Housing market spot check

[brewer12345]

A couple of our friends are having their rented outer boro of NYC digs sold out from under them. Since they are thinking about having kids, they have decided to look for a house. They looked in Westchester, but were appalled at the prices even after reductions. They were interested in NJ, so DW, some other local friends and I took them on a tour yesterday. I did most of the pseudo-realtor duties, including walking into several open houses as we were cruising around looking at neightborhoods. This was all in central NJ, mostly in Monmouth County. A few observations:

- There is a ton of stuff sitting on the market. 6 months, 9 months not uncommon, and we saw a number of properties that had seen asking prices reduced more than once (with clear intimations that asking prices were just that).
- Some of the 'hoods we looked at were original Levit developments, where the houses were pretty much the same in the same 4 basic models. Prices for the same model varied a bit by age and location, but the price range wasn't that wide and there appears to be a leapfrog effect where vcompeting properties keep chopping prices to get below the other guy.
- Why in Gawd's name would you try to sell a property with the original 60s asbestos shingles, even if they were still in good shape?
- Realtors are looking pretty sad and desparate, and a few even started to size me up as competition as I lead our friends into open houses. I thought this was curious since I was walking around in a faded t shirt, well worn costco shorts, and 3 days beard growth (practicing for ER).
- Even stuff with unique features or location seemed to be open to offers. We saw a ranch that had been turned into a mother-daughter (complete with second kitchen) and had the garage converted to a very nice den that was open to offers. Also saw the most immaculate 35 YO house I have ever seen on a really nice piece of property in a nice 'hood that had had the price slashed twice.
- We looked at a bank-owned property through the windows and stomped around the yard gawking. Really nice spot, but it needs a ton of work. No way they will get anything like their asking price. Even if they got their asking price, I would estimate that the bank will take a ~50% loss.

I think RE has a long way to go (down).

 

[REWahoo]

Someone with a dissenting opinion will be along shortly to refute your observations...

BTW, nice avatar. I think it's "you".

 

[Sandy]

Our Sat paper has a RE section with a weekly front article by the local RE association. Each week the articles say it is a [-]good[/-] great time to buy. They use statistics, local and national information in conflicting and misleading ways to prove their point. The main philosophy seems to be "if we tell 'em things are good often enough, they will believe it and start buying". By looking around my neighborhood and surrounding ones, the tactic is not working. The houses sit, prices drop some, and the houses continue to sit.

 

[bright eyed]

Yup, each week I scan the new development section of the LA times and each week it's the "best time to buy ever" and prices are slashed by $100k at a time! I feel bad for those folks who got in right at the peak and are seeing their values drop so quickly (actually have a friend who is in that position). Hope they planned to stick around in the first place!

 

[Moemg]

Was scanning the real estate and saw a house next to my old house that sold in Nov.2006 for $370,000 .It is now on the market for $297,000. Ouch !! Houses just seem to be sitting around here (southwest Florida ) New houses are being slashed $100,000. I'd really like to sell my house but no way am I doing it now.My sister in Long Island ,NY has had her house on the market for almost two years .

 

[Nords]

They were interested in NJ, so DW, some other local friends and I took them on a tour yesterday. I did most of the pseudo-realtor duties, including walking into several open houses as we were cruising around looking at neightborhoods. This was all in central NJ, mostly in Monmouth County.

Nothing beats going through open houses, does it?

Hawaii first-time buyers are struggling even more than usual, and yesterday we were surprised to see all the open-house signs on the road leading to our cul-de-sac. A lot of high-end homes are for sale in our neighborhood, including a couple of [-]clueless realtors & sellers[/-] premium properties that didn't have an open house yesterday, and I suspect that prices are going to get even better as we head into the slow part of the year.

Glad I'm not a renter. But if I had to be a renter, this would be the time to convert to homeowner.

 

[NotSoonEnough]

In addition to the now stale "Price Reduced" signs, we are beginning to see, "Just Reduced", "Further reduced", and "New Price" signs.

A tactic that has recently received some media attention here, an agent will take a house off the market one week and put it back on the market the next so that it appears at the top of the pile as a "New Listing!!!" in the MLS.

 

[brewer12345]

In addition to the now stale "Price Reduced" signs, we are beginning to see, "Just Reduced", "Further reduced", and "New Price" signs.

The repo we looked at stated "bank owned" on the sign quite prominently. Bet that becomes a more popular sign.

 

[Grizz]

yesterday we were surprised to see all the open-house signs on the road leading to our cul-de-sac.

Maybe the neighbors are worried that a trend is starting and that the place might get overrun with long haired surfer dudes that don't have jobs.

 

[twaddle]

I think RE has a long way to go (down).

Ya really thing so?

Yeah, me too.

FWIW, I'm in a burb of Seattle (the last hot market in the US), and the market seems to have stalled, sellers who were merely fishing have delisted, and I've seen asking prices come down a lot. Even some sellers that will take a loss vs last year's purchase price.

 

[saluki9]

You think the realtors look sad now? Wait until January comes and the snow is piling up. Those open houses are going to get really lonely.

 

[Nords]

Maybe the neighbors are worried that a trend is starting and that the place might get overrun with long haired surfer dudes that don't have jobs.

They wish. We have the best house in the neighborhood because we have the time to take care of it. The second- and third-best houses in the neighborhood are getting our help too...

I really get the gimmes when I see the blue-light-specials start flashing all over the place. Then I remember that it's actual real work to pull this off. I lie down for a nap and the feeling eventually fades away.

Small surf this morning, but I'm taking an Army officer out to White Plains on one of his very few days off. He works insane hours at PACOM and he's considered to be a rising star on a hot career, but I bet I can corrupt his work ethic in less than an hour! I met him while taking care of his house for his landlord...

 

[W2R]

FWIW, I'm in a burb of Seattle (the last hot market in the US), and the market seems to have stalled, sellers who were merely fishing have delisted, and I've seen asking prices come down a lot. Even some sellers that will take a loss vs last year's purchase price.

New Orleans is not a hot market (as I'm sure most of you know). Inventory of existing homes for sale is very high. But amazingly, some sellers are STILL fishing. The house next door to me is for sale for at least $25/sq ft more than the other three houses for sale on this (short) block, and their house is no better than the others! Nobody seems to know what a house might be worth around here. Major cranial flatulence abounds.

 

[Delawaredave5]

Ya really thing so?
.

That chart is very interesting. Back in late 80's/early 90's- RE "got ahead of itself" and leveled off for a bunch of years until "back on the trendline".

I'd normally expect same this time. HOWEVER, this time prices are so far out of whack - that things have to dip AND go sideways for a bunch of years.

RE pricing fundamentally has to be tied to affordability - right ? Some multiple of income and/or wealth. Historically I thought 4x average income - now we're 8x.

And I don't see any drivers for real wage growth - in fact, the opposite - offshoring, productivity gains reducing, etc.

Maybe the weak dollar could create some "manufacturing / export boom" - but I wouldn't hold my breath on that. If the currency drops 50%, these developing country laborers are now making $2/hour instead of $1....

 

[bright eyed]

Has there been any other point in history (recorded) where the prices got soo out of line?

if so, what happened? that 80's bump looks nothing like this one...was it the easy (dumb) credit?

 

[twaddle]

Has there been any other point in history (recorded) where the prices got soo out of line?

No, I think this will go down as the largest bubble in US history. But NASDAQ was pretty close. My original estimate was that if we get back to the historical housing appreciation trend line, $7 trillion in wealth will be wiped out.

if so, what happened? that 80's bump looks nothing like this one...was it the easy (dumb) credit?

Who knows what will happen. Not much happened after the NAZ popped -- just a mild recession followed immediately by a different asset bubble.

And, yeah, it was a combination of easy credit and speculation. People actually thought of their home as an investment! Can you imagine? Does anybody think of their furniture or cars as an investment?

 

[W2R]

RE pricing fundamentally has to be tied to affordability - right ? Some multiple of income and/or wealth. Historically I thought 4x average income - now we're 8x.

Wow!! That's awful. No wonder I am on a great track to ER. My house cost 2.6x my income when I bought it in 2002, and assuming I could sell it, it now would be worth only 2.3x my present (larger) income.

I could no more handle 8x than fly!

 

[Sandy]

Twaddle:

if $7 trillion vanishes, I would think that a lot of people are going to be hurting. Those with high mortgages and equity loans won't be able to sell or refinance. I don't see how they can all walk away - where would they go? It's not like letting your car or furniture get reposed. You have to live somewhere. I guess the rental market could be tight as a result. Then again, if many of those who get caught are boomers, they will need to keep working.

 

[twaddle]

if $7 trillion vanishes, I would think that a lot of people are going to be hurting. Those with high mortgages and equity loans won't be able to sell or refinance. I don't see how they can all walk away - where would they go? It's not like letting your car or furniture get reposed. You have to live somewhere. I guess the rental market could be tight as a result. Then again, if many of those who get caught are boomers, they will need to keep working.

If it really falls by that much, it'll be similar to the magnitude of the NASDAQ drop. I think the NAZ lost around $6 trillion. It "hurt" a lot of people, but there were also a lot of people who sold and captured a bunch of the upside.

I think we'll see something similar here. A lot of job losses (much of the job growth in the last few years was related to real estate). A big decrease in consumption. But then we'll probably have a new round of fiscal and monetary policy to get a new party started.

I just don't know how many of these serial parties we can have, though.

 

[twaddle]

BTW, I should point out that my methodology is pretty simplistic.

The federal reserve publishes a balance sheet each quarter, and one of the line items is total real estate value owned by households. In the latest report, that value is about $21 trillion.

Historically, the total value of housing has been pretty close to the total size of GDP. It really started to grow much faster than GDP starting in about 1997. Current GDP size is about $13.5 trillion, so the delta is now $7.5 trillion ($7 trillion was from 2006). I don't really expect value to get down to 100% of GDP again, but even at 120% of GDP, we'd be looking at a $5-6 trillion drop in value.

For comparison, google tells me that the NASDAQ drop from peak to valley was $4.2 trillion.

 

[W2R]

BTW, I should point out that my methodology is pretty simplistic.

The federal reserve publishes a balance sheet each quarter, and one of the line items is total real estate value owned by households. In the latest report, that value is about $21 trillion.

Historically, the total value of housing has been pretty close to the total size of GDP. It really started to grow much faster than GDP starting in about 1997. Current GDP size is about $13.5 trillion, so the delta is now $7.5 trillion ($7 trillion was from 2006). I don't really expect value to get down to 100% of GDP again, but even at 120% of GDP, we'd be looking at a $5-6 trillion drop in value.

For comparison, google tells me that the NASDAQ drop from peak to valley was $4.2 trillion.

Fascinating analysis!! I guess the hard part for me to understand would be how low the value could be expected to go. Why 120% instead of 130%, in other words?

 

[ziggy29]

If it really falls by that much, it'll be similar to the magnitude of the NASDAQ drop. I think the NAZ lost around $6 trillion. It "hurt" a lot of people, but there were also a lot of people who sold and captured a bunch of the upside.

True. But it's much easier to unload a few hundred shares of QQQ (or whatever) than it is to sell a house in a depressed market.

 

[twaddle]

Fascinating analysis!! I guess the hard part for me to understand would be how low the value could be expected to go. Why 120% instead of 130%, in other words?

No way to know, really, but I assume that housing prices are primarily a function of wage growth. Wages historically have grown at about CPI+2%, and housing prices have also historically grown by CPI+2% on a national basis.

GDP has grown at something like CPI+3%, so it seems like they should all trend together pretty closely. Generally, the only time we have a permanent trend separation is after some big structural change (like WWII).

I just don't see that this time, but home ownership rates have gone up in the last few years due to easy credit, so if that remains a permanent state, I suppose it would justify a one-time growth spurt.

 

[Puzzley]

Read a few items concerning the housing market today that are an eye-opener:

Seems that in many areas, builders are slashing prices on inventory homes by 50-100K, (300k-400k range homes) trying to sustain some cash flow to pay debt. This puts further pressure on those in the same area or subdivision who are upside down on their houses, and can't sell for what they want/need.

Many homeowners have not yet realized that in order for their house to sell, they will HAVE to cut the price, without regard to how much is owed on it, or don't sell it. In Bruce Williams' advice article today, a couple was looking for advice on what to do about their house that wouldn't sell at the asking price. they stated that the house was worth $150,000.00, but the highest offer had been $115,000.00 Bruce told them that first off, the house was worth $115K, not 150K because that's what someone was willing to pay for it. Difficult situations for many people, and apparently all the air is not out of the market yet.....

 

[Bestwifeever]

True but everyone has to live somewhere. It seems to me the people hurt by the housing market other than the subprime borrowers who may not be able to keep their homes (and does anyone know how significant a percentage of homeowners they are?) will be real estate investors (and maybe the capital pumped into RE when stocks skittered has something to do with the inflated prices), not those of us whose only real estate holding is our own home. If people like me have to sell now, and therefore sell low, we will also presumably be buying a replacement home at the low end (or could rent low, too, it seems).

Too many parentheses, I know. Sorry.