Apr092015

Sell now or be priced-in forever!

Rather than being priced out forever, the real risk in today’s housing market is getting priced in for a very long time.

Since lenders learned to can-kick their way out of any bout of irresponsible lending, they created a new phenomenon in modern real estate: priced-in forever.panic

In a bygone era prior to the housing bubble, it was nearly impossible to be priced-in to your home for very long. Adequate down payment requirements coupled with stable and steadily rising prices made it unlikely a homeowner would ever be unable to sell and pay off the mortgage.

If a borrower became financially distressed and started missing mortgage payments, either they would sell voluntarily, or the lender would foreclose to force a sale at auction to recover the original loan capital. Neither owners nor lenders were ever in limbo where the owner couldn’t sell or the lender wouldn’t foreclose.

Now, in our era of can-kicking, price volatility, and low down payment loans, homeowners risk being priced-in for extended periods. Even with lenders’ best efforts to reflate the housing bubble, many peak buyers in Las Vegas, Phoenix, and other markets are still priced-in, and they probably will be for another decade or longer.christ_of_abyss

Sell now or be priced in forever!

Efforts to reflate the housing bubble fizzled as markets hit the limit of affordability, which most markets reached since the 2012 recovery began. Since the bubble was reflated with subsidized mortgage interest rates, the market is dogged by questions as to what will happen when these props are removed.

Sell now or be priced in forever! That will be the new manipulative refrain by realtors. With the absence of affordability products, buyers won’t be able to raise their bids when mortgage rates go up, so sellers are the only group with whom it makes sense to generate a sense of urgency.distressed_borrowers

Realistically, if sellers don’t sell while buyers can finance such high prices, they might get priced in to their current homes for a very long time. Rising mortgage rates make this outcome a real possibility. Evidence of this “priced-in” effect is clear, as millions of loanowners are currently priced-in their homes because they are underwater and unable to sell.

Many homeowners who no longer are deeply underwater refuse to sell their properties because they lack sufficient equity to execute a move up trade — their greed is stronger than their fear. The more cautious, and perhaps wiser, homeowners will take advantage of the reflated housing bubble to sell while they still can.

4 reasons to sell your home now

By Kathryn Vasel, March 25, 2015

Attention potential sellers sitting on the fence: It could be time to make a move.

Mid-March to mid-April is the best time to hang the sale sign nationally, with homes selling 15% faster and for 2% more than the average sale, according to Zillow. The window tends to be a little earlier for sellers in warmer climates and a little later in colder climates.

It’s still predominately a seller’s market, but less so than the last year or two,” said Stan Humphries, Zillow’s chief economist. “Some advantages are moving back to buyers; but largely and broadly … it’s still favoring the sellers.”

To restore a true balance to the housing market and increase sales volumes, the market needs more sellers to come to market. The market is moving this direction, but more supply is needed. (See: OC for-sale home inventory up 45%, sales down 3.6%)

OC Inventory 3-2015

Here are four reasons you might want to list your home:

1. Low housing supply: Tight inventory is a main reason the ball is still in the sellers’ court. …

Tight inventory tends to prop up home prices and can result in multiple offers and spur bidding wars.

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

But at the same time, low supply is also keeping some sellers in their homes. “They aren’t typically going to sell and then rent,” explained Hale. If sellers aren’t comfortable that they will be able to find a new home, it can keep them off the market. “There needs to be more construction in the market to ease the pressure,” she said.

This was a big concern in 2012 when inventory was severely restricted and prices were going straight up, but this isn’t a major concern today.

2. Fewer cash buyers: All-cash and investment buyers helped buoy home sales in the last couple years. …

All-cash offers made up nearly 31% of sales in 2014, according to RealtyTrac, a 13% drop from 2013 and the lowest level in four years.

“We are predicting a more stable and sustainable housing market in terms of price growth,” said Ralph McLaughlin, Trulia’s housing economist. “A lot of the growth we saw was from cash buyers, but now we are thinking those buyers will play less of a role.”

all_cashCash buyers ceased activity in most markets, largely due to high prices. Cash returns no longer make sense, so cash buyers don’t bother.

3. Higher interest rates: While mortgage rates remain low, experts predict more buyers will enter the market in the coming months.

The Federal Reserve’s recent hint that higher interest rates are coming sooner rather than later could prompt buyers to start their house hunt in order to take advantage of lower mortgage rates.

While realtors may cajole a few gullible buyers to increase their urgency, it’s really sellers who should be concerned about higher rates. Future buyers will only be able to afford what they can afford. Sellers can’t rely on buyers using toxic financing to bail them out.

“When interest rates are thought to be escalating, we see a wave up activity with people getting off the sidelines,” said Budge Huskey, president and CEO of Coldwell Banker Real Estate.

Spoken like a true realtor.

realtor_gran_torino

4. Rising rents: Rising rental prices could motivate tenants to make the leap into home ownership. Rent prices have risen 15% nationwide in the past five years in 70 metro areas across the U.S. and income growth hasn’t kept up, according to NAR.

“Every time there’s an increase, it triggers the decision processes on whether [renters] should go into the market and buy,” said Huskey. Getting more buyers into the market, especially first-timers, can help sellers feel more comfortable about their prospects. “It allows others to move up the chain in the market.”

But higher rents can be a double-edged sword, according to Humphries. “Renting is so darn expensive already it makes it hard to save for a down payment.”

Rising rents are not a good reason to sell; in fact, rising rents are one of the best reasons to be a homeowner. Rents determine the cashflow value of real estate, and rising rents are a reason to own, not to rent.

Are house prices peaking?

peak_buyerThe real question owners need to ask themselves is whether or not waiting to sell later will give them a large check at closing. Rising mortgage rates will increase borrowing costs and reduce loan balances — that’s just a fact. Whether or not this impacts sales volumes or house prices on aggregate is a supposition, but there is good evidence that rising mortgage rates will first impact volume and later impact prices, assuming wages don’t rise to compensate.

If rising mortgage rates causes a minor correction in house prices — and any such correction would likely be minor — it could trap many homeowners in their properties until a combination of restricted inventory and rising wages allowed buyers to raise their bids enough to buy bail them out.


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