Resetting, Not Recession?

Yesterday, Microsoft CEO Steve Ballmer made a notable statement when announcing the software giant's first mass layoffs in history. He said that the economy isn't really in a recession — there's a resetting in the economy to a "lower level of business and consumer spending" based largely on reduced leverage in the economy. Now, Ballmer's statements have p.r. flack spin written all over them. And whatever "R" word you use — resetting or recession — the economy is still in a world of hurt. But Ballmer's statement really stuck with me and got me thinking about how it applies to real estate here.

Eight years ago, when I started selling real estate here, Sullivan County seemed like a veritable bargain bin of real estate. I paid cash for the 18 acres of view property I bought in the Beechwoods to build my house for $30,000. Folks looking for a charming little farmhouse on a few acres to update could easily find something for $150,000. A nicer or larger farmhouse, or with more acres, could regularly be had in the mid $200's. In 2002, my highest sale was a house on the Delaware River just north of Callicoon for $312,000 (that resold in 2007 for $525,000.) In 2002/2003, a Smallwood year rounder would typically change hands around $100,000, and a modest 3 bedroom lakefront house was around $250,000 to $300,000.

I could go on and on with other examples. But the common element is that 5 or 6 years ago, it just didn't seem that expensive or extravagant for middle class New Yorkers to buy a country getaway here. Purchases also weren't fueled by the "wealth effect." Middle class folks looked at their income, their assets and the expenses associated with carrying a second home and made a decision about what they could afford. Buyers, for the most part, weren't tapping the equity in their appreciated NYC apartments, churning bonuses into real estate, or highly leveraging themselves with interest-only mortgages in hopes of future returns.

That started to change in 2004 and accelerated in 2005. Real estate was the hot asset category. Everyone wanted in. There seemed to be rivers of cash, either from Wall Streeters with bonuses, or homeowners tapping their appreciated equity. That cash enabled some buyers to pay above appraised value for the best properties. 2005 through 2007 was a buying frenzy with sharply rising prices, a combination of wealth effect and leverage. I remember commenting a number of times that buying a country place now involved "real money". When you rephrase $500,000 as a half a million, or $250,000 as a quarter of a million, it seems even more "real."

And here's where I come back to Steve Ballmer's comment about resetting. Real estate prices here are clearly resetting. The issue right now for everyone — buyers, sellers, brokers and lenders — is that it's difficult to know where prices are resetting to, particularly in market segments with few or no sales. It may be a while before sales volume picks up and those price points begin to redfine themselves.

In the meantime, it may be helpful to look at perceptions and attitudes related to prices. What's the price where buyers again have the perception that Sullivan County is a good value, a place where they can comfortably afford a getaway without a lot of stretching or financial maneuvering. The price where the annual costs are palatable, without relying on dangerous leverage or betting on future appreciation to make the numbers add up.

In terms of kick starting the market, most sellers and brokers are looking at pricing from the wrong end — working down in mostly baby steps from the pre-recession, high leverage, high "wealth perception" era that has disappeared. But we need to look at pricing from the other end, from the buyer's perspective about what they see as affordable. It's easy to write off buyers with low price expectations as unrealistic, and they may well be, at this moment in time. If someone calls and asks about finding a 3 bedroom lakefront house under $300,000, or a farmhouse on 5 acres under $175,000, I probably can't make it happen at this point in time in the market. But those buyers are providing valuable information that we need to pay attention to. They're telling us that a $300,000 lake house or a $175,000 farmhouse fits their vision of what's affordable and achieveable.

Comments

[Hank]

David bought 18 acres for 30K in Beechwoods less than 10 years ago.

Isn't double (60k) enough today for such a property?
My property in Westchester has barely doubled since 1991 recession.

There is alot more pain coming. Resetting, Recession, whatever.
It's a depression in my book.

[Reg]

I think the concepts of resetting and recession aren't incompatible.

I would bet that the recession is a path to a hard reset.

[B.]

Hello all,
It's Friday and here are the four week closing figures.

I wish I could sugarcoat this - but to quote our host - "it sure ain't pretty".

B.

P.S.
And to respond to Rod -

============
"I see people buying assets cheap. Or I guess you could wait until everyone else is buying."

Posted by: rod | January 23, 2009 at 12:14 AM
===========

Most people - en masse - never buy cheap or at the bottom. They are too fearful that prices will continue to drop. Some brave individuals that have capital and time might venture in to the marketplace - but not the general public - most buy when the price is too high and the value is already baked in.

Onwards...

=========================================================

12/26/2008 through 1/23/2009

CLOSED sales - Within Sullivan County, NY

==========================================================

MEDIAN: $87,450
AVERAGE: $110,710

==========================================================

* 60% of closed sales were either in the
townships of Liberty, Thomson or Fallsburgh.

* The top price for the monthly time period
was $275,000.

*Of those houses that sold over 200k - 83%
(5) were either in Tusten, Highland or Cochecton.

============================================================

[cfranch]

I think Dave's point is that buyers will emerge at some price point. Wherever that is will depend upon NYC employment. The job loss in Manhattan is causing a white collar recession. It is hard to see how the stimulus package with all it's shovel ready projects is going to help white collar job loss. NYC lagged in the starting point and end point of the last housing bust. Same thing is happening now. Sullivan county real estate is tied directly to NYC's economy. Even with lower farmhouse prices it's hard to see how a pool of potential buyers emerges for even fire sale prices.

[o_lac]

As someone who is in the midst of building a new home near Barryville, I would hope that this “resetting” of pricing wouldn’t go lower than the raw cost of materials & labor for a new home. Although not intended as an investment, I would hope that new construction would not be similar to buying a new car (Where a new car drops in value as soon as you leave the lot….). Time will tell.

[andy]

How nice that Dave and others got nice properties cheap. Now I'm reflecting on this "resetting" that Dave suggests may be occurring. One thing it means, I think, is that an awful lot of people who bought second homes in the past three or four years -- many of whom, I assume, were clients of Dave -- have lost lots and lots and lots of money. Tough luck for them, Dave? Weren't they writing checks on the basis of advice that what they were buying was, to use a phrase repeated endlessly on this site, "good value?" If the market is, within less than nine years, "resetting" by 70-100%, wasn't that advice a bit off?

[Frank P]

"Even with lower farmhouse prices it's hard to see how a pool of potential buyers emerges for even fire sale prices."

Bullseye!

Things have to get really really bad (worse than 1991-1995) for a reset to occur. By 2012-2014, there will be so few buyers. That will be the time to buy.

[morgan]

O_lac writes "I would hope that this “resetting” of pricing wouldn’t go lower than the raw cost of materials & labor for a new home"

YES, there was a time when the option of buying land and building your own home on it was a much costlier alternative. Those days are returning.

[David Knudsen]

Andy, any 'advice' about value was based on a snapshot of supply, demand and prices at any given point. Nobody, apart from possibly Nouriel Roubini, predicted this financial and economic meltdown. And I would suffice it to say that most folks who bought real estate in Sullivan County have fared far, far better than investors who bought shares of Lehman, Citi or Goldman. (And at least folks get to enjoy their houses.) I think most of my clients have fared better than 'average' in this market, because I've tended to be very conservative in guidance to my clients. And keep in mind, that with any asset, you don't take a loss or realize a gain until you sell it.

I also didn't say that the market was resetting by 70 to 100%. I didn't say we were going back to 2001 prices unadjusted for inflation. The point I was hoping to make is that it's important to look at prices from the buyer's perspective as to what they perceive as affordable and a real estate purchase as a cost they're willing to incur as a part of their overall budget.

[David Knudsen]

o_lac, I think that most new construction right now probably will have a short term resale value less than the construction cost. I don't think that the cost of building — raw materials, labor and land — has dropped as fast as the prices of resale homes. But you have to factor something qualitative into the equation, that you're getting the exact home that you want, because you're having it built to your own personal specifications. There is quite a bit of offsetting value to that from a personal standpoint. If you're planning to enjoy the house for the next few years, rather than flip and sell, don't fret about it.

[henry]

Forget resetting... Is this a recession or a depression? The economic data keeps getting worse... still accelerating down.

Speaking of NYC... Right now, new listings (1188) and price cuts (1416) are ~4.7x and ~5.6 times contracts signed (252) in the last 30 days, respectively, according to the urbandigs website based on streeteasy data. The contracts signed figure (252) implies more than a three year supply of inventory (9426) if you annualize this sales rate (and it is supposed to be the busy bonus season period here!). Plus, Wall Street profitable, compensation and employee count are down dramatically. For those who lose their jobs, the prospects of getting another job in finance is bleak... which should create a pool of forced sales over the next year. Not surprisingly, prices are in free fall. Prices of new deals are down 20-25% in a matter of months... AND STILL FALLING. UGLY!!!

Prices of SC vacation homes may not be showing this type of decline yet... however, I can't see them escaping the economic downturn sweeping the region. This is really scary.

[henry]

Dave has been pretty clear over time that he is not an economist, and that he bases his "good value" advice on relative value (ie a snapshot of the current market). The quote below from Dave in Dec 2007 in response to one of my posts about the market going down stands out in my memory. Sound familiar?

**********************************

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.)

Posted by: David Knudsen | December 27, 2007 at 05:25 PM

[David Knudsen]

Henry, prices are showing declines here, too. I haven't been sugarcoasting that at all. For the past few months, I've been writing that prices are down about 25%, give or take 5% depending on property type, from their mid-2007 peaks. I do think, however, that we all need to be cautious in reading too much into the short term sales or deal data from the past couple of months, in either Sullivan County or Manhattan. There's been this 'deer in the headlights' crisis mentality since mid-September that's skewing the data. Real estate markets haven't had anything resembling normal buyer-seller behavior for 3 months. The only sellers, for the most part, are those that have to sell. And the only buyers are ones that have to buy, for relocation for example, or find a seller distress price too good to pass up. More discretionary buying, in my mind, dropped to a standstill for the last few months, and is just starting to show some new signs of life.

Lots of folks who post comments on this blog seem to view "real estate" as this abstract asset class to bat around, divorced from the people who live in, own and enjoy their houses. The fact is that some houses today are worth less than what the owners paid for them. And for many of us, so are our stock portfolios and 401(k)'s, and for those of us lucky enough own big honking Durango, our vehicles. And I bet someone who paid a huge premium for Prius last summer isn't too happy, either.

The fact is, though, that present situation only directly affects homeowners who have to sell, for whatever reason, or to a lesser extent, those who want to refinance. If you don't need to sell, a perceived drop in the value of your house is kind of academic as an immediate concern. It's similar to when my monthly investment statement comes. I open it, look at the number at the bottom and get all upset because the number keeps getting smaller, and it's about 30% below where it was a year ago. I kick myself for not converting everything to cash last summer, but that's water over the dam.

As upsetting as it is that my portfolio is down, it doesn't have a direct impact on my day to day life. I'm not retired, or looking to retire in the next year or two, and need those investments to live on right now. If I was retired, a big drop in investment income would be a big concern. I may have to work a couple more years than I planned. But from day to day, for the next couple of years, I'm fine. Just as long as I don't look at that monthly investment statement.

It's similar with your house, whether it's your primary home or your second home. None of us, frankly, can do much individually about the value of our houses. That's more in the hands of Barney Frank, Barack Obama and God. Until those 3 sort out this mess, those of us who don't have to make any major moves, or have a negative change in our circumstances, just need to sit back, tighten our seat belts and wait it out.

[B.]

[Dave Knudsen writes:]
"The fact is, though, that present situation only directly affects homeowners who have to sell, for whatever reason, or to a lesser extent, those who want to refinance. If you don't need to sell, a perceived drop in the value of your house is kind of academic as an immediate concern. It's similar to when my monthly investment statement comes. I open it, look at the number at the bottom and get all upset because the number keeps getting smaller, and it's about 30% below where it was a year ago. I kick myself for not converting everything to cash last summer, but that's water over the dam."
-------------------

Not really unless you bought stock on margin.

The difference.

Whereas with a house in Sullivan County that has now (on paper) depreciated about 25% to 35% a from peak in 2006, the owner still:

1) Has to pay monthly mortgage payments on it. That doesn't stop. Plus, if you are one of those unfortunates that wanted to refi in the past four years - your loan amount probably exceeds what your home in really worth in 2009. Not too good. Or if you had an adjustable mortgage and it has now since been reset.

2) Has to pay annual town and school taxes on your house. That doesn't stop too. No tax breaks for second homeowners too in NYS.

3) Gotta heat that home and insure it too. Another bill in the mail.

4) How do we even get to our country home from the city? Wheels! Auto payments, gas payments and those horrid monthly city parking lot fees. Another bill!!!!

See where I'm heading Dave?

Real estate is illiqid compared to stock - plus...there's much much more debt service with real property.

B.

[henry]

I never said that you were sugar-coating it. I posted the comment to show that you have been consistent in your advice (and its limits) and that, unlike many other agents, were not claiming that real estate would never go down. I give you credit for not being in the "buy now or forever be priced out of the market" real estate crowd.

The decline in asset values (including real estate) and resulting wealth destruction is real, and affects everyone... not just those who need to sell. Hiding your statement or your head in the sand may be a good coping mechanism but is not a good strategy for planning for the future or for making life/economic choices.

You can't dismiss behavior over the past four months. The destruction in wealth, jobs, credit and confidence is real and is not likely to recover quickly. I have posted that I guesstimated that SC had another 10% down, but the economic data keeps getting worse and the risks of further downside (and even an economic train wreck) keep growing. Further, I am not holding my breath for the return of the discretionary buyer in SC with any scale. Asking prices in SC have been much slower to adjust than in other areas. Until ask prices adjust to the new economic reality, sales in SC will remain stagnant.

With respect to NYC, the near-term data reflects the reality that Wall Street, one of the great pillars of its economic strength, just collapsed... at the worst possible time. The market has moved from a tight market to over-supplied market in an unbelievably short time. Unfortunately, the trends that drove this change are not going away any time soon. Ignore the near-term data at your peril.

[rod]

Recessions and resettings are as common as asset growth. Check your history books.

[B.]

=========================================================

12/26/2008 through 1/23/2009

CLOSED sales - Within Sullivan County, NY - Last four weeks:

============================================================

MEDIAN: $87,450
AVERAGE: $110,710

============================================================

Dave's three month figures from 10/1/2008 through 12/31/2008:

MEDIAN: $150,000
AVERAGE: $171,791

=============================================================

Look at those figures - both the three month data and the four week data are way off - by 40%!

Unfortunately, the trend is down and that is why four week data should be included as more timely to observers when reviewing three month running data of sold prices.

The argument that the lower priced sales were foreclosures is true.

However, they, too, now must be equated with the overall market stats. To cull them out would give our readers an unfair spin.

Sadly, this, too, is the state of the Sullivan County real estate market today.

B.

[cfranch]

"Recessions and resettings are as common as asset growth. Check your history books."

True but all are not created equal. All seem to agree this is worst financial crisis since the depression and may yet rival it. The meteoric price appreciation of housing just like the internet stock bubble is unwinding at a truly mind boggling rate. Is it me or does everything seem to happen in a more rapid time frame since the dawn of the internet age? The democratization of information via the internet is probably the cause. Ultimately this will prove to be a good thing particularly for those of us who want to buy in Manhattan where there is no MLS and real estate facts and figures are hard to come by(go URbandigs.com, streeteasy.com)!

This is no time to be buying real estate particularly as a discretionary asset. True there are wonderful benefits to owning a second home but not if it keeps you up at night.

[rod]

all do not agree 'this is the worst crisis since the depression'. In fact, the nytimes just had an article out the other day, specifically looking at similar claims, and found for the most part, the numbers are no worse than the recession of the early 80's - to date, of course.

but, like we all know, keep repeating something, it starts to be believed, then it's more likely to become a reality. and if you are trying to sell media, 'worst since the depression' is a ton more compelling than 'the worst since 1983'.

believe me, if this downturn rivals the depression, it won't be an abstract guess if 'we are there yet'. but for now, it's all nonsense hyperbole.

[henry]

B,

Interesting and ugly. Ton of questions... What percent of the sales were foreclosures? If half the sales were below 87K (ie median), it suggests that only the lower end is selling? Suggests much of the market is dormant? Due to lack of credit, bid/ask spread or combo? Also, it would be helpful if you posted the number of sales along with your pricing data. Maybe only a small number of sales?

One caveat: be careful about drawing conclusions about prices in SC given the small sample size and apparent mix shift. I suspect few (if any) vacation homes in that sample.

Thanks for the data.

[B.]

:B,

:Interesting and ugly. Ton of questions... What percent of the sales were foreclosures?

>> I would say 20% + / -

-------

:If half the sales were below 87K (ie median), it suggests that only the lower end is selling?

>> That is correct - especially in the townships of Liberty, Thompson and Fallsburgh.
The western end - like Tusten, Cochecton and Delwaware are seeing prices over 200k with very little volume. However, even in Callicoon and Long Eddy you are seeing homes selling for bargain basement prices from 32k to 89k.

-----

:Suggests much of the market is dormant?

>> Correct.

--------

:Due to lack of credit, bid/ask spread or combo?

>>All of the above and overall uncertainty of buyers to enter the fray - fearful that prices have more to fall.

-----

:Also, it would be helpful if you posted the number of sales along with your pricing data. Maybe only a small number of sales?

>>I believe it was 28 or so in the county of Sullivan - I do not have my chart in from of me. There were a few more closed sales in Ulster and Orange that were not used.

-------

:One caveat: be careful about drawing conclusions about prices in SC given the small sample size and apparent mix shift. I suspect few (if any) vacation homes in that sample.

Thanks for the data.

>> That was the four week data.
This week marks the end of January and you'll have the January 2009 closed sales by this coming Saturday - from 1/1/09 through 1/31/09.

The trend, unfortunately, is down - at least for this quarter.

B.

[cfranch]

rod one ny times article does not mitigate the facts that this is, at the very least, one of the worst recessions since the depression. this is not hyperbole just facts. we probably come from different perspectives here. i do not own any property and you most probably do. this will shade our perceptions of this crisis.

[rod]

cfranch - true that one NYtimes article does not make a fact (although there are hundreds of others saying the same thing), but neither do 5000 articles saying it does compare to the depression, if the facts don't support it.-

The whole reporting reminds me of the 'green' trend of building - every single magazine, newspaper, periodical, etc... covered it front page - but, if you ask someone building a home (behind closed doors, of course), the reponse is the same - 'don't save the world on my dime.'

The old adage is always there - don't believe everything you read. - Or, don't believe the hype.

It was only 6 months ago that the world was running out of oil and prices would reach $500 a barrel.

[B.]

:It was only 6 months ago that the world was running out of oil and prices would reach $500 a barrel.

:Posted by: rod | January 26, 2009 at 08:24 AM

>> ...and what about all those landowners this summer that were getting a tad too greedy holding out for more that $2,500 per acre from Cabot and Chesapeake? In hindsight, I bet most of them now wish that they had signed six months ago and had banked some dough - now, the landmen have vanished and they've got zilch.

Fear and greed... drives every market.

B.

[Nick]

"The whole reporting reminds me of the 'green' trend of building - every single magazine, newspaper, periodical, etc... covered it front page - but, if you ask someone building a home (behind closed doors, of course), the reponse is the same - 'don't save the world on my dime.'

That's funny. My wife is an architect at a very large firm, has worked on major commercial projects for years, skyscrapers, that kind of thing. She's said that it's basically a given now that all buildings will have to undergo heavy review for green issues, and that clients demand LEED certification as a matter of course. Even developers (notoriously some of the cheapest people on the planet) demand it as their tenants demand it in turn from them.

You mention homes, which is entirely different. But much of the technology trickles down, and green building is not a joke or a passing fad. Falling energy prices of course will dampen things but it's here to stay. Hell I just replaced my entire heating system, and even though prices had plummeted when I made the decisions, I spent more for green (ie more efficient) than I probably should have, with the idea that when (not if) energy prices end up being a problem again I'll be really glad I did.

But anyways... To change the subject, here's something I bet you didn't see coming:

http://finance.yahoo.com/news/December-existing-home-sales-apf-14153279.html

[henry]

I think we have moved from a mild recession to a deeper recession. Clearly, the risk has also increased for something much more. It is scary... whatever the semantics. No one knows.

From my perspective, the company surveys that cross my desk (including trucking, about as forward looking as you can get) keep getting worse. Also, things like auto sales, which got better in early january, fell off again at the end of the month. Company earnings/outlooks are brutal. Economies worldwide are going down at the same time, compounded by a credit crunch. Meanwhile govts around the world are embarking on great economic experiments in their financial industries. Huge risks. It is very ugly, and there is no quick fix.

B's numbers appear to show that the market shut down in oct (post Lehman). To be fair, this is not surprising... and is also backwards looking given lag to close. Fits with David's "deer in headlights" comment. That said, I think that we are looking at more of this going forward as risks remain elevated and not much has changed. I suspect prices will have to come down significantly (to a level where deals happen)... as there will be sellers that need to sell.

[henry]

By prices coming down, I mainly meant ask prices... which generally have not moved much. Over time, I suspect they will.

[cfranch]

Yes the media are full of stories on how bad things are but they are merely reporting facts. However the media often give contrary signals to the prevailing trend. When I start to see magazine covers declaring housing will never come back or stocks will never be a good investment, I would assume we are near a bottom. Same thing happens on the way up. Anyone remember a book called Dow 36,000? If you had shorted stocks the day it was published you'd be quite rich.
Nothing I see in the media indicates to me that we are near a bottom in stocks or housing. Granted this is only one indicator but it is keeping me on the sidelines.

[MS]

I'm not sure why the doom and gloomers are everywhere on this blog. I would love to know the info on these posters--disgruntled second home buyers who bought at the peak? layed off white collar metro area workers? I believe that most (if not all) are very isolated from this recession having any real impact on their lives.
It seems they prefer to pontificate from the remote vantage point of their wireless laptops, while in the corner of the screen they have the vitals from their Catskill farmhouse beamed to them (we must know if the boiler shuts down. We can't have the imported bamboo hardwood buckle.)

This recession was born by greed, and the gen X theology that a certain standard of living is a god given right, and we must do whatever it takes to chase the specter of pleasure and acquisition.

And now as it begins to change, and the playing field becomes foreign, we get these posts born by fear, but covered by bravado. If one can try to predict the future, it becomes less frightening.

Have no fear. For every trough there is a wave, and for the part of the population that can afford a second home purely for leisure, this will be nothing more than a temporary bump in the road. A minor inconvenience where the monthly numbers have temporarily gotten smaller.

For some it is much more, but those folks are not posting here.

[Reg]

MS- It isn't so much that the doom-and-gloomers are everywhere.

It is one or two people who use dozens of different names. You can easily spot that they are the same person though if you read what they have to say and how they say it.

I find the best strategy for reading comments on this blog is to ignore nearly all of them (especially the ones that reproduce the last 43 seconds worth of MLS data and call it representative) and focus on what the genuinely smart people have to say. And there are a few of them who comment once in a while.