Hope springs eternal. People are prone to believe what they want to believe, and with a little bullshit from the the National Association of realtors buyer sentiment toward housing has barely declined at all since the housing bubble catastrophically burst six years ago. Take a careful look at the chart below, and marvel over the foolish optimism of potential homebuyers.
Most homebuyers over the last 10 years are currently either underwater or the value of their home is worth less than they paid for it. Homebuyer sentiment during the housing bubble was high, but that isn’t surprising given the strength of the kool aid. What shocks me is how well homebuying sentiment has held up during the crash.
Sellers on the other hand have been forced to deal with a heavy dose of reality. Falling prices have wiped out their equity and left them penniless. The precipitous decline in seller sentiment has tracked the deflation of the housing bubble very well. The attitudes of buyers is inexplicably high.
Buyers, sellers continue to butt heads on home prices
by JUSTIN T. HILLEY
Thursday, December 29th, 2011, 2:19 pmMost Americans feel now is a good time to buy a home, but those who want to sell are having difficulty finding buyers at desired prices, causing seller sentiment to fall to record lows.
The low opinion is causing a wide gap between homebuying and home selling that won’t narrow for at least the next five quarters, according to a new report by the Mortgage Bankers Association‘s Research Institute for Housing America.
From 1992 to 2005, positive seller sentiment fluctuated between 40% and 60%, according to the report. Since 2005, sentiment has plummeted to 7.6%, even while homebuyer opinions remain high. Despite high unemployment, slow economic growth and problems plaguing the economy, nearly 80% of American households believe now is a good time to buy a home.
Ordinarily, investor sentiment is a good contrarian indicator. When everyone is bullish, it generally a good time to sell, and when everyone is bearish, it’s often a good time to buy. I expected to see buyer sentiment to decline with the continuing decline in prices. As a contrarian, I am bullish in beaten down markets like Las Vegas were everyone is bearish. The fact that buyer sentiment is so high is either a result of NAr kool aid or a sign that more pain is ahead.
Today’s pattern of homebuying sentiment looks similar to past recessions, but what is different is today’s historically low positive seller sentiment, according to Gary Engelhardt, Syracuse economics professor. The large overhang of mortgages past due or in foreclosure is a major factor for the difference. As market values have fallen, potential sellers have not adjusted their target selling prices downward fast enough to bring buyer and seller sentiment more in line with one another.
Seller sentiment is down because they are underwater, and they can’t get their wishing prices like generations past. The American Dream is a nightmare for today’s sellers.
Engelhardt said it is difficult to determine the main driver of the gap, but offers a few more possible explanations for the discrepancy.
He says seller prices may be anchored to past market values such as the purchase price of the property or what a comparable property sold for recently, especially around the market peak.
“If owners update these anchor prices infrequently, then a wide gap in buyer and seller sentiment would emerge in the face of sharp, prolonged declines in market values, such as those seen in the last few years,” Engelhardt says.
Psychological anchoring is partly responsible. Although sellers have delusions of what their houses are worth in all markets, so perhaps it shouldn’t be too surprising they haven’t adjusted to the crash.
He also cites the underwater homeowners who can’t or won’t adjust their selling prices to below that of their outstanding mortgage amount, as they would need to bring cash to the table to pay off the mortgage plus transactions costs.
Over the next three to five years, we will see many sellers who set their prices to pay off their mortgage rather than to sell the property. In a slow decline, prices are sticky due to seller reluctance. This phenomenon will be particularly acute among bear rally buyers who erroneously thought they were buying the bottom. Knife catchers are loath to admit their mistake.
Currently, about 20% of all homeowners with mortgages nationally are underwater. In some particularly hard-hit markets, as many as half of all homeowners with mortgages are underwater. Those are the same places with the highest incidence of delinquent mortgages and foreclosures.
The actual percentage of effectively underwater loan owners is much higher than 20%. Most underwater studies are based on original loan amounts which fail to take refinances into account, and these studies also ignore second mortgages. Further, these studies also ignore sales costs to get out.
Also, with large declines in market values, sellers now hold a highly leveraged option that pays off with any future increase in prices, meaning there may be increased value in waiting, either to initially list, or to keep, the property on the market. This could hold prices high enough to drive a substantial wedge between the existing buyer and seller. And a poor jobs market with limited mobility, a key driver of housing-market transactions, may exacerbate this.
Analyst expect home prices to stabilize in 2012.
Some analyst will call the bottom every year just as analysts have been calling the bottom every year since 2007. Eventually, like a broken clock that’s right twice a day, someone will correctly call the bottom. Hopefully for them, everyone will have forgotten their incorrect calls of years earlier.
The current lack of positive sentiment cuts across almost all demographic categories and regions. Positive seller sentiment is stronger among nonwhite households.
Engelhardt says that over the next five quarters, positive homebuying sentiment is forecast to align with current and long-run average levels. In contrast, positive seller sentiment is projected to remain at current and historically low levels. This indicates that home-selling sentiment and, hence, market activity, will also remain sluggish in the near term.
Write toJustin T. Hilley.
Follow him on Twitter @JustinHilley.
The market will remain sluggish in the near term, not due to seller sentiment, but due to their inability to sell without bank approval. Further, the lack of a move-up market will hurt demand. Low interest rates are the only salvation of the market, and low rates will not be enough in the near term.
For more news, market analysis and property profiles, please see the North OC Housing News.
Rising rents are increasing affordability in Garden Grove
Affordability is a measure of price versus rent moderated by the interest rate. Affordability can increase through falling prices, rising rents, or falling interest rates. All three are happening in Garden Grove, but the increasing rents are having the biggest effect.
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This property was purchased at the peak of the previous housing bubble in 1990. Since then it has appreciated at 1.6% per year, and that is factoring in a second massive housing bubble and a 60% decline in borrowing costs.
Apparently, the former owners borrowed as the value went up during the bubble, and they lost the property in a foreclosure auction.
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Proprietary OC Housing News home purchase analysis 
12582 OCEAN BREEZE Dr Garden Grove, CA 92841
$469,900 …….. Asking Price
$328,000 ………. Purchase Price
9/26/1990 ………. Purchase Date
$141,900 ………. Gross Gain (Loss)
($26,240) ………… Commissions and Costs at 8%
============================================
$115,660 ………. Net Gain (Loss)
============================================
43.3% ………. Gross Percent Change
35.3% ………. Net Percent Change
1.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$469,900 …….. Asking Price
$16,447 ………… 3.5% Down FHA Financing
3.94% …………. Mortgage Interest Rate
30 ……………… Number of Years
$453,454 …….. Mortgage
$123,693 ………. Income Requirement
$2,149 ………… Monthly Mortgage Payment
$407 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$117 ………… Homeowners Insurance at 0.3%
$521 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,195 ………. Monthly Cash Outlays
($332) ………. Tax Savings
($660) ………. Equity Hidden in Payment
$22 ………….. Lost Income to Down Payment
$137 ………….. Maintenance and Replacement Reserves
============================================
$2,363 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,199 ………… Furnishing and Move In at 1% + $1,500
$6,199 ………… Closing Costs at 1% + $1,500
$4,535 ………… Interest Points
$16,447 ………… Down Payment
============================================
$33,379 ………. Total Cash Costs
$36,200 ………. Emergency Cash Reserves
============================================
$69,579 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..
We're sorry, but we couldn't find MLS # P805937 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$620,000 12661 NELSON St |
1.01 miles 4 bd / 2.5 ba 2,600 Sq. Ft. |
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$560,000 13284 MICHAEL RAINFORD Cir |
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$472,800 12862 SYCAMORE St |
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18 Responses to “Kool aid is poison to sellers, nectar for buyers”
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Being that homeowners are going to be taxed more and more as time passes, the expanding gap between median price and rental parity will be closed, not by rising asset prices, but by rising carry/input costs.
Reality is, the GG market is not undervalued.
To look at the prices, it certainly doesn’t appear to be undervalued, but based on the relative cost of debt and rents, the math says it is.
The real question is what will happen to interest rates and the cost of borrowing. If interest rates go up, affordability will plummet, and prices will follow. As long as interest rates remain low and rents increase, people will buy based on payment affordability.
We really don’t know what will happen to home prices till mid-year 2013 when the FEDs are done with QE 2,3, QE Infinity, Operation Twist and other forms of government intervention. Incomes have been falling since 1999 and student loan debts have been increasing 300% more than CPI inflation. With increasing rates in 2013…prices should fall, but by how much.
Payment affordability is a good measure to make a home buying decision, but what if prices fall another 10% due to incomes declining personal debt increasing and the lack of sustainable jobs…anywhere.
I would rather buy in a high interest rate environment if I had the cash than in a low interest rate environment. You can always refinance your rate, but your bank will never reduce your principal.
In a perfect world, I too would rather buy in a high interest rate environment. However, it’s beginning to look like we won’t see that until 2020. Interest rates will go up, but how long will it take to rise from 4% to 8%? Unless we have a currency crisis — which is very possible — it will take a long time for rates to double.
There is one advantage of buying at 4% interest rates. If high inflation is coming, and I think it is, you could conceivably see inflation rates exceeded the fixed rate on 2012-2013 mortgages. In that scenario, you would be repaying the debt with dollars declining in value faster than the interest rate. Holding debt in that scenario is great. As I buy more cashflow properties, I think more and more about that scenario. I just hope it comes with wage inflation to increase my rents.
I think that when interest rates do start to rise, they will rise quickly, like a spring that is released after being compressed and compressed and compressed and … .
Expect to see 30yr money availability at 3.5% for a sustained period. At least until the banks have offloaded most of the remaining bad paper.
For prospective home-buyers, problem is, this is only repricing. Due to declining real incomes, what’s needed for stability is a reduction in debt.
Japan can’t raise their interest rates because if they did, the government would not be able to pay their monthly nut. Isn’t this the same case for USA?
If we are using Japan as a leading indicator of what will happen to the US, we will still be in low interest rates for a very long time. When Japans’ interest rates go up, then you can expect US interest rates to finally go up. Japans’ interest rates have been low for 20 years.
The Japanization of the USA is a few years away, or it might already be here. I think people have to get used to a lower living standard, unless your name is Blankfein, Moynihan, Mozilla or Bernanke of course. They are smart…and found a away to indebt the American middle class for most of their adult lives for their own rape and pillaging. Bravo boys! Central planning is AWESOME.
My God, look at the rent growth. The guy in charge of the North OC cities should have caught that.
Some of that growth in rent may be due to some unusually low data points from 2010, but even if the rent growth was half that amount, it is still a factor which is pushing affordability higher.
If one was a young couple, let’s say 32 married with one kid, what is the absolute LEGAL minimum cash/reserves to get an FHA loan? That’s the only number I have ever seen a young couple look at (well, almost always, a few are more sensible). A good real estate agent digs out that number AND THEN gets the seller to pay closing costs where permissible. What is typically going on with this in OC? That’s what sets the pricing on the majority of homes closing, I surmise. Relevance? well, we can project a day…maybe…where the minimum down payment is raised to 5%, and seller participation barred, that would knock out about half or even two thirds of the younger buyers, so yes, that’s the potential “someday” blow to real estate values one can see coming…someday. Not this year, the FHA giveaway/insanity continues, and this is a bubble I don’t see ending soon as to FHA. This bubble will collapse when US 10-year notes suddenly require higher interest due to exactly that inflation; then home prices will collapse further and utterly.
That is the nightmare scenario people are rightly worried about. As awgee pointed out above, interest rates could go very high very quickly, particularly if investors lose confidence in US Treasuries.
In the short term, I think the government will continue to pour billions into FHA loans to stablize the housing market. When the inevitable defaults and losses occur, politicians will justify it was necessary to save the housing market. Loan owners will all agree.
In Las Vegas, the market is completely dominated by FHA buyers putting the absolute minimum down. Even with the bar being lowered that much, there simply aren’t enough of them to absorb the inventory, so low prices get even lower. It could happen here. In some areas, it is now.
I think a demand shock is more likely. If investors start quailing at lending the government money, it is not going to start paying higher interest rates. That is right off the table, because the interest would torpedo the budget and take both the Administration and ruling party in Congress down with it. Won’t happen. The Fed will just be empowered to print as much money as necessary to buy the Treasuries and keep the interest rates low.
I know it’s common to think the Fed is keeping interest rates low for homebuyers — but I think that is just a convenient excuse and a bit of obfuscation. The Fed is keeping interest rates low for the Federal government, so it can borrow $trillions without exploding the interest chunk of the budget.
Now you have to ask yourself what will happen with all those dollars injected into New York investment fund coffers? God’s own commodity bubble, would be my guest, which will produce raging “non core” (ha ha) inflation and positively ruin what little purchasing power for big fixed assets remains in middle-class hands.
That implies a dreadful demand shock for things like houses. When gasoline is $5.50 a gallon and a jug of milk $6, while wages are stagnant, unemployment high, and your 401k is earning -3.0% year over year, nobody is going to even look at a $500k 3BR 2BA 1600 sq ft SFR in OC.
I agree that our government is caught in a low interest borrowing trap. They can’t raise interest because government monthly nut would get too high to manage.
So yeah 2013 comes…then more of the same..low interest rates forever or until our system collapses…..
Either low interest rates, or our system collapses.
Let me define system collapse:
Companies can’t collect A/R
People don’t get paid
Stores have empty shelves
etc.
People start bartering.
I agree with you Carl. Kinda funny….after S&P downgraded the United States, people bought more bonds and treasuries. I guess there are no other places to park your cash. In a perfect market, a lower credit rating should yield higher borrowing costs.
Affordable?
according to: http://www.clrsearch.com/92841_Demographics/Household-Income
only 14% of households in this zip have the income to purchase this 2 bedroom house.
that’s the problem with looking at market rents. the marginal rent does not make this house ‘affordable’.
“the marginal rent does not make this house ‘affordable’.”
This may sound stupid, but I never thought of that.