There’s been a lot of talk lately about whether or not the Seattle-area real estate market is “at bottom.”
Before I go any further, I should point out that as a practical matter, I think that it doesn’t really matter where the absolute bottom is. As I have always said:
If you find a home that you love, at a price that you’re comfortable paying (i.e. – you wouldn’t be upset if the price dropped another 10-20%), and you plan to live there for a long time, then go for it.
During the real estate bubble, people were buying homes based primarily on the hope of future appreciation, which led to a mindset of “there’s no such thing as an overpriced house.” If you’re buying a house you can afford, primarily as a place to live, and are paying a price you are happy with, who really cares whether or not we’re “at bottom”? So the price drops another 25%, so what? You were happy with the price you paid, right?
However, I’m not ignorant. I realize that the question of when we will hit bottom is one that interests many people. That’s why I am making this week Bottom-Calling Week on Seattle Bubble. In keeping with the statistics-focused nature of this site, we’ll be using a variety of statistical methods to attempt to forecast when the Seattle-area real estate market will hit bottom, and at what price point (expressed as a percentage drop from the peak).
Here’s how the week will be structured:
- Introduction: Bottom-Calling Week on Seattle Bubble
- Method 0: Blind Optimism
- Method 1: Inventory-Based Forecast
- Method 2: Dollars per Square Foot Linear Forecast
- Method 3: Simple Mirror Forecast
- Method 4: Affordability Index Forecast
- Method 5: San Diego Lag Forecast
- Conclusion: So Where’s the Bottom?
Continue reading this post for Method 0: Blind Optimism. Method 1: Inventory-Based Forecast will be posted at noon today. The remaining methods will be posted each morning this week at 6:00, and the conclusion will go live at noon on Friday.
Bottom-Calling: Blind Optimism
Our first method of “analysis” has been deemed “Blind Optimism.” As best I can tell, this is roughly equivalent to the method Ardell is using in her “at bottom” post, where her reasoning seems to be something along the lines of “homes are selling at X price, so this must be the bottom.”
Here are our basic assumptions for the Blind Optimism forecast.
- January 2009 was the lowest month for YOY negative home price changes.
- YOY home price appreciation will ramp back up to 0% at the same rate it declined from 0%.
Given these assumptions, here’s a rough picture of what Seattle’s Case-Shiller Home Price Index would look like through early 2010:
The Blind Optimism forecast method gives us a price floor in February 2009 at 16.9% off the July 2007 peak. Home prices increase slightly leading into the summer, but retreat back almost to the bottom again by early 2010.
Frankly, I see little to no reason from a statistical standpoint to believe that reality will even slightly resemble this forecast. Year-over-year home price declines in Seattle are accelerating by all measures, as area job losses mount and nationwide economic pressures increase. In my opinion, this forecast is the least likely to come true.
Method 0: Blind Optimism (Summary)
Bottom Month: February 2009
Bottom Value: 16.9% off peak
Likelihood*: 5%
* Likelihood is a totally subjective value assigned according to The Tim’s gut feeling. Treat it accordingly.
Kary L. Krismer » Feb 16, 2009 at 6:36 am
First, I like the comment about who cares if prices drop. Sometimes just finding the right home is tough, so finding it is key. Hopefully you don’t find that right house in a strong seller’s market, but other than that, if you’re a picky buyer finding it is the key. If you’re not so picky about where you live then perhaps price trends would be more important, but for some people it really isn’t that important. Look how many people buy cars every 3 years and how much money they lose there. And unlike houses, 99.9% of cars have no chance of increasing their value once it’s starts disappearing.
Second, I believe in things like resistance and support for stock prices, but not for housing, and I think that’s what the “blind optimism” model is. It’s not surprising Ardell would think that, because she apparently used to be a stock broker or some such thing.
Third, what I’m not seeing here, or in the future topics, is much mention of volume. Volume has increasingly become a more critical issue over the past year, and the last four months especially. And in fact, rather than trying to predict when price will bottom, I’d argue it’s more important to predict when volume will bottom.
biliruben » Feb 16, 2009 at 7:10 am
Volume is useful for Realtors, because low volume = low income, on average.
For a consumer-oriented site like this, volume is only useful as a means to gauge the direction of prices. Most of us only buy one house. We don’t care one wit whether it was the only house bought in all Seattle during 2009, or one of 50,000. We do care what we paid. It’s a useful tool to gauge something important, but for actual humans, not important in itself.
In other words, Kary, go start a post in that echo-chamber you belong to if you are interested in volume. ;)
Kary L. Krismer » Feb 16, 2009 at 7:16 am
Volume is important to sellers as well as agents. Also, you’re making the assumption that when volume is down for all agents, it’s down for all agents. My volume was up in December 2007 and about 3 months thereafter, even though the overall volume was down.
There were under 400 condos sold in Snohomish county last month. There were under 700 SFR units sold in King County last month. That’s very bad if you’re an owner trying to sell such properties. It’s also bad if you own and want to move up. But everyone focuses on price, and hardly mentions volume. Volume should have been the headline for the last four months on stories about the NWMLS monthly stats. Instead it was barely mentioned, if at all.
Wanting to buy! » Feb 16, 2009 at 7:23 am
Fundementals apply more than ever “even in Seattle”. I think we will go back to 150 times to 200 times the monthly rent price for home/condo. The days of renting it for $1200 and paying 400k to purchase are over.
biliruben » Feb 16, 2009 at 7:27 am
I didn’t make any assumption. I said “…on average”. Your volume was up likely because, if I recall correctly, you have only been in the business for 2-3 years. It isn’t surprising that your volume would be up after your rookie year, regardless of what the overall volume was.
You are right however, that volume matters to sellers. I think if this site as buyer oriented, but that’s probably not completely true.
stephen » Feb 16, 2009 at 7:32 am
Not sure the past couple of months and the next few mean anything at all. The entire country is holding it’s breath waiting to see anything positive/negative indicating which direction this calamity is going to go. Sure folks will continue to live but with so many people putting evrything financial on hold it’s anybodies guess how this is going to play out short term.
I guess all of this doom and gloom may force this time period to be the bottom :-)
Sniglet » Feb 16, 2009 at 7:56 am
I agree that the price doesn’t really matter, it’s your comfort level and financial capacity to pay that count.
That said, I do feel that people should consider how it would impact them if a house they were considering to buy were to drop an additional 50% from it’s current price point. This probability of such an even (i.e. a 50% or greater price drop from current valuations) is NOT trivial and is worth taking seriously.
So, if such a scenario wouldn’t cause you hardship, then don’t really worry about whether we have hit bottom or not. Just buy a home you like, in a price range you can afford.
jonasb » Feb 16, 2009 at 8:26 am
If we found a house that we really like and can afford, and very comfortable about the price, AND we bought it THEN it loses 10% or more of its value, I will still regret not waiting. Actually, I will regret it A LOT, even if we can afford it, an extra 10% of the home’s price in our pocket is still a lot of money. It is very different from buying a new car… 10% of 30k is very small compared to 10% of 350k
So we care if prices drop. We’d rather wait longer, make sure that we’re as close to the bottom as possible (prices stay flat for a while) before we buy.
demo_kid » Feb 16, 2009 at 8:35 am
Ardell’s thesis wasn’t that the prices had hit the absolute bottom and were going to rebound. The argument she made was that prices had stabilized after a period of uncertainty after the peak, and that the market had effectively repriced homes at a 20-37% discount from the peak level. This certainly didn’t mean that they could decline further, just that the floor had been reached when it came to the economic chaos over the past year. If Microsoft/Boeing/Amazon/WaMu employees can’t find a job to pay their mortgage and go into default, or if the dam breaks and builders start dumping their properties at pennies on the dollar, there’s nothing to say that this couldn’t decline even further. In fact, I’d argue that more declines are inevitable and just over the horizon, especially if more companies go bankrupt and sell off real estate assets.
Volume is useful for realtors, and the price drops in 2008 pale in comparison to the complete collapse in volume. Putting the cart before the horse is unproductive here though. Statistics over the holidays are crap and sales volume even in January is not really back to a point where a clear picture can be formed. YOY metrics can help, but we’re not going to know how the market is really doing until we get closer to yearly peaks and volume picks up again. We’re also not going to know what the impact will be of these layoffs or of the stimulus measures until the summer as well. After some rather embarrassing projections in previous years, most folks should be very wary of committing to any sort of long-term prognostication of any kind until we can actually see what happens after buyers come out of hibernation.
Regarding price drops, I think that Kary is absolutely right. Folks buy cars all the time, and do not expect them to appreciate unless they buy something expensive and scarce. However, for many people their house is the largest asset in their investment portfolio, and they plan on using it for loan collateral, HELOCs, retirement funds, and so forth. We need to change our thinking radically when it comes to the home as an investment if property values continue to decline. The years of excess in homebuying have come to an end.
In short, I think that Ardell made some good points in her original post and you’ve made some good arguments here (and will be making good arguments in future posts), but it is a waiting game until the residential market ramps up again.
(And of course, despite this roller coaster ride, being involved in residential real estate in the Seattle market is thousands of times better than being a commercial real estate investor around here right now…)
Wanting to buy! » Feb 16, 2009 at 9:09 am
[moderated]
Kary L. Krismer » Feb 16, 2009 at 9:09 am
By jonasb @ 8:
I’m not saying some people shouldn’t think that way. I’m just saying it’s not that big of a deal to everyone.
We had a client who before he met us found a house he loved, but didn’t pull the trigger. Prices have probably dropped over 10% since then, but he regretted not getting that particular house, because he couldn’t find anything else exactly like it.
When we were looking we looked at over 80 houses, and only found two we wanted to make an offer on, and maybe 5 more we looked at more than once. Since then (late 2007) I’ve only seen one other house in a similar price range that I would take over our house, and that’s out of looking at hundreds of properties.
biliruben » Feb 16, 2009 at 9:13 am
Everybody’s different, jonas. After living out of boxes for a year, I felt a bit differently about the possibility of a 10-20% decline after purchase than I did a year or two ago.
If it were just monopoly instead of life, it would be easier to show patience and wait another year or two to squeeze a bit more of the decline out of the market before purchasing.
In real life, we couldn’t wait that long. So I had to use my research to come up with reasonable probabilities and consider our situation. It went something like this, the house and area we have ended up buying:
Probability of another 10% decline, beyond the 15% we’ve seen – maybe 80% chance. We’d be fine with that.
Probability of another 15% decline – maybe 60% chance. We’d be fine with that.
Probability of another 20% decline – maybe 30% chance. We’d start being a little less fine with it, but not the end of the world.
Steeper declines – maybe another 25%-35%, maybe a 5-10% chance. That would be pretty horrible, but given what I consider the low probability of it happening in the area we are buying, it wouldn’t be enough of a reason to keep our living situation in limbo for another year or two.
If one or both of us lose our job, things would get quite tight, but we still would be okay as long as it wasn’t protracted, year-plus of unemployment. We have savings, and we qualified on one salary (though why, I have no idea), so after considering all the possibilities, buying made sense to me.
Everybody’s calculation will be different, and everyone should go through the calculation with as much info as the can possible glean in order to feel comfortable about their final decision.
shawn » Feb 16, 2009 at 9:37 am
RE: Kary L. Krismer @ 3 – Minor point Kary, but when volume is down for all realtors, how is it not down for all realtors? I think you need a modifiter in that claim for it to make sense.
AMS » Feb 16, 2009 at 9:39 am
By Kary L. Krismer @ 3:
Total Sales Volume = Quantity sold * Average Selling price.
If we keep the sales commission constant, the REALTOR commissions are based wholly on Total Sales Volume. In this market we are seeing the quantity sold and the average selling price going down. It should be clear that total sales volume is therefore going down.
Sure an individual agent might be holding his or her own ground in this market, but the majority of agents are experiencing a downward trend in sales value and volume, and thus income is approaching zero.
Oh, and if anything, I think we are seeing downward pressure on REALTOR commissions. Thus even if the REALTOR commissions are not constant, then they are experiencing even greater reductions in income. Couple that with some fixed costs, and it’s very problematic!
AMS » Feb 16, 2009 at 9:42 am
By shawn @ 13:
Total volume can be going down for the entire industry while total volume is going up for an individual REALTOR. This just means that the remaining REALTORs suffer even greater losses in volume.
Clearly volume has increased for the new guy who makes his first sale.
shawn » Feb 16, 2009 at 9:42 am
We have not hit bottom. How do I know? We are not two years past the time the local press has told us we have hit bottom ;)
AMS » Feb 16, 2009 at 9:43 am
By Kary L. Krismer @ 1:
Kary-
Can you suggest how one might balance financial realities with being picky?
AMS » Feb 16, 2009 at 9:49 am
By Kary L. Krismer @ 11:
1. Don’t love something that won’t love you back. Houses do not love people back.
2. If you have the cash, spend it however you want. The problem with today’s market is that too many people purchased what they could not afford. Even if they ‘love the place’ in violation of #1 above, they simply cannot afford it.
An original Rembrandt for $25,000 would be a great deal, unless you don’t have the cash.
The Tim » Feb 16, 2009 at 9:49 am
By jonasb @ 8:
Then I’d say that you wouldn’t meet the qualification of “paying a price you are happy with,” in which case, don’t buy until prices fall to that level for you.
Chris » Feb 16, 2009 at 9:58 am
@biliruben
“Probability of another 15% decline – maybe 60% chance. We’d be fine with that.”
%15 decline for a $250k would MAYBE be fine for some. If you are saying this for a 500k or more valued house, you may wanna put some number on paper if you haven’t figured it out yet.
For 500k house – %15 decline: $75k + %6 agent commissions during sell: $25.5k (out of $425k value home)
You are just losing $100k! in few years. If you are able to afford $100k loss and still ok, you should spend your time in more practical things for you rather than commenting in Seattle Bubble and justifying your case.
Kary L. Krismer » Feb 16, 2009 at 10:16 am
By shawn @ 13:
I’m pulling a Clinton. It just depends on what the definition of the word “all” is. All in the first instance means all realtors in total, and in the second it means not all of them will be down.
Kary L. Krismer » Feb 16, 2009 at 10:24 am
By AMS @ 17:
It’s up to the individual person. Everyone’s different. I wouldn’t suggest they change their level of “pickiness” or there level of risk aversion to match the market.
The worst situation for a buyer is to be picky and be in a very hot market where anything good gets an offer within 24 hours. They can really benefit in this market, because they’re more likely to get what they want–and even at a decent price. Someone who’s not picky they can bid on the rest of the stuff in a hot market, and in this market they can probably drive an even harder bargain by going after properties most people wouldn’t consider, but it’s likely to be a better property than what they’d get in a hot market.
Kary L. Krismer » Feb 16, 2009 at 10:27 am
By demo_kid @ 9:
I’m not so sure that’s what she’s saying, but are you saying that she sees the current market as a resistance point, like the stock market thing I mentioned?
patient » Feb 16, 2009 at 10:33 am
Volume is of very big interrest to bottom calling. The volume bottom is not really of interrest though, it’s the balance point that is. I.e the point of sales volume where price stability is possible in our market. Looking backwards I would guess the point is some where between 2000 and 2500 units closed a month in average. Until volume recovers to that level you will not achieve price stability, you can have temporary false bottoms but without the volume to support it, it will not be sustainable.
Kary L. Krismer » Feb 16, 2009 at 10:44 am
Patient, I’d agree, but I think your numbers might be a bit high. Those type of numbers (especially during December and January) would probably drive the market up, and not be equilibrium.
PublicEnemy#1 » Feb 16, 2009 at 10:47 am
RE: Kary L. Krismer @ 11 –
Kary,
You bring up some good points regarding each individual’s requirements in a home.
Some people will lose out on a dream home and constantly beat themselves up over missing “that one home”. Those are the people for whom any time is the right time, I guess.
For me, I consider a house like an old classic car or a vintage guitar.
Despite what a seller or magazine tells you, experience tells me there is ALWAYS another one out there for less money if you are willing to wait for it to show up.
I have always taken the “wait for the right price” method of purchasing, whether it’s cars, guitars or houses.
Some people have patience, some don’t. Some people need it now, some people choose to wait.
I think both belong in the world of purchasing!
patient » Feb 16, 2009 at 10:54 am
Kary, with average I meant average over the year. Does 2000 – 2500 units seems like a fair estimate to you in that context?
deejayoh » Feb 16, 2009 at 10:54 am
I think what has been shown in other markets during this correction is that when volume picks up, price drops accelerate.
That is because most of the change in volume in other markets has been due to distressed sales and foreclosures making up a larger percentage of sales. In addition, I think volume also picks up when sellers start to panic a bit and drop prices more aggressively.
Given the rise in NTS as a proportion of overall sales that Tim blogged about last week, I would say be careful what you wish for in terms of changes in volume.
patient » Feb 16, 2009 at 11:01 am
Dj, good point. it’s important to note that while price stability can not be achieved without supporting volume, volume is not immediately going to achieve price stability. We had two years of falling volume before prices started to decline. The same can happen with raising volume.
The Tim » Feb 16, 2009 at 11:08 am
RE: deejayoh @ 28 – Ding. That’s exactly why I won’t be doing any bottom-calling based on sales projections. Down in San Diego, January sales volume came in at the highest point in 3 years, but prices are still steadily dropping.
patient » Feb 16, 2009 at 11:10 am
I agree you can;t do bottom calling based on volume but you have to include volume in the formula since without volume a bottom will not be sustainable. I.e it will be a false bottom.
Kary L. Krismer » Feb 16, 2009 at 11:13 am
By patient @ 27:
I don’t usually think in terms of annual numbers, so I’m not sure. I was going to suggest you might need a broader range, but now that I know what you mean that’s not the case. If I had to guess, 2500 a month average (30,000 a year) might be a bit high for equilibrium, but I’m not sure.
patient » Feb 16, 2009 at 11:19 am
Since you still need many months of sustained volume I don’t think a broader range will be helpful. In that case you need to specify the volume for each month instead. Well if 2500 is potentially a bit high and perhaps 2000 potentially a bit low, it seems that the estimate is fair enough :)
Nick » Feb 16, 2009 at 11:23 am
I think it’s terrible terrible advice from the industry that builds this “as long as you can afford it, who cares if it goes down” mentality. It’s financially destructive and it teaches people to ignore the concept of fundamental valuation of financial assets.
OK, now it’s time to note: houses often trade with at least SOME non-economic premium. Fine. We get it. Duly noted.
However, how many tens of thousands of dollars are we advising people to be willing to pay in order to access these “non-economic” benefits? Note: you can paint walls and do landscaping even at rental properties.
Bottom line: very very few Americans can “afford” to pay $600K for a house and then have it be worth $480K 18 months later. My contention is basically that you should NEVER be willing to buy a financial asset that you think has a good chance of substantial depreciation (particularly when considering the absurdly exorbitant transaction costs in and out).
The Tim » Feb 16, 2009 at 11:24 am
RE: patient @ 31 – I was actually thinking about this a few days ago… I wonder if there is a way to calculate what the “baseline” level of sales volume “should” be, using some combination of data on immigration, emigration, home ownership levels, and so forth.
The Tim » Feb 16, 2009 at 11:28 am
RE: Nick @ 34 – Note: my definition of “afford” is probably very different from that of mortgage peddlers, real estate salespeople, and builders. I consider the “30% of gross pay” standard to be an absolute maximum.
Also, note my other primary qualification, that you’re paying “a price you are happy with.” I have long railed against the concept of buying a house solely based on whether you can afford the monthly payment.
The two questions are of equal importance in my mind: “Can I afford this house?” and “Do I think this house is really worth this price?”
deejayoh » Feb 16, 2009 at 11:33 am
By The Tim @ 35:
I think that velocity of home sales is more dictated by the availability of money and peoples expectations about the future than it is by immigration, emigration etc.
If you dig through the numbers the biggest driver of demand through the boom was increased % of home ownership. Going from 60 – 65% is a 10% increase in demand. At the same time, population growth in the PS area was basically flat.
That increase in % ownership was all driven by the availability of funds and “can’t lose” mentality.
Ira Sacharoff » Feb 16, 2009 at 11:34 am
Betting on an exact bottom is like catching a falling knife. Maybe satisfying and fun to watch, but there’s a good shot you”ll end up a little bloodied.
As Patient said, a couple of years ago there was every indication that home prices should fall, but prices kept rising long past when I thought they would…Sales were down significantly, total listings were way up, and prices kept rising ( Well, til they didn’t).
I’m guessing that while rising volume and shrinking inventory is a good indicator that prices will rise, we haven’t even entered that potentially long period of price flatness that I think will happen before prices start to rise.
The Tim » Feb 16, 2009 at 11:37 am
RE: deejayoh @ 37 – I was not really saying that it would be a good way to predict the volume of home sales, just that it might give us a baseline sales volume level that indicates something like “above X sales per month, prices will probably rise, below that, prices will probably fall.”
I’d argue that the 60% home ownership level is probably where things are sustainable, so factoring in that plus people going in and coming out, and some sort of constant for people moving from house to house in the same area, should give you some “baseline” sales volume for sustainable prices.
Thomas B. » Feb 16, 2009 at 11:40 am
The Tim @36
“30% of gross pay” as absolute maximum.
Honestly, I don’t know why more realtors see that. Heck even apartment managers use that as a guide stick to determine if a renter is able to pay. Realtors like to say that housing prices are affordable now, but it’s not affordable if you’ve been laid off. Realtors tend to forget that part of the equation. So, my point is, while prices are off their speculative high, it does not mean housing is “affordable”. It won’t be affordable until layoffs stop happening and median wages catch up to the median price of a home (or median prices of homes fall to meet median wages).
AMS » Feb 16, 2009 at 11:44 am
By Kary L. Krismer @ 22:
Kary-
The best thing that can happen is someone is too picky during a hot market! Making good choices is always better than quick decisions–especially in real estate.
I cannot tell you the number of people who have thanked me for not getting into the “hot” market. On suggested she avoided a $50,000 loss, in hindsight. I suggested that she had blinders on, and foresight really isn’t as difficult, but you must open your eyes.
Love is blind.
jon » Feb 16, 2009 at 11:54 am
RE: deejayoh @ 37 –
“If you dig through the numbers the biggest driver of demand through the boom was increased % of home ownership. Going from 60 – 65% is a 10% increase in demand.”
That is just a shift from rental to owned, which doesn’t really increase the number of houses that are lived in. There are some secondary effects, such as people will be willing to live in a smaller place while renting, but when they buy they want a place they will be happy in for many years, so that will shift the mix towards larger houses.
One graph I found interesting was the YOY change in sales and listings.
http://seattlebubble.com/blog/wp-content/uploads/2008/12/kingcosupplyvsdemandpct2008-11.png
Those lines crossed in 2002, at the start of the boom, and again going the other way in 2006, near the top. They are close to crossing again.
Ray Pepper » Feb 16, 2009 at 11:55 am
Again with calling the bottom? Not for many years friends. There is no bottom. Just a long flat line with a near-term trend line down. Watch the banks. As soon as Nationalization occurs and/or tripling of market cap in BAC,WFC,C we will begin forming a base. Ken Lewis says in 3 years the Fed will have been paid off. I hope so, but I doubt it. Foreclosures will continue unless principle reduction occurs. No principle reduction? Just lowering rates and extending terms=WILL NOT WORK. People will not pay taxes, insurance, upkeep, and payment(albeit lower) when they are upside down triple digits. We are a mobile society and at the 1st sign of a problem THEY WILL WALK! GUARANTEED!
No vested interest? Inability to sell and get a profit bye bye. Many will be happy at a lower payment. But, I assure you its just a band-aid on a wound. The home will eventually end up in foreclosure or short sale. The Fed will and MUST institute principle reduction or this will continue for the next decade.
No principle reduction? Then let them all foreclose with “incentives” to the former homeowner to buy the home back at current market rate (if they qualify), or let the homeowner save money and agree to move-out on a preagreed upon date and to leave the home in good condition. If former homeowners are given 6 free and they can save and have a definitive time they must be out, it will soften the blow.
Just one man’s opinion. But, hey I made King 5 last night but they didn’t wanna hear this or about 500. All they wanted to hear was the lack of traffic at The Seattle Home Show. Apparently 12% less. I didn’t bite. I stated the parking garage was packed and it was quite busy. But, they included my 1 statement “The vendors are telling me people don’t want to buy on credit..just cash.” thats my 3 seconds of fame and air-time. "golly" King 5. always an Agenda.
pfft » Feb 16, 2009 at 12:04 pm
“First, I like the comment about who cares if prices drop. Sometimes just finding the right home is tough, so finding it is key.”
dude, every where you go there are houses and these days they are all for sale!
seriously, who cares if prices fall?
TheHulk » Feb 16, 2009 at 12:08 pm
By jon @ 42 –
Except for two things:
- As noticed recently, a LOT of pending sales have not actually translated into actual closed sales.
- Also, there are a ton of listings that have been pulled simply because the house was not selling. There are also a large number of people who bought anytime from 2005 thru end of 2007 who are scared the way prices have been falling. In fact so scared that they desperately want to sell, but have nightmares about “finding out” the true value of their houses when they do actually list the house.
eric » Feb 16, 2009 at 1:13 pm
RE: Chris @ 20 –
If that 500K home dropped 15% in value to $425K where would the buyer be in 5 years. Assume 10% down on purchase with one loan of $450K at a rate of 5.125%. They would be applying $528 per month to principal or $6339 per year. At year 5 they would have paid down the principal by $31,695 to a balance of $418,305.
At the same time a 15% drop to $425K with a subsequent appreciation of 3% per year would leave them with a value of $478,341.
A 10% drop to $450K with the same 3% appreciation of 3% per year would leave them with a value of $521,673.
I’m no tax wiz, but one of you could probably take this analysis further. When it comes time to sell take off 9% to cover excise tax, and realtor fees. 9% sounded right, as i have no real knowledge if that is correct or not.
In the first assessment that would leave them with $435,290
The 2nd assessment would leave them with $474,722
At 5.125% thats $23,062 per year in interest. I’m sure there are a whole lot of other write-offs that you could deduct. anyone want to then figure out the true interest rate of those in the various tax brackets and give us an overall assessment as to the pros or cons
rose-colored-coolaid » Feb 16, 2009 at 1:50 pm
By The Tim @ 19:
I think that’s not entirely fair. Many (most?) people have a natural disposition towards loss aversion. They literally find something they already possess to be more valuable than something they might get in the future. If I have $100k and no house yet, the thought of losing most of that in the housing crash, even if I buy a home I can trivially afford, is quite demoralizing. This is part of why people take it so hard when perceived value plummets (bought a house for $350k, Zillowed at $600k in ‘07, and now they can’t imagine selling for less than $525k).
A related, but perhaps more interesting human behavior is the tendency to value what we have at a higher rate than others would. I don’t know what the real term for this is, but here’s a PDF that goes into some detail. This is what’s at play when I look at a house the owner insists is worth $500k and I think I would hardly pay $400k for it. Some of it might be delusional, but the owner knows and loves the house, whereas to me it’s just another house.
Anyways, all this rambling is to say that even if someone gets a great house at a great price, it’s not unreasonable for them to be bummed if they later learned they could have purchased it cheaper. Let’s say I got a 2500 sq ft 4 bd 3 bth home in Ballard on a 20,000 sq ft lot for $200k. That is just absolutely awesome, right? But what if I later learned that I could have bought the same place next winter for $100k. I love the house. I can easily afford it. Still, I could have used that other $100k difference to buy a new car, take an exotic vacation, purchase a home theater system, and landscape my yard. It’s not unreasonable to be bummed at the opportunity cost of buying before the bubble crashes.
Ira Sacharoff » Feb 16, 2009 at 2:03 pm
If you’re looking at a house primarily as a place to live for a long time, and then buy that 2500 sq ft home in Ballard for 200,000 dollars, the trick is to stop looking at real estate prices! Once you’ve bought that house and prices are still declining, forget about Seattle Bubble, start reading US Magazine or the National Enquirer.
rose-colored-coolaid » Feb 16, 2009 at 3:32 pm
RE: Ira Sacharoff @ 48 –
I get what your saying Ira, and frankly that’s what I plan on doing when I do decide it’s time to get off the fence. I’m just concerned that people are trying to overcompensate for perceived bias by emphasizing how people should buy just because they kind of feel ready. Let me give you an analogy.
I go to the car dealership with $30,000 cash in my checking account, and find a car I like. The sticker price is $24,500. I can easily afford it, but instead I haggle for a bit and snag it for $22,750. Wow! I just ’saved’ $1750. I’m feeling pretty good about the deal so I start showing it off to my friends. Third friend I visit has the exact same car, and he asks what I paid cause he wants to know if he got a good deal. So, I tell him, and he kind of shakes his head and tells me he paid $21,900 for his.
Suddenly I feel ripped off. $850 more than my friend for the exact same car. I could have saved that and bought a 42″ flatscreen TV.
People get irked over all kinds of perceived situations where they overpay. Ever buy a computer for $1000 and six months later your a little angry that it’s obsolete? How about a $50 shirt only to see it on clearance for $17 a month later at the end of the season? Or what if you buy apples at one grocery store for $1.50 a lb and then see they are only $1.29 a lb later that afternoon at another store (you overpaid by $0.90).
People are literally frustrated by perceived rip-offs valued at less than a dollar, we shouldn’t trivialize making a foolish decision and losing literally hundreds of thousands of dollars. For most people, that’s the equivalent of 2-6 years of labor!
pfft » Feb 16, 2009 at 4:11 pm
“I don’t know what the real term for this is, but here’s a PDF that goes into some detail.”
I believe it’s the endownment effect.
The Tim » Feb 16, 2009 at 4:13 pm
By rose-colored-coolaid @ 49:
I can honestly say I have never spent $50 on a shirt.
Also, I wasn’t trying to trivialize the feeling of being ripped off when prices fall after you bought. I’m just agreeing that if that describes you, then you shouldn’t buy until we do indeed hit the bottom.
AMS » Feb 16, 2009 at 6:14 pm
By rose-colored-coolaid @ 49:
This violates the historic pricing principle.
Even if your friend purchased his vehicle for less, there must be some reason. For example, maybe the dealer was in a different location, maybe the dealer offered a different level of service, and so on.
The shirt that has been discounted a month later–it must have been worth $50 last month. I don’t know about you, but I would not pay the same amount for a month old newspaper as the one published today.
ARDELL » Feb 16, 2009 at 8:09 pm
The Tim,
Case Shiller’s “Blind Optimism” is more optimistic than mine. My “bottom” would be a green line at 20% under peak (vs.16.9% in your graph) for Average Joe Seller and a red one at 37% under peak for foreclosures and distressed property.
I think the bounce looks right, but Case Shiller’s trailing up line into 2010 would be a trailing down line in my 4th quarter of 2009. I expect 4th quarter of 2009 to correct downward for the Spring Bounce period, and possibly go under 1st quarter 2009 by a tad, indicating a continuing flat to slightly down market through 2013 or so, at minimum. Each year will have a Spring Bounce and trail down in the 4th quarter, not up as indicated in your chart in this post.
I don’t expect much upward trend until 2015 or so. Demo_Kid’s read of me was pretty spot on. I am saying you can get a nice house at 20% under peak right now. Not that all people will do that. All sellers won’t take that. But having read my theory, some sellers are saying “If I have to price it that low, I’m not going to bother putting it on market at all”, and that helps with the inventory numbers.
I’d like to give you some really good examples of perfect houses at deep discounts in great locations…but the ink’s still drying on the contract :)
EconE » Feb 16, 2009 at 9:36 pm
By AMS @ 52:
I think RCC’s point is quite valid…and all though it may appear to be stretching it by using cars, shirts and apples as examples, it is a fair enough example of consumer psychology. WRT real estate…it would apply best to condo’s and homogeneous tract style homes.
I only bought one new car in my life. The best price I could negotiate at one dealership (in a nicer area) was $16,750 out the door. I went to a different dealership and got the exact same car for $14,002 out the door. No extra services were offered by the $16,750 dealer.
Is there a reason that the other dealer couldn’t/wouldn’t go lower? I’m sure there was…it could have been an “intangible” reason such as ego from being in a nicer area. OTOH, it could have been a very tangible reason such as higher rent. Problem is…I don’t care what the dealers overhead costs are. Had I purchased there and run into a person who negotiated a $14,002 deal…I would have felt like a moron for not shopping around. I’m glad that I didn’t have to pay nearly 20% more for the same thing.
Let’s talk shirts…
Was the $17 shirt really ever worth $50?
A while back I had a $30 gift card for the Lucky Jeans store. I thought “cool…I’ll just go grab a free overpriced t-shirt”. When I got there, the T-shirts were $50.
Did I get a $50 shirt for $20?
Is a T-shirt even worth $20 let alone $50?
I actually kind of felt like I got a $17 T-shirt for $20 but I’ve gotta admit…it’s pretty comfortable.
Nice try with the “last months news” example however. ;^)
Kary L. Krismer » Feb 17, 2009 at 7:32 am
RE: EconE @ 54 – The dealers have different negotiating strategies. One makes money on volume, the other doesn’t. I doubt there was a “reason” the first dealer couldn’t go lower. They just didn’t want to.
EconE » Feb 17, 2009 at 8:12 am
RE: Kary L. Krismer @ 55 –
Which dealer lost out?
tomtom » Feb 17, 2009 at 8:32 am
By Ira Sacharoff @ 38:
A fear-based analogy that makes no sense.
Buying at the bottom will be like seeing a bunch of knives lying on the floor and picking up the one that catches your eye.
rose-colored-coolaid » Feb 17, 2009 at 8:51 am
By AMS @ 52:
No, my examples only serve to demonstrate that people do not always have perfect knowledge, and that in the lack of perfect knowledge they occasionally make purchases that they later regret.
Take my car example. If I know I can buy a car for $1k less I’ll bargain to that, but if I don’t really know how cheaply I can get it I might still feel like a victor for paying a higher price. EconE’s real world example was a good one, but there’s no reason to suggest two people with different haggling skills might not get different prices on the same car from the same dealer working with the same salesperson.
More to the point, I know people who thought they made killer purchases on houses 6 mos, 1 year, 2 years ago and now are less enthusiastic about them or even kind of regret it. Just because they liked a house and could afford it didn’t make it an optimal use of a scarce resource (money and subsequently time).
Interloper » Feb 17, 2009 at 2:18 pm
I think I see where this series is going.
Each successive day/method will project a greater % decline from Peak.
Best guess: the “affordability” method wins out here on the blog.
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