Growing seller realism, but not here in Massachusetts

Heck, I am a renter looking to buy, and keep running across this with almost every home we see.

Home sellers need to realize that they need to price their homes at the SAME price as it would cost to rent their house (after a 5-10% down payment). So if you have a house, and it would rent for $2000 a month, thats what a buyer should be paying in mortage/taxes/insurance etc (after deductions etc).

If it costs a renter 20-30% MORE to buy your house, than to rent it, your house is overpriced. (ie, if it costs $2500 to BUY, but only $2000 to rent, then its overpriced).

Hi Scott,

I'm one of those frustrated buyers that thinks the Boston market is way above historical price levels. I've been using re-calculator.com to estimate what Boston property's should be today if they had been growing at historically average levels over the past 10 year. Boston is way overpriced!

In cities and town near Boston starting with B, C, N, L, S and W prices still way too high. Those have to come down and drag the rest of th state down to somewhat more reasonble levels. It'll hapen propably in the fall/winter.

As a homebuyer, I do believe the home price in Boston area is still overpriced. However, the optimistic view of home owners here is not baseless. Many first-time homebuyers are rushing to the spring market and competing for handful of nicer properties. Sellers are asking buyers to come up with an offer within a day or two. Many re-listed properties from last winter are selling quickly now. It is likely that $8000 credit for first home buyers actually benefit home sellers more since the credit is not going to be enough to cover for the higher home price.

I don't really understand the point of these surveys. These are many of the same people that believed 5 years ago that they had to buy because home prices always go up. Not exactly the most qualified group to be applying economic fundamentals to analyzethe real estate market.

I think the denial has a lot to do with the fact that home prices in Mass have "only" fallen some 30%, while in other parts of the country home prices are down 50% or more. Of course, Mass didn't have the same run up, so comparing percent declines is meaningless. The important thing is that prices should revert to their pre-bubble levels. That is already happening in some parts of the country, Las Vegas and Phoenix for example. Of course, those places didn't really start to see the bubble until around 2002. The bubble in Mass was longer, starting probably in 1998 and less explosive, 80% price gains as opposed to 150% gains.

So, I think the more gradual price declines in Mass have a lot to do with this denial. Which is more painful, 5 years of watching your portfolio drop 10% each year, or watching it plunge 50% in 6 months?

"The important thing is that prices should revert to their pre-bubble levels."

That's pretty unrealistic. People who paid $350,000 in 2005 are not going to sell their house to you now for the $200,000 it was worth in 1998. That loss of equity/value is not good for the economy in general, despite what buyers may think.

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pendog (#2): Cool site you mention. Never seen that one before.

BH (#6): Nice try, but imagining your home is worth more does not actually make it worth more. The market dictates price and by extension the value equity. If you don't believe me (that is, you think your equity still exists) try taking out a HELOC against it. Let us know how you do.

That's pretty unrealistic. People who paid $350,000 in 2005 are not going to sell their house to you now for the $200,000 it was worth in 1998.

Maybe, but the people who bought in 1998 will. Doesn't seem like the people who bought at the peak of the bubble will have much of a choice when they are in the minority.

That loss of equity/value is not good for the economy in general, despite what buyers may think.

It's the loss of an illusion, not the loss of value. The value was never there. And it absolutely is better for the long term health of the economy if shelter is more affordable. High housing prices only benefit the incumbents. Lower prices benefit first time buyers and all future generations, which is far more people.

It boils down to affordability. Many (prudent) first time home buyers got priced out few years ago, and they still don't want to pay more than 3x yearly income for a piece of property.
That's not greediness but common sense. I refuse to put 75-80% of my liquid asset into a real estate which is likely not to recover for the next 10 years. Here goes my retirement. That's a lot of money.
No thanks, I'd rather wait, I have a luxury to wait, I'm saving money, whereas sellers lose and bleed their future money.. We will likely face an increase in interest rates, this will take care of home proces.

BH,

Actually it is good for the economy since it is bringing everything back to reality, and bad for the person's credit score taking the hit. Unfortuantly for those people who bought in 2005 they have 2 choices take the hit and sell or stay put for 10-15 years as prices will not go back to those levels for that long. Either way if the seller does not have to sell they are fine. They will just have to live with it and not be bitter that people are buying houses that are nicer that theirs for half the money

BH,

True, but they're not going to sell their house for another decade or more if they don't price the home at pre-bubble prices. This will be an interesting showdown between buyers & sellers because buyers are smarter and have more tools & information to guide them in a home buying decision these days. Sellers refuse to accept the fact that if they sold in 2005, they'd have A LOT more money than they'll get today. Sellers have to make a choice between selling their house now to meet whatever their goal (retirement, trade up etc.) and making a profit from what they paid when they bought the house. What will it be?

Prices will revert to pre bubble levels, in Central Mass, I just paid 115,000 for a home, guess what it sold for in 1989? 139,000. Yes folks that was 20 years ago, and it is in move in condition.

#6. Most bubbles revert back to their pre-bubble levels because those levels are based upon economic fundamentals. The housing bubble is no different than any other bubble.

That person who bought at the peak in 2005 who wants to sell, will not be able to then. And they'll wait 5 years, 10 years or however long it takes for their home to get back to 2005 prices. Of course, at that point they will be sitting on a huge real loss. Nominally, they will be right back where they started.

You need to remember the old saying, "Markets can remain irrational longer than you can remain solvent". If someone watches the value of their home drop 50% over the course of 8 years, some of them will give up and just throw in the towel for fear of losing more money. How many people held on to stocks at DOW 10,000, 9,000, 8000, and decided to sell at 7,000? More than you think.

It isn't necessary for houses to return to pre-bubble levels. They need to return to pre-bubble levels, plus the historical rate of home appreciation. Which isn't much above inflation. So the proper way to arrive at a fair house value is to go back to a suitable inflection point, which can be either 1997 or around 1985, then adjust that price for today. The result will still be significantly higher than your start year, but also, significantly lower than the bubble price. If you're looking at a house you can get for near that price, and think you can swing the mortgage, go for it.

Mass prices will collapse back to 1997 levels. From Bloomberg...

Hamptons Homes Decline Most Since Realtors Kept Records in 1982 Sculptor Fredi Cohen expected the hand-carved sinks and tubs in her East Hampton, New York, home to stand out in the real estate market and help sell her three- bedroom house for $1.25 million.

Rich Default on Luxury Homes Like Subprime Victims Chuck Dayton put down a quarter of the $950,000 purchase price when he bought his house in Newport Beach, California, in 2004. He was making $500,000 a year with his drywall company and he expected home values to keep rising.

Southern California Home Prices Fall 36% on Higher
HUng

#2, i just checked out re-calculator.com -- the numbers are ridiculous! there is only one metro area for all of MA, and that averages in Mattapan, Dorchester, Lawrence, Medford.....

real estate is local....

and i still say if we are talking about houses where you will live with your loved ones (or alone), and not an investment property, people need to stop thinking of owning a house like a stock portfolio. it is a home. i would bet interest rates will not be better for a long time, the first-time homebuyer incentive is not going to last foerever...

you can wait to pay less money at 15% interest -- and some people will prefer to do that figuring they can refinance if rates drop. i would rather be paying more money to principal than to some bank, even if it is for a few years (or more...).

depends what you want -- you want a home? they're out there...

Actually, I've done the research, instead of just blindly listening to the media. Perusing recent sales in my neighborhood, the value of my home has most assuredly not gone back to pre-bubble prices. Not even close. Certainly it is possible that it might if the economy gets even worse, but I don't buy that. Now, maybe in some neighborhoods of some states (i.e. central MA), your home value will go down to pre-bubble. But to just blindly state that all home prices everywhere will crash back like that, is wishful thinking on the part of the buyers.

Here's the way I see it: Someone decides to sell their house. They put it on the market thinking that it's still 2005 or 2006. The house sits on the market for a while, and then they drop the price by, say $25,000 or $50,000 at a time.

Everyone thinks their house is the only one that hasn't been hit by the downturn, or they think "it may be happening in other towns, but not here in MY town," but then they find out it HAS happened in their town when they try to sell. Prices will keep coming down... the higher the price, the more it has to fall.

Chloe,
Too many people, like yourself, conflate the emotion of buying a house ("where you will lived with your loved ones") with the financial considerations ("i would bet interest rates will not be better for a long time"). They are completely different.

Favor one side or the other, but you cannot use one to justify the other or you get a circular argument (and spiraling prices).

Also, in nominal terms e.g. affordability, absolutely this is a great time to buy.

However, in real terms e.g. how much money will you have when you sell your house, it is terrible. It is increasingly likely that inflation will outstrip appreciation of homes in the near to mid-term that will force you to hold on to your house for at least 11-18 years before breaking even.

Inflation outstrips home appreciation currently; has outstripped for at least the last 2 years; will outstrip for the next 6 - 12 months; and probably for 1 - 3 years.

In all down markets, irrespective of asset class, you are always better off buying 6 months after a trough (than you are "dollar cost averaging" into a position. In fact dollar cost averaging is in itself a fallacy).

#16, "you can wait to pay less money at 15% interest -- and some people will prefer to do that figuring they can refinance if rates drop. i would rather be paying more money to principal than to some bank, even if it is for a few years (or more...)." The one flaw in that logic is you would borrow a lot less if prices decrease and rates go up. Lets say you'd need to borrow 100k. @ current rate of 4.75 for 30 years your payment would be roughly $520. To get the same monthly payment @ 15% the amount, you'd only be borrowing $41000. So the house cost would have to decrease to $4100 to compensate for such a rate hike. Now lets add the fact that you have a $25k downpayment saved. This means in the later case you'd only need to borrow 16k while in the former you'd be borrowing 75k. If you had a 50k down payment for the original purchase...you wouldn't be borrowing anything when rates hit 15% while still borrowing 50k when they are at 4.75.

#2, i just checked out re-calculator.com -- the numbers are ridiculous! there is only one metro area for all of MA, and that averages in Mattapan, Dorchester, Lawrence, Medford.....

real estate is local....

Sorry, but you simply don’t understand how it works. It makes no difference that Beacon Hill is more expensive than Mattapan. The calculator is designed to estimate a price for any property, in any location, based on the well-documented long-term appreciation rates for real estate. Such rates are not local; they have been consistent across 100 years of US real estate data and 400 years of international data.

and i still say if we are talking about houses where you will live with your loved ones (or alone), and not an investment property, people need to stop thinking of owning a house like a stock portfolio. it is a home.

If owning a wonderful, welcoming family shelter makes money unimportant, certainly you will not hesitate to radically cut your asking price. Or do you only counsel buyers to handle money recklessly? It’s interesting that we only hear the “don’t think of a house as an investment” argument from sellers asking inflated prices, isn’t it?

i would bet interest rates will not be better for a long time,

Good to see that you agree that home prices will plummet further when mortgage rates rise, as they inevitably will.

you can wait to pay less money at 15% interest -- and some people will prefer to do that figuring they can refinance if rates drop.

Which is precisely what happens. You can refinance out of a high rate when rates go down, but you can never refinance out of high principal. Of course, many on this blog will be buying with very small mortgages, or cash, so this is less of an issue for us.

I am curious what people think of the quality of the inventory on the market right now, especially compared to the past few years. I had been looking at condos and houses since 2005. The quality of houses really took a dive last year. And this year is no different. I see this as people with nice homes who have decided to "upgrade" in previous years are instead waiting. I can understand prices dropping again into the winter, but I just don't see these 20-30% drops that some are forecasting.

note to WSJevons and Marcus -- btw, i am not in the market to sell my house right now. people sell and buy when they need and can sell and buy. i have no intention of selling at the moment -- i can afford my modest and very nice home, and i live in a desireable (to most) town and neighborhood. if i decide to sell, i will price it reasonably because i have no desire to go through the hassle of keeping it ready for showings for months and months -- frankly, i don't have that kind of time in my very busy life.

and yes, it is my family's home -- home is home, whether you own or rent.

and Marcus, it can take a decade for interest rates to drop once they rise and in that time the bank will have made oodles off of you. either way it is a wash. i think of my house as a place i live in, not an investment. in my opinion the costs of the upkeep and maintenance of owning a home versus the lack of the tax deduction by renting a home are a wash, unless you actually stay in it long enough to own it outright.

i am more concerned about my retirement funds than my house value as an investment.

9256, i agree that the inventory is pretty poor quality -- houses that need a fair amount of work and updating. but those are the people that need to sell. of course people with nice homes are waiting.

Here on Long Island prices rose to 8+ times more than income. Ridiculous, really. I've been saving, saving saving.... i WANT rates to rise to 20%.... then my fixed income will actually start producing and that 400k home will drop down to 160k where it should be. Then i will buy for cash or close to it.

High real estate prices are bad for EVERYONE.... when did spending all your money on housing become a good thing? the only ones making out are local government raising RE taxes, realtors and home improvement companies. LOW housing prices mean a strong economy and money can be spent ELSEWHERE to keep different sectors

It seems the attitude of those trying to enter the market is "housed are overpriced, and need to come down x%". But I wonder what these same people will say once they buy at x% off, and the next crop of buyers clamor for another y% off? I'm betting that their tune will change...

9256 asked about people's opinions of the quality of inventory, and as somone contemplating buying a house (only if the perfect one comes along), I can say I think they suck. Everything out there needs work, has no yard, or is on a busy street. I have only seen two nice houses in the last year. On one the homeowner wouldn't come down to my price (then sold 2 months later to someone else at the exact price I was bidding), and the other sold within 3 days of being on the market. The one good thing is I don't have to worry about 'should I buy now' because with what is out there I don't want to.

Historically, principle residence prices are driven largely through the monthly payment. The bubble was not so much an asset bubble as a credit bubble as this is an asset almost always financed. To cut to the point, home prices were determined on temporary teaser rates rather than a classic 20 year fully amortizing mortgage. Banks were able to process loans and resell them by misrepresenting the underlying assumptions of risk of repayment. That is still happening, although much less.
"All real estate is local, but all financing is international"

If we take a fully amortizing 30 year loan at 5% for $500,000, the payment is $2,685 (PIA). We then look at the same type of loan at, say 10%. The identical terms and payment of $2,685 will finance $306,000. Basic economic theory indicates the asset price will fall, sooner or later (and subject to inflation/deflation), by $184,000 or 39% to normalize the payment (ignoring tax effects).

I think we can all agree that the person with the 5% loan will not be able to refinance for a substantially lower rate, even assuming the asset appreciates. But say a borrower wants to pay a bit extra, say $200 per month, to pay off the debt sooner. The person with the $306k loan will reduce the number of payments from 360 to 259; the $500k loan will reduce the number of payments to 308. 308 – 259 = 49 payments of $2,885 or $141,365 extra for the person with the $500k loan.

Lastly, the tax effect. Both the original loans have the same payments, $2,685 for 360 months, or $967,000. However, one loan pays an additional $184,000 in interest which is tax deductible. At a common federal + MA tax rate of 30%, that’s $55,000 less in taxes over the loan, front loaded somewhat due to amortization mechanics.

Chloe,
You are not grasping the difference between real and nominal.

If inflation rises 3% and home prices rise 1%, I have real loss of 2%.

If this is the anticipated scenario, I am indifferent between a cost of funds of 4.5% today and 6.5% in the future. (THIS IS A RULE OF THUMB ONLY!)

True, I am going to pay out more in interest for at least some portion of the future loan, but I will be paying less of a down payment in real terms. If you expect interest rates to continue to rise, then take the excess down payment and invest it. An inflation protected security will provide risk free relative return.

In short, I am indifferent to mortgage rates and care only about my opportunities.

#3 -- there are reasons besides the overall economy that some towns will do better than others. Closer proximity to transit, excellent school systems, tax rates, access to amenities and so on. The prices will dip in some of the towns you mention, sure -- but keep in mind with money available at 4%(ish) rates there are going to be people who will want to move in there.

But if your town isn't close to a major roadway or train line, has awful schools, high taxes and no amenities to speak of, yeah, the house prices are going to drop like a rock.

Also keep in mind there are people who think they want to sell and people who know they have to sell. The thinkers are OK with having the house on the market for months. The knowers know they have to get out quick for whatever reason -- they lost their job, got transferred somewhere else, got a divorce, etc. They will price their house to move quickly.

One comment on this interest rate rise: if you're seeing rates of 15% (such as back in the late 70s early 80s) that's indicative of high inflation, which will counteract against housing prices falling (they'll actually rise in inflationary, but not real, value).

Don't think that things work as efficiently as you think with interest rate increases automatically lowering prices. This is a pretty good opportunity with rates under 5% right now. An example:

Say you do have this $25k downpayment (and forget focusing on a $100k loan - how many properties are you considering at that price range). Say instead you're looking at a house/condo in the $250k price range. So you're looking at a mortgage of $225,000; 30-year fixed @ 4.75% mortgage payment (ignoring taxes and insurance) would be $1,174.

Now in your example you decide to wait for prices to drop another 10%, so the property is now $225,000 and you need a mortgage of $200,000. Payments on varying interest rates (again ignoring taxes and insurance) would be:

5% - $1,074
6% - $1,199
7% - $1,331
8% - 1,468
9% - $1,609
10% - $1,755
and your scary number
15% - $2,529

Read and compare: 4.75% and $225,000 less than 6% and $200,000.

OWNER 7 SAYS.... It seems the attitude of those trying to enter the market is "housed are overpriced, and need to come down x%". But I wonder what these same people will say once they buy at x% off, and the next crop of buyers clamor for another y% off? I'm betting that their tune will change...
When housing rose with the rate of inflation, prices were simply a result of what people could pay/afford with tradtional financing. YOU DIDNT buy to make a profit. It just made sense to buy because prices were in line with incomes. For that you GOT A PLACE to live. HOUSES arent investments... they are depreciating assetts.

Mike,
There are several flaws in your argument:
+ your analysis is crucially dependent on the speed of interest rate changes
+ you ignore that inflationary prices require inflationary wages to support those prices
+ you ignore the effect of falling interest rates after 15%
+ the value of your down payment increases and real returns can be locked in using TIPS OR MIPS.

In your favor - and I would argue strongly in your favor - is that the government is maintaining artificially low interest rates. This effectively prevents true price discovery. The counterbalance is that the government is likely to keep rates artificially low until the housing market rights itself - which suggests waiting.

#25 - don't bet on it. I bought a townhouse in February for $250,000 and I still think the prices are too high today. It is better for me if prices fall as quicly as possible so the recovery may start. I firmly believe that the government's interfering with the market (bailouts and such), is slowing down the eventual recovery and harming the overall economy. I am not going anywhere from this condo for the next 6-7 years when my twins will need schools. By then I hope this mess will be over. The status quo is necessary for one group of people only: those who bought in the early 2000s. The rest can afford to loose some of that paper appreciation. Don't tell me that these people are the prevailing portion of the population.

#17. Your home price hasn't gone back to pre-bubble levels yet.........

"It seems the attitude of those trying to enter the market is "housed are overpriced, and need to come down x%". But I wonder what these same people will say once they buy at x% off, and the next crop of buyers clamor for another y% off? I'm betting that their tune will change..."

Not me, for a few reasons:
1. I'll be buying based on value NOT price.

2. Because I understand how real estate should be valued and where prices are headed, I will be buying near the bottom and risking little downside potential. And because home prices will not rebound in a matter of weeks or even months, there's no risk even if I miss the bottom (which is inevitable).

3. I don't view a home that you live in as an investment, so even if it does drop in value, I will not care.

WSJ, more directing at someone looking to near term buy (say within a year). Rates can adjust quickly, so hoping that you're timing by holding a few more months for future price drops can bite you with higher rates. We had an extended closing when we bought a house in '99 (P&S signed in April, close in August) and rates went from 6 to 7% in that time frame. Wasn't a deal breaker, but look at those numbers again. Holding off for a further drop (you hope) in price over the next few months and having rates go up from 4.75% can leave you in a worse position.

As anyone who lived through the 70s can attest, there is more than one way to create inflation. You're describing the late 60s "wage push" model. Ponder that we are going to have fund trillions of dollars of government paper; if you think that treasury rates are going to stay where they are, I'd think again. Inflation is going to be coming with a vengeance (regardless of what happens with wages) when we have to start offering a premium to get these T-notes sold. Don't know about you, but I'd be pretty happy paying a mortgage rate of 4.75% with much less valuable dollars than a 10-11% rate with the same less valuable dollars (but more of them).

We bought our first house in '95, now on our third house. If you choose a decent town (and stick to the rule of buying the worst house in a nice neighborhood rather than the nicest house in a soso neighborhood) and think long-term, you'll do OK.

Lama, one correction: no mortgage interest deduction in MA.

BH wrote:
"But to just blindly state that all home prices everywhere will crash back like that, is wishful thinking on the part of the buyers."

I can assure you that this is not wishful thinking, this is reality. Your neighborhood may be the magical place that is not the norm, but my husband and I have been studying the Boston market for two years now and see no reason to buy yet. Why? Because the prices keep dropping and dropping. We have seen a large inventory and many homes remaining on the market for over a year because they are overpriced. The bottom line is, people who NEED to sell are setting competitive prices. Some sellers, however, don't seem to get that the economy has changed; these are the folks engaging in wishful thinking, as they stubbornly cling to 2005 prices while their homes languish on the market.

Conventionally financed Residentail real estate was on a steady climb of +10% per annum from 1982 throogh 2001 when it spiked to as much as 20-25% per annum through the peak in the Fall of 2003. After that peak, greed in all financing and sales of real estate took over and the spike continued with alt-A, Subprime and outright fraud perpetrated from the buyer, to the seller to the RE Broker and on up to the AIGs of the world that insured the MBS's. The spike abruptly ended in the spring of 2006 and the values will continue to drop exponentially until it reaches the slow steady line of sustainable growth of 10% that it was on when the unsustainable spikes began. Even the Government has not learned the lesson of undercapitalization. FHA was responsible for only about 3% of national production during the spike years witha a 6% reserve to insure the pipe. Their volume jumped to 25% over the past 20 months but thier reserves are down to 2% - When lending returns to Common Sense Underwriting with a real 20% down and heavy jail time if you're caught lying, we will resume the slow and steady growth in value of owned real estate.

Mike,

Thanks for your post. We disagree about regimes and should probably leave it at that since this is a housing blog. We do agree that interest rates at some point in the future will be egregiously high unless the fed and treasury thread the needle.

The real wild card in all this is that I believe the fed will hold rates artificially low until housing recovers. If the broader economic recovery is "V" shaped or even maybe "U" shaped, then I am dead wrong. If the economy is sideways to lower with fed enhanced low rates, then people should wait.

Either way, I have not found an asset class where the common investor is not better off waiting until x-number of months after the trough to buy. (Six month for broader equities. Housing is local.)

"Your neighborhood may be the magical place that is not the norm, but my husband and I have been studying the Boston market for two years now and see no reason to buy yet"

That may well be the case, JP has done very well, at least my part of it. Recent sales prices of places very similar to ours, in terms of BR, BA, sq footage, age of home, etc, in the last 3 months (even up to a week or 2 ago) show these places are selling for just about the same price we bought ours for in 2006. So for you to insist that our place is going to decrease in value by 100%, I just don't buy it, when the evidence is to the contrry.

"stick to the rule of buying the worst house in a nice neighborhood rather than the nicest house in a soso neighborhood"

Hm. This sounds nice, except when we shopped a while ago in Bethesda, MD and later on in Winchester, MA I don't even want to descibe what we saw for $550K. To pay my hard earned dollars for that crap they called housing I would stop respecting myself. And I am from Belarus, mind you. So we bought in Stoughton for $250K. My wife is in love with the townhouse we bought. Go figure.

That may well be the case, JP has done very well

Really? Not according to Trulia, which draws its data from public sources:

The median sales price for homes in Jamaica Plain MA for Feb 09 to Apr 09 was $319,000. This represents an increase of 6.3%, or $19,000, compared to the prior quarter and a decrease of 35.6% compared to the prior year. The average listing price for Jamaica Plain homes for sale on Trulia was $389,094 for the week ending May 13, which represents a decline of 4.2%, or $17,026, compared to the prior week and a decline of 6.5%, or $26,916, compared to the week ending Apr 22.

Average price per square foot for Jamaica Plain MA was $196, a decrease of 27.9% compared to the same period last year.

Maybe your street is immune. Or maybe just the 200 square feet around your house, or something.

A lot of buyers are waiting for things to hit bottom, but (here’s a shocker) – we could already be there! And even if we’re not, essentially nobody out there will time the market perfectly anyhow (anybody who says they can is completely delusional). So it’s unlikely that a particular buyer will actually make the purchase at the exact bottom of the market.

Prices have fallen so far that in many markets (e.g. Phoenix, Las Vegas) there are investment groups coming in and buying blocks of property. Think they may know something that Joe & Jane Public looking for a place to call home don’t? Real estate in Boston may have been overpriced, but it wasn’t inflated to the level of those markets. So the expectation that Boston should fall as much as these other markets is just plain unrealistic.

The reality is that we’re within 5% or at most 10% of the bottom in the housing markets, if we haven’t hit it already. And any further price reductions in housing will be more than offset by rising mortgage interest rates due to the inflation that’s coming due to all this federal borrowing and spending. And it’ll be years, maybe decades, before sub-5% loans are available from lenders.

So, if you're a buyer, right now is just about as good as you’re going to get it. Remain on the sidelines at your own financial peril, because either you’ll have missed the bottom of the real estate market or the loan you take out down the road is going to cost you more in interest. Either way, you lose.

#14 Sorry to disagree Marcus, but bubbles tend to over correct on the downside. And the reason they do so is because the over correction is necessary to achieve reversion to the mean. Otherwise the trend line gets redrawn. And while trend lines can get redrawn in the short term, it's the long term trend I'm talking here.

And even if we’re not, essentially nobody out there will time the market perfectly anyhow (anybody who says they can is completely delusional).

Brian, I think people here have explained more times than I can count that 1) nobody is trying to "time" the market; the only people using that phrase are sellers and realtors and 2) someone's gut feeling that the market is at bottom is about as interesting and persuasive as a late-night Mexican infomercial. The debate is about price versus long-term value, and those numbers still don't line up. Plus, I don't know a single economist, analyst or government official in his right mind saying this is the bottom.

bubbles tend to over correct on the downside.

I know that. I was trying to clarify what people were saying about returning to 1997 prices, when what they really meant was, returning to the long-term trend, from which we diverged in 1997.

Although, if you're planning to stay put for a decade or so, I still think it's not unreasonable to buy a house today at its intrinsic value. Sure, its price will dip further, but that's a dip you can expect to correct itself over time. And trying to buy at the absolute bottom is market timing.

Great discussion here today. I got interested a bit in re-calculator.com so I figured I'd test it out on my house, which has a checkered past--in the past 53 years (as far back as our title search went) it has changed hands 10 times and been foreclosed on 3 times. A perfect test house for the website!

About the house: originally a small wood-framed single family rowhouse tacked on to the end of a bunch of classic brick rowhouses in a gorgeous section of Roxbury that "recovered" (er, gentrified?) much earlier than some of the better-known parts of Roxbury. At some point around the mid-80's, it was converted into a 2-family by adding a 1-bedroom unit in the basement. Around the same time, the whole place was gutted to the studs and the owner's unit has a gorgeous open floor plan, new hardwood floors within the last 5-6 years, modern kitchen with tile floors and stainless appliances (no granite though, thankfully!). Plumbing seems to have been updated during this remodel and electric was updated to 100-amp breakers (1 for each unit). When we bought it in August of 2008, we put about $40k in for structural work and some modest updates in both units.

We paid $270,500 in August 08 at 6.85% on a 3% down 203k loan and financed 30k of the improvements, then refinanced last month to 5.5% and owe about $303k at $2200 PITI, including PMI. We rent the basement at $1075 and feel we could probably get about $1800-$2000 for the owner's unit if we put it on the market. Taking the conservative end and using a rough 100x rent valuation, that gives us a home that's worth about what we owe on it, +/- a few thousand dollars.

So what does re-calculator have to say about our house's value based on each of the sales over the last 53 years?

1/31/56 placed into trust in a family deal for less than $100--not a free market trade

12/22/60 sold for $4500 ($3000 mortgage, payments $25 a month)

2/28/69 foreclosed (yup, they couldn't make the $25 monthly payment)

4/15/69 sold for $3000 (banks didn't hold onto property back then, apparently)

12/15/76 foreclosed on again (by the same bank!)

9/13/78 bank sells it for $1000 to a developer

12/29/80 developer sells it for $4000

6/29/81 it sells again, also for $4000 It seems we have found the true market value!

11/21/84 it sells for $5000

4/8/86 it sells for $80,000 (holy bubble, batman!)

12/15/87 it sells for $142,000. This is the first year that re-calculator.com (re-c) will calculate for. Today's value per re-c: $195,804 - $225,471

6/3/99 it sells for $157,000. Today's value per re-c: $171,601 - $197,601

2003: transferred among family members for $1. Such a deal!

4/7/05: sold for $565,000 Today's value per re-c: $325,225 - $374,502 (hmm)

4/14/06: sold for $599,000 Today's value per re-c: $347,553 - $400,212

10/18/07 foreclosed

8/22/08 We buy it for $270,500, about 55% off of the peak price. Today's value per re-c: $171,301 - $197,255

Morals of the story: Past sales prices are meaningless. The house has had many upgrades since it sold 30 years ago for $1000, the neighborhood has changed, interest rates have gone all over the place, etc., etc. Also, re-calculator.com doesn't seem to be doing its math right, from my simple empirical observations. I still think that from a fundamental point of view (i.e., rents at ~$3000/month if we moved out) the house is worth what we owe on it (about $303k). But more importantly, I love the house and can't imagine moving, and we can easily afford it on our current income.

Sometime I wonder: why should the price of an existing home go up at all? I haven't really found a satisfactory answer to this question -- and without it, it seems impossible to reason about what will happen to prices.

Is it really just supply and demand? Granted, the supply is fixed; but the demand (i.e., population * salaries) seems pretty stagnant, too. The next ten years will be very interesting as the Baby Boomers retire and sell their big homes in the suburbs.

Is it psychological? People expect prices to go up (even buyers), so they do. People expect a house to be an investment, whereas you would never expect, say, a new car to be an investment.

Is it purely financial? And once you've stretched to buy something, you're stuck (and, as a consequence, the whole market is frozen). If you can borrow money to buy something, what is the downward force on prices? Clearly, most buyers work in terms of monthly payments -- if interest rates go up there will be tremendous downward pressure on prices.

Is there a kind of collusion? For all intents and purposes, every house sale is mediated by a member of a single organization, the Realtors, with a strong interest in maintaining the general sense that homes are desirable, home prices go up, homes are a good investment.