphone. But will any of us buy one soon?

When people do not want to buy because of a change in sentiment, prices must correct.

I think mass psychology is a big part of the run up. The dot.com boom was so great that people didn't want it to end.

I think mass psychology is a big part of the run up. The dot.com boom was so great that people didn’t want it to end.

As I have said before, the market is 99.5% psychology and 0.5% fat-finger errors.

Funny that Alan Greenspan is not being prosecuted … even by economic historians (if not by justice department)

Historians? Let's wait 20 years.

Funny that Alan Greenspan is not being prosecuted … even by economic historians (if not by justice department)

hang him high...

The short answer:

Downward prices in all imperfect markets* are always sticky.

Real estate is an imperfect market. It is an inefficient market. It is a market where transactions are long and assets are not liquid.

Add in a huge dose of buyer & seller psychology factors (mental accounting) and things become that much stickier.

Please note, all those who knee jerk against the very utterance of "sticky". Sticky is not the same as soft. Sticky prices can still happen in a hard landing. Also, we're very clearly experiencing sticky at this very moment.

A technical analysis of price action I prepared a couple of weeks ago.

Just got back from three days in my old stomping grounds in San Jose.

For the most part, the city seems like it getting old.

Have they poured any money into the streets lately? Hwy 87 coming out of San Jose looks like crap. My old neighborhood near the SW foothills is way overpriced and looking rather dumpy.

I was considering giving SJ another try, but Phoenix is looking pretty good compared to Cali. Finally, the hot, hot weather is breaking and it's getting a little cooler.

NAR:

Second biggest national Median price drop ever. One of only 4 in 30 some odd years.

Inventory down slightly in Midwest and Northeast, probably because prices there are coming down significantly.

Inventory up in West. Probably because prices still edging up, stubbornly.

According to CNBC about 15 minutes ago, the inventory nationwide is the highest since 1993. They even explained the concept of 'sticky prices' at grade student level..

From the last thread: @David J and LILLL

Wow, in great company ! Count me in the Unholy Trimverate, as I'm in Van Nuys.

Like you, we're waiting this out. I look up our rental on zillow every time the prices update and have seen a small decline in the Zestimate over the last couple of weeks, but our modest 2b/2b a quarter mile from Van Nuys Airport is still over 600K. Though not quite as crazy as El Segundo - i go and have a look for stuff there on ZipRealty every once in a while for entertainment purposes only.
Anyway, nothing much more to add except to say its nice to know that we're not the only ones waiting and wondering in the San Fernando Valley...

Folks,

Don't lose sight of the downturn in new housing starts. Many of the major players in new construction have either delayed new projects or simply walked away from land commitments altogether. When you look at basic supply and demand numbers as measured by unsold inventory, as soon as the excess begins to diminish, upward pressure on prices will take place. There are ALWAYS people who will buy regardless of any logic or fundamentals which will begin to shrink the available inventory.

A word of caution....don't let what you want to happen influence what the market is telling you. I'd keep a keen eye on inventory levels.......

Just my 2cents worth

wish vacancies would go up here, and send rents AND house prices crashing... altho land releases and new building may have been curbed to add in the strangulation of supply factor to keep prices artificially high...

We finally have YoY national home price declines. The West held out with a 0.3% increase in prices - I suspect this will reverse soon - it's probably based on lagging locale price increases (UT, WA, OR) and lagging-indicator nature of existing home sales in general.

Here's the link to the NAR existing home sales report for August Randy H alluded to:

http://www.realtor.org/PublicAffairsWeb.nsf/Pages/ehs_aug06_existing_home_sales_holding?OpenDocument

"Existing-Home Sales Holding At A Sustainable Pace

WASHINGTON (September 25, 2006) – Existing-home sales stabilized at a sustainable pace in August, while home prices showed an anticipated decline, according to the National Association of Realtors®. "

Now is that title and opening sentence a demonstratoin of the mastery of spin, or what! "Sales numbers plummeted, but thank god they're now sustainable. Prices declined, but it was expected, so please, don't panic!"

Allah,

I don't think its as simple as 2 types of buyers (rich and average). Despite the obvious slowdown in sales and (now) declining prices nationally, sales volume has not gone completely to zero. the current drop of even 20-30% in sales volume in bubble markets is definitely a plummet in my book, but there are still a vast number of transactions going on (the other 70-80%). I agree that there are idiots wtill willing to buy just to get in a house, and there are the filthy rich who don't care as much about price (although many of them don't want to buy in a declining market, I'm certain). But there will always be a steady stream of people buying and selling for the "real" usual reasons - job relocations, marriage, divorce, death in the family, retirement, etc., otherwise volume would approach zero. However, more and more of people in these situations may be deciding to rent for a while, or at least postpone the life event as much as feasible based on the market.

I went down to the coast (Half Moon Bay -> Montara) and cruised a 5-6 open houses. The whole coast is up for sale with open houses everywhere. It was a spectacular day, so one might have thought they would be more crowded, but instead there was just a few older folks (curious locals- "I always wanted to see the inside of this house.") and one young (late twenties) couple who I saw twice.

My perception was that the asking prices are either what was appropriate last year or they're asking way above even last years prices. Once the indian summer disappears and the fog rolls back in, there's going to be real panic down there.

Given the average length of "ownership" the bidding up of home prices makes about as much sense as bidding up the prices of season tickets, hotel rooms and parking spaces.

The article Ha Ha linked from Money Week shared that residential building soared 35.6%. The big laggard in domestic spending was business non-residential investment up only 3.6%. So we're spending TEN TIMES as much on building McMansions as we are on business development? What is wrong with this picture?

But sellers are still in the twilight zone asking crazy high prices. Definitely “sticky” so far.

People will only ask for prices that are affordable to them. Psychologically, many people think that paper losses are not losses. (But paper gains are real gains?)

Doug H's words should be taken as sage advice.

I think a good number of folks here and elsewhere have let emotion and desire cloud their perception. It is only human to want prices to come crashing down at exactly the point when you're ready to buy. You might as well play the lottery as you'll have more chances there of "winning the game".

Buying a home is not an investment. Again. buying a home is not and investment. It is something you do as a quality of life decision. Economically it is called your "utility". The value of this utility changes as your life changes from things like marriage, divorce, kids, kids leaving, retirement. There is a financial factor in home ownership. It is affordability. If someone can afford a home, and they believe their life will be better by owning a home, then their decision to purchase at whatever stage of whatever cycle is largely irrelevant.

Worse, if you get too caught up in the financial engineering of the situation, and lose sight of why you buy a house (as a primary residence), then you'll most likely end Fd yourself.

A home is not an investment. It is a place to live that also acts as a savings account over time, as you pay off your mortgage.

Take that to heart when you read all the punditry from folks here and elsewhere. Many are either too smart, too invested, or actually professional real-estate investors/operators themselves. You are not a landlord of 500 units. You are not a REIT manager. You are not a public homebuilder CFO. You're just a guy and/or gal wanting a nice place to live for you and your family.

SQT,

We're even seeing that in Oregon. Just go to Craigslist on any given day and look up "Homes for Rent" (then please to notice same said home also in the "Real Estate For Sale" section)! Prices (prices) sheesh, are all over the board. I've seen these clowns have it "listed" for 700K (get ZERO action) and then pump it up to 850! We'll assume that at 700K it was drawing the "wrong crowd" and now that it's more appropriately priced the well heeled will be coming out of the woodwork to throw money at you!

Investigate further you'll also find it in there somewhere (or at some time) as a "Lease to Own" home. I'm sorry, I just don't know any other way to put it. That smacks of desperation! So that's your business plan. Let's see, I'll pay ridiculous amount of money on a momentum play, get re-dickle-dockle loan, then sell/rent/Lease2Own? Can you believe this garbage in/garbage out thinking?

Buy this house and I'll give you a lifetime supply of crack! Sorry, I'm just not in a very generous mood on this particular Monday.

Here are some "sage" words from a sampling of economists from the WSJ re: today's existing housing numbers. Gotta love Lereah's complete lunacy:

"The price correction is a welcome development. The price drop has stopped the bleeding. Sales have hit bottom. Sellers are finally getting it. I am confident the housing sector is picking up." --David Lereah, National Association of Realtors

Where the hell does he get the idea that today's numbers represent an inflexion point - "hitting bottom," as opposed to being another pit stop on the long, inevitable decline?

***********

ECONOMISTS REACT

Existing-Homes Sales Data Show
Welcome Correction or Burst Bubble?
September 25, 2006 12:08 p.m.

* * *
The price correction is a welcome development. The price drop has stopped the bleeding. Sales have hit bottom. Sellers are finally getting it. I am confident the housing sector is picking up. --David Lereah, National Association of Realtors

* * *
Pop goes the housing bubble… Prices fell from their August 2005 levels. This was the first year-over-year price drop in eleven years. And that decline is likely to continue as the supply of homes, measured in months, reached the highest level in over thirteen years. That does not bode well for sellers, though if they do drop the price, sales may stabilize. Still, it is likely that for the whole year, condo prices will be down though single-family homes may post a modest increase. With inventories so high, there is a lot more adjustment before the existing home market hits bottom. Prices are going to have to fall a lot further and/or sellers are going to have to pull their home off the market. Until those things happen, the excess supply will pressure prices. --Naroff Economic Advisors

* * *
Home sales fell for the fifth straight month but the pace of descent was the slowest in that span and sales of single family homes were flat. Though prices were lower than a year ago, they were higher than they've been in seven of the last 12 months. While the large inventory of homes for sale will continue to push sellers toward price cuts, these data, reinforced by recent signs of stability in sales related mortgage finance lend support to hopes that the housing market "correction" will remain orderly. --Nomura Economics Research

* * *
The inventory position continues to get worse, not better, despite the housing market peaking almost a year ago. This is disturbing given that prices are now falling… What happens from here? With the imbalance between supply and demand getting worse not better, we would argue that the housing market downturn is will continue to accelerate… We are skeptical about the level of turnover reported in today's report and, at a minimum, would expect a sharp fall next month as the real cost of housing (housing price inflation less mortgage rate) continues to rise. And downward pressure on prices can only continue. --Richard Iley, BNP Paribas Market Economics

* * *
Price adjustment is starting to occur. Over time, this development should help restore a reasonably degree of affordability and stabilize the housing market. However, this process could take a year or more to play out fully. --Morgan Stanley U.S. Economics

* * *
Existing home sales peaked last summer and have been trending lower even since then. These declines have been driven by higher mortgage rates. The recent retreat in mortgage rates is not yet providing much support for home sales. Slower sales have pushed inventories of unsold homes to record levels. In turn, this has pressured prices, which are now falling. Further declines are anticipated. As home equity stagnates or falls, homeowners will have less equity (growth) to tap into to support consumer spending. Housing's contribution to economic growth peaked last year and is now subtracting from overall economic activity. --Steven Wood, Insight Economics

* * *
[The price drop] should be viewed in the context of the 111% leap in the median single-family home price that occurred from early 1995 through this summer, and therefore it should not be a huge shock that we are seeing a price correction. Moreover, while certainly a change in trend, so far these data are not corroborating some of the more alarmist stories being bandied about recently (although the most recent data are for deals agreed to about two months ago, so price trends since then could be worse).--Joshua Shapiro, MFR, Inc.

Randy H,

Again, I'm just not in a generous mood. So I'd have to say that your position is "interesting". WRONG (but interesting).

I'm CEO of DinOR Corp. I like to think I make good decisions (from time to time). Buying now (because you're buckling) and cave in to things like convenient commute, "utility" and lifestyle makes less than no sense.

If I was getting BENT OVER on my rent then yeah, maybe I could see it. Right now my rent is running me somewhere between an ill advised night on the town and a luxury car payment. Where's my motivation to "get off the fence". The ONLY reason I'm not seriously considering being a lifetime renter is b/c my Schedule C is tapped out.

DinOR,

I have to say that my position on this issue is somewhere between yours and Randy H's. There will always be emotional factors playing into homebuying, as there should be - it's your home, after all. I think it's wrong to completely divorce that aspect from the decision process. That being said, the economic factors should of course be considered too. Even aside from mere affordability issues, someone buying a place out of purely "utility" as Randy points out is okay, but the person who can stomach that and live in a house they may have been able to purchase for 10%, 20%, 30% less as the years go by is a stronger person than me!

DinOR,

Not all "utility" is "emotional fluff". In my own case -- and I'm not buying now either mind you -- I have a disabled mother and am unable to provide adequate facilities to her whilst renting. It improves my life in both qualitative and quantitative ways to remove this obstacle.

The point of "utility" is that not everyone maximizes the same things using the same formula. That's a good thing, because otherwise there wouldn't be a market. I'm sure you can appreciate that it is differences not similarities that make a market.

Homebuying might be a lifestyle investment, but it's such a large financial commitment that dollar calculations have to enter in at an early point.

Say you buy 20% from the bottom and know it. 20% of $500K is a lot of money capable of buying lots of other quality of life improvements. Realtors would like everybody to forget that other quality of life issues exist: like financial security, job flexibility or ever retiring. Financially savvy homeowners (the kind that tracks the value of all their possessions) are going to be absolutely miserable quality of life for the next couple years, as they contemplate the loss of $100K or more from their net worth .

skibum,

Getting people motivated is hard.

KEEPING them motivated is even tougher. Even the most disciplined among us would find it difficult to make the monthly mortgage payment/payments knowing full well the ONLY benefit they ARE getting is the "utility" aspect!

Any "lust" I had for personalizing, customizing and/or "decorating" died in 2000/2001. The sheer thought of hanging wallpaper or painting makes me queasy.

Other than from a tax standpoint I can see NO earthly good to owning until there is some semblance of balance to the rent/own calculator.

Randy,

In that case, you're not the average renter/homeowner! Your homeownership utility function actually reach beyond the aesthetics (wall color).

My Sunday Open-House Report:

Summary: very little traffic, lots of bored and frustrated agents. Nothing that we'll even be making "realistically priced" (pejoratively lowball) offers on.

First thing that struck me after a couple months of laying low was just how bored and/or frustrated the agents were. I only got actively "worked" by one agent, and that was a very half-hearted effort from a youngish guy who probably hasn't done a deal all year and is about to give up.

Price wise we saw that stuff is very erratically priced, almost without rhyme nor reason. We looked in Mill Valley, Tiberon, Corte Madera. Huge inventory. Lots of stuff that's been on market for more than 100 days (according to Zip Realty). Lots of stuff that's been on the market for 4 days too.

It's actually a bit daunting to even go looking because there are almost too many choices and I have trouble figuring out how to filter because prices are so soft. That is, I have to search in a $0.75M range or greater because there is easily a +/- $300K swing in just today's negotiating prices. People have $200K-reduced signs everywhere, and Zip shows they've come down sometimes more like $300K+ from original-original list.

But prices are still too high. And sellers are still stubborn. One example was a rebuilt home in Mill Valley, mid-price neighborhood, for $1.9M. Very very nice home, classy and not McMansionish. But, in a neighborhood of $800Kish (today's prices) homes, so way overbuilt for its neighborhood. Then there was another home for the same price in Corte Madera, on about a half acre, with a legal 1/1 studio and another 1/1 in-law/au pair studio. I asked the agent at the Mill Valley home (which I saw after the CM home) if the seller (the builder) was ready to accept "realistic" offers, as I showed her the $1.9M home flier in CM. She sighed and said "He's already come down $200K". I said, no, he raised the price from $1.9M 90 days ago to $2.1M, so he could "reduce" it to $1.9 again. Her response was "then go buy the CM house". Clearly frustrated.

One other agent admitted that there were probably only 5 "real buyers" to come through her new listing in Tiburon. She said the other 100 people were neighbors and other agents trying to sell homes down the street.

I can sense the growing "seller defection" occurring. The question now is how many buyers are there in that tail of demand -- buyers who'll buy on the first significant price decrease? There are a *ton* of escrow listings (2 of which we saw). These homes seem to be very nice, and more reasonably (as compared to peers) priced. So, sellers who're willing to substantially undercut the average are finding buyers into at-least escrow. What I don't know is what the escrow-to-close ratio currently is. I get the feeling there's a good amount of "falling out of escrow" going on as people get rejected for funky mortgages.

That's my report. We won't lowball on any new listings until they've fermented for at least 3-weeks. If they sell now, so be it. We're prepared to be in the 3rd or 4th step of buyer demand, but not the first.

"Say you buy 20% from the bottom"

astrid, in my book 20% is HUGE! I mean HUGE! No amount of use or utility is going to fill that hole where I'm concerned.

In short order I'll be tasked with caring for either my mother (or my wife's aunt) so I do hear Randy H. There's no way I'd be able to have a second story condo w/that type of arrangement. When that phone call happens and the market hasn't decimated to my satisfaction I'll have to make other rental arrangements. Fortunately for me my mother worked for Chicago Title for 30 years. (She's more bearish on residential RE than I am). If that's possible. She still chips her teeth over 30 year mortgages vice the standard 20 in her day.

Think about it. 30 freaking years! Pffft. I'm trying to make it to Friday!

I think what we're disagreeing about is what's best for "most people". Again, all you people here are not "most people". "Most people" don't read this blog. "Most people" don't understand the time-value-of-money.

In fact, most people don't fully fund their 401ks, they don't save enough of their incomes, they don't understand how their insurance works, they don't adequately read contracts they sign.

For most people, buying a home when they can conservatively and safely afford it, and living in it for a goodly number of years while paying an amortizing loan, is *the best savings* they'll ever do in their entire lives. And they'll only do it because they're forced to by the way the arrangement works.

If you put "most people" into apartments, they'll just blow their extra $ on frivolous bullshit, and won't put a single cent into any form of savings or investment.

If you're disciplined and knowledgeable enough, then sure, be more sophisticated in your planning. But, that still won't make wishing a perfect crash into existence a reality. More likely, the future will play out in a way which you, nor anyone else, didn't perfectly predict.

cajun100

Thanks much for the kind words. It is indeed the quality of contributions from diverse perspective that make these forums so valuable.

Randy H,

Excellent report! I can't believe the realtor told you to "go ahead and buy the Corte Madera home then"! I hate to say it but as a sales person that is a major no-no. We all get frustrated from time to time but overtly showing it in a sales environment is the kiss of death. It's not my job to tell them (that they'd listen anyway) but realtors are not helping their cause in the slightest with that attitude!

I actually got the "Interesting, wrong, but.....interesting" line while seeing a house band at the Orleans Hotel in LV. That was the 4th of July and I've just now been able to work it into a conversation. Definitely try it sometime. Even if it's just with your kids. Mine seem to get a kick out of it! (After a while your kids have heard all your BS so it's great when you get to add to your "portfolio" of utterly useless comments).

I know how cynical this thought is, but it occurred to me (half seriously) that most people nowadays live too long for their own good. Time value of money is not as much of a problem if you're working until you're dead and don't have to worry about retirement or higher education for the kids.

(How does this compare to Peter P's gallows for most major crimes comment?)

Randy,

Thanks for that perceptive, informative and witty report.

Don’t lose sight of the downturn in new housing starts. Many of the major players in new construction have either delayed new projects or simply walked away from land commitments altogether. When you look at basic supply and demand numbers as measured by unsold inventory, as soon as the excess begins to diminish, upward pressure on prices will take place. There are ALWAYS people who will buy regardless of any logic or fundamentals which will begin to shrink the available inventory.

Doug H,

You are correct in noting housing starts are down from previosu (record) highs. However, I would not equate housing starts coming down with "immediate/imminent plunge in inventory for sale. Keep in mind that this boom has been going almost nonstop for 9 years, and in bubble territory (based on historic price-rent & price-income ratios) for at least 5 of those years.

There is a tremendous, unprecedented amount of inventory already in the system (close to 4 million-- ). This inventory alone could take years to clear out at current (falling) sales rates. This does not even take into account ADDITIONAL inventory about to come on line due to the Casey Serins, Dianne Harnells, SDCIA Jeffs, etc. as these specuvestor geniuses edge ever closer to insolvency/foreclosure.

We have a long, long, loooong time before low inventory becomes a factor in most markets.

There were still builders working in 1994 and they managed to scrape profits selling homes at 1/3 the current prices. The builders will build when the market lets them build and sell them for a profit.

Randy H,

Thanks for the battle report from your "realistic price" (avoiding the innaccurate and perjorative term "lowball") offers. I understand Joe Schmoe is now doing them in SCAL as well, and I hope to start doing so as soon as time permits.

Sort of OT, but I have to toss in a bit of news from my hometown of Shanghai. Chen Liangyu, Shanghai's party chief, has just been put into house arrest for corruption. I noticed that every report mentions his close ties to Shanghai's construction industry and how he undermined China central government's effort to temp down RE.

It'll be interesting to see where Shanghai's RE goes. I hope my mom can tear herself from Taiwan's Chen Shuibian scandal and report back on Shanghai's RE market.

Robert Schiller, just loving life on CNBC. When you're an economist this is about as much "fun" as they get to have!

Proper use of "the line" can produce major laughs! For those that might be even remotely interested it works like this;

INTERESTING! (with feigned sincerity) and a slight pause.

WRONG........ (with a curious emphasis)

but (quick and sharp)

i n t e r e s t i n g........... (trailing off like Peter Sellers as Inspector Clouseau)

There were still builders working in 1994 and they managed to scrape profits selling homes at 1/3 the current prices. The builders will build when the market lets them build and sell them for a profit.

I don't have any ready stats available, but I've read a lot of anecdotal reports on other sites that indicate builders, far from slowing down building, are actually BUILDING FASTER in order to complete already started projects and sell them ASAP before prices fall further. The difference is, these projects are not considered new "housing starts" in the statistics, because they were already started.

Also plenty of stats on Patrick's links page & Ben's site showing major home builders (KB, Lennar, Toll, Pulte, etc.) walking away from land options negotiated at the height of the bubble --along with their deposits/earnest money. Builders have NO "sticky" emotional attachment to their inventory. Any house that can be built and sold profitably (as in, the land was purchased pre or early bubble) will be sold.

I repeat: we have a long, long, looooong way to go before we are even "inventory neutral" based on population & fundamental 'housing-as-shelter' demand, much less inventory "short".

Yeah, just caught him too.

Randy H:
" Her response was “then go buy the CM house”. Clearly frustrated"

Not to mention rude, indifferent and stuffed with her own sour sense of entitlement.
It's a pity that the owner wasn't around to hear how well she's 'selling' the property to prospecitve buyers.

Sounds like she needs a right good slapping.

'housing-as-shelter'

Robert C made the observation above that nowadays when referring to your "home" you need to make the distinction that it is your 'primary' home! Lest others get confused and mistakenly think you're referring to your 2nd home or even your vacation home. (Evidently there is a distinction between 2nd and vacation home).