Tuesday, October 02, 2007

Owners Face Selling at a "Loss" Now that the Housing Bubble has Burst

Nothing but boring and utterly predictable news in the world of housing these days. Hence, no posts. So I guess I have to post this, now old, article from the SF Chronicle.

These poor saps buy a house in American Canyon, in south Napa, for $424,000 and find that they cannot sell now for their wishing price of $925,000. So they have to "sell for a loss" at $868,000. Sheesh! I'm sorry, but selling for $444,000 above your original purchase price is hardly selling for a "loss". Now, they did put in "upgrades" but I seriously doubt said upgrades totaled anywhere near the $444K. Of course, like idiots they could have also HELOCed out their phantom equity and so may in fact be SOL.

At least the article mentions the fact that, with the possible exception of during the unusual years of the housing bubble, you don't normally get back in the sale price what you paid out for upgrades... a point that most sellers would do well to remember:
The trouble is, upgrades for one family are renovations waiting to happen for another family..."Upgrades are very difficult to value," Barker said. "So much of what people do to their homes they won't get a return on."
I fully agree with this reader's comments on this ridiculous couple's situation:
What's amazing to me about this article is what it reveals about people's perception of a "loss." If you read the article, you learn the couple paid $424,000 in 2001, and now they're bracing themselves for a "loss" when they sell for $825K-$868K. The couple "declined to say" how much they spent on upgrades.

Either of the two ways they're defining this to be a "loss" is nonsensical. It seems like their perceived loss is the fact that, at best, they will be selling for $100K less than they could have sold a year ago. No loss there. As far as the upgrades, that's silly as well. If you spend money on maintaining a car, the amount of money spent is not simply added to the value of the car. Ditto for granite countertops, or most other expenditures on a home, other than those that add square footage.

It just boggles my mind. If people are whining about "losses" now, think how psychologically ill-prepared people will be when they face real losses, i.e., selling their home for less than they paid. We've got a long way to go.
Look, it's not going to get any better any time soon; only worse. There is no way a significant majority of people are going to pay (let alone be able to pay) the fantasy pricing we've "enjoyed" over the last few years now that easy credit is history. Not now, not when significant down payments, documented income, mortgage payments at 30% or so of income, etc. become the norm again. Hoping for the days of easy credit to return is just wishful thinking. And don't even get me started on the rising interest rates on mortgage loans. So deal with it. The sooner you do, the less your "loss". Or take your over priced POS off the market and give those who are serious about selling a break.

Or, you could be like the following Mill Valley sap who has been trying to sell his house for essentially two years (it's amazing that they never bothered to play the relist game and get that DOM reset; either they are very arrogant or very respectable). My guess, knowing a lot of South Mariners, is that they are arrogant and feel entitled to getting near that bubble peak price. It will be fun watching this house over the years:

Looking at that above house, it seems really nice. The write-up (not shown) certainly sounds wonderful (but don't they all?). You would think that this house would sell in a heartbeat as it's a South Marin wannabe's wet-dream-come-true. So what's wrong with it? Must be the price. But given that the sellers seem to be willing to knock $100K or so off the wishing price each year, it should be marked to market in, oh, about five years.

Clearly, we are still in the denial phase. Sad. So very sad.

Thanks to the reader for sending me the link to the Chronicle article (I had seen it before) and kicking my lazy arse back into blogging.

PS - By the way, I'll share an anecdote with you all. I was up at the Novato Target the other day (because I am too cheap to pay South Marin prices if I don't have to) and guess who I saw working at a cash register? A former Marin real estate agent acquaintance of mine. How sweet it is! I didn't have the heart to ask if she still had the leased Lexus.


Blogger see me said...

Target pays an excellent livable Marin wage. I hear they have excellent benefits too. Why lease a new Lexus, when you can own an old Toyota? "OH BIG BOXMART...!" Its a brave new economy folts.

Oct 3, 2007, 7:25:00 AM  
Blogger sf jack said...

The thing that struck me about the Chronicle article, more than anything else, were the reader's comments a few days ago and how they took the paper to task for their "reporting".

Among other remarks about how the article was essentially an advertisement for an open house, a reader chimed in saying that the upgrades to the house were paid for by the builder in order to avoid litigation... and that the owners were put up somewhere for months in a place with maid service.

As well, commenters were all fired up with regard to the owners posting to the comments sections about the property, etc.

As with almost anything related to both real estate and the mainstream media, it appears, much was missing in the original story.

Oct 3, 2007, 10:46:00 AM  
Blogger sf jack said...

A tale of two markets.

It's certainly not Marin, but since it's where some Marinite's spend their leisure time, I thought I would point out that median house prices in north Tahoe are changing. It's being called a "normalization" (see below).

-23% in Tahoe City ($679,000 from $885,000)
-13% in Truckee ($645,000 from $740,000)
+18% in Incline Village (no figures)

For the "money doesn't matter" crowd, it really doesn't (Incline):

"'The high-end is continuing to be extremely active and there are record-breaking numbers in the high, high end. We are definitely having a normalization in other price ranges,' Lowe said."

Or perhaps the highest end buyers believe buying a house there is an inflation hedge of sorts because they understand the Fed will be seriously inflating for the next half decade or so.

In any case, admitted realtor optimism aside (the sub-headline is: "... buyer's market..."), the best time to buy up there for most is many years away.




Oct 3, 2007, 11:10:00 AM  
Blogger hans said...

I hear much about the same housing markets having trouble time and again. I agree with the common wisdom out there about why we are in this mess. At the same time I wonder how much this is going to be a series of local situations that only mildly effect neighboring metro areas. For example when, if ever, will we see price corrections on the SF peninnsula? Yes, I understand places in the far East Bay like Brentwood have huge amounts of housing stock on the market but how (and when) will that over supply effect demand in places that have always been much more desirable to live. I'm not saying it can't happen - I just don't think it's a given that sometime in 2008/9 houses in Mtn View or Palo Alto will be selling at prices 20+% below current levels. Any thoughts?

Oct 3, 2007, 1:55:00 PM  
Blogger Lisa said...

On one hand, the MSM stories are getting more dire. On the other hand, sellers are slow to admit what this means...that they missed the peak and will not sell for what they could have 1 or 2 years ago. And here in Marin, that can easily translate to $100K, $200K, $300K less. And sellers seem to feel "entitled" to that money, hence, sales have gone off the cliff given the ridiculous wishing prices. The Marin Heat Index is 0.32 today. It's dropped like a stone since the credit crunch last month. Which makes me think would-be Marin homeowners are "less wealthy" than everyone would like to think.

In the last bust, I think it took about 2 years to start to see serious price drops, and 4 years to bottom. Sales dropped off first, then prices followed.

Selling a home does not guarantee you a profit. We still have a ways to go until folks really digest this fact.

Oct 3, 2007, 7:28:00 PM  
Blogger Rebecca said...

I'm so glad you posted on this! I had the exact reaction when I read the article last Sunday.

I had the same mindset as those homeowners when I sold my home in Wisconsin - I "lost" 12K when the double rent and various fees were factored in. All because I priced it too high to begin with. Funny that it was a gorgeous home in a great neighborhood for $100K...that market never rose, but still managed to stagnate.

But even with realty and other fees, and maybe paying 2 mortgages, I just don't see how they're going to take a loss on this place _if_ the get their current wishing price. They're probably nice people, but for the sake of everyone, I hope they don't find any suckers to pay it.

Oct 3, 2007, 9:27:00 PM  
Anonymous Anonymous said...

This comment has been removed by a blog administrator.

Oct 4, 2007, 11:07:00 AM  
Blogger golfer_X said...

At the Quiznos near my work the guy working the register has his Century-21 biz cards on the counter. I smile every time I go in there.

Oct 4, 2007, 2:13:00 PM  
Blogger see me said...

"really good written" -Luxury said :))) I think the average Costa Rican citizen's salary is about $3500 U.S. Dollars a year. Those not really good salaries = no rental value = a terrible investment. Oh yeah, all those rich baby boomers are flocking to Costa Rica, pushing prices sky high forever! :)))) I recently read that remittance to Latin America is way down.

Oct 4, 2007, 7:20:00 PM  
Blogger sf jack said...

"I just don't think it's a given that sometime in 2008/9 houses in Mtn View or Palo Alto will be selling at prices 20+% below current levels. Any thoughts?"


I don't think it's a given.

Among other factors, perhaps it depends on what (if any) kind of recession we might have locally. And what will the Fed money-printers say about it?

To me, it's not so much what declines houses will have in price (or not), it's more an affordability question.

[But since you asked, I've been thinking that combined with the effects of inflation particular Peninsula, City and Marin neighborhoods could see those types of declines you describe over five years (to 2012)...

Whether one considers that a correction or not, it's up to them, I suppose.]

As far as affordability, I believe you're going to get more for your money in few years (or longer out) than otherwise.

I posted this here not too long ago in another thread. Look at how much more affordable a mortgage for a median priced home became between 1990 to 1995:

Marin $2,268 $1,846 -18.6

SF $1,967 $1,440 -26.8

San Mateo $2,069 $1,683 -18.7

Santa Clara $1,844 $1,414 -23.3

Could the percentage changes this time be any different? Could they be greater?

(If I recall from data I've looked at the Fed was lowering rates through much of this time frame - I'm not sure they have as much room to work this time)

So whether it's through lower rates, cheaper houses, or some combination... and whether one wants to believe it, or not, houses have to become more affordable (as we've seen before) before the market is really "moving" again.





Here's another interesting piece of information from 1996. Fully five years after house prices stopped rising, more than 20% of Marin house sellers were selling at a loss. That's one in five... and far from the best performing market, as measured by that metric, in California at the time.





Also, another "data point".

If I recall (I haven't looked at these in a while), in 2005 the median household income in Marin was around $100K and the median house price (before CAR changed the way it was computed) was affordable to a household with $133K in income using traditional financing.

So, were houses 33% overvalued? Do they need to become 33% more affordable for a "normal" market? That's probably a poor way to approach it, as since then the median house prices have been rising as the high end performs better and the lower ends have stalled.

As well, who's to say that traditional financing will make a complete return? There may always be room for exotic financing for the well qualified (or super well qualified), and that may produce higher house prices...

Oct 5, 2007, 11:15:00 AM  
Blogger marinite2 said...

Last month's job report was revised to show a gain in jobs, making Bernanke's justification for the 50 BPS rate cut, bogus.

That, and this (from Yahoo Finance):

Stocks jumped sharply and bond prices tumbled Friday after the government reported strong September job growth and revised August's weak data upward,

...makes it clear the 50 BPS rate cut was arse-backwards wrong. That fact and the dying dollar makes one wonder what will Bernanke do now?

Oct 5, 2007, 11:17:00 AM  
Blogger marine_explorer said...

"...I just don't think it's a given that sometime in 2008/9 houses in Mtn View or Palo Alto will be selling at prices 20+% below current levels."

You're right--nothing is a given, including current RE pricing around SF Bay.

I'll just add this: take away the promise of the "house ATM" providing future wealth/liquidity, and that $1M track home loses its appeal. Don't we have enough data points to see what's coming? As the psychology reverses and credit tightens, I doubt many professionals will take on such crushing debt. But many already have, and their downside will be noticed by the herd of think-alikes, which will then stampede in the opposite direction.

Oct 5, 2007, 12:20:00 PM  
Blogger linda said...

This comment has been removed by a blog administrator.

Oct 5, 2007, 7:24:00 PM  
Blogger Lisa said...

"Last month's job report was revised to show a gain in jobs, making Bernanke's justification for the 50 BPS rate cut, bogus."

Yep, and the 10 Year T-Bill soared to 4.63%, up .12 on Friday alone. That's a big one-day jump. The cat's out of the bag, the rate cut was totally bogus, and if BB had "correct" job figures for August, the rate cut would have been zero or maybe 0.25.

And there have been quite a few MSM stories about how mortgage rates have gone UP since the rate cut, so hopefully FB's will figure out at some point that the Fed rate cuts won't save them.

Oct 6, 2007, 9:04:00 AM  

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