Rental Rate Barometer for Price Correction Potential

I've long thought there's a close relationship between rental rates and sales prices, kind of like the relationships between bonds and stocks. Today on Yahoo there was a great article from Fortune/CNN Money about that relationship, and using it to predict the possible rate of price correction in real estate sales prices. Which is what they did in a number of major markets. Click here to check it out.

Comments

[JM]

Rental rates and RE prices lost their parallel back in 1999-2000.
Either rents go up or housing goes down (or both) for the parallel to come back.

[David Knudsen]

JM, I think that's the point the article is trying to make. That sales prices have climbed too high in relationship to rental rates, and that sales prices will likely come down in a relationship to rental rates (adjusting also for an increase in rental rates.)

[TR]

Wells Fargo Chief Executive Says Housing Market in Worst Downturn Since Great Depression

NEW YORK (AP) - Wells Fargo & Co. President and Chief Executive John Stumpf said Thursday the housing market is experiencing its worst decline since the Great Depression.

at:

http://www.cnbc.com/id/21821577/site/14081545/

Wells Fargo, which has sidestepped many of the credit and liquidity problems plaguing U.S. mortgage lenders, believes the nation's housing slump is the worst since the Great Depression and is far from over, Chief Executive John Stumpf said Thursday.

[Cramer Video]

and at...

http://www.reuters.com/article/newsOne/idUKN1530003920071115

and at...

http://beta.silobreaker.com/DocumentReader.aspx?Item=5_790594320

TR

[JM]

Many years from now, this housing depression will be better known as the "Great Experiment" by Alan Greenspan and company.

This is not a housing 'slump', nor a recession (lasting 2 quarters)
This is a a housing Depression which will outlast in years, the last housing depression of 1990-1998.

[Steve]

Neither the article, nor the figures, address the impact of foreign investment or increased housing needs. With exchange rates favoring foreign currency, more people will be investing in U.S. real estate. I see it here in New York. We'll also see an increased movement into urban areas with immigration and people moving from the suburbs. In five years time I foresee further changes in the social fabric of the nation.

The truth is that America is a bargain right now. Our housing costs are not overvalued, they're undervalued. If you compare the prices of real estate among other English-speaking nations, you'll notice U.S. real estate is low in comparison. In a global market, we're a bargain.

[chuck]

I hope this is a repeat of '90-'98, because a lot of people got rich off real estate from '98 to '07.

[TR]

{Steve writes...}

"The truth is that America is a bargain right now. Our housing costs are not overvalued, they're undervalued. If you compare the prices of real estate among other English-speaking nations, you'll notice U.S. real estate is low in comparison. In a global market, we're a bargain."
==============

Yes.

However, only if you're from abroad paying with Euros to invest in a co-opm or condo in Manhattan since the dollar is now so weak.

But we're talking about Sullivan County. Same state - but that's where the similarities end.

Residential real estate tends to local in scope.

Not many folks care if a home in Jeffersonville, New York on three acres is affordable in relation to a home in say - Scotland - unless you're moving abroad.

Banks hire appraisers to quantify what the current value is of a house under contract during a specific time frame by receiving "comps" - comparible SOLD properties in the same region of a county - properties that have sold within a six month time period - not a year or two past - since market valuations flucuate like we've been seeing - and will continue to see.

I'm not seeing too many Europeans or Asians looking to purchase in Sullivan County right now.

Maybe I'm wrong.

Dave? Chuck?
===========

{Steve writes}

"(impact of)...increased housing needs."

============

This county, for the most part, has been and is - a second-home market.

We're not seeing an increase of enrollment at schools from folks leaving the city or suburbs - or new companies -or casinos for that matter - starting up in the area increasing the workforce.

If anything - there is a decrease in housing needs due to a shrinking population base and an increase of available inventory due to the economics that we've all been reading about since early August 2007.

Subprime mess, increased oil prices, slow retail sales, many foreclosures and a general malaise that is spreading from homebuilders to financial companies to the general public.

==========
{Chuck writes}

"I hope this is a repeat of '90-'98, because a lot of people got rich off real estate from '98 to '07."

==========

And Chuck - you really "hope" for a repeat of 1990 through 1998 in your post above?

That's almost a decade - a pretty long time - for the market to turn around.

I was up here back then - I don't believe you were.

Nice houses - capes, farmhouses, ranches... priced under $100,000 would sit on the market for sometimes up to *two years*. A lot of people went through a lot of pain during that time period.

Those were the days before Sullivan County had the writeups in The Times and NY Magazine. It was before Florke and before 9/11 - way before Sullivan County was ever compared to The Hamptons.

Before the droves came up here in 2002 through 2005 and pushed the prices up, up and away.

Those will be the people who would be most hurt - that is - if they had to sell- since they have been here the shortest amount of time and bought into Sullivan at the top of the cycle.

Plus, they will be in all likihood the most difficult to deal and negotiate with since nobody ever wants to be counseled that their home is now worth less that what they paid for it only two to four years ago - even after improvements have been made.

Let us hope that no one has to go through that again just to realize a profit.

The next three to six months will give us all a clue.

Wishing all a happy and healthy Thanksgiving.

Sinecerely,
TR

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Sales Comparison Approach

In the sales comparison approach, market value is estimated by comparing properties similar to the subject property that have recently been sold, are listed for sale, or are under contract. A major premise of the sales comparison approach is that the market value of a property is directly related to the prices of comparable, competitive properties. The more comparable sales that can be found the better the final analysis.

Comparative analysis focuses on similarities and differences among properties and transactions that affect value. Once a set of comparable sales has been determined they are adjusted to the subject property based on the date each sale occurred, the buyer or seller motivation, the average volume per timbered acre, the site features (e.g., road costs, operability, terrain), the timber quality, the average age of the timber, the species mix, property location and size, property rights conveyed, and conditions of the sale.
---------------

I hope this is a repeat of '90-'98, because a lot of people got rich off real estate from '98 to '07.

Posted by: chuck | November 19, 2007 at 12:29 PM

[chuck]

TR- this is a free-market system and since it's invention things go up, things bust, they go up again, then they bust again, then they go up again, then they bust again.

Value is value, but lots of properties escalated by multiples for no reason but exuberance.

Should a house worth $250k sell for $400k just because someone has been convinced to buy it, and the entire financial system plays along? I think lots, if not all, properties increased in value of the last 6 years. But should they have more than doubled? I think the seller expectation vs. reality will be the most difficult pain. Having sold 25 homes over the past 3 years, I have cut, when necessary, 10%-30% off the price of an individual home to get it sold (even homes appraised at original price). If your house was worth $125k in 2000, is it really a disappointment to try to sell it at $250k (even if for one brief moment you believed it was worth $345k)?

Owning a home has never been a 'sure thing' way to get rich - it was a place to raise a family, pay the mortgage, ie. shelter and protection from the storm of the outside world. What's amazing about my 15 years of professional learning is the repeat of scenarios - dot-com run-up and bust, mortgage run-up and bust, S&L run up and bust, bio-tech run up and bust. Buying and selling for the long term, avoiding fads, diversifying an investment portfolio seems the way to go. The danger of Bubble wealth and 'this time is different' never seems to be lasting lesson.

And the most extraordinary lesson I've witnessed is how short memories are when it comes to these ups and downs, and the amount of persons convinced that not to act as prices escalate, is to miss out on sure fire wealth - for some it works out, for others it does not, and the others just live their lives and enjoy their homes - although maybe a bit nervous and hunkered down. For those of us joining the working world after 1994 - we have had a free ride, as far as the consistent strength of the economy is concerned - there is probably some real long-term lessons on the way.

[David Knudsen]

I tend to agree with Chuck on the 'value' part --- and that's what makes this market transition more difficult. In real estate, "value" is the price at which a buyer is willing to buy and a seller is willing to sell. There is no inherent 'value' in real estate, like the wetness of water or the hardness of rock. I'm also definitely feeling this push-pull in buyers between the "investment" value and the "enjoyment" value. They want a house here but they don't want to pay too much. I think the loser in all of this is higher priced real estate, because the safest thing is to buy the cheapest thing, and that will leave a lot of higher priced houses sitting on the market --- even if they are well priced in relative terms.

[JM]

I do give much blame to seller RE brokers in Sullivan county. Many, many, if not all, RE offices have made promises to the sellers in fear of not acquiring the listing. These promises have come back to bite the seller RE brokers in the face. Now seller brokers are forced to let the listings just sit on websites. You know how many brokers are reluctant to pass through Low offers in fear of the seller being pissed-off? They would rather not submit the offer. I have been discouraged by many realtors from actually making my offer official, even though there is NOT ONE OFFER ON THE TABLE!!

[TR]

As a listing broker, I personally would rather represent *four or five* decent listings that I am totally behind - and they need not be trophy properties.

They can be a $30,000 vacant lot, $180,000 village home or $620,000 lakefront home - as opposed to collecting dozens and dozens of listings - just for the sake of collecting.

Most are usually overpriced to start and then sit on the MLS for many months - sometimes years - with numerous price reductions.

What is really gained?

Not much.

I would lose valuable time and I would lose my money - and so do the sellers.

And - if a seller says to me (and many have)...

"Tony, I'm in no particular hurry to sell my property. I can let it sit through the winter...the spring...the summer, etc."

Well, I'll pass on listing that property and representing that person because I *am* in a hurry to market, present and sell property and spend money on the merchandising on it as well.

If the seller agrees with my marketing plan as to how I intend to represent them and if the seller agrees to the offering price I would like to set - after I have produced recent comparibles for ther home - and not the other way around - the properties I list usually sell - if not by me - by another agent in the Sullivan MLS.

http://www.ilovethecatskills.com/list.htm

Happy Thanksgiving to all,
Tony Ritter

[Steve]

Tony - I've seen a number of foreign residents buying in Sullivan, including three families who recently moved to Liberty being European and South African.

I appreciate a straight-shooting agent like yourself, but what about the case where the agent gives you a price on the house to move and it doesn't move? I'm seeing a lot of that lately.

**********

"You know how many brokers are reluctant to pass through Low offers in fear of the seller being pissed-off? They would rather not submit the offer."

I would consider that unethical and actionable under the law and I would hope that my agent would not do that.

[TR]

{Steve writes}
"...but what about the case where the agent gives you a price on the house to move and it doesn't move? I'm seeing a lot of that lately."

---------

Steve,
IMO, before one lists their property, I would interview as many as four or five agents from different offices in the SCMLS to listen to not only what they think your property is currently worth along with backing that number up with facts but also what that agent's game plan is - if they have the opportunity to acquire your listing.

Who are they and what are their accomplishments?

How much money will they be spending in your property?

Where will they be advertsing your property?

Will the advertising be print or digital - or both?

In fact - does their office have an internet presence? And are they capable of using the language of the digital age like HTML, PHP, Javascript, CSS, etc. so that you can get the most exposure as possible?

Will they be always present upon a showing of your property to answer specific questions? Or will they
just leave a lockbox - or a key in their office?

Will they be available to you and return your inquiries within a few hours?

Just because that agency might have a lot of listings does not mean that your listen will be duly represented - in fact - it might get lost in the shuffle.

Those and many more questions should be asked when you interview the agent to represent you.

Happy holidays to you and yours,
Tony Ritter

[David Knudsen]

Steve, an agent is legally to present all offers. But that doesn't mean they have to actually support all offers. The seller inevitably asks their agent "What do you think?" One of the problems right now is that most agents in this county (myself included) haven't been through a down market, and may also be clinging to unrealistic expectations, particularly that a better offer is coming.

Tony, I agree with your comments with one exception. I don't think its necessarily in the seller's best interest for the listing agent to be required to be at all showings. Sure, its nice to have them represent the property. But on more than one occasion I've had to scratch a house off a list because I wasn't able to coordinate a showing with the listing agent. And I've also sold a number of houses because, as I'm out with the potential buyers I see what they're responding to and shift gears while we're enroute to swing by another house. If you don't get a potential buyer into the house, it doesn't matter how good the 'sales presentation' might be with the listing agent.

[JML]

I have also experienced brokers not submitting offers or saying they would "pass it on to the seller" but I know damn well they tossed it in the wastebasket. While it is unethical and perhaps illegal who is going to spend the time and aggravation to make a case against them? I just move on to the next property. It is no surprise to me that property sits longer than it should.

[Tom Fry's Ghost]

David

A Happy Thanksgiving to you and others on this site who have made the debate a rather interesting one.
Your candor and integrity is greatly appreciated by this writer.

[David Knudsen]

JML, how do you KNOW an agent didn't submit your offer? Did you have some follow-up ndirectly with the seller? Or are you just assuming because you didn't get a counter offer to a low offer that it wasn't submitted? There's also a big difference between a verbal "See if the seller will take $50,000 for this property", versus a written offer with a binder deposit. Is the first an offer or fishing? What are the terms on that $50,000 offer?

Its in an agent's interest to submit all offers, no matter how low. If he/she submits a lot of 'low ball' offers, it builds the case with the seller that the property may be priced too high. A seller can instruct their agent not to bother them (e.g. submit) offers below a certain threshold. On those occasions when that's happened to me, the listing agent has said, "Look, you can write up and fax over the offer, but the seller has indicated they don't want to see any offers in that range."

If you think your offers aren't being submitted, you can ask that you receive a written acknowledgement from the seller that the offer was received. It is NOT an acceptance of the offer, just an acknowledgement of receipt. When I've had a client who's skeptical of whether an offer has been submitted, I type up a short "Acknowledgement of Receipt" and fax it along with the offer, so its very easy for the seller to sign or initial it and return it to their agent to return to me.