The half-full glass
Surely one of the great lessons of the late real estate bubble is the importance of listening to the other side of the argument. Now that we have a real estate downturn, and the chorus has switched its tune, it seems worthwhile to remember to consider what the contrarians are saying now.
First, there are those who say the problem is overstated. Sure, sales prices are falling. But they argue that the sellers are disproportionately people so desparate to sell -- including banks overloaded with foreclosed properties -- that prices have dropped below actual values. Lou Barnes, a Colorado commentator on the real estate market, is a major proponent of this idea. He notes evidence that average national home values may still be rising, notwithstanding the deep trouble in some markets, and even in those markets, the depth of the problems may be overstated.
Second, there are those who say the impact on the economy is overrated. Bill Wheaton, an economics professor at MIT, was recently cited in the Wall Street Journal for reporting that even a 20 percent drop in nationwide housing prices -- and so far the national drop is nowhere near that large -- would reduce the economy by about one year's growth, causing at worst a mild recession. The basic reason, Wheaton says, is that the effect of falling property values on consumer spending is overrated: 90 percent of the money people borrowed against their homes was spent on renovations.
Third, there are those who point out that downturns are not comprehensive events. The map above shows cities and towns in the Boston area with at least 20 sales of single-family homes during the first two months of 2008. In the blue towns, the median sales price is still climbing. In the red towns, prices are falling. A Boston real estate agent recently wrote us to complain that he can't find enough sellers in some of those blue towns. He wrote, "Can you find a way to print an article directed at sellers to let them know that its a good time to sell in certain Boston neighborhoods... and suburbs??"
Finally, as I wrote earlier this week, there is some evidence that the worst is already upon us, and therefore that better days are coming. BusinessWeek makes the argument that this is happening in part because actions by the federal government are having the desired effect.
Fire at will.
The prices of homes in this area are just too high. I think they will continue to go down and the market will continue to correct for the next year or so. The spring is the best time of year to buy and sell houses so the market won't look so bad over the next few months but over the next year things will drop. I think the people buying homes are more cautious now as a result of the crash of the sub prime market and the recession. People are more aware of getting in over there head and they are being patient before they buy. I do belive that there are buyers out there including myself but at this point its a waiting game and a bagin shoppers market and I am looking for the best deal.
Once again, there's no need to guess - it's math.
Real estate prices are a function of supply and demand. Currently supply is high. That will put pressure on prices until supply is in equilibrium.
On the demand side, buyers can afford to pay what they can afford to pay. In the last few years, as the result of cheap credit and high debt to income ratios, they could afford a lot.
As DTI returns to its traditional rate of 30% or so, buyers can afford a place that is around 3.5 times income.
So prices will fall to that level. Which if you look at a graph over the last 60 years or so, you'll see that's been a constant.
Even if buyers want to pay more, the banks won't provide them with the money. Banks are still losing fortunes in mortgage write downs. All of the measures put in to shore up the mortgage market make clear that underwriting will be much stricter.
In fact, we will probably swing to far in the other direction, with credit difficult for creditworthy borrowers to obtain.
Yes, other factors do come into play around the edges - submarket demand, household creation, consumer expectations. The first could be a positive (flight to quality), even in this market, the latter are poor
But broadly, real estate prices will continue to drop until people can afford to buy real estate. Tautological sounding, but with no buyer one can't have a seller.
You are right on the mark. My only thing to add is directed as first time homebuyers. If you think there is ever going to be a better time to buy, you are kidding yourself. There is no more room for interest rates to go down, and at the slightest sign of a rebound, they'll be heading up. Home prices may go slightly lower, but you can build whatever percent decrease you think might happen into your offer. Finally, you'll never find a more desparate pool of sellers as you have now in this perfect storm. The real estate investors who didn't get caught in this mess completely already know this and are scooping up the bargains. So don't wait too long to jump in. Spring will be when most are grabbed.
This was the biggest asset bubble in economic history. It went on for years unchecked. Politicians and regulators turned blind eyes and ears despite ample warnings (Robert Shiller's "Irrational Exuberance", 2ed, 2005 comes to mind). Agents, lenders, brokers, flippers, banks, and borrowers greedily joined the fee-ding frenzy.
The public, the media, the politicians have finally just woken up by some miracle, they're no longer denying it was a huge abdication of responsibility (although they all point fingers at others). We are now at the beginning of the aftermath, and it will stretch on for years, by all reputable, objective accounts. The whole financial system (the mechanism that allows governments, businesses and people to plan and execute projects) will have to be reengineered to prevent greed from destroying it again.
To say that it's time to look for it to be over, for the sun to come out and everyone's house to start appreciating again is unrealistic, and misses the point. This was a catastrophe that will set responsible people and businesses back years and trillions of dollars. We should be watching the Fed, the regulators to make sure they don't spend tax dollars on bailing out the opportunists, not looking for signs of false hope for a quick shove-it-under-the rug solution.
No more privatized profits and socialized losses.
The argument that now is a good time to buy because interest rates are low and are only headed up is flawed. As interest rates rise, prices will fall. Unless you buck the odds and end up living in the same place for the entire 30 years until your mortgage is paid off, higher rates when you sell will necessarily mean lower prices and most likely a loss. Also, those with a substantial down payment would be much better off with higher interest rates as higher rates will restrict the buying capacity of the competition.
Buyers need to realize that sellers aren't as desperate as they think or want them to be. I am selling and have received offers at insulting rates. My house is priced well under what I purchased 3 years ago. I need to move b/c we are relocating for work. But I am not going to give my hard earned money and sweat equity away. Buyers offering low ball offers in a desired town with little foreclosure rates, need to realize it won't work. They need to consider respectable offers and put themselves in the shoes of the sellers. Buyers need to look in their price range or don't look at all. I too will be a buyer once I sell, but I won't be disrespectful to the sellers.
The blue areas on the map are upper income areas while the red are lower. I don't think it's news to anybody that homes in lower income areas are way way way overpriced, while the upper eschelon homes are largely unaffected. That's been all over the news. It's the lower income people who can't afford their loans.
ZB, it sounds like you are the one being disrespectful. If you don't like the offer just say "no thanks" and move on. At least the buyers are doing you the favor of letting you know the price that your house would definitely sell for if you had to do it ASAP.
1:10---why is it insulting for someone to bid what they think a property is worth? they are free to bid and you are free to turn them down. however, if you are receiving multiple offers below your asking price and nothing close to what you believe your place is worth, has it ocurred to you that you might just be wrong?
Regarding housing's effect on the broader economy, the problem isn't house prices in isolation, it is the degree to which our economy is LEVERAGED based on the expectation of constantly rising house prices. Now that the collateral is not worth what everyone assumed it would be (higher), there is a systemic margin call ocurring which is draining capital from other productive uses. This is not a minor issue.
Reply to Phil (#3) - You are a real comedian. You are suggesting that you must buy now, since rates will only go up?
Listen, if rates go up, that hurts affordability, which will drive prices down. The banks get more money, the home seller gets less money. You should be ashamed of such pro-RE cheerleading.
ZB, I don't know why you think that is insulting. You put your home for sell on the market and basically you are conducting business. There is no hard feelings in business. You are going to get initial offers that you may or may not like but there is the term in business: negotiation. If I was a buyer, I would give my offer some headroom for negotiation. I think in your case, you're the one doing bad business. Buyers don't care about the seller's circumstances. Mind as well as posting the sign "For Sale, for this price only" (like the other blog topic) and "For people can afford with this price".
Whenever real estate cheerleaders argue that prices are poised for a rebound, my immediate question is this: Can most people afford to buy most houses?
The answer to this question is "No." Home prices are still not aligned with incomes, even in upper middle class areas. Until prices return to levels that are affordable for most people, prices will continue to fall.
I have yet to hear a compelling counter argument. To the realtors who read and comment on this blog, I'd like to see an explanation as to why price-to-income ratios don't matter.
Yawn:
Red communities like Lexington, Sudbury, Wellesley and even Braintree are not low income areas.
I am not being disrespectful to buyers nor do I misunderstand the nature of the business. I not taking this personally, I am just stating a sellers perspective since there seems to be so much buyers resentment on these pages. I understand the chance to try to make a deal, but mine is not the only situation. Many sellers are going through the same thing. Good reasearch and minimal understanding of the marketplace will help buyers who really want to buy now. Otherwise, I don't blame them for waiting.
the bottom line is that all realtors want is a sale period. of course they are screaming to whoever listens, "it's a buyer's market! never a better time to buy!" realtors are like used car salesman, only they are selling much more expensive items.
ZB, good luck.
You are selling your house in a buyer's market. If you are getting multiple offers that you find "insulting" than maybe your asking price is "insulting" to buyers who DO NOT CARE about the fact you over-spent for your house 3 years ago and then continued to invest even more into it. This market is what it is. Rent it out while you are away and sell once the market rebounds if your ego is so bruised.
Have fun.
For those who are bullish on the real estate rebound, take a cautious look at employment data. Consumer spending and the ability to purchase a home is directly related to strong employment data. With continued cutbacks in the real estate and financial industry: construction, sales, banking and an increased in inflation on basic necessity (gas, food) -- something has to give.
The problem with the continued Fed Reserve pumping of liquidity into financial institutions to prop the stock markets in the short-term (until the elections, anyways) has allowed inflation run up. Has anyone noticed the price of diesel gas recently? It is over $4.
To the uninitiated I offer a way to translate all of the real estate blogs:
"Now is the perfect time to buy" means I am a Realtor. "Now is a terrible time to buy" means that I have been waiting for houses to come down 30% for the last 15 years. "The housing bubble is the fault of greedy brokers and bankers" means I am a liberal. "The housing bubble was caused by people borrowing more than they could afford" means that I am a conservative."The housing bubble, like all things, will pass" means I am older than 30. "We have it tougher than anyone in history" means I am younger than 30. "Houses are too expensive" means I resent not being able to live as well as my parents do now. "Everyone is leaving Mass." means that I have been thinking about going to a state where no one will recognize me working at Starbucks. "The credit crunch will end life as we know it" means my parents are refusing to pay for graduate school and I have to get a real job thus ending life as I know it. "Seller's Agents are crooks" means that I think that I could sell my house without a loss if I could just do it for free. "Buyers agents are crooks" mean that I bet that I could afford the house of my dreams if it weren't for broker's commissions. "I know what I am talking about" means that I do not know what I am talking about. If I did, why would I be wasting my time on these blogs?
Please, normal people, run for your lives. The people on these sites are sitting at their terminals with tin foil hats waiting for Hale-Bopp to take them to the planet where houses are free, real estate agents and bankers are persecuted, and guys who play video games and go to Star Trek conventions are elevated to the status of gods. The future is uncertain. It always has been. One more click ain't going to do you any good. Log off and enjoy your life.
Sagatious Sally,
Thanks for the ROFL moment. I am well over 30 so I am in the "this will pass group." Now back to something really important.........March Madness.
Hey Sally, am I a liberal or conservative? I think that the bubble was caused by both greedy/reckless lenders and greedy/reckless borrowers.
And by the way, Boston housing prices had indeed fallen 30% (inflation adjusted) about 15 years ago. That was the drop from the peak in the 80's which lasted through most of the 90's. I do believe that now is a bad time to buy, but it only became so in the 2000's.
"Home prices may go slightly lower, but you can build whatever percent decrease you think might happen into your offer."
Regarding Phil's post (#3), how do you build a percent decrease into your offer? Do you use appraisals and simply state that if there is any decrease in the appraised value, such decrease shall be reflected in the sale price? That would seem to put too much weight on the appraised value. Do you follow some other well-followed index? I am a first-timer, so I am very interested in how this can be done.
Phils comment is absurd. Just wrong in every respect.
I'm a real estate investor who jumped out in 2005. I'll jump back in again. But not in this overpriced market. Read my comment above, its still math.
Real estate is neither inherently a good investment, nor inherently a bad investment. Like everything, its when you get in and when to get out.
And its not time to get in until forced sellers like ZB have woken up to the new reality. But ZB is typical. Which means stay out, and save your cash.
Compare monthly rental outgoes to monthly ownership outgoes.
DO THE MATH PEOPLE. Math is your friend.
It is not a good time to buy. You can refi if rates drop but you can never go back and renegotiate the price .
There are deals to be had but not if you think it is only about the rates.
ZB:
I don't want to "insult" anyone but how exactly should I put myself "in the shoes of the sellers"?
Does that mean I should be thinking: Man I should up my offer because ZB really needs the money? He over spent 3 years ago and life is hard so I'll bail him out. Maybe I could fork over an extra 50K because he put so much sweat equity into this house. No.. make it 70K because he's such a nice guy.
Let us know when the REAL offers start rolling in.
Sagatious Sally - loved that post! Couldn't agree with you more!
Occasionally read this blog - not for the real estate, but because I always get a kick out of how Appelbaum can throw a blantantly controversial topic out there and the same people jump on it like a dog on a bone - day after day after day. Dance monkeys, dance!
I'm in the business, so I tell my clients not to buy unless there is a lifestyle event (growing family, relocation to the area with a time/pressure deadline, etc) as the numbers don't work in the current market. If you look at what one will pay for a home in the current market, between taxes, gas/electric, maintenance and repairs, insurance and mortgage payments, vs. what they would pay for renting a similar home, it is cheaper to rent or stay where they are. Naturally, there are "soft" benefits to owning, but since the market has appreciated so much in such a short period and has not corrected itself across the board, it is better to wait until prices are in more in proporation to salaries. Houses (and expenses) went up 70% or more in just a few years, while salaries haven't. There will always be exceptions to this rule as there will always be people who want to buy and are not concerned about market conditions, market trends or making a profit in the next 5 to 7 years if they'll need to sell for any reason.
This past housing bubble was different than past housing booms, in that the "jet fuel" which propelled this boom were all the easy money terms which weren't available in the past. It brought many new people into the housing market and caused them to buy their first home they couldn't afford long term and/or helped people to buy larger, move up McMansion homes - all the while thinking that rising prices and refinancing would bail them out. It was the dot.com bubble all over again. Easy credit, huge risk, rising market prices with no end in sight and all "the financial numbers" not working long term. It was the same for all the people which bought internet stocks at the peak of the market and then the market changed.
Now is not a good time to buy unless you really want or need to. Now is not a good time to sell unless you really need to . Sellers have to price (or reprice) their homes and not try and capture a 50 - 70% price appreciation in this down market with its higher and more restrictive interest rates, liquidity and qualification issues. From my vantage point, I do not see a growing and high salaried population moving to the area. Those businesses are mainly going to the Sun Belt or to Silicon Valley, where they are presently located or are starting out there.
"Compare monthly rental outgoes to monthly ownership outgoes."
*rental outgo: to landlord's mortgage and equity.
*ownership outgo: to your mortgage and equity.
Buy a home. Live in it, the way you like to live. Stay there for 4-5 years or more and you will build equity.
Here's a tidbit from The Federal Reserve, where they do a lot of math:
"Median net worth of U.S. homeowners is $184,400, or 46 times greater than the average renter's median net worth of $4,000."
There's some math for ya!
Charles is right. Do the math. I have a spreadsheet in which I enter the amount I want to offer, how much a down payment I can afford, what the resulting loan would be, include the monthly taxes and insurance (an estimate based on an a discussion with my insurance agent), and the current interest rate. This gives me an estimated monthly payment. I placed an offer on a house two weeks ago that is 9% less than the asking price but I included my calculations along with my offer and stated that I believe that I can rent the equivalent to this house in the same town for the monthly payment that I've calculated. I allow $100-200 more on a rental because if I'm renting I don't have to pay for regular home maintenance. I've owned a home previously. I know there always at least one unexpected expenditure yearly that will work out to at least $100 a month if not more (usually more). My realtor asked how sure I was about the rental prices so I spent the last 2 weeks looking at rentals and I feel that I'm pretty on target. The offer was not accepted but I think I may have found an apartment that I'm interested in renting while I wait.
Phil has a valid point. I do mortgages, and the margin of overstatement by the seller in the last 12 months, in my experience, is only about 1-2% when it is overstated, not 20-30% as some people calling me seem to think.
Remember that most sellers get realtors to list their house, based on actual recent sales prices in their town. If a house lists for $400,000, a realtor should be able to show a market analysis backing this up with real facts, not a wishy-washy feeling. Asking a seller to drop $75,000 in price IS an insult, in that it tells you the buyer thinks they know more about your house and your market than you do, even though they may not have read the CMA to substantiate their claims.
Finally, all mortgages require appraisals from a licensed appraiser, who knows his work WILL be double- and triple-checked by the lender before closing. The lender and the appraiser use comps from the same place the realtor gets them--the MLS showing recent closed sales. Again, very few appraisals arrive at less than asking price, not because of some conspiracy, but because the numbers support the realtor's/seller's idea of value.
joey,
I meant general trends. My point was that you can spin things however you like but the facts remain that the homes in what used to be lower priced areas are far more overpriced than those in the higher areas.
Speaking of spin, he doesn't say what his sources are for the prices. There are plenty of ways to show prices are rising if you crunch the numbers the right way. Ask any realtor.
Disrespect for the seller? Are you kidding? Wide eyed sellers, salivating realtors and misguided monetary policy pushed home prices to ridiculous, unsupportable levels. Real estate - like the economy in general - is cyclical. For the seller still looking to make a killing, sorry, the cycle has picked up steam heading down the other side of the curve again. And with folks with ARMs looking at a few more years of interest rate resets, we've still got a way to go before we reach the bottom. They'll be more foreclosures, except now they'll include those above the subprime level.
Bernanke is in an impossible situation. The Fed has to raise interest rates to stem inflation (why rising fuel costs, food prices and health care are not figured into core inflation calculations when everyone has to pay for them is beyond me) and, in turn, knock down consumer debt. At the same time that throws millions out of their homes.
Water finds its own level, so will real estate and the economy.
If the Globe has any sort of award for best post of the year, Sagatious Sally deserves to win!
Sagacious Sally - great post!
Right now interest rates are the lowest they have been in my adult life (I'm 53), and house prices are below their peak. While it is admittedly difficult for a first-time homebuyer, it was for me also in 1980 when home prices were lower, but so were salaries, and the best interst rate we could get was 12.5%. We put our mortgage payment first (it was a huge chuck of our monthly take-home), and managed everything else with discipline. It was a small house, and after a few years we sold and bought a bigger one, which we live in today (and which is paid for).
My advice to first-time buyers - Stop whining about prices, buy a house you can afford and can live in for at least 5 years. Trade up after you've built some equity. Make reasonable offers based on recent sales of comparable properties (don't offer $400k for a 3000 sq ft house in an area where they sell for >$500k). And remember - no one will know when the bottom has been reached until afterwards.
This guy Charles is hanging his hat on incomplete mathematics, that are flawed. Being half right and half wrong is very dangerous, because the half that's right can cause the acceptance of a decision that's ultimately incorrect.
You are correct that real estate is not inherently good or bad, it's based on cash flows. You are also correct that prices are based on supply and demand and affordability. What you are dreadfully incorrect on, is DTI or mean reverting assumptions as a generality. Markets change - based on information and demand, and many markets have never tracked DTI and are in too high demand to do so.
The worst hasn't even started yet. That begins a few year from now. The game hasn't begun yet with real estate--the organist is just sitting down to play the National Anthem. This downturn will last at least 20 years. Japan is still reeling from a housing bubble deflation begun in 1990.
When computers, modems, shoes, cameras, film, spreadsheet packages--in other words, "things"--are no longer manufactured in eastern Massachusetts, the people have three basic employer options: education, government and bio-sciences. But an economy must manufacture "things" to thrive; arguably, bio is the only relevant industry to meet that criteria.
You can pass all the weekly paychecks you want into your favorite 401K account, but an economy based primarily on finance (Boston, anyone?) is based on nothing more than credit liquidity--which is broad-based and global. You cannot sustain a local economy which is comprised almost solely of people sitting at computers in Financial District skyscrapers passing money to and from each other. When those layoffs begin (and the layoffs of secondary and tertiary businesses which are dependent on them), you'll quickly see those blue perimeters turn red as unemployment benefits run up against 24 week limits.
It's the "Massachusetts Miracle."
We're recession proof. "Make It In Massachusetts Vicariously Through China."
why do I continue to read these comments? It's always the same thing. Buyers want the sellers to lower their prices and sellers want buyers to suck it up and buy. Everyone gets to vent and explain why they know best. Good luck to all, back to WonderPets.
Polly, that's the kind of math that gets an F on math test. Quoting random statistics isn't math. A little thought on the phrase "correlation is not causation"
Kevin, you don't think DTI will change? Have you heard of the mortgage loan crisis? You might read up on it, how it happened, and the proposed solutions. Lowering DTI has been agreed to by all parties.
Your statements about demand make no sense.
Once again, in order for sellers to sell, there must be a buyer.
And in order for a buyer to buy, they must have money.
Think about where that money comes from, and a lot of the real estate market becomes clear.
Once again, I'm a developer who sold out of my real estate in the late summer of 2005. Not coincidence, or random statistics of dubious relevance, but math.
Fred said"You cannot sustain a local economy which is comprised almost solely of people sitting at computers in Financial District skyscrapers passing money to and from each other. "
Fred, my instinct is to say you are right. It doesnt make any rational sense to conclude otherwise. But, lets face it. Cities have thrived doing just that for thousands of years. Bankers control the world. Always have, always will.
"In the blue towns, the median sales price is still climbing. In the red towns, prices are falling."
This looks an episode out of the paper-money blog's "Arlington artifice" series [tinyurl.com/229s3j], in which the blogger takes apart (based on Warren Group data) claims made in the Globe that home prices in Arlington are appreciating or stand out in some way. Arlington home prices are sales are not appreciating in any significant way. Here's the data for Arlington prices and sales. As everyone can see, no story there.
The leads one to question whether there is anything going on in any of the other "blue" towns as claimed. May we please see the data that supports these claims?
The blogger concludes: "the data shows that there is nothing exceptional about Arlington's housing market proving clearly that the claims made in the Boston Globe ... were entirely erroneous."
Sunny Jim,
The map is based on Warren Group data on single-family sales during the first two months of 2008, compared to the first two months of 2007.
Arlington
2007: 42 sales, $437,500
2008: 21 sales, $526,000
So the median price so far this year is up 20 percent, while sales volume is down 50 percent.
@ Binyamin Appelbaum, "So the median price so far this year is up 20 percent, while sales volume is down 50 percent."
The Warren data shows that there were only nine (9) sales in Arlington this February, down from 11 sales in January -- Arlington sales dropped 20 percent in February!!! Aside from illustrating the largest drop since the housing bust in the recession of the early 1990s, how are price trends derived from sample-starved sales numbers in any way statistically significant or exceptional?
All this data shows is an exceptionally weak market. Reporting a 20 percent increase in median prices based on these tiny numbers is as irresponsible as would be reporting a 20 percent drop in home sales, which actually happened last month.
The troubling part about the Globe's misuse of these poor statistics is that the Globe could be quoted by others to misrepresent the state of the market to unsophisticated buyers.
This is really simple. I have a chart of the indexed values of real estate going back to 1890. It slows that the indexed price is 185 today where the baseline is 100. That indicates that real estate prices are 85% above fair value. There are numerous times during this 115 year period where real estate was below 100. It’s not a pretty picture for anyone that bought real estate during this decade.
Stay away from real estate.
All these pro-Arlington stories makes us wonder whether someone on the staff actually has something to gain from an Arlington boom.
This blogger might want to review your comment before posting it.
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