The Stages of Loss

There's been a great discussion on the previous post, "When I Can't Support the Price." One regular visitor, Dan F., posted a comment that sellers may be going through stages similar to the stages of grieving described by Elizabeth Kubler-Ross:

"If anyone has ever read "On Death and Dying" by Elizabeth Kubler-Ross. You will see an uncanny parallel to selling a piece of real estate in a declining market. Based on seller behavior, it seems they are dealing with the declines the same way people are said to deal with death...Someone should do a study. Kubler Ross states the levels of people dealing with the death of a loved one is

1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance

Sadly, I think this could definitely apply to Real Estate !" --- Dan F.

I think Dan makes a great point, and it really helps me to understand the difficulty on making deals lately. Many sellers are clearly in denial that the market has changed, and that prices in many cases may be dropping. And they sure are angry. Rather than being appreciative that someone is interested enough in their house to make an offer, they're angry that the potential buyer's offer doesn't meet their expectation. Recently I've heard of a number of deals that have fallen apart with the seller and buyer just a few percentage points apart, either at the offer stage or at the appraisal stage when an appraisal comes in short and the seller is unwilling to renegotiate the price. In the case of an appraisal shortfall, I've heard of a couple of sellers saying essentially, "If they (the buyers) don't want to make up the difference (between the agreed upon selling price and the appraisal) in cash, we'll just put it back on the market and wait for someone who does."

Wow. Big time denial. Kind of like someone who lost a spouse sitting in a dark living room believing their dead spouse is coming back to make dinner. There's this magical belief that there's going to be a market turnaround in the spring, kind of like a collective real estate resurrection fantasy.

Its tough to make a deal with a seller stuck in the denial-anger stage. If I look back at the successful deals I've made in the last few months, all of the sellers had moved into the bargaining-acceptance stage. All of them, in one way or another, had the attitude "I want to move on with my life. Let's figure out how to make this deal happen." Now, those deals have not been at 'bargain hunting, bottom feeder' low ball prices, but at what I consider very realistic and supportable prices. But in situations where the seller is in the first stages of real estate 'grief', its not been possible to make the deal.

 

Comments

[JM]

well.... Sellers have at least 8-10 years to reach the acceptance stage.
Hopefully, just in time for the next housing craze!

[David Knudsen]

I wouldn't agree with '8 to 10 years', but I think it will take 8 to 10 months. I went through this last year when selling my condo in Florida. I put my condo on the market at the end of 2005 during the peak of the boom, elated at the run-up in prices and already counting my paper profits. But it didn't sell, more inventory came on the market and I kept lowering my price little by little. I rented the place out and had reasonable income, but it was still cash flow negative. At a certain point, I moved to the 'acceptance' phase, or in real estate parlance, I was ready to move on. I also realized that by holding onto it for another 12 or 24 months I wasn't likely to make much more money on the sale. We haven't reached that point here yet. I think we have to go through the spring and summer selling season before reality sets in for some of these sellers.

I want to make one point, though, that it is still quite possible to buy houses here at good prices --- if the seller is motivated to sell, or has reached that "I'm ready to move on" point. But if you encounter a seller still in the denial-anger phase, its much tougher.

[henry]

It certainly could take years to bottom and then many more to recover from the drop. Looking at nationwide data (Case-Shiller) for 1990s crash, the market took more than three years to bottom. That time, the market bottomed down 8.3% (peak-to-trough), but it was preceded by only a 30% boom in the preceeding three years. This time we have a 60% boom in the preceeding few years, an abrupt end to cheap financing and the prospect of a recession on the horizon.

Also, I think that it is difficult to say that "good prices" are available. In most metro areas (and i don't have sullivan county data), houses are extremely expensive on affordability criteria as well as relative to renting. The dramatic rise in home prices in the last three years broke relationships that have existed for decades.

But maybe it will be different this time...

Anyway, this is the downside risk that sellers should be aware of... as they contemplate taking (only) a 50% profit by selling today.

[David Knudsen]

Good comments, Henry. When I consider what's a "good price", I can only base that on a snapshot of the current market. I don't have a crystal ball to know what may happen in six months, a year or two years. I have clients who want houses, and generally they want a house now or in the short term to enjoy with their family and friends, and not in two years. One of the toughest parts of my job is having clients fall in love with a house, only to have me step in and say I think its ridiculously overpriced, which is essentially saying its 'high risk' relative to the way the market is moving. I think managing 'risk' is a reason we're seeing second home buyers gravitating to less expensive, more moderately priced properties. On a percentage basis, the downside risk may be the same as a more expensive property, but in absolute dollars its smaller. So, for example, this year most of the lakefront houses I've sold have been in the $300's, and I haven't sold one lakefront house in the $500's or above. That's very different than 2005/2006, when most lakefront houses I sold were priced $500K and above. (Important point: those $500K+ houses haven't dropped in price into the $300's. The buyers I'm seeing are just gravitating to smaller, more modest and less expensive houses.)

[CP]

DK - true that - there remains a big marketplace for affordable, high-value 2nd homes priced under $325k, mostly being bought by families who can afford much more.

Having experienced the pschological angst and adjustment to get deals done currently, I think it's misleading to say deals fall apart for 'just a few percentage points'. Usually, in the event of a smart seller, he/she has agreed to his lowest price, then agreed to an appraisal shortfall reduction, then agreed to a home inspection punch list rebate, etc... to where the buyer pushes a little too far, and the deal is over. Those last few percentage points come after many points given up previously.

There is a psychological element to selling/buying a home, and most sellers won't be able to continually give, give, give, without at some point freaking out and demanding a little respect. Human nature, not always best economics.

Talented realtors feel when one side or the other has reached their final number and are able to bridge it fairly - because most deals can get done, even at reduced prices, if the seller can walk away with their self-respect, as well as any profit.

[Steve]

I think further to the comments above, during periods of market turbulence, there will be less deals period. And the deals that do go through, will be on the low side. Nobody wants to pay market or above market in a slump. They want to make sure that when they buy it's not going to further depreciate in value. In that way, the numbers cannot accurately determine where the market will be in 6 months time. If nothing is selling, then how do you determine current market value? If only cheap property is selling, is that an indication of a recession or consumer confidence?

Further still, there is disillusionment on both sides (buyer and seller) that the market will either plummet or increase in the next few months/years. The likely scenario is that it will be right around what the market is today, but with more stability and confidence.

And as with any type of wealth, there is a group of people who are happy to think that people will lose their shirt. They have been calling for a real estate bubble pop for a long time with glee.

[henry]

Some great comments.

Not all people who think that the housing market is going down double digits on average (with certain markets down 30%+) are happy about it. I think that it is great that people made money, and even better, if they print a sale and turn a paper profit into cash. Also, housing has been a great driver of wealth in this nation, and a drop in housing could lead to a recession and job losses.

Contrary to Steve, I don't believe that the most "likely" scenario for the housing market is that it will remain flat. It seems unlikely that a market that has been increasing at a double digit rate and now, in recent months, decreasing at a double digit rate will suddenly become less volatile. This is especially true if you consider the increased volatility in other markets (like the stock market). Further, the large bid/ask spread between buyers and sellers suggests volatility... as this spread will close one way or the other. Lastly, look at where the financial instruments based on mortgages are trading. Wall street does not believe that housing is going to be flat.

One other implication... increased volatility suggests increased risk (both up and down). Fasten your seat belts.

[CP]

When time passes and we stop using a historic record year to compare everything else to, then some reasonably analysis will be easier.

As far as what Wall Street believes, I think the current situation shows that is not a group to be held as a barameter of sane, independent decision making. More like hysterical and reckless exhuberance followed by hysterical and paranoid fear. Anyone not working towards a year end bonus knew the CDO's were nonsense wrapped up in more nonsense.

let me see if I understand Wall Street's actions correctly - buy loans given to people without money or good credit, package them with other loans given to people without money or good credit, and rely on a cyclical real estate environment to stay perfect forever. And then try to make headlines (and avert blame) by stating this 5 month housing slump is as worse as the depression. Sounds foolish, even to someone without a high-finance pedigree.

[David Knudsen]

Chuck, I disagree that the problem is with buyer's nickel and diming. I'm not talking here about a buyer and seller getting through all the stages you mention --- agreeing to the lowest price, then adjusting for an appraisal shortfall and fixing inspection repair items. Its hard right now to get agreement on price, and then comes the appraisal. In the second home market, I'm not seeing 'bottom feeding bargain hunters', but buyers who are pretty rational and not willing to cave in to a seller's price expectations that are outdated and not based in current market reality. A key part of buyer psychology right now is that, in general, they see absolutely NO downside in waiting --- if anything, time is on their side, since the general wisdom is that real estate is far more likely to go down in the short to mid term than up. And am I hearing about deals collapsing for just a few percentage points, e.g. less than 5%, the answer is a definite yes — either negotiations have stalemated with less than a 5% gap, or there's been an appraisal gap that could be bridged with a seller willing to move 5% or less.

[CP]

I guess it all comes down to how accurate the asking price was to begin with. By the time you get to the final '5%', the seller could already be giving up 10-30% to get the deal started.

For non-appraisal related deals where the house is appropriately priced with comps-
$350k asking price -
Seller agrees initially to $315k (10% off asking, $35,000 off deal)
$5k for inspection negotiations (12% off asking, $40k off deal)
Buyer asks for another 5% to make the deal happen (17% off asking, $59,500 off deal)
8% for realtor ($25,200 off deal, or $87,500 total)- yes realtors are still trying to get 8-10%
$5k for closing costs ($92,500)

Seller expection - $310k - $325k
Seller reality - $257,500

Presented with that type of scenario for a home priced correctly initially, it's not an easy decision for a seller to sell, if the need is not immediate.

Above analysis has nothing to do with overpriced or aggressively priced homes, which account for most of the marketplace currently. The $350k to $425k asking prices will be an interesting thing to watch, since I don't believe any price point is as crowded with unworthy homes as the upper $300's.