The bottom end is where the first-time home buyers are concentrated. These low-end homes will likely take the full 10% hit, bounded by $8k. Some of these homes are priced below $80,000, so they are bounded by the 10%.

On the top end, as we have discussed, the $8k has essentially no impact. A $1M home selling to a first-time home buyer for $8k less than $1M isn’t going to make or break the transaction, or at least it shouldn’t. Somewhere between the bottom end, which is nearly 100% first-time home buyers, and the top end, which is nearly 0% first-time home buyers, the impact shifts from the full 10% (bound by $8k) to no impact.

Summary:
$80k and under homes will take a 10% hit, as these have nearly 100% first-time buyers.
$80k – (some reasonable amount based on local market conditions) will take a near $8k hit.
High end homes will see little, if any, direct impact.

That’s all independent of the whole “move-up” theory. The “move-up” theory might support a much greater collapse than the $8k on the top end if there are no bottom end buyers.

It could also be that home sales are already put back on firm foundation, but I doubt it.

“car makers set prices”

The manufacturer sets the “MSRP,” Manufacturer’s Suggested Retail Price. Suggested is a key word. The dealership may generally sell above or below that price. In the case of the new Camaro, dealers were initially asking about $5,000 above MSRP. Generally MSRP is the starting negotiation point where the consumer seeks a lower price.”

Car makers set what they sell the car to dealers for. Yes, dealers can charge whatever they want. But let’s say Ford charges the dealers $20K for a car. Dealer A can ask $22K, but if Dealer B is willing to live with $1K margin they can ask $21K and steal share. And so on and so on… This is economics 101.

I’m not sure why you keep harping on this “not all buyers qualified”. It doesn’t matter. Are there properties that don’t attract a single qualified buyer. Sure. But with first time buying making up ~40% of buyers on average, there’s plenty to go around. Actually, what’s probably happening is on the low end it’s bidding up properties well more than $8K (since I can get $8K today for a few extra dollars per month – that appeals to many Americans) and on the high end no impact

There doesn’t seem to be a glut of nice homes for sale in Phinney. I like the neighborhood and would love to live there, but all I see is overpriced bungalows with extensively renovated basements. You may be sitting on a really nice home that could stand out from all the rest. And you could just luck out. A house we rented in Greenwood sold for 524K in May. It was a nice house, don’t get me wrong, but was it 524K? Not to me at least.

The owners had originally listed it right when prices started to fall in 2007, so from their original asking price at close to peak it was down just 9%. I’m just saying you never know who will bite and why.

RE: AMS @ 78 –

Aug SAAR – 14.2M vehicles
Sept SAAR – 9.2M vehicles

In the case of CFC, car makers set prices (and chose not to raise with CFC, which would have been politically unacceptable) and therefore volume adjustments balance supply/demand.

With housing, prices are market set and supply relatively fixed in short-term, therefore we’re more likely to see impact in prices.

“car makers set prices”

The manufacturer sets the “MSRP,” Manufacturer’s Suggested Retail Price. Suggested is a key word. The dealership may generally sell above or below that price. In the case of the new Camaro, dealers were initially asking about $5,000 above MSRP. Generally MSRP is the starting negotiation point where the consumer seeks a lower price.

“(and chose not to raise with CFC, which would have been politically unacceptable)”

CFC prohibited not passing the CFC money to the consumer. I am not an attorney, but charging above MSRP seems to be price gouging under the CFC program. However selling at MSRP seems perfectly acceptable, or at least how would one argue that selling at the suggested retail price that was established long before CFC was enacted is price gouging.

“With housing, prices are market set and supply relatively fixed in short-term, therefore we’re more likely to see impact in prices.”

With the CFC, prices did not come down, so volume did. If dealerships drop the price of new cars by $4,500, then I’d expect higher new car sales numbers (quantity sold).

What you are suggesting is that in housing the quantity sold will remain a constant number (or near constant), so the price will need to be adjusted to maintain the same quantity of sales. This may be true, but it may not take a full $8k, as not all buyers qualified for the credit, as illustrated above.

Aug SAAR – 14.2M vehicles
Sept SAAR – 9.2M vehicles

In the case of CFC, car makers set prices (and chose not to raise with CFC, which would have been politically unacceptable) and therefore see impact in volumes.

With housing, prices are market set and supply relatively fixed in short-term (does $8K make someone move when wasn’t considering before, are builders going to break ground in this market for potential $8K), therefore we’re more likely to see impact in prices.

This is a really difficult claim to support, as not all home buyers qualify for the $8,000, and furthermore, assigning all the gains or losses to a single factor in a complex market is going to be very difficult to support.

I’m posting on seattlebubble, not trying to get published in the American Econonic Journal. Correlation does not equal causation, but when theory and observation are in line, it’s suggestive at a minimum. We’ll just have to see what happens when the subsidy is removed.

As a final thought on $8K, let’s do some really rough math:

1) Stimulus bill passed in late February
2) ~60 days to close, so impact starts being see after April
3) Case Shiller 20 city at 139.25 for April
4) Latest Case Shiller at 144.23 (about 4% higher)
5) Median US home price is about $202K (probably higher in 20 city index)
5) $202 * 4% = $8K

I’m sure it’s just a coincidence…

This is a really difficult claim to support, as not all home buyers qualify for the $8,000, and furthermore, assigning all the gains or losses to a single factor in a complex market is going to be very difficult to support.

There is a 3 year residency requirement. Technically arbitrage requires an immediate sale, as it is simultaneously buying and selling between two different markets.

By AMS @ 20:

RE:
You assume a 100% qualification rate. It’s lower than that, so the “inflated price” is inflated by less than the full $8k.

Doesn’t take 100% qualification rate. I acknowledge the highest bidder doesn’t always win, but usally. So as long as you have enough qualified folks in the market, the price will get bid up. Folks who don’t qualify will just pay more…or won’t win the houses.

Specifically let’s consider, “Folks who don’t qualify will just pay more…or won’t win the houses”

After the $8k expires, those folks will still “just pay more.”

Asking price $250,000

Qualified first time home buyer net price: $242,000
Everyone else must pay $250,000

If there is a first-time home buyer that places a value of $245,000, and is willing and able, then they will pay the $250,000 to net out to $242,000. The buyer will net out $3,000 in alpha, or buy a product for $3,000 less than the value that they place on it, while the seller realized the full $250,000.

If I am willing to pay $249,000, I will not purchase the home until after the expiration of the $8k credit. The home will now sell for $249,000, not $242,000. As an unqualified buyer my value does not suddenly change.

In this example,

With $8k credit the home will sell for $250,000, a net of $242,000 for the qualified first-time home buyer.
Without the credit the home will sell for $249,000.

1) Stimulus bill passed in late February
2) ~60 days to close, so impact starts being see after April
3) Case Shiller 20 city at 139.25 for April
4) Latest Case Shiller at 144.23 (about 4% higher)
5) Median US home price is about $202K (probably higher in 20 city index)
5) $202 * 4% = $8K

I’m sure it’s just a coincidence…

RE: sead97 @ 16 – Looks like someone needs a primer on Arbitrage.

Ok, here you go:

Let’s assume:
1) House’s real value is $100
2) People in group A don’t qualify
3) People in group B do qualify

Group B person can pay 101 for the house, then resell to group A person for 100. B Pockets 7. Until the price goes to 108, Someone from group B can lock in a risk free gain (assume they pre-negotiate the deal).

Now, you are probably mentally factoring in transaction costs (realty fees, sales tax). But there are juridictions that don’t charge sales tax, and there are ways around realty fees (FSBO). Arbitrage opportunities are always subject to the transaction costs required to execute – which can lead some opportunities to persist. And real estate – being less fungible than finanical assets and having higher carrying costs – makes it harder to realize the opportunity. Harder, but not impossible.

So now you’ll say the law prevents by requiring 3 years occupancy. Maybe – I don’t qualify and haven’t looked into the fine print. However, I have infinite confidence in the ability of smart people to game the system.

RE:
You assume a 100% qualification rate. It’s lower than that, so the “inflated price” is inflated by less than the full $8k.

Doesn’t take 100% qualification rate. I acknowledge the highest bidder doesn’t always win, but usally. So as long as you have enough qualified folks in the market, the price will get bid up. Folks who don’t qualify will just pay more…or won’t win the houses.

Agree Scotsman..It is my impression Phinney will lose his money he placed down and the home will sell rather quickly due to its unique location and style.

Kary the walk away option should be held for the likes of Steve Tytlers friend. Even then his pal should live in the home until the bitter end and save save save. If his Mtg is 3000 per month then at the very least the Phoenix Broker should have 30k saved up while his boxes are being packed up.

Just common sense……Kary, your a smart guy………..Just realize you are NOW living in a different world. Adaptation is essential.

RE: Kary L. Krismer @ 59 –

??? I’m not advocating he walk away because it sounds like he can sell it with no out of pocket expense. Why walk and take the credit hit if there’s still enough equity to get you out? I’m not sure where you’re coming from on this one.

I was comparing it not to what you said in that post (or in the past that I remember), but instead the general advice here. The general advice here is to walk away if you’re underwater. Well if that’s the case, then this person would basically be playing with the house’s money if he/she is even right now. If prices go up, they pocket it. If prices go down, they can walk away, because foreclosure has no significance or consequences (per the standard advice given here).

??? I’m not advocating he walk away because it sounds like he can sell it with no out of pocket expense. Why walk and take the credit hit if there’s still enough equity to get you out? I’m not sure where you’re coming from on this one.

This selling season was all about people getting out of properties. If this guy has a chance he should take it.

Just like cash for clunkers the free ride for Real Estate agents and mortgage brokers is coming to an end. If by chance banks, lenders, and insurance companies are given more free tax dollars there will be a back lash.

Anyway you look at the larger economic picture banks are pretty much backed into a corner. This year was a free money give away, next year will be tougher.

An insignificant amount, relatively to the size of the loan.

If a person closes on the first, then they make the full payment, less the dollar or two in principal, and then don’t make another payment for 60 days, plus or minus.

Given a 60 time frame, there is little difference in any of this, but the cash must be brought to closing.

By DrShort @ 33:

There were a LOT of closings in the last couple of days of the month’s end, for whatever that’s worth. Buyers with not much cash for prepaid interest, maybe?

Aren’t any of the MLS insiders gonna give us a sneak peak at the median sales price??

I don’t think “prepaid interest” is legal. Time must pass before interest is earned.

Generally with renting you pay forward.

With mortgages you pay after the time has passed. Your October 1 payment covers the interest that was earned during September.

You don’t typically have a payment on the first day of the first month after closing. The pre-paid interest covers the interest that accrues during those days. So if you close on the 25th you’d have 5 or 6 days of prepaid interest.

Aren’t any of the MLS insiders gonna give us a sneak peak at the median sales price??

I reported earlier the median appeared to be up, but still within the range of the summer. The volume is looking better than when I last looked, but I suspect it will be slightly down. That’s hard to judge.

RE: Rojo @ 21 –

“Why take a huge loss just because some doomsday sayers are telling it is going to get a lot worse.”

Um, because a huge loss is better than a worse-than-huge loss? This isn’t rocket science. And besides, it looks like he can get out at about break even in terms of future commitment verses financing a an even bigger loss going forward. It’s basic risk analysis. There’s a very small chance of any gain or recovery in the foreseeable future, he has the opportunity to zero out at this point (the down payment is already gone), and there is still a significant risk of further reductions.

This is entirely inconsistent with the bulk of other advice given here–the walk away argument.

Assuming there’s only one loan, and not a first and a second, then this person has almost zero risk, because of the likelihood of a non-judicial foreclosure. They can just walk away, which most people here claim is a good option. But if the market rises again–profit!

That said, I’m not advocating that approach (riding it out). Being a landlord can be a PITA, and it’s not for everyone. Also, foreclosure isn’t a good thing to have on your record. I would have sold our house 2 years ago even if we didn’t have significant equity to recover, rather than owning two houses.

For this past selling season my contemporaries have made fun of me for sitting it out. My wife and I have carried the two or three mortgages at a time and it is a killer, even in the best of times.

One investor who has been making deals consistently admitted on hard questioning by me that yes she did have to carry this last property for 9 months before it got an offer. It’s a good house, good location, fair price, but buyers can afford to be picky.

My award winning company A Spring Cleaning has prepared thousands of properties for rent and sale. We have worked with most of the top real estate agents in the Seattle area. We bid for free up to thirty minutes of consultation.

You can click through to my Real Estate site on this comment.

I’m still torn. I’m leaning towards selling the home because it is a very well maintained 1906 craftsman that may still sell okay in this market (Phinney seems to sell their homes very quickly too). Updated electrical/plumbing, all drywall, updated bathrooms and kitchens with heated floors, big deck, new roof, and new paint job. Hardwood floors and original trimwork and doors throughout. 3 bd, 2 ba. Only drawback is the size (1100 sq ft). The neighborhood is great though.

I’d love to rent it but I don’t have a lot of cash reserves (I’m only 28) to maintain the home or carry two mortgages simultaneously if say I had trouble finding renters.

http://www.wtop.com/?nid=600&sid=1774722

http://www.usnews.com/money/personal-finance/articles/2009/10/01/10-hard-hit-housing-markets-that-are-ready-to-rebound.html

However, each and every sign that goes up educates the public and therefore turns into more Buyers eventually. Statistics dictate that 72% of sellers become Buyers. We give out free listings all the time if the property lies on busy streets!

Red Fin will always be the top dog due to their Capital they had infused. 60 Minutes GOOD LORD! That was a great day. With their high 5500 office minimum we get tremendous over flow due to their inability to give anything to the masses in Tacoma, Puyallup, Graham, Bremerton, etc.

Never feel you need to “plug” us. Its just a slow grind at educating the public and if there was no Red Fin it would be even HARDER on us. Findwell needs to enjoy their position just dangling on their coat tails and never attempt to criticize or challenge just offer a more enticing deal to the consumer! Same for Shop Prop and Handspring!

I believe the Phoenix market will be very difficult for us to educate next year because of the lack of companies that do the same. I only wish Red Fin would hit that market hard and assist us!

You know that I was going to recommend you.

I am curious about the different price structures though. My reasoning with redfin is that they are a buyers site and probably the most open search site to the public.

It never occurred to me until this past week that consumers don’t have search sites available that are not filtered, framed with agent links, or extremely difficult to maneuver.

I would offer 3% commission to the buyer’s agent. A half a point for a solid sale is cheap.

I don’t like lease to own, especially for a historic home. Some leasers like to fix stuff. It can get messy. Then if the market changes, like goes down, they want out and you are left with the fixings.

Here is my advice (which is usually the best in my opinion)…………

You list it with someone who charges you no more then 500 or 600. Yes, I know I’m plugging our services but not really. Red Fin wants the Buyers like we do. Thats their focus. They are NOT cheap to LIST! I suggest MLS 4 Owners on their 99.00 plan or 500 Realty type plan for 100.00. You are here at the Bubble so I assume you are somewhat astute and can use this type of service. Furthermore you throw 2.5% out for the BUYERS AGENT. I personally can care less about scoring your 100.00 but find someone who has this service and use them.

Secondly and simultaneously you run ads on CraigsList for Rent, Rent to Own, and Lease Option. Not sure what your payment is but if you find a tenant that is SOLID and can cover the payment your GOLDEN. If you find someone with 10% down and is willing to PAY for a LEASE OPTION your GOLDEN!

Hit it hard all at once but focus on selling it. However, if you find a GEM of a tenant WITH CASH your set. Price the home aggressively and pass the savings on to the BUYER that your saving in listing it.

I have not read this entire thread but I want to tell you being a Landlord can be a pain but with only 1 you will be fine. FIND SOMEONE WITH CASH.

You already know the answer of what you SHOULD do and you don’t need all of us to hold your hand. The answer is obvious and you knew it before you asked it. Now get it done!

A historic home is hard to rent without consequence. Historic may mean deferred maintenance or that some of the charm is valuable, like glass door knobs.

If the house has been completely redone that may influence me, but if there is stuff left to do renting it out may be a hassle.

You have a small buyer pool that I would advertise for on craigslist. I would also list the property with some one cheap, like redfin. I know it’s a sacrilege but you need market exposure without commitment. You do have 5%.

I have had this conversation with friends and family and in my opinion this would be the best year to sell. You should try at least.

Pick the lowest number you can and list, then advertise through all search sites, like zillow, trulia, google, yahoo, and craigslist.

Get rid of it.

I suppose the question to ask yourself is how bad renting out the house will be. I’m renting out my old house right now, and while I’ve been lucky in that I have good renters, it hasn’t been problem free. Do you have enough liquid cash available that you’ll be able to deal with the water heater having issues? Or a pipe bursting in winter? You’ll be paying to maintain the home, but not reaping the benefits of living in it.

The best thing you can do is sit down and do the math. Estimate how much you’ll get in rent and thus cover of your mortgage and realistically what maintenance costs will be. Now estimate that 25% you’ll pay if you sell and compare the two numbers. How long will it take you, renting, the house out, to lose as much as you’d lose in its sale? Two years? Three? Four? Five? If it’s take five, I’d probably rent it. Two… maybe not.

So, yes, I see what the concern is… I don’t have any idea how many buyers fall into the category, but yes, it could be a significant impact for someone who has very little capital.

I am going to guess that these buyers have the “forced savings” mentality too.

RE: DrShort @ 41 -

If I close on the first and pay the full month in advance, I don’t have to make a payment for 60 days, two months.

I guess it really does not matter much in the end.

For those who can barely scrape together the 3.5% down payment, it matters A LOT. They need a paycheck or two to build up some cash.

If I close on the first and pay the full month in advance, I don’t have to make a payment for 60 days, two months.

I guess it really does not matter much in the end; unless, like you suggest, buyers don’t have the extra capital.

RE: DrShort @ 39 – So if they close on the first day of the month they owe the whole mortgage payment in advance, less the dollar or two in principal?

Yup.

By DrShort @ 33:

There were a LOT of closings in the last couple of days of the month’s end, for whatever that’s worth. Buyers with not much cash for prepaid interest, maybe?

Aren’t any of the MLS insiders gonna give us a sneak peak at the median sales price??

I don’t think “prepaid interest” is legal. Time must pass before interest is earned.

Generally with renting you pay forward.

With mortgages you pay after the time has passed. Your October 1 payment covers the interest that was earned during September.

Generally, you pay interest on the remaining days of the month at closing. Then you don’t make your first mortgage payment until the first day of the month following the next.

For instance, if you closed on September 25th you’d pay interest for the 5 remaining days in September at closing. You wouldn’t have a payment due Oct 1st. Your first payment would for due Nov 1st.

So for a lot of cash strapped home buyers, closing at the end of the month is a cash preserving strategy. Should you close in the beginning or middle of the month, you have to bring more cash to close.

What makes you think that rents will not continue to fall? How much rent do unemployed folks feel they can pay?

Another poster here, Magnolia44, ridiculed us for thinking housing prices would ever fall. Then when they did indeed fall, he talked about how much he loved his house, and how it was more than an investment. As things continued to deteriorate he talked about how his equity was disappearing, but he wouldn’t walk until he was under water by a certain amount. With transaction costs, I believe he’s now upside down. In one of his last posts he talked about losing his job……

I’m not in the mood to say “we told you so”. But I do wish things had turned out differently for him. How many more are in the same spot?

One rule of investing or money management that too many overlook or fail to take to heart is that if you suffer a 50% loss, it takes a 100% return on what’s left to build your capital back up to where you started, to get back to “zero.” And 100% gains are hard to come by. It’s better to minimize the losses, given the difficulty of finding big gains, or the long periods of time required at more easily attained rates of return. Sell now- and wait. The chances for success are much higher.

We are talking losses here, right? They are selling below purchase price, not above, no matter what the final sales price. Just because they paid cash does not automatically mean that the home will sell for more than was paid.

You described their situation PERFECTLY (almost).

“Mr. X lists the house 20% off his purchase price because that’s what he thinks he should based on how much the overall market has declined. 1 month passes by, no offers and he decides to reduce by 5%. Another month passes by, no offers, he drops it another 5%. A few months pass by, he has dropped it 10-15% but still no offers”

It took them over a year to sell. I’d have to go back and get all the data, but the price drops are almost exactly what you speak of. There is one big difference, however. Early on they got a “low ball” offer, at least according to their expectations. They ended up selling for less than that “low ball” offer, and it was over a year later too.

In any event, their purchase price was about $125,000 more than selling price, before sales commissions and expenses.

RE: Rojo @ 30 – “Right now is the time for only the very desperate to sell their houses. If a person is not desperate, I don�t see why somebody should try to sell in today�s market.”

We need to discuss discount rates. I spoke with an elderly couple who wanted to move closer to their children. They didn’t owe anything on their home. It was part of their retirement plan.

Were they “very desperate” to sell?

Financially, no, but they had other goals. Certainly their discount rate was not excessively high, but they did want to sell while their grandchildren were young. I guess they could have waited 10 years, but that’s a lot of lost time.

Are they desperate? I don’t consider them desperate.

Next, given enough time, everyone becomes desperate, I suppose. I’ve heard it from single mothers, “I thought the child support would come in sooner rather than never.”

No, I would not call them desperate. They are just living their lives. The needed to sell, could stomach the loss from a gain they never realized. Different situation. Life will continue to happen and market will become normal from that perspective. Right now it is not. Most people are putting a hold on their lives. Kudos to these elderly couple of continuing on.

Desperation comes when you are putting money into a hole. Take this example: Mr. X lists the house 20% off his purchase price because that’s what he thinks he should based on how much the overall market has declined. 1 month passes by, no offers and he decides to reduce by 5%. Another month passes by, no offers, he drops it another 5%. A few months pass by, he has dropped it 10-15% but still no offers and he also lost 10K in mortgage. Yes, he would get pretty desperate. The problem right now is, the buyer pool is very small and very scared. They are rejecting houses for the color of the door. Finding a buyer is not easy unless you are willing to make it into a screaming deal. I am not sure too many people would want to do that unless they are desperate.

Again, it is a personal decision and many things need to be weighed in. Giving an advice to run and cut your losses without knowing details not just silly but also careless.

There were a LOT of closings in the last couple of days of the month’s end, for whatever that’s worth. Buyers with not much cash for prepaid interest, maybe?

Aren’t any of the MLS insiders gonna give us a sneak peak at the median sales price??

I don’t think “prepaid interest” is legal. Time must pass before interest is earned.

Generally with renting you pay forward.

With mortgages you pay after the time has passed. Your October 1 payment covers the interest that was earned during September.

Sorry, but you are wrong on so many levels. Boeing and Microsoft salaries did little to cause the housing bubble here or anywhere else. And even today, the average salaries paid by these companies do not support current housing prices, let alone current housing prices when markets return to more normal interest rates. Inflated housing prices are the result of lax lending standards and loan structures that didn’t even require the payment of sustainable interest rates, let alone full amortization. Can you explain a negative amortization loan with a “teaser” rate to me? Now that even FHA is looking at increased down payments and tighter front and back ratios, far fewer folks can qualify for any kind of loan. Fewer qualified buyers means lower prices- it has always worked that way.

After years of rapidly rising prices even plateaued values and the financial breather they offer would look like an opportunity. Twenty percent off would look like a great deal. But we’re just getting started on this contraction. And I would be surprised if we saw market prices (nominal) matching the highs of 2006/2007 for literally decades. Adjusted for inflation, we may never see them again. What has begun is a global realignment that will keep the damper on U.S. productivity and wages for a long, long time. The great advantages we had, a political and tax system that rewarded risk taking and innovation, are slowly fading away in the face of ever increasing foreign competition and competence.

People used to 30 second sound bites have a hard time believing something is immanent in historical terms if it doesn’t happen by the end of the week, or next month at the latest. It’s frustrating when we can do the math, see the inevitable outcome, but not see progress toward that end over a time frame we can relate to. But that doesn’t change the end result. The math doesn’t lie- there is no way out of the box the U.S. has put itself in without clearing away decades of debt, false growth, and unsustainable commitments. And while lots of people are happy to claim the worst is over, in reality we haven’t even started talking seriously about the needed solutions. When you hear politicians talk about reducing spending and not just deficits, but the debt, you’ll know some level of sustainable economic reality is on the horizon. But to my knowledge the conversation hasn’t even started.