patrick.net

Joe Schmoe,

I agree with your assessment. Most people, even so called financial advisers, can't think in real dollars and opportunity costs. They'll probably sit things out.

However, enough will sell (and many will eventually sell in foreclosure, once the system is in place to deal with the big gush of them) to move the prices lower

Joe Schmoe,

The first is people with lots of equity. They bought their house 15-20 years ago and did not take out HELOC, or only took out a small one. These people will be reluctant to sell becuase they will not want to give up their “wealth.”

I come to exactly the opposite conclusion, for a number of reasons:

1) People's "mental accounting" doesn't work that way. People who bought long ago will be affected by the "large number" effect, and won't really perceive the percentage difference between selling in 2004 versus 2007, even if it's some 35% difference. You can find the mental accounting research on my site.

2) A lot of these people are older, moving for change-of-life reasons, and don't give much of a squat about what we debate here in the blogosphere. They will just ask their friendly local agent and perhaps ask about something they read in the local paper, USA Today, or saw on the morning news show. They won't be that sensitive to marginal price swings. Many of these types of folks kept selling right through previous downturns.

Much lower prices are the best thing that could happen for the US economy, as it would free up a lot of dollars for capital investment elsewhere.

It might also allow consumers to spend without going into quite so much crazy debt, so as not to have to use their houses as ATMS out of "necessity".

My $.02.

When were the American "best times" economically? That's right, the 1950s, 1960s and to some extent the 1970s and 1980s.

The so-called good times now are an illusion.

What do those earlier periods all have in common?

That's right,

much lower house prices.

Need I add that when basic hard-working people can't even afford an apartment, it opens up the economy to all kinds of criminal pressures.

ie- I'm a cop but all I can afford is a mobile home, hey, maybe I'll accept those bribes... ;)

tsusiat,

There were a lot of other macro factors contributing to the "good time" periods. In fact, home prices may well be more of an affect than a cause. Especially the 50s and 60s were enormously different periods in terms of capital flows, trade balances, and global competition/friction.

tsusiat, is it true that Vancouver condo price (per sqft) are closing in on that of Honolulu?

That's true Randy,

but nonetheless, jobs + cheaper houses = better times.

It's that simple.

No idea on the condo prices per sq foot in Vancouver,

what I do know is Vancouver has an excellent history of crashing real estate, the last big one was starting in 1995-96.

We'll see, but no way Vancouver should be more expensive than Hawaii.

That's nuts!

There is a trend to smaller and smaller while more expensive among the new buildings. Thant may be influencing the price.

Randy-

I don't know if I accept the mental accounting thesis. Maybe in a normal market, but lately housing prices have become the talk of the town. In places like SoCal, EVERYONE knows what their house is worth today.

My in-laws are 80 and 81, and their neigbors on either side are in their late 70's, and every single one of them knows exactly how much their houses are worth. My father-in-law is a retired tool and die maker, my mother-in-law does not speak English; if news of the housing market has reached them, it has reached everyone. The hysteria has reached that level; housing prices are on the evening news almost every night.

There are no 80 year-old retirees who bought their house for $30k and will be "pleasantly" surprised to learn that it is now worth $300k. Not if it was worth $500k two years ago.

A lot of these people will still sell because they have to, or becuase they are just as pleased with a $270k gain as with a $470k gain; but they'll all feel as if they are taking a loss.

And the 80 year olds are an extreme example. What about the 50 year-old who bought his house for $250k 10 years ago? Today it has appreciated to $1.25mm. This person is still fifteen years away from retirement; he almost certainly considers his home equity to be a substantial part of his net worth. He has probably even factored it into his future plans.

For these reasons, I think that equity-rich sellers resistance to taking a "loss" will play a role here.

We’ll see, but no way Vancouver should be more expensive than Hawaii.

Well, Canadian dollars can only appreciate over time...

NOT INVESTMENT ADVICE

There is a trend to smaller and smaller while more expensive among the new buildings. Thant may be influencing the price.

Sad. To me, a 2/2 under 1000 sqft is too small. Ideally, it should be more than 1500 sqft.

I have great faith in Canada, not because it has free healthcare, but I think Canadians are some of the nicest people in the world.

And being nice get karmic rewards. :)

tsusiat,
According to an economics book I'm reading, the year that the highest number of Americans were the most content was in 1957. What's striking about that is that the ag american home was only 700 square feet, the avg family had one car, and only 30% of the population had television sets. If you gauge the incremental increase in TV's and house sizes, the prices go up and up and up. The book was written at the height of the dot-com, when the economy was percieved to be the best it had ever been, yet the level of discontent, even for people that were well off was at an all time high.

Joe,
I see an awful lot of the older folks in Alameda selling. These are regular folks- people who worked for a living who've never had lots of money. Suddenly they have the possibility to sell for 800k and move to Dallas where they can live comfortably for the rest of their lives. I can't say I don't blame them. I also think these people will be the ones, if not already, who will sell the quickest and be willing to even take signifigant low bids if they have to. I can see these people undercutting the average 30-50somethings who bought 4-5 years ago, and possibly even investors. These older folks are the ones who will make the most off of their equitty- almost 100% in some cases, so they will jump at the chance. I would also imagine that they want to do this to perhaps leave an inheritence to their children.

Did you say: "boy I'm hungry.. I think I'm going to Mcdonalds(tm)." They have the best burgers, so don't forget to stop by today and say hey to the clown."

And the 80 year olds are an extreme example. What about the 50 year-old who bought his house for $250k 10 years ago? Today it has appreciated to $1.25mm. This person is still fifteen years away from retirement; he almost certainly considers his home equity to be a substantial part of his net worth. He has probably even factored it into his future plans.

For these reasons, I think that equity-rich sellers resistance to taking a “loss” will play a role here.

Joe,

I think you may be overstating the percentage of elderly retirees who are closely following the market online (or in the MSM) or flipping properties. I don't have the statistic handy, but I'd wager that most seniors still don't even have Internet access --not even in CA. What's to keep such a person from selling for a $500K profit instead of a $1million profit?

Regardless, it is not "needs-based' pricing of the seller that determines the sale price, it is whatever price that will bring a buyer at the time the property is offered. With average residential turn-over somewhere around 7-8%/year, it doesn't take many "motivated" sellers to quickly reset market expectations. IMHO, the really resistant sellers will be underwater f@cked buyers who cannot afford to sell or refinance, and will hold out until the bitter (and inevitable) conclusion.

HARM,

My limited experience agrees with Joe's. These old people know how much their houses are worth. If they didn't five years ago, all the recent hoopla about RE has made them aware. And 80 year olds start thinking very carefully about estate planning and where they leave their money.

@astrid,

You and Joe may be right about that, I'm no gerontologist ;-). Even so, I still stand by my truism: Regardless, it is not “needs-based’ pricing of the seller that determines the sale price, it is whatever price that will bring a buyer at the time the property is offered.

What happened to SQT?

On a whim I wandered to Wikipedia to see what it had to say about different building techniques. The first image in the "Stucco" article was completely unexpected; dating from around 1850 in Iran: "Stucco from the House of Borujerdi-ha".

As for [physical] attractiveness, I think there's a continuum between three poles: cute, hot, and plain. For some reason I don't think I'd find someone at the extremes of the 'hot' and 'plain' categories that attractive. (But then I try to maintain a strict filter on personality and cluefulness, so looks end up being more of a bonus than a selection criteria.)

newsfreak,

Oh, let's get over FAB's thing, maybe guys are different. It was just a tinge impolite to state it in mixed company, even if it is online and semi-anonymous mixed company. ;) FAB probably keeps rather exaulted company offline, so the guys can get hot chicks easily and the women have over inflated ideas of their personal attractiveness.

(Admittedly, I wouldn't want to be with a guy who was TOO good looking or TOO social because I'd be afraid that he'll be cheating on me or ready to dump me at every moment of the relationship. Oh, give me an ole lovable nerd any day)

I have great faith in Canada, not because it has free healthcare, but I think Canadians are some of the nicest people in the world.

because they are in the british commonwealth :P , and knew things would get better if they just waited a couple of centuries...

Joe,

I don't disagree with much of your logic, although I dispute whether the "average" equity rich seller will ultimately sell on needs-based pricing. This gets down to how people negotiate, as we discussed in a previous thread. The seller with a lot of equity has a lot of room to still come out ahead. They are weighing real-life concerns on the other hand, and can easily convince themselves that their "winnings" are worth much less than potentially more "losses". This is basic mental accounting theory.

And, you don't have to agree with the thesis of mental accounting to recognize the massive body of empirically supporting evidence for the effect. Put it this way, if mental accounting theory is wrong then vegas casinos and state lotteries don't make any money.

Robert,

Stickyness won’t apply this time.

I'll take that bet. Loser pays the sushi bill.

I am not big on emperical evidence. Statistics, figures...they just make my eyes glaze over.

Joe
I agree with you especially on the fact that housing prices are well known to the older retirees. When the 2+2 ordinary stucco $hitbox down the street sells for over a million....everybody and I mean everybody in the neighborhood knows about it. The little old widows come out of their stucco $hitboxes and gossip and stare.
It will be hard for people to take less than their neighbors got only 6 mos. ago.Very few will have the courage to sell, then rent for a few years. Believe me...it takes courage and commitment...2 things that sheeple seem to lack.
The agent repping my old house was saying the other day ' All the signs of a housing bubble and subsequent crash were there but nobody was paying attention'...I think this pretty much sums up how blind people have been to readilly available information. But when it's all over the front page news...

Randy,

I agree that most people are risk adversely when well informed (that is: $100K gain creates less pleasure than $100K loss causes in pain), however,
Casinos and state lotteries work because they hold out the promise of life changing millions without apparent downsides.

The housing market will not work like that. Once people realize that housing prices can go down as well as up, their mental arithmetic will change dramatically to accomodate.

Buffpilot,

The new bankruptcy law specifically limited the state homestead exemptions both in time, in dollar amount, and in applicable situations. Furthermore, it basically prevented anyone with an above state average income from getting a clean slate.

The new bankruptcy laws are extremely unfriendly to sheeple financially under water.

"because they are in the british commonwealth , and knew things would get better if they just waited a couple of centuries… "

Haha Different sean, are you a monarchist or a republican... ;)

buffpilot,

There's always political risk, but I doubt enough to rewrite the bankruptcy code in the near future. Foreclosure is a long process with lots of protection for the homeowner, so it won't be a very dramatic process. And anyone making above avg. wage and/or HELOCed themselves into trouble will not be particularly sympathetic.

The government is more likely to do band aid solutions like hold hearings against Fannie Mae/major mortgage brokers/NAR. Much cheaper and easier than going against the banks/credit card companies.

disclaimer: don't rely on my guesses, make your own!

I ate at Panda Express last night fergawdsake. (I don’t think they use real panda). Todai is my idea of fancy.

Panda Express? You need to watch out for eating too much oil though.

At the price of three pieces of Toro, Todai is not too bad a deal.

My mom can buy 9 pounds of live blue crabs for your one piece of Toro!

Blue crabs are indeed delicious (they're usually good after October, but I had some very good ones this April) though very time consuming and quite messy. You can't eat crabs and blog at the same time...

It all comes down to Haiku, so I'll reiterate my previous post, postehaste.

HOUSING BUBBLE HIPPY:

See the butterfly
So high away. Take a toke
As housing crumbles…

Blue crabs are indeed delicious (they’re usually good after October, but I had some very good ones this April) though very time consuming and quite messy. You can’t eat crabs and blog at the same time…

I love crab roe and blue crab has lots of it!

I once had sauteed blue crab and rice cakes in a Chinese restaurant. Yum!

Houses are sticky on the way down only because home debtors have a big pile of cash to blow through or a stable job to make the payment. At the beginning of every fall, you can count on cash-poor, laid-off debtors being the trail blazers in setting new low comps. American housing bubble has a very important distinguishable characteristic compareed to the rest of the world: toxic loans. I have never seen any loan terms as crazy as the ones given out here, it should be called kami kaze loan.

I actually argue otherwise that the long-time holders with extra equity are not going to sell out at a price that they are not happy with. You know property can be passed down at the same prop 13 base right? Why would any parent give that up? Particularly since we are going to enter a high-inflation period, financially savvy parents are not going to let go of the paid-off property. I talked to a couple of my long-time neighbors who own their homes free and clear, they have no intention to let go whether the market is up or down, unless they run out of retirement money (pension or SS evaporates).

Amateur flipping is a form of financial gene pool cleansing. Inexperienced flippers are an effective wealth transfer tool from themselves to other members of the society, when this is all over, we should be thankful for their contribution.

astrid,

Casinos and state lotteries work because they hold out the promise of life changing millions without apparent downsides.

Casinos work because they give wins in big chunks but spread out losses into a series of small events. This is why you can sit there for 3 hours, come out negative, but still "feel" like you came out ahead. You remember the gain more than the little losses.

So, I'll only agree with the "little old lady" theories so long as the correction is _so massive and fast_ that it causes her to take a huge hit all at once. Otherwise, she's going to see the "+650K" from her purchase years ago much more than the "-225K" that she lost from not selling at the perfect time.

And, everyone here is missing the point about mental accounting. This is "house money" (in gambling terms). Most people haven't banked this money into a mental account until they allocate it/promise it/plan to depend upon it. Wins and losses are internalized very differently for them than for the HELOCer, the Flipper, or the FBer.

Anyways, if I'm wrong it will only result in even _more_ stickiness than I already think exists. lol.

Wins and losses are internalized very differently for them than for the HELOCer, the Flipper, or the FBer.

True. Behavioral Finance offers much insight. ;)