Friday, September 01, 2006

Lereah: Potential Buyers on Sidelines

David Lereah, NAR’s chief economist, said higher interest rates dampened sales but that price softening is good news for the housing market because it is drawing buyers. “Many potential home buyers have been on the sidelines, some ‘kicking the tires,’ but mostly waiting for sellers to compromise on prices and terms,” he said. “Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.” (NAR 8/23/06)


  1. Richard M. Johnston, Realtor said...
    I distinctly recall turning away 100% buyers because the chance of them getting their offer accepted was very slim.

    I distinctly detect a violation of your fudiciary duy to pesent all offers. Some suprise.

  2. Price decreases cause price increases.

    If price decreases, price increases.

    If price increases, price increases.

    See, real estates never go down!

  3. robert cote said:
    "I distinctly detect a violation of your fudiciary duy to pesent all offers."

    Except in the case of a "buyer's agent", the agent owes his/her fiduciary duty to the seller under the law ... not to the buyer.

  4. Failure to present offers can be considered a breach of fiduciary duty. The first post is is load of self-serving nonsense.

  5. In other words...

    There were plenty of potential suckers waiting in line for ARMs they didn't understand would very soon ruin them. Now that the first wave of suckers has been ruined, the second wave of ARM suckering can begin.

    Lereah is just confirming (IMHO) that there really is one born every minute.

  6. Meant to say failure to present offers considered a breach of duty to the seller. Also constitutes a specific breach of NAR's code of ethics.

  7. Lex said...
    "Meant to say failure to present offers considered a breach of duty to the seller."

    Very true. But the first poster didn't say he wasn't presenting offers, just that he "recall(ed) turning away 100% buyers because the chance of them getting their offer accepted was very slim." Real estate offers must be in writing, if the agent convinced the potential buyers not to put the offer to paper, then the agent was under no obligation to present.

    I once experienced a situation where I had a buyer's agent and I had equested that this agent present an offer for me on a property that was not on the market ... but which fit the bill for what I was looking for ... and was rented out. He delayed his best until I reminded him of the obligation to present all offers made. When he phoned in the offer, with me present, he told the owner something to the effect that he was presenting because he was required to and that if the owner ever wanted to list he could ensure him a price higher than what I had offered! I ended up buying (a different condo) without the assistance of a real estate agent. (That condo wasn't on the market either ... But instead rented out.) I also called the local realtor board to report what had happened but was told he was very active on this board and while the person I was speaking with sympathized with me, no course of action was suggested or ever considered. I was basically given the brush off.

  8. Bob,

    Interesting ... So, you are considering in going in now ... while there are 10% - 15% "discounts" ... just as I had predicted would start to happen. You're not the only one who will. All those except those either unable to buy because of financial or emotional reasons will indeed start hopping in .. Which is what will ensure that prices don't drop much further and that prices return to where they were within a 12 to 18 month period. It's also interesting that you're acknowledging that "value areas" (such as Bethesda) are retaining their values ... again, like I'd said. Why is it I suspect that within the next 6 - 12 months we'll find that a lot of current bubbleheads will have made the switch over to being homeowners ... ? Except of course those unable to buy ... such as the longtime renters who will always find a reason why "it's NEVER a good time to buy!" My last prediction is the David is out looking now, and will join the ranks of homeowners before the end of the year. And what will that mean for this blog?

  9. Lance,

    Take a look at this graph:

    This graph compares inflation edjusted and nominal prices for houses in he DC area for the past 30 years. If the historic trend continues, it could be more than 10 years before DC prices return to their peak price levels of last summer. The last major housing bubble in DC peaked in 1989. Had you purchased a home in 1989, you likely would have had to wait until 2001 to be able to sell your home at the real, inflation-adjusted, price you bought it for. You would have actually lost money, when taking into account 10% in closing costs and sales commission, not to mention maintanence.

    Anyone who would advocate jumping into the housing market in the current environment has no respect for history.

  10. barbosa,

    I acknowledge that looking at history as a guide for future decisions is important. However, understanding historical precedent isn't as simple as looking at a grpah representing past trends and assuming that those trends will automatically repeat themselves. To do so is to make a major error in logic .. It is to assume that nothing ever changes. In the case of DC, the 1990s were a period of bankrutpcy and general financial instability and uncertainty in general for the District itself and of reduced federal budgets for the employment providers of the region as a whole. Do you think it co-incidental that house prices went up just when the District got its financial house in order and the current federal administration started opening the spicket full force for federal funding of the kind most applicable to our local IT industries? I.e., the "fundamentals" in the region today are very very different than they were in the 1990s. Additionally, information flows much much more quickly. Why do you think the upward trend in prices stopped far quicker than we'd ever seen in the past? ... simple answer: instant and plentiful communications and information such as this very blog. This same fast flowing information will also quicken the recovery part of the cycle. Mark my words, 12 to 18 months max ...

  11. Bob,

    Ok, well we are getting into semantics. As I've said before, there were many many places out there in transitional neighborhoods/iffy areas or way out in the exhurbs that in the last year of the boom got overpriced by some 10% - 15% or more. These were for example the condos in Silver Spring being priced for what similar condos in Bethesda were selling for. So, when you say that prices have dropped 10% - 15%, are you referring to these inappropriately priced places? .. or the "value" places such as Bethesda, which as you said earlier today, were holding their prices? Are you going to go into the appropriately priced areas such as Bethesda and offer 40% of what they were asking? or go into the other places where they have now more appropriately priced and offer 10 - 15% below that? Either way, unless you can really get those Bethesda condos for 40% under what they were selling for in 2005, I don't think you can say we've a had a bubble burst. In the end, you're going to get a 10% - 15% discount off of what things were really selling for in 2005 ... irrespective of whether they were appropriately priced or not. "Asking" price doesn't mean much ...

  12. data miner,

    the term "bubble" comes straight to us from the bursting of the "stockmarket bubble" at the turn of the millenium. this was a life-defining moment in the lives of the gen-Xers who when they shortly thereafter went house hunting had to come up with some reasonable scenario that could give them hope for house or condo purchases to become more affordable. taken in that context, a bubble is really not definable based on percentage of selling price dropped or any other percentage change. stock prices had become disconnected from the underlying values of the assets and business which they represented a share of because the market itself --- and not the underlying assets/businesses --- had become the focus of the investors. No such thing has occured in real estate. What we are experiencing is a regular business cycle. The cycle starts with a demand for housing that is in short supply, which drives up prices, which brings all the developers out of the woodwork, which increases the supply beyond the need, which then leads to a price drop (as we are now seeing), which leads to a cut back in new contruction/conversion, which leads to a lack of supply for given demand, and the cycle begins all over again. This is NOT a bubble where people bought real estate only for its investment/gains value and then dumped it all because they realized that the expected gains could never justify the price. Fundamentally, we have too very different things occuring here. I've gone over some of the reasons before why real estate cannot experience a bubble including the fact that you can't have a "market" in real estate in the classis economic sense of having interchangeable widgits. So, you can't really put a percentage value to what defines a bubble ... but the bottom line is that for a bubble to have existed there would have had to be a disconnect between the true inherent value of real estate and what it was selling for ... and meaningless value would just evaporate when everyone found out it wasn't there. But, if it's not really there in real estate, how do you explain to the millions who bought and are living in their homes that it was all fake, and they are living in meaningless, imaginary homes? Ditto the investor with the imaginary rents he is collecting each month? It's not a bubble. Can't be cause the value is real.

  13. DC_TOO,

    Funny how I never heard the term "bubble" applied to the Great Depression before ... Now, you are calling it such and asking me to explain why things are different? There wasn't a bubble in the real estate market back then ... and there isn't one there now either. Things aren't different. Normal business cycles ... then AND now. And let's not try to turn around the circumstances. In the 30s we had a general economic depression that would have naturally pushed down prices of real estate along with everything else. If we have another great depression I would expect our real estate prices now to fall to. But please don't go turning around the situation to say that real estate caused a depresssion then or will cause one now. Opportunities for employment and the pruchasing power that employment provides cause/prevent depressions and real estate prices, like the prices of everything else, are a result of who has how much to buy what.

  14. If you have any doubts that current house prices are unsustainable, check out this graph created by Yale economist Robert Schiller. Schiller is the author of the book "Irrational Exuberance," a book that predicted the 2001 stock crash. He has published a new edition of his book that is predicting a housing crash.

  15. fogcutter,

    we were talking about --- and I was referencing a real estate bubble. there was no real estate bubble then and there isn't one now. the people walking away from their farms were walking away because they couldn't live off the things they were growing there ... the people walking away from their homes were walking away because they similarly couldn't earn money at their jobs ... no one was walking away from their homes or farms because they'd been sold valueless properties which is what a bubble implies ... it is NOT synonymous with the down side of a cycle. bubble = illusionary value ... like the illusionary dividends people expected from stocks. people get real and not illusionary benefits from buying real estate as a shelter or as investment. "bubble" can't happen here unless you expect the real estate to suddenly evaporate. bottom line is that the great depression analogy doesn't work here since you have the scenario backwards ... the causation and effect backwards. If people lost their homes and farms in the great depression it wasn't because of a real estate bubble but because general economic conditions were bad and people didn't have income with which to pay their mortgages ... no such situation exists now ... the economy is thriving ... BUT even if it weren't it would still be the economy causing the problem and their wouldn't be a real estate "bubble" which is an impossibility since the benefits of owning real estate cannot be illusionary.

  16. from the Merriam-Webster Dictionary:


    a : something that lacks firmness, solidity, or reality
    b : a delusive scheme

    Bottom line is that "bubble" as applied to the Dot com bust and as the gen Xers are applying it to real estate means "illusionary benefits" ... and real estate can't have illusionary benefits since by definition it is "real" ... now REITs, shares of builder's stock, etc. are NOT real and you could have a bubble there. but don't confuse that with real estate itself.

  17. you, I kinda miss the "anonymous" posts (not the lewd ones mind you, but the reg ones) ...

  18. data miner, I agree with you that there was a fundamental change after WWII. After WWII prices remained relatively stable, hovering around an index value of 110 up until 1997, the start of the current boom. Prior to WWII, prices were much more volatile.

  19. barbosa,

    what was the reason for the fundamental change after WWII?

  20. " Past is prologue..."

    Precisely. This is why I'm waiting for the next great Irish Potato Famine (IPF). The next IPF will be very much like the last IPF; it will result in a massive influx of Irish immigrants, and I'm going to gouge them on rent.

  21. data miner,

    thanks for finding the substantiation that housing is relatively MORE affordable by median income families now than it was in the early 80s. this puts to rest the argument that the "median" family is being priced out. however, it doesn't address the fact that it is likely that more and more of those below the median income are being left further and further behind ... with home purchases becoming more and more difficult for them.

  22. "Past is prologue..."

    Precisely. Which is why I'm waiting for the US to become embroiled in the next major global conflict (WWIII). Millions will die, the population will drop dramatically, and the demand for housing will fall off sharply. I will then snatch up houses for pennies on the dollar.

    Anything can happen. You just gotta wait...

  23. antonio said:
    "since developers are trying to finish what they already started (greed)."

    Since when is providing places for people to live considered being greedy?

  24. dc_too said:
    "Should salaries inflate dramatically, it is virtually guaranteed that the interest rates under which these mortgage products will increase proportionally. Zero sum game."

    you're confusing new loans with existing loans. for example my loan rate is fixed at 5% for 30 years. even those loans that can go up (ARMs) are all capped ... meaning that they can't go up by more than something like 4% points (e.g., a 5% loan can't go higher than 9%). traditionally, even 9% would be considered very very low. normal mortgage rates before the current period tended to be around 12%. because of the money being spent on iraq and other defense and security needs (and the lowering of taxes for the very wealthy), I think we should expect a return of high inflation and high interest rates in short order. all those with the vision to have bought earlier and gotten low interest mortgages will make out like bandits while the renters and new buyers who won't have the protection of being "locked in" will carry the freight of inflation for us.

  25. From an earlier post. But please, no talking to Lance about charts and data. Data simply is not needed when it’s “no bad time to buy”.

    Lance said...
    "It's not the pricing calcs that are in question ... It's conclusion that is being drawn from the study by at least some bubbleheads (e.g., Robert.) You can't separate the return from the price where the question is "Is buying vs. renting more or less expensive over the long term."

    “Thank you. With that, you have hopefully just put to rest Robert's recurrent use of Shiller's study to negate the value of owning real estate.”

    Ok Lance,
    -the Yale economist Robert J. Shiller created an index of American housing prices going back to 1890. It is based on sale prices of standard existing houses, not new construction, to track the value of housing as an investment over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.
    The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation adjusted to today’s dollars), an equivalent standard house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890)-

    And why would I post this link? Forget the buy vs rent argument; forget the “investment” theme, and it was certainly not to “negate the value of owning real estate”,it was in response to:

    Lance said...
    “It sounds like you are not familiar with the cyclical nature of real estate ... or with the nature of trends borne out of cycles?”

    This is (only) one chart that shows the “cyclic nature” of real estate. Does it not Lance? If not, please provide data and/or a chart/link that shows this “soft landing” cyclic nature of real estate since 1890, or as far back as you dare go.

    And please, I think it’s really about time you put your post where your mouth is and show some type of data, any kind. For goodness sake, look on the back of some captain crunch and post the ingredients. Anything that you deem necessary that indicates that housing can/will sustain current prices.