Eyes Wide Shut

California and Marin house owners are slowly coming back to their senses following a prolonged period of debt-induced intoxication and I seriously doubt that they will like what they see (underlining is mine):

[Says one California seller] “We have to be competitive, and we can’t be greedy,...It seems like people are afraid to buy now. They don’t know where the bottom is." Real estate agents and economists say Sterbens, and thousands of other sellers, may have to consider further reductions.

‘We’ve got sellers out there who have not adjusted to the new reality,’ said (realtor) Carla Giustino.

The only upside is that many California towns have turned from unaffordable hamlets to buyers’ markets.

Fresh data show that California’s market is not immune, and may be on the cusp of a long-feared correction. ‘I could see some continuing declines at least over the next 12 months,’ said economist Stephen Levy,. ‘Typically sellers begin to lower their prices, and that’s when you worry that the bottom could drop out. We still haven’t reached that point, but I don’t see how the economy can continue with these prices.’

The median price last month in San Mateo County was $721,000, down from $773,000 a year ago. The median home price in Marin County last month was $803,000, down from $822,000 in August 2005 [a 2.3% YOY price decline]. San Diego and Alameda counties also saw prices decline.

The median Marin County home is nearly four times the national median [but our median income is not four times the national median income], and agents say that's made some locals oblivious to the downward pressure. Too often, they're pricing their homes higher than comparable homes in their zip code, and they still expect bidding wars and multiple offers.

"We've got sellers out there who have not adjusted to the new reality," said Carla Giustino of Greenbrae-based Frank Howard Allen Realtors. Giustino urges clients with homes worth $1 million or more to drop prices by $50,000 to $100,000.

No, "the only upside" is that many California towns have turned from a grotesquely unaffordable sellers' market to a fence-sitters' market. We here in Marin are still dealing with seller denial and significant hubris and so it will just take a little longer for us is all. A 5-10% drop in price is a very long way from what any California or Marin fence-sitter will enjoy. Why buy now at the inflection point ("the cusp of a long-feared correction")? Why buy if the price is going down? Think of all the money you would save, not just in terms of the down payment, but also in terms of taxes year after year. As prices come down and your savings increase, you could spend that money (that you actually earned yourself) to live instead of paying an overly inflated mortgage. Or you can use the savings to make an even larger down payment in the future, assume an even smaller loan, and actually afford to retire one day without being dependent on housing speculation. Or buy an even bigger, more grand place if that's your thing.

A lot of recent buyers were willing to pay prices that they knew perfectly well were ludicrous only because of their expectation of greater future appreciation. Many extracted equity (borrowed against the assumed future sale price) to live a lifestyle now, today that they couldn't otherwise afford and were not willing to wait for when the day came to actually sell the house. They now want you, the buyer, to pay for that lifestyle. Don't believe me? Check out this poor fellow (found on the Housing Panic blog). He's only 24 years old and our massively screwed up lending system actually lent him millions of dollars to buy seven properties in various states; he is now over two million dollars in debt and facing foreclosure. This may be an extreme and certainly very sad example but I fear not an uncommon one as we will be hearing more and more such stories. Just look at all the "investment" properties suddenly being sold in Sonoma, Napa, Tahoe, etc. As sorry as we may feel about people like this 24-year-old, should we really bail them out by buying their still obscenely price-inflated houses? Should you repeat their mistake of paying too much or does charity play a role in what you are willing to pay for a house? Or should you wait and buy when their asking prices are more appropriate? You buyers are starting to face some tough questions. The choice seems obvious, but that's just me.

So where are we in the Kübler-Ross sequence? Some are at the anger stage, others are still in denial, and still others may now be bargaining.

You buyers are firmly in the driver's seat now. Do you want to bring this market down faster? Here's how.