patrick.net

@Brigadier,

Most un-sellers are still stuck in the "Denial" or "Anger" phases. It will be quite a while before most of them shift to "Bargaining", "Depression" and (finally) "Acceptance".

HARM

Probably best to make sure it doesn't have the meaning to insiders like FAB as he described. I've taken my definition from reading various economic papers & such, where Phantom Inventory is more general than just real estate.

Allah,

That's why we describe C/L as "the place where dreams are FREE!"

When people have to fork over real money it slaps the silly WTF toss your hat in the ring sh@t right out of 'em. The same is true of their relationship with realtors. Since the realtor is footing the bill for advertising why not go for it? Well realtors have reluctantly said, enough! Trust me, this is not a message they want to send but now it's down to survival mode. They have plenty of inventory, what they NEED is buyers!

Randy H,

I don't want to split hairs here but if the condos/TH/lofts are priced away from the market should they be counted out anyway?

RE: “Mental Accounting,” this is exactly what gamblers do at the table. They win a few big hands, yay. Then they end up on a losing streak, go negative a bit. Their "mental accounting" pushes them to keep playing hands, hoping to "get back to where I was ahead." Of course, we all know how that usually ends up.

"but after a year and a half I don’t see ANY price drops here."

LOL, I just received an email from a friend who bought in 2004 (Silicon Valley). He says prices are dropping and he's freaking out. I guess it depends on what side of the fence you're on (seller / buyer).

My other friend has still not received an offer on her Cupertino house, even after reducing the price. She's going to pull the listing in December if it does not sell - relist in the spring.

We sold in July of 2005 (need to downsize) and I thought our timing was perfect (bought in ‘97), but after a year and a half I don’t see ANY price drops here.

As long as you put whatever equity you gained from the sale into an instrument that beats inflation, you're actually ahead. Even if you don't see "ANY price drops here," flat prices equals real losses accounting for inflation.

She’s going to pull the listing in December if it does not sell - relist in the spring.

Aaahh, Spring 2007, the promised land for sellers and FB's, after the winter of our (FB's) discontent. People like her are going to be in for a rude awakening.

DinOR

I don’t want to split hairs here but if the condos/TH/lofts are priced away from the market should they be counted out anyway?

I would. That was FAB's comment. Perhaps in the RE industry they call unadvertised or pocket listings "phantom". From an econ perspective, it is still supply, and not "unreal". It just suffers some information asymmetry.

Brigadier,

Downsizing has perils all it's own (never mind a ridiculously hyper-inflated bubble in the mix to boot!) A great deal of our time frame of ownership for our second home shares an "overlap". It's not easy when you're used to 2,400 sq. ft. and like 3 acres but we managed to fit our lives into a 1,500 sq. ft. rented condo w/1 car garage. (It has never had a car in it).

I feel your pain. While Randy H's definition of phantom inventory excludes listings "out of the money" or "away from the market" what happens when realistic sellers begin to seriously undercut their "support"? I mean some of these people are so far out there their home might as well be on the moon!

@skibum -

Yeah, I know. I know. Her philosophy is that the "housing bust" has happened - which apparently to her means prices come down a few thousand dollars and the market stays flat for a while. We shall see...

I'm sensing unrest among my more recent home buying friends (2003-2005). I'm hearing a lot of "you should get in the market now" and "it's just a lull before prices go back up" and "prices are going up, just more slowly." It's like they are seeking to herd my husband and me - the lone renters.

Brigadier,

There are people buying at the higher prices, which is part of the buyer-side sticky-price action in my linked econ analysis. Buyers are also not on the same curve. The "supply of demanders" on the upper shelf has diminished to almost 0 at this point.

The rest of us are way down here, looking up at those silly sellers wondering when they'll drop their prices. Many just won't. That's fine, enough will so we'll still see price drops. Those who hold will come out behind in the long run, assuming they were originally considering selling for some reason other than whim.

Brigedier,

If you are looking for a condo in the Palo Alto area, just wait until all the new ones come online. (e.g. Vantage by Warmington, the old Hyatt Rickey's site, the old Mayfield Mall site, a couple of other large properties on West Bayshore and East Meadow Drive...) It is a long list. I'm looking forward to the impact of all that new inventory. It should be very interesting for those that wait.

It’s just too hard to sit and wait, epecially when your rent goes up 10% after just over a year.

Patience. Think of it this way - unless you're severely overpaying in rent, a 10% rent increase in the Palo Alto area doesn't even begin to make the cost of renting come close to the cost of "owning" an equivalent home. Condos in Palo Alto that are pushing $800-900K would have to rent for $4-5K/month just to cover PITI, even accounting for the mortgage tax break.

Look on the bright side. You sold at a time when selling was easy (less stress on your part), and by renting for a while, you're engaging in a sort of "temporal arbitrage."

lunarpark,

That's what I have to keep reminding myself. Yeah this sucks (even though most would say our condo is to die for) but I've been on the other side. Me likey here.

Believe it or not even selling into a strong market can be stressful. When we sold our place I had this older realtor call and say she wanted to show our home. She called at every intersection not knowing where to go next. I cleaned frantically while giving directions while on my headset. ONE block from our front door she calls and says her clients didn't like "the area"! Sheesh, yeah true story.

I thought to myself, what a suck @ss realtor. Drives out all this way and can't convince the prospect to go one more block? Because we live out in the country we must have showed it 15-20 times and our first offer was our last (thank God). Can you imagine what it's like now!

@DinOR -

You know, I'm actually enjoying renting. I have to admit it - I'm in absolutely no rush to buy. We're (sort of) newlywed DINKs with no debt and zero worries. I love the condo we rent - in fact, I wouldn't mind having one in our building if prices came down 20% or so. It's uncomfortable to watch some of my close friends go through this bubble, but I also remember having my nose rubbed in their equity over the last few years. So, there's that...

Brigadier,

Lucky you! Seriously, we were in the same place for 10 years (1994-2004) and when we decided to downsize we started a year in advance. Every week we made runs to charities, yard sales and the dump. It was a pain. We really hadn't let the place go but you accumulate stuff. Also, my research was a little premature so it wasn't like we had multiple offers or anything. I'd have to say it's been worth it. Our blood pressure is down and I can focus on business ( blog/chew gum at same time) and our next entry point on our last place! (Daughters are 19 and 22) thankfully.

DinOR,
I have to ask, what was your reaction to the recent roof failure/flooding your experienced as a rentor:
1. I wish I owned my home and had to replace the roof.
2. Its too bad I don't have to look forward to the condo association special assessment to deal with shoddy construction.
3. Buckets are cheap... what is the landlords phone number?

lunarpark,

Uh, yeah the nose rubbing bit eh? I'm less bitter every day and I agree, we like this place well enough to keep it as an office/hideaway indefinitely! If the price "isn't right" I don't mind b/c if we ultimately buy elsewhere the FULL amt. paid here is written off on schedule C. Hurt me!

Ha Ha, DinOR, terrific attitude!

EBGuy!

Damn! LOL! Yeah uh I'll take uh door # 3? No kidding. Since I was at my desk and the leak was in front of my face I just reached into my "personal" drawer and wuh-lah! No probalo.

@Brigadier,

If you were thinking the correction/crash was going to be fully played out in one year, I think you've been listening to too much REIC propaganda. Just won't happen that way --never has, probably never will. We've discussed the "sticky on the way down" phenomenon here to death, so I won't go into that any further. I'd check out the "mental accounting" and "sticky prices" links that have been posted here, though.

If you believe this correction will roughly track previous historical RE cycles, you could expect a bust / boom timeline ratio of approx. 0.6. In other words, if you figure the current boom started in 1997 and ended in 2005, you could guestimate it will take roughly 5 years to correct this time ( 0.6 * 8 = 4.8 yrs ).

Back on topic, here's RealtyTimes' take on the phenomenon of realtors' frustration with sellers:

http://realtytimes.com/rtapages/20061109_frustratedsell.htm

EBGuy,

I felt awful for the one couple that actually owns here. Of the 5 units in the complex 4 are (or will be soon) "repartments". (A term HARM coined to describe condos sold as flips that oddly resurface as rentals no matter how many times you bring them to the river in a burlap sack). The only other non-rental will soon be vacated by the realtor/owner and rented out so she can get long term appreciation. Pffft, whatever. So this poor couple is basically an HOA of........ one. GFL selling LL's on doing major repairs etc.

I have been a regular reader of this blog for a while now and I have reached a state where I am very happy renting. I have savings, flexibility and no unexpected maintenance costs.

So, personally, I don't care about the prices not dropping in the BA. Unless it drops around 50% from last year, I won't even be tempted to buy.

skibum,

The Realt-Whore Times article was revealing.

Last but not least make certain you are working with a MOTIVATED seller or don't take the listing!

Whoa. Did you hear that? Or don't take the listing. Whoa. That should rattle all these "priced to sit" mf'rs to the core man! To the core!

Randy H Says:

> Psychologically, the reason sellers do this is
> “Mental Accounting”. People don’t think in real
> terms, and the don’t think in total net-value terms.
> They put costs into buckets in their head, and only
> consider what’s in those buckets. They do not
> optimize rationally.

Last night I was talking with a friend who told me that his girlfriend has been living with him since the beginning of the year so she put her condo on the market a few months back.

They were asking me if I knew why the condo was not selling for $600K when other condos in her building had sold earlier in the year for as much as $625K.

I asked when she bought the condo and what she paid and she said she bought it in 2003 for $425K.

They seemed shocked when I told her to price it lower than anything else and sell it as fast as possible unless they have solid evidence that Bay Area condo buyers are making 50% more than they did in 2003…

FAB,

That's cold man, cold.

austingal, a troll? Never!

Half the reason folks like us are primarily "entertainment" here is b/c in the BA the amount you're prepared to pay is amount the buyer and seller are haggling over! So we're just pikers. Not even "real" bubble sitters, we're "toy" bubble sitters.

Oh and for your Bubbletainment it's only Nov. and we already have homes sliding off the dunes and into the Pacific. First storm of the year and look ma, no back yard! It's so neat to see the erosion "scallop" out from under the house!

Look out below... house becoming unstuck!
This was an interesting listing as it sat on the market for quite sometime, went off the market, came back on and recently took 15% off asking to hit the magic $499k mark. What's interesting is a buyers agent is trolling the listing on CL, except he hasn't noticed the reduction yet and has it listed for the old, higher price -- of course he says "100% financing available". Yes, this is, unfortunately, a "starter home" in the BA (2/1 ~850sq.ft, hardly any yard.) I remember touring several months ago wondering what the seller was smoking -- maybe the agent knocked some sense into her.

@FAB,

Beautiful, baby, beautiful!

@Brigadier,

I agree that as long as unemployment stays low and USD remains relatively weak, inflation will definitely be a factor. Keep in mind though, that as long as you invest in something (stocks/bonds/CDs, etc.) that consistently returns at or above "inflation" (however you choose to measure it), you are not really "losing" any purchasing power. You don't necessarily need to tie up all your money in "hard assets", whether it's RE, gold, etc. to stay ahead of inflation. Especially not when that "hard asset" is depreciating in nominal as well as real terms.

NIA

Jumper,

Love the screen name btw, we're really only a year past peak. What started (as do all bull markets) with legitimate appreciation has snowballed into something unrecognizable. As per HARM's post above use (.6) as your multiplier for the length of time historically it takes for a correction to work through the cycle. So 8 X .6 = 4.8 years from peak to crater.

Got any....... 3's?

Nobody's going to tell me to "go fish"?

@Jumper,

DinOR pretty much beat me to the punch, but I'd also add this:

Extremely low Fed funds rate (1%) is largely what got the ball rolling in the first place, but re-lowering them again is just not likely to stop the unwinding. Fact is, virtually every qualified buyer (and quite a few unqualified ones) has already bought. Hence the all-time high 70% "home-ownership" figure politicians & REIC love to tout.

The Fed can try to re-spike the punchbowl, but who's left to buy? Us? (not at these prices) Investors? (not at 1-2% cap rates) The best they can do with that strategy is creating an opportunity for the few option-ARM FBs who haven't already cashed out all their equity (and then some) to refinanced into a FRM.

Jumper,

I feel for people in the BA, really I do. I'm up in Oregon and it's entirely possible that our correction may not provide the P + P (Pain and Pyrotechnics) I've been foaming at the mouth for either.

Here's what I do know. Merrill Lynch has already revised their position on the start of the easing cycle by 2 qtrs. CSFB has said fed funds will be at these levels for the foreseeable future. (So we're getting some back peddling even now). I for one am not holding my breath for rate reductions. Too many (infinitely more qualified than myself) have shared this strategy may be taken off the table due to inflationary pressures and detrimental influences on our flagging currency. Housing has to stand on it's own two feet and the administration has bigger problems right now than artificially propping it up.

HARM,

I don't see it so much as beating you to the punch, just trying to show I'm not 'totally' untrainable.

But it appears that only flatness is going to happen from here, not nominal price declines.

I very much doubt this is possible, given the enormous run-up in prices over the last several years, especially in CA, FL and other major bubble epicenters. If you crunch a few numbers, you'll see that it would take about 15-20 years for house prices to revert to the mean (vs. supporting rents & incomes) with inflation alone. Not saying inflation won't take care of some of the correction, just that prices are not likely to correct through inflation alone. That would require a Japan-style period of stagflation the likes of which we've never seen here.

Also, even if prices stay completely flat for many years with no nominal drops (unlikely), you're still losing real value (plus property tax, maintenance, insurance, etc.) vs. other more liquid investments. That's a lot of risk & expense for negative real return.

Jumper,

I'll meet you a little bit of the way. I also don't see a rapid, massive crash in prices. I've posted historical data before which shows that a 9% median drop is about the largest in previous cycles.

Now, this cycle is certainly a lot bigger. But it's not quite as big of a jump as it was in the early 80s in terms of real dollar affordability as measured by either rent ratios or income ratios.

But, we're closer to the maximum income ratio that a family can bear without certain financial distress.

I don't think foreigners are going to stop buying MBS' anytime soon. A lot of the macro worries I think are misplaced. There is tremendous global liquidity, and that won't dry up overnight. Foreign demand for US paper will take many many years to subside, assuming it does subside. About the only major macro threat comes in the form of total cataclysm, like WWI style global collapse of trade. That could happen tomorrow, or in 100 years. So no use fretting.

What I see is a protracted period of stagnant prices, which bounce around but trend down for many years. Add in inflation, which will rise for many years to come, and RE is a loser. But so are fence-sitters like me or new buyers waiting it out because we're all stuck with the prospect of renting for upwards of another 7-10 years. And even if we do, saving gainfully is not an easy task in an inflationary environment.

It could well be that the overpriced buyer who hangs on through the period ends up in about the same place as the prudent but average saver who rents through the period. For savers who know how to beat inflation, sure it's a big winner. But it also means fighting ever rising rents, which puts more burden on savings returns.

You can download my Excel model if you want to set your own future parameters and see how it all balances.

Here's another look into the mind of the frustrated realtor (TM):

http://www.lendinguniverse.com/RealEstateNewsStory.asp?story_id=58546&url=999

Some choice quotes:

"When they want to sell, they'll sell it," McWilliam said. "When all that stuff shifts away, we'll have true inventory -- not just people that are going on a fishing expedition."

***

A seller with unrealistic price expectations and a weak Realtor is "a recipe for disappointment and disaster," said Stephen B. McWilliam, president of Florida State Realty Group Inc. in Ft. Lauderdale, Fla.

"The weak Realtors in desperation, in order to obtain the listing, will contract to list the property for the seller's unrealistic price. When it does not sell, and in some cases it does not even get shown, they suggest lowering and lowering and lowering the price," McWilliam said.

***

"I think the reasons sellers are stubborn has more to do with the reason they are selling than the actual price," Crespillo said. "If they still remain stubborn after all has been explained to them, then I simply tell them I am not the best Realtor for them and I would be happy to refer them out to someone else. I would rather bow out gracefully then be kicked out later for circumstances I cannot control."

And another one from San Diego:

http://www.sandiegometro.com/2006/oct/resale.php

But sellers aren’t feeling very good about that little bit of appreciation.

‘If it’s priced more realistically, you’ll get more lookers and it will sell,’ advises Ethel Merriman, a Downtown real estate agent since 1999.

“Sellers are still bowing to the 11th commandment: thou shalt not sell thy real estate for less than thy neighbor,” Valone says. “Sellers are being understandably stubborn about holding on to their value.”

The problem with that approach is that buyers won’t look twice — because they don’t have to, says Ethel Merriman, who’s been selling Downtown homes since 1999.

“You can’t price like it was six months ago and you can’t price it too high and expect you will drop it during negotiations,” she says. “Sellers don’t want to hear that but it’s not their market any more.” And, she says, what keeps buyers away — the fear of falling prices — is reinforced by sellers pricing too high.

“When sellers price too high and then drop their prices, it tells potential buyers that prices are still dropping and it makes them reticent to buy,” Merriman says. “If it’s priced realistically, you’ll get more lookers and it will sell.”