Navigating Today's Real Estate Market 13 comments
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Back in March I began helping a client execute a search for homes under $325k in the Carlsbad, Oceanside, and Vista areas. We had 20% down, plenty of reserves, solid credit, and great income. We ultimately negotiated the successful purchase of a great home that fit their goals and budget… but not before viewing literally 150+ homes, spread across a 25 mile radius, and making 10+ offers on different properties before our bid was finally accepted after three months of aggressive searching. In one case we were outbid even after offering 20% above list price.
Talk about a seller’s market.
Largely based on this type of anecdotal evidence, there is a sentiment brewing on the street that “the real estate market” may have reached a bottom. Also sprouting up lately are bullish media driven statistics like this one:
“The pace of decline in residential real estate slowed in April… Furthermore, (nearly all) metro areas… recorded an improvement in monthly returns over March”
But here’s the thing...
In my more recent post, entitled “Here’s a Statistic I Dare You to Challenge”, I conclusively present how our local MLS database reflects an artificial short supply of inventory in this hottest selling, low-end market segment.
Furthermore…
- 73% of all sales this year have been under $400k
- 11% were from $401k to $500k
- 11% were from $501k to $700k
- 8% were over $700k
So while this market bottom sentiment is based more on wishful thinking than fundamentals, at least its thought process is understandable.
However, folks who point to this type of statistic as some sort of a bottom are being misleading at best and ridiculous at worst. To take a low-end-specific, ultra-short-term statistic grossly out of context to self promote a lame argument that the overall “market" has bottomed is preposterous.
Not only are these types of statistics misleading because they make it seem like “declining at a slower rate” is a good thing; or because one month does not establish any real trend; or because they apply exclusively to the lowest end of the pricing spectrum; but they are deceptive too, since they do not reflect a functional free market.
It’s a seller’s market alright, but only because roughly three quarters of the inventory is being artificially held back. While the supbrime re-set waves are behind us, the problem has not been fully digested. So far, 25% of all US mortgage holders are upside down. This number is just gaining traction.
Many good folks have been working extra jobs to pay their mortgage on time, creating no room for excuses. They have been pleading for loan modification aide. But the aide has been going to the wrong subset of consumers, the ones who have already missed payments and therefore have no credit profile left to defend. Aside from sending the wrong message to the folks still hanging in there, it is pretty safe to say this insipid plan is failing, since over 50% have already re-defaulted!
Even as we lick our subprime wounds, a new time bomb is imminent, and its impact looks to be three times the magnitude. The big thing people are missing is this: its more than just taboo terms like ‘Option Arm’ and ‘Alt-A’ that need to be baked into the market - the very best “A-Paper Prime 800 FICO Fully Documented Income Loans” that were written during the last five years -should also be placed in the same category as “subprime”. We do not have a socio-demographic problem. We never did. It has always been a math thing.
Leverage up = fun.
De-leverage down = not so fun.
If the measly little subprime crisis brought the financial world to its knees, what will happen when the real hammer drops? Let’s see how many “good credit risks” hold onto their homes when they’re upside down by $200k.The idea of a bottom is nothing short of preposterous.
Bottom Line
If you own a $700k to $10m home, and realistically expect to hold onto it for the next 10 to 12 years, then you’ll probably make out very well with anticipated inflation and demographic explosion.
However, if you think you will be selling anytime between now and the next four or five years, I would seriously think about an immediate, aggressive price drop before your neighbors do. Prospective buyers of this segment are better off waiting to lower their cost basis regardless of their cash position.
Prospective sellers in the $500k-$700k market should recognize how quickly this market is deteriorating. Cut your losses as quickly as you can. On the buy side, this market really needs to be approached with caution. If you are financing a lot of your purchase then proceed on a case by case basis. A minimum down payment of 20% is strongly recommended because FHA pricing and/or mortgage insurance fees are cost prohibitive using this high of a loan amount.
This market is deteriorating rapidly so good deals are starting to sprout up, but there is a good amount of downward pricing pressure expected. Rates are anyone’s guess, but if they stay low there is no hurry to buy right away. If they start ticking up, you may want to consider how your monthly payment will go up even as prices come down. If you are paying all or mostly in cash, then time is on your side.
In the $350k and below market segment, prospective sellers who still have equity are actually in a great position to sell but the appraised value will limit the price they can obtain. Buyers in this segment can’t go too wrong. There is a lot of demand for these homes. It is possible that an inevitable flood of inventory can outpace demand, but even prices drop substantially, the intrinsic value at $325k exceeds the risk of downward pricing pressure… even substantial pressure.
A good way to measure intrinsic value is by using my market bottom triangulation principal.
A good way to determine your budget is by using my awesome housing payment calculator.
A good way to get immediate, personalized, meaningful advice is by contacting an agent committed to customer service excellence.
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The problem with the real estate industry is how they present data. We should present data as the whole, than the sub-groups.
73% of sales below $400K does not sound like a problem. And to state people are holding back inventory and not selling; Well that is a remarkable observation!
Why would anyone sell in a down market unless they had no choice!
Inflation: in the biggest DEflationary period our country has ever seen? The money supply pumping doesn't even begin to cover it*.
Demographics: what explosion? Remember that the US is population-neutral without immigration and we're kicking out immigrants right now, not inviting them in. The Boomers are moving out of big houses close to work and into small houses in the middle of nowhere.
Yes, they pumped the money supply "a little bit" ($1T). No, that's not even close to the loss in asset values ($4-8T?). This isn't the 70s! This is a different world. Inflation would be an act of war against China. Don't count on it in our lifetimes.
As for immigration, every day the nut jobs on Fox News are drumming up support to close our doors. Even many Demo districts are filled with stupid rednecks that feel threatened by the guys in front of Home Depot. There is clearly anti-immigrant sentiment here in the US. This is very bad for housing.
The PUNCHLINE for this whole thing is that these hard-working catalysts of our economy are going to LEAVE and NOT COME BACK because conditions are improving across the world. Immigrants are already leaving in droves.
There is absolutely no "demographic explosion" on our horizon. Quite the opposite, long-term demographics have never been so negative for housing in the history of our country.
***
Guys, we're going to tell our children that buying a house used to be considered an "investment". They won't understand. Home ownership will be looked at like we look at fancy jewelry today: a nice luxury, something possibly enjoyable, but certainly not an "investment" and only an IDIOT would plan a RETIREMENT around a house going up in price let alone it even staying stable.
OP
Seller's market? With 20 million surplus properties out there?
Do you read the bona fide home price and sales data, or only the bald faced propaganda disseminated by your own special-interest group, The National Association of 'Realtors'?
However since I admit the primary purpose of SA is not to promote our services… take me at face value when I say the purpose is to provide informed opinions in a forum that stimulates a clash of ideas.
As an industry-insider I see some things non-real estate professionals do not.
I think some of you gave up reading after the first paragraph or two. That’s ok… I see how it could be viewed as the typical cheerleader BS. It wasn’t meant that way.
This artificially stimulated, ultra-low-end “seller’s market IS such an oddity. That’s why I juxtaposed these isolated experiences with my extremely bearish forecast about the bulk of the correction that has yet to begin.
The point is these lame statistics are leading to the mother of all head fakes.
Mad Hedge, well said. Nym and Roger… thanks for the support.
Larry G presents a perfectly reasonable opinion about the opening anecdote seeming contrived. However, I belabored the point for a reason. People have been taking this elevated low-end activity as a sign that the overall market has turned the corner. The purpose of this piece was to expose this sentiment for the absurdity that it is.
If you haven’t given up on me yet, I invite you to re-read the piece from this perspective. How many realtors do you know who would flat out put it on the line and tell people not to buy a $700k+ home if they are at all concerned with protecting their financial investment?
Accuritz- “The problem with the real estate industry is how they present data. We should present data as the whole, than the sub-groups.”
I agree wholeheartedly with the first sentence. I couldn’t disagree more with the second. The (failed?) goal of this piece was to prevent half-baked statistics relevant only to the lowest end of the market from being misconstrued as relevant to the broader market.
“73% of sales below $400K does not sound like a problem. And to state people are holding back inventory and not selling; Well that is a remarkable observation! “
Um… in the market I am reporting on, from 2005 through 2007, $700+ homes represented an average of 22% of sales. Today they average less than 8%. On what planet does this not sound like a problem? And this is before the real loan re-sets begin in earnest.
Regarding holding back inventory, I believe you misconstrued the context. For clarification, I invite you to review:
seekingalpha.com/artic...
Anyway thanks to all for reading my article and for your thoughtful comments.
11% were from $401k to $500k
11% were from $501k to $700k
8% were over $700k
1st question; how does this compare to the total numbers of houses that would sell, (or would be valued) in this price range?
2nd question, do you have a single shred of facts to back up what you are saying? This is why realtors in general have zero credibility.
3rd, and last, a house selling for $325k even in Oceanside is going to be a complete fixer unless it's a condo.
1. I'm just a dumb realtor... can you please rephrase your question in a way that makes sense to someone who can't read your mind?
i.e. what do you mean, "would sell"?... they sold. and what do you mean, "in this price range"? you cut and paste the same four prices ranges I listed.
Do you mean "would sell if all of the shadow inventory being artificially held back... actually got listed on the MLS?"
2. Is this rhetorical?
3. Well, they are in Oceanside... and they're selling for $325k... what do you expect?
Here's a question for you? Did you read the whole article?
As a housing stat junkie from outside the industry, your two postings this week were fantastic. just ignore the random comments who are trying to pick a bar fight. You wouldn't respond in a bar would you?
Back to the topic at hand, I can confirm there are starting to be deals in the mid-to high end in northern california, but the volume of inventory is soooo high, that I think most people are still over paying. In my county (San Mateo), the median sales price was $555k last month, but the median asking price well over a million. Around 80% of the available inventory is priced over the median. Obviously, that's not the sign of a healthy market.
And lastly, less than 1% of true foreclosures are on the MLS in San Mateo County (part of Silicon Valley). 11 foreclosures come up on a Redfin search. Realty track lists 1016 as in a trustee sale, 1098 as bank owned, 154 on the MLS, and another 1849 in pre-foreclosure. Talk about withholding inventory!!!!!
I guess it was my bad for hamming it up too much though… :)
Yeah, the artificial inventory stockpile is insane and just getting worse. On the higher-end, here in San Diego, prices are finally starting to decrease, but I'm hesitant to call them "deals" just yet, as this outlook may be relative to existing prices only. Future price drops may make today’s “deals” look like tomorrow’s bummers... sort of like how P/E ratios are low at 8-10... but only if the "E" part doesn't decrease further.
But hey, on the other hand… everybody and their brother who bought 2-4 years ago who followed conventional wisdom at the time thought they were right. If I had to pick, I’d rather be unpopular in buying now, getting a $200k discount, compared to the folks who enjoyed “being right” two years ago. Of course, I’d rather be both right and happy waiting another year or so in most market segments. Ha.