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Return of the crazy buyer?

Posted by Scott Van Voorhis January 6, 2014 09:40 AM

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Prices are rising and the number of homes for sale is nowhere close to meeting demand. Plus, interest rates continue to edge up.

It's a brew that almost guarantees that 2014 could see the return of the desperate buyer, that poor soul who is convinced of the need to buy into the market, at any price, or risk getting locked out altogether.

I recent asked Boston Real Estate Now readers to offer up their real estate predictions for the coming year, and, as always, I wound up with a bevy of great replies.

From what I am reading, BREN readers are concerned about overly anxious buyers chasing prices up, ready to ditch inspection and even mortgage contingencies in their headlong pursuit to grab a house before rates and prices go up even higher.

"One of the top stories has to be the ... unwillingness of many real estate buyers to be patient and wait," jimbloke writes.

There's also a big concern about what happens when the Fed finally scales back on its multitrillion-dollar campaign to prop up the housing market, and the growing competition out there from wealthy foreign buyers.

Here are some selected comments from my recent post asking for your 2014 real estate predictions.

NoLongerBostonian12/27/13 08:35 AM
The really big story is did you see that the 10 US Treasury hit 3.0% yesterday and is this signaling the Federal Reserve losing control. Anyone out there who thinks the Fed can't lose control of interest rates must not have experience the DotCom Bust of 2000-2001 or the Housing Bubble Bust 1.0 ... There was a time when I didn't pay any attention to this minutiae. Here is a story of the Bond hitting 3% yesterday - this is important because insane prices for homes require low interest rates. If a house just sold in your town for an insane price you can bet the buyers borrowed more than any previous owner of that home: ...

Meanwhile around Boston there is lots of construction projects financed with cheap money and Greater Boston Colleges are booming when many tuitions are $50,000 per year. What happens to construction, housing, and Colleges in a world of higher interest rates? Look closely at the facts most of the industries that are thriving today are dependent on low interest rates to function. Why do you think that Automobile Manufacturers (most are really auto finance operations that happen to build cars) and real estate are doing well at the same time because both industries boom when interest rates fall or are at 40 year lows.

pamlow12/27/13 06:34 PM
For me it's the extent to which the local real estate market has been internationalized. In my neighborhood, many Russians are buying, along with Chinese and to a lesser extent Europeans. While these seem to be folks who have some sort of tie to the city --- a family member in school here, or a connection with one of the big pharma or biotech companies --- I also get the impression that these folks hold onto their properties, either electing to stay in town for the long term or holding onto a place as a rental when they move on.

thirtysomething12/29/13 10:45 AM
The last crash suggests that strategic defaults are unlikely if homeowners are only a few thousand dollars in the hole. They don't start to rise until the negative equity passes 10%. Thus a home with $490k sale price and $100k downpayment is not a jingle mail candidate unless prices fall to around $350k.

I know that some are projecting another huge crash in the housing market, but I'm just not seeing it. To get a crash of that magnitude, you need a strong positive feedback loop, and I don't believe lending standards have fallen to the point where that is possible.

A huge crash WOULD be possible if the entire US economy were to collapse. As Dr. D points out, foreclosures rise with job loss regardless of equity. But it would take a much larger shock than what we saw in 2008, and with less help from the housing market in getting started.

An alternate explanation of the stock market and housing values is that they are correctly anticipating inflation, the result of QE pushed into the system. The 30% rise may seem premature, but if it is followed by 30% inflation over the next few years then it could in some sense be "correct". (Though if inflation does pick up like that, I would expect a market crash followed by a rebound, not a simple stagnation.)

Either way, I agree with Dr. D. Don't count on being able to sell for the same price in five years. The price jump might stick, but there are multiple scenarios in which it does not.

DrDoofenschmirtz12/29/13 09:51 AM
I would like to add one more thing to the discussion.
I understand that banks are looking at the overall picture when assessing the would-be -buyer and apparently it is harder to qualify. as it was before. But that still doesn't explain, to me at least, rapid and very severe rise in appraisal of properties that ended up in the bidding wars. There were instances where buyers went good 100K over the asking. Now, you might say that if they had good down-payment, banks had no problem hitting the appraisal number (again). But, are we that naive to think that if in the case of much higher interest rates, recession, or depressed RE in five years from now, the same "winning" home owners will not need some sort loan modification, play "jingle mail", or simply be foreclosed on, as they e.g. lost an income, need to relocate for a job and unable to sell, or in the mist of divorce, death etc.? How can we be sure that higher down-payments will insulate the market? And especially if many foreign people are buying at the inflated prices, what makes us think that they will stick around if RE falls?
In the end, I still do not get it. How condo that was worth 385K (couldn't fetch higher price) in January of 2013, can be appraised and sold for 490K in March of 2013? And how is that healthy RE market? Healthy appraisal? Kosher lending?
It seems to me that same games are being played, only banks and lending moved to a higher income bracket. To me Re looks like a pyramid scheme more than ever. Any buyer that bought last year will need "greater fool" to be able to sell and not lose on down-payment and equity.

jimbloke12/26/13 09:01 PM
one of the top stories has to be the ... unwillingness of many real estate buyers to be patient and wait. The "cheap" rate gives the buyers the impression there won't a better time than now in the history of the housing to get a house with good reason even at today's 4.375% versus the 3.5% last May. The true test for potential buyers is the restraint to get anything even if the deal seems to bad. The worst part is many first time home buyers might not have the experience to fight against these bad deals since many of these people do not even know the things to do or check, such as using the inspection and finance clauses or using some means to check the condition of the housing structure, plumbing and/or electricals.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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