Housing Kool-Aid: House prices going to the moon!
Rising house prices is bringing more inventory to the market, but many of the sellers have unrealistic expectations for what they can sell their house for.
Despite the equity-crushing housing bust of 2007-2009, a short but furious price rally from early 2012 to mid 2013 revived animal spirits and rekindled faith in home price appreciation, the official religion of California. Religious faith is great for people looking for peace of mind in a chaotic world, but it doesn’t apply well to investments. People who chose to believe an investment opportunity will turn out well simply because they want it to are often disappointed by the results. Financial markets generally don’t respond to faith, prayer, or wishful thinking.
Faith in home price appreciation is seductive because it offers unlimited wealth for doing absolutely nothing, and everyone wants to make money for doing nothing. Learning about investing takes time and effort, and the results are far too slow to satisfy most people. Plus, you have to sell the investment and pay taxes on the gains. It’s too much hassle.
Residential real estate is much better. Everyone is already an expert on real estate (or so they think) because they live in a house or condo. No learning is required, and when people get lucky and catch a bubble, they get to pat themselves on the back for their great financial prowess. And best of all, they don’t have to sell a house to get the cash. Banks will give them all the money they want with a HELOC. If the house keeps going up in value — and it can never go down, right? — then the bank will give them more and more money. What a deal!
There is no other investment that takes so little intelligence, research, learning or effort and produces such large and consistent returns. It’s a wonder everyone doesn’t want to own a house.
Once someone drinks real estate kool aid and believes real estate values always go up, they no longer consider risk or value. Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money. Value loses all meaning.
Also, since you can pay back any borrowed sums when you sell, it doesn’t matter how much you borrow or under what terms; debt becomes something to be serviced, not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears magically through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice.
The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
Faith in neverending appreciation was severely shaken by the housing bust. It’s difficult for people to completely ignore reality even if their faith demands they do so. Now with house prices rising, the faithful are drinking kool aid again, hoping to blot out the bad memories of the reality of the housing bust.
Home prices are moving so far, so fast, that at least 1,000 local housing markets have hit all-time price highs, according to Zillow. It should come as no surprise, therefore, that potential home sellers are giddy with value.
“I even hear them say that prices are skyrocketing,” said Jeremy Cunningham, a northern Virginia real estate agent with Redfin, a real estate brokerage. “When you ask them what their data source is or where they’re getting their information, it’s more of a vibe.”
It’s more of a vibe? That’s kool aid.
Forty percent of sellers surveyed by Redfin said they are planning on pricing their homes above market value when they list in the second quarter of this year; that’s up from 33 percent at the beginning of the year. Redfin polled 1,128 active home sellers across 25 U.S. cities.
Confidence is behind it all. Fifty-two percent said they were confident that now is a good time to sell, versus just 37.5 percent three months ago. This, conversely, as sales of existing homes were actually lower in March by 7.5 percent from a year ago, according to the National Association of realtors.
So homeowners are more confident they can sell, but fewer of them are doing so.
Another survey of 1,000 homeowners and renters by mortgage giant Fannie Mae found that those who say it is a good time to buy a house held steady in April at 69 percent, but those who say it is a good time to sell increased 4 percentage points from the previous month to 42 percent, an all-time survey high.
“Consistent with (April’s) upbeat jobs report, concern about job loss among employed consumers also has hit a record survey low. These results are in line with our expectations for increased housing activity and gradual strengthening of the housing market going into the spring and summer selling season,” said Doug Duncan, Fannie Mae’s chief economist.
More sellers now say they are pricing their homes high because they are willing to wait if it doesn’t sell, according to Redfin. An increasing number of sellers also say they are pricing high because they need that value to pay off their mortgages. Nearly 10 million U.S. homeowners were underwater on their mortgages at the end of last year, according to Zillow.
The MLS is littered with properties with WTF price tags. Despite the low inventory, a property still needs to be priced appropriately to sell. Since lenders aren’t enabling borrowers with unlimited buying power, potential buyers really have to afford the mortgage payments; thus bids are limited.
The Soricelli family in northern Virginia thought about selling their home a year ago, but held off, hoping that prices would improve. After watching solid home appreciation in the neighborhood and across the country, they decided to put their home up for sale this spring. Their asking price, however, was higher than their real estate agent, Cunningham, thought was realistic.
“My wife and myself, we take a lot of pride in our house and did a lot of upgrades,” said Brad Soricelli. “We put a lot of money into it, so in trying to reconcile that with what the market is now, there was a little back and forth.”
Cunningham said he is usually able to talk his clients back to reality by showing them comparable sales, but the data can be confusing. That is especially true in markets where investors and all-cash buyers are more prevalent.
Sellers are more likely to get their asking price from an all-cash buyer, and all cash means there will be no appraisal issues. However, for those in markets where there are fewer investors and all-cash buyers, commanding an above-market price is a dicey proposition. Even if they do strike a deal with a credit-dependent buyer, they are at the mercy of the appraiser, who will make the final decision as to the real market value of the home.
“When you look at comps, it’s very difficult. The trends are hard to identify,” said Cunningham. “You could have on any given street, price variations of $50,000 to $75,000 for the exact same house.”
The Soricellis did take Cunningham’s advice and brought their asking price down. The house sold in one day, but they say they have no regrets.
“Not having to go through waiting and some of the aggravation of having your house on the market for a period of time is worth a certain amount of money,” said Brad Soricelli.
Especially when they look across the street. Their neighbor’s house, which has already undergone a price drop, is still sitting on the market.
Price drops? Prices only go up, right? Have faith…