Why are people selling for a loss? Nobody wants to lose money when they sell their house. Many of the sellers we have seen to date put no money down, so they were not losing any money, only their credit score. Lately, I have been seeing more and more sellers who have lost some of their own money. So why are they selling? In the crash of the early 90s many people submerged beneath the debt on their homes. They were unable to sell, and the few that had to sell due to job loss, divorce or other circumstances created the foreclosure problems of the early 90s. However, for as bad as the foreclosures were then, we have already quadrupled the previous peak, and the problem is only getting worse.
I suppose the easy answer to why people are selling is that the owners cannot afford the payments. Many probably still believe real estate is a great investment and all the other kool aid nonsense they believed when they bought the property. Unfortunately, they were unable to hang on long enough to enjoy the benefits of their great purchase. The ones who have capitulated already are the lucky ones in many ways. The disaster is over for them. Now they can go back to living within their means in a rental, and the crushing debt service payments are a distant memory. The owners who have not capitulated yet, the ones who have the means to hang on longer, they are the ones for whom this price collapse will be a major disaster.
Bear markets are self fueling. Once a price decline gains momentum, the "weak hands" are shaken out, and as they are, they sell and drive prices even lower. This puts a new series of owners in distress and creates a downward spiral. The only thing that stops a bear market like this one is capitulation among owners who give up waiting for prices to come back to breakeven, or a new influx of buyers.
Larger numbers of buyers will not enter the market until prices are affordable. This isn't because it is financially prudent or because people started reading this blog. Once a vicious price decline gets underway, the tightening of credit prevents many buyers from committing financial suicide. Whereas lenders were willing to give anyone $600,000 a few years ago, now they are only willing to give $300,000 to a select few with good jobs and solid credit ratings. The realtor spin about "pent up demand" is complete bull$hit. There is probably a lot of pent up desire for housing, but demand is measured in dollars, and there is a major lack of demand with the absence of lender funds, and a large and growing "pent up supply" of REOs.
I have mentioned a number of times that I believe this fall and winter will see another major leg down in the market. The economic recession will be in full swing. When times are tough and jobs are uncertain, it is not a time when people commit to large purchases like houses. Also, it is becoming increasingly obvious there is strong downward momentum in prices. This is prompting many to put off purchases because prices will be lower later. As the foreclosure problem worsens and more and more loans begin resetting to higher payments, supply will continue to enter the market.
Usually there is a strong seasonal component to inventory. This year we did not get a big inventory spike in the summer. Perhaps it is our "inverted year" and we will see ballooning inventories this fall and winter. There are many REOs that are not listed yet, and these will hit the market eventually. The lenders would have been better served selling them this summer when there was some volume. Now many of these will hit in the fall and winter when few buyers are around. Since this is must-sell inventory, it will push prices lower.
Today's rollback is truly impressive, not because it is a great property or a great deal, but because the discount is so severe. The low end of the market is searching for the bottom, and it hasn't found it yet. What is also interesting about this property is its cost per square foot. At $174/SF, it is the least expensive place in Irvine. This might be expected on a large property over 3,000 SF, but when you see a price like that on a small condo, it is signaling more declines in the market. Smaller units almost always carry a higher price tag on a per square foot basis. From a construction cost perspective this makes sense because the smaller units still have the expensive bathroom and kitchen space and very little of the inexpensive filler.
The low end of the market must find a bottom before the market can stabilize. Without price stabilization there, the move-up market is non-existent, and the substitution effect will eventually pull down the larger, more desirable properties. Someone looking for a two bedroom place might take a smaller property if the price differential is great enough. Is that second bedroom really worth paying double for? Today's featured property is probably the least desirable property in Irvine. It is old, small, ugly and in need up renovation (although it is a livable rental.) All premiums can be measured off units at the bottom. Properties in Brio may be superior, but would you pay 80% more ($360,000) for a smaller unit there? (2701 Ladrillo Aisle, Irvine, CA 92606) People looking at 1 bedroom properties will not likely pay an 80% premium no matter how much nicer the property might be. As you can see this will put further price pressures on units in Brio, and this will reverberate through the entire chain of move ups. High-end property prices will not hold up with continued price erosion at the bottom of the market. The high end may continue to be populated by a few knife catchers, but as the substitution effect really kicks in, volume will decline further, and the imbalance of supply and demand will create a fragile market. REOs that find the few remaining buyers will finally overwhelm the feeble price support, and the next leg down will begin. Look for it this fall and winter.
Whenever someone overpays for real estate, it is justified with platitudes like "if you used conservative financing and stayed within your income, then you will be OK." Or "If you love the home and you can afford it, everything isn't about money." I hope people take comfort with statements like these because the financial cost is much greater than most realize. That is the topic of today's analysis post: how much is buying at the peak really going to cost?
Sometimes you see a property where the asking price simply cannot be explained as anything other than greed. This weekend's featured property falls in this category. It has been on the market for 580 days! Do you think they might have been able to lower the price and move it by now? These owners have been very conservative with their mortgage, they have paid it down, and there are no HELOCs. Their asking price gyrations have nothing to do with mortgage conditions or anything other than their desire to double their money in 5-6 years. Their inability to grasp the reality of the market has left them changing their asking price frequently and woefully missing the market. I hope they and their realtor are having a good time because they certainly haven't done much to sell their house.
Listing Price History
Date
Price
Feb 03, 2007
$939,900
Feb 12, 2007
$924,900
Mar 06, 2007
$919,900
May 02, 2007
$914,900
May 04, 2007
$912,000
Jul 21, 2007
$899,900
Jul 25, 2007
$912,000
Aug 18, 2007
$899,000
Jan 27, 2008
$849,900
Mar 03, 2008
$824,900
Mar 08, 2008
$799,900
Apr 30, 2008
$849,900
Jun 30, 2008
$824,900
Source: SoCalMLS
Their listing price activity reminds me of the Curly Shuffle -- two steps forward and one step back.
Beautiful Fieldstone Barrington home located on a cul-de-sac. Nice size
yard w/patio cover/dramatic slate hardscape in back & front
yard/ceiling fans/built-in cabinets in garage/french doors/beautiful
tile floors/full splash in kitchen. Do not miss seeing this home!
Update 5 -- I received word that this property finally closed escrow at $1,300,000. The total loss was $529,000 after a 6% commission. They avoided a short sale, but they lost every penny of their equity. Go tell these owners that real estate always goes up...
Update 4 -- The saga continues... This house was relisted again for $1,359,000. The total loss stands at $473,540. After putting $525,400 down, I imagine this seller did not think they would be risking a short sale. Their equity is all but gone...
Update 3 -- The price is down to $1,499,000 and still no takers. Total loss stands at $341,940 after commissions.
Update 2 -- This house was pulled from the MLS and relisted at $1,549,000. This seller must realize they are a bagholder and they are getting really motivated to save whatever they can of their equity. Right now, if they get their new asking price, they stand to lose $294,940 after a 6% commission.
Update 1 -- The asking price on this house just dropped from $1,700,000 to $1,650,000. That is a motivated seller. If today's seller gets their asking price, they stand to lose $203,000.
Oh, a storm is threat'ning My very life today If I don't get some shelter Oh yeah, I'm gonna fade away
Exhausted buyers, tightening credit, excessive inventory, foreclosures: Is the perfect storm threatening our real estate market? As far as finding shelter goes, you could do far worse than today's property. It is a high-end house in Woodbury. So far the more expensive stuff in Woodbury has maintained its denial, but lately there have been a few properties showing a true desire for a transaction. Today's seller has been on the market over 90 days, and they are lowering their price to try to move it.
Beds: 4 Baths: 4.5 Sq. Ft.: 3,750 $/Sq. Ft.: $453 Lot Size: 6,348 sq. ft. Year Built: 2005 Stories: 2 Type: Single Family Residence View: Park or Green Belt County: Orange Neighborhood: Woodbury MLS#: S472319 Status: Active On Redfin: 215 days Unsold in 90+ days
From Redfin, "The Jewel of Woodbury! Ready to deal. Rich woods on floor, ceilings, p aneling etc. Gorgeous paint schemes, tile designs. All Viking Kitchen, open bright floor plan typical of Juliet's Balcony homes. Surround sound, huge master bath, all bedrooms are suites. Designer window treatments. Across from a private park. Walk to parks and 6 pools, elementary school, shopping center. Woodbury's amenities are incredible and the lifestyle resort like."
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If today's seller gets their asking price, they stand to lose $153,000 in less than two years. They have the equity to absorb the blow, but it must still be quite disheartening.
I like Woodbury. It is at the cutting edge of master plan community design. The amenities are first rate, the architecture and landscaping is attractive, and the community center is inviting. It would be a great place to call home -- at much lower prices.
Why are people selling for a loss? Nobody wants to lose money when they sell their house. Many of the sellers we have seen to date put no money down, so they were not losing any money, only their credit score. Lately, I have been seeing more and more sellers who have lost some of their own money. So why are they selling? In the crash of the early 90s many people submerged beneath the debt on their homes. They were unable to sell, and the few that had to sell due to job loss, divorce or other circumstances created the foreclosure problems of the early 90s. However, for as bad as the foreclosures were then, we have already quadrupled the previous peak, and the problem is only getting worse.
Unsold in 90+ days
