Each successive day/method will project a greater % decline from Peak.

Best guess: the “affordability” method wins out here on the blog.

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.

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).

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.

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.

Which dealer lost out?

By rose-colored-coolaid @ 49:

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!

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.

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. ;^)

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 :)

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!

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.

How about a $50 shirt only to see it on clearance for $17 a month later at the end of the season?

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.

I believe it’s the endownment effect.

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!

By jonasb @ 8:

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

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.

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.

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

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.

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.

dude, every where you go there are houses and these days they are all for sale!

seriously, who cares if prices fall?

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.

“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.

By AMS @ 17:

Can you suggest how one might balance financial realities with being picky?

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-

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.

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).

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.

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.

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.

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?”

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).

Kary, with average I meant average over the year. Does 2000 – 2500 units seems like a fair estimate to you in that context?

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.

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.

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!

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.

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?

Can you suggest how one might balance financial realities with being picky?

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.

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.

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.

%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.

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

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.

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.

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.

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.

Kary-

Can you suggest how one might balance financial realities with being picky?

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.

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.

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.

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!