Anemic homes sales, not prices, the bigger problem

$280,000 in the Boston area means it's a hole in the wall. Look at the MLS. That price is for 1,100 sqft bungalow that needs serious updating. This report is telling us low end properties are selling and dragging down the median prices.

I know several younger couples who are thinking of buying a home, and other families that want to move. But everyone is just plain scared. Fear is really high these days. Fear is the result of uncertainty

Affordability is not in and of itself really the problem. The bigger issue, in Mass, is that many of the homes for sale are older and are under-maintained. If these homes didnt need so much rennovation, the current prices might not be so bad.

Yay! Maybe our children will be able to afford a home someday without having to move to Texas.

The symptoms of a market crash appear in stages and are easy to recognize. They occur roughly as follows:

1) There is a shock and/or the market reaches a tipping point.

2) A large and growing gap (spread) develops between the price buyers are willing and able to pay (bid) and what sellers are willing and able to accept (ask).

3) Sales volume (liquidity) dries up.

4) There is a showdown between buyers and sellers. This may last for some time, depending on the market. There may be bear rallies and other rumblings of a “return to normal”.

5) Fear, panic, and capitulation selling eventually set in.

6) Prices plummet.

7) Liquidity returns to the market.

8) A “new normal” occurs as equilibrium is restored at much lower prices.

This pattern can be found in most (if not all) of the great financial crashes in history: the south seas bubble, the dutch tulip craze, the great depression, the great panic of 1873, the real estate crash of the late 1980s, the dot-com crash, etc.

Thus it is no surprise to see sales volume drying up now. The U.S. is in the midst of a housing market collapse of unprecedented proportions. Places like CA, FL, AZ and NV are much further along in the correction process-- perhaps somewhere around stages 6 or 7. Boston (especially the nicer areas) is still in stages 3 or 4. In short, the Boston market has a long, long way to go.

P.S. For an excellent pictorial representation of the stages of a bubble, Google search terms “KB_Manias Bubbles" and check out the PDF diagram.

Forget about prices? We cannot undertand the sales volume inactivity unless we take a hard look at prices. The pockets of increased volume come from the communities that have already seen the biggest price drops. I fear that families that are waiting for the market to "recover" are only going to see sales volume and price medians flatten, while the value of their property is slowly lowering.

From today's globe: Housing prices in Mass. decline again...
"
Sales slowed dramatically - by more than 50 percent - in many of the more expensive communities, including Brookline, Cam bridge, Weston, Wellesley, and Newton.

Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, attributed the slowdown to sellers who are not willing to drop their prices enough to attract buyers.

“A lot of people in Cambridge and Wellesley are probably not in a situation where they have to sell,’’ Retsinas said. “If they don’t have to sell, they are not going to lower the price.’’
"

basic economics: low sales, higher inventory, transaction activity can only increase via lower prices, this market is headed much lower. Low home prices are the solution, not the problem.

People would do well to understand what Lance, Hung Wang, Marcus and Sunny Jim have to say. I'm consistently impressed by their thoughtful analysis and data.

Note - not assumptions and hopes, actual data and math.

As for low volume, that's absolutely to be expected at this point in a market correction. Only forced sellers are selling now. Discretionary sellers are holding off the market until "prices come back to normal". The market will not return to normal operation until those sellers capitulate, and realize that prices now ARE normal - it was prices post 2000 that were out of the ordinary.

Amazing the extent that people can agree their was a bubble in real estate, but still stubbornly refuse to understand the implications of that.

Put simply, bubble prices are NOT normal prices. This is not a matter of opinion, its rather basic. People should think through the implications of that.

Its all rather reminiscent of Kubler-Ross' stages of grief, interestingly enough. Which as a side note to my mind is yet another piece of data support the behavioral economists and debunking the nonsense of the efficient markets hypothesis.

"And until sales start to pick up again, it’s hard to see prices doing much of anything." Except continue to drop.

One of my favorite figures Lance (#4). Many people still appear to be in the denial phase. Some are probably moving slowly into the fear phase, but we are still far from capitulation and despair.

"Amazing the extent that people can agree their was a bubble in real estate, but still stubbornly refuse to understand the implications of that."

Couldn't agree more Charles. Anyone who thinks that prices will not drop much further is in effect denying that we ever had a bubble, which as we know is utter nonsense. What we have seen for price drops would essentially constitute a correction. Corrections happen during a normal boom/bust cycle. A bubble gets cleansed with a bust (think 50% price declines)

The rates will not be going down appreciably to maintain the faltering restart of reduction of inventory we're seeing here in Boston, let alone the rest of the nation.
In order for sales volume to increase at least one of 3 thing s *MUST* happen.
1 -incomes must go up. (inflationary, means rates are going up too, not a real solution in the real world.)
2 - rates must come down - back under 5 for no point loans - *highly* unlikely...don't plan on it.
3- prices must come down. given how much sellers are unwilling to reduce their price (other than those who *must* sell), this is unlikely too.

For more info on this dynamic search for a white paper by Case-Schiller done in the late 80's called, " The psychology of home buyers and sellers in boom and post-boom markets". What we are seeing is nothing new or unexpected in terms of pricing....

Expect anemic prices and stagnant sales volume to be the new norm for the better part of the next year or so.

Charles, the inventory level (about 12 months of supply) appears to be more an indication that sales are just slow period. I do agree that many sellers are probably holding out for that "return to normal" which is many, many, many years away. I've seen a fair amount of for sale signs come down in the last month or so (and it's not because they have sold). Many of these homes have been on the market since last summer/fall. And we have all heard the stories of bank owned homes being held off the market. I will not take up space recounting all the negatives against housing now, but suffice to say, I see absolutely no reason to be optimistic on a housing recovery anytime in the next few years.

It seems to me that only a few houses are selling because most buyers want move-in ready properties around the current average selling price, but only a few sellers are able or willing to sell at around that price.

Even if the number of "forced sellers" increases, I am pessimistic that they will be able to sell at rational market prices since they may well be underwater (either from bubble buying or doing the ATM thing). So they will just foreclose. And foreclosures will only trickle into the market because the Federal government, the Fed, and state & local governments just take money from wannabe home-owners (among other taxpayers) and give it to inefficient and sleazy corporate owners in lieu of their dried-up rent or mortgage money. So they don't have to sell them to wannabe buyers at rational prices, they just get from the government the money they need to keep them off the market. Examples of these siphoning channels are TARP, the government's printing of funny money, and the Fed "discount window," I think.

So when local governments levy fines on corporate owners of foreclosed homes or force them to pay for the upkeep of foreclosed homes, they chuckle inwardly, reach into our taxpayer pockets to take what they need, and pay it to the local governments or property upkeepers.

So don't expect capitulation any time soon, unless the government does an about face. But that won't happen unless this country's people cease to be sheep and gets some ability to make short-term trade-offs for long-term benefits.

Speaking of figures, the recent graph put out by the FED, IMF and others showing the total outstanding debt by asset class is truly staggering. If you do a Google image search for "T2 partners, total outstanding debt" you'll get what appears to be an older version (since it has some incorrect data). I've seen the updated figure on a few websites, but they escape me at the moment.

If that graph doesn't scare you, well then you just haven't been paying attention in the last 2 years.

All of this 'doom and gloom' news is a positive for some. We just bought our first house, got a great rate at 4.875 for 30-yr fixed, and got financed through FHA for just 3.5% down. We had been watching the market for the past year or so and made our move just before rates started to increase. Sure, the timing may have been lucky on our part but I have to say that this is the first time in 12 years that we could have afforded the great house we're moving to next week. Then again, we're reasonable people who weren't looking for a McMansion in the 'best' towns or needed the 'best schools', just wanted a nice house to call home.

One factor regarding home sellers isn't addressed here: families who are not forced to sell, and may choose to invest their money in renovating their existing home instead of moving to a bigger or better home.

In my neighborhood of smaller 1950s homes (mostly in the 1500 sf range), there are at least 4 families who are making significant renovations rather than moving. The same thing happenned in the 1980s when the RE market was down and mortgage rates were rising. I'm fortunate to have a comfortable home with a low interest fixed rate mortgage, and the contractors are offering "sale" prices on renovations.

Five years ago it would have made more sense to sell & move up to a bigger house, but that scale has tipped for those of us who don't have a good reason to move.

Charles, what makes you think the discretionary sellers are going to put their houses on the market before prices begin to rebound? They are exactly that - discretionary. These are the people who are considering a house upgrade, but decide to wait things out. Maybe it's the uncertain job market or the wounded stock portfolio. People will tighten their belts over the next two years. The economy will rebound and quality houses will return to inventory. Until then, prices will plummet off of distressed properties, because that's all you'll find in the MLS.

Because at some point, enough sellers have to move, die, divorce, want more space than the money, etc. etc.

Thats how markets work. And its a big country - certain individuals may never sell, but enough will give in. Its how markets work, its how they've always worked. Its called capitulation, and it takes a while.

So yes, there are a lot of "low quality" houses on the market now, as people think "the economy will rebound". First of all, its far from clear the economy will rebound any time soon - yes, it will stop dropping, but the media hasn't done a good job of making clear thats a far cry from rebound. Google L shaped recession.

Second. BUBBLE PRICES ARE NOT NORMAL PRICES. Yelling seems necessary. Even when the economy rebounds, house prices will not go back to "normal", at least as defined in the last 8 years or so. That was a bubble. There will be a new, lower, normal. Take a look at the prices of internet stocks after the bubble, in a good economy, if you'd like to see what it looks like - a 10 year graph of nasdaq will do fine as a proxy

i don't know about you, charles, but in my sleepy town of 14,000 people, residents are not dropping like flies, the divorce rate is not 60%, and the town is like hotel california -- you can never leave. people move from house to house in town, rarely out.

our inventory is down to where it was during the bubble era. we have had 26 sales out of an inventory of about 60 homes on the market in the past three months. last year at this time there were 100 homes on the market -- today there are 57. in this town we have hit bottom, and prices are stable.

real estate is all local....

Comments like Chloe's are what lead me to believe that Boston is not going to suffer any further. It always seems to escape what's going on nationally during the downturns.