Friday Flashback: Homeowners Will Just Stay Put

Here’s a flashback to Summer of 2006, when I was engaged in a very wordy blog / counter-blog debate with local real estate professional Gregory Wharton.

Here are a few excerpts from his posts.

July 3rd, 2006:

Looking at the factors discussed in the previous four chapters, we can see that not only was there a fundamental economic reason for money to start pouring into real estate (capital flight to safety), three additional factors have been sustaining and accelerating upward price movement. … In all four cases, fundamental economic value has underpinned large increases in prices.

So, even though prices have been increasing, sometimes at breathtaking rates, in Seattle there have been solid economic reasons for them to have done so. That doesn’t necessarily mean that prices will continue to rise at their recent rates (an issue I will address in the final chapter to come), but it also means that a bubble-deflating crash to fundamentals isn’t impending. For those who have been priced out of the market, now facing still-stagnant wages and rising interest rates, that will likely be unwelcome news.

…claims of a bubble are grossly exaggerated. … there is no bubble in Seattle real estate.

July 12th, 2006:

I briefly mentioned in an earlier chapter than when real estate markets soften, it is usually not prices that fall but liquidity. Unless forced to sell for some reason, homeowners can continue to live in their homes if they cannot find buyers at their offering price. This effect has been observed in many different housing markets all around the world, even in very depressed markets. In the U.S., where mortgage finance plays a large part in home purchase decisions, homeowners will typically only sell at reduced prices if they can afford the implied loss of equity (which most can’t). If a sale price would fall below the outstanding principal amount on their mortgage, homeowners will usually stay put and continue making the payments rather than take such a loss. They may not like it, but they do it anyway.

That’s why it’s important to remember that real estate is not like the stock market. Even in a full-scale bear market, prices in real estate typically do not “crash” for systemic reasons.

Seattle has experienced other periods of price appreciation similar to what we’ve seen in the last five years. They’ve all been followed by decade-long plateaus before the next cycle gets going.

Oops. Apparently there were a few faulty assumptions in Mr. Wharton’s thesis after all.

Did Seattle-area home prices skyrocket for “solid economic reasons”? Nope. Are homeowners choosing to just “stay put and continue making the payments” on underwater homes? Nope. Was this boom anything like the booms of the past that just resulted in “plateaus”? Nope.

Lesson: If you base a lengthy argument on a bunch of faulty assumptions all you will end up with in the end is thousands of words that lead to a grossly incorrect conclusion.

The purpose of our Friday Flashback series is to remind people why it’s never a good idea to base your home purchase decisions on the word of someone with a vested financial interest in selling as many homes as possible for as much as possible, no matter what. If you’ve got a good example of local home salespeople or other industry shills on record making fools of themselves in the years before the bubble burst, shoot me an email.
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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

22 comments:

  1. 1
    Blurtman says:

    Seems like he has changed his tune: http://www.linkedin.com/osview/canvas?_ch_page_id=2&_ch_panel_id=3&_ch_app_id=24501580&_applicationId=1200&appParams=%7B%22from%22%3A%22profile_view%22%2C%22view%22%3A%22canvas%22%2C%22page%22%3A%22slideview%22%2C%22slideshow_id%22%3A%221917121%22%7D&_ownerId=2695773&completeUrlHash=I_nx

    But jeepers, the dude’s an architect, not an economist. Not that he would be any more accurate if he were an economist. Self-serving arguments abound. Don’t enact a Diogenes quest in the RE market, afterall.

  2. 2
    HappyRenter says:

    There is one thing though that I like in Wharton’s statements: “real estate is not like the stock market”. Yes, this is probably one of the things that lead to the bubble: speculation in real estate like if it was something traded on the New York Stock Exchange floor.

    (It’s a different context than what Wharton was using it for, but this sentence makes sense when taken on its own.)

  3. 3
    ray pepper says:

    ” it’s never a good idea to base your home purchase decisions on the word of someone with a vested financial interest in selling as many homes as possible ”

    I would further emphasize..” its NEVER a good idea to base ANY PURCHASE on the word of someone with a vested financial interest in you making one decision over another….”

    Words to live by………Right here on the bubble….Free!

  4. 4
    Haybaler says:

    RE: HappyRenter @ 2
    Deja vu.

    Regarding Whartons statements about homesellers choosing to not sell….I think that’s what we have been discussing when we describe the current lack of inventory. Sellers are waiting it out when they can and that describes the majority of homeowners.

    Recent email blast from Redfin’s Kelman…..in his easy, personable description of the current realestate “market”, at the end of which he invites us to join in the blog discussion of his comments. I wanted to chime in and take him to task for perpetuating the idea that real estate is a market like the stock market. Naturally it simply isn’t, trading costs are 10% of the trade and illiquid to boot unlike a real market where similar transaction occur in minutes and similar dollar denominations can cost only $14 per trade.

  5. 5

    RE: Haybaler @ 4 – I’d agree, especially on the liquidity comment. Also, the time periods are a lot different. A day of trading on the stock market is like a year of the real estate market.

    If the real estate market was like the stock market, at the end of the year 48% of homeowners would be getting margin calls! :-D

  6. 6
    Toad37 says:

    RE: Kary L. Krismer @ 5 – LOL, so true.

  7. 7
    karl says:

    hey, you guys might be on to something. A VIX for real estate….10-20-30 year options @pennies on the dollar.

  8. 8
    David Losh says:

    RE: karl @ 7

    That was the intention of Case Schiller, in my opinion.

  9. 9
    Feedback says:

    Congratulations to Tim on defeating Gregory Wharton!

  10. 10
    Scotsman says:

    Wow. Just Wow. I don’t remember reading this tripe but it would have been fun to join in.

    “. . . priced out of the market, now facing still-stagnant wages and rising interest rates, . . . ”

    And there it is, right before his eyes, in his own words, and yet he remains oblivious. The bomb’s fuse is lit, burning as he watches, and yet the little light in his head doesn’t pop on.

    That’s not analysis- it’s bad religion. I wonder if he sees it now.

  11. 11
    Scotsman says:

    RE: Kary L. Krismer @ 5

    “at the end of the year 48% of homeowners would be getting margin calls!”

    Um, essentially they are- it’s called negative equity. Not 48% yet- but we’re headed in that direction.

    It’s a great time to buy a house- prices haven’t been this low in almost a decade, interest rates are at historic lows, and it’s a buyer’s market! Step right up, and see the amazing bearded lady with her three headed sloth!

  12. 12
    Macro Investor says:

    I’d love to see a blog on “where are they now”. Most likely Suzanne is turning tricks to feed her $5 a day meth habit. Steve Tittler is on skid row begging for spare change. David Lereah was the most successful of the bunch. He’s selling hot dogs outside of Yankee stadium… under an assumed name, of course.

  13. 13
    LocalYokel says:

    I was waiting for the irony…nope not a Wharton MBA.
    However, he was a SAE frat boy somewhere and an architect.

    Wanna go bankrupt? Listen to your architect, accountant, and attorney for financial
    advice. There’s your triple A ratings for investments. :)

  14. 14
    Jonness says:

    “Lesson: If you base a lengthy argument on a bunch of faulty assumptions all you will end up with in the end is thousands of words that lead to a grossly incorrect conclusion.”

    Lesson: Never trust a professional.

  15. 15

    By Scotsman @ 11:

    RE: Kary L. Krismer @ 5

    “at the end of the year 48% of homeowners would be getting margin calls!”

    Um, essentially they are- it’s called negative equity. Not 48% yet- but we’re headed in that direction.

    The 48% was a joke with the precise number pulled from the DB “study” discussion in another thread.

    Negative equity isn’t a margin call because you’re not forced to sell. In fact it makes selling more difficult. There are some transactions entered into where you know it’s going to be negative equity going in. The most common example of that is a low down auto lease.

  16. 16

    By ray pepper @ 3:

    ” I would further emphasize..” its NEVER a good idea to base ANY PURCHASE on the word of someone with a vested financial interest in you making one decision over another….”

    By Jonness @ 14:

    Lesson: Never trust a professional.

    I love how people learn the wrong things from events. The California energy crisis teaching people deregulation is a bad thing, or that Enron caused it is another. If you learn the wrong thing you make the same mistakes again and miss opportunities. For example, if you don’t listen to your doctor because she is a professional, you may miss the opportunity of living the rest of your life. And remember, your doctor has a financial stake in your treatment!

    The proper lesson learned is that when someone is talking about what will happen in the future, they’re just making wild guesses, unless maybe it’s when some comet will pass by.

    What’s amazing though is how much heat I’ve taken here for not making predictions of the future, and how so many people expect their real estate agents to be able to make predictions. Apparently people like buying snake oil.

  17. 17
    Macro Investor says:

    RE: Kary L. Krismer @ 16

    “The proper lesson learned is that when someone is talking about what will happen in the future, they’re just making wild guesses…

    What’s amazing though is how much heat I’ve taken here for not making predictions of the future, and how so many people expect their real estate agents to be able to make predictions…”

    I’m guessing “don’t trust professionals” was sarcastic and you took it seriously. When someone says something that outrageous, that should be your first clue. Obviously, it’s buyer beware and you shouldn’t trust anyone you don’t know personally. A smart consumer shops around and learns what to trust.

    The disconnect here is you represent sellers, and Seattle Bubble readers are mostly buyers. To a seller, predictions aren’t important. Just market my house and be done with it.

    But for buyers, there is value in a well educated, well reasoned prediction. You as a professional SHOULD KNOW whether it’s a good time to buy, what neighborhoods will hold value, and what defects to look out for. But those predictions are the “more likely” outcome” rather than some absolute. However, your obligation to the seller makes PARTING WITH that knowledge impossible. You are essentially required to steer us to your listing, rather than what is best for us.

    That is why a computer search is all a buyer really needs. And then maybe a good lawyer to help review docs and close the deal.

  18. 18
    David Losh says:

    RE: Macro Investor @ 17

    Well, you contradicted yourself. On one hand you are saying that as a buyer you should seek out prudent opinions about market trends, and the value of a property, then go on to say that all a buyer needs is an internet search function.

    Buyers, especially, need guidance in a property search. I look at property every day. It’s an addiction. It’s an awareness that most buyers miss until it’s time to buy a property, then forgotten after the purchase. Being a home owner makes people more aware of property values, then again, maybe not.

    The great thing about agency is that a Real Estate agent can solicit listings when it’s time to sell, and buyers when it’s time to buy. Agents, good agents, can have a very rounded view of the market place.

  19. 19
    BillE says:

    By Kary L. Krismer @ 16: you may miss the opportunity of living the rest of your life.

    I’m pretty sure you’ll get to live the rest of your life. How long that is may be another issue;)

  20. 20
    David Losh says:

    RE: Kary L. Krismer @ 16

    You lost the Enron argument over a year ago and you still insist on falling back in that.

    A doctor makes those “wild guesses” by relying on past case study. It’s the same for markets.

  21. 21

    By David Losh @ 20:

    You lost the Enron argument over a year ago and you still insist on falling back in that.

    Just because you didn’t understand doesn’t mean I lost. You simply fell hook line and sinker for the story told by the press and politicians about 10 years ago, and thus you and unfortunately most the rest of society are likely to repeat the same mistake again.

    But for the price controls in place on retail electricity in California, there would not have been a problem. People learned from gas lines in the 70s with price control, but this last time the press and politicians blamed deregulation and Enron.

  22. 22
    larry says:

    If you had worked closely with Greg as I did for several years you would know what a pompous gas bag busily using the largest possible words to demonstrate how little he actually knows this guy is… How on earth did he get his position with the paper??

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