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August 30, 2007

Wait 2.0: Negative cycle creating marginal or mega-savings for patient homebuyers?

Stop_poorfarmrd At the end of 2006, one of our blog posts linked to this cautionary (albeit biased) advice from the outgoing president of the Massachusetts Association of Realtors:

“With home prices leveling, interest rates remaining low, inventory still plentiful and more sellers accepting market-based pricing, Bay State homebuyers have a special window of opportunity right now,” Mr. Wluka said. “We just don’t know how long the window will stay open, with factors remaining so favorable. For anyone trying to time the market, the waiting game may be a big mistake.”

Eight months later, a survey of economists and the interview below on Marketplace.org, suggest that waiting could create more savings opportunities for homebuyers from what economists call a "negative cycle."  How much have you saved by delaying your home buying plans over the past year or two, and how much more do you think you can save my waiting longer?  How long will you wait, or will you be bargain hunting this Fall and winter as seasonal markdowns accelerate savings opportunities?

Marketplace.org:  "Ride Dow roller coaster, or sit it out? (8/30/07)
Links and excerpts selected by The Real Estate Cafe, audio online above (but no transcript yet):

Marketplace host:  You get the feeling that investors can't seem to make up their minds?  ...Once emotions loosen the markets, where it all ends, can be anyone's guess.  ...That has a lot of us in some kind of limbo these days.

Steve Tripoli, Marketplace:  Even well-healed potential buyers are thinking twice these days.  Lois Vitt has written a book about real estate that focuses on buyer and seller psychology.  She says "caution" is what happens when markets turn sharply south.

Dr. Lois Vitt, author:  Fear is contagious and that's what's going on right now.  People are afraid.  And so they worry that they might get in trouble if they go ahead with their plans and so people are holding back.

Steve Tripoli, Marketplace:  Nationwide chatter about a housing bubble, and further price drops isn't helping; even if it is accurate says Wellesley College housing expert Karl Case.

Karl Case, housing economist:   I've got a t-shirt that says, "Mr. Housing Bubble:  I pop and you are done."  There's just a lot of press, a lot of news about the mortgage market, about auctions, houses, about foreclosures.  If you are in the market about to make a big decision about buying a large asset, that is going to scare you.

Steve Tripoli, Marketplace:  It's not only that a house is a big asset, says Case, but it's one most buyers will hold for a long time.

Karl Case, housing economist:   And they borrowed the money to do it.  So they naturally have expectations about whether it's likely for it to go up or down, and it is clear that the demand is sensitive to those expectations.

Steve Tripoli, Marketplace:  The problem with this negative market psychology is that it can be self-fulfilling.  Buyers hold back, prices drop; so more mortgages exceed the home's value, and prices drop more.  Then buyers pull back even more.  I asked re Karl Case and Lois Vit, "Are we are in danger of that kind of negative feedback cycle right now?"

Karl Case, housing economist:   Absolutely.

Dr .Lois Vitt, author:  Absolutely.

Steve Tripoli, Marketplace:  And all of the sophisticated computer models, and hedge fund managers in the world can't predict where that kind of negative thinking will take us.  So fasten your seat belts.  I'm Steve Tripoli for Marketplace.

Listen to NPR's "All Things Considered" this evening for more insight into the negative cycle spiraling downward in the housing market.  Here's a key pull quote:

Economists expect total declines of about 10 percent throughout many parts of the country — and up to 25 percent in some of the formerly hottest markets.

Bill Wendel | 02:15 PM in Consumer surveys, Housing forecasts, Market trends, Price trends, Real Estate Bubble, Savings & Rebates, Timing the market | Permalink

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Oh, I'll be sitting on the sidelines for quite a while to come. I am in Boston, where everything is topsy-turvy. But can't wait for the day (two years hence?) I will buy that properly priced house.

Posted by: Rhea | Aug 30, 2007 3:53:40 PM

"Are we are in danger of that kind of negative feedback cycle right now?" "Absolutely"

Why don't they bother to mention that it was an irrational _positive_ feedback cycle that (in part anyway) contributed to the inflation of this bubble? Earlier in the decade, I didn't hear very many people complaining about how the positive press was contributing to a housing market that made many people take out irrationally risky loans. I've seen very little objective press about the housing market for the past 7 years.

Posted by: Dave | Aug 30, 2007 8:26:04 PM

Rhea & Dave,

Thanks for your comments. Rhea, are you presently renting in Boston? I can see that you are a prolific blogger!

Have you written much about housing issues for baby boomers?

When rent control ended 12 years ago in Massachusetts, The Real Estate Cafe hosted a seminar targeted at boomers called "Mid-Life Housing Crisis." Do you know if anyone has estimated how many of the anticipated 2 to 3 million foreclosures expected in coming years will involve boomers, particularly single or divorced women?

I can see from your post, "Baby Boomers: Self-Reliance is Overrated," that you are a fan of co-housing. As adjustable mortgage put the squeeze on boomers, some may need to share housing, or take in boarders to carry their rising mortgage payments.

A friend of mine has developed a prototype for a mini-cohousing concept she calls "Shared Hearth."

Perhaps the two of you should correspond before the upcoming AARP convention in Boston, 9/6-8/07.


Posted by: RealEstateCafe | Aug 30, 2007 10:55:51 PM

All things considered.... Sept 18th ( or sooner) has a lot more implications than the average person could/would suspect. The short term federal rate has direct consequences for everyone involved ( those with money & those without). This bubble is much more severe and involved than the average consumer can comprehend. Its a matter of connecting the dots. Not for the wealthy, but for those that aspire. Bernanke has an unbelievable weight on his shoulders... and avoiding the " Greenspan Put" as many refer to will tell the story for the next several months. The old adage that Cash is King will prevail regardless of any family's / persons plight. The true point of all this is how willing people are to live above their means and roll the dice on going back to square one...

My humble opinion (which I hope is objective and not doom & gloom), let the market correct itself... let those that over extend realize their own plight. In the end, it will make us a better & stronger economy and get America back to where we need to be globally... Saving and not spending..

Posted by: morgan. s | Aug 30, 2007 11:25:04 PM

Dave,

Thanks for your comment, too. I've maintained an excel spreadsheet comparing housing market conditions from 2000 to 2007. The original version was prepared for Halloween 2002, and resulted in a slideshow called, "Haunted by the Housing Market."

As Halloween approaches this year, and NPR reports that Wall Street is "spooked by a sharp drop in housing prices," I am thinking about sharing the spreadsheet and inviting others to update the "Haunted by the Housing Market" slideshow. At a minimum, I'd love to develop a timeline which shows the "positive feedback cycle" you describe.

Most people forget that the housing market was heading into recession before 9/11, and by Halloween 2002 we had the lowest interest rates in 40 years! This excerpt, a month before 9/11, shows that the housing market was on the edge of a negative cycle six years ago:

Feds Report: Housing Starting To Weaken (8/13/01)

"In warning national banks to be wary, Deputy Comptroller Nancy Wentzler reminded reporters recently that housing values dropped 8 percent on average during the last recession in 1991. Not only could it happen again, she said, it could "happen rather abruptly."

Maybe I'll cross post this in The Real Estate Cafe's Idea Bar (a wiki which users can edit) or a blog post tomorrow.

Posted by: RealEstateCafe | Aug 30, 2007 11:28:19 PM

Morgan,

Thanks for your post. This Time Magazine article has been recommended to me to "help connect the dots," as you say. The online version doesn't seem to have the impressive graphics the print version does, which are helpful because they show the relationships between Wall Street and Main Street.

Real Estate's Fault Line.

If anyone else can find the graphics online, can you post the link?

Posted by: RealEstateCafe | Aug 30, 2007 11:41:49 PM

The quotation that started this article shows us again how do we treat realtor's "expert opinions"!
For them, it's always "great time to buy"! We are in the middle of the bubble? "Buy now until it's too late! They won't make more land!". The prices are falling? "but now until it's too late!" again!
Why?
Just because those multy-millon gang of slakers want to live large and doesn't want to do more work!
Most people who wants to make more take classes, educate yourselves, work more.
But realtors doubled or tripled their incomes in the last 2-3 years by just hyping "buy now!"
What is still amaze me is people are still listening to them! And their clowns, or, sorry, I meant, "Presidents" and "economists" are widely quoted even in respected mass media!

Posted by: Booba | Aug 31, 2007 12:15:26 PM

"Earlier in the decade, I didn't hear very many people complaining about how the positive press was contributing to a housing market that made many people take out irrationally risky loans. I've seen very little objective press about the housing market for the past 7 years."

Good point!
Look at the terms mass media used/still use describing the bubble: "housing ENJOYED boom", "SPECTACULAR grow of housing market", etc.
And places where prices are still growing they call "BRIGHT SPOTS".
Why the hack prices growing 25% per year is a "bright spot"???? For whom? For realtors whose income automatically grows 25% also?
Mass media bears as much responsibilities for the booble as speculators, lenders and borrowers!
Flip-flop shows on TV, stories about people who made millions speculating with real estate, who made "investment", etc. Or about a familiy with 60K income that "figured out that they can afford a house that cost $400,000" (Boston Globe, 2004).
Now the notorious National Association of Realtors blame mass media for anemic sales!
Without fierce support from mass media that was well paid by realtors, there would not have been the ""boom"!
How many "skeptics" opinions found their way to mass media during that "boom"? I cannot recall any!

Posted by: Booba | Aug 31, 2007 12:26:42 PM

Thank you, Bill, for honorable mention of the Shared Hearth model of housing, which is a floor plan that incorporates a precise architectural device in the kitchen. The floor plan enables two people to share the stove in a standard unit, while designating a portion of the unit to each of them in a way that eliminates the need to cross over onto each others space, unless they both choose. My inclination as an organizer of living/work space, led me to design the model for single parents who want to share a standard unit, but the layout would work for others as well. Actually, it would work for 'starter homes'. (See drawings in the Home-Hold Photo Album.)

Posted by: Donna | Sep 1, 2007 12:12:35 PM

Donna,

Thanks for your comment and vision. I can't help but think that there are thousands of single people, or worse single parents, who are no longer able to meet rising mortgage payments who could benefit from "sharing their hearth."

Anyone who visits your online gallery can see that you have put an impressive amount of thought into the "Shared Hearth" concept. Glad you've got your own blog, but I'd also encourage you to think about how to use other social networking sites like Ning.com begin developing a community of like-minded people and to give each of them the opportunity to have their own voice, profile, etc.

As Rhea wrote, "self-reliance is overrated," as the subprime mortgage scandal is revealing, self-reliance increasingly expensive, too. When The Real Estate Cafe wrote this parody on April Fool's Day 2007, we had no idea that "Shared Hearth" might actually be a way for some households to forestall foreclosure by renting part of their house!

Forestall foreclosure by selling your home one room at a time

Is your goal to create an online database individuals and households looking to share space?

Posted by: RealEstateCafe | Sep 1, 2007 12:34:29 PM

How long will you wait, or will you be bargain hunting this Fall and winter as seasonal markdowns accelerate savings opportunities?

I'll wait at least until I see the effects on home prices of this credit crunch, resetting ARMs (75% of Boston mortgages during the runup), foreclosures, defaulting CDOs, hedge funds, banks, and possible nationwide recession. Just based on local price-rent ratios, I expect that Shiller and others warning of a 50% haircut is not far off for Boston.

All this will take years to play out, so realistically, that's going to be outside of 2010, just when the bulk of all the boomers begin to retire! It could be a long, long time, but I plan to continue investing wisely and growing wealth, not watching it vanish as a leveraged McMansion or dot-Condo loses value year after year.

Another benefit for renters of this national bubble is that it's imploding all around the country at once! If things don't work out as I expect here, then I'll give my months notice and move to a more or newly affordable part of the country.

So I don't see a downside to renting and staying out of the Boston housing market until at least 2010-2015.

Posted by: Steve | Sep 5, 2007 5:23:36 PM

If anyone else can find the graphics online, can you post the link?

Wikipedia has lots of graphics on this subject:

U.S. Home Prices since 1890
Comparison of U.S. Bubble to Japan Bubble
Comparison of current bust to previous

Posted by: Steve | Sep 5, 2007 5:29:33 PM

Steve,

Extraordinary posts! The wikipedia content has come a long way since The Real Estate Cafe was removed from the sources section ;-) Seriously, some editor once linked our site to the page you posted or another on wikipedia, but another editor must have removed it. Are you a contributor there, too?

I love the timeline that is unfolding, and would gladly let someone access the timeline / excel spreadsheet I've been keeping since 2000.

Have you seen our Real Estate Bubble Map, or the Haunted by the Housing Market contest we're thinking about launching?

The wiki content you linked, plus your own perspective could be good talking points for those videos / slideshows. For the Real Estate Cafe, our clients, and blog readers, thanks for sharing your knowledge!

Posted by: RealEstateCafe | Sep 5, 2007 5:52:01 PM

Imagine going to the bank and asking, "I'd like to open an account for minus (-)$100K". After years of deposits adding up to $100K you will have $0 in the account. Silly isn't it? Well that is exactly what you will be doing if you bought a house right now. Maybe a little more, or a little less, but either way doesn't sound too good does it? DONT BUY REAL ESTATE BE SMART

Posted by: dont do it | Sep 9, 2007 8:36:17 AM

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