Three Strikes Against Home Buyers

by Alexander Green

We all know that, within the housing market, home sales are in the tank, foreclosures are up and prices are down from the past few years. What a wonderful time to be a buyer, right? Don’t believe it.

If you live in the hardest hit areas like Miami, Phoenix, Las Vegas, Sacramento, Orlando or a few others, there are bargains out there for the picking. But in most towns, the real values are few and far between. The nation’s housing market is completely dysfunctional right now, in my view.

3 Types Of Sellers In The Housing Market

Three types of sellers in the housing market are preventing prices from reaching their natural level.

• The first is the home seller who bought his house in the last five years. Many of these folks bought their homes with little or no money down and with adjustable-rate mortgages that have ratcheted higher, making the home unaffordable.
  
  At first blush, you might think that a distressed seller would bring their asking price down fairly quickly. But times are different now. Most of these folks are under water, some of them seriously. If they can barely afford the payment, they definitely can’t afford to bring $100,000 or more to closing to make up the difference between what they paid and what the home might reasonably fetch today.
  
  In other words, strike one.
• The second type of seller is the homeowner who bought before the housing mania really took off and therefore would be in a good position to negotiate his asking price. Except too often this seller pulled the equity out of his home to buy a new boat, or a house full of furniture or to pay off his credit cards.
  
  Because these sellers used their homes as an ATM - often two or three times - they are in exactly the same position as the seller who bought near the top of the market. They owe more on their home than what it’s worth. Therefore, they are unable to bring their asking price down to realistic levels.
  
  Strike two.
• The last seller to frustrate would-be buyers is the guy who bought his home before the run-up, didn’t pull out the equity, but simply can’t get out of his head what his home was worth “at the top.” He knows his neighbor got $650,000 for a similar home four years ago and - dagnabbit - he isn’t taking much less. He is an unmotivated seller - and a dreamer.
  
  Strike three.

Housing Markets Nationwide - Bank Foreclosures At 50%

In many housing markets around the country, nearly 50% of home resales are bank foreclosures. The reason is obvious. The banks are willing to take a big loss. Most homeowners aren’t - or simply can’t.

Please don’t send me an e-mail reminding me that all real estate is local and your market in Salt Lake City or Charlottesville or wherever is different. This dynamic is going on all over the country right now. And if the big slowdown hasn’t hit your community yet, just wait. It’s coming.

This is a highly mobile country. According to the U.S. Census Bureau:

• The average American moves once every seven years.
• More than 40 million people relocate each year.
• Fifteen million of them move more than 50 miles.

Most homebuyers are home sellers. If you can’t sell your home in one market, it’s difficult to buy one in another.

I’m not gloating about this, incidentally. I own two homes myself and I know that if I had to sell either one of them today, I would get a lot less than I could have a few years ago.

The Housing Market’s “Myth of the Buyer’s Market”

If you’re in the housing market to buy a home, however, get ready to discover “the myth of the buyers’ market.”

• It would be one.
• It should be one.
• But it isn’t.
• Not yet.

I expect home prices to grind lower for months… and perhaps years.

Potential buyers should look over the housing market listings in their area, but check the paper for auctions and bank resales, too. That’s where you’ll find the real bargains today.

Comments

[User 345523:]

Thank Goodness someone has written about what it’s like to be a buyer. Not to be too insensitive to owners here, but as a like-to-be buyer it sucks also.
First, the article should include a 4th strike against buyers->the home owning banks themselves. Who is digging into how aggressive banks are with unloading properties? From my experience, it’s not very. Why should they? They’re flush (not all, but too many) with TARP money and the promise of the government to give them more. Banks have traditionally been the most willing to part with real estate and clear it from their books, but no longer—or at least not at a rate or in an amount that you would expect. Irrespective of market forces (like letting properties go to auction, then pulling it off the market only to relist it higher than the original suggested price) banks are mired in the #3 phenomenon spoke above.
Maybe they are stuck in time, or maybe they’re attempting to protect the communities their in somehow, or maybe they just want to meter out loses in a digestible way. In any outcome, they don’t have to move off the shined until the government tells them the well is dry.
All frustrating as a buyer.
The second point, is that it’s great to see low rates and prices that have come off the top so much, but ….well….so what? I’m not worried about my job, have the down payment, have the desire to move out of renting (last 2 years) and into *my* house, but am I really ready to accept the risk? I know my perspective IS the problem (lack of confidence in the world to open my wallet), but I’m no hero. I don’t know that I can call the bottom, but getting in now still looks like a lot of pain headed my way.
I would do it if any of the 4 strike groups above would/could come to reality and accept the risk for me (lower prices further just to get back to a return to means average level), but alas, I’m not finding much luck. So, I have to continue to sit on the sideline while I wait for the sand to further erode under the ground people are standing on. I sucks to be a buyer too.

Jan 27 01:21 PM

[HARM:]

Great article! Preach the Truth, Alexander --sing it, brother!

<i>"First, the article should include a 4th strike against buyers->the home owning banks themselves. Who is digging into how aggressive banks are with unloading properties? From my experience, it’s not very. Why should they? They’re flush (not all, but too many) with TARP money and the promise of the government to give them more. Banks have traditionally been the most willing to part with real estate and clear it from their books, but no longer—or at least not at a rate or in an amount that you would expect."</i>

The phenomemon of "ghost inventory" (unlisted bank REOs) and "shadow inventory" (private sellers who want to sell, but not at today's prices) is well documented and very real. Some estimates place current ghost inventory at 2:1 vs. listed inventory.
www.calculatedriskblog...

DON'T be a knife-catcher.
DO pay attention to local house price-vs.-HH income ratios.
DO pay attention to local house price-vs.-rent ratios.
DO pay attention to the Shiller chart.
www.financialsense.com...
DO pay attention to the Credit-Suisse ARM reset chart.
www.housingwire.com/wp...

Jan 27 01:51 PM

[AGreenspan:]

All of this is directly opposite of Barbara Corcoran's advice she recently gave on Good Morning America. Who to believe?

Jan 27 01:55 PM

[HARM:]

"All of this is directly opposite of Barbara Corcoran's advice she recently gave on Good Morning America. Who to believe?"

Let's see... motivational speaker, self-help book peddler and Bubblevision talking head, or... common sense and reason.

That's a tough choice!

Jan 27 02:15 PM

[Tony Petroski:]

In my neck of the woods there are bargains everywhere and many properties priced at 50% discounts off prices of two years ago and well under the cost of construction. If those are not "natural prices" I don't know what are. If you can get financing and can buy a home, do you wait two years because the home you want may drop another 10%? Two years from now do you wait another two years for the price to drop again? Get on with your lives.

Jan 27 10:14 PM

[TommyG:]

If idiots would stop looking at their personal home as an investment it would help. If you have the down payment, you can afford the monthly PITI and maintenance, the home meets you needs as shelter, then buy the damn thing!

Jan 28 09:20 AM

[nym:]

To me the biggest fools are those who think a house is cheap because it was much more expensive two years ago. They are also the ones who get fooled by phoney auctions, of which the writer seems to know nothing.

Jan 28 09:59 AM

[Guero:]

The sellers in the first two situations do a short-sale. It's happening all over the place as we speak. The third one is stuck in 2004. What we are watching is price/value discovery in progress. A particularly nasty case, too.

Regarding your points about the US being a mobile place: that is so 2004. That is part of the corporate go-go model of that period. We are entering a new model now that will see less corporate relo's because there are simply less corporate sheep to move around. More people are 'in business for themselves' and as a result are more rooted where they are. Welcome to the new reality.

Jan 28 10:25 AM

[loanwolfe:]

Three prerequisites to stabilization of housing prices: (1) the typical first-time buyer must be able to afford the median-priced home; (2) monthly PITI payment on the median-priced home doesn't exceed a third of monthly gross income; and (3) median-priced home doesn't exceed twice the borrower's annual gross income. These are the guidelines we grew up with in the mortgage industry. No one has made a compelling case why these should have been abandoned.

Jan 28 10:41 AM

[scotty1560:]

agree with the author and let's add a few more concerns.

Greedy taxation & soaring insurance...equivalent to another mortgage.
Much tighter lending guidelines...wipes out lots of prospects.
Lower salaries and incomes....means less sales and lower debt ratios.
Over building....years of supply has flooded the markets.
Lower rental prices...mean lower prices to investors purchasing.
Lower values to all assets...nowhere to borrow emergency funds.

foreclosures..foreclos... the dominant species..hammering prices
down at 25-50 cents on the dollar.

Areas like South Florida: 7-8 years of buyers are now negative equity..they are
best to walk...heck they don't really own anything...much cheaper to rent...
just supporting the pig lenders and local governments that created scam loans.

IMO...2 years of downside...2-3 years of sideways....Makes zero sense to
buy right now unless you must for tax reasons. Wait until the foreclosure
issue resolves itself...plenty of time later.

Jan 28 11:35 AM

[1234987:]

to 345523
The price of the house matters twice, when U buy & when U sell!!

Thats it...

If you can afford the house, payments, taxes & upkeep buy now & do not wait.
But you are a lifetime renter/never buyer.
The tax savings for Home mortgage interest almost covers the ownership
costs depending on your tax bracket.

Find a home, I'll buy it & rent to you so you can pay off my mortgage.

Jan 28 12:01 PM

[xmplary:]

Good article and agree with "User 345523" as well. However, if you are renting, and waiting for prices to go lower, dont forget to consider the "losses" you are incurring by renting as well. For instance, if you are paying $1000 in rent, thats $12000 you have paid with no tax benefit. Also, take into consideration the changes in the interest rates and how it would affect your bottom line. You might save a few thousands by waiting, but might be giving out from another side.

Jan 28 12:25 PM

[Drew Horn:]

To 1234987

You assume too much. Some of us have the cash to buy, don't need a mortgage, and thus, take the standard tax deduction. We cant benefit from the deductibility of interest expense. Owning a home is, compared with renting, an economic break even for me. If government wants us to buy, change the tax code to allow anyone to annually deduct 5% of their purchase price. If so, I will buy. If not, I won't.

Jan 28 12:34 PM

[notsosmart:]

a house is not an investment or an atm. its a liability that is the roof over your head.many learning this the hard way. pay off as fast as you can & never take a heloc.worked great for me.

Jan 28 01:23 PM

[mallarde:]

Author is correct that many sellers refuse to see the light. I was in the market 2 years ago in the beach towns of Los Angeles (Santa Monica, primarily). I told my agent that the sellers were refusing to price their condos reasonably. I was already thinking ahead a couple of years, knowing things were starting to unravel.

In Santa Monica, CA and neighboring towns, many sellers STILL refuse to drop their prices. Some rent their units out -- waiting out the storm, so they think. Others allow their units to languish on the market. Some do, in fact, drop their list price.

The price drops are starting to occur in even the poshest markets in Los Angeles. But I won't get into the market until all the air flushes from it. Could be awhile.

Jan 28 01:35 PM

[Terry Finn:]

The main strike against possible "HOME BUYERS" is their own lack of patience. Buyers should watch and see what is happening to workers at Caterpillar, Boeing, Microsoft, Google, and even Toyota. Layoffs and more layoffs! Don't even think for a minute that we are near the bottom. Will six million layed off U.S. workers in 2009 be buying or selling there homes? Don't believe the Realtor! Rent, rent, rent. Stay where you are. We are only seeing the tip of the iceberg. Is the government's printing press going to pull us out of this. I don't think so. Homes are just beginning their downward spiral. This downhill snowball is quickly gaining speed and momentum. PATIENT BUYERS with cash have the world by the _ _ _!

Jan 28 01:59 PM

[softomic:]

Love the article. Even point 4 is valid. I can't blame the banks for stockpiling money. Why wouldn't they, but where is congress now? They were up in arms as the bill passed through the senate and the house, but now they are surprisingly quiet while John Q. Public is struggling more than ever.

Jan 28 07:54 PM