Driving Blind in a Snowstorm

I've been a bit amazed that the post below, "Housing Tax Credit and Sullivan County" generated over 60 comments. Most of those comments are very thoughtful, and took the writers quite a bit of time. Notably in that thread, there's a real conversation going on. The barbs and attacks by the "Crumudgeon Club" that punctuate many previous threads are largely absent, replaced by a tone of folks trying to figure out what's going on.

Over the last two or three weeks there has been a noticeable attitude shift — among both buyers I'm working with and colleagues I talk with. For the past 3 or 4 months, the downturn in sales volume has been laid at the feet of unrealistic seller price expectations. There's been a collective belief that if an attractive house is priced right, it will sell. That belief has been echoed on this blog, both by myself and a number of commenters.

I don't know that price, alone, can be blamed for the sales doldrums. There have been a number of houses in the last 4 to 6 weeks that have taken a drastic price haircut, and I was almost certain they would sell quickly. Most haven't. A lot of buyers are choosing to sit on the bench right now, waiting to see what happens. Even the carrot of a great price isn't quite enough to get them off the sidelines and back into the game.

I get a half dozen calls a week from sellers or other brokers asking my opinion about what it will take, particularly in terms of price, to get a house sold. Up until a couple of months ago, I could proffer a range for most houses with some confidence. My numbers often weren't what a seller wanted to hear, but I believed that at the right price, most homes would find a buyer. I don't think that's necessarily true now.

Take that mythical 3 bedroom, 2 bath, 2,000 sq. ft. lakefront home in good condition on a 1/3 acre lot on Swinging Bridge, the example I often trot out to make a price point. The last one that sold closed last June at $495,000. Through the fall, I felt that sale pretty much represented a market value range for that type of property. As the market turned down, I revised my price expectations downward somewhat, and up until mid January thought the mid-$400's would be a good target for that type of property. How the world has changed! Today, I really don't have a clue about what the price would be to move a similar house. $350,000? $400,000? $450,000?

That's the big problem right now. Where should prices be to counter the demand inertia? Is there a price that will entice nervous acorn-hoarders to get off the bench? Or is price irrelevant, and for the time being at least, price isn't a tool that can effectively stimulate demand?

That's what I mean when I say it's like driving blind in a snowstorm. There aren't any recent guideposts. The real estate valuation model over the past decade has rested on historical comps, with some percentage time adjustments during the faster run-up periods. With low sales volumes, that model isn't working well right now. There's been a lot of discussion about ratios — income to price and rent to price — but these deal more with macro price levels, not the price of individual properties.

Pricing today depends greatly on all the parties — buyers, sellers, brokers and lenders — essentially agreeing on a set of assumptions. If buyers are pessimistic about the future, and believe that prices might drop a further 30% in the next 12 months, they're only going to strike a deal with a seller who generally shares that pessimistic assumption, or if in a distress situation, is forced to accept it. These tacit assumptions are often emotional, and not based on actual recent sales data, because we don't have enough data to confidently draw a trendline. While the overall median sales price in Sullivan County is down about 35% from the peak, that doesn't necessarily translate directly to every type of house. For example, I can't confidently say that lakefront houses have declined 35%, or 15% or 45% for that matter, from the peak because there haven't been enough lakefront sales in the last 3 or 4 months to draw any meaningful conclusions.

With the dearth of market activity, and a meaningful volume of actual sales data, I think a lot of the commenters on this blog are trying, like I am, to paint some picture, any picture, of where real estate here is headed using a palette of theories, metrics and hypotheses. It ain't easy, and none of us, if we were truly honest, have the answer. I sure do appreciate everyone who's adding a new brushstroke to the canvas.

Comments

[Irving Blum]

The majority of seller's throughout Sullivan County are currently in denial or in some sort of fantasy land thus their unrealistic offering prices on the MLS - and elsewhere - which translates into lack of sales (almost 45 +/-% decrease from four years ago) as evidenced by Dave's comments below and figures in a previous post of closing sales from 2005 through 2009 for a specific three month time period.

Until seller's come to terms with the current market - whether they bought five years or twenty-five years ago in Sullivan County - the market will be at a stalemate.

Low volume and contiuning lower median prices - a recessionary environment.

It is obvious that it will more painful for those that purchased recently - from 2002 through 2006 - as opposed to those that purchased in the 1980 or early 1990's - but your entry point and cost basis becomes - along with your debt service - very important.

Think of those that purchased a home for say $70,000 back in 1989 and have long since paid off their mortgage versus somebody that paid $180,000 (2.5x times) for a *comparable property* in 2005 - then put another $35,000 - into it - and have a thirty year note for $140,000 @ 6%.

However, properties like these continually stay on the market at the *buyer's purchase price* of 2003 - 2006.

And they sit.

And sit... since owners of property purchased in the past five years are reluctant to come to terms - if they really want / need to sell.

Question for Dave.

If you know that a seller(s) was/were reluctant to budge in the asking price of their house after you have brought a qualified buyer with a decent offering price - do you then continue to show that house to others knowing that it is all really in vain?

Irving Blum

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Knudsen writes:
"As a buyer agent who's been negotiating with sellers on behalf of my buyer clients throughout this downturn, I don't have a lot of sympathy. Over the last 12 months, I've had 4 situations where my clients have put good offers, supportable from a market value standpont, on the table that were flat out declined by sellers. I have to admit that I take some perverse pleasure that all of those houses are still on the market."

[DN]

There was a recent interesting article on how even massive price incentives aren't resulting in many auto sales. One auto maker has had some success with a program whereby a buyer can return the car if he or she loses her job within a certain time frame. My point is that many people are just too scared about how bad this "Great Recession" will get to part with their cash even if a car or a house is a bargain, especially if it's a luxury like a second home.

[Bix]

I think that Irving is basically right, and the situation that he describes has been so for a long time. I described in a previous thread how a mediocre house I looked at in May is still on the MLS despite having its price lowered 20%. It just is not in the right price class. But will lowering it further result in a sale? Not necessarily, unless there are buyers in that price range stopping by, and I just don't know about that.

[cfranch]

Over the weekend Barron's lead story was the decline in Manhattan real estate prices. We are about 20% off the peak and probably have another 20-35% to go according to the article. Whether this pans out or not the fact is it adds, at the very least, uncertainty. Investors or house buyers do not like uncertainty. Everytime the Obama administration talks about bank rescue, the stock market craters. Happening as I write. The trouble with these rescue plans is that there are no details. So here we sit, frozen. Eventually things will move but I think we are going to have to see some capitulation on the part of sellers. We need an ugly Black Monday in the stock market coupled with the nationalization or failure of weak banks(Citigroup, BoFa). Only then can the stock market repair itself and credit start flowing. Real estate will lag but at least we may hit a bottom.

[larry]

to find your answers, why not ask brokers, agents or seller's who has been through this before. very similar real estate experiences existed in the 1970's and the 1990's. some real estate professionals have been in the business more than 8 years and may be able to help. and as far as realistic selling price, why not go from bottom to top. would the lakefront sell for $75,000? how about $100,000? i'm sure you could arrive at a price someone is willing to pay.

[David Knudsen]

Irving, if I'm aware of a deal not being able to be made at what I might consider a reasonable or appropriate price, I'm very reluctant to show the house. Sometimes, though, clients really want to see the house. However, because I'm a buyer agent, I'll tell them upfront that I think the house is overpriced, and if I have knowledge that the seller has been inflexible on price. And not all sellers remain static in their position. While a seller may not have lowered their asking price, they may be much more flexible a few months down the line. But overall, if all the signs points to an unrealistic, inflexible seller — stalemated negotiations or offers with no realistic counter, months on market with no meaningful price reductions, and no indication from the seller's agent that the seller is more flexible — it's like a cold shower. A house moves way down on my list of what encourage my clients to consider.

[Not that Irving Blum from 57th Street]

Right.

Thank you for the insight.

I just heard on the radio that the SP500 closed at the *April 1997* level today.

Dave, that's close to twelve years of investments - IRA's, 401k's, pensions, etc. up in smoke...if you were long in equities.

Down over 52% from its' peak on October 11 2007.

Now, what on earth would make a seller think that their home should be priced like it was in 2006?

Do they have their heads in the sand?

Regards,
Irving

[Nick]

The stock market and Real Estate are not directly correlated assets by any stretch of the imagination.

They aren't unrelated, there's a connection. Obviously much of people's wealth or perceived wealth is in stocks and mutual funds and that affects their purchasing decisions. But a quote like "Now, what on earth would make a seller think that their home should be priced like it was in 2006?" doesn't make much sense, coming right out of the "S&P down over 52% from its' peak" line.

Think of the corollary. Would you expect houses to fall by around 40% or so from 2000-2003? You would if you used your logic, that's what happened to the S&P. Housing of course was inversely correlated. And in fact it's theorized that people moving market gains into real estate after the 1990's runup actually helped lead to the housing bubble.

But no point guessing. You know how to read a least-mean-squares regression? If so: http://www.cxoadvisory.com/blog/internal/blog6-12-07/scatter.gif

As you can see the S&P and the Case-Shiller index are weakly correlated at most. Check out that dot scatter, it's not a tight cluster.

Now of course real estate is definitely affecting stocks right now. No question at all. But that's not a historical pattern necessarily, nor one we should automatically expect to continue.

Frankly I could see the market start to rebound sharply while housing prices continue to fall sharply. Market tends to be a much more leading indicator than house prices. Though personally I don't think the market's about to rebound in a big way either. But still, even taking into account the wealth effect, the two asset classes aren't the same thing at all.

[ar]

I don't read Irving's comment as an argument about a historical correlation between the stock market and housing prices. Is there really any doubt about what happened in the 2000-2003 period? People burned by the dot com collapse came to believe that real estate was a sure-fire alternative to the stock market. So capital moved from one asset class to another, inflating a different bubble. It will be a long time before people make that mistake about real estate again. I read Irving's comments as a rather common sense observation that today, with the illusion of the housing boom gone, the current stock market collapse inevitably is having a negative effect on the market for major discretionary purchases like second homes. Irving understandably wonders why some sellers can't figure that out. Of course, one answer may be that a lot of sellers don't care enough about whether they make a sale -- they have a price out there that they'd take if they could get it, but if not, they can and will hang onto the house.

[Susie]

Bravo on a really excellent blog post!

[Dan F]

Hi Dave-

I think that the model for valuing real estate does take into account unreliable and even unpredictable assumptions. The human element and the lack of a clearing platform real estate such as an exchange or "marketplace" where something can be exchanged quickly are things that make the valuation of real estate inefficient. I still feel that somethings value is nothing more than what one is willing to give (or take) in exchange for it. I am sure that a property will sell at absolute auction. So shouldn't that be what its "worth"?

[compo]

Ar,

You are correct that the dot.com bust and associated bear market caused some people to move to a different asset class. But two other major contributors to the bubble came from the government; abnormally low interest rates for an extended period (end of 2001 through 2004) and a push by the government through Fannie and Freddie to increase the home ownership rate. Many people got loans who would not have otherwise qualified. We know now both backfired. I could write a lot more but I think everyone knows what fueled this fire.

[Rod]

What is missing from the possible scenarios that don't include the world ending is the fact that Manhattanittes who have not been not able to afford in the city and hence buy their home up here and continue renting in the city, may be able, at last, to afford the city, reducing local demand.

In that same vein, if someone is on the fence about where to plunk their real estate dollars, it's probably safer to put it up here and see a 15% decline or $45k loss, as opposed to a possible $200k loss in the city.

[Officer Krupke]

Rod schreibt...

"What is missing from the possible scenarios that don't include the world ending is the fact that Manhattanittes who have not been not able to afford in the city and hence buy their home up here and continue renting in the city, may be able, at last, to afford the city, reducing local demand."
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Ja Rod. Herr Knudsen erwähnte bereits den!

Grüße von Hankins, New York!

Officer Krupke

[Nick]

Speaking as a NYC resident and SC owner, I have to say that comparing New York and Sullivan real estate purchasing decisions is kinda like comparing bananas and hand grenades. I recently bought a beautiful large Victorian house on over 20 acres with two outbuildings including a huge barn. While I was in the process I decided to go to a few open houses in my neighborhood just to get a rough idea of what my trade-offs were. There were essentially no apartments at all anywhere near me (and I'm in Brooklyn, mind you) of any kind at the price I paid for my house and land in Sullivan. If you factor in what I'm paying for renovation then I would probably have enough for a tiny post-war studio apartment in a generic building with some kind of major flaw, like walkup, view of a brick wall, or something else. And the maintenance I'd have to pay would be about 30-40% higher than the total cost of all property taxes, school taxes, and even regular upkeep of my Sullivan house. And for most (co-ops) I'd have to put down 25% and have two years of payments held back in cash and submit to a proctologist-level financial probing. Realistically, to just replace what I'm renting (stabilized) I would have enough to buy an above average place in Chapin Estates. And I currently live in a one bedroom. And I'm talking current prices, not 2007 prices.

I'm sure that there's some truth to it, don't mean to be 100% contrarian. Obviously it's tough for most people to buy both. But the difference in price is so tremendous that it's hard to think that one's substituting for the other. I've seen parking spaces around here go for close to 100k, which could get you a respectable small or unfashionable cottage on a little land in Sullivan. I wouldn't argue completely, but I sort of feel like these two things aren't all that well correlated.

[Top Banana]

"Speaking as a NYC resident and SC owner, I have to say that comparing New York and Sullivan real estate purchasing decisions is kinda like comparing bananas and hand grenades..."

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You mean to say hand grenades and bananas repectively right?

"Top Banana" Shecky