patrick.net

One thing we are totally discounting here is the use of "incentives". Some a$$clown builder wants to give away a hummer or a pool or all expense paid vacations that is effectively lowering the cost of the home. Before everyone dog piles on me (I'm aware these are mostly figured in) but it's also true that "some" of that cost was born by the seller/builder. Now of course they still book the sale as "full price offer" but they also threw in pergraniteteel, up-grade maple cabinets, central vac. an exposed aggragate driveway, sound surround system and a 2 year pre-paid lease to a mini Cooper!

But! They are still showing it as support for the median! I guess the Pulte 12 hour 100K off sale doesn't count? Ridiculous I tell you!

I do not mind free upgrades, free interest rate buy-down, and free closing though. :)

Ridiculous.

HARM Says:

It’s very hard to tell w/out the data on which specific preperties have actually sold vs. a year ago, but the impression I get listening to realtors like George is that it’s mostly the higher-end homes that have been selling recently.

I agree that median price is a crude measure of market status, but clearly the MSM and the average American homedebtor rely on that number as a gauge. Re: higher-end homes selling, that may be true in FLA, but my impression is that in many parts of the BA the higher end stuff is barely moving. This has been brought up many times before, but I think there is a buyer mentality to look within a certain price range (based on acceptable monthly payments via ARM, FRM, or whatever), and buy the most home one can afford. With declining prices, these people are just looking at better houses, better locations, better amenities for the same price point. Those who purchased a year ago and are aware of this are probably gnashing their teeth.

skibum, above-median houses in BA are hardly high-end houses. A 750K townhouse is nothing impressive even in Sunnyvale on the "wrong" side of El Camino.

Peter P's explanation of the trouble using median measures is one aspect. Another is falling transaction volume.

What happens is that as the number of transactions falls, the confidence of the mean (median or average) accurately predicting any specific data point in the entire universe of transactions falls. Anyone familiar with stats knows this as the confidence interval or alpha.

So, medians are still very accurate for a very broad sample; so broad that it lumps an entire county together ignoring the fact that both Redwood City and Atherton are in the same sample set for San Mateo. But, if you start to dive more granular, by relevant zip code or neighborhood, then you have too few sample points to accurately predict much of anything.

All that's happening now is volatility (std deviation) is rising. So the usefulness of any of these numbers is diminishing, and won't be helpful again until the prices come down by enough to increase transaction volume. Maybe a better number to watch right now is standard deviation.

You won't find sigma or n included in any news articles or CAR releases. You'll have to find them in raw data or more detailed stats releases.

Peter P,

Well exactly!

Homedebtor A bought at the peak of the market and "won" the multiple offer bidding war.

Homedebtor B bought slightly after the peak and has all mentioned above AND his HOA's (or whatever) paid for a year!

You know, a big screen isn't going to motivate off the sideline but at some point we'll have to calculate the difference between buying at the absolute rock bottom (from the bank likely as not) OR milking the "incentives" for all they're worth. They will intersect at some point. Something tells me once builders "blow out" their current and in progress inventory they won't be handing out incentives at all. (Won't be able to afford to)!

I drove past a condo complex that I used to live in. It has 8-10 for sale signs outside.

The complex is in Sunnyvale and most units are priced under 550K.

On one of the lowballs I wrote the seller was offering a bunch of hoo ha incentives (but no big-screen TV). Things like 1 year paid pool service, gardening, credit with a landscaper, and credit towards a new dishwasher. In my offer I stipulated a valuation of each of those line items and then reduced my already low asking price by those amounts. A signal: no thanks, keep your comps, but since you're offering, take that off the price too.

You know, a big screen isn’t going to motivate off the sideline but at some point we’ll have to calculate the difference between buying at the absolute rock bottom (from the bank likely as not) OR milking the “incentives” for all they’re worth.

I will only appreciate "incentives" that are useful to me. Vacation or big screen TV? Perhaps not. Marble bath? Perhaps. :)

DinOR,

All good points. Yes, homebuilders, Realtors and sellers alike are all loath to see median sales price go down and will do almost anything --including outright fraud and illegal off-book "rebates"-- to try to artifically buoy those sales price stats. Personally, I don't see how throwing in a "free" Hummer or hot tub is supposed to help buyers, as they will effectively be paying interest on these baubles for the 30+ year life of their mortgages.

As a prospective buyer, I understand that the thing which helps me the most --by far-- is LOWERING THE DAMN PRICE. A lower sale price means a lot less money paid in lifetime interest, a lower tax basis for the house, lower homeowner's insurance premiums, lower closing costs, etc. But then again, I'm not completely math illiterate like most Americans.

above-median houses in BA are hardly high-end houses. A 750K townhouse is nothing impressive even in Sunnyvale on the “wrong” side of El Camino.

That is the sad truth of BA home prices.

That is the sad truth of BA home prices.

My point is that median-lifting transactions can still be occuring.

above-median houses in BA are hardly high-end houses. A 750K townhouse is nothing impressive even in Sunnyvale on the “wrong” side of El Camino.

That is the sad truth of BA home prices.

The real sad truth is, BA has much higher concentration of engineers in the population than most of the areas in the world, and they still have no clue about the basic math needed to make a purchase. The 2 things they definitely do not understand is "median", and "price per sqft" (for both house and lot). It's depressing to see the brightest minds become "howmuchamonth" crowd.

HARM,

Don't get me wrong, what these incentives basically are is "bag money". (Usually given for someone to look the other way). So I agree, and it is frustrating watching all this shuckin' and jivin' when the ethical thing would be to lower the price. I suppose it's all in the details. Most of the finance incentives are structured around using "their in house lender" which I trust as far as I could throw! It won't take long before web-sites pop up "rating" just which builder has the best incentives and then Consumer Reports will jump on the band wagon just as they've done with the auto industry.

All I'm saying is if it had to boil down to being FB: A (bought at the peak) or being FB B: (tangible incentives out the ying yang) I guess I'd rather be FB B. If he/she HAD to sell it would give them a better market position than FB A. (Damn, maybe I SHOULD try on a blue blazer)!

SP,

Can't say as I've ever seen a stampeding wildebeest (other than on Mutual of Omaha with Marlon Perkins) but your point # 4 is dead on! Seller vs. Seller! Spy vs. Spy! And yes that lowball mf is now your best friend. The Selfish 'Gene".

MSM seems to be rather enjoying the gore fest already.

SP,
Exactly. One thing to add, though, is that MSM are hardly impartial journalists wanting to sell stories. How many reporters own homes and have a bias towards seeing the bull housing market continue? How does this consciously or subconsciously affect their reporting? Ideally, each real estate story should have the reporter state conflicts of interest (I own a home, I have X number of investment properties, etc.)

You are all correct, except...

Fed may start cutting rate later in the year when the trouble starts. I am not saying that rate cutting can save the world, but it gives the FBs extra breathing room on the way down.

The worst capitalized FBs (who are usually specuvestors at this stage) will be gone in 12 months, chap 13, chap 7 whatever. But if the Fed starts cutting rate, I'd say the low/no-volume, slow-motion price dipping will go on for about 1-2 years until the FBs run out of savings (or financing alternatives). Then you will see a big crash.

So I predict a 10-15% drop by the end of the year till mid 2007, then level off, after the Fed starts cutting rates. Give it another couple of years, then you will see the true avalanche.

People won't get serious about price cutting for their main residence until they run out of options.

Peter P,

if you are buying in CA where your property tax now and in the future is tied to ONE thing and one thing only - sale price, you should just forgo all incentives and head straight for the home run - price reduction. Sale price affects the perpetual cashflow on property tax.

For a difference of $50K in sale price, the difference in property tax paid in the first year is 625, the summation of such difference for 30 years, in undiscounted cashflow is about 25K. So the $50K difference is not just $50K, it is rather $75K or more.

Therefore, even if the incentives appeal to me, I will reject them just based on principal, without even considering the impact on my financing cost difference.

Therefore, even if the incentives appeal to me, I will reject them just based on principal, without even considering the impact on my financing cost difference.

Of course, I prefer price reduction. However, it is easier to get incentives than a reduction from builders. Just keep the discounted cashflow in mind.

I am under the impression that it is easier to get 50K worth of incentives than 25K in reduction. The key is whether you can find utility in the incentives.

Of course, I prefer price reduction. However, it is easier to get incentives than a reduction from builders.

It's always easier to get the incentives, this is true. Of course, successful negotiating is never easy, as it is always in your interest to obtain concessions the other party does not want to give you. Remember: builders and sellers have been playing hardball with buyers now for 6+ years running. Isn't it about time to be our turn?

I'd still wait at least couple of years, when blood is running freely in the streets. You just might be able to get both without much haggling.

I am not sure if you want to get anything from the builders in a down market. They are losing money, they are laying off people, so the quality of their homes will definitely suffer. There are so many ways to skimp, and inspection can hardly uncover all the problems. Plus, I think you only have a walk-through but no inspection for a new construction?

There are already horror stories out there about builders substituting recycled pipes in their new construction which will greatly reduce the lifetime of the house. Get something that is built in the late 90s (but not early 90s) is probably a better bet for quality.

We should have a vintage chart for homes built in the BA according to economic cycles and local events. Houses built right after the big quake are likely to be more conservative in shock-resistant designs. Houses built at the top of the bubble are more likely to be rushed to the market.

OO,

Good points. Ties in nicely with DinOR's "nothing built, bought, HELOC'ed or Refi-ed since 2001" rule.

OO,

Fed may start cutting rate later in the year when the trouble starts. I am not saying that rate cutting can save the world, but it gives the FBs extra breathing room on the way down.

Not only that, but the credit industry will simply keep moving around the goal posts until someone calls them on it. And, with liquidity, that someone won't be the market collapsing, but will have to be government regulators.

These are the fundamentals that keep me undecided about hard v soft landing.

(and please spare any global calamity, MBS-China catrastophe, gold fiat trilateral arguments. there's a higher probability that a real war starts before all that mumbo jumbo ever comes to pass, then all the rules change anyway)

Unfortunately some people think they are really getting $5000 out of that deal.

They are really getting $5000 out of the deal if and only if they plan to buy that for $5000 anyway.

These are the fundamentals that keep me undecided about hard v soft landing.

Just flip a condo and decide.

- condo
+ coin

Randy,

Have you considered the impending global calamity, MBS-China catrastophe, or gold fiat trilateral arguments? How about the impact of Mel Gibson's arrest on the international credit markets? Just wondering...

Peter P Says:

- condo
+ coin

LOL.

Are you also suggesting 50:50 odds of a hard landing? I call "tails" on the condo.

The secondary MBS market is very likely to turn later this year.

Our biggest bagholder, China, is going for a generous pay hike for their civil servants by Oct, paid out of their own pocket of course. No details are given, but this is the general directive from the central. Now keep in mind their civil service employs far far more percentage of the labor force. This is an attempt to stimulate internal demand to soak up their own excess housing inventory, and more important, to put their enormous U$ paper reserve to a better use than holding the bag. Increasing their internal money supply is also a way to fend off Yuan appreciation. Chinese money supply is growing at 15%+ per year, at a higher rate than us, uhh, till end of March, 2006 of course since we have no idea of what happens beyond then.

In the beginning of 2006, their speed of adding on U$ treasury has already gone down, Japan even started reducing slightly. But for the increased demand from the Arabs (well, our recent stance behind Israel is not going to please too many moneyed Arabs), and Brits (what the hell are they buying our treasury for??), the excess supply of our treasury would have ended up with no buyers.

The party of course is going to end. I'd say the steps taken by the Chinese bagholders will be gradual and calculated, so expect no big moves there, although they are definitely moving in a direction unfavorable to our housing market.

Will our politicians get tough even AFTER the election? I am not sure. If Republicans secure their current representation, there is absolutely no chance of them poo pooing the party in light of the 2008 election. If the Democrats win, maybe, but they certainly don't want to be the scapegoat in triggering any crash events cos' they have the same election do deal with 2 years down the road.

My only optimistic hope of a fast and furious correction comes down to a major earthquake, for which California is overdue. That will be one hell of a trigger event, but I hope at least I can survive that quake when that happens.

As long as someone is still buying the MBS at an acceptable price, don't expect the mortgage lender to care about fraud. They wash their hands off the entire thing the moment the loan package is sold.

Unfortunately it does take a serious crash to wipe out the fraudulent practices in the RE related industry. The crash has to come first, not after.

ptiemann,

If your friend does agree to go through with the cash-back scheme, please forward his/her name and the name of the buyer to me so I can report them to the authorities and have the MLS sale price properly rolled back. Nothing would give me greater satisfaction than sending crooks and liars to prison, while simultaneously helping to expose mortgage fraud.

"Have you considered the impending global calamity, MBS-China catrastophe, or gold fiat trilateral arguments? How about the impact of Mel Gibson’s arrest on the international credit markets? Just wondering…"

So what's the Elders of Zion's position on the global credit bubble? (And hurry it up with the weather machines, okay?)

How about the impact of Mel Gibson’s arrest on the international credit markets? Just wondering…

If you drink, you cannot drive. It is as simple as that.

If your friend does agree to go through with the cash-back scheme, please forward his/her name and the name of the buyer to me so I can report them to the authorities and have the MLS sale price properly rolled back. Nothing would give me greater satisfaction than sending crooks and liars to prison, while simultaneously helping to expose mortgage fraud.

HARM, forget about it. I know you are angry, but the market will fall on its own weight. How much mortgage fraud are you willing to expose?

My only optimistic hope of a fast and furious correction comes down to a major earthquake, for which California is overdue. That will be one hell of a trigger event, but I hope at least I can survive that quake when that happens.

Please do not wish for that.

Those of you who were around back then and posted predictions can click here to see how your forecasts compared to actual results. I will post my own here to get things started:

Maybe next year... ;)

Peter P,

I am not wishing for the earthquake, it will happen regardless of what we wish for. We are long overdue for a big one per consensus by many scientists.

In history, natural disaster typically serves as the trigger event for some major changes, e.g. weather-induced famine leading up to the French revolution, tbe Russian revoution, a prolonged drought in China triggering the overthrowing of the Ming Dynasty...