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August 27, 2007

Dismal scientists fear dismal housing recovery

Slow_sign1 For some time, The Real Estate Cafe has been saying that client house hunts that once took two to three months in Greater Boston, are now taking two to three years.  That was before this stunning headline,  "Economists see credit problems as bigger threat than terrorism," revealed these findings:

Asked to look five years into the future, 42 percent [of business economists] expected U.S. home prices to remain flat, 41 percent said prices should rise, and 16 percent predicted prices will fall

Only one in five of those surveyed predicted a "meaningful" recovery in U.S. housing markets before the second half of 2008. About 38 percent expected a recovery in the second half of 2008, while 42 percent said housing markets won't turn around until 2009 or later.

If you are a home buyer, will the dismal survey findings above cause you to extend your house hunt by months or years?  Or will you be bargain hunting this Fall and winter, as seasonal price reductions create attractive home buying opportunities?

Join the discussion on our social networking site:  Wait 2.0?  Will dismal housing forecast extend househunts another 2 years?

Bill Wendel | 07:51 PM in Housing forecasts, Real Estate Bubble, Timing the market | Permalink

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Oh, I am sooooo waiting longer for the prices to come down even more.

Posted by: Rhea | Aug 27, 2007 9:14:12 PM

The buyers are going to hold out/wait for the 'right' home. AKA Dream home, a place they can live in for 5-10 years. Meaning no main streets, bad locations, and "starter home" purchases.

Posted by: jenn | Aug 28, 2007 9:16:42 AM

Jenn & Rhea,

Mind if I ask how long have you been house hunting, and whether you are searching in Greater Boston or elsewhere?

What web sites are you using to monitor the housing market?

Are you familiar with the term, Web 2.0? I just cross-posted this discussion on The Real Estate Cafe's social networking site to get home buyers talking about "Wait 2.0":

Wait 2.0? Will dismal housing forecast extend househunts another 2 years?

Our MLS access reveals that we have lots of users who have looked at over 1,000 pages (interior or exterior photos of homes) over a two year period. With this new housing forecast, I'm wondering if those households are planning on extending their searches another two years; or alternatively, are prepared to buy the "right" home (as Jenn says) as soon as the opportunity presents itself.

Either way, can you tell me what kind of tools, web sites, or other resources -- online or off -- you are using to inform your extended searches?

Posted by: RealEstateCafe | Aug 28, 2007 9:30:09 AM

my husband and I are teachers in southern california. no way we can afford to buy anything out here, so for the last year and a half, we've been looking at properties on Cape Cod. I'm from Massachusetts and have family there, and one day we'll retire in that great state. In the meantime, the place we buy will serve us during summer break and a 6-week christmas break. maybe we'll rent it out.

in june, we backed out of a deal after inspection because we realized that we came in way too high (we're first time buyers and are learning a lot as we go.) and were overpaying for the property. The day after we backed out, the asking price dropped 10K. I think this last week it might finally have gone under agreement or is just plain off the market.

Hard as it is to see that cute little pond-front property go away, we're holding out. The Cape is a seasonal place and we believe that prices will go down, especially for second home areas. It's hard to hold off, considering we've been standing on the sidelines for years, waiting for the tide to turn. It finally has but we're not jumping in too soon.

We've got excellent credit and 20 percent in cash. i think (translation: i hope) that in 6 months they'll be begging for buyers like us.

Posted by: msprompt | Aug 28, 2007 11:05:05 AM

I will definitely wait!
Prices are still insane!
MA average household income, according to latest data is $52,713.
http://www.usatoday.com/money/economy/2005-11-29-wage_x.htm.
Average single family house in MA costs around $320,000.
Any financial advicer will tell you that you can safely afford a hous that costs 2.5 to 3 times as much as your annual household income.
In MA average single family house costs now SIX times as much as average household income!
People could "buy" houses in the last 2-4 years with "exotic" mortgages. That was the major reason of the "boom". Not anymore!
Mortgage companies go bancrupcy almost every day, and banks have been closing their mortgage branches. So, no "zero down", "bad credit ok", etc. anymore!
Besides, don't forget that starting this October all of those "exotic" mortgages issued in 2005-2006 will start "recharging". And they will be recharing every month until 2011.
It means folks who took them will face 20-50% higher monthly payment. And exotic mortgages in 2005-2006 were accounted for some 40-50% in MA!
So, if you take the facts above into consideration, you will see prices will go down.
The "experts" that predict the housing will "rebound" (read: prices will go up again) soon don't bother providing any arguments other than unemployment is low. So what? You also must make enough to afford the prices!

Posted by: Booba | Aug 28, 2007 11:20:10 AM

MsPrompt,

Your case study is a sign of the times, and glad to hear you were able to exercise your inspection contingency to withdraw your offer and avoid overpaying for a house.

Love your comment:

"i think (translation: i hope) that in 6 months they'll be begging for buyers like us."

There are new business models coming that may make that possible.

Although it may be wise to wait six months or more, there is no need to wait to begin identifying potential sellers and savings opportunities. About 2,000 listings expired a week this time of year, and The Real Estate Cafe encourages home buyers to approach those sellers directly and to identify other homes that aren't even on the market yet.

A number of our clients are experimenting with a process we call "proactive house hunting." See this blog post for more information, and if you are interested, I can add you to our password-protected intranet so you can see examples of letters buyers are mailing into targeted neighborhoods to create their own listings and the kind of results they are getting.

If there is interest, we'll gladly revive the proactive house hunting course we first taught over a decade ago when listings were scarce. Times have changed but our mission remains the same: help tech-savvy home buyers like you save money!

Bill

PS. Glad to know you and your husband are both teachers. I'm the runt in my family of origin, ie. the only one of six who is not and never has been a college professor (even though I went to Harvard & MIT).

Posted by: RealEstateCafe | Aug 28, 2007 11:36:51 AM

All this discussion about prices and salaries is irrelevant -- the market doesn't care how much money you make. It does, however, put an intrinsic value on a home's utility: how much you can rent it out to others.

I'll wait until home prices drop to the fiscally responsible level of about 12 times annual rent, where rents generate positive cash flow for owners. In Boston, prices are running 20-24 times annual rent, which means that it's impossible for new owners to generate positive cash flow.

In the meantime, I'm generating lots of return on the investing the difference between prices and rents in safe long-term assets.

I expect a correction in real terms of about 40-50% from the peak that will take 5-10 years to play out, and am profiting handsomely from the huge difference between prices and rents. I also expect and have observed in 2007 that rents will become cheaper in Boston as more and more owners rent their properties rather than selling for less in the declining market. This is, of course, another driver of the vicious cycle of a correcting market that will provide a double benefit to renters for the foreseeable future.

Posted by: Steve | Aug 28, 2007 3:10:01 PM

Hi Bill,

Thanks for your response. I think the idea of proactive house hunting is fantastic. Had I known of this when we started the home search, you bet your bippy we'd be in. And we'll certainly keep it in mind for the next house we buy (or sell). But, unfortunately, we are already working with an agent who has labored tirelessly for us, showing us properties and doing a lot of local legwork for us, considering we're out of state. I just don't feel right cutting her out of the deal at this point. Plus, she is a friend of the family, so it really wouldn't be right.

I love the idea of a la carte, because it would allow me to handle my own transaction and cut the broker out of the transaction entirely. Throughout our deal-that-almost-was this past June, I came to learn the real role of brokers: manufacture a false sense of urgency, and ram the deal through as fast as possible for as much as possible, while lying as necessary. Foolishly, I'd believed brokers to be close confidants helping to chart the best strategy! Ugh, what a moron.

But I'm learning. Fast.

If you can add my e-mail to your password-protected intranet, I'd appreciate it.

Have the papers done a story on the kind of services you're offering? They should.

Thanks for the info

Posted by: msprompt | Aug 28, 2007 8:29:59 PM

Steve is correct. There are no bargains out there, yet. Housing is still overpriced by orders of magnitude.

One marvels at how clueless some people can be. The Internet offers easy access to the latest news about the world credit markets, which have seized up to the point that the global banking system is threatened--in the opinion of the world's central bankers. Exotic mortgages, subprimes, no-money-downs, NINJAs, SISAs--all the mortgages that drove the bubble are gone. Gone. Now, you can only get a mortgage that can be sold to a GSE, which means a down payment, decent credit, and a loan amount under $417,0000.

And sellers still list their homes for barely under the same prices they could command during the bubble. Hilarious.

Honey: There. Are. No. More. Mortgages.

And just wait until JQ Public realizes that there are sub-prime-backed securities in his MONEY MARKET ACCOUNT.

Posted by: Sold already | Aug 29, 2007 3:32:30 PM

Sold already.

Sounds like you sold your home or investment properties before prices began to slide.

Regardless, I really appreciate the candor and financial savvy you and Steve bring to this discussion.

Sounds like Steve has invested his money outside real estate, but that both of you will be back in the market when there are bargains. In the meantime, can you make recommendations about tools or websites you'd advise others use if they are making homebuying decisions this Fall?

I think there is a very real chance that new buyers could see a short-term loss of equity. Looks like there are a few data points, like local market foreclosure rate, in this AVM (automated valuation model) from HomeSmartReport that may help buyers identify market risk at the individual property level before making an offer.

Anyone used it or willing to try and give others feedback? Not sure it covers properties in MA, but it was one of the more innovative exhibitors a month ago at a real estate technology conference I attended in San Francisco.

I'm curious whether others in Boston might be interested in hosting our own real estate unconference this Fall.

So we can learn about defensive homebuying tools strategies from companies like HomeSmartReports, my-currency.com, etc -- and strategies from readers like those posting to this blog!

THANKS FOR YOUR PERSPECTIVES!

Bill

Posted by: RealEstateCafe | Aug 29, 2007 3:57:27 PM

i checked out the home smart value report. isn't it just info that can be obtained on one's own thru zillow, the local tax man, registry of deeds, etc.? What do you get for the money?

Posted by: msprompt | Aug 29, 2007 6:59:40 PM

Worse than terrorists? Wow, that's harsh.

Posted by: Louisville Real Estate | Sep 1, 2007 3:49:40 PM

can you make recommendations about tools or websites you'd advise others use if they are making homebuying decisions this Fall?

Sure: the NYT's Buy versus Rent Calculator. There are no guarantees, but be sure to see what happens when you adjust the annual home appreciation (left hand side slider) into the negative (Shiller and others are talking about the possibility of a 50% haircut, which is consistent with price-rent ratios that would generate positive cashflow). Also, I expect that local rents will rise less than core inflation (for the reasons stated above), but fiddle with this assumption to see what happens.

The main problem with this calculator is that it does not show the total benefit, only the annual dollar amount. The total benefit is potentially huge.

Posted by: Steve | Sep 5, 2007 5:06:15 PM

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