Friday, October 13, 2006

L.A. Times: Would-Be Home Sellers Settle In Rather Than Cut Prices Further

According to this October 13, 2006 L.A. Times story by local market watcher Annette Haddad, Southern California homesellers are taking their marbles and going home. Almost literally. Buyer and seller have been locked eyeball to eyeball, and the seller is refusing to budge.

According to the story, inventory has dropped. Buyers are giving up on selling so they are pulling their homes off the market. Apparently the housing bears have been a bit too quick in showing their upper hand (or should I say claw?). Low-ball offers are being rejected.

Foreclosures have been rising, but they are still at a very low level compared to previous downturns. The job market and the economy are in a holding pattern, the article states, therefore sellers aren't under particular pressure to sell their homes.

One expert says that a reduction in home listings is "one of the preconditions to stabilization in the housing market... and that's a good sign."

And here we have some data on September activity in Los Angeles County. Apparently the median home price (all homes) rose to $509,000, up 3%. Sales fell 27.9%. Apparently, all price gains since May have been given back. Orange County, too, saw a median home price rise to $626,000, up 2.6%, while sales declined 34.6%. Riverside County median price rose 8.2% to $423,000 (this is an "affordable" area, remember) and San Bernadino county median price rose 3.7% to $365,000.

The article does say that the reduction in inventory does not seem to be stimulating buyer interest. Esmael Adibi, an economist at Chapman University, fears that "weak sales will continue to drag down prices, sapping equity from recent home buyers who are counting on appreciation to offset their mortgage debt." He says, "the market hasn't gone into that desperation mode yet, but we see it as in the earliest stage of the downward pressure on prices." He thinks that a year from now, inventory could be "considerably higher", due to recent home buyers with risky mortgages facing the need to sell if they run into trouble making payments. "How many of this group will be able to get out of a bad situation...if they face payment shock or financial distress and will need to sell?"

If my two cents is worth anything, I've been seeing inventory increase in the South Bay on Zip Realty, not decrease. Inventory did dip into September, but it has been slowly climbing back up again. Just tracking 90278 alone on Zip Realty, inventory had been as high as 260, then went down to about 230, and is now back up around 250. Price reductions are also creeping back up. They had been in the 130's, had gone down into the 110's, and are now back up in the 120's.

In those areas where inventory actually did decrease, what are realtors going to do? Start their "Hurry up, buy now before it's too late!" campaigns? What ever happened to "Now is a great time to buy, there are more homes to choose from!"

I have been wrong many times in the past about when and how bubbles will burst, and I could be wrong again. But I just don't think that collectively, it is in our psychological makeup to all join hands and sing "Michael Row Your Boat Ashore", as we pass around houses to each other, slivering a few $K here and there off prices, distributing the financial pain in a benevolent, uniform, serene way. No, I think somebody who really needs to sell is going to crack, and deeply cut his asking price. Once that happens, other sellers will get angry because they now have to face the reality of prices falling hard, and then if they need to sell they'll be forced to follow the slope down.

I think Esmael Adibi has more going for him than the economists at either the Anderson School at UCLA or the Lusk Center at USC!

Right now, it looks like there has been a very recent sales spurt in my area. This might be somewhat related to the recent decline in longer-term interest rates and the jump in new mortgage applications. This could be what the bubblonians such as Greenspan are trumpeting as a recovery (even though our local inventory is creeping back up). Let's continue to keep an eye on things.


Blogger judicious1 said...

Sellers can "hold out" as long as they want, but that won't prevent the correction from taking place as there are many other factors involved:

- The expectation of housing appreciation is a thing of the past.
- ARM resets will continue to present payment shock to those who bought beyond their means with exotic mortgages.
- Real estate and construction related job losses.
- The housing ATM is now "out of order" to fuel the consumer-driven economy.

...and the list goes on.

The first phase of the downturn is already here in the form of houses that nobody is willing to buy. This will get much worse as "potential buyers" continue to postpone purchasing an overpriced, depreciating asset. No spin from RE cheerleaders or misinformed journalists can prevent what we'll experience over the next several years.

10:00 AM, October 14, 2006  
Blogger bearmaster said...

Yeah, I could see this market flattening out and maybe even showing a mild "recovery" over the next few months. (It will look like a recovery because the market stunk so bad this past summer, but when you're at the bottom of the well the top of the well looks good, even if the well is in a field of manure, right?) I can even see the bubble temporarily shifting to very low end high density housing, the kind where slums are born if there is a severe economic contraction lying ahead.

But I can't think of a single time in history when the sellers in a huge asset market just flat-out refused to sell because they couldn't get their asking prices, the buyers relented and came back and met the sellers prices, and the market just magically recovered. Sooner or later there will be sellers who MUST sell and they will crack and slash their prices.

1:08 PM, October 14, 2006  
Blogger sylvie said...

Macros don't lie the momemtum has been building for a long time. As much as the Fed would like to manufacture a soft landing it won't happen.Too much bad paper loans out there. Banks, RE employment, home related businesses, borrowers, millions affected. There is no way this is not going to have negetive effect on the larger economy. Wall street can get false optimism over falling fuel but the yield curve doesn't lie. We are a nation of non producing debt ridden consumptionist. Especially in California where it is a cultural phenom to live higher than your paycheck just to impress unimpressive people. It's time to pay the piper. 07 will tell volumes and shorty after the dollar will plummet I see bad things in the US for years. Those with csh and low dept will survive those ovr extended will be descimated.

1:23 PM, October 14, 2006  
Blogger bearmaster said...

Federal Reserve (and former Fed) officials have been flapping their lips lately saying the real estate market may be recovering. They are basing that opinion on the fact that pending home sales jumped unexpectedly by over 4% according to NAR, as reported October 2, that there has been a jump in new mortgage applications, and that mortgage rates eased back down to their lowest levels in about 6 months.

I would not be surprised to see some leveling off or even some mild "recovery" in real estate in the months ahead - after all we've reflated the stock markets, which are now floating on layers of thin air. But in very recent trading long term treasuries have been selling off, suggesting to me that long term interest rates are once again due to head up. So the Fed is looking at mortgage rates in a rear-view mirror, in my opinion. And I've got a stack of neighborhood brochures sitting in my file drawer of unsold properties from the past year.

What will the market be like next spring with all those frustrated 2006 would-be sellers out there again determined to get their dream asking prices, plus all the new 2007 sellers entering the market???

Anyway, here's the latest from the L.A. Times. Just a reminder to housing bears that bear markets don't always plunge straight down.

Some robust stats contradict the market-gone-bust reports
By Kenneth R. Harney
Washington Post Writers Group

October 15, 2006

WASHINGTON — With all the dismal reports about the home real estate market, don't lose track of something critically important: Mortgage interest rates have been falling quietly but steadily for months and are now at their lowest level in half a year, barely a percentage point above 40-year lows.

New mortgage applications are up sharply, the number of pending home sales is up, the national economy continues to expand moderately, and the rate of unemployment just declined again — to 4.6%.

All of which begs the question: Just what kind of housing bust is this anyway? With gloom-and-doom purveyors forecasting imminent crashes in dozens of metropolitan areas, how could such key fundamentals as jobs, interest rates and even pending home sales simultaneously be trending in the opposite direction?

Donald L. Kohn, the Federal Reserve's vice chairman, took a stab at that seeming conundrum in a recent speech at New York University. His views are worth keeping in mind if you want to put the negative news on home prices and sales in perspective.

To begin with the fundamental point: Kohn sees no imminent bust or crash in housing. It is a "correction" that's underway — a cyclical re-balancing of a marketplace that got too hot for too long in some parts of the country and is now heading back toward more "normal" conditions, where prices are more in line with what consumers can afford.

"The reported declines in house prices in a number of areas should help to facilitate the re-balancing of supply and demand in those markets," Kohn said. Not all home sellers have fully grasped the altered realities in their own local markets — that they've got to reduce their asking prices if they truly want to sell. So the process is still unfolding. Re-priced houses, in turn, should stimulate greater numbers of potential buyers to get off the sidelines and make offers. The unexpected 4.3% increase in the latest monthly number of pending home-sales contracts heading for closing nationwide reported Oct. 2 by the National Assn. of Realtors could be a sign that Kohn's prediction is already taking shape.

Second, said Kohn, the housing correction — expressed through new-home starts — suggests we are well on our way toward bottoming out and eventually returning to positive growth in new-home starts and resales.

Now to interest rates. Today's "unusually low" long-term mortgage rate environment "stands in sharp contrast to some past downturns in the housing market that followed actions by the Federal Reserve to tighten credit conditions significantly." Translation: Affordable mortgage money should help shorten the current housing down cycle compared with credit-squeezed periods in the 1980s, when mortgage rates sometimes exceeded 16% for fixed-rate loans.

A final key factor, according to Kohn: "Continuing growth in real incomes should underpin the demand for housing and, as home prices stop rising, help erode affordability constraints."

Add it all up: Lower asking and selling prices on houses are integral parts of the correction. Lower interest rates should make those lower prices affordable to a broader number of potential buyers. That could become an even more important factor if mortgage rates dip below 6% in the coming months, as some Wall Street capital market analysts expect.

5.75% a possibility

James Glassman, a managing director at JP Morgan Chase, says 30-year fixed-rate mortgages at 5.75% are a distinct possibility if long-term rates in the global bond market continue to ease.

So, what's the source of some of the confusion about just where housing is headed? Mike Moran, chief economist of Wall Street's Daiwa Securities America, minces no words: The financial press and TV news shows are over-dramatizing what is a normal and long-predicted cyclical re-balancing, and "portraying it as a catastrophe," he said

Housing "is going through a correction that's badly needed," he said. "The key issue is whether it is orderly or disorderly" — and all signs point to a continued orderly process, not a breakout bust or panic.

Doug Duncan, chief economist of the Mortgage Bankers Assn., points out that national housing sales numbers are merely rolling back to 2003 levels — "and that was a record year." Serious sellers and buyers shouldn't be misled by predictions of imminent crashes, Duncan said. Not only do the doom reports ignore the positives out there in the marketplace — mortgage rates in particular — but also "the rhetoric is just way overwrought."

Comments for Kenneth R. Harney can be sent to

5:59 PM, October 14, 2006  
Blogger jonaskinny said...

just open the latest southbay real estate freeby (I think thats the name) and count the 'reduced' or 'seller will look at all offers' or 'call for pricing' that were not there - on the same properties - in the last few issues.

3:45 PM, October 15, 2006  

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