Marshall's versus Macy's

Over the past couple of months, I've talked with (and shown property to) a number of potential buyers who have "great deal" as their primary factor. They're not necessarily looking for the cheapest house, but rather that house where you can make a really great deal.

You've heard me write (complain?) on this blog about the vast majority of sellers that are unrealistic and unmotivated, and that asking prices have hardly moved down at all. While that may be the "vast majority", there is a smaller subset of properties where the sellers are motivated and a great deal can be struck. But that subset of houses is quite small relative to the overall inventory, so the selection within the "distressed or very motivated" category is quite small as well.

A lot of buyers, though, don't make the distinction between regular market rate inventory — where you probably won't strike a great deal — and that subset of properties being sold by motivated or distressed sellers. They want the full selection, but at distressed "end of season" prices.

A good analogy is Marshall's versus Macy's. When you go to Macy's (or Barney's or Lord and Taylor or any other 'full price retailer') you expect to have a full selection of brands, with every color available in every size. If you're paying retail or close to retail, you expect that they'll have the dress from the designer you want in size 8 in purple, and they'll even alter it to fit perfectly. If you're paying the full $600 retail for the dress, you don't want to settle for yellow or a size 6 that you can squeeze into but isn't comfortable.

When you go to Marshall's or any other overstock discounter, your expectations are very different. You don't expect that every style will be in stock in every size and color. When you find a great bargain you figure out if you can make it work for you. Your mindset is more "It wasn't exactly what I was looking for. In fact, it isn't even close to what I came in to find, but its such a great deal that I can't turn it down."

That's the attitude that buyers should have if they're looking for a deal — like they're shyopping at Marshall's rather than Macy's. There aren't a lot of houses here in a distress seller situation, but there are some, and there are some good deals to be made. They may not be exactly what you dreamed about, but for the right price, can you make them work? I realize there's a big difference between a hundred dollar jacket and a two hundred thousand dollar house. But the Marshall's versus Macy's comparison is apt. At Macy's, you may have a wide selection of similar jackets for $300, but the jacket at Marshall's at $100 that isn't quite what you had your heart set on is too good a deal to pass up. Likewise, the house of your dreams may be $350,000 to $400,000 — charming, set off the road, good condition with privacy — and isn't necessarily a deal.  But there may be a deal house you could pick up for $200,000 that isn't near as perfect and save a chunk of money.

PS: Someone is sure to ask if I can post a list of the houses I consider "potential deal" opportunities. I'm not going to post a list, because some sellers would probably be aghast that I considered their house to be in that category. Also, a house may present a better deal opportunity for any number of reasons, not only because a seller is in financial distress. The owners may have moved out of the area and no longer use the house; a small group of investors got together to do a flip renovation and want to move the property off their books; or the house is owned by an estate that would prefer to close out its affairs sooner rather than later. In fact, very few of the better opportunities I see are actual foreclosures or subject to short sales.

Comments

[Chris]

It's all about the DEFLATION SPIRAL.
Property owners don't know what's in store for them.
Sell now, before it's too late!!

[bix]

"Some sellers would be aghast..." Yes, but if you say that these properties are "fairly priced," they may not object so much. After all, most properties in Sullivan County are NOT fairly priced, as evidenced by the fact that nobody will buy them!

[DN]

You made a smart analogy. The sellers who must sell will have to cut their prices. The other sellers can either follow suit or pull their properties off the market.

[Jeff Milton]

Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."

David GothardWhen markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes.

Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.

But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.
These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

I was on the White House staff as George Shultz's economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.

I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.
There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

[huh?]

Talk about long falls, Jeff -- from White House staff to rambling off-topic on the Sullivan County real estate blog.

[Consumer]

Breaking News:

Consumer confidence tumbles to 38 in October, its lowest point ever, from 61.4 in September. Consumers' expectations for the next six months are even bleaker, according to the Conference Board report.

[Cucuzza]

Very intersting NYT article about Sullivan co. from 1981
This was written just coming out of the depressing 70's lost decade.

http://query.nytimes.com/gst/fullpage.html?sec=travel&res=9A04E0D9163BF936A15754C0A967948260

[harry hazelburger]

Peter Schiff, president of broker-dealer Euro Pacific Capital, believes the impact will be decidedly negative.

"The goal of all these plans is to give consumers more money to spend. However, excess consumer spending is part of the problem, not part of the solution" he said. "After a decade-long spending orgy, market forces are finally trying to restrict consumer spending and dampen credit. But the stimulus looks to provide a new source of funds after savings, income, and credit have been exhausted. Our imbalanced economy is in desperate need of retrenchment, but stimulus plans will effectively hold the firemen at bay while throwing gasoline on the flames."

Schiff explained that the housing boom's exotic mortgages, which let people buy homes with zero money down, have vanished. Now people must save to afford a home. But easy credit means people will buy more consumer goods and save less to put towards housing. As a result, he expects home prices to fall a lot more.

"They'll surrender all the gains they made in the past 10 years," he said, "and be even lower than they were 10 years ago."

[Bernanke]

http://www.247wallst.com/2008/10/faced-with-spec.html

Faced With Spectre Of 1974, Fed May Make Radical Cut

Some economists would make the argument that the recession the world economy is entering now will be worse that the one in 1974. The recent record low in consumer confidence, huge job cuts throughout the economy, falling earnings forecasts, and a banking crisis which has no real precedent could haul GDP growth down for two years or longer.

But, 1974 was bad enough. Experts might settle for the same sort of downturn, but its brutality is hard to forget. GDP dropped six quarters in a row. Unemployment reached close to 9% and in some of the industrial sections of the US that figure was well in excess of 10%.

What Fed Chairman Ben Bernanke is facing is the awful world he already knows along with a world which he probably can predict will be much worse. Jobs are being lost so fast unemployment could rise from 6.1% in September to 8% at the end of this year or early in 2009. With housing prices still falling at 15% to 20% compared with 2007, there is no buffer at all for the consumer, especially if the he loses his job. His lack of access to credit is both historic and remarkable.

The nation's businesses also have no access to cash. Coupled with falling sales from an economic slowdown, bankruptcies are likely to rocket up, not just at big firms like GM (GM), but at tens of thousands of smaller business. Companies with under 100 employees still represent most of the jobs in the US economy. These operations have even less access to capital than larger corporations which may be able to pledge huge asset bases or turn to the public credit markets.

As Bernanke looks into the early part of next year, it should not be hard for him to imagine a jobless rate which moves over 10% and quarterly GDP drops of 3% or 4%. He has one last chance to slow the economy's momentum in that direction.

Bernanke is out of time.

[Margaret]

Excellent article in NYT Business
Some great comments too

http://norris.blogs.nytimes.com/2008/10/30/consumers-drag-economy-down/?hp

[Betty Byrnes]

You really hit the mark with the "Marshall's vs. Macy's" analogy! It really helps people really "get it"!

I am in a much different market than yours - price-wise. In the "good days", our median sale price was around $120,000. Now with the number of foreclosures on the market, the median sales price is around $75,000 with 40% of the solds being foreclosure homes.

Everyone wants a bargain! And compared to 4 years ago, 99% of all homes offered for sale today are bargains. Unfortunately, so many buyers want a $40K "bargain" that is move-in ready, with all the bells and whistles of a $100K home.

If you don't mind, I am going to add your analogy to my little arsenal. Other comparisons that come to mind for my locale are Big Lots or Goodwill vs Von Maur, depending on the situation.

Thank you for the excellent post and the wonderful analogy!