Housing demand; market inertia, addendum
Posted on April 27, 2008
Filed Under Selling Real Estate, Buying Real Estate, Real Estate |
Git reminded me what I forgot in the last post: what will reverse inertia?
There are many who blame the media for much of the downturn, and think it’s the media that can pull us out. Emphasizing the negative froze buying; perhaps emphasizing the positive can inspire the thaw. Wrong on at least two counts:
- People are infinitely smarter than that. They hate spin, and know it when they see it. Puff pieces - see NAR - not only don’t have a positive effect, they infect the credibility of those in the business who do try to tell the truth.
- The mainstream media - especially, say, The Oregonian - do have a vested interest in the proper spin, but it’s directly in favor of the real estate industry. Builders and brokers are among the last consistent revenue streams, and keeping them (us) happy is critical.
[The biggest problem in the mainstream media, at least locally, is they have no one writing or speaking about real estate who knows anything about real estate.]
Keeping the shoe analogy alive, here’s Git:
With “motivated sellers” it’s like having to sell at least one pair of shoes a day - when there are few buyers you may have to drop the price to sell a pair - that resets the market price for all inventory.
When retail inventory languishes, retail has a: sale. The entire run is marked down. It’s a psychological (think: inertia) factor almost as much as economic: when people see ’sale’, they’re more likely to buy.
In housing it manifests as auctions, REOs and short sales. As I’ve said before, the human condition insists that if someone else is on the losing end, I must be winning. (Warning: it’s not true in all cases. Short sales especially are dicey.) I don’t think we’ll ever hit what’s happening in California, where a third of all new resales are foreclosures, but when a significant percentage here are REOs, prices will drop accordingly, investors will reap reward, and all sales will tick up…
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It’s been my observation that main stream media can affect behavior, but not nearly to the extent some would have us believe.
Your post hits the nail on the head. It’s ironic how those who wail about the media can figure it out, but imply the rest of the world isn’t as quick on the intellectual draw.
Also, haven’t you noticed how the discussion about general media negativity, (if it bleeds, it leads) seems to morph into, ‘the media controls everyone’s behavior?
What really happens is your neighbor, John, buys a $300K house for a huge discount, and before you know it, half the block is reconsidering their take on the real estate market.
People are infinitely smarter than that….hmmmm. So why are we having a price correction in Portland? Why is our foreclosure rate high and growing higher? Why do/did we have so many folks taking out funny loans to get into more house than they normally could afford, many believing RE only went up?!?! Maybe all these folks are infinitely smarter than that, they just made really stupid decisions?!?!
Were all those folks in CA, NV, AZ, and FL infinitely smarter than that?!?! Can Oregonians say we are smarter than those other people:O)? (I am joking, no hate mail please!)
I think people did get caught up in the spin. Don’t give ‘em too much credit.
Something to keep in mind…who do you guys keep company with? Who do you network with? My profession has given me the opportunity to meet many not so bright people. I could right a book about the stupid things I hear and overhear while taking care of patients and their families. Just last month one of the patient transport guys was bragging about his $600 mortgage payment on his $180K house that would likely sell for over 300K in outer SE Portland. I asked when his loan resets and he had no idea what I was talking about.
So maybe stupid is too harsh. I will settle with uneducated. There are a hell of a lot of uneducated people out there!
Let’s throw ‘naive’ in there, too, since I fell under that category 9 years ago with our first home purchase.
>I think people did get caught up in the spin. Don’t give ‘em too much credit.
Bearlee, you’re making the Obamaesque elitist mistake of assuming that anyone not attendant to your own worldview must necessarily be victims of spin. Not the case.
In the aggregate - note there are always exceptions; there are those who really believe 9/11 was an inside job - when confronted with a choice between what’s seen and empty platitudes people will invariably choose the former. In the runup people saw their neighbors get 20% more for the home they’d bought six months prior and opted into the action. Now when, say, the NAR paints a rosy picture and that same neighbor’s house is in foreclosure, the resulting scoff is audible.
Yes, of course there are uneducated people, and those with a PhD in physics can still be uneducated when it comes to real estate. The buying and selling of homes is somewhat more complicated than shopping for a loaf of bread; if everyone knew everything there is to know my services wouldn’t be needed.
Gag, no Obama comparison please. Edwards supporter here and I must say I am very disappointed in my conservative friends for not giving me a viable alternative to C and O. But enough about politics.
How do you explain the HUGE run up in prices in the aforementioned states if folks were so smart? Who was buying these overpriced homes?
I am not generalizing the entire state, I am just saying there were a lot of unwise folks out there. And boy, look at the mess our economy is in now!
>How do you explain the HUGE run up in prices in the aforementioned states if folks were so smart?
People were responding to events, not to spin. There was a lot of money made by a lot of people in the run-up; that didn’t make them smart or uneducated, it made them interested in their own economic success. All reasons are connected, but rather than spin you’ve already identified probably the biggest factor: novelty loans (availability of capital).
I’ll get to that as soon as I get a second.
[And for the record: I’m no fan of McCain…]
I think it’s fair to say that the media played a big part in fueling that frenzy. Their reporting of the price rises due to the abolition of all sane lending standards definitely poured gas on the fire.
You couldn’t turn a TV on without hearing “Your $3000 improvement will add $50,000 to the value of your house”.
Front page news every weekend was about how fast RE was appreciating and how you should get in or you’d be a dirty renter forever.
>Front page news every weekend was about how fast RE was appreciating and how you should get in or you’d be a dirty renter forever.
Would you point me, please, to the article that said that?
So how did folks hear about these ‘great’ RE investments if it weren’t for the media? Why do we know so much about AZ, FL, CA, and NV?
Yes, lots of people made lots of money but in the end someone gets left holding the bag;O)
Plenty of Realtors were advising people to buy or be “priced out forever”.
That was a pretty standard sales pitch over the last few years - with a quick follow up how you don’t need decent credit or a downpayment to “Get into your dream home”.
Git, you’re operating on a largely failed supposition informed by an affected stereotype, which is why you lack any substantive evidence.
There’s no reason I can think of why I - or any other broker - would tell a buyer to buy now or be priced out forever. Among other things, it would set us up for serious liability.
And, inside or outside of real estate, the only time I’ve ever heard a renter referred to as ‘dirty’ - or any other pejorative, is from: you.
And therein lies the problem with the bubble mentality.
I stopped by the Polygon Timberland development about 2 weeks ago. First thing out of the realtor’s mouth after ‘hello and welcome’ was “are you renting or do you own?”. I, of course, said I am a renter. Without skipping a beat the realtor said, “you are throwing your money away.” And without skipping a beat I said you have no idea what I pay in rent. Besides, I’ve done the calculations and at this point the tax benefit does not out weigh the pain of paying all that interest on mortgage and property taxes. I will buy if I feel it is a good deal and I love the place.” I think I caught her off guard. Realtors are still spouting BS if you ask me!
>I think I caught her off guard. Realtors are still spouting BS if you ask me!
There are stupid people everywhere, Bearlee, and if someone told you, especially in this market, that you were throwing money away renting - without knowing anything else about your circumstance - she’s an idiot.
But in logic the fallacy of secundum quid (hasty generalization) applies. It doesn’t work to extrapolate from a part to a whole. In my experience, she represents a decided minority.
Come on Jeff -
The media was running 24/7 stories about the real estate boom and how it would never end - and if you didn’t buy soon you may not be able to afford a house - after all RE never drops.
The lead economist of the NAR even wrote a book on it -
http://tinyurl.com/6ozwxx
While I misspoke using the term “dirty” and apologize for implying it was RE professionals that have that attitude - take a quick stroll though the archives of some of the bubble blogs and see how often the term “Bitter / Jealous renter” appears - consider blogs a slice of our culture - the attitude exists to some extent.
I feel your example on sales is flawed in that a “Sale” in retail represents a temporary reduction in price for a limited time - that’s what drives the buy now psychology.
What we have here is an asset price decline - fear of catching a falling knife and “wait to see how low it goes” is what emotion will be generated here - especially when coupled with the tighter credit markets.
While eventually dropping prices will bring increased sales, it’ll also bring increased inventory as people who are underwater throw in the towel as their mortgages adjust - the more underwater the bigger the incentive to jingle mail the banks. At some point it’ll balance out.
I’m trying to be open here - but you seem to be stereotyping me as some kind of blinkered “bubble mentality blogger” - I don’t think that’s really fair as I’ve tried to argue my points in a logical fashion and state my hypothesis as clearly as possible and provide datapoints as why I believe these things. Heck I’ve even taken flack on some “bubble blogs” for defending realtors and pointing out that a good realtor can bring significant value to the table.
Some secundum quid going on on both sides of the discussion possibly ?
>The media was running 24/7 stories about the real estate boom and how it would never end
You still haven’t pointed me to anything to substantiate that (and a book now 384k on Amazon, about a boom through the end of the decade by a failed NAR economist isn’t proof of much of anything.)
Let’s take this back to the original post: I said, and still say, people can see through empty platitudes; spin. Yes, the media reported events which accelerated more events, something I’ve said repeatedly, but the reporting didn’t cause the events in the first place. (Post hoc ergo propter hoc.) The same thing is happening now in the obverse: media are reporting depressed sales, which depresses sales further, but isn’t the underlying factor of what stopped the runup.
And you’re mistaken about retail sales. With the exception of Anniversary Sales - where items are marked back up at the end of a specified period - their sole intent is to clear distressed inventory. Markdown one, markdown two, half price, depending just how distressed the inventory is.
For the record: I don’t put either you or Bearlee in the same category as, say, Clint. I appreciate the back and forth, and, yes, you both argue from a logical platform.
But I will say something when I think you’re presenting a case without evidence to back it up, which is standard fare with bubble blogs. (I trust you’ll do the same.) My whole intent here is to provide as much accurate information as possible for readers so they can make informed decisions in a dicey market.
Jeff - you’ve repeatedly stated that a California type meltdown won’t happen here - I’m of the opinion it’ll be bad but not california bad.
I know it’s a crystal ball type projection and as a professional you don’t like doing that kind of thing - but I’d be curious as to your personal (not professional) opinion on how big of a fall from peak can reasonably be expected (if any)?
While cruising for info re: headlines and RE I came across this site:
http://www.rntl.net/history_of_a_housing_bubble.htm
Fascinating!
You’ve lost me, Git. Why would you think my professional opinion would differ in any way from my personal opinion?
Just that you may not want to give an official “prediction” as a realtor - not saying it would differ at all - just “off the record” so to speak.
I’m just curious of where you think we are heading price wise in the next few years.
“Why would you think my professional opinion would differ in any way from my personal opinion?”
I few weeks ago Ryan Frank, from the O, interviewed some realtors in the area and one of the comments was…
Kathy MacNaughton of Realty Trust Group said: “What you say privately and publicly is different.”
“How so?” I asked.
“I don’t think it does you any good to say the market is tanking. And it’s not. We know that. You’ve heard that today. But I will tell you that probably six months ago I talked to my buyers privately and said, ‘You know what, we have to be very careful. I see signs in this market of settling.’ And I think all of us did the same thing.”
http://www.portlandrealestateblog.com/realestate/2008/04/oregonian-inter.html
I think what Git is getting at is that those who have a vested interest in a healthy market are less likely to be negative because being negative will contribute to the fear factor that supposedly is keeping buyers away (god forbid it’s the prices!?)
Git and Bearlee …
I’m on my way out to a meeting so I’ll respond at length later, but briefly: My affliction, one that’s done me a lot of good AND caused me enormous grief, is that I have no affinity for telling people what they want to hear. What I say behind someone’s back is exactly what I’ll say to his or her face.
So I have no problem giving an opinion - I’ve already said we’re in for at least another tough six months - but putting a specific number on it is only mental masturbation. Which formulation? Case/Shiller? OFHEO? NAR? RMLS? Which area? Portland/Vancouver? Portland Metro? Portland only? We have a twenty-four month supply of million dollar homes in Lake Oswego; there’s a two month supply of homes under $350,000 in SE. What possible good does it do buyers or sellers in either of those markets to announce a nebulous “I think there’s going to be a 10% drop in prices”, when at best it’s broad and largely unsupportable speculation?
Jeff - overall as per Case Shiller I guess. I agree it won’t give buyers any good info for a particular area, but it will show a general direction for the Portland market - some areas will fare worse - some better.
My gut feel is top to bottom PDX will see a 20%-30% decline as per case Schiller.
A steep drop - but nothing compared to what other parts of the country are going to see.
I came across this chart analyzing how much house people can really afford -
http://s3.amazonaws.com/iehi-img-mli/20080429chart.png
With the median Portland home now at $340k ish the median income needed is around 80k - assuming a 60k downpayment. Seems to me that’s still pretty far out of wack price wise.
>With the median Portland home now at $340k ish
You’ve proven my point.
The PDX median price isn’t anywhere near $340k; it peaked last July at around $300k, will be around $280k in April. SFDs $320k and $295k respectively. You’re likely thinking average price, which is even less reliable an indicator than median.
As I said, broadly based predictions are a waste of time. When you base those predictions on faulty data to begin with, well…what’s more worthless than worthless?
OK well how about something more generic like how long do you think prices will continue to decline ?
http://jeffreykempe.com/2007/10/24/the-media-and-the-market/
David Oringdulph – Legend Homes – was interviewed in Sunday’s Oregonian. In the interview he emphasized – and emphasized! - what I (and many others) have been saying for awhile: In the Portland real estate market fundamentals are essentially good; it’s the media that have driven buyer confidence – as measured in sales – south.
Jeff - I took the median price from the housing tracker pages *shrug* -
http://housing-watch.com/regionview.aspx?city=Portland&pct=50&g=m
If you are looking to buy the median home in Portland today that’s what you’re looking at.
Anon… [why is it people who consider themselves clever are never so confident in their cleverness that they’re courageous enough to provide a name?] I stand by what I said six months ago - readers here are savvy enough to read the entire post - and I’m more than happy to defend what I’ve said in the last few days. If, in fact, you’re claiming a contradiction, it doesn’t exist; unless you’d like to elaborate?
>If you are looking to buy the median home in Portland today that’s what you’re looking at.
Git, sorry, but your perpetual muddle is wearing me out. You’re pointing to median list prices.
2007/10/24:
“…it’s the media that have driven buyer confidence…”
2008/04/27:
“Yes, the media reported events which accelerated more events, something I’ve said repeatedly, but the reporting didn’t cause the events in the first place.”
Oh I know you gonna claim I’m taking the statements out of context, blah blah. It is pretty clear cut if you ask me, back in October the media was to blame for driving the sales down because the fundamentals are in check according to you. Today, according to you, the media has no effect because people are smart and they see through what the media is saying as spin.
Which is it Jeff?
>Oh I know you gonna claim I’m taking the statements out of context…
You would be correct.
“I’m more than happy to defend what I’ve said in the last few days.”
Obviously not.
Jeff - even if property is selling at 10% under list we are still overpriced.
Or do you not agree we are overpriced given the average income in PDX?
>Or do you not agree we are overpriced given the average income in PDX?
I agree we’re still overpriced - I’ll have new numbers tomorrow - I don’t agree it’s tied strictly to the average income. Much more important: access to capital.
Is it healthy for an average income family to have access to IO, option ARM, etc kind of loans when they will drown when the loan resets? Is that the kind of access to capital you are talking about? I am not trying to be a smartars, I just think the recent run on access to capital was a disaster.
Bearlee, there’s more to the access of capital than novelty loans, many of which did make sense, and still do.
A point uptick in interest rates will drive a significant percentage out of their desired price range. The capital available as equity in one’s current home is a major factor as the down payment on the next. Lake Oswego has the highest median price in the state, but it also has a median age of 42, meaning a high percentage moving in or living here have already made their money and are retired, sitting on a multi-million dollar estate but earning less than $50k a year…