patrick.net

@alien,

Sounds cool --Bendover Bernie & DL should jump on this. Personally, I like the idea of bringing back debtor's prison and making children responsible for their parents' debts by default.

astrid,

My bad. Rock climbing in the vaulted living room it is!

It's so funny to see the same C/L posting week after week and you always feel like a doofus for being tricked into clicking on the same un-sellable listing time and again. After awhile you even recognize the tracks the vacuum cleaner left in the carpet.

NOTE TO C/L SELLERS!

Now that we are on month EIGHT of having to shuffle through your lame @ss listing kindly reduce the price substantially or consider other means to unload your overpriced sh@tbox! (Apparently C/L is not cutting it for you).

Thank you.

The C/L community.

Oh - thanks Peter P for the Kaygetsu reccomendation

Please try not to tell other people. It is getting difficult to make reservations.

Following onto HARM's comments,

We are in the teeth of downward price stickiness and escalation of commitment (from BOTH buyers and sellers). Pretty much everyone except for the out and out clueless has now heard that the ride is over.

Sellers don't want to sell below the last "legitimate" comparable, within reason. They are quick to discount other sellers who take lower prices so long as there are only a few of them.

I wouldn't be so quick to assume that masses of sellers will be forced out of their homes anytime soon. As with everything, there is a distribution of desperate to overly conservative, with most in between. I expect the average seller to be capable of maneuvering into staying in their house for a long time if prices start falling too fast.

The best situation may be slower price declines, because it allows sellers to break from their mental-accounting, and reset their expectations on the way down.

I've thought alot about the notion that prices of homes are set marginally (the last home sold determines the price for all homes). I have concluded this is false in reality. It is true as an economic abstraction, but it ignores behavioral psychology. What happens in reality is sellers look for any and every reason they can to disqualify lower prices as aberrations. "He was greedy, she was impatient, they were desperate". So although the purely mathematical analysis will show prices went down because "they were desperate", it is false to conclude that supply & demand really meet where the math says they should. Instead there are really two supply curves. One with people willing to take the marginal price -- to be price takers. At first (now) there are very few sellers on this curve. The other curve is all the sellers who ignore the marginal price and refuse to sell except at a much higher price.

The problem is that the second supply curve misses most of the demand, which itself is shifting in (because most price-taking buyers are now gone).

Yes, I know - I didn’t see your follow up about reservations until after my first attempt to eat there! I had to wait until the following week…Worth it though!

If you LOVE fish you can also try Sawa Sushi in Sunnyvale. You will be overwhelmed by sashimi.

Randy H,

I agree. There are two seperate and distinct supply curves. The differences can be stark.

In SFWoman's WSJ article about the gal in Northern VA she had her home appraised at 1.1 mil. in 2005. She tried for months to sell it. Lowered it to 899K? with no takers. Put it up for auction and declined on bid of 475K. High bidder finally offered 530K and she accepted.

I realize this is an extreme example but whatever other sellers are thinking about this person, was she desperate, greedy or impatient really doesn't matter now. What's done is done.

alien,

Seriously? 900 bucks for A/C? Good for you! I hope your pets were in the lap of luxury as the central air hummed away continuously during your lengthy and numerous trips.

What are these FB LL's thinking?

Uh, o.k sure sounds good to me!

What does WSJ stand for? Excuse my ignorance :-)

At least I know about the housing bubble - or is it officially a housing crash now?

Instead there are really two supply curves. One with people willing to take the marginal price — to be price takers.

Randy, I buy most of your econ, but isn't this nonsense? Of course, houses aren't identical widgets, but consider a tract of identical houses with 500 on the market. All you're saying is that the supply curve rises late and steeply (lots of folks willing to sell for $800K but only a few at $650K) and that the demand curve falls fast and steeply (lots willing at $400-500K but only a few at $650).

The marginal price is still in the middle at $650, it just happens to be at a really low sale/month figure.

Our thesis is that buyers are more stubborn now than sellers, so the supply curve should shift in favor of lower prices.

Our thesis is that buyers are more stubborn now than sellers, so the supply curve should shift in favor of lower prices.

Now that the fear of being priced out is gone, buyers operate on greed.

The greed within sellers are slowly turning into fear. Forget about fundamentals.

However, will buyers soon fear of missing the opportunity to buy on the dip?

According to some it's going to be a long time until the bottom of the dip is reached. It's way to early to worry about missing the opportunity of buying on the dip. I guess maybe the uninformed might think that's it's a temporary dip and go for it, but surely not after all the news coverage has finally started?

George - do you think it's hit rock bottom in Florida? Is that why you're looking to buy properties now?

Peter P,

I think that pretty much sums up the mindset right now. With so many "potential buyers" just now hearing horror stories from co-workers etc. I'm not too worried about people running out to jump all over the dips. While we here have tracked this meltdown in the making for what feels like a lifetime, the general public is just now learning that 20% appreciation per year is NOT the norm?

Even if they had the inclination to throw money at an attempt to bottom feed they're tapped out. Their DTI is barely hanging in there now. They'd have to sell one or all of their properties (in most cases). We ran into this last year with the auto mfrs. Great deals! Sure, but each incentive just seemed to lower their trade-in that much more.

Oh, would you care to venture an opinion on Claire's charitable giving quandry. Seems there's a tax bill waiting for her and she wondered how big an impact "giving" would have on her bill?

Anyone notice lately how the yield curve is now fully and strongly inverted (35 bps spread between the 6 mo. & 10-yr. Treas.)?

http://www.bloomberg.com/markets/rates/

Folks, the train has officially left Bubbleville, next stop: Recession City.

Oh, would you care to venture an opinion on Claire’s charitable giving quandry. Seems there’s a tax bill waiting for her and she wondered how big an impact “giving” would have on her bill?

I am not an expert, but what is wrong with paying that tax bill? That should involve less out-of-pocket money, right?

Uh, o.k so no one seems like they're in a real charitable mood right now AND I'M O.K WITH THAT!

If we'd rather scratch out a check for the FULL amount to the gub'ment please be my guest.

True, this is the quickest and easiest way out of ANY situation. Just CTC (cut the check). Lawsuit? CTC! Divorce? CTC! Dispute w/employee/employer? CTC! Short sale on overpriced sh@tbox? CTC! See? It all goes away. I know it's what most CPA's would say. This is why CPA's suck. Sorry.

This author of the article linked below has a disturbing take on household solvency (or lack thereof). The author notes that 20 million homeowner households have $0 or negative net worth. Also interesting to learn that there are 74 million households above the poverty level--and 69 million homeowner households (most of these are probably people who are barely above the poverty level--the rest are presumably perma-renters or bubble-sitters).

When the crash hits, who will win? The 20M FBs or the 5M solvent renters?

http://www.oftwominds.com/blogmay06/wealth-effect.html

Put my son’s money in a 5.85 CD today at Wamu.(The money he saved for a car ..10K)He’ll get it out when he’s 15 and 1/2…just in time to start dreaming about a car…which make…color…life is good.

Make sure it is a safe car (5-star rating frontal and side) though.

When the crash hits, who will win? The 20M FBs or the 5M solvent renters?

20M FBs? It is 20 vs. 5 or 4 to 1!

alien Says:

A note on renting - I just moved in to a 1/3 of a $1.5M house in Topanga,

I'm looking to buy in Topanga, once the prices come down. Nice little house, bit of land....

Already seeing some reductions - a 1.2 million place got a 25% "haircut" this morning to 900K.

So, what's Topanga like? The good? the bad? The ugly?

From Ben's blog:

Better to live next to a salvage yard than in a staged house during a slow real-estate market.

I know quite a few people who still expect high single digit appreciation as a sustainable norm.

So you are implying that people you know are not out and out clueless?

Pretty much everyone except for the out and out clueless has now heard that the ride is over.

Unfortunately, the "out and out clueless" group constitutes approx. 99% of the U.S. population.

I posted an article about the economics of what DinOR and I were discussing earlier on my blog: Housing Bubble Economics.

TN,

I'm pretty sure. The only bulls left are finding themselves like the guys that show up at a party with a keg over their shoulder only to find, it's not "that kind" of a party.

Cherry picking is one thing, ignoring overwhelming data is another.

FRIFY,

All you’re saying is that the supply curve rises late and steeply

I'm saying something a bit different. I'm saying there is a distinct discontinuity in the supply curve on the way down, just as there was in the demand curve on the way up. This discontinuity grows the most right before a shift in sentiment. A sloped or curved continuity would imply that the "in between price" was attainable. I contend it is not (in most cases), until the entire vertical is flushed from the system.

I’m saying there is a distinct discontinuity in the supply curve on the way down, just as there was in the demand curve on the way up.

I do not believe there are "discontinuities". I tend to think that the supply and demands curves themselves are heavily dependent on price expectations.

newsfreak,

I'm not saying it's an anomaly. I'm saying it is an erratic price, not likely to be reproduced with regularity. There is not enough supply at that level to support the assertion that 540K is the new equilibrium price, as a marginal price analysis would assert.

In technical terms, this is a price either on or below a discontinuity in the supply curve.

Moreover, price expectations themselves are based on price actions. As a result, any analysis of supply and demand would be completely useless.

However, although sellers may not accept the reality of lower comps, each anecdote of price reduction will only add to their fear.

Everybody breaks after a certain point.

I do not believe there are “discontinuities”. I tend to think that the supply and demands curves themselves are heavily dependent on price expectations.

Imagine there are only two sellers in an unique neighborhood. Say one is you and the other is me. You want to sell your condo $hitbox for 1.1mil, and won't take a penny under 1.0mil because you think you'll just rent it out otherwise.

I, on the other hand have to get the hell out, and will take whatever the market will bear. I therefore will consider an offer of $450K.

This is a discontinuity, by definition.

In fact, granularly, all housing is a series of discontinuities because each individual seller is a step function to the next. It is only in aggregate that we can integrate and assume continuity; but it is in reality an abstraction.

any analysis of supply and demand would be completely useless.

It is far from useless.

Everybody breaks after a certain point.

No, some people leave the market; just like we did on the way up. You're implying that everyone would sell for a penny if pushed far enough. That itself ignores behavioral factors.

In fact, granularly, all housing is a series of discontinuities because each individual seller is a step function to the next. It is only in aggregate that we can integrate and assume continuity; but it is in reality an abstraction.

I agree. However, if one is willing to look at a wide variety of housing units, the curve will appear to be less discontinuous.

You’re implying that everyone would sell for a penny if pushed far enough. That itself ignores behavioral factors.

They will. I did not say how far though. :)

No, some people leave the market; just like we did on the way up.

We all have breaking points.

Wha!

Wolf Blizter on CNN is going to have a story on the HB sometime this hour.

It is far from useless.

It is not only useless, it is counter-productive. Why was demand booming when prices were skyrocketing? Why is demand plummeting when prices begin to drift downwards?

Again, one should not trust me on economics. Randy is the expert.

"It is not only useless, it is counter-productive. Why was demand booming when prices were skyrocketing? Why is demand plummeting when prices begin to drift downwards?"

We've either found the elusive Giffen Good or its another case of people with unrealistic expectations about future price growth.

Most likely the latter. We also see similar behavior amongst people during periods of hyper-inflation.

Randy,

If push comes to shove, people will abandon property they own, if the net present value of the property is at zero or negative. This will happen if the cost of maintenance is greater than the value derived from the property. We see it all the time with old computers and abandoned mines all the time. We may soon see it amongst condos with high HOA fees and high desert houses with 3 hour commutes and $600 cooling bills.

Well that characterization is rather subjective but what I meant to say is that particular mentality isn’t as scarce as you might think.

That mentality is WIDEspread. Actually, I want to become clueless as well. It should give me better sleep at night.

In the case of that 50% off house, the seller must have had totally unrealistic original expectations about the value of the property. NoVA houses have not dropped anywhere near 50%. I'm seeing 5 to 10% reductions on SFHs and THs, maybe up to 20% on condos, but the asking prices are still pretty high and decently priced houses (around April-May 2005 levels) are still moving okay.