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MASSIVE FORECLOSURES COMING? THE MARKET IS SPEAKING LOUD AND CLEAR.

LOOKING TO THE FUTURE OF THE HOUSING INDUSTRY - LISTEN TO THE MARKET.

Prices must come down. The problem with government intervention to avoid massive foreclosures is that it will probably take massive foreclosures to bring prices down. Many are bemoaning the impending foreclosures because they will:

Depress prices in the neighborhood
Cause financial hardship on the home owners

FACT: The mortgage documents signed by home buyers clearly said and are usually paraphrased by the title attorney conducting settlements as "you pay, you stay".

FACT: Home prices for existing homes have remained high in many areas despite a dearth of home buyers.

FACT: Real estate practitioners continue to take listings of homes for sale without any supporting documentation for the price.

FACT: Loan officers continue to steer home buyers to costly loan instruments despite the availability of lower cost loans.

FACT: The secondary mortgage market is still mired in a financial quagmire that prevents timely intervention.

FACT: Financial investors have reduced liquidity to loan originators making underwriting more costly for qualified buyers.

FACT: Average resale home prices are priced out of qualifying range of the average home buyer.

All the above despite a dramatic reduction in the number of closed sales. Buyers will not buy what they do not want and they do not want what they new qualify to buy. The days of high demand and ever increasing prices are OVER. We don't know when they are return. However, we are now in November and I have spoken to many real estate agents who are telling sellers that the market will be great in the coming Spring real estate buying season.

When a home buyer with a $120,001 income, the maximum government GS pay scale, cannot qualify for a home priced at $500,000, there is nothing for him to buy when homes in his area are priced at an average of $750,000. The homes priced at $750,000 today were priced at $500,000 in 2004 and $400,000 in 2002. That same government employee's income in 2002 was about $96,000 and he could qualify for a $400,000 mortgage loan.

THAT IS ALL IN THE PAST. NOW, WHAT ABOUT THE FUTURE?

THE CURE IS SIMPLE. Either we have a dramatic reduction in home prices or buyers will not or cannot buy. If buyers cannot buy, sellers cannot sell. Massive foreclosures may be the only way to bring prices down. The real estate industry and the mortgage market together, the smart folks in real estate transactions, have not been able to counsel the consumer to act intelligently in response to market forces.

THE MARKET WILL RULE.

THE MARKET HAS SPOKEN.

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 11/25/2007 01:24 AM

Comments (127)

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127 Comments on MASSIVE FORECLOSURES COMING? THE MARKET IS SPEAKING LOUD AND CLEAR.

NOV

2007

I hope you are wrong about massive foreclosures. I do agree about prices coming down, but how much who knows.

John. In my market, a 20-25% reduction is needed to get prices in line with incomes.

Lenn, I consider the presence of investors my market "turn around signal". I don't mean the novice "flippers." At present, housing remains too high due to the prices paid; they won't make a natural decline (after a sharp upturn that pulled the rug out of the zero-downers), so the only alternative, for investors, is to wait it out until foreclosures occur. The "general public" will follow immediately. If the market refuses to down itself (whether by intention or bad timing) the ONLY way to get it back is to FORCE the issue (which foreclosures will). Did I interpret correctly (if so, I agree 100%). If not, I'd love more of your take.

Laurie. You read me right. The market in your are is probably not going to be subject to foreclosures as other parts of the country. It's already started in Florida, California and some in my area of Maryland and Northern Virginia. Our trouble is simply high prices.

If prices won't come down voluntarily, the MARKET will bring them down.

One point that I do agree on is that the prices must come down.... Number one reason a home does not sell is due to the fact that it is over priced... This is my opinion of course.

Lenn, here it is exactly as you've described on the surface- there are more people in trouble than is realized AT THIS point. We're talking with some of them, and it's quite surprising. There are people here (like everywhere) that have a temporary abililty to maintain control of the house costs. HOWEVER, as reductions take place and things get closer and closer to the loan amount with no sale, people are beginning to acknowledge that there may be a problem. Next year will be interesting.

I think this is a very localized problem. That's not to say it's exclusive to your area, Lenn, just that there are areas where this is the case, in your situation one where Uncle Sam is far and away the largest employer and pay scales are relevant to home prices. That's not entirely unique to your market, but not at all the case in many other markets across the country, like NYC, particularly Manhattan, downtown Chicago, etc.

In our own building it's the million dollar plus listings that have been snapped up, not the low priced ones. I anticipate this to be the start of a long trend of the same - it's a higher priced buyer that's moving in and the places that can't command that aren't in demand because that buyer pool is being moved farther out of the core high rent district. I don't see anything like a 20% to 25% price correction from today's prices. In fact, year over year median prices in Illinois are actuall UP! I would say that there was a price correction already, and yes, that probably worked out to as much as 20% in many cases, but liquidity was more of the problem than pricing.

Some agents just keep slashing prices to rediculously low levels and don't understand when mobs of people don't start coming in the door as they predict to their sellers. There has been more than one sale in our building in the last year with that phenomenon, where we told the sellers to hold firm on their prices because it wasn't a price problem (we weren't after their listings - that's not what I do) and they dropped them anyway, over and over, and ended up with a sale finally...to someone that in each case admitted they would have paid much more, but just weren't in the market earlier to have seen the place at a higher price. In our market the issue is, again, generally one of liquidity, which translates into DOM (day on market), NOT pricing.

Lenn.. Fortunately the market will correct itself over time. In my area some places will see a 50% decline in value while others will see less then 10%. Much depends on your market and in this case I think local markets will vary widely. There are some very pricey markets that are just going to continue going up despite the hopeful prayers of buyers. Market knowledge will be the key to buying or selling in a particular market.

NOV

2007

Just for the sake of the people who had been put in this situation by many lenders letting them just sign away. It will have to settle. I think I will buy more property because these people will need some place to stay! the rental market will have to go up!

Foreclosures and short sales (if lucky) are the name of the game here in Michigan. Even in the real estate golden Ann Arbor area where I work, we are seeing foreclosures in all price ranges. I do agree it is a localized issue. Many realtors did not realize they would have to deal with these issues but as had been expressed before, every problem presents an opportunity. My investors are very happy.

Lenn,

Thanks for a sober voice in a sea of calls to do something they do not know what.

Of course, the market will correct itself. If the buyers do not buy, the sellers would have to reduce the prices in order to sell. It is very difficult phycologically. You could have sold the house for $525K and now you would not get more that $350K, and you have refinanced the house and got $425K out between the mortgage and HELOC, so you are in trouble.

It takes time for people to accept what the realities are. It takes sober realtors to communicate to their clients where the market is and where it is going. Instead of trying to make the media to scream "Honey", some realtors need to stop being irresponsible and promise miracles in coming Spring just because they want them very very much.

Of course, the markets are not homogeneous, and this is where the professionalism of the licensees would shine. Like in the situation that Gabriel describes.

I think the first order for real estate licensees is to understand, analyze and accept the obvious changes to the market. Stop bashing everyone around. Become professional. No panic, but no hype either. Ignorant hype is dangerous. If you think that the only problem for the real estate market is the media, hang your license, you can't serve the public.

Every downturn cycle creates the situation where the demand is not there but the Sellers are still trying to reach yesterday. There is no surprise in that sense. No matter what we tell the customers, they would first go through denial, before accepting.

Believe it or not, we are going there and that's what I expect within a year. Stabilization, where the inventory at least would start growing because the Sellers, who would have to accept the reality, would agree to price their properties according to the market, and we will see healthy sales.

In California we are seeing more foreclosures than average, as we are one of the hot states for foreclosures right now. Our governor just got four major lenders to delay the increase of the adjustable mortgages so people can keep their homes and recover. Many of the folks I know in trouble are situational problems, ie, layoffs, hurt on the job, etc. These people have made their payments regularly, lived in their homes for a while and just need a bit of help through the slower economy. They are good people who don't want to loose their homes. And, when the economy recovers, so will they and then when they sell, they'll do so without the shame of foreclosure. We have heard the statistic that 97.3% of all first mortgages are current and something like 50% of all homes owned in the US are free and clear. Well, we in California are part of the 2.7% of foreclosures and in the big picture, the press is causing much of this self fulfilling prophecy and scaring the buyers. Reporters are often not homeowner's nor do they present the big picture, just the hype that sells papers. So, I'm with the bunch that believe that we are going to stop the freefall ...and now is a phenomenal time to buy. I got a rate quote for a client at 6% 1 point...and with prices down 20% that makes homes more affordable than in years. The buyers I've put in homes this last quarter, were looking at having to buy condos 2 years ago and now can purchase homes. Whose quote is it? "I've heard there is a recession and I refuse to participate". Just my opinion of course.

Hi Lenn: I am in Fort Worth, but I have a decent knowledge of the DC/Nova/MD market. In your market area, and in others that have been subject to inordinately high price increases... what goes up quickly... just might come down. How quickly, it depends. On a bunch of things.

Markets aren't even regional, they are local, and even within those local markets, there are mini-markets. In Fort Worth, with our gradual appreciation rates... 2 to 3 to 4% or so... the average buyer with a $50,000 income... either combined or individual, can afford a brand new home... perhaps 1800 sq ft... payments of about 1,200 a month. This is a free-standing home, not a townhouse or condo. Two car garage, fifty or fifty-five by 110 lot, full sod and sprinkler, 14 SEER heating and cooling.

Prices do not have to plummet here to reach affordability here in Fort Worth. They are already there. I have often marvelled, or actually have been stumped... at the crazy appreciation rates in some of the "hot" markets.

What goes up too quickly... may come down. What gets hot too quickly... may burn those who grab hold at the wrong time. Just my take. Lenn... I admire your extensive knowledge, and your experience. Thank you so much for sharing. Karen Anne

So tell me Gabriel Silverstein, what else did they teach you in your 2 week workshop to get your license... I guess they forgot to teach you the basics of supply and demand pricing and recession. The market value of any asset is only worth what will be paid for it today.. This includes SIV's all the way down to your little building in Chicago. It is your uneducated thinking that got us in this mess in the first place. Do yourself a favor and start reading and stop commenting.. There is clearly a bottom. It is when the only people buying homes are doing it with 20 percent down and no government intervention to help all the so called "VICTIMS"

I think you are right Lenn, I don't think we have seen the tip of the iceberg here yet. Recently I have received several phone calls from homeowners indicating that they are 8 months in arrears on their mortgage payments, I found this to be incredible. Upon questioning them it came out that they had not even received NOD's. Now I know there is something wrong with this scenerio.

A lender friend of mine said that the banks are likely holding off to push the losses into next year. With these added to the losses that will be rolling in next year naturally, next year should be the true American Nightmare.

Our prices here are now approaching the prices of 2005, the buyers are still not jumping in, neither are many of the investors. We have a little bit of inventory moving, very little.

Christina. The number support your opinion. The first thing a listing agent says to a seller with an overpriced home is, "it's time to lower the price".

Laurie. That is precisely why I have always provided my buyers who purchase with an ARM product with a five year amortization table. Consumers can't understand a "2% reset". They understand that "your mortgage payment is $3,000 this year and will be $3,600 in three years and $4,300 in 5 years". That they understand.

Gabriel. The luxury market in our area is still moving too, albeit slower than in previous years. I market to luxury home buyers and they buy with their eyes wide open. However, the luxury home buyer in my area, say $1.5M+ is only 10% of home buyers and 10% of homes for sale. 10% isn't a market. The market here varies from county to county, but in N.Va, the average is $760,000. However, the average income can't qualify for that price.

Kaye. You're right. Market knowledge is key to helping home buyers understand and make smart choices. My market knowledge tells active duty military to rent on this tour, don't buy. My market knowledge tells my buyers to buy new and negotiate a cushion for another year of deprecation. My market knowledge tells a super luxury buyers that it's fine if you're going to stay in the house for at least 5 years.

Gary. Rents in our area have gone up 3% in the past year. That's not a lot. The trend is up, but the rents are fairly stable because there's so much on the market.

Jon. Thanks for commenting. I find it ironic that real estate professionals who lauded "the market" when prices were escalating faster than a speeding bullet, now eschew "the market" when prices are coming down and are looking for government intervention.

Terrylynn. If prices in your market have come down 20%, you are indeed fortunate. Ours has not and buyers are not buying.

Karen. In my area, $50,000 doesn't qualify a buyer for a one bedroom condo. But, you're right that we have large, local and neighborhood markets. Many in my area. In fact, many of our counties have more than one market.

Lenn, I'm starting to see some stabilization in my area. I *hope* we've hit the peak of foreclosures. The problem is, when it is happening all around the country it definitely affects the mortgage products available for those who are able to purchase here. The whole country needs healing.

Laurie. I doubt a statement that they have not been notified. I don't believe a mortgage servicing company is going to reprogram their system to avoid noticing defaulting buyers. The "I never got the bill" is the famous claim of the consumer who misses a payment. Fact is, whether they got notice or not, the home owner knows when they have or have not made a payment.

Your market sounds a lot like mine. So prices are back to about 2005. That's funny because 2005 was the turning point for us. Prices kept going up, up, up until about July/Aug of 2005 and then it came to a screatching halt when buyers said "no more".

It doesn't really matter what our prices are any more because the story here is NOT price. It's volume.

Mmmmmmm. That sounds like good material for a post.

Kris. Healing yes. I doubt, though, that the big hand of government can provide it. I suppose it's my natural distrust of big government.

We feel our prices are at least back to 2003 and heading towards 2002. There just aren't that many buyers out there. Our Realtor membership has already lost 60 members because dues are due 12/1/07

Lenn, we have been in the price reduction stage a lot longer than most areas. Now, most of the homes are priced right. Believe it or not, but the buyers still read the national news and think they can get a steal. Our problem now is absorbing the inventory in all our areas.

Fortunately, the builders have STOPPED building specs, and that will help, plus there is not a bank in town that will loan the independant builders for speculation housing, so nothing new is going up except in a few isolated areas. Builders are having to sell new builds from the ground up. Of course the people moving in don't want to wait 6 to 9 months to get a home. I know many many builders who have left the state and gone South. I also know some that are selling short sale. One is the best most custome builder in Ann Arbor, he has a spec listed for 650 that started at 1.2 million, a short sale.

It is beautiful and such a great opportunity but there is so many lots sitting around it, buyers don't want to be in a sub, with empty lots and no assurance when it will get built out. Ouch Sorry this is long.

These kinds of comments and adjustments, as noted by so many others, are very specific to areas of the country where prices have increased unrealistically. In the Triangle area of North Carolina, home prices are still very, very reasonable. Added to that is the fact that there are high paying jobs available across a multitude of industries. The Triangle has been called the "Silicon Valley of the East".

At end of 3rd quarter 2007, there was a 4 month supply of housing, compared to an average 10 month supply throughout the US.
Average sales price is just over $300K.
Months of supply in homes under $300K is 2 or less, depending on the area.
There are homes available in every price range, including single family homes in mid to high $100's.

In some areas, there really isn't any adjustment that needs to be made. Buyers may be hesitating because they feel prices will go down - but they will realize in a few months that prices in these areas are already very reasonable, and that the "foreclosure opportunities" available in other parts of the country aren't available everywhere!

Lenn,

Most was said in the above comments...common sense wise ...what once went up must come down. We are so over saturated with at least 2 years of inventory...it is only going to get worse every-time another home goes on the market priced right or not..it doesn't matter...unless a ship filled with buyers suddenly comes in. You will see another 20% reductions across the country by the end of 2008. The last 5 yrs of high prices will now be just the opposite. The biggest problem is that the ones who can sit will just add to the problem.

Lenn, I think you nailed this topic. I don't have much to add. We have the same dynamics going on here and to be honest, I don't think many people in my area get it yet. My office is progressive, but this perspective has not been presented. I felt it some time ago and took short sale training to help people in this market. How do you think we work with the consumer on this? I am thinking that I need to put together my own "white paper" or the situation that I can provide my sellers and clients. It would be similar to your post and to some of the posts we have seen over the last week. I don't know how else to help people change their perspective and deal with this new market and reality. You have to convincing present the facts in a compelling and clear way. Great post. Thank you for staying so "ON TARGET"!

Jay. 2003???? That's extraordinary. If we were back to 2003 prices, we'd be in the pink. We're at early 2005 prices and that's not enough. We can't recover until we get back to 2004 prices where the average buyer can buy.

Missy. Don't worry about long on my blog. My middle name is long. If it gets too long, just make it a post. Michigan has unique problems not in any way related to the market in MD and N.Va. Your housing problems were caused by unemployment and loss of job opportunities. Ours was caused by rapid price escalation fed by low interest rates. Completely different. Buyers in your area couldn't or can't buy becasue they don't have jobs. Buyers in my area can't or won't buy because they won't buy what they're qualified for and can't qualify for what they could have bought in 2002,3,4. Thanks for dropping by.

Penny. You are, indeed, in a unique area. You're incomes are good and the housing supply is priced reasonably. A four month supply sounds like a normal market. We have about a 10-15 month supply depending on the area. Prices are still out of reach for the avearage buyer. You can't buy a reasonably located new home for less than $600K in most counties. In close to DC counties, that figure goes up to $1,3Million plus. We've got a long way to go to close the gap between prices and affordibility before volume gets back to normal. Our volume is 1/3 of what it was 2 years ago.

Neal. Florida is a special case. I've been following the Florida market. I don't know how far it will have to fall before buyers come back. I've never seen anything like it. I'd like to ship a few of our buyers down there. Might as well, they are not buying here.

Lenn, while this is a national problem, it is playing out a bit differently in each market. I expect that the CA market where I was for 15 years will continue to go down because the median prices are outrageous and unaffordable. However, here in the Charlotte market, where prices rise a boring 5% a year, I expect prices to dip once sellers and listing agents finally figure out they need to lower their prices, but not to the extent that they will elsewhere. The most vulnerable sellers we have are those that bought new construction in subdivisions that are still building as the resale is competing with the very motivated builders and when that happens they lose!

Our MA legislature is passing a reform to lending. The problems I see are lenders not able to finance the people to purchase the foreclosed homes and fix them up. We have towns that are losing control, higher crime, etc with many boarded up homes. They need those to be purchased and rented out.

Great post Lenn! I hear that a city close to me has about 20-30% of their listings as foreclosures. I believe the market needs to correct itself.

In response to annon's rude comment to Gabriel, Gabriel is correct real estate is local and it goes in cycles. Markets go up they go down but it doesn't neccessarily go up and down nationally at the same time.

My market, Manhattan NYC is unique. I think there are similar markets like San Francisco and perhaps Chicago where there are high paying jobs and much wealth.

One of the reasons Manhattan is not facing this problem right now is because of the requirements to buy here. 50% of all real estate transactions in Manhattan are ALL CASH. Most of our buildings require a minimum of 20% down, many require 25%-50%. Some very exclusive buildings do not allow any financing. Most buildings here use 25% income to debt ratio and the buyer has to have at least a year or two years worth of mortgage and maintenance payments in liquid assets left over after the closing.

Our market currently is strong in all categories. The high end above $3 million and the low end below $500K. I just sold a studio apartment in the high $400's, (1st time buyer) the buyer put 40% down with a no financing contingency.

Our market has experienced down turns, in 2006 we were in a buyers market. In the early 90's prices were down 40% from the late 80's, prices came down for 3 months after 9/11/01

Markets are driven by Fundamentals. The fundamentals support my local market.

Christina. Buying, fixing up and renting means investors buying. Investor buyers won't come in an overpriced market. They putting feelers out here, but our prices are still too high.

Diane. That has always been a problem for new home buyers. If they have to sell before the community is finished, it may be years. They are competing with the new home builder and I've never seen a viable resale market in a community until the builder was out.

Jeanean. Publish your white paper when you have it. We'd all like to read it.

Our new construction prices have returned to 2003 levels and buying activity in that sector is picking up and is very healthy. Foreclosures are attracting buyers to this market and the absorption rate for bank owned property is lower than most other sub markets here. Investors (the long term kind) are attracted to very little or no negative cash flow because of these prices.

Prices have come down so far in new construction that we are back to waiting lists, long build outs and even price increases. The deals are no longer needles in a haystack for us, even though they are still not exactly the easiest finds!

excellent points, thanks for sharing your wisdom!

Joseph. It would appear that if 20-25% are going to foreclosure, the "adjustment" is happening.

Mitchell. Your market is indeed unique. The exchange rate is helping your market too by bringing folks with other currencies to town. It's easy to control a market that is largely condominium and co-op. It's not so easy with fee simple, detached single family homes. Our multi-family buildings are mostly rental.

Our co-op buildings do control. We sold one two months ago and the buyers need a min. 20% loan. We just have so few of them.

Most co-op buyers I speak with are from NY. Don't you love it??

Lenn, Another excellent post! I just added this to the resource post. This is really good stuff.

The Poinciana market certainly needs to come down further. My market is very much price driven as it is NOT a destination market. Folks bought in Poinciana because it was inexpensive. We do still have buyers but they are few and far between.

I placed a property on the market a week ago at $179,000. 4/3 with over 2400 sq ft living space and only 3 years old. It is by far the best priced home of it's size and the buyers have been knocking the doors down! I had 5 showings in the first 3 days on the market and I'm expecting multiple offers to come in tomorrow. The reason this property is so hot is because of the price. We priced it at rock bottom. My comps came in at $225,000! However at that price their are 100s of available homes and only 6 closed transactions this year for similar homes. Fortunately the seller bought pre-boom and left his equity in the house.

By doing it right he is now able to sell and will make a little bit of a profit. He paid $129,000 in 2004. I just need more sellers in a position to sell.

Lenn,

Awesome! Facts and wisdom.....two great bed partners. Affordability is the prime ingredient that will serve to restore the market that has "fed on itself" for so many years.

Bryant. Leaving his equity in the house is the smart thing to do. If only. . . . . . .

The list is wonderful. The post from Lola that I read this a.m. was a knock-out.

Ron. You may have coined a great description of our market, feeding on itself. Love it.

Renee. Great comment. I love to get a "snap-shot" of an area.

Our new home prices are back to 2004-2005. That's why I'm selling them and them only. The builders in my area are going "all out" to keep building. It's a great opportunity for buyers.

I agree - everyone keeps talking about rates. Interest rates are not the problem, it is the price of land that drove everything out of site.

Well written Lenn. My major in college was economics and we learned all about this. The market forces are pretty powerful and it will correct itself. If the prices are too high.... something has to give.

Lenn,

Thanks for laying out the facts, the dirty laundry so to speak...your statement, 'Buyers will not buy what they do not want and they do not want what they now qualify to buy' sums it up nicely...

My family had that same problem 5 years ago...we were 'forced' to move to an area more remote where property values were a lot cheaper for a similar house...If people today try to do the same, they may get eaten up by high gas prices and higher cost of living...for example taxes in our area tripled in this 5 year period...not for our home but for new construction within the last 4 years. Thanks, Fran

Fran. Thanks for contributing to this series of discussions. Gasoline is a problem here to since we have little viable mass transportation unless a suburbanite can spend two hours commuting. Shucks. Many are spending two hours commuting no matter how they commute.

Martin. Thanks very much for dropping by. The only thing that threatens the market is the government wanting to buy blocks of votes by giving advantages over one voting block over another. Eeeek.

Kevin. That is precisely what caused the problem in my area. Priximity to DC drives land prices and land prices drive new home prices and new home prices drive existing home prices. Gee, it's all so simple isn't it. Ha!!

You have it absolutely correct! There is no way that things will change until the market corrects itself. As you say, government intervention will not help nor is it the answer. The real estate market is cyclical if you look at past history as I'm sure you are well aware of. This to will come to pass, just not as quickly as so many think or wish that it may. Yes, as we all know and some have pointed out, real estate is definitely local. But this is a national crisis and will affect the majority. I really believe as you and many have noted that we are just seeing the beginning of the foreclosures. Buyers will not come back to the market until they feel comfortable and that is not about to happen too soon. As some have mentioned about their market, I'm very lucky to be in the Orlando market. Even with the high inventory, increased amount of foreclosures, lowering prices (much more need to be adjusted), etc. we are still doing better than the rest of Florida as a whole and many, many other areas of the country.

Don't forget the troubles fannie and freddie are experiencing. Some of the expanded approval loans may go away due to defaults.

Gil. I didn't forget Fannie and Freddie for one second.

FACT: The secondary mortgage market is still mired in a financial quagmire that prevents timely intervention.

Marc. Glad your market is doing well. You're right that real estate is local. You are spot on about real estate being national crisis.

Thanks for dropping by.

real estate is local. There are areas in the twin cities that are hit very hard by foreclosures and many are becasue of business practices in the mortgage industry, as you mention in this post. Prices in these areas have fallen. Prices in other parts of town have gone up and yes homes go on the market with prices that are too high, and yes home buyers here have been priced out of the market.

As long as people did not buy beyond their means and have a payment they can afford they can just ride the cycles. If they speculated and purchased beyond their means, then all bets are off.

I am sure if you look in the driveways of many of those in trouble, you may see car payments beyond their means also.

Thanks Teresa. Jay Merten has told us about the mortgage industry in some parts of your market.

Pricing is our only problem. We have an affluent buying pool. Once prices come down, our buyers will be out. I must stay "at the ready" for that time.

Randy. You are so right. I sell a lot of luxury homes and, almost without exception, my buyers drive very modest vehicles. Yet, when I get a call from a buyer for a $300-400K home and I run a qualifier to get their ratios, they have the unbelievable auto payments of $700-800 a month. Eeeeeeek.

Lenn,

Dead center of the target! I have been preaching this sermon for the past few months. The financial institutions are holding too many foreclosures at this time attempting to recoup the most they can from short sales. I believe the shareholders will rise up and demand that the institutions put this money back to work by selling off these foreclosures at deep discounts. Which in turn will drive prices down during the middle of the first quarter of 2008. The possibility of entire neighborhoods being devalued at a rate of 20-30% is real. I am advising potential clients to sell now if they truly need to sell. The pendulum is about to swing back. Thanks for your always insightful opinions

Greg

Here is a recent Fortune article that supports Lenn's point about what buyers are willing to buy versus what they can afford. Some brokers and agents quote "the law of supply and demand" when justifying inflated home prices, but the demand is for housing and while renting is an imperfect substitute for home ownership, more people will choose to rent when the premium on home ownership is too high.

I remember a statement that I picked up years ago and continue to use: "The market may not always be kind, but it is always right."

Lenn,

Where's the bottom in this bottomless pit. In my area some communities are their and some never had to worry about it. But those communities are the exception to the rule. Some communities here are down 30% and still going down. I think once the bottom is found the market will normalize. The problem is the bottom is dark and deep and know one knows when it will hit. The bright side is we're "first in first out" - I would hate to be just starting to see the signs of a slowing market "and many ignore it" that would be 3-4 years of a stinky market. I think my area is about half way through it.

Mike Lewis

Nothing like a bucket of cold water to get the attention of the buying public. Thanks for your insight.

we have been lucky not to have too many foreclosure in Southern New Hampshire. However, prices are too high and sellers aren't getting the picture. Some have simply taken their homes off the market for the winter -- and others who have condos are renting them and are hoping or the best in the spring. I am not sure why sellers are so reluctant to see reality. Several agents in the area refuse to list with unrealistic sellers, but there are always agents who will do so. I have several buyers who are ready, willing and able to buy a reasonable price, but the sellers won't sell. Hmmm.

Lenn - As a newbie I have been reading and reading as many posts as I can and have observed that yours are the most 'tell it like it is, not as you would like it to be' and with the length of this discussion, it is an obvious hotbed of current opinions. I have not seen many posts from the 'stagers' on the site. It appears to me that price alone is not the single item to move inventory, but also condition. This is why I am a great proponent of MORE PICTURES, because when I see in the remarks, 'recently updated' or updated this and updated that, and then pictures of the street side and the backyard, or the buildings pool and common areas I get worried... I believe you have to be the lead dog down the economic hill to be noticed, and to do that you have to be 'best in show' so that all the improvements and renovations are discounted in the process, but the property is sold, which is the goal. All the original conditioned properties are being considered for even bigger discounts. It is very difficult in these times to convince the sellers to paint it - clean it - organize it - to get the best result when they are facing hard financial issues, but that is what must be conveyed by the professionals to the sellers to get noticed and sold.

we need to get the home sellers to ''Look at the donut, rather than the hole". meaning lets look at what you will actually realize from your home sale rather than what you are not getting.

I ran the numbers here a few months ago, and the average home buyer can afford the average home... or close enough that we can wiggle with it. The problem here is that fraud ran rampant a few years ago, and there are big foreclosures that are still running off of that, as well as the "national sentiment" created by the media (I mis-typed a word, and think I just made a new one medfia... media + mafia) hyping the bad news in specific markets, and terrible news in some others.

The point is that some markets should begin a turn as soon as the spring, if the buyers aren't freaked out by the news in other areas...

Lane. We're no where close to affordability. We've got a lot way to go.

There isn't that much difference in incomes between Georgia and MD/VA. We're probably about 20% higher than Georgia. However, our homes are easily twice the price.

It's price that's killed our market. The average home buyer here cannot afford the average home.

Richard. I don't believe you'll find many comments from stagers on my site.

"Telling it like it is" means focusing on square feet, location AND CONDITION. Many homes are priced with consideration of location, yet the comperables used have been upgraded, remodeled or have square feet added by heated and fully appraisable square feet, often a sun room or family room added or sometimes adding a complete level to a home's square feet.

Condition is usually a factor with foreclosures and one of the reasons they sit for long periods of time. Banks and even HUD are loathe to discount for condition because they know that buyer offers are going to do that anyway. That kind of thinking is precisely what keeps the foreclosures on the market for so long. They are over priced in anticipation of low offers for condition.

Then on the other hand, if you show a home that HAS been discounted for condition, the buyer will want to make a lower offer BECAUSE OF condition.

Round and round we go, where we stop, nobody knows.

For the most part I don't think we can blame the lenders or the government for the high rate of foreclosures. It's typical for buyers to purchase what they can't really afford. In my experience, it was the buyers who went back to their loan officer asking if something "creative" could be done to up what they can afford. And everything was spelled out for them before they ever made an offer on a house, and then again at the closing.

When I was a new agent, the average person stayed in a house 5-7 years. When properties were rapidly escalating during the mid-late 90's and into the first couple years of this millennium, people were selling every couple years. Or refinancing every year or two to pay off credit cards that they would just run up again and depend on their house to pay them off.

I would have kids who still were paying on student loans wanting bigger and newer than what their parents had.

Prices either had to start going down or the average middle class person was never going to be able to afford to buy a house. An agent in my office who has been around forever doesn't call this a down market. To him the market is stabilizing.

An eye catching post for sure.

No matter what price it ends up being, a house always seems expensive on the day we buy it. So difficult to time it like a stock purchase or mutual fund. Maybe it's time to get back to basics, when an owner occupied home was a place to live in and take a tax deduction, not a rollercoaster ride. Of course, this doesn't help anyone who is facing foreclosure now.

Hi Lenn - real estate really is local, and we haven't seen too much of the foreclosure issues here in my area. Sure, we've had some, but not an impact on our market at this point.

These are the numbers for my area, which shows for 2007 YTD, that our average selling prices have gone up from last year, average days on the market are just a few days longer, and more units have sold than last year.

2002 - 426,879; DOM 76; units sold 318
2003 - 441,875; DOM 96; units sold 367
2004 - 543,307; DOM 85; units sold 365
2005 - 595.785; DOM 103; units sold 321
2006 - 522,305; DOM 119; units sold 235
2007 - 567,498; DOM 126; units sold 284 YTD

I have been involved in multiple offer situations over the last few months, both as a buyer's agent and as a seller's agent, and we've seen some over-the-asking price selling prices, too. Not A LOT, to be sure, but we are seeing that happen here again.

Ann

Lenn,

As always, you have posted another fabulous and informing post.

My question to you is...how do you deal with people (for example, who owe $330,000. - didn't have enough or get enough insurance $$$ after Wilma in 2005) to fix the damages...

How do you tell them, your house is only worth $250,000.?

They're in short sale status or worse...what do you tell these people?

Yes, I agree, the prices have to come down...but what do you say?

Lenn, Of course there will be more foreclosures, because of the great number of NINJA loans that were made and, yes, prices have to come down. Actually, it wouldn't hurt if they went back to 2002. On top of all that the cost of "gasoline living" is causing consumers to cut back in many arenas as prices for goods that involve oil continue to escalate, Karen

Karen. The cost of EVERYTHING in this area is out of sight. I know that the masses of buyers cannot pay the prices for homes around here.

I'll settle for 2003.

Karen. Those folks just have to stay where they are. What else can they do??

I see a lot of bankruptcies coming in addition to foreclosures and short sales. Florida is just sad.

Lenn, if I was a gambling woman, I'd bet on 2002 being the number, lol, Karen

Ann. Thanks for posting that. Looks like a healthy market report to me. Have you done a Localism for this. I'd be posting it every other day if I could find some good facts like that.

I post Localisms for new homes because that's the only thing that has any value in my market.

New homes are selling for about 10-15% below appraised value. We know the value is there. The buyers just have to take advantage of the prices now and stop listening to the news.

Our prices are coming down. Slowly but surely. Very slowly.

Jackie. We had a bad market back in 1989-1992. Northern Virginia lost 25% of market value.

I called that an adjustment.

This is much worse.

Gene. Ah, the good old days. Buy vs. rent.

Foreclosure is not a good solution, but it's often the only solution.

This will take some time to shake out because it extends far into the financial markets.

Hi Lenn - that thought crossed my mind as I was pulling up that info to include in my comment. Thanks for that prodding - I'll work on that!

Ann

an interesting post and interesting comments...

short sales and DILs will certainly help to bring prices down (foreclosures/auctions convey by certificate of title rather than warranty deed and are generally not considered by appraisers) but the discounted values represented by short sales & DILs compromise the value of properties NOT in foreclosure

example - a house bought in Jan 2006 for $325,000 with a mortgage of $315,000. Today, the house would not sell at a price high enough for this homeowner to break even.

If property values are to drop by 20 to 25% as many posters believe is needed, then this homeowner is effectively throwing away his mortgage payments on this hefty $315k loan every month. Also, when he does sell whether it be 2008, 2009 of whenever; he will lose even more money on this upside down piece of real estate.

Should this homeowner look for a pre-foreclosure to purchase at distressed (short sale discounts) and let his over-mortgaged property go back to the bank?

Ann, a few months ago my family and I rode the train from Boston to Portland. Along the way we saw a lot of old mills that were completely vacant. What do you think is driving the economy in your area? Are you getting a lot of tax exiles from northern Massachusetts? Are Massachusetts commuters relocating from southern Maine to save on gas?

Thanks!

Wendy, if the homeowner plans to buy and hold, the payments aran't being thrown away. Rent payments are thrown away. Mortgage payments earn equity (albeit little at the start, but the sooner you start, the better) and generate tax benefits. If you can afford the mortgage and you feel the house is worth that monthly payment, you should ignore the short term trend unless you are a short term investor. Throwing away money on rent only makes sense when the mortgage on a similar property is not affordable. Unfortunately that is the market we are in right now. Renters can't afford to buy similar properties at a reasonable premium.

Thanks!

Hi Frank - not sure what town you saw those old mills in but it wasn't Portsmouth or the close surrounding towns. You would have gone through Exeter, Newmarket, Durham, Dover and Rollinsford here in NH, and through South Berwick in southern Maine. There are old mill buildings in each of those towns, and most of them have been converted into businesses and condos - gorgeous conversions with lots of the original period features intact - exposed brick, original beams, etc. We do get a number of folks who work in Mass. who buy and live up here, but we've got a pretty vibrant and robust economy right here in the Seacoast all our own. And no, we don't have people who move from Maine to NH who work in Mass. to save on gas. We also have a good number of people who live in this area who telecommute all over the country.

Ann

I think that what you are saying is that the free market system is broken. The free market brought on the current real estate crisis. Leaving it to the free market to solve will destroy our economy and the future of many people. True, wages have not kept up with the rise in real estate prices. This is a crisis that cannot be dealt with through cavalier free market speech.

The free market has failed, our political leaders have failed - bring me solutions. We in, the industry must stand up and bring real solutions to the market. I for one am tired of hearing free market BS. There is nothing free about our system when politicians can be bought at the expense of the electorate

I have experienced several buyers who purchased in 2005 with zero down, no closing costs and let the house go to the bank BUT just before doing that, they purhcased a new house for less money.

Most of my buyers over the past two years were 100% financing so what do they have to lose by foreclosing? Bad credit isn't deterent enough.

Many of my sellers this year have raided all their equity doing cash-out refi's so what do they have to lose?

I think much of the problem is also societal...we want it all even if we can't pay for it.

Lenn:

I understand Kate's frustration, but the free market system is not broken, it is asserting itself. The correction in real estate will be local. It will not respect neighborhood, position or income. Buyer/borrowers who have leveraged themselves to maximize wealth without the resources to ride out the market correction will go bankrupt. The government is neither the villian nor the savior of the situation. At the same time that Tucson's MLS numbers show existing home sales substantially up for the month of September, year over year, they show a correction in new home sales. While the average and median price of existing home sales is up for the same period, the average and median price of new home sales has dropped substantially. Today's Sunday Arizona Daily Star's headline above the fold reads "Foreclosure Surge Hits Every Corner of Tucson." I've got more to say, but this is beginning to turn into a post.

Mike in Tucson

Mike, the government is the villain to the extent that they let Greenspan slash interest rates to cover weakness in the jobs sector for several years. Absurdly low rates meant that homebuyers could bid up prices and homeowners could uses houses as ATM machines. Bidding up prices (along with cheap cash) caused lenders to overextend credit since there was "no way they could lose" on mortgages.

It was a bubble, just like many housing bubbles before it. Seems like every twenty years or so we forget the lessons of the past and make the same painful mistakes. Now our choices are lowering rates to an absurd level to get the economy moving, suffering a little for a long time until earnings catch up with housing prices, or suffering a lot all at once as the economy adjusts to where it should have been all along.

Frank Jewett

Obviously everyone's market is local and thus the varying opinions on how much it will come down and if it will come down, but it is intriguing to see the common thread of prices hovering back around the 2004-2005 numbers......when it comes back (yes I said when because that is my opinion) I think people will be kicking themselves for not buying now.

No matter how many foreclosures we go through people need to realize houses aren't going up in value the dollar just happens to be going down in value. Long story short, 2009 will be an interesting year.

Excellent post. Always enjoy your posts and information.

Richard,

Learn as much as you can from Lenn's posts...read them all, she is a great wealth of knowledge...actually unbelievable....she should write the books for agents...no one says it better...

Karen - thank you for your acknowledgement! Yes I like the lady's style and content - she is everywhere!

Prices are coming down in my market, but it's amazing how many sellers seem unaware of what is going on with the market and our economy and still want to overprice. Good post.

Lenn - "Massive foreclosures may be the only way to bring prices down." The fact that this hurts and we do not like it as an industry isn't going to change the reality. Another great article you've posted here.

NOV

2007

Mike, thanks for the e-mail and your comment regarding my "free market" comment. You are absolutely right, those that made sound decisions will weather the storm better than those that didn't. In some cases even sound decisions and resources won't be enough to weather the storm. I truly believe that our economic system is broken and that the American Consumer has been sacrificed to the stock market Gods. Our political system has allowed this to happen through lack of competition in the Political arena. Our founding Fathers never intended that we only have two parties. As we enter a true world economy where we are competing against countries with protected economic policy can we truly compete?

Our politicians have bankrupted Social Security through poor economic policy and they have not bankrupted our people through lack of over-site. Is it any wonder that people make the financial decisions that they make? I think that Government policy can and should be developed to encourage loan modifications where reasonable to stem the foreclosure rates.

It's not an easy issue to debate because at some level, all sides are right and at another level all sides are wrong.

Richard. I'm not everywhere. I'm at my computer. With the exception of haunting new home builders, I work from home and I "work" ActiveRain. I blog for business and it works. I post to ActiveRain because it's so much fun.

Kate. Thanks for commenting. All I want the government to do is "get out of the way" and let the market do what it does much better. The "market" doesn't have hands in the financial lobbiests pockets as do the folks on the hill. Follow the money and you'll know precisely why politicians do what they do. I wrote about that but it didn't get featured. Too hot to handle??? See: http://activerain.com/blogsview/259842/BARNEY-FRANK-FOLLOW-THE

Ken. I agree completely.

Fran. Prices are coming down here to but new listings go on the market way high.

Ryan. 2008??? I'm getting ready. I do not expect a housing recovery by the end of 2008, but I do expect some good opportunities.

Frank. Absolutely right. Incomes did and could not have kept pace with the escalation in housing prices. That's the difference between businesses paying what they can to workers to get the job done and consumers paying what they have to to get what they want.

In our present market, businesses, the home builders are lowering prices to make sales and stay in business. Yet, home owners are listing homes high depite overwhelming evidence that the market will not pay the price. It's the difference between folks who know what they're doing and folks who do not.

Mike in Tuscon. Run with it. I'm sure it will be interesting. I'll drop by.

Hello to All.

I have reviewed the comments on the upcoming massive foreclosure market that is ahead. Unfortunately I see the hand writing on the wall in our small hamlet of a area in the Southern California area of North San Diego also. To many homes on the market that are over what the real estate market can financially afford in this area and way to many buyers--- that think that prices will still come down further. Foreclosures are occuring to the tune of 100 a day. The REO's that are being taken by realtors in the area, are pricing them to high. There is a listing that came on the market in June of 2007 by an REO realtor she put it on the market for $556,000 it is now $479,00, the lender took it back on the court house steps for $492,000. The time loss and the money wasted is very sad. Had the realtor been honest it could have sold this summer. I would not be surprised if this home see's another price reduction. Oh, by the way, so many of these lenders are crying about their loss, when in essence they are doing pretty well. They got the home owner to paid for X amount of months on the loan, they foreclosed on the property in four months, and now they get the chance to re-sell it. Seems to me that some of these lenders are not as bad off as they make themselves out to be. What does a lender make on a 30 year loan. Something in the neighborhood of thousand of dollars.

Lorraine

Lenn- Yes you do "work" AR and I mean that in the most positive way. You seem to have quite a following and everyone I've read has the highest regard for your posts, I am included. Your opinions are insightful, well meaning, and timely. Thank you for your knowledge.

Lorraine. The practice of agents "buying listings" is little known to the public because the agents are telling the seller what they want to hear.

Just like when the mortgage starts out with a low payment, just what the buyer wants.

Folks need to start thinking about the future.

Richard. Thanks. ActiveRain is in my job description and in my market plan. I take it very seriously because it brings me business.

Lenn,

These are some frightening facts and despite all the people in the industry out there telling the world how it's all the fault of the media and that real estate is local, the trickle down theory must ultimately hit all segments and all areas of the country. We are all connected and although there may be those who are thriving nicely, there are more that are not. You provide some eye-popping reality!

Hello Again:

As I wrote my earlier post, I could not help but recall a post by Terrylynn Fisher from Manhattan Beach, Ca. She feels in her post that a buyer that she represent at one time could only purchase a condo which was two years ago, now they can purchase a home. Well I am glad that they are now able to purchase a home, but if that does not indicate that the market has change drastically --- I do not know what does. I attended a California Realtor Assoication symposium on 10/26/2007 in Los Angeles, and three of the speakers said that it maybe in your best interest to leave real estate for the next couple of years and return when the market starts to get better. This information was coming from not one but three speakers that were hired by the California Realtors Association, and these speaker did not pull any punches. Leslie Appleton-Young, the VP of Ecomonic's here in California for the California Realtor's Association, stated in her presentation, that she was glad that she had a paycheck she could look forward to getting on the first and the fifthteen of every mont. Her heart went out to all realtors because it is going to get worst before it get better. Now if that is not food for thought.

Lorraine

Lenn~ I always look forward to your posts from the perspective of the amount of information you put into them. Here in Central NJ we are not yet hearing of a tremendous amount of foreclosures yet but I am hearing whisperings of a greater number of short sales. At this point, NJ's low unemployment rate, healthy economy, and excellent school systems (at least in my area) are keeping us out of danger for now.

Lenn - I am a typical DC area agent. Always late to the party. I agree with you on most points. I don't even see a problem. It wasn't a problem when prices were going up and it is not a problem as they fall. It is what it is.

As you have always said, homes sell when people can afford them. That is not a local or regional point of view. That is not even just a national point of view. That is a universal truth.

Somehow, the folks loaning money decided it was ok to have 100% on the line. When prices were rising, that may have been a great short term policy. Prices have always gone up and down. The nature of our system usually has the price ending up higher than lower in the long term. Financial folks looking for quick short term gains rolled the dice.

In 2005, they rolled craps.

It is what it is. Hundreds of thousands will lose their homes. Numbers higher than that will find that they are upside down for years to come. The situation will dictate what sells. Foreclosures will occur and they will be purchased at prices lower than current list prices. As those sales take place, values will drop. Folks that used the equity they used to have for an ATM will move from solid ground to upside down. Everyone of those that used the 100% financing can choose to continue paying what amounts to tax deductible rent or walk away and destroy their credit. Those that have owned longer than 5 or 10 years will have watched the whirlwind and decide if they want to sell or not.

Those that keep pointing to statistics that say that the average sold price is going up so therefore their market is turning the corner or improving, have no understanding of the statistic they are using.

Thanks for sharing.

Lorraine. Interesting input from an association employee. Fact is, we are self employed business owners. Each owns our own practice. We hang our license with a broker, but we usually generate our own business.

I'm sure that the association folks have a sense of what the business is like in an area.

Lisa. I don't know the NJ market. My sense is that it isn't as bad from overpricing as ours in the DC/MD/VA areas. But, sooner or later, the retraction in the financial markets will reach many.

typical DC area agent. Every time I see a statistic that prices in some DC/MD/Va area has increased, I want to scream. BUT, on what the volume. Sure, prices are up 1% but it's on a third of the sale from 2005.

Lenn,

The market will fix itself. When the pendulum swings too far in one direction, it will have to swing too far in the other direction in order to balance out and find it's way back in the middle.

Sandy

Sandy. Funny how that works.

However, with government intervention, it doesn't always work well. The Congress will usually protect the interest of the group buying influence. Follow the money.

Lenn - I am a typical DC area agent. Always late to the party (and apparently forgot to sign in before commenting above). I agree with you on most points. I don't even see a problem. It wasn't a problem when prices were going up and it is not a problem as they fall. It is what it is.

As you have always said, homes sell when people can afford them. That is not a local or regional point of view. That is not even just a national point of view. That is a universal truth.

In 2005, they rolled craps.

Thanks for sharing.

Lenn, I have not read your blog before but I'm glad I came across it. While I agree with you that massive foreclosures must happen in order to clear the way for expansion once again, I still believe strongly that the free market system is severely broken. A governments job is to protect it's citizens, not just the wealthy citizens. Stop guards should have been put in place to prevent what is happening. In the short term government regulation will just mess things up simply because it's politically motivated. In the long term we as citizens must demand changes in economic and political policy. We as a country cannot continue to reward big business at the expense of the consumer. It's bad policy and it is bankrupting our country. We must encourage economic policy that rewards long term thinking instead of punishing it.

In some ways I think that the debate is generational. I think that the rules have changed significantly in this global economy. What used to work can no longer be sustained.

I have young children and as I watch what is happening I feel a heavy weight on my shoulders. The economic life that those of us who grew up pre 90's will be substantially different than that our children will experience. There are no safe guards in place and it does not bode well for the economic health our your people.

This is clearly evidenced in the economic numbers which show declining real wages, shrinking middle class, and our kids coming out of college with 10, 20, 50, even $100,000 in student loans.

Kate,

Is it a government's job to protect its citizens from themselves?? It would be easy to blame the banks and big business if bad home loans were the only debt people had. Unfortunately, many of these homeowners in trouble have huge car loans, credit card debt, etc. There is a whole segment of people going through foreclosure that took cash out of their homes to pay for a lifestyle they feel they "need" like new cars, vacations and granite kitchen counters--I have had a number of these sellers over the past year. There is another segment of flippers that took out 100-120% loans with big dreams of a fast sale. Of course, there are also people who were given bad loan and government intervenion should be to go after those loan officers personally.

When I grew up my sisters and I always shared a room, we owned the same station wagon until it broke down and we had 1 TV in the entire house. I hear people come through my open houses and they tell me 1,600 square feet is too small, the 2-car garage isn't big enough for their SUVs, etc. I agree that wages have not kept pace and the middle class is having a hard time but people need to take responsibility to control their spending, too. I work for several banks doing loan modifications and I see the financial situation people get themselves into...in very rare cases did someone twist the borrower's arm to buy the house, their cars, etc.

I don't mean to sound heartless but I don't think it is the governments job to get people out of debt. The banks will have to take the hit on making bad decisions to give people these loans.

John. I wondered who that was. I hope I was polite. I don't have a lot of patience with anonn. posters. But, that one seemed to be a case of just forgetting to sign in. You understand our market. It what is is really sums it up.

I remember the years 2000-2005 when there was virtually NO appreation. Folks purchased condos at the top of the market in 1985-1989 and in five years when they had two children, had no equity. I sold them new homes with money taken from there retirement fund. I sold their condos, mostly FHA to buyers who assumed their loans. No approval was required up to about 1999 for many. No real estate commission involved. I made my money on their new home buy.

So, when I see this market, all I can say is "Been there, done that, didn't like it, survived".

This time around will, I believe be worse.

Shari,

I in no way believe that it's the governments job to get people out of debt. It is however the Government's job to develop standards and policies that encourage financial education and savings. It is the governments job to make sure that sins of the past do not get repeated. In this instance, the mis-packaging of mortgage back securities took place in the 80's and was a significant cause of the economic downturn in the 90's. The story is the same, the circumstances are different.

The difference is that we as a country were more isolated in the 80's so it took longer to effect the markets. The global economy was just beginning to develop. Today we are in a full fledged global economy that is near instantaneous. This is what accounts for the rapidity of the current decline.

When the entire economic model is based on consumer consumption something is seriously wrong with the survival of the economic model. We as a society cannot sustain the trickle down economic policies where big business is rewarded, misinformation disseminated via media outlets is rampant and consumers being stretched to the seams is the standard.

I'm not arguing for a hand out - I'm arguing for a hand up. Some people cannot be helped - however, those that can be helped should be given workable solutions.

Shari. Thanks for commenting. I'll give you a classic example. I had a buyer family who refinanced their home to take equity out to buy new and rent the existing home in DC. I had the financing all worked out.

I remember the day I knew it was all over. I called on Saturday a.m. to tell them that I had worked out a great incentive package with a new home builder and we needed to get a lot hold on the lot they liked.

"Oh Lenn, we can't go today, it's Saturday. We go to the Mall on Saturday. We're leaving as soon as Mary gets back from the hair dresser."

By the time I could get them to the builder, they had squandared enough money that they couldn't buy. They needed at least 10% down with their debt ratio. They spend their equity.

This is my favorite Lenn Harley post yet - you speak to all of us Thanks for the post.

Rebecca. Thanks. Well, clearly I don't speak for all of us. But, I appreciate your thought.

Lenn, Your over-priced houses are cheap compared to what they will be in 10 years. The value of the dollar keeps slipping. You can call it inflation or price level or whatever you want. Ten years from now it will take a whole lot more dollars to buy those same houses.

If you project growth for your area, you can graph "prices" from that 2002 base you referenced using your anticipated growth rate. Then you can lay another line on top of that for the anticipated inflation. At some point the line will intersect your market prices. The answer is to just wait.

I think people instinctively know that time will cure a lot of ills in the market.

Bill Roberts

NOV

2007

Interesting, let the market correct? But you are right, unless the prices come down, nobody is going to buy anything! Let him ride, but give the people an option to come clean and somehow renegotiate the terms so that we don't break the whole economy......see ya ktm

Amen! This is so true. Believe it brothers and sisters. Markets always fix themselves. It is too bad so many will have to get hurt in the process.

NOV

2007

I agree with all your points! I do feel the reason that we have so many overpriced homes it is because we have so many new agents that never sold anything, nor have they ever been in a market that is correcting. In short, this market is just totally dysfunctional, and inexperience is a major part of the blame both on the sales side, and listing side!

Bill. I disagree completely. When the average price of a home in the two most active counties in my market area is over $700K and the average home buyers can only qualify for $500K. What difference does it make what the house will sell for in 10 years???

Uh oh. I feel a post coming on.

Hi Lenn: I can hear the "post-writing" wheels in your brain starting to turn. You go, woman ! Share with us some more of your pearls of wisdom. I enjoy you and your posts ! Karen Anne

Lenn,

Check out the article on foreclosures on Yahoo's home page. The list certain Metro area's, values in June of 2007, the five-year projections, and the double digit decreases in store for us...

A -27.8% decrease is projected in Baltimore, and a -32.2% decrease in Miami....among others.

Let me know what you think.

Karen M.

NOV

2007

Hello Lenn,

I have read some of your posts, and you are a force to be reckoned.

My head is spinning. I have been in real estate for 18 months here in Michigan's upper peninsula on Drummond Island. To find comps for my listings, bank foreclosures I have to go back TWO AND THREE YEARS. I am working on a comp now for a company out in D.C. 80 acres of vacant land. I have searched all over the Eastern Upper Peninsula for 8 comps dating back three years. It took me hours to go through all the companies and their listings.

When I comp out a price for a home it is almost as difficult. Our market up here took a dive in 04. Our sellers have not, will not, refuse to taken my advice. On one occasion I pulled out the termination form and said, Sign It!!! I am outta here. They were a nasty couple who yelled at me for not selling their over-pirced home listed at 200k over market value. What can I say, it was my second listing and very stupid of me.

I start out my listing appointments now with "When do you want to sell now or 3 years from now" I have several over priced listings and I fight almost daily to not write a scathing letter to my clients for not taking my advice to REDUCE YOUR PRICE. I am angry at myself for continuing with them. The advice I get from some agents is, "your sign is out advertising for you" Which makes my blood boil, I am more angry at me than anyone. In the end the buck stops here.

Michigan is in such a dire mess. We lead the in foreclosures and in Mortgage fraud I learned in a workshop I took last summer given by a representative of government loans.

Being new to the industry I hesitate to tell it like it is all the time. but as I say I get angry more at myself.

I read my periodicals and Margret Kelly of the higher eschelons of RE/MAX said the market will come back by the end of 07, as a newbie, I knew that was wrong. Then I read in my NAR magazine last June that the market will be back the end of 08. Wrong! I don't believe Michigans market will return any time soon. THEN you have the upper peninsula, THEN you have Drummond Island. We are a second home/retirement community. In this economy second homes are taking a big hit. Owners want to make a profit on their homes they have owned for 4-10 years. They don't want to hear the truth.

It's such a dilemma. I think I am finally ready to write those letters to my clients. REDUCE YOUR PRICE or I am walking. It is my responsibility to manage and market their homes and if they have their head in the clouds then I have to be the bearer of bad news. Been shot before!

Being a Realtor is not for the faint of heart. I love this job, I hope with all my heart to be able to stay the course and stay with my company

You have one more follower in your posts. Thank you for your straight talk.

I think we've still got a long way to go before we see any sort of return to market normalcy. Thanks so much for your honesty ability to have the stones to say so!

I agree that sellers are turning a blind eye to the media, but they do like facts particularly facts that are objective to support a lower price.

Using data from The Warren Group, a real estate research company here in the northeast is the best way to show that not one person can put a price on the home. The market puts the price on the home.

Lenn - maybe you're right and maybe you're not. The bottom line is there is ALWAYS a market and the biggest problem right now is that it's a smaller one and there are too many Realtors. A lot of us are still doing well and right now there is more money to be made than there ever was in the boom.

Lori. I can't blame sellers as much as I can blame folks in the industry who are supposed to understand the market, but who continue to turn a blind eye to the facts.

The market will NOT support the prices as is evidenced by the sales volume. In my area, sales volume is 1/3 what it was in 2005. The biggest problem we have is agents who either don't know what they are doing or are buying listings just to get their sign in the yard. I suppose they're waiting for a customer buyer to fall for their showing prowess. Buyers with honest buyers agents are not going to sell the overpriced homes.

Marsha. Thanks for reading my stuff. I appreciate it.

Vivienne. Finding comps in this market is not always possible. However, you can always compute a price recommendation. Appraisers do it regularly for unique properties. It does take some experience. IMO, going back 2-3 years is not going to get an accurate price recommendation. Try to stick within 6 months or go wider. Old sales are just that, old sales.

In this market, the last thing agents need to do is focus on price. A smart agent on a listing appointment will talk to the sellers about the hosue, the neighborhood, the kitchen, the view, almost everything until they have complete trust in you and then, only then can you bring up price. Not until you have them in the palm of your hand can you talk price. Back it up with facts, comparables and trends. At this point, market data is more important than comps because it shows the trends.

The mags you're reading are in the business of recruiting new agents. They don't give you accurate market data. That's not their job.

Just remember that an overpriced listing will "eat you alive". Let your competition have them and save your time and resources for buyers right now because it's a buyers' market.

You're in a tough spot in Michigan. I read Lola Audu and she describes it vividly. It's almost like being there. Check Lola's blog. She's experienced and eloquent.

Simon. You are absolutely right. There are too many licensees. The bar is too low for entry into this business.

NOV

2007

Today I did a quick scan of the new listings on the market in my city. About half are short sales. When I clicked on the assessor number to see how far off the list price is from what is owed on the properties, I was amazed at the difference. The current list prices, which are at market now, are about 20% below the last sold price. Is this the market dropping? Not by that much. Many of these are examples of fraud--the homes were never worth the amount lent. Obviously there were some stupid buyers willing to do those deals, but there was some funny business getting them to appraise at 10% over the market. Of course now these owners see the value 20% below their loans and they are bailing.

It seems like one simple solution to eliminate this type of fraud from happening in the future is for lenders to require 2 appraisals on each property without the appraiser knowing what the purchase price is. Appraisers have access to the MLS so they can see what the list price is but they don't need to know what the pending price is. Two apprasiers simply assessing the value would give a better indication than one appraiser with pressure to shoot for a magic number. This would include refinancing also.

Thank you Lenn for your response. I see what you mean about market trends, not comp work. I take comps to my listing appointments and try to express to people that to list to high is not good for any of us.

I have read some of Lola Audu's posts, I believe she is in Grand Rapids about 5 hours south of me.

I am hanging in there, fortunately I have a wonderful Broker

DEC

2007

Lenn, I finially realize what bugged me so much about this post. The market isn't speaking at all. The market is reacting to the fact that it was manipulated by "investor's appetite and greed for more, more, & more. The real question behind your numbers is how many of those short sales wouldn't be on the market at all if a viable solution were created to modify the loan by extending the initial terms of the loan.

Apparently such a solution is in the works. You can read about it here:. Hopefully the agreement between the Treasurey Department and Mortagage Leaders will be finalized sooner rather than later. This wll only help to ward off some of the impending foreclosures and allow the market to stabalize more naturally.

Hi Lenn. I agree fundamentally with your assesment of the current market. The market will take care of itself. However, I don't believe the situation will be as dire as you or some in the media are predicting. In my experience and study of markets, not just real estate but equities markets as well, I have noticed recurring trends. When we have a run up in prices whether in be in homes, as we did in '04 and '05, or in stocks, as we did during the dot com boom of the late 90's, a correction is inevitably to follow. With the dot com bust we had the unfortunate timing of the 9/11 attacks which sent the market into a nosedive. But, even though the market lost substantial value, it did not return to pre-dot com/911 levels. It corrected, no doubt, but again, not to 1995 levels. And the same holds true pretty much for housing markets. Yes, we do get slumps and corrections in the housing markets, but rarely do the prices return to the level prior to the run up. And I don't expect it will happen this time either. I was born and raised in California and saw these booms and corrections first hand. I also heard as a kid many adults bemoaning the fact that "they should have bought five years ago when the prices were $xxxx." Yes indeed they should have. Because real estate has an intrinsic value, unlike stocks. Now, of course there are exceptions to the rule. Certain areas have economic downturns (see Detroit and Michigan in general) due large industries packing up shop or vanishing altogether. However, if we look long term over the past 70 years since the Great Depression you can hardly find consecutive years where home values dropped. We are seeing the market factors already at work. Interest rates are falling and home prices are falling. Rarely do these things occur in tandem. This will attract more buyers into the market itself. Without government intervention. This is the time when Realtors have to earn their worth both in respect to educating our clients and drumming up new business. I wish all my fellow Realtors the best for '08. We'll weather this storm and come out stronger on the other end.

Kate. The problem with extending the start rate or pre-adjust rate for borrowers is that it does't bring average prices down to a place where buyers will or can buy.

It won't help buyers qualify because prices are still way too high. All it will do is give us a status quo for some home owners.

How is freezing the rate for some borrowers going to bring balance back to the market.

I believe it's a political ploy and I can't think of anyone I want messing in the housing market less than the government in collusion with wall street. If Treasury is looking out for anyone, it's not home owner borrowers, it's the large financial houses that are caught short and writing off Billions.

We'll see.

Jerry. Thanks for your very thoughtful post.

I never compare the housing market to the stock market. Stocks are a liquid asset. Real estate isn't.

I don't believe the fed is lowering interest rates to help the housing market. I believe they are doing it to give the big financial houses liqudity so the American shopper can continue to shop.

DEC

2007

Lenn, freezing the interest rates will decrease the number of houses that go into foreclosure, thereby decreaing the number of houses on the market. If the note is adjusted, many people will be able to ride the storm regardless of the value of the home. As long as notes are allowed to adjust we don't know what that number is.

Prices are still going to fall, but the absorbtion of unsold inventory will take place more quickly. Right now the unsold inventory numbers are artificially high because of note adjustments. Unless something is done about the note adjustments, the market will stabalize later rather than sooner.

We agree 100% that the Treasury is not looking out for the homeowner. But, if some homeowners benefit from the collusion with Wall Street so be it. IMHO, collusion with Wall Street created this mess.

My argument is that if the notes are not frozen, the housing prices will artificially fall below that equilibrium point.

Let it be said that I'm the first to acknowledge that there is a flaw in this argument. Adjusting the notes could simply push the inevitable off into the future, thereby extending the pain. I belive that the gamble is worth it because of the cyclical nature of the market. As prices start to increase, houses and existing loans are paid down, many of these same people will be able to refinance out of the loans.

Thoughtful fiscal policy on the part of govenrmnet and homeowners can help to ease some of the pain.

If the sole issue is wages and your argument is true, than I think that headed into a depression that will put the Great Depression into the weeds!

Jerry, I just read your comment more thoroughly and it is very insightful. The difference between history and today is the global market. All bets are off. Oil prices will continue to rise as China and India increase their use of oil in the years to come. Unless alternatives can be found, this will hold down the economy for years to come.

Lenn your comment about dropping interest rates to keep the shoppers shopping is really scary. I thought that we were on opposite ends of the spectrum. We're not, our views are frighteningly similar, your just more of a purest in your solutions than I am. You see, I don't the markets are pure at all. Government intervention already takes place in the favor of business.

You have a good day!

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