Great Article - When the Price Isn't Right

In Sunday's (Dec. 9 ) NYTimes Week in Review Section there was a really good article, "When the Price Isn't Right" that hit the nail on the head --- about financial ambiguity that's choking markets, including real estate.

One quote: "The real estate market ... is locked up because few can agree on a fair price. Sellers cannot fathom how their homes could be worth so much less than a year ago...  Buyers have heard about plummeting prices and are holding out for some of that. The result: stalemate.:

The whole article is pretty interesting, about the difficulties in establishing values right now in a lot of markets, not just real estate. In reading through the article, I realized that a big part of what I'm sensing from potential buyers here isn't that they can't or don't want to spend, say, $400,000 on a farmhouse, nor are they mired in economic fear. They just don't know what the right price should be for what they want. Consider a hypothetical lakefront 5 acre lot at Chapin. 4 years ago it might have sold for $350,000. A year ago it might have sold for $650,000. So what's it worth today? $650,000? $550,000? $450,000? If this hypothetical lot is on the market, it might actually be listed for $750,000 (with the seller optimistically extrapolating an upward trend from last year's prices.)  The problem is when I have a buyer interested in buying a lakefront lot at Chapin, they don't have a good way to put a value on it. You just can't look at what a similar property sold for a year ago, because the market is very different today.

Comments

[henry]

Your clients are asking the wrong question.... There is no such thing as a "fair" price. Fair value is an opinion until there is a buyer and a transaction. The price that a neighbor received last year is meaningless if conditions have changed, and there are no buyers at this price. Flipping the argument around, there is nothing wrong with paying a million for a Chapin property if a buyer has the cash and the desire.

Few items that are NOT opinion...

First, the carrying costs are significant on the purchase of a $600,000 summer place. Say $45,000 per year based on $15,000+ in taxes plus $30,000 in capital costs (making the rough assumption of a blended after tax cost for debt and equity of 5% on a $600,000 purchase price). Then add the costs of home ownership.

Second, buyers have amazing options if they are going to spend this type of money ($45,000 per year) on summer recreation. Maybe a trip to the South Pacific every summer ($500 per day for three months). Maybe renting a place and investing the rest. Maybe spending more to buy a place outside of Sullivan county that can be used year round and that has a top-notch school system. The problem for the sellers is that the prices of most substitutes have not gone up as much as Chapin real estate... causing buyers to look elsewhere.

[JM]

Once again,
Sullivan county is not a 750K locale, not even 500K locale.
NOT EVEN a $300K getaway...... We are in a Liquidity TRAP (http://en.wikipedia.org/wiki/Liquidity_trap)

Easy money is dissapearing and fast. What is ANY property worth without a mortgage? Maybe 2 years worth of one's salary?.. like it was in the 50's and 60's before Nixon cut the dollar from the Gold standard. Banks have been ballooning in profits since then based on American DEBT...That is what has maintained our GDP for almost 40 years... YES DEBT!! Asset Bubble is what financial engineering has made. It makes us middle class feel richer too. But the ones winning have been the BANKS...they starve when we stop borrowing....and guess what that does to US GDP? Liquidity TRAP causes them to hold on to their cash and not lend it away in fear of defaults. Look forward to many many years of asset price depreciation. How will property owners come to grips that what they paid for in Sullivan Co. will be worth half by 2012? Will realtors be there to advise them to sell or continue to tell them to hold out and just keep the listing on the website for a few more years?

[JM]

During the asset price bubble inflation, realtors used this line:

"a property is worth what the highest bidder is willing to pay for it"

why not use the same rule when there is an asset price deflation?

Is it worth MORE than the highest bidder? haha