Asking Prices Out of Line? How Far?

I'm going to start a new thread here, picking up on the extensive comments from the thread below (Sullivan Remix - About Changes in the Buyer Mix for Sullivan County real estate). A number of commenters are rightly questioning the mindset behind many seller's asking prices and whether they're out of line with market realities. The real estate market has been slow since the beginning of the year, and I've said for months that most sellers seem to be inhabiting an alternate universe — where time stands still, everyone is happy, and prices never drop.

Let's take a quick look at the "market basket" of the average and median asking prices for single family homes listed in the Sullivan MLS. Asking prices peaked in June 2007, with the average at $310,328 and the median at $249,000. Today, the average asking price is $283,857, a decline from the peak of just 8.5%, and the median is $219,000, a drop of 12%. More striking is the fact that from January 2008 until now, the average (which stood at $292,363 in January) has only dropped 2.5% in the last 10 months, and the median ($229,900 in January) has only fallen 4.7%.

Hello???? Any of these sellers look at the stock market? Equities are off 35% to 40% from their peaks. Might there be some relationship between how people value equities and how they might value real estate, which is essentially another asset class? Of course, equity markets can make huge moves in a day, while real estate markets are much slower to turn. While there isn't a direct correlation between movement in stocks and price movement in real estate, given the abrupt resetting of value in everything from stocks to oil to the Euro, it is not unreasonable to expect that there will be a parallel resetting of value expectations in real estate.

One of the big problems right now in real estate in Sullivan County is I don't think anyone has much of a clue on where that value will reset. Take a house that's on the market for $600,000 that might have sold during a robust market for $550,000 or $575,000. Is the 'reset price' $500,000? Or $400,000? I don't think its $300,000 (and you really negative bears out there will probably say 'hey, in a year it'll only be $200,000), but then I didn't think we'd see the DOW dip below 8,000 or oil trading at $64 a barrel.

ADDENDUM to the orginal post: The CNBC talking heads are saying that stock indices are at about 2003 levels. In 2003, the average sales price for a single family home in Sullivan County was $138,000, about 75% of today's $185,000. The real estate market was on an upswing that year, and the average was inn the upper $140's at the end of the year. The housing stock has arguably improved here since 2003, with renovations and larger new builds. So, if you want to argue that the drop in real estate prices might parallel the drop in stock prices (and you believe we may have hit or be close to the bottom on stocks), then real estate here may have 20% to go (from this point) to catch up with the DOW.

Comments

[JM]

September Sales:

Current Asking Price: $283,707
Current Selling Price: $185,342

Ask to Sell Spread = 35%

This tells you that Sullivan County is in a Serious Correction.
This is what Miami, San Diego, etc. went through in 2005-2007 period.

The Bid to Ask spread must obviously be much higher than 35% since homes are selling 35% below asking prices.

Anyone want to jump in and buy in a hail storm?

[JM]

Non Lake-Fronts on 10 acres or more:

Current Asking Price $575,518
Current Selling Price $278,362

Ask to Sell Spread: 52%

These are selling less than half the asking price (48% of asking price)
This confirms that people must be bidding much less than 1/2 the asking price in this category.

More evidence a serious correction is underway.

[henry]

Few assumptions:
* Time horizon of at least one year to sell... and financial markets stabilize and economy does not get worse. (I don't think that much sells now at any price)
* Nice lakefront property with some privacy. (Not much demand for farms and a huge amount of supply.)
* Peak price was realistic/market. There is/was an amazing variation in listing prices for similar places. Much of what is still on the market from that the 2006 era was priced at an insane level then.

Given this "best" case, I think that a seller could get $400K (CAVEAT: there is significant downside risk if economy deteriorates or if supply/demand balance is worse than I think, which is possible given wall street influence in this price range). Implies 25-30% reduction from peak "paper" profit but well above 2000 levels. Would expect more typical properties (with less demand) to be down much more. Also, I expect prices to then remain flat at this level for years, allowing affordability ratios to move toward historical norms (as income rises) and given that people have had a wakeup call and should now pay attention to the economic cost (and not just monthly payment) of things.

At 400K, you are looking at annual capital cost of ~24k (assumes tax benefit from debt and now, a more expensive and larger equity component). Add in home ownership costs and divide by six months of usage. 4-5K per month usage. Could be $1000+ per weekend. Not exactly cheap given alternatives.

[Mister Nick]

Ask to sell spread isn't really the most meaningful statistic though. Especially at the upper end. You have to compare the spread between what the asking price was for a property and its eventual selling price. Or what the asking price for a current listing is compared to comparable recent closed sales.

You see stats like those:

> Current Asking Price $575,518
> Current Selling Price $278,362
>
> Ask to Sell Spread: 52%

Ok, with you so far, question is what does that number mean. You say:

> These are selling less than half the asking price (48% of asking price)
> This confirms that people must be bidding much less than 1/2 the asking price in this category.

Whoa, that's one hell of a leap, this confirms nothing of the sort. It's equally plausible (perhaps far more plausible) that in that category (non lakefront on acreage) the high end stuff just isn't selling, at all. The lower end properties that are actually in fact selling could each have sold at 20% above their asking price and those numbers above could still be the same. Of course that's not likely either. It just proves that numbers like that in the aggregate prove little to nothing. If I had to guess I'd say there's a wide range of stuff on the market, and the expensive overpriced stuff just sits there, driving up the average asking price figure. The average sale is the average of the subset of properties that don't include things that are absurdly priced.

You have access to real data? It's not rocket science, though you'd have to do some work to figure it out. But the proper methodology would be to summarize and average the last known asking price of every property that actually sold, and compare to the average of the actual sales price for those same exact properties. Then you'd know what the average discount off asking price is for people who are actually making purchases. But the above numbers don't do that at all.

I was looking at the MLS out of curiosity the other day in just this category (which happens to be my category) and saw a lot of places in the 600k-900k range that just seemed ludicrously out of range in terms of price. When you get into that level of spend you don't want compromises. By definition you're not on a lake, so that's compromise one. There can't be any others. There are listings out there with super dated kitchens, not that much space, right on roads, etc. Sure they have acreage but I couldn't believe people really thought they could get high 600's for some of these properties.

But that doesn't mean any given house is only worth half its asking price. What I personally think it means -- just an opinion -- is that there are a glut of 600k+ listings that are totally divorced from reality and will never sell for anywhere near that to anyone anytime soon. That's what I'd postulate is driving all the averages into wierd territory. It doesn't mean all houses in that class are worth 52% of ask for similar places. It means there's a subset, skewed towards the high end in my observation, isn't priced seriously at all, and will sit there forever. If I had access to the data and a bunch of free time to kill I'd be curious to run cross-tabs and do things like exclude all properties that have been listed for 12 months or more without a change in asking price, or attempt to come up with a coefficient that relates acreage and square footage to sales price, and compare that to asks, which is how NYC apartments are often done (though price per square foot in NYC works better as intangibles are proportionally less important than they are in Sullivan). Or something like that to analyze the data more creatively -- step one being to try to cut the listings down to the people actively engaged in trying to sell real estate and omit those listings that have no relation to reality and have been sitting in the system unchanged since 2007.

[Mal]

The recent survey of 2nd-home owners in Sullivan county sheds light on why some sellers seem unwilling to accept that their home value has declined. As a group, these owners have high incomes and generally purchased with a substantial downpayment, so they are considered to be at relatively low risk for foreclosure. In addition, the median period of ownership is 16 years. This is a group of owners with the means and inclination to hold onto their homes for a very long time.

[henry]

There is still a massive difference in the MEDIAN listing and sale price. By definition, this excludes much of the effect of outliers. That said, you still can have mix issues, and Mister Nick's method would be preferable... if it was practical. (I certainly don't have the time.)

Mister Nick, what is your view on the pricing disconnect? Take an example in your area (non-lake)that would have sold at 550K-575K at the peak (or choose a slightly higher price to fit in your range). Give acres, features, etc. Where do you think it would sell today (if at all)? Why?

[Friday910]

I'm a NYC resident and have been looking for the last couple of years for a 2nd/weekend home in SC.

At this point in time the the only numbers that count are the asking price 2 months ago, current asking price, and percentage drop of the market for the same duration.

Regarding (only) the 2nd home market:

The only three types of entities selling in this economy are the dreamers, the desperate ones, and the very desperate ones.

The dreamers are the ones who can still justify a current asking price that is is within 10% of the late august asking price.

The desperate ones are the ones who would be happy if they break even.

And the very desperate ones are the banks who foreclose on the desperate ones who hold on wanting to make a profit.

The very desperate properties are appearing on MLS.

Mister Nick,
Regarding a comment you made in a previous thread something like "fundamentals in SC are strong"!!!

Are those fundamentals along the lines of Darwin, Marx or Bozo the Clown, because if the current economic situation are based on some strong fundamentals (even Bozo's) I wouldn't want to be around when the fundamentals are wrong.

friday910

[Mal]

Henry, I have championed the median on this site in previous postings, but in this case it doesn't really diminish Mister Nick's point. Even with medians, the essential problem remains: the listing and sale prices are not matched samples. The median listing price reflects ALL properties, whereas the median sale price reflects only the restricted set that is selling. Earlier this year David tantalized us with matched sample data of the kind we need: first asking price minus final sale price for the same property. Those values were much smaller than the spread implied by means or medians of unmatched samples.

[henry]

Mal,

I understand the issues with data, and was trying to agree that Mr. Nick's solution would be better if it was practical.

David's sample of matched data would be very interesting... even if it is not real-time and of limited sample size. In addition, this set would contain selection bias in the other direction as, in general, only realistically-priced (or even under-priced) homes sell. Such data would not indicate how much the typical asking price is away from the bid price. In my example above, such a home might have just come on the market at $475K (not $600 or even 800 for those extrapolating out the price trend through 2006) and sell at 400K.

In any event, I think that Dave's question above has merit... as it seems clear that, in general, the bid price is far below ask (in a way that I think that most sellers would find shocking)... causing stagnation in the second home market. This can't continue indefinitely... as people do need to sell and eventually there will be hard data showing the new price equilibrium (whether up or down).

[JM]

Mr Nick,

If we want precise spreads, we can get much more accurate by using data and methods that are universal in statistical analysis. I am in healthcare and have spent a greater part of my undergradute and graduate years conducting studies utilizing various designs: cohort, factorial, simple correlations and even regression equations. No-one has time to do that and I am sure even if it was done, who cares? We know where this mess is heading. This is an economic catastrophy and simply put, bids and asking prices are way too far from eachother. It is just too obvious that a study isn't neccessary.

JM

[David Knudsen]

I think most of the comments correcting JM's logic are, well, correct. The "market basket" of asking prices to actual sale prices (average and median) is NOT an indication that individual properties are selling at 50% of asking prices. But it does indicate 2 possibilties — that only lower priced properties within a category are actually selling, and that many properties may be overpriced relative to what the market will support.

I do periodically run an apples-to-apples statistic, which looks at the "bid/ask" ratio for each individual property, or the percentage of the sale price to the asking price, and then take an average of all of those individual bid/asks. I typically put that in the Current Market Conditions report, but didn't run it last month. Overall, though, for the past few months its been running right around 90%.

[Bix]

Keep in mind also that there is a kind of snowball effect. I haven't tried, but I'd bet that it is nearly impossible to get a mortgage for a high-priced property, largely because the high-priced properties aren't selling and you can't get comparables. I had a hell of a time with comparables when I bought my house, which was priced at just around the median. The appraisal was rejected, but fortunately there had been a few sales since the appraisal was written.

[henry]

Another headwind affecting the upper end... The large change in asset prices changes the opportunity set. Some anecdotal evidence.... several of my friends were also looking at places in the catskills over the past several years. All "30 somethings" from NYC. All still have their jobs... but none of us are really focused on the catskills anymore. We believe that better opportunities are coming elsewhere. One is looking in areas closer to NYC with better schools or on the coast (as he "can now get a more year-round place" at a reasonable price). My other friend and I are now more focused on NYC given the 25% increase in NYC inventory since august (see real-time charts on urbandigs.com) and layoffs coming. The strategy of buying a summer place before buying a larger apartment is less appealing given where we see NYC prices going. Further, I am not in a rush to cash out my financial investments at these levels.

[David Knudsen]

Henry, you raise a very important point about the relationship between NYC residential real estate prices and demand here in Sullivan. One factor that drove the "30 something" Sullivan boom over the last 5 years was that younger buyers couldn't afford to buy in the city, and decided to continue renting and then buy a place upstate (or wherever). I think that Manhattan itself will continue to be "unaffordable" for larger, family sized apartments, but the opportunity for these 30-somethings will be in the non-Manhattan "close in" areas (Brooklyn, Queens, Jersey City, Hoboken and even the Bronx) where prices will likely drop more than in Manhattan. That will certainly pull out some portion of demand, but there will still be 2 segments that will still want upstate places — folks that really do want something rural and country as a counterpoint to the city or 'burbs, and folks who just couldn't think of giving up Manhattan and even if prices drop 20% there, still can't afford to buy.

[Reg]

Yet again, Mister Nick has it right.

The ONLY way to look at the bid/ask ratio is to look at it for the SAME properties. You can't just take mean or median values for a market and mix the two--you'll wind up with two samples that do not represent the same population. Bad statistics, bad math, bad logic, and bad information.

Right now, it is foolish to assume we can guess where the market will end up or what current values are. Especially with stocks fluctuating as they are, people have no consistent perspective on their net worth, so they cannot possibly put accurate valuations on homes until things settle down considerably. This is a time for looking at real data, not making wild predictions or guesses.

[mlk]

Its a business cycle-

Existing homes sales record biggest increase since 2003.

Gas companies stock has plummeted with cost of gas decrease, and land leases under negotiation in the area have altogether stopped forward progress.

30-40% off asking in some cases is by no means out of the question, depending on the house. Most upper $300k houses belong in the high $200k's.

Some potential buyers are searching for one reason, the same reason that drove the market right after 9/11 - they want 'a place to go if everything goes to pieces'. It goes back to one of posts not too long ago, where the purchase of a 'sanctuary' or 'respite' from city hustle is more important than monetary return on investment.

[andy]

There is reason to question whether the problem is just a "business cycle" for Sullivan County. Prior to the 2000-2007 Sullivan County boom, there were four decades of decrepitude in Sullivan, while business cycles came and went and the Hudson Valley demonstrated consistent demand for the second home market. It's fair to ask whether the Sullivan County boom was a once in a lifetime event that is now played out. The questions of whether and when to buy are accompanied by the question where. In terms of a track record of holding value, there are safer places than Sullivan.

[David Knudsen]

Andy, it was about a 30 year decline, but not for the county as a whole, but for the Catskills resort hotels and the associated boarding houses and bungalow colonies that surrounded them. In the 80's and 90's there were a number of new developments — Black Lake, Timber Lake, York Lake, Elko Lake, North Branch Commons, Top of the World. There was quite a real estate boom here in the early 80's and then a crash I believe in the late 80's, but there hasn't been a 30 year straight line decline. It would also be mistaken to think of the Hudson Valley as an uninterrupted beacon of desireability. Yes, the Hudson Valley has Woodstock and Rhinebeck, but it also has Newburgh and Kingston. In the downturn, Sullivan may well lose its "last new place" edge among urban hipsters, but that isn't the only constituency we have. Capelli's redevelopment of the Concord will likely bring in a whole new market as wlll as revitalize the older Florida split-time market around Emerald Green. For the rest of the county, the key to competing with the Hudson Valley will be offering more land and more privacy, easier access to outdoor recreation and less congestion at prices 30% less than the Hudson Valley.

[David Knudsen]

One other thing ... the Hudson Valley by and large doesn't have lakes.

[andy]

Fair points, Dave, and the fact remains that Sullivan retains a greater degree of "raw" country feel than the Hudson Valley, and that feature has its own unique appeal. Nevertheless, after all this time, when you tell people in Manhattan that you have a house in, say, Callicoon Center, they scratch their heads, while you don't get the same reaction to Columbia or Dutchess Counties. This is not a point about prestige but strictly about resale value.

[Sailor Sam]

One other thing ... the Hudson Valley by and large doesn't have lakes.

Posted by: David Knudsen | October 26, 2008 at 08:34 AM
=======

Ri on Dave!

En et don have eeny strems en rivahs!

Sullivan haz muchca mor water thanna th udder cowtees.

Memer to VOTe...en vote offen!
Sailor Sam

[Coocoozza]

Where have all the buyers gone? We don't get many calls nowadays.
Hopefully, Obama will change things around.

[Mary Ellen]

Anyone who wants a house in Sullivan County is waiting to see where the bottom will be. When they are satisfied that prices are as low as they are going to go, there will be buyers again. The past few years have provided plenty of PR for Sullivan, and the lowered home prices that will occur in a few months will provide the spark that will get people interested again. Especially those who expected super-bargains in the past and were disappointed.

Whomever the new President is, the change might give the population a sense of hope for a new beginning. That is, if we aren't taxed to death before anyone can buy a second home.

[HOwie]

Just in...

A new beginning? Not with McCain.

...HOwie

At:

http://www.marketwatch.com/news/story/analyst-sees-bigger-home-price-drop/story.aspx?guid=%7B5857274F%2D7B3E%2D4D60%2DB528%2D78AD69499BEE%7D&dist=hplatest

Analyst sees bigger home-price drop on foreclosures

By John Spence
Last update: 8:36 a.m. EDT Oct. 27, 2008
BOSTON (MarketWatch) -- Fox-Pitt Kelton housing analyst Robert Stevenson on Monday increased his forecast for home-price declines, saying foreclosures are driving down pricing faster than he had expected. "Our original expectation that home prices had another 15% to fall appears far too conservative," Stevenson wrote in a report to clients. His base-case assumption is now an additional decline in range of 20% to 25%. "In a bear-case scenario where unemployment exceeds 9%, we believe prices could instead drop 30% to 35%," he added. Home prices are already off about 20% nationally from the peak, so the bearish forecast represents a 44% to 48% peak-to-trough drop, Stevenson said.

[Jackie]

Regardless of previous PR or county fundamentals, the new economy will flush out most buyers who have been on the sidelines. At this point, even if home prices fall 40% (deflating very slowly) as some economists suggest will happen over the next several years, it will take much more than pretty magazine articles to get people to come back up here. Once unemployment reaches 10+%, the mood will be very negative all around.

[bix]

Andy -- I think the obscurity of much of Sullivan County is a selling point for some buyers. Driving through the backroads to 17 yesterday, through scenery that would rival Scotland, I was reminded of why I bought my house here in the first place. It has a peace and tranquility you just can't find closer to the city.

[David Knudsen]

Foreclosures certainly have a negative impact on prices, and in high foreclosure areas, foreclosure sales effectively set the price floor. But its important to remember that foreclosures are not evenly spaced across all markets throughout the country. Some markets have very high foreclosure rates, others much lower foreclosure rates. And even within markets, some types of properties may be more prone to foreclosure than others.

[Steve]

Another thing western SC could use more of is protected land for hiking. The only public hiking I've found in western SC is the 10 Mile River Trail and another trail up near Lordville. Perhaps with the economic downturn and retreat of gas leasing, there's an opportunity for land to be preserved and put into public use. Just a thought.

[Dumb $ chasing Smart $]

Dumb $ chasing Smart $

Once upon a time in a village, a man appeared and announced to the
villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to
the forest, and started catching them. The man bought thousands at $10

and as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy at $20. This renewed the
efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back
to their farms. The offer increased to $25 each and the supply of
monkeys became so little that it was an effort to even see a monkey,
let alone catch it!

The man now announced that he would buy monkeys at $50! However, since

he had to go to the city on some business, his assistant would now buy

on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at
all these monkeys in the big cage that the man has collected. I will
sell them to you at $35 and when the man returns from the city, you can

sell them to him for $50 each."

The villagers rounded up with all their savings and bought all the
monkeys. Then they never saw the man nor his assistant again, only
monkeys everywhere!

Dumb $ chasing Smart $

[Mary Ellen]

As long as we have the crystal ball out of the cupboard, maybe with the slower economy people will be looking for a cheaper way to vacation, i.e. buy a little place in the Catskills now that prices are so low. A market crash is a great opportunity if you've been saving your money all along.

Also, people's personal lives don't always follow the headlines. Couples who've been thinking of buying a vacation home will do so regardless of what they hear on MSNBC.

This site always expects the general population to go in one direction, the direction that the pundits dictate on TV, at NYU, at the corner bar. But haven't we all been in the opposite position as what we read and hear? Haven't we all had our own personal 'most prosperous time' when the newspapers were yelling gloom and doom? It's been so for me personally as a single woman, and also for my husband and family now that I'm doing the suburban mom thing.

The country isn't one solid wave of financial turmoil; every family has a different financial situation. If a buyer had any sense at all, you'd buy when prices were lowest.

As for the election, certainly taxes will escalate with Obama, but McCain may just bore us to death. But it might be fun to watch the cobwebs grow around his ears, play connect-the-dots with his age spots.