WHAT IS THE REAL CAUSE OF THE HOUSING SLUMP?WHAT'S THE SOLUTION?
The housing slump of 2005-200? will be the subject of real estate historians for some years to come. The NAR, Congress, the media and even some in the mortgage industry are blaming the mortgage industry for the housing slump. I don't accept that for a minute and never did. The mortgage industry didn't lower the institutional interest rates, the fed did that to save the stock market after 9/11. Who can blame home buyers who saw their once in a lifetime opportunity to buy their dream home when they could get a 30 year fixed mortgage for 4.5%? I don't blame home buyers. They don't make policy.
Granted, some lenders have to acknowledge looking the other way when observing abuses.
Granted, many lending institutions did not aggressively enforce lending guidelines.
Granted, many lenders were opportunistic when making housing loans for home buyers in the past 5 years.
Granted, some lenders even engaged in mortgage fraud to extend mortgage money to home buyers who should not have been involved in buying a home.
Granted, buyers wore blinders for some years when they saw the irrestable interest rates and astronomical escalation of home prices and equity growth.
Granted, many folks who should not have been thinking of investing in real estate bought the second and third new homes figuring they could flip the house at a nice profit when the house was built.
What did cause the housing slump? I believe that the cause of the housing slump is high home prices caused by uncontrolled price escalation which resulted from frantic home buying. Buyers bid up the prices of homes and sellers benefited. Now that the buyers are no longer bidding up the prices, market forces dictate that prices must come down. Prices will come down. Prices will continue to come down until they reach the price range where buyers are comfortable with what their incomes will qualify them to buy.
STILL A DISCONNECT. At this point, there is still a gap of about 25% between what buyers can or will pay and list prices for homes for sale. Sure, homes are still selling and prices are actually increasing modestly in some pockets of high demand. However, the number of units sold is still off by about 25% to sustain a viable real estate market that will be in conformity with the overall cost of living increases each year, our historical market value measurement. Growth in housing prices is desirable. Wild, uncontrolled growth in housing prices simply killed the goose that brought the golden egg to settlement. In some markets, particularly in the south, home buyers invested in 2nd and 3rd homes for investment purposes. When prices got to a point where new buyers didn't exist, these investor buyers couldn't sell when the homes were delivered and many are going to foreclosure. That will further depress the market in those area and I don't believe that market will recover until new home owner occupants and first time home buyers feel comfortable with what they can qualify to by for their residence.
Consider the facts: Housing prices increased 80-100% between the years 2002 and 2005. Incomes for the same period increased by approximately 15-20%. In the years 2002 and the 3rd quarter of 2005, incomes increased an average of 1.6% per quarter. Housing, in the same period, was increasing as much as 1.6% per month in many areas. In fact, one of the highest income gains in the years 2002 through 2005 was real estate. Real estate agents and brokers made record incomes. But, these record incomes were usually related to the dramatic escalation in housing prices and buyer's frantic rush to buy and benefit from the very low interest rates.
2005
2004
% Change
Total Sold Dollar Volume:
$ 12,556,228,485
$ 11,388,452,359
10.25 %
Average Sold Price:
$ 543,230
$ 442,838
22.67 %
Median Sold Price:
$ 479,195
$ 385,000
24.47 %
Total Units Sold:
23,114
25,717
- 10.12 %
Average Days on Market:
21
20
5.00 %
Average List Price:
$ 547,360
$ 484,176
13.05 %
Avg Sale Price as a percentage of Avg List Price:
99.25 %
91.46 %
Housing prices in Fairfax County, Virginia increased by an average of 22.67% for in 2005. DID INCOMES INCREASE 22.67% for the same period?
Fast forward to the year 2006.
2006
2005
% Change
Total Sold Dollar Volume:
$ 8,861,711,790
$ 12,556,228,485
- 29.42 %
Average Sold Price:
$ 543,163
$ 543,230
- 0.01 %
Median Sold Price:
$ 470,000
$ 479,195
- 1.92 %
Total Units Sold:
16,314
23,114
- 29.42 %
Average Days on Market:
63
21
200.00 %
Average List Price:
$ 568,698
$ 547,360
3.90 %
Avg Sale Price as a percentage of Avg List Price:
95.51 %
99.25 %
Prices for 2006 remained steady. However, the number of units sold decreased by 29.42%. FOLKS PUT THEIR FOOT DOWN AND SAID "I WON'T PAY THESE PRICES FOR THESE HOMES."
HOME BUYERS HAVE LEFT THE BUILDING.
IN 2007, THE #1 BARRIER TO SALE IS PRICE. I can remember when price was not always the #1 factor in buyer's decision to decide to buy one home over another. Buyers searched for that special kitchen, that wooded lot, that convenient commute, that favorite school, the extra bedroom, the great family room off the kitchen that their present home didn't have. Today, with the astronomical escalation in home prices from 2002 to 2005, many buyers will not pay the price for what they see in their price range. When a 15 year old home with 4 bedroom, 2 1/2 baths, a 2 car garage on a 1/4 acre lot escalated in price from $279,900 to $499,900, buyers suddenly realized that they were not going to buy a home now and decided to simply wait for the next phase in the market. More importantly, and so often overlooked, the buyer's income did not keep pace with the housing price escalation. The #1 barrier to home sales is price.
WHAT WILL IT TAKE TO BRING HOME BUYERS BACK? The disconnect in the housing market is clear and easy to undertand when we realize that, while home prices in some markets increased by as much as 80-100%, incomes did not. If incomes had been indexed to the housing market, we wouldn't be in a housing slump. When buyers can get a reasonable home for their dollar and qualify for a home for their family, they'll be back.
IS IT A TUG OF WAR? Are prices too high? Or, are incomes too low? Which is most likely to change, home prices come down or incomes go up? How far down do home prices have to fall before folks will buy in significant numbers? How far would incomes have to go up for home buyers to qualify for the present prices??
I suggest that we are not likely to see a dramatic increase in incomes throughout the country. If wages started to rise dramatically, as did home prices, the Federal Reserve would consider that inflationary and raise interest rates dramatically, which would, again, slow real estate sales. There is only one cure for the housing slump, lower home prices.
Richard. Good luck. Real estate practitioners are one of the real losers in this housing slump. I remember giving my agents the "save your money" lecture back in 2003-2204-2205. None did. One even invested in a second home for rental which eventually went to foreclosure.
While the prices were jumping I remember saying "how can they keep going up, the numbers just don't make sense" and sure enough here we are 2 years later.
I am amazed at how detailed your Posts are. I felt like this was coming for some time now, and sadly the housing market shifted as expected. It's going to be a while before we see a Good sense of Normalcy again.
Great post Lenn, very informative for me as a newer agent.
My question to you is, how do you explain to people who bought high that their house isn't worth what they even paid for it now. And, what solution do I give them when I tell them it's better to come out even than to foreclose. That walking away even is better. They look at you and say they just lost two years of retirement money. The situation is sad.
Karen Monsour, Realtor, Fort Lauderdale, Fl 954-464-4194
Lenn: Great market perspective and an excellent post. The other thing about the prices escalating is the property taxes that are attached to those prices.... You are very correct to say that good old supply and demand is at work here....that rising prices simply wipe out borrowers who cannot afford houses.....and restrictions on stated income loans has wiped out those who couldn't afford, but bought anyway. Finally, with the speculators gone (since values are declining) why would anyone be surprised at the market?
And Lenn: thanks for very objective and fair comments regarding how the mortgage industry played a part in the slow down.
Janet. Thanks for commenting. I have never blamed the mortgage industry for the housing mess. I was there. I saw buyers bidding up prices. I saw sellers taking the highest bidders. All I saw mortgage folks doing is helping buyers achieve their goals.
Jeff. Great attitude. Problem is, in my market, buyers who get a resale at today's prices are likely to see a significant loss in market value. However, if they plan to live in the home, it's still a good time to buy. We're getting some great prices.
Lenn, house prices could not continue to go up like they were, no ones salaries were increasing at that rate. WE are in a correction of the over-inflated prices. Yes, others were at fault too, but it is what it is. The hardest hit were those who bought high and now are trying to sell. My own home has ( should I sell ) is worth about 50K, less but it was only worth that in my head.
From a listing end, it's really tough, Lenn- understanding your post (which I do) essentially makes MOST of them overpriced- whether intentionally or not. Those that sell sell to people that have a need, not a want (or seem to, anyway). Fived again.
Another great article! This is a Catch-22 for us REALTORS, we should be buying now, yet our incomes don't warrant it, and those stated income loans are gone. Brings true meaning to the investment strategy.....buy low, sell high, at least my taxes will remain stable for awhile.
Missy. I suppose I should add to my post what I believe to have been the cause of the rapid rise in prices. I think I'll go back and add it. I've written about it several time. I believe it was greenspan's efforts to fix the stock market crash after 9/11 and the low interest rates he caused.
Laurie. I do believe that home prices escalated far beyond logic or reason. But, shucks, it was supply and demand. Can't blame a home owner for getting what they could. Can't blame a buyer who simply paid what they could for a home. It simply reached a limit over which no one could jump. That's where we are now. Prices must come down.
Dick. Thanks very much. Realtors were not responsible for the escalation. We don't make policy.
As always a great dead on post about the market. The listings that are hurting are only the ones that were purchased over the last few years. Homes bought prior to this are still in the positive.
I have a chart somewhere from either Amy Crew Cutts of Freddie Mac or Lawrence Yun of NAR that shows the housing prices and the income levels over the last 30 years. If I find it, I will share with you if you'd like.
You made some excellent points, Lenn. Consumers' incomes did not keep up with prices. 'Would love to see that chart, Bob. Lenn, thanks again for the food for thought - it will add a new perspective to the conversation the next time this comes up.
Thanks Bob. I have it. I'll look it over. However, I have to tell you that I don't have a lot of interest is stuff coming from Dr. Yun. The stats will be interesting to study though.
Thanks Margaret. I've been voicing this opinion since I pulled the income stats about 3 months ago and found the "disconnect". No way folks can pay the price for real estate today. At least not in the numbers that we need for all of these Realtors to make a living.
Lenn, I agree it is about pricing. That's actually one of the things I may have going for me in my market. Poinciana has always been a price driven market as opposed to a destination market. Folks bought in Poinciana because it WAS inexpensive. Now values are plummeting so quickly that very soon it will be very affordable again. I'm hoping that since our crash was so fast and so drastic that our rebound will be quicker than other areas. But with 3.5 years worth of inventory on the market prices are really going to have to come down. We need rental property investors back in the market.
You are so right! We need rental properties for sure. Where are all these people going to live when their homes are foreclosed on and they are evicted? I cannot find affordable rentals for these people - atleast here in Fort Lauderdale, Coral Springs, Broward County areas!
Karen Monsour, Realtor, EXIT Realty Properties, Broward County, Fl
Prices will keep coming down until buyers are willing to live in what they qualified to buy. As of today, many folks will not pay the prices for homes in their price range in this area.
In the two hundred or so years since Adam Smith first wrote about economics, two things have remained constant. Supply and demand must maintain some form of equilibrium, and economics is called the "dismal science" because needs and wants are infinite, resources are finite.
The other thing today's market reinforces is that our leaders, both business and political, don't know history.
I lived and participated in the Las Vegas BOOM! I moved and liquidated in October of 2005.............. Lucky I guess I'm sure glad I'm out of there. Same situation as described. Many homeowners had purchased 2-3 homes with the "Pay Option Arm" taking the minimum payment and qualifying for several properties (myself included). It was great when there was an influx of people moving there and it is great when the markets are climbing with appreciation, but I think this is another cause and effect........ don't you agree?
They may not be buying quickly anymore here and I still don't understand why prices are even going up in some neighborhoods, down in others and then up again. It's so weird here...and I surely don't know where it's going and don't understand how it's been...
I will just keep doing what I'm doing...that's all I can do.
Incomes are certainly not moving in an upward direction around here. Higher paying jobs have been leaving the state and the country for years and the lower wage positions don't even pay enough to purchase a starter shack... Not the anyone really buys starter homes, younger people are not as willing to start small and progressively move up like previous generations.
Karen. I'm surprised you could find any rentals for folks who had just lost a home to foreclosure. It's going to be on their credit report pretty quickly. They'll need a good heafty security deposit.
Jim, Jim, Jim. You are so right. If I've said it once, I've harped on it. The market rules.
Kirk. It's the market. It's the market.
Sally. Great plan. It's about all we can do. I do study the market and focus on what is selling and go after buyers for that market. So far, it's working Foreclosure buyers, new construction buyers and relocaiton buyers. That's my target market for now.
Lenn - Hard-core & Dead-on! As if I had to say it, but of all the 'Rainers' you write the most Hard-Core and insightful Real Estate posts of all. Book-marking, this post needs to be studied like a class in a higher education institution. Excellent!!! The income increase didn't follow the price increase of homes, not even close. It was bound to occur. Out of every freaking post I've read, I hope this gets more hits and attention than any other!
Dan. Young first time home buyers don't want to start in a small home around here, but we do have a good alternative in town homes and condos. Townhomes are very popular here. Inexpensive, smaller homes don't work because our buyers would rather have a town home in a good school district than a smaller, older detached home in areas with lower ranked schools. Folks pay a premium for schools around here.
Problem now is that the price of town homes got out of hand in the past few years. I spoke with a home owner yesterday that has a $500K town home in a southern county where no town home is ever going to be worth $500K. In 2004, builders could sell a pig in a poke to buyers who didn't have a good buyer's agent.
Jason. Thank you so much. I was beginning to wonder if the "powers" were even going to read it. "Hard Core" isn't necessarily favored. But, I know my market and I write this for other agents and consumers around here, if nothing else.
I love the ActiveRain "sounding board". Things that I see in my market often apply to other markets as well. Posting to ActiveRain gets my message out.
Lenn, Great post as usual. I talked to a new buyer tonight and his fear is echoed by many buyers I speak to. What if I buy now and prices go down further? They won't be back in large numbers until they're convinced that the market has bottomed out and their fear of making a bad decision is minimized. With all the resources available today...they have too much information to digest.
Lenn - I just came from the seminar on the market conditions in NJ. The years of spiraling increases are over, because the "perfect storm" of factors, that contributed to it, will not likely happen again. The states with increasing population migration and job growth, can fare a bit better. What will bring the buyers back in NJ, is the sellers pricing their homes right. What will make sellers price their homes right? hopefully -it's agents like you who understand the market dynamics.
Lenn- Amen!! It's a constant battle with my client to help him understand the housing market. Thank you for good information here!! It might be just the perfect email to him.
Exquisitely crafted analysis Lenn! Always enjoy reading your analysis. And...you're right. Even in states like Michigan which did not see hugely inflated gains and were also caught in some macro economic issues, the criteria is still applicable. As jobs went...home prices have had to adjust to reflect what the available buyers can afford and are willing to pay for.
I am printing this to disrtibute at my sales meeting. I have to say that in the midwest we didn't see the franatic appreciation that other areas did. Our average sales price is about $202,000 and it is flat from last year. And in total dollar value this year is the 4th best year in history! But the number of units is down about 18%.
Great post. I agree with your post almost 100%. I think our problem now is simply supply and demand. And specifically, supply. Demand is probably closer to normal. The demand we saw in 03, 04 and 05 was not normal.
Well balanced, thoughtful, and concise thesis Lenn. Nice to read about this topic without sweeping statements and finger pointing. It's all inter-connected with many people making the most of opportunities they saw, and ultimatly driving those opportunities into the ground or in this case...sky high.
Really, really liked the rational thinking and presentation!
Another great post Lenn. The only problem I see here is that real Estate has always been an investment. It is right now too - and that has nothing to do with incomes.
Timely point. In many areas, including Vegas, prices recently raced way ahead of the household incomes and now the markets are stalled. Or sinking. One or the other has to give in and you know which one will.
Lenn, I wondered about this myself as the distance between incomes and home prices kept growing. At some point, home prices had to level out. It couldn't go on like that forever. Of course, I entered the real estate business just as it had peaked. I entered the dot.com world three weeks before it crashed. Unlike my dot.com foray, the real estate business was the right move for me. My business is growing despite the general market conditions.
Good post, Lenn. I think your 25% gap figure is probably about right. My money is on 5% taken care of by increasing incomes and 20% taken care of by falling prices. It's not going to be fun to be a seller if you have to take a 20% haircut.
This is an excellent post. You are so right. People simply in many cases do not make enough to afford the prices of the homes. And even the ones who do make enough, are taking a look at the prices and saying that home is simply not worth that much money.
We had quite a few years here in Michigan in which home prices didn't reflect wages. Finally we're starting to see that correction. For example: My single first time buyers can now purchase with a mortgage payment close to what they are paying in rent.
Your area of the country and others (California, Florida, etc..) need to make that adjustment. If only everyone could see things as clearly as you do Lenn. Instead they make grand speeches and throw the baby out with the bath water...
I was going to refrain - but just one thing: I am tired of hearing "young people these days don't want to start small." My husband and I, with two incomes can only barely qualify to buy the house that our parents had when they got married - which they bought on ONE income. And that would be with a risky mortgage - you know the ones that are blowing up all over the place?
I realize agents are frustrated because if only we would buy a little one-bedroom condo they could make a sale. But that would be a decision that would be unwise and harmful to us. Condos used to be always considered a bad investment, and guess what they still are. There is a price point, of course at which it makes sense to buy a condo - I bought one several years ago and sold last year. That price point is long gone.
Franky I question where these agents are coming from who say things like this to us, it's like they were born the day after the bubble started and have no memory of what life was like before. That scares me. I want an agent to be MORE knowledgable than me. Not less.
Lenn: As always, a thoughtful, well-written post. You touched on incomes, noting that incomes have risen about 15-20% between “2002 and the 3rd quarter of 2005”. That is true overall. However, in the blue collar part of the middle class, incomes have not been rising anywhere near that percentage. Their income is not keeping up with the cost of living, as raises are few and far between. Many are losing their reasonably well-paying jobs, and taking less money just to be employed. In Minnesota, a traditionally high employment state, we have for the first time in a very long time a higher unemployment rate than the national average.
This does not bode well for the housing market in the immediate (and even longer ranged) future.
Jay and Jack. Thanks for stopping by. Slowly but surely, I'm finishing my market report about mortgages and housing prices. You are absolutely right about the blue collar part of the middle class not keeping up with many income averages across the country. Unions haven't the power they did. Many of the blue collar employment sectors are moving south, far south across the border or across the Pacific to other competitors of the US labor market. We can't compete with wages in China, but we can buy cheap toys, as long as you don't mind your children being poisoned. Good grief, what on earth happened. If I sell a home built in 1978 or earlier, I have to warn the buyers about the dangers of lead poisoning in their children. How many folks looked the other way on that disaster????? Can't make paint shiny without lead?? News Flash! ! Children don't care about shiny, parents do.
The manufacturing jobs that once were the driving force of our economy is virtually gone. That's sad and it does not bode well for the future socioeconomic outlook for the country. Not every child goes to college and not every child will work in a service sector. Service to what or to whom???
Kathy. Thanks for stopping buy. In my market, it is true that "young people these days don't want to start small." When we show a young first time home buyer what their income will qualify them to buy, it's over, they just renew their lease. In your parent's case, they probably saved for years to buy that first home because banks required significant down payments, which is no longer the case. It's a lot harder to save money these days so without the low or no down payment loans, many fewer first time buyers would even be able to buy. Our entry level pricing is about $250,000 for a condo. How many first time home buyers have a 20% cash down payment for even that???? Low or no down payment loans aren't the ones blowing up. Short term ARMs are blowing up because folks thought they could buy and sell quickly. They no longer can. So, now they're in an resetting ARM loan and can't sell. That's because they planned to sell quickly. They weren't even looking for a place to live long enough for the home to appreciate. They wanted instant appreciation.
Condos are not always a bad investment. When home prices reach the level they have in my market, condos and town homes are the only thing in a price range that folks can qualify to buy. If condos are the only homes in prices where folks can qualify, a condo is not a bad investment if the buyer will plan on holding for a few years. I've owned two one bedroom condos. I made $35,000 on the first one and $46,000 on the second one. I recommend two bedroom condos to buyers because that's the market preference. Condos are a good investment when the prices of towns and singles is significantly higher. Many folks buy condos to benefit from the mortgage interest tax deduction. That is often what makes the condo a better investment than rent.
Of course agents want a commission. If the only thing they are showing you are condos, it could be what you're qualified to buy. Don't blame the agent for that. I suspect that most agents are more knowledgeable than you. They just may not be telling you what you want to hear.
Randal. Thanks for stopping by. Prices are holding here, but the number of units sold is down 20-25%. I'm glad you noticed that statistic because I believe it's very important.
Joan. You are right. Higher incomes won't cure this market. Lower prices are the only answer.
Deborah. Thanks. Finger pointing isn't going to help. Understanding the market and what it will take to cure it is the answer.
Simon. Real estate as an investment isn't our market. 95% of our properties are home owner occupied. Your market is quite different. You have many investor, second home, etc. owners. But, even in your market when the investors see their equity evaporating, they won't be in an acquisition mood.
Esko. First stalled, now sinking. That's the way it is going to be until prices get to where folks can and will buy.
Gail. Very much like the dot.com mess around here in the late 1990s. But, that was only a small segment of the home buying public. Overall home prices in the dot.com crash affected a lot of stock market investors, but I didn't see much fall out here in home prices.
John. I believe your numbers are just about right. But, don't forget that the minute the fed sees incomes rising, they'll send interest rates up, up and away. That will not help the housing market.
Bob and Carolin. That is exactly what happens in my area. They can qualify, just don't want the homes.
Kris. Lots of folks in our industry see things clearly. But, we don't control things. We just adjust to what others do. We can help by rejecting the overpriced listings. "One small step."
Susan. Thanks. Our home prices are just about twice that of your, but incomes in the research triangle are about the same as ours. Makes housing very expensive here.
Richard. The best thing a buyer can do today is buy new construction or negotiate the price down at least 10%. That doesn't make sellers very happy. But, they're either going to take the hit now through negotiation or later through depreciation. Seems to me that the future value of money would say that they would want to take the hit today. If they can.
Faina. We could have another "perfect storm" with another terrorist hit. IMO, that is what started this disaster. The financial markets were hit and hit hard. The fed did what they did to help the financial markets. Those lower interest rates fueled the housing boom. It just spiraled out of hand.
Gilbert. If your client is a seller, he won't be happy. If he's a buyer, he won't be happy.
Thanks Lola. Jobs are critical to a healthy housing market. We have just about ZERO unemployment here. Yet, housing got out of reach of even well earning families. A family earning $100,000 can buy a home priced less than $400K here unless the buyers are going to work in the outer suburbs. $400K doesn't buy much around here. That's town home price. Sad but true. If they go too far out, gas prices each them alive.
"Of course agents want a commission. If the only thing they are showing you are condos, it could be what you're qualified to buy. Don't blame the agent for that. I suspect that most agents are more knowledgeable than you. They just may not be telling you what you want to hear."
Lenn, with all due respect, affordability is at an all-time low. You have been one of the few who seem aware of this so I don't understand where you're coming from right now. With affordability being at the lowest level it has ever been IN HISTORY, the younger person's housing dollar buys less than ever before. Compare incomes to prices in real dollars -- we cannot buy what our parents could buy, this is just a fact. It's called the Case-Shiller index. So yes, in fact we don't want to "start small" now that a starter home has been defined down to a one-bedroom condo that will be continuing to lose value over the next five years. By the way I am comparing what my parents could buy when they were in their mid-20's, we are in our mid-30's with two incomes. We have been saving and have plenty of money in the bank for a down payment. Since when in our society do people who are supposed to be on the verge of starting a family get advised to purchase a 1-bedroom dwelling?
No, realtors are not telling me what I want to hear. They are standing there in a house that has been reduced 50K in six months telling me I will never be able to buy at 2.5x income again. They are not like you, realizing that prices need to come down if they are going to make sales again. Maybe they think they can get a sale if they make me feel like dirt for wanting to buy at the same price levels in real dollars and with the same lending standards that they and their parents could buy for. Or maybe housing will go back to fundamentals and a DINK family can purchase a home big enough to actually live in.
BTW, I am already aware that all I am qualified to buy is a condo, I don't need an agent to tell me that. Last time I bought a property I found several items wrong with my mortgage that my agent didn't even understand - they were trying to break the laws of MD. Needless to say I went to another lender. I was also given a worthless buyer's agency agreement to sign which said in the fine print that if I buy a house listed with my agent's broker then the agent is actually representing the seller, not me. This is the same agent that advised me to waive inspection, etc etc. So, maybe the agents telling me I will never see affordability again are right but I am keeping my own counsel right now. Thanks for listening.
Lenn - Truly excellent post. I am with you and have been for quite some time on this subject. I am in the camp that says we have a ways to go before prices hit bottom. What I don't understand is why the general public believes that all of a sudden things are going to turn around and go right back to the way they were prior to 2005. When you see a decade plus long increase in prices every year and in some years by double digits, it just makes sense that it can not be sustained. Your point in relation to incomes makes perfect sense.
In addition to interest rates being so favorable, another aspect that was not mentioned is the growth in wealth through the stock market. The last 12-15 years we have seen an expansion like no other in terms of wealth created by investment in the stock market. Much of the carefree spending was also made possible by the psychology of paper wealth. Many have become too comfortable with their inflated financial reports. Spending money on homes was made easier by the fact that people doubled and tripled their net worth through the market.
Hopefully wall street does not take a big hit otherwise this country could be in for some very real problems.
"If incomes had been indexed to the housing market, we wouldn't be in a housing slump."
Lenn, if pigs had wings they could fly. I think a truer statement would be that if housing prices had been indexed to incomes, we wouldn't be in a housing slump. Buyers were paying irrational prices for quite awhile, facilitated by the mortgage industry. I don't believe this could ever have happened if there had not been a disconnect between a buyer's ability to get financing and their ability to actually afford making the payments down the road. The banks are now paying the price for their greed and foolishness big-time, along with those buyers who came late to the party.
I recently touched on this issue in my off AR blog, but not in such detail.
In 2000 I could get people into a nicer home for less money than they were paying in rent. Prices were about right.
There are only two reasons that a person would pay a higher monthly payment to buy a home than to rent a similar home.
1. They think it's a good investment and that prices will continue to rise.
2. They just flat out want to own their own home, they are tired of landlords.
Having lived through a major slump where home prices were cut in 1/2 in less than 3 years, I never tell people that house prices always go up.
Although there are certain local economies that are growing enough to slow the slump, I believe the general nationwide trend is down for at least one or two more year unless prices take a more drastic turn downward.
With house prices in the Northwest suburbs of Illinois being very high, the first time buyer has a very difficult time finding more than a shoebox that they can afford. Many of our first-timers do start out in a condo or townhome just out of pure economics. It can be very discouraging for them when they want the yard and white picket fence. However, I must say that I also run into many young couples that are driving BMWs, take big vacations regularly and have huge engagement rings & expensive furniture in their apartments. And they spend more than a down payment on their weddings. When my husband and I first started out, we scrimped and saved and used furniture donated from our parents to get into that first house. I don't see that so much anymore in this younger generation who lives for "now." Affordability may be at an all time low in some parts of the country but the spending habits of people have gotten out of hand as well. They have the income, but they have no money.
Kelly. You focused on a big factor of why many of the "no down payment" loans were so popular. It is based on credit score and income. Down payments are not required. But, that puts a lot more folks in homes. Many folks do consider "shopping" a necessary part of their routine.
Marty. I agree. Two more years at least. I've lived through two real estate busts. It's not easy.
Stefan. I purposely worded it the way I did. Fact is, incomes are not controlled and neigher are housing prices. But, mortgage companies are regulated. So much for enforcement. The "enforcers" were out to lunch. They getting busy now trying to play catch up.
Bill. Thanks for the thoughtful comments. Since you agree with me, what can I say. I, too, believe that we have a way to go. Unfortunately, I have a rather pessimistic feeling about the stock market too. The hedge funds, mortgage related instruments and indices could be in for a rather nasty down turn too. Of course, the fed would "quickly" jump in to save that segment of the economy. There would be none of this "let the market work" talk of wall street were in serious trouble.
Kathy. You made my point precisely. Prices ARE too high. They DO need to come down. I'm enraged when a first time buyer or young couple can't buy a reasonable home when they make $100,000. The entire first time home buyer is "out of the market".
My comments are based on an overall view of the market, not specifically one buyer of whom I know nothing. That said, when a buyer comes along and can only qualify for a condo, they are either going to buy a condo or nothing, they will get the advice from an agent "if you wish to buy, this is what you can qualifiy to buy". That's not the agent's fault.
Over the years, I've had hundreds of buyers who qualify for a condo, townhome, or older detached tell me "I only want new construction" when the only new construction is triple their qualifying price. They're either going to change their outlook on what they will own or continue to rent. I have rarely found that renting is a viable option for anyone except military families who won't be here long enough to pay the cost of sale when they transfer out. I recommend that they rent.
In our present market in Maryland and Northern Virginia, if a buyer can't get a price reduction of 10-15% at purchase, they should either buy new or stay where they are. UNLESS, and it's a big unless, they plan to be in their home for 5 years or more and will be able to recover from the loss in value that is SURE to come in the next couple of years. In that case, the mortgage tax deduction may offset losses to a point where it still makes sense to own.
Bottom line for me is that I believe folks WANT to own their own home. We're a nation of home owners or folks who wished they were or plan to be. Buying real estate is still possible in today's market. You just have to know what you're doing and what to expect.
Lenn, you do a great job of outlining the case for prices being too high, and in many markets they are. However, in other (major) markets, they aren't. I pulled a similar topic on the county I do most of my business in. I found that the median home prices and the median income weren't that far off. What it came down to is that the average family could afford the average home in average circumstances. Of course, here the medain home is about half the cost of your area.
Lenn - Thank you for sharing your wisdom. As you may know, I am in the front row of the choir on this issue. Everyone wants someone else to come up with a solution. The solution will take time. Those that bought in the last five years will have to either lose money on a sale or stay put. Prices do not have to come down.......prices will come down. Those that are selling will have to accept that they may only receive what homes similar to theirs sold for in 2000. I would imagine a great number of my blogs have been about this subject. I do not have the wisdom to ferret out the sources for the facts that you have presented. In my gut, I have always felt that prices would have to adjust downward unless incomes rose drastically. Recently, I shared the similar view that homes will have to drop 25%-50% before we see a return of buyers.
Kathy, there are agents that understand the reality of the market. Lenn is a perfect example. Please do not paint us all with the brush that accurately paints the image of your agent. There are those of us that do understand your frustration and would prefer that you join the legions waiting for prices to drop before purchasing. You will be better served if you are allowed to purchase what you want. You will need patience.
Lenn, just who is writing your posts. They are very well writen and come along very often, how can you possibly have time to gather facts compose make it look and read well, and sell real estate??
I don't have time to read back to my previous post, but I meant that I could NOT find any rentals for them. Their price range is $800 - $1200 for 3 bedrooms. Down here they need first, last, and security. If they had $3600. saved up, they probably wouldn't have foreclosed...
What I mean is, where are all these people who are losing their homes going to live?
I mean, the other day someone told me that 65% of Port St. Lucie down here in Florida is in foreclosure...
Lane. The numbers for Atlanta to Gaithersburg MD are
If you move from Atlanta GA to Bethesda-Gaithersburg-Frederick MD...
Groceries will cost:
12.114%
more
Housing will cost:
100.189%
more
Utilities will cost:
43.731%
more
Transportation will cost:
8.056%
more
Healthcare will cost:
5.624%
more
We're looking at 100% more for housing. The most expensive item in a budget. Our incomes aren't that much higher than Atlanta. Most folks that relocate from Georgia to here gain about 15-20% in income. It's just not enough.
John. Thanks for dropping by. You are in my market so you see what I see. Yes, indeed, 25-30% more downward in prices will bring buyers back out in the numbers we need.
James, James, James. I'm a research junkie. I was an analyst for the SEC for years. Research is in my old bones. I've often said, "Nothing means anything without a statistic". I use statistics to help my very human home buyers benefit and try to get the very best home for their money possible. The Google Gods speak to me.
As for the writing, that's pure Lenn, unedited, unscripted, occasionally spell-checked.
Karen. You are, indeed, in a very depressed market. I've spoken to Bryant Tutas about his market too. However, your job is to stay focused and do the best job you can for your buyer or seller clients. Otherwise, you'll be out of business and then you won't be able to help anyone.
If you focus your energies on folks who are going to lose their homes, you won't be able to help those that aren't losing their homes. Don't get me wrong. I've been known to bring folks home with me. But, if you're not in a position to do that, focus on the ones who can be helped. I'd be looking for buyers in your market. I'd stay away from short sales and pre-foreclosures and focus on healthier, probably higher priced areas and advertise for relocating, retiring buyers. In your market, you've got to work with your head, not your heart.
Lenn, Don't worry about me, those rentals were just a few things the office manager asked me to help out...I'm focused....I have several million dollar deals on my table right now.
I'm just pointing out that as many of the people who have homes for sale right now in this market...no one can afford to rent for $800 - $1200 here in south Florida....
I just met with the marketing Director for where I am advertising for the next 3 months...our season.... It's called Distinguished Homes. Not to worry, I am doing great and have a positive attitude even in this market. I am going to accompany the VP of a yacht transport co. (who I just sold to) to the Yacht Show the end of the week...
I was just making a point...no one can rent down here and survive for less than $2500. a month. Where are the rest of the people that can only afford $800 to $1200 supposed to live??? The problem is whe need these people as well...to do the jobs they do... you know what I mean?
Lenn: I'm late to the discussion, but if wages had kept pace with real estate prices, we would be in the throes of an inflationary cycle that might rival some South American countries.
A reduction in the price of homes is the only solution.
According to MSNBC...it's going to be late 2009, early 2010... even if we have a few buyers in our pipeline to sell to...it's going to be a long hard road...I am not going to work for McDonalds or Walmart...I can go back to my Nuclear Medicine profession and do just fine...that is not my passion though...so I will continue to think positively and move forward...it IS a buyer's market....and I will survive doing what I love best!
The interaction with Kathy was a very interesting juxtaposition to the blog itself.
The blog focussed on how affordability was way down. That is true, it really is. But the general context is one where young buyers had become accustomed to a very nice and spacious HOUSE right out of the starting gate. That was my generation. I came of age in the 1990s. Went out as a single person looking for a place for myself in 1996. My mother had passed away, leaving me with some money. I never expected to afford a HOUSE, but in that day and in that time, I could. So I bought a very small house that I live in to this day. I put nearly 50% down for that house. kind of affordability is a thing of the past.
However, the house in question has many variables that today's buyers would turn their noses up at. It has only ONE bathroom - a deal killer with many young couples, it has only two bedrooms - another deal killer with young people. Although the house has charm and character, the kitchen is dire need of updating and they layout is awkward. Eventually I will have to cover the old textured plaster with drywall - but that rough textured look which I can live with - a lot of young buyers would turn their noses up at.
My father has been ill. So I have been spending a lot of time with him these days. He has practiced real estate law for years. He sees the problem as double-pronged - and after much thought I tend to agree. He said that he and my mother saved for YEARS to get a house. I was about five years old and they had been married nearly eight years before they purchased their first house. The kitchen was TINY. No granite, no cherry wood cabinets, no fancy appliances. There were only 1.5 baths. The furnace was old. A washer/dryer needed to be installed. There was no AC and we settled for window units after a couple of years. I saw all of this through the eyes of a child. I thought it was great fun to watch the house being torn apart and improved, but it must have been a colossal headache for my parents.
Part of the problem is that people got used to things getting better and better. But perhaps what happened when I was in my twenties and thirties was the exception. The rule is that people scrimped for years to afford a small (less than 2000 sq.ft.) home with a single or 1.5 baths and a utilitarian kitchen. In one of my blogs I wrote that I had experienced couples who simply wouldn't compromise on things like having a POOL in their complex or GRANITE in the kitchen. In many ways, this is irrational. It is far too expensive to rent around here even if it allows you to afford "the good life" with all the perks temporarily. The fact is, people who live this way and won't sacrifice, build nothing and end up with nothing. Just as sellers need to adjust their expectations, buyers need to realize that in the past it took years of work to afford what they want right out of the starting gate.
Sorry this is so long.
I am grateful for what I was able to afford when I was 30 years of age. However - I was SURPRISED at what I could afford, and willing to COMPROMISE on features such as fancy kitchens and more than one bath. I was expecting to buy a 2 BR coop or 1 BR condo. My expectations were more realistic and the economy of that moment let me afford more than I could have imagined. So the two pronged problem is that while expectations are through the roof, affordability is very low. I hesitate to say "all-time" low without more facts. My advice to young people is buy what you can afford - fix it up - and sell for a profit in five years. All too many opt to rent in luxury rentals which eat up their ability to build equity. Its a shame. Even though it is difficult, they have more than they think if they would make do and put in some old fashioned sweat equity. The clients that have done this are sitting pretty in houses that they fixed up within 10 years. The others will rent forever.
Karen. Glad things are going well for you. Something we tend to forget is that not everyone can buy. If they have let their credit go, they aren't going to be able to buy right away. In my area with housing so expensive, folks at the lower end of the income scale will either rent or buy as family units with several incomes inlcuded. This is more common with immigrant families who may have 2-3 generations buying together.
The folks who have a real problem buying is the teachers, policeman, etc. They may not qualify for homes anywhere near their jobs. The government programs don't help because the "teacher,policemen, firefighters/EMT" programs only work for homes in very high crime areas. HUD can't sell those homes so they cut the price in half for teachers and others. When I give a family a list of HUD homes that qualify for the special HUD programs, they are furious that in order to qualify for the homes under the teacher/policeman program, they have to live in the highest crime areas around. HUD calls the areas "revitalization areas" and the buyers, to qualify for the 50% price must agree to live in the house for 3 years. These homes are quite often what I call "junkers".
Rents are high here too and going up. Folks won't buy so they are renting and rents are going up. That is the market.
Roberta. That was my point, that, if incomes had kept pace, the fed would have given us 18% interest rates again.
The only solution and there is only one, is for prices to give back some of that 100% rise in home prices when interest rates were very low.
Ruthmarie. You were fortunate that you had a stake from your mother. Without that, you'd have had to save for years to get what you did. I've staked my children and grandchildren to homes because saving is so difficult with our cost of living. I'm fortunate that my business pays me the income to be able to help my family. I figure they did their job just by keeping their credit clean. Too many young folks don't follow good credit practices and then when they need it to buy a home, they've got another barrier.
As for the conversation with Kathy, it had to end because she is so much more knowledgeable about the real estate market than I, it was embarrassing. Also, since she revealed agents as being worthless, there just wasn't anything to talk about. Her personal experiences were far more valuable than my 30 years in the real estate industry.
Len, you have a great sense of humor. Your 30 years experience is indeed useless! My point about my home is that back then I could afford far, far more than I had hoped. But to get there I made several major compromises. I made a lot of concessions to buy a home at that low a price - they included funky layout, one very small bathroom, dated but functional kitchen, busy side street, plastering or drywall required, outside access to basement only, no garage, inability to finish basement due to age and low ceilings. Hilly terrain in yard, only 2 BR total - loft like arrangement on second floor, almost no closet space. I could see hundreds of young people turning their noses up at this type of arrangement-rejecting it out of hand.
Why did I bother? The neighborhood was amazing neighborhood filled with mansions and McMansions. My house is simply the gatehouse. I have an enormous lot that might be subdividable at some point. I bought the house for its land and the neighborhood. It's not an "easy" house. Its a house that requries work, but it was a terrific investment over time. But I do get tired of people saying there is "nothing to buy." They can buy and though its not what they wanted, it probably is just what they need to build equity. Looking for a diamond in the rough is how you make money.
Ruthmarie. I purchased one of those "diamonds in the rough" back in 2003. People thought I was crazy. Well, that wasn't the first time folks though me crazy. I lived in it while my sons and I remodeled. I invested about $75K and netted a cool $350K when I sold in July 2005. You just have to know where and when.
"As for the conversation with Kathy, it had to end because she is so much more knowledgeable about the real estate market than I, it was embarrassing. Also, since she revealed agents as being worthless, there just wasn't anything to talk about. Her personal experiences were far more valuable than my 30 years in the real estate industry. "
Why be sarcastic? I never said agents were worthless. Oddly enough I am reading a blog by a real estate agent right now. What I have gleaned from my personal experience is that I don't trust what someone says just because they are an agent. I used to be in the real estate industry too but working for a developer so I know how to do all of those nifty calculations. Obviously I had some very disappointing experiences with agents but I didn't smear the entire profession.
The ONLY item we disagree on is that it makes sense to say "young people don't want to start small" during a time when affordability levels ensure that their dollar buys less house than their parents' did or even five years ago. The person who said that sounded as if they felt that people have a sense of entitlement just because they want to buy at a similar level to what people of their income could historically afford. It's worth commenting on because a lot of agents seem to have this attitude, I encounter this as the lone looky-lou at deserted open houses across the region. It isn't making me want to work with any of them and it isn't helping anyone make sales. At least someone is putting out the news flash: hey , the sooner prices come back to typical historic levels the sooner we can all buy and sell some houses. I am looking forward to that day, in my case econ 101, in your case experience as an agent tells us both it will come again. And we will all be happy.
And, just to be clear, I swear I am not giving these folks a hard time! I say very little to the agents and most of the time they don't say much to me, but when on occasion I am asked about my buying plans I just say I am hoping to buy when prices go back to approx 2.5x incomes. I am not some cranky person telling people their homes are over priced, I promise :-) I do however want to know the neighborhood inside and out before I buy so I am scoping things out now.
Kathy, that's not happening. A collapse of housing prices to the extent that you want would bring financial markets to their knees. What exactly do you expect to buy when you are on a bread line with no job? What people don't realize is that they are wishing for something that could cause a DEPRESSION not just a recession. If you stay on your current path, you are destined to rent forever.
Historically, people DID start small. My parent's bought their first home when I was five years old. They had been married nearly eight years. It was tiny, tiny by today's standards. Less than 2000 sq.ft. SMALL Galley style kitchen. Only 1.5 baths. 1 car garage - they were always juggling the cars. They were in a 700 sq.ft. unit when they married and moved up to 1100 sq.ft unit when i was about six months old until I was about 5. Were they poor? NO! My father was a successful attorney and my mother (at that time) was a radio commentator. But that's what they could afford in the dark ages of the 1970s - after saving for eight years. We lived in that house for about 12 years. I have a feeling that's a lot less house that you have in mind right out of the starting gate.
As far as builders go, its easy to be critical. I'm a bit tired of the ever-bigger ever-larger McMansions that price out the middle class. They also convey a sense that this is a "normal" sized home. Historically, it isn't and I'd rather see more yard and less house. But you were EMPLOYED you didn't take big risks to work for them. A deal didn't go through, you still got paid. The deal doesn't work - they get nothing but still have overhead. As an agent, you run your own business and start to appreciate the need to make money because our business is high risk. The potential for high reward is the only thing that makes the risk worthwhile.
You DO need to start small if you want to own. My generation was the exception, not the rule. My mother was STUNNED at what young people were buying and taking for granted. I have a couple right now that won't compromise at all. So what do they do? Throw away $3k a month to live in a Trump complex...no that makes sense. Let's blow $90k over three years and have nothing to show for it. Would they be wiling to scale down their expectations they might actually be able to build something for less money each month. For most people buying still makes sense. But you have to bite that bullet and recognize that things aren't always going to go in one direction - better for each generation. That's the reality. You need to deal with it.
Ruthmarie, without getting into too much detail, have you thought about what will happen if we continue with a paradigm where people are paying much more than 28%-30% of income on housing? Bye bye disposable income. Bye bye spending at Target and WalMart. Forget about going to the mall. What would THAT do to the financial markets? Whereas historically housing fundamentals have been at 2.5x incomes. What is more likely to cause disaster, going back to fundamentals or 100% inflation of people's basic needs (shelter.) The only reason we have been able to support such high home prices is with easy credit. If people are actually going to pay back these loans now they will have no money in their pocket to spend on anything else and then you will really see some bread lines.
I wll be sad if it comes to a point where I can never buy but IMO I will have much worse problems than owning vs. renting if the economy should come to such a state. As it is right now I can take the difference between rent and a mortgage payment and invest it and I will do much better than seeing negative apreciation in the housing market. There is more than one way to make money. I do heartily agree with you that the expectation of prosperity in the US is not a guarantee. However I doubt we will become a country where only a "landed gentry" has access to ownership. Would we just bulldoze all of the regular suburban houses? If the number of rich people is not growing (which it isn't) then who would buy the houses.
Anyway, even though we disagree I'm glad we are at least discussing it.
I moved back to VA in fall of 2001. I remember walking into a new housing development and telling the CSR there, that we'd be back after the 1st of the year, when our income had risen so that we would easilly qualify for the home we were interested in. Her response? After January 1st, the prices will be going up 20%. I was dumb-struck. And, that 20% increase continued for years. We were always "just out of reach" for a 2,000 square foot home (we had 2 children at the time). It got so bad, that at the peak, we were looking at townhomes for $350-$400k -- a TOWNHOME 1hr south of DC for $400k?
We knew it was whacked. We waited. Now, were carefully watching for our home to hit a realistic price. We're looking at REOs -- but even the banks aren't being realistic about what they will take for a home that needs work.
Let's see... a 2600 square foot home, full basement. Needs 100% new flooring, paint, roof, garage doors, wood-rot on windows and railings, appliances -- and they want $389! At last listing, the house was listed for $339 (nearly a year later). Know what I can get for $339 right now? a 2700 sq. ft. home, PLUS a finished basement, granite counters, upgraded cabinets and hardwood on the entire first floor.
How long before the bank-owned properties are listed for what they are worth?
Seriously, being as patient as possible. But that darn money is burning a hole in my pocket (no, actually it's more like 4 kids in a partially finished basement, with about 900 square feet, that's getting on my nerves). I wish I could waive a check at potential sellers and say, "who wants my money -- I'm looking for the best deal to make me move!"
It certainly would make my life easier!
One development in our area has 3 YEARS worth of home inventory. And I still can't fathom the number of "estate home" developments. It seems like 8 out of 10 homes in the Parade of Homes was in a development with homes STARTING in the mid 400's or higher. And, they were nothing special homes to-boot.
Thanks for being sane -- and not being afraid to state the truth.
"I wish I could waive a check at potential sellers and say, "who wants my money -- I'm looking for the best deal to make me move!""
I have had this exact thought many times.
I think everyone is done reading this thread, but one more thing:
"If you stay on your current path, you are destined to rent forever."
This housing situation is not my fault! I am priced out. It's not that I stubbornly refuse to buy, it's that I cannot buy something that meets my needs and still put food on the table. Owning a home is not an absolute good to be pursued to the exclusion of all other things in life. It is not worth spending 50% of my gross income in order to own. Yet I can easily rent something that meets my needs. I am paying off my student loans and building a portfolio with my downpayment money, no use keeping it liquid. We're going to be waiting a while the way things are going.
Thanks very much for your thoughtful and supportive comment.
Your comment about foreclosures being overprice in some cases is correct. I'll be posting about a foreclosure that we filmed yesterday in Woodbridge in Prince William County priced at $549,900.
That bank foreclosure has been on the market for over 200 days. HOWEVER, it happens to be located next door to a new home model. The builder is offering new homes in the same community with an upgraded kitchen, which the foreclosure does NOT have, a deck, which the foreclosure does NOT have, hardwood in the foyer, kitchen and more, which the foreclosure does NOT have, and more.
Watch my blog and I'll explain why I have 5 new homes under contract and am NOT selling over priced resales this year. It's a bit more complicated than that because as a broker, I have access to detailed real estate sales data that permits me to model TRENDS. Often trends are more informative than sales data.
We have also toured a number of homes in Stafford County priced UNDER $400K. These, we believe are a good buy because the builders have adjusted the prices to about 20% lower than a year or two ago. That gives a home owner some cushion for the future. We may see further declines in the next year or two.
Of course, we believe that home ownership is still a worthwile goal, if the owner plans to occupy the home for some years. It's a complicated matrix to determine the value of home ownership and we never discount the benefit of living in your own HOME.
Good luck with your search. Northern Virginia is a great place to live. I'm in Loudoun County and I love it. I have a place in MD, but most of my time is spent in VA.
Its interesting what people are saying about the banks. We aren't having many foreclosures in my immediate area. But the few that we have are priced very high. We've had so few that its very hard to draw conclusions based on our market - but I've been reading that this is a trend nationwide. I was discussing the listings with several brokers I know and they agreed that the listing prices were high. One would think that the bank would want to unload these homes, but apparently, they too want to get all their money out!
Rosemarie. Thanks for commenting. I follow foreclosures very closely in my market area because I get so many calls from buyers looking for a "deal". For years, many years, I've been trying to tell folks that foreclosures are not priced to give anyone a deal. They are priced by appraisal just like any other property for sale. They may be discounted for condition, but not always.
I'm advertising foreclosures these days simply because it's in the new, all day every day. But, they're not priced any lower than home owner listings.
We've always shown bank foreclosures right along with every other home for sale.
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I guess its just a matter of time.........hope I can financially wait it out with 2 in college and 2 still home!