The Two Year Breakeven

During 'normal' real estate times, when property appreciated at a rate slightly better than inflation, but not that the rapid rates we saw over the last few years, the general rule of thumb was that it took two years after buying a house to sell it and break even, given the costs of acquiring the house (mortgage app, title, legal fees) and selling it (commissions, legal fees, etc.) If someone bought a house and needed to sell it in less than two years, it was generally acknowledged that the seller would likely take some loss. During the run up of the past four or five years, that rule of thumb was thrown out the window. Sellers expected to make a profit if they only held a property for even less than a year.

That psychology is causing some problems right now. There are some houses on the market right now that were bought by the current owners within the past year. In most cases, these aren't investors looking to flip a house, but rather owners who's situations have changed --- moving, transfer, divorce or just simply not using the house. They've put them on the market, but at a price substantially higher than they paid (breakeven, with the expenses coming in and going out, is about 10% above their purchase price.) Sales prices are a matter of public record, and buyers are questioning why a house is worth more than it was 6, 9 or even 12 months ago, given the downward trend in the market. Its a good question, and one that appraisers ask as well. Appraisers are required to report on recent sales of the property being appraised as pt of he appraisal process

These "recently bought, now back on the market" properties are difficult to make a deal on, because sellers still harbor the idea that they'll never take a loss, but buyers are understandably hesitant to pay more for a house than it sold for six months ago. Its just another clog in making deals and getting the market moving.

Comments

[JM]

The realistic sales will be by those who have owned property for more than 6-10 years.
They will be helping the downward price pressure. Those who purchased from 2002-2006 won't be able nor willing to sell until the next peak in 12 years.

By the way, if you speak of 'normal' real estate times, I assume you are speaking of the time between peak cycles (1973-1978, 1982-1986, 1989-1999). Price appreciation is actually below inflation if you look at data from 1900 to today during those 'normal' times. Home prices appreciate above inflation only during the boom cycles every 10-12 years.

I think many SC RE are not used to this between peak normal period of price deflation.
So many are young, new agents who work part-time and moved up here or in orange co. during the boom.

[CP]

"Those who purchased from 2002-2006 won't be able nor willing to sell until the next peak in 12 years"

That may be a bit of a stretch, even with a sluggish real estate market.

[JM]

CP,
There is no sane way anyone who purchased property from 02-06 in SC or in NYC metro will be able to sell within the next 10 years at the same price or higher of what they paid for. Forget taxes, RE fees, atty fees, improvements and other misc fees. I am talking about the selling price. Do you actually believe property is still appreciating? The 1986-1989 housing boom was so small compared to the 2000-2006 housing boom. And the housing fallout lasted from 1990-1999. What makes this time any different? It's actually worse this time.

If one assumes bottom is going to be 08, 09 or before 2011, one is not a realist, as I consider myself. (Some think I am pessimistic lol). If you assume Home/Land prices will relatively fall (or at least stay the same) adjusted for inflation (meaning salaries will rise, rents will rise, etc to catch up) as opposed to actually fall, then the USA is starring at HYPERINFLATION in the face. Imagine gas, food and your salary double and tripple within the next few years!

You want to know where real estate will be? Well then you need to be in between the economists... reading their blogs.....This one is the best... Head of the NYU Stern School for Business.

http://www.rgemonitor.com/blog/roubini/234460

[CP]

JM - If you start seeing 2002-2004 selling prices, please let me know. In 2002/2003, land could still be had for under $3k an acre, and a $335k asking price for a very nice house on 4 acres was aggressive.

The last housing boom actually started in 1993, and continued until early 2006. True enough, if you use an example where someone bought at the peak in '89, it took a decade to recoup, but most people did not purchase at the peak.

And conceivably, even if ALL houses purchased in late 2004-2007 were overpriced (which they weren't), most people did not buy homes during that period. I wonder what the statistic is for families that have owned their homes for more than 5 years, versus those who have owned less than 5 years? And most homeowners did not hyper-overextend through home-equities, etc...

If your home tripled in value, now declined by 10%, did you really lose money, or are you still up quite a bit?

[JM]

Sullivan county cannot sell property at 2-3K per acre
I have multiple properties that cannot sell at that asking price!

[CP]

Please forward SBL's and addresses. If they are good pieces I'll buy them. Immediately. I have a feeling they probably are lacking in a critical attribute.

[Steve]

"There is no sane way anyone who purchased property from 02-06 in SC or in NYC metro will be able to sell within the next 10 years at the same price or higher of what they paid for."

I can say that property in my neighborhood in Manhattan is still appreciating and things are not staying on the market long. I have friends in Jersey that have bought and sold property at a profit. While I no doubt agree that selling prices in Sullivan County will not be as high as they were two years ago, and where a few handful will be forced to sell at a loss because they can't sit on it, I see no logic that people will be losing money on real estate in New York for the next 10 years. That would defy the entire economic history of real estate in the United States.