A Double-Dip in Housing Prices?

The Case-Shiller Report has reached the conclusion that we are in a double-dip housing decline, but there is not much evidence that there was ever a bump to make this a double-dip instead of just a continuation of a bad housing problem.

“”This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation,” David Blitzer, chairman of the index committee at S&P Indices, said in a statement. “Home prices continue on their downward spiral with no relief in sight.”

http://www.cnbc.com/id/43222783

There is no longer any reason for continued drops in housing prices, except for an overall economy that cannot provide job security needed for home purchases. That lack of job growth has caused Consumer Confidence to fall as well.

Not only was the housing market oversold, so was the jobs market and now corporations have discovered that they can do just as well as before but without the same number of people. Until the government stops paying for people to wait for their old jobs to come back, the jobs market, like the housing market will suffer from an excess of product. There are simply more people than available jobs.

Those in the currently fully subsidized job market, who are currently being paid to NOT work, will have to offer their knowledge/skills on the entrepreneurial or part-time market, because there is no incentive for corporations to rehire them and there is not likely to be. Regardless of who wins the next election, the next administration will not continue to pay people to wait for their old job to become available to them again.

But people just selling their knowledge and skills in the part-time and entrepreneurial markets do not buy new homes for a long time. The best they can do is to hold on to what they have, and where they fail their homes go into foreclosure and the housing market continues to cycle down.

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Places You Don’t Want to Be in Real Estate

There are certain paces you don’t want to be as Buyers, and some for Sellers as well.

As a Buyer, you don’t want to chase the market up in a rising market. I have represented Buyers who insisted that they needed a home but continually offered just enough under the rising market to lose home after home.

Most people get into a market where they both have a home for sale and a home they want to buy. The WORST position for them is to get into a position where they either own no homes – having sold and closed theirs without having a place to put their family and furniture – OR they own TWO HOMES, having closed their buy without having a bite on their home. Both of these positions are untenable unless you have major liquid assets.

Then as a Seller, the worst position is to chase the market down. I have some very good friends/clients who really follow the real estate market closely but got caught in their own emotionalism, and did just this. They were always $10,000 too high in their pricing even to elicit an offer, and lowering their selling price just behind the market for more than a year – instead of getting ahead of the market initially as was recommended. They didn’t want to “lose” $20,000 in their initial price, and instead spent more than a year and lost more than $100,000 as they lagged the market downward.

When I see buyers lose house after house because they lag a market, I just smile because it teaches them a lesson they can (eventually) apply to the next offer – but being too high for a seller is a vastly different position. They usually don’t get offers from which they can learn for the next transaction – they get no or few offers, and so the feed-back loop is not efficient.

In this market, timing is everything and that is why I recommend getting an outside Appraisal and pricing the home UNDER the market. Buyers are looking for bargains, and being a bargain is binary – you either are or you are not – and Buyers have usually been looking for sufficiently long and have sufficient experience to know what a bargain looks like.

Putting On a Happy Face is Not Justified

It was Salvador Nasello who famously said, “If you laid every economist in the country end to end you would still not reach a conclusion.” And just to demonstrate this, the Economist for the National Association of Realtors (Lawrence Yun) says we are in for better days ahead. (“Why home sales will rise this year.”)

Of course Realtors are famous for putting the best face on everything, and sure enough this employee of our industry has all of the requisite graphs to “prove” his point. And, he gives his reasoning: “More jobs, rising stock market wealth, rising apartment rents…” etc, etc.

One of the things he “credits” for the potential for increased sales is falling prices, which, although they contribute to increased sales, diminishes the wealth of the existing owners and that is more deleterious to the overall market. Few benefit from it since most people are not buyers, or sellers, they are holders and for holders, their wealth in diminished!

If sales numbers alone were the single criteria, it would be best if prices for all homes were $1 – we would have LOTS of sales, and people would move every few months just for the hell of it!

We are already in a strange and economically unjustifiable land. Lenders are reluctant to lend even to the most qualified Buyers because Lenders can close their doors, fire everyone, sell their buildings, borrow at zero percent from the Fed and buy government bonds that pay one and a half percent.

One and an half percent is all profit, and the more you borrow at zero percent, the more money you make at no risk.

The government knows this and tries to bully the lenders to actually lend money, and they do – just enough to keep the government, their “Regulators,” reasonably happy, but not enough to buoy the system.

The Federal Reserve on the other hand, cannot raise their lending rates above zero without crashing a tenuous market for car loans, and business loans, and increased inflation in the face of high gas prices and increasing food prices.

The Federal Reserve is trying to balance a number of things that are not symmetrical and are inherently out of balance in a good market, but are tragically imbalanced right now.

IF gas prices come down (as they should), and if the pressure on prices on food can be diminished through stopping the insane subsidy for grain Ethanol, then interest rates will be permitted to rise slightly, and while that will help the economy it will not help the housing market, except that over the long haul Lenders will have to actually lend money and buy fewer government bonds.

But all of that is long range, and nothing in the mix offsets the existing and continuing foreclosures. The number of foreclosures already sitting empty, those in reserve (foreclosed but held in inventory and not on the market), and those with Notice of Default but not yet foreclosed, is stunning!

There are not millions of potential Buyers just waiting to whisk those homes off the market, and until we get to a stable market without foreclosures in the double-handful, this market will not turn around.

Outside Expertise

For more than a decade I have been recommending that Sellers first, before contacting a Realtor, get the advice of a outside appraiser – and for the past decade I do not know of a single person who did what I advised, until the past year.

In the past seven months I have had four inquiries as to the name of an independent Appraiser. This is good news, because both Seller and Realtor have discernable personal interests in the home that they cannot erase, while an Appraiser has none

Further, if you use an Appraiser who is also used by lenders, you get foresight into what the Underwriters are telling the Appraisers as to the future market in the Lenders’ opinion, and everyone knows that the lender does not mark to market – they hedge to future markets.

Why does this matter? Because no matter what number a Buyer and Seller agree upon, the FINAL arbiter is the Lender. The Lender will appraise the home with one eye on the future. If the market in home prices is rising, he will let time cover any high price that the Buyer and Seller have agreed upon. In many markets I have seen, a $10,000 over-agreement be covered before the close of a 90 day escrow!

In this market, we have exactly the opposite. It is more likely that a Lender’s appraisal will be UNDER the agreed upon price, because the Buyer and Seller are working in the present with pretty good knowledge of where they stand. The lender will hedge his bets by appraising with an eye toward the future, and lending 80% of a lower appraisal.

This upsets the agreement between Buyer and Seller. With prices falling between a half a percent and a full percent each month, and no economic reason to see any change for at least six months (and then facing Winter markets), Sellers who do not want to face another year need to get ahead of the curve.

I just wish the foreclosures and short sales would stop, because that is what drives lower prices. All markets overcorrect, and this one certainly has. Every market harms some and helps some, and this one certainly has.

Cash Offer?

Nationally, some 30% of all home sales are for cash – indicating a large number of investors are still buying.

Cash buyers believe that a cash offer should entitle them to a lower price, and indeed that is the case in certain circumstances.

If a seller has time constraints, a cash offer is worth exchanging for money because something like 50% of all short-sale escrows never go to a close of escrow. Lenders are VERY careful, perhaps overly careful and they will use anything that upsets their initial calculation of worthiness to cancel the deal.

In good markets, buyers often take the initial approval of a loan as an opportunity to rush out and buy a new car, a purchase that diminishes their credit and often cancels the loan before it is made when, in the final 72 hours, the lender does a credit update.

These days, loans are so carefully made that placing a washing machine on your credit will give a lender the opportunity to cancel a loan, and believe me they are just looking for an opportunity!

Cash offers have two advantages: They offer the opportunity to close and escrow in days, not months, and they solve the credit worthiness problem.

So, if you get a cash offer it may well be worth reducing your final expectations for a price rather than facing the very likely cancelation of an escrow and having to keep your home listed in this relatively cold market.

In effect, you trade money for time – but then that is what almost all economic transactions are about.

Keeping Perspective

One of the problems with doing any analysis is the variations on a theme of home prices (with apologies to Paganini), caused by blind analysts feeling different parts of the same elephant.

You intuitively know all this, but it is desirable to emphasize it.

One day we read Zillow, or Morgan-Stanley viewing the national market, the next day we read the voiceofsandiego.com analysis of San Diego County, and the next the North County Times view of North County.

Each is a correct analysis of the area for which they view, but none of them accurately reflect Hidden Meadows – although each impacts Hidden Meadows.

Just as the temperature of the water off some beaches is warmer or cooler than the ocean overall, neighborhood sales and prices are different from the national housing overall, but it is certainly influenced by that overall market and cannot get too far from the overall sales and prices without being brought back into some balance.

So, when I print information by different analysts wider markets, please keep that in mind.

Today, we view the analysis of North County as published by the North County Times, which is certainly more reflective of Hidden Meadows than a national, state or county analysis because it actually covers buyers and sellers who are direct competitors.

While we treasure Hidden Meadows as a very special place, buyers who are less informed are just as happy to buy a home in Escondido or San Marcos – but unlikely to consider San Carlos, and certainly not Chicago.

“North San Diego County house sales and the median price slipped in April compared with last year, when government incentives pumped up the market, according to transaction data and real estate agents.

The median house price in April dipped to $430,000, down 4.9 percent from March and 2.8 percent from the same month last year, according to a North County Times analysis of data from the San Diego County assessor. Sales slipped to 602, down 15 percent from March and down 20.8 percent from April 2010.”

http://www.nctimes.com/business/article_be7913fe-e735-569d-92d7-a8232fd57a1d.html

Few “Happy Faces” in Real Estate

Realtors are supposed to put a Happy Face on everything, but it is getting harder. The bad news just keeps coming, which of course is a self-fulfilling prophesy, and the only thing I can say positive is that if you are both buying and selling in the same market, then it makes no difference.

But in our area, we have people who are taking their sales to go to retirement homes, and that hurts them

Every market has winners and losers. In this market the investors and first-time homebuyers are winners and the seniors are losers.

This from the Friday, May 13 LA Times: “By Alejandro Lazo, Los Angeles Times

“It is shaping up to be a silent spring for the housing industry.

Warmer days and the need for many families to make a move during the summer school recess have long made spring the peak season for buying homes. But lingering economic uncertainties and the expiration of federal tax incentives — which juiced up sales last year — have turned the market soft.

April home sales in Southern California were down 9.2% from a year earlier. The figure, the lowest for April in three years, was 25.4% below the month’s average since record-keeping began in 1988, DataQuick of San Diego reported Thursday.”

http://www.latimes.com/business/realestate/la-fi-spring-home-buying-20110513,0,1259102.story

So, I suppose the answer is to sell as quickly as possible for a seller – and that means getting ahead of a downward sloping curve, and for buyers to try to get a deep discount on today’s actual value.

The pressure is ion the seller, it is as simple as that, and you do not have to follow the literature to discover that fact because Realtors do that for you either representing buyers or sellers.

There is very little of “beating the market” in real estate.