Apr082015

Is “priced-out of the housing market” a myth or reality?

Buyers can’t be priced out forever, but many potential buyers can be priced out for long periods of time.

Buy Now or Be Priced Out Forever! Does everyone remember that refrain from realtors during the housing bubble? It’s not as effective of a sales tactic as it used to be, but some agents still use it.

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When prices rise faster than their wages, people can obtain less real estate with their income, so there is a natural tendency for people to react with urgency because they don’t want to be forced to accept lower quality accommodations later on.

When people react to the fear of being priced out, they often act irrationally and buy whatever is available, and in their buying, they contribute to the problem of rapidly rising prices that prompts even more irrational buying. A frenzy results.dc-real-estate-promo-0924_296

For realtors, buying frenzies are a great thing because it maximizes their income; unfortunately, since it is a frenzy unsupported by fundamentals, something causes the fever to break, sales volumes plummet, and often prices follow — a set of conditions realtors don’t relish quite so much.

realtors should recognize this pattern — a pattern they reinforce with false urgency — and chose stability over periods of feast and famine; however, this requires a modicum of self reflection and the discipline not to engage in activities that maximize their short-term income, and since realtors lack both of those attributes, we can expect them to continue stoking the market and blaming others when it crashes.

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The problem with the “priced-out” argument is that there is a grain of truth to it. Particularly now that lenders believe they can sustain any price peak by can-kicking delinquent mortgages, house prices can become elevated and remain elevated for a very long time. While it isn’t possible to price out all buyers forever, it certainly is possible to price out large segments of the population for extended periods of time.

Priced out: New housing froth discourages buyers

Diana Olick, March 31, 2015californians_talk_real_estate

… While several local housing markets are still nowhere near as expensive as they were during the housing boom, others are approaching so-called “froth” yet again. Prices in the nation’s top 20 housing markets were 4.6 percent higher in January than in January 2014, according to the latest reading from S&P/Case Shiller. …”The combination of low interest rates and strong consumer confidence based on solid job growth, cheap oil and low inflation continue to support further increases in home prices,” said David Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices.

Actually, only low interest rates support house prices. The remainder of his list is filler and nonsense.

“Despite price gains, the housing market faces some difficulties. Home prices are rising roughly twice as fast as wages, putting pressure on potential home buyers and heightening the risk that any uptick in interest rates could be a major setback.” …

(See: Rising interest rates do not boost house prices)close-the-gap

Even these cities, however, do not top the list of overvalued markets. Instead, Houston and Austin, Texas, do. Neither of these markets were particularly frothy during the housing boom, nor did they suffer as dramatically as the rest of the country during the bust. Driven by strong local economies, housing flourished on its own merits.”These are the cities experiencing a classic boom. Although Fitch identifies many of these cities as overvalued, this is from over-exuberant growth, rather than a lack of strong fundamentals,” Hilts said.

Texas housing markets are a case study for a stimulus induced house price bubble. These markets did not participate in the housing bubble because the lack of HELOC availability and high property taxes made Texas residential real estate less desirable as a investment, so Texans viewed their houses as a consumptive expense, which it is.

However, since the housing bust in the rest of the country prompted manipulation of mortgage rates from 6.5% to 3.5%, Texans suddenly found houses much more affordable, and since their economy was strong, people used the additional borrowing power to push up house prices to a new equilibrium.eliminate-lending-standards

While the rest of the country needed the super low mortgage rates to reflate the old housing bubble to bail out bankers, Texas didn’t need this stimulus; however, it isn’t possible to deny Texans access to the stimulus they didn’t need, so Texas house prices got pushed up significantly, accelerating 20 years worth of stable appreciation into the last 5. So Texas faces the prospect of a slow grinding price decline as mortgage rates rise despite fundamental strength in their economy.

There is growing concern, of course, that the drop in oil prices will trickle down through the overall Texas economy and weaken both the employment and housing markets. There is still very tight supply, given demand, in major Texas markets, but builders are holding a magnifying glass over the state for fear of missing even the slightest cracks.

Unlike Texas, other over-valued markets are seeing price gains based not on strong fundamentals of their economies, but on very tight supply.

(See: Bidding wars are caused by underwater homes missing from MLS inventory)

Priced-out buyers often ends badly for owners

dream_homeJust before the stock market crash signaling the beginning of the Great Depression, Irving Fisher, a noted economist at the time, was quoted as saying “Stock prices have reached what looks like a permanently high plateau.” Of course, stock prices dropped significantly after he made this statement. This sentiment is based on the idea that inflated prices can stay inflated indefinitely.

However, when valuations cannot be pushed up any higher, as is the case today, future price increases would only match inflation. Also, when the quality of units available for rent at a given monthly payment far exceeds the quality of those available for sale at the same monthly payment level, people choose not to bid on the property and they rent instead. One sign of a housing bubble is a wide disparity between the quality of rentals and the quality of for-sale houses at a given price point, a condition people can readily research here on this site.

certified_distressed_property_expertPeople choosing to rent curtails the rapid rise in prices and thereby lowers the demand for real estate, putting downward pressure on prices, which eliminates the primary motivation speculators had for purchasing the asset.  Greed created the condition of rapidly rising prices which in turn spawns the fear of being priced out. When greed ceases to motivate buyers, prices fall.

Once prices begin to fall, the fear of being priced “out” forever changes to a fear of being priced “in” forever. A buyer who overpaid and over-borrowed will be in a circumstance where they owe more on their mortgage than the property is worth on the open market. They cannot sell because they cannot pay off the mortgage. They become trapped in their homes until prices increase enough to allow a breakeven sale. This puts the conditions in place to reverse the cycle and causes prices to drop precipitously.

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