The housing market has changed dramatically in the bubble markets over the last year. Back in the summer of 2005 bidding wars were common and inventory was very low in the bubble markets across the USA. Those days are a sweet memory to the legions of stuck flippers.
Today, a new reality faces both buyers and sellers. Its the Inventory Stupid! Inventory has increased dramatically in most bubble markets in the past 12 months. In Phoenix, inventory rose from 10,748 on 7/20/05 to 54,441 on 9/23/06 according ZipRealty and Bubble Markets Tracking Inventory. The inventory of houses for sale in the San Fernando Valley (the Los Angeles area) has more than doubled since August 2005 (DataQuick).At the same time the number of housing units sold has fallen dramatically in the bubble markets compare with a year ago. The California Association of Realtors reported that housing sales decreased 30.1 percent in August 2006 compared to August 2005.
Some real estate agents are claiming that is now a 'buyer's market' due to the increased inventory, lack of bidding wars and the small reductions in prices. Blanche Evans , Editor of Realty Times thinks it is a good time to buy. “You can get a better price on a better home that will pay off when the slump ends.”
So is it a good time to buy in the bubble markets?
In many bubble markets, the peak price was reached late summer 2005. Real prices will continue to decline in the bubble markets for many more years. Prices declines in the bubble markets are very likely to vary between 20% - 65 in real dollars (inflation adjusted) from peak to bottom (it may take up to 8 years). Most of the real dollar price decline will occur in the first 3 years of the housing bust. Indeed, the huge price appreciation that occurred in the bubble markets over the past 5 years or so was a speculative episode.
Just as importantly, monthly rents are generally cheap compared to buying in the bubble markets. Buying in the bubble markets generally costs 1.25 to 2.5 times the cost of renting ( for a similar property; assuming 30yr fixed, solid credit, property taxes, and typical interest rate tax deduction). Each month hundreds if not thousands of dollars can be saved and invested if one chooses to rent as opposed to owning.
Buying now in a bubble market does not make financial sense. As housing inventory continues to rise and prices decline there will be lots of buying opportunities in the future. Additionally, an economic recession in very likely to occur in the US within the next 9 months. If you earn a reasonable income it is an absolute fallacy that you need to "Buy now or be priced out forever." This is not a small temporary 3 months dip like Mr. Lereah suggested. In the bubble markets, this is a multiyear housing market bust. In the Bubble Markets, renting and waiting is fiscally prudent. Don't be fooled.
Posts
A bit of humor from craigslist...
ReplyDelete"Resale value for this condo is better than most others, as its one of the few places that has marble in both bathrooms, granite, stainless steel & washer-dryer in the kitchen, and hardwood floors, crown moudings, plantation shutters, HUGE windows, and ceiling fans throughout..."
If the so-called resale value is so high, why the hell doesn't the current owner sell it at that price???
http://washingtondc.craigslist.org/doc/rfs/212104167.html
Use zillow to track the price hsitory.
ReplyDeleteDont use it for current estimates.
In SOCAl, 2003 is the breaking point for the prices in many areas.
The slope of the price curve was between5/8 degrees till then and it slopes upward dramatically at 25/45 degrees.
Once see this curve you will be able to determin the ball park price very easily
IMO, the prices have not really come down as yet. What some deem to be "reductions" are merely sellers and agents simply not getting their asking price which they have, up to now, always pegged at 5% above what the guy next door sold his place for. Instead of the 5% premium, sellers are adjusting their asking price to what the guy next door sold his place for (which was typically last year's high).
ReplyDeleteThat said, I'd be happily surprised if prices come down 20% but I don't think its likely with interest rates still hovering at 6%. I think a 5-10% reduction is more realistic. Money is still too cheap folks.
David,
ReplyDeleteGreat self-justification for being trigger-shy!
I own homes in the Phx metro area and rents have risen over 10% during the past year. What was once $850 for a 3 bedroom home is not $1025-$1050. My feeling is if rents rise above the $1100 level it will make little sense not to buy given that mortgage for a $240,000 would be all that much higher.
ReplyDeleteMuch of the excessive inventory in the Phx metro is located in the newer developments. This is not to suggest homes closer in aren’t seeing plenty of competition for buyer but to say home prices where I own have fallen 10%-15% from a high of last year.
My advice for buyers in the Phx metro area would be to look around for serious deals while they are in the driver’s seat. The Phx metro aves. 100,000 new residents each year and I tend to doubt buyers looking in Phx, Chandler, East Mesa and Scottsdale will be in a much better position than they are now. On the other hand my guess is home prices for properties located on the outskirts will continue to suffer.
Although it’s safe to say the housing bubble has popped it’s hard to actually predict how far prices will fall further. Given the change in housing psychology, increased inventory I was expecting prices to have fallen a lot further than the current 10-15% but that just hasn’t happened.
And now with the increases in the Phx metro inventory slowing down and interest rate hikes on hold the buyers may not find themselves in a better postion than right now.
Another fantastic post. You have helped many not be fooled by the dirt like Lereah.
ReplyDeleteThe slightest bit of common sense will tell you that now is a horrible time to buy a house. The last year was worse (no inspection contingencies, etc), but its still horrible now (paying twice as much as homes are really worth).
ReplyDeleteImagine being a week into the NASDAQ 5000 crash and some sell side analyst saying "the NASDAQ at 4,700 presents a wonderful opportunity to get into stocks - its a buyers market!"
That's what we've got today. I remember watching CNBC as the NASDAQ started to crumble and analysts said "this is just a temporary blip." The same is being said by housing bulls today. It's either ignorant or dishonest or both.
Sure prices have come down a tiny bit, but this is just the start of the massive price corrections that are coming over the next few years. The average joe still thinks everything is fine in housingland. Once the masses become aware of just how ugly the fundamentals are (for example, the three year supply of condos in DC as reported in today's Wash Post), then the market will crumble under its own bloated weight.
This is NOT a buyers market. Sure there is a ton of supply, but a glut of supply absent great prices is not a buyers market. It will be a buyers market when you can buy for less than the cost to rent. Trust me, we'll see that before this crash is over.
Price declines will average 50% over the next three to five years (from the peak). Outlying areas will be hit worse than close-in areas and condos and towns will be hit worse than SFH's.
This is not a doomsday forecast - this is reality.
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ReplyDeleteMake your offer at 1997 prices + 3.5% annual appreciation and you won't get hurt. If they don't accept it, walk away and repeat cycle.
I own homes in the Phx metro area and rents have risen over 10% during the past year. What was once $850 for a 3 bedroom home is not $1025-$1050. My feeling is if rents rise above the $1100 level it will make little sense not to buy given that mortgage for a $240,000 would be all that much higher.
ReplyDeleteThat's a great argument to buy a house in Phoenix. I was not aware that in Phoenix, unlike the rest of the country, other expenses like property taxes, insurance, and maintenance expenses do not exist.
That 1997 price + 3.5%/year would require about a 38% discount to today's prices in NOVA.
ReplyDeletesource: http://www.nvar.com/market/history.lasso
My $0.02.
anon said:
ReplyDelete"Make your offer at 1997 prices + 3.5% annual appreciation and you won't get hurt. If they don't accept it, walk away and repeat cycle."
But, aren't you going to get tired out from walking around in circles ... getting rejected ... over and over? Let's be realistic and if you really want to do a "bottom up" pricing analysis at a minimum add in for "real value." For example, perhaps this place you're looking at is in Shaw. In 1997 Shaw was still a war zone ... now it is a very desireable place to live. I hope you can agree that that is "real value" added? Prices would easily have doubled there in the period because the real value of the neighborhood has at a minimum doubled. Similarly, look at the population increase for the Metro area as a whole and understand that if the population went up 20%, then desireable places which may not have seen any construction (think North Arlington SFHs) are going to have 20% more people wanting to buy them and bidding up the prices accordingly ... not to mention the fact that in a metro area with 20% more people, a close in location has simply more "real value" in saved commute times vs. the alternatives currently available. I've said it before and I'll say it again. A "home" is not an investment, it is an expense. All the rules that come into play in determining the value of investments go out the window when applied to an expense. And if you're using investment rules to guide your decisions in incurring a housing expense, you are not going to be doing a very good job in minimizing your aggregate lifelong housing expenses. As an anology, you're too busy focusing on getting more ballast into your sinking ship and ignoring the hole below the hull that's letting the water in.
http://photos1.blogger.com/hello/101/3984/1024/JapanLandPrices-2006-Autumn1.0.jpg
ReplyDeleteIt's just too good not to post.
"And now with the increases in the Phx metro inventory slowing down and interest rate hikes on hold the buyers may not find themselves in a better postion than right now."
ReplyDeleteSure. A water-deprived hellhole in the desert, with more than twice the available for-sale inventory of New York City, with less than half the population. Crime statistics in every category higher than the national average. And according to Freddie Mac, a nice fat 30% of 2005 sales were made to investors.
C'mon Larry, you can do better than that.
desi dude, you are right. here is some evidence that the sacramento prices on the low end are selling for much cheaper than the zillow prices:
ReplyDeletehttp://blog.myspace.com/index.cfm?fuseaction=blog.view&friendID=51443639&blogID=172859731&MyToken=f6287163-7d87-4707-9eaa-2c2296ece964
Lance,
ReplyDeleteFaith-based economics! How goes your work these days as a real estate agent? Tough times, I'm sure. Good luck finding people to pull the "trigger."
By the way, where's your analysis and the numbers to support what's implicit in your last statement - that now is a good time to buy? (Hint: take a look at housing stocks and see if the smart Wall St. money supports this view. End hint.)
I think our blog author's analysis is spot on. Though predicting a recession is tricky business - and one no one really wants to be right about.
hmmmm .... this one really should be being posted by a bubblehead ... but it was too good to not post it ...
ReplyDeletehttp://washingtondc.craigslist.org/doc/cas/213292441.html
"All the rules that come into play in determining the value of investments go out the window when applied to an expense."
ReplyDeleteThat is utterly false. If the present-value of your savings on expenses is 0.5% of your up-front cost, then you've made a dumb decision. Paying money now to save on future expenses is an investment, and is evaluated like other investments.
Now, if you want to discuss the value of reducing the variance of your future expenses, then there might be something, because now you're really talking about something like "insurance." But there are lots of ways to reduce the variance of your future housing expenses that don't involve buying a house.
va_investor said...
ReplyDelete“Yes, the past few years have been an anomaly. It is hard to believe that anyone beyond their 20's doesn't realize this. History will repeat. We are on the downside of a normal real estate cycle.”
So which is it? An “anomaly” or “normal” cycle?
http://www.lendingthegreen.com
ReplyDeleteBuy now on interest only loan or be priced out forever.
va_investor said...
ReplyDelete“Both robert. Take a look at the late 80's and early 90's - same stuff, different decade.”
anom•a•ly
Pronunciation: &-'nä-m&-lE
Function: noun
Inflected Form(s): plural -lies
1 : the angular distance of a planet from its perihelion as seen from the sun
2 : deviation from the common rule : IRREGULARITY
3 : something anomalous : something different, abnormal, peculiar, or not easily classified
nor•mal
Pronunciation: 'nor-m&l
Function: adjective
Etymology: Latin normalis, from norma
1 : PERPENDICULAR; especially : perpendicular to a tangent at a point of tangency
2 a : according with, constituting, or not deviating from a norm, rule, or principle b : conforming to a type, standard, or regular pattern
If this is a normal cycle as defined by “the late 80's and early 90's” are you suggesting prices will revert to the mean? Or, if this is an anomaly, are you suggesting that prices will fall below or stay above the historical average?
If this is like 1991, the home across the street from my folks lost 40% of its nominal value over 4 years (slightly more than 50% of real value).
ReplyDeleteDo you buy like my last boss where he was so underwater that only in the *next* bubble could he upgrade? I one buys within 2 years of the peak, I hope you don't need to move for a decade. It will take that long to be in the black on the house.
Homes in my area are poised to drop more than my annual salary during the next 12 months. :(
Then again, so many of the loans in my areas are the high risk that this will make 1991-1995 look so gentle.
Neil
Exactly - given that a 'normal' correction can take up to a decade to get back to peak prices, and can mean that people are still selling for a loss 6, 7, 8 years after buying, what does Va-Investor mean???
ReplyDeleteOk. Folks. NOVA Fence Sitter here has decided to get off the fence. I went apartment shopping in Arlington and anything worth living in is $2000 per month. I've figured out that with interest rates where they are I can get a nice town house for close to that using conventional fiancing. With inventory the way it is I think I can negotiate 10% off list which will get me in the $390K range - which at 6.13% is close to $2100 per month (with tax benefits). Although in purely fiancial terms renting still makes sense I think the "utility" that owning will bring to me is worth the extra $100 per month. In the end I think the bubble heads and the housing heads are both a little bit right. I still believe prices will come down but the cost of renting will provide a floor. Unless we go into full financial melt down mode then all bets are off -but then again at that point we will all be up the creek without a paddle.
ReplyDeleteNOVA Fence Sitter
Good analysis Fencesitter! Let us know when you've found your home! Btw, that $100 differential is going to buy you a lot more than "utility" ... Among other things it buys you is a lifetime guarantee that what you pay for housing won't go up unless you want it to! (eg., you go out and buy a bigger house.)
ReplyDeleteva_investor said...
ReplyDelete“Why get hysterical? It is a normal housing cycle. I am not going to argue semantics with robert.”
Sure va_, it’s a “normal anomaly”. No need to argue semantics huh?
Before I dig in take this first fact, dont listen to "experts", "analysts", etc... They will say anything to keep the market bolstered (esp. NY TIMES) Find a good friend who is in the market flipping or investing or simply buying and holding. Its like talking(experts) a class from a teaBefore I dig in take this first fact, dont listen to "experts", "analysts", etc... They will say anything to keep the market bolstered (esp. NY TIMES) Find a good friend who is in the market flipping or investing or simply buying and holding. Its like talking(experts) a class from a teacher who has retired and isnt in the field. I look at the papers, talk to friends, read blogs and avoid "experts". I can give some insight that may be able to give New Yorkers( and high priced LA areas) a broader perspective. I have properties both in Manhattan and West Palm Beach. I can tell you what will happen in NYC/LA by telling you what's happening in FL. Yes they are two different markets but its like a ripple effect. West Palm Beach real Estate is devastated. You cant imagine how many flippers are stranded here. Im here and its worse than the hurricane (btw- not even one hurricane...so you cant blame mother nature) The prices cant go lower than whats owed on the property and many, like friends of mine, are simply returning the deeds to the mortgage companies. Its less severe than bankruptcy and it still saves some face according to some. As for rents they are dropping dramatically as flippers are trying to get their places rented out... this is West Palm.... NYC /Manhattan is different because of jobs. People need to live there to work. But its only a question of time before that ripple hits the Manhattan market. It will take time but it will make a severe dent. As for buying or waiting.... ooooh nooo... wait until mid 2007 to see the way things are shaping up. If you are desperate to sell, dont wait until 2007....do it NOW. 2007 is predicted to be very high and dry like Elephants walking miles on the Kalhari with no water!!! And with LOTS of hungry lions waiting at the watering holes!!! While there are no crystal balls... I as an investor would advise any friend to WAIT... there will always be deals. Dont plunk your hard earned money in a market that is going SOUTH. The only people that should buy are people that would literally save more money in renting than buying. But with prices falling so fast who knows how low they will go. I remember a woman in our co-op(NYC) building on 18th street who bought her 1 bedroom 14 years ago for 14,000. Yup, no joke and no lie. 14 years is not that long ago... Its long but not that long to see something go from 14,000 to 399,000 in a prewar tenement building. Prices in Manhattan just got disgustingly high. Its as if a bunch of magicians put a voodoo spell on the whole market to hypnotize us and we're all waking up...saying what fu**!cher who has retired and isnt in the field. I look at the papers, talk to friends, read blogs and avoid "experts". I can give some insight that may be able to give New Yorkers( and high priced LA areas) a broader perspective. I have properties both in Manhattan and West Palm Beach. I can tell you what will happen in NYC/LA by telling you what's happening in FL. Yes they are two different markets but its like a ripple effect. West Palm Beach real Estate is devastated. You cant imagine how many flippers are stranded here. Im here and its worse than the hurricane (btw- not even one hurricane...so you cant blame mother nature) The prices cant go lower than whats owed on the property and many, like friends of mine, are simply returning the deeds to the mortgage companies. Its less severe than bankruptcy and it still saves some face according to some. As for rents they are dropping dramatically as flippers are trying to get their places rented out... this is West Palm.... NYC /Manhattan is different because of jobs. People need to live there to work. But its only a question of time before that ripple hits the Manhattan market. It will take time but it will make a severe dent. As for buying or waiting.... ooooh nooo... wait until mid 2007 to see the way things are shaping up. If you are desperate to sell, dont wait until 2007....do it NOW. 2007 is predicted to be very high and dry like Elephants walking miles on the Kalhari with no water!!! And with LOTS of hungry lions waiting at the watering holes!!! While there are no crystal balls... I as an investor would advise any friend to WAIT... there will always be deals. Dont plunk your hard earned money in a market that is going SOUTH. The only people that should buy are people that would literally save more money in renting than buying. But with prices falling so fast who knows how low they will go. I remember a woman in our co-op(NYC) building on 18th street who bought her 1 bedroom 14 years ago for 14,000. Yup, no joke and no lie. 14 years is not that long ago... Its long but not that long to see something go from 14,000 to 399,000 in a prewar tenement building. Prices in Manhattan just got disgustingly high. Its as if a bunch of magicians put a voodoo spell on the whole buying market to hypnotize us and we're all waking up...saying what fu** did I buy!
ReplyDelete