Why Don’t Big Housing Sales Drop Produce Big Price Drops?

Marketbeat observes "one puzzle about yesterday’s existing-home-sales data from the National Association of Realtors is that, while the number of sales plummeted and inventories rose to a 13-year high, the median price nationally was up year-over-year.

I was just discussing this with someone over the weekend; I found two possible explanations for this: one nefarious and one less so.

The reported measure of Median home price sales is impacted by both the region where homes are selling, as well as the size/price of the house. While this mix should (more or less) average out over time, there will be periods where it might get skewed.

I suspect this is one of those times.

For example:
Let’s assume the hottest areas that have seen the most price appreciation have cooled off dramatically. Much fewer homes are selling today in Miami and Las Vegas. Existing Home Sales in the North East dropped 12.5%, and plummeted 18 out West. However,  the Midwest fell only 10%, and the South fell 7%. Backout the hot areas of these last 2 (Chicago and South Florida) and the cooler areas of the country where prices haven’t gotten ridiculous are likely still selling in decent, "non frothy" numbers.

Another factor: less starter homes and lower end housing sales. Given the home affordability index is at 15 year lows, and rental prices have moved significantly upwards, we are likely seeing a mix of homes skewed much more towards the upper than lower ends of the spectrum. As more people get priced out of the home ownership market, we will see less "starter" homes, and more higher end (but not neccessarily McMansions) Houses sold. This could have the effect of making median price changes appear steady.

So we may be seeing the hottest areas unit sales drop a lot, and the cooler areas maintain some semblance of normality; At the same time, a lot higher percentage of big houses are being sold than last year, it may make prices appear steady — but we know they really aren’t.

One of the more nefarious sources is that new homes are throwing in lots of seller’s concessions. I’ve seen ads for free cars, free landscaping, free mortgage payments, free granite counter tops, subsidized mortgages — even (literally) the kitchen sink. Any seller’s concession on a new or even an existing home makes the sale price appear far greater than it actually is, hence, skewing the data to the upside.


UPDATE August 25, 2006 9:24am

I wrote this last night, and cleaned it up and posted it earlier this morning — then on the train into work, I see this NYT story:

Home for Sale, by Anxious Owner

Home sales are falling rapidly, and the number of houses on the market is
surging. Yet each new economic report offering evidence of a housing slowdown
also shows that the national median home price has continued to rise over the
last year…

“We don’t have any house price indexes that get it right,” said Todd Sinai, an
associate professor of real estate at the Wharton School of the University of

That sounds about right. Once we look at the specifics, incentives seem to be rather aggressive:

"The typical incentive package from a home builder consists of upgrades to the
house — granite countertops instead of humdrum tiles, stainless-steel
refrigerators and stoves instead of plain white models and wood blinds instead
of plastic. At the extremes, some have thrown in $30,000 swimming pools.

Buyers who demand discounts often get them in the form of excused closing
costs or low interest rate loans made by builder-affiliated mortgage

On the west coast of Florida, builders are advertising incentives like
upgraded countertops, interest rate promotions and cash rebates totaling
$40,000, or 6.6 percent to 8 percent of the sales price, on homes that sell for
$500,000 to $600,000, said John Dew, a real estate agent in Naples."

The reality is that home prices have probably fallen 10% already . . .



Rents Are Rising Rapidly After Long Lull

NYTimes, August 19, 2006

Home Sour Home
Jesse Eisinger
WSJ, 1:43 p.m., August 24, 2006

Home for Sale, by Anxious Owner
NYTimes, August 25, 2006

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What's been said:

Discussions found on the web:
  1. doh! commented on Aug 25

    Thanks goodness corporate execs won’t lose money when they sell their million dollar homes thanks to the generosity of their helpless, hapless shareholders (see Slate article and Nike and Ebay etc…). This really smells bad.

  2. DBLWYO commented on Aug 25

    Didn’t this come up in an earlier series of comments a week or so ago ? Anyway there’s some merit to both ideas but a third is likely and known to be true – houses aren’t very liquid and owners, depending on terms are both reluctant to lower prices rapidly and usually have the room to no. If somebody bought a house for $X and thinks it’ll see for $X+$Y as along as they can afford the payments there’s no reason to drop the prices. Housing prices are ‘sticky’ and always adjust after other adjustments – it’s what happened in the last CA bust when prices didn’t really go down much at all.

  3. Jrs commented on Aug 25

    A thought about CPI when I read the NYT link…Rents are part of CPI and now they are increasing and will drive an increase in inflation reading – cause and effect. It is contrary to some info I was reviewing this AM about decease in home prices signals that inflation is lowering and demonstrates many of the experts, well supposed experts, do not understand the numbers, look at the details yet write for the masses.

    Also, I live in Kansas City and yes concessions are being driven into sales that are not reflected in the selling price. Given the agents as a group self report via the MLS system, it is thier best interest to make the numbers as ‘robust’ as possible yet reality is at the negotiation table between a willing buyer and seller.

    And one final note is a thought about the economic perspective of selling price of a home in terms of NPV vrs nominal terms on an interest rate buy down. When a seller buys down a 30 year mortgage by 1.5 percent on a $300K loan, the seller concession in terms of NPV is a huge concession and is not reflected in the selling price yet that in fact is real decrease in economic selling price.

  4. Craig commented on Aug 25

    NAR announced yesterday that sellers are going to have to drop prices by 10-15% to get existing homes to move. It would seem that sellers, like most markets, react slowly to the changing market.

    That could be the third reason. I suspect those falling numbers get to sellers *after* we read about it. I would look for sellers to react soon if they need to sell.

    If we are looking for reasoning, look at how we all argue over the future of the equities market….inflation, slowing, stagflation…bears vs bulls.

    Home sellers, RE people are going through the same thing…..accepting that the market is slowing more than they thought. The RE bulls all argued too.

    “There’s no bubble”, “There’s no slow-down”.

    Now what tune are they singing?

  5. Carl commented on Aug 25

    Perhaps this is a standard technical analysis setup.

    If house prices were plotted as a stock you would see rising prices on lower volume….This implies a reversal.

    Also, price momentum has slowed dramatically as can be seen by MACD or other standard indicator.

    For those of us who look at price charts all day long this one is behaving normally.

    Price will follow.

  6. ac commented on Aug 25

    Getting a homeowner to drop the price of their house is like trying to pull a steak out of the mouth of a hungry lion.

    Also, many people (notably recent investors) can’t drop the price of their houses because they don’t have the cash to cover their negative equity.

  7. lauteus commented on Aug 25

    Isn’t the housing data quite a laggard? It takes some time to complete a home purchase, doesn’t it? The home sales and prices released in these reports are for the past, what, 30-60 days transactions. I have seen some price movement in Phoenix, it isn’t much, yet, but it will accelerate because it has to.

    I definately agree that the “starter” homes have declined more than the larger (but not McMansion) homes. Since the “cheap” homes aren’t selling because “affordability” is low, the homes that are moving have a higher price point, and when blended into the mix of things will produce a higher MEDIAN.

    Now that the news is all over the home prices and slow down, etc. The only logical progression will be for price movement. I don’t think I would buy even at low interest rates if I was expecting a price decline.

    Just wait until we toss the Sept. and Oct. numbers around.

    For the record, I sold in Jan. and holding for price drop. (Phx, AZ)

  8. Craig commented on Aug 25

    True. Recent home buyers are like recent stock buyers that have a gap down before they set-up a stop loss.


  9. Marshall commented on Aug 25

    What I have seen is that people’s egos get seriously involved when home sales go South. After the bubble burst here in the Washington, D.C., area in the late 1980’s, I saw houses stay on the market for literally 1 year+, because the sellers just were not willing to come down on the price. (And not just a few – where I live it was commonplace.) I also remember a local realtor annoucing that they wouldn’t take new sales contracts unless the seller was prepared to be “realistic” and take their suggestions on the price.

    What other area do you see this ? Not cars. Not stocks. I just figure that they knew that the home next door went for $ 300 K 6 months ago, and, by heaven, they were going to get $ 300 K for theirs too.

  10. Royce commented on Aug 25

    What drives prices down are desperate sellers. What we need to see is a ‘desperate seller index’ measuring the number of people who have to sell regardless of the price they get.

  11. spencer commented on Aug 25

    The idea of lower income people dropping out of the market creates a major distortion of new home prices
    but it does not have a significant impact on existing home prices. With new homes it is largely driven by builders dropping out of the lower end of the market first, so by the end of the cycle the only thing they are building is top of the line homes.

  12. JoshK commented on Aug 25

    I don’t think it’s likely for the market to become bifrucated. There is continuity between local areas and pricing levels.

    For example in NYC, the glut of new housing in Williamsburg will lower demand for housing in Upper Manhattan, which in turn lowers the demand for even the higher end housing (CPW, 5th Ave). Would a CPW buyer looking in Williamsburg? No, but they would consider a nice place off the park…

    IMHO, the real selling pressure is going to come from people who are in the money and have been considering downsizing for retirement or family changes. eg: All of my friends who own a 1 br appt with a baby on the way. They will want to lock in their gains and not get stuck with a family in a 600sq ft apt.

  13. jkw commented on Aug 25

    This is why you want a price index that is based on all the houses in the area, not just the ones that have been sold. Zillow’s Zindex is based on their estimated price for all the houses in a region. The estimates are updated every time a house is sold. If an area has a lot of condos and a few houses and condo sales slow down more than house sales while prices of everything drop, the median sold price will increase, but the Zindex will drop. Zillow might not have a perfect algorithm, but at least they are producing an index of something that actually matters.

    The Zindex for the US peaked in November and bottomed in May. It is now back to where it was in November (maybe even a little higher). It is up 5.7% in the past year. I think they have about half the homes in the country in their index. But in some regions their estimates are way off, so I don’t think I trust their national index yet.

    For my area (Boston), their estimates have been pretty good (based on their comparison to historical estimates vs historical actual sales prices). MA is down about 1% over the past year. Middlesex county is down 2.3%. Suffolk County is down 2.4%. Those two counties include most of the Boston metropolitan region.

  14. Barry Ritholtz commented on Aug 25

    Zindex sounds interesting — but its more for fun.

    I always prefer hard prices of transactions rather than estimates or surveys.

    One is real and the other is a best guess.

  15. JoshK commented on Aug 25

    Houses varry so much that it has got to be hard. Even ifyou compare same house resales, areas themselves change dramatically.

  16. drsqueeze commented on Aug 25

    I love how you take any piece of evidence, like the bond market, or housing prices, or unemployment numbers, and then explain it away. Pretty soon you’ll be right for the sole reason that you’ve explained away every single piece of data.



    Hey Doc,

    Is it your postion that prices are NOT coming down?

    Again, as I noted last week, this blog has evolved into a counter-balance to the general mindless cheerleading of Wall Street, the spin of the Federal government, and the superficial coverage presented by much of the MSM.

    There’s plenty of MSM stuff that will tell you that its all okay, not to worry. We go out of our way to find the stuff that you won’t hear in the MSM.

    If you want mainstream, headline, unquestioning reporting — well, its not like there’s a shortage of that stuff. . .

  17. Mr. Beach commented on Aug 25

    Question for you guys:

    Will a Fed rate *drop* cause the housing bubble to re-inflate? Will the party start once again if the Fed drops Fed Funds down to say 3%?

  18. advsys commented on Aug 25

    Don’t forget inflation!
    House prices must be adjusted for inflation. Govt stats never do this.
    So, if inflation is 3% and home prices are up 3% you actually have a 0% increase.

  19. The J Man commented on Aug 25

    Nice comment on homebuilder incentives but what about normal people with mortgages? They can’t do all that stuff without great effort and money. All they can only take the pain of lowering prices that 10%, and obviously they have not yet.

  20. Craig H commented on Aug 25

    The homies hide their price cuts by including incentives in the SGA column. Look at TOL for example. As their sales fell, their SGA rose in the last quarter.

  21. Geoff commented on Aug 25

    I think we’ve also skipped over the obvious here – when you look at year over year median price growth (which is what is typically reported), you still see small gains. But the month to month gains have been negative for a while. Granted there are seasonal issues, but the only way youd see prices fall yoy is if the bottom fell out in one month, and housing markets, unlike stocks, dont work that way. This is especially true when the previous year comp has been inflated by nearly 20% yoy gains. So, it takes more than a couple of months to pare that back so that the monthly declines eventually can accumulate to the point of producing a year over year decline. But dont fool yourself folks, prices have been falling for a while already, even without factoring in all of the above.

  22. JoshK commented on Aug 25

    By us out in the Northeaste, in the suburbs, people have lowered prices already. Often more than 10%. We were at one open house earlier this year where they claimed to have offers already @840k, but if we had a good, cash offer, we could get done @850k. The house eventually went for 740k.

    I think the only real way to qualify bubble conditions is the rent vs buy analysis. Otherwise, it’s hard to say what re is worth. If you could rent out that 600k 1br for $20k/mo, you’d be crazy *NOT* to buy it.

  23. MtHood commented on Aug 25

    I’ve been watching my area (Northern CA) very closely, since I sold in 2005 and have been renting since.

    I think we agree that the best measure is the sale of comparable homes, not median. Given that, here’s my anecdotal reading:

    1. Homes in my area have about six or seven floor plans, so comparisons are fairly straight-forward. Last October prices peaked at about 1.1 million for the mid-range houses. Today those same houses are getting just over 1 million, but only the nice ones are selling. Everything else is just sitting, and people are reluctantly making price reductions as the months march on. Inventory is up 100% since last year (I track it daily).

    2. I periodically touch base with the most experienced real estate agent in the area (30+ years), and she estimates prices have dropped 10% from last summer (she’s so well established that she can dispense with the realtor happy talk).

    If you look at the DataQuick numbers, our area has only dropped 1% year over year in July.

    Like I said, it’s anecdotal, but I’m confident anyone else looking at their particular neighborhood is seeing a similar picture: median price measures are not picking up the magnitude of price drops – and we’re in the early innings of this game.

  24. edhopper commented on Aug 25

    The median price data comes from the RE industry. People like David Lereah from the NAR lie daily about housing. Why should we believe their info about prices still rising?
    I think Barry is spot on with his 10% estimate.

  25. Mathieu commented on Aug 25

    I concurr to say that home prices are sticky and don’t adjust like stocks or bonds.

    The truth is that the length it takes to sell a house today is the first variable to adjust, then come the bonus (pool, closing cost, upgrades, etc.) and only when they realize this still doesn’t sell, will homeowner lower their asking price. I’d say that in 6 months maximum we’ll start seeing the median price decline yoy.

  26. BDG123 commented on Aug 25

    Let me understand your concerns. I take it you are worried about housing? Five or six posts in a row. lol.

  27. Geoff commented on Aug 25

    I’ll up you one Mathieu and say that in two months we’ll see the yoy median decline nationally. We’re practically theere this month already, with prices fallying yoy in 3 of 4 census regions. No need to wait that long.

  28. Mike M commented on Aug 25

    My theory on a stable median price is simply due to the exodus of the first time buyer. Here is an example of how median sales amounts can easily deceive reality. Let’t say this is a sample of homes sold in period 1:

    $100k, 100, 200, 300, 500, 600, 1,000

    Median Price = $300k (seven homes sold)

    Now in period 2 the bottom part of the market lacks sales volume but even if more expensive homes drop prices you can get a higher median:

    $100, 200, 400, 500, 900 Median Price = $400k(five homes sold)

    So the median number actually rises even though the market is substantially weaker. I expect when lower end home sellers get realistic, the median price number will drop substantially.

  29. GerryL commented on Aug 25

    When I purchased a new home from a major homebuilder a few years ago I was offered a rebate. However, they did not change the sales price. Instead they gave me a credit at the closing. This is one of the tricks homebuilders use to maintain the official sales price of a home.

  30. Bob A commented on Aug 25

    There is a ‘rents are rising’ story in today’s Seattle Times as well.

  31. teddy commented on Aug 25

    Mr Beach, yup, more partying. Congress yesterday said fannie is ok.

  32. wcw commented on Aug 25

    DBLWYO in comment #2 nails it: residential housing prices have always been sticky. Never mind homes sitting on the market for a year in downturns; my folks neighbor’s sat on the market for half a decade following the ’89 peak because he wouldn’t sell at its actual ’90s trough price, and wasn’t quite broke enough to have to. He ended up getting “his price” after throwing in a new roof, a new deck and other maintenance that we guesstimated took 20% off the price of the house.

    For all their faults (>>“We don’t have any house price indexes that get it right,” said Todd Sinai, an associate professor of real estate at the Wharton <<), the Case-Shiller indexes will give you a flavor of how those markets behave. San Francisco goes up 60% from ’87 to ’89, eases less than ten percent below its peak, and flatlines for a decade.

    That’s what sticky pricing looks like. “True” prices are variable, but if the seller won’t take the real price, and you want a place to live, and mortgage rates are affordable and the government gives you a ludicrously generous subsidy to own, eventually you’re going to buy.

    I wish I had sales and dollar volume data, though.

  33. edhopper commented on Aug 25

    I bet you were laughing at all those people who were concerned about a “dot.com bubble” in 1999.
    Why would the only thing that has kept this economy in the black the last three years, and is now collapsing, be worthy of our interest?

  34. ac commented on Aug 25

    Question for you guys:

    Will a Fed rate *drop* cause the housing bubble to re-inflate? Will the party start once again if the Fed drops Fed Funds down to say 3%?

    Currently the downturn is being driven by excess supply. Homebuilders have been cranking out homes at a completely unprecedented rate the past several years partly to meet investor demand (28% of all sales last year) — i.e. they’ve been building homes that nobody ever inteded to live in.

    As a result we simply have way too many homes now.

    Lowering rates will not make these excess homes dissappear.

  35. Trend Watcher commented on Aug 25

    What’s going on here makes a lot more sense when we look at the charts for some of the key metrics. The NYimes article that’s referenced in this post has some good interactive charts showing what’s going on with the rental market. http://www.nytimes.com/2006/08/19/business/19rents.html
    The chart in the previous post, also from the NYT shows some important housing data. Clicking through many links back to some of the source data, there is a great spreadsheet of the original source data used in the NYTimes chart at:
    This gives the breakdown of both sales volume and price by region and for the US as a whole and it also shows national numbers for inventory. A quick examination of either NYTimes chart or the spreadsheet shows that the South had the smallest decline in sales year over year while at the same time increasing its median price – the only region to do so. The overall increase in median price for the US as a whole would seem to follow from these two points and validate Barry’s first theory.
    It’s too bad the reported time span in the report is so short – only covering the last 12 months. It’s also too bad that inventory is not broken down further by region and that inventory and total sales are not broken down by price range.
    One other interesting quick fact that can be drawn from the spreadsheet is that total inventory increased by over 1 million in the last 12 months
    To test Barry’s theory for the second factor, we would need to see the whole distribution of sales price ranges and associated volumes. A distribution of inventory by price range would also likely proven enlightening. If you have to have a single metric, the median is often better than the average, but with a complex distribution, it rarely proves to be sufficient for full understanding

  36. ~ Nona commented on Aug 25

    For a few years I had a specialty real estate magazine as a client. (I’m a writer.) In interviewing RE professionals and mortgage brokers, the emphasis always had to be upbeat and happy. The publisher wouldn’t allow any “On the other hand…” kinds of comments in any articles. (The publication was RE-dependent for its advertising.)

    Frankly, I thought everyone was drinking a lot of kool-aid.

    Example: I recall asking a mortgage broker whom I was interviewing re: new mortgage “products” if she wasn’t concerned about the possibility of a real estate pull-back. She was honestly taken aback by my question. It seemed unimaginable to her that prices could come down affecting (and afflicting!) these new mortgage holders. See what I mean about the kool-aid?

    I put my money where my misgivings were. I put a house on the market at the end of ’04 and closed in early ’05. Early this year I persuaded a cousin (with two young children) who sold his co-op and was dying to buy a home in Long Island, to rent for now. He’s shrewd and smart and probably didn’t need my encouragement, but it might have helped. Now he’s thrilled to be renting — and waiting for much better choices and prices.

    But here’s the best part of the story. I finally began to believe that I was smart selling the house when I did, but my former publisher proved to be even smarter: he sold his real estate publication at what seems to be the top of the market.

    He may have been serving kool-aid, but it appears that he wasn’t drinking it.

  37. Bob_in_MA commented on Aug 25

    One thing the Times article didn’t seem to mention was how using rebates to essentially sell a home at an inflated value distorts the LTV figures.

    On that subject, you all should take a look at the OFHEO House Price Index. They have a graph showing how the house price appreciation is higher for homes that were refinanced versus those that were sold. In other words, the stated LTV on the average refinancing is probably underestimated by about 5%. Basically attributable to friendly appraisors.

    The LTV figures are definitely suspect….

  38. Jay Walker commented on Aug 25


    Having been involved in valuing real estate for two decades now, both the factors you mention come into play, but a third force is also at work.

    Volume is a leading indicator, and prices – from my observations anyway – always lag the indicator. That’s true on both sides of the market. In fact, one of the valuation seminars I went to awhile ago, mention was made of an academic study that examined price declines in various global markets, and the authors concluded that the signs of a coming decline give a lead time of 12 to 18 months.

    The lead indicator: volumes. Prices follow volumes.

    Jay Walker
    The Confused Capitalist

  39. S commented on Aug 25

    The march toward the decline in home prices will have to be lead by existing homeowners. There is 0% chance a business savy builder will lead the way.

    Using round numbers as an example, let’s assume a premiere luxury builder opens a new community, planning to build 50 homes priced at $1 million each. He pre-sales 10 units and then hits a wall. If he lowers the price for the 40 unsold units to $900,000, it may spur demand. But one thing it is certain to do is piss off the 10 guys who pre-bought for $1,000,000. Those buyers have just seen the value of their home decline by 10% and they haven’t even moved in yet. Once word got out, it could seriously harm the builders future business. I mean, why would anyone want buy from a builder who may undercut you and damage the value of your home before you even move in?

    If the builder is smart, he’d rather keep the price at $1,000,000 and offer $150,000 of concessions to move the inventory than lower the price to $900,000.

  40. financialrx commented on Aug 25

    I’ll repeat here what I posted on a similar discussion over at Mish’s Blog (I think BR got the whole thing rolling in several forums):

    For those *still* confused about where we stand right now, just read Bob Toll and the other homebuilder CEO’s statements/conf call transcripts from the past two months.

    Contrast that with the UBER-bullish comments made by same industry veterans as recently as April/May.

    Reminds me of when John Chambers came back from a trip to Europe in 2001 (as you may recall, everything had gone h-e-double-toothpick here in the US, yet he and HP and a few others continued to brag of fantastic growth). Anyhoo, he did an interview on CNBC and his face was literally ashen. He basically said orders had gone off a cliff. He was at a loss about “what happened or why” but was going to get back to HQ and find out asap. (turned out everybody was double and triple ordering all up and down the food chain.)

    We humans tend to get pointed in one direction and plow ahead. As long as it’s working it’s working and it ain’t broke so don’t fix it and nobody can tell me otherwise when I can see what’s right in front of my face with my own two eyes!!!! Even THE industry experts and research analysts (not just from the street) will keep saying what they’re saying as long as they’re seeing what they’re seeing.

    Until, like Wyle E Coyote, they look down and discover they’re now standing in the air above a deep canyon.

  41. ac commented on Aug 25

    The march toward the decline in home prices will have to be lead by existing homeowners. There is 0% chance a business savy builder will lead the way.

    This is in fact precisely the opposite of what is happening. Homebuilders have begun slashing prices (10.5% since April) while existing homeowners sit on their properties in an attempt to hold out and get the price they want. Ultimately they ride the market down.

    The homebuilders who can’t sit on properties because they need to generate revenue, make payroll, etc. have begun slashing prices to keep up volume. Even that’s not working.

  42. JoshK commented on Aug 25

    S, I think that I have read that in previous declines, builders did exactly what you are saying they won’t do. They had to lower prices, pissing off previous buyers.

  43. ac commented on Aug 25

    Existing Home Prices (median):

    Jan 2006 – $220,000
    Feb 2006 – $218,000
    Mar 2006 – $218,000
    Apr 2006 – $222,000
    May 2006 – $229,000
    Jun 2006 – $229,000
    Jul 2006 – $230,000

    New Home Prices (median):

    Jan 2006 – $244,900
    Feb 2006 – $250,800
    Mar 2006 – $238,800
    Apr 2006 – $257,000
    May 2006 – $235,800
    Jun 2006 – $233,800
    Jul 2006 – $230,000

  44. BDG123 commented on Aug 25

    Well, Mr Ed say hello to Wiiiilllbbbuuurr for me. I just so was laughing at those people in 1999 because the market didn’t top until 2000 and dumping in 1999 cost you big time.

    That said, whilst Barry and others (not to speak for him) are anticipating a bottom with the four year cycle, I am not anticipating a bottom for a year from October. There are overriding factors I don’t see playing out by October or, even using the market as a discounting mechanism, six months post October. Those overriding factors have trumped the four year cycle before. Who knows. But, unlike your interpretation of my post, I’ve become more bearish than Barry because people ran the market off of a cliff in the first half of this year and the imbalances which concern me are still growing. Not the least of which is housing. I think his targets will be met. I just don’t think the market is going to oblige the 99% of people who believe we will reset in October for another run at a brave new world.

    This market is extremely expensive. Forget about the S&P500. I’m talking about the other 5,000 stocks.

    A horse is a horse of course of course…..

  45. albiegf13 commented on Aug 25

    As far as I can see, anecdotally speaking, this is just the beginning of what will be a long and extended drag on consumers. Some of the diyamics that I see operating in the real estate market are barely noticable at this juncture. For instance, appraisals vs LTV, when a house sells in a subdivision or street at a discounted price, it will affect the entire pricing structure of the neighborhood as it relates to financing and refinancing. Just recentlly a house that had been priced in a very nice neighborhood in West Palm Beach, FL at 1.295M was reduced to 995K. the owner of this property paid 1.1M aprox one year ago. Still, no takers. However, other properties, inferior to this one, although priced much lower, are demanding prices that are not viable as it relates to LTV. The primary danger as I see it, is the equitable possition of the entire market. Even someone like me who owns free and clear and is current and aware of the pricing in the local market where I live, have had to make an adjustment downward of nearly 30% on the valule of my primary residence since a market peak in Feb of 2005 at which time I rejected an usolicited offer from a buyer, based on comps then and based on comps now. That is the reality as I see it. One can spin statistics anyway you like, but if the person who was willing to purchase my house would have financed the property with the standard 80% LTV aprox a year and a half ago and would have been looking to sell it today, they would take a serious bath. We all know that the real estate market is in serious trouble and it’s not a qestion of if, it’s a question of when… We have seen a huge speculative bubble in this market, not froth. If just a miniscule percentage of these speculators are forced into liquidation because of “magin calls”, they will reprice the market dramatically and this will cause a financial catastrophy.

    The fact is that I do not see any way out of this, short of some supernatural event. For those who still believe in the Tooth Fairy, I extend my best wishes.

  46. lauteus commented on Aug 25

    Just as a thought… I just used ziprealty.com to see how many homes are for sale (100k to 1,125k) in the Phoenix metro area-31,010. After selecting “show only homes with reduced prices”, the number dropped to 14,316. That means that 46.2% of the homes ON THIS PARTICULAR web-site have dropped their prices. Granted, this was/is by no means a scientific study but it does shed some light on the possible current direction in this once super-hot market. Even if this fuzzy study has a std dev. of 20%, its still a substantial amount of reduced prices.

    IMO, the “for sale by owner” homes have dropped in price more substantially than the RE agent listed ones, and these are hard to track since many owners don’t list/market their homes as aggressively. I guess the question is, who is going to hold the bag…I bet it’s not the big $$ builders or the prudent owner/sellers but rather the “professionals”.

    It’s not a steak but its got meat flavor.

  47. T commented on Aug 25

    The key issue here that differentiates price behavior from more liquid markets (say, public equities) is that you can’t short housing directly. So the average sale price doesn’t represent the consensus view on value any more — it represents the “greatest fool” bid regardless of how “deep” that bid is.

    If you could short housing, and the prices got too far away from the consensus value, people could “short” housing out to those willing to pay above the consensus value and if the bid at that level is thin, then the marginal price will drop as the bid gets exhausted (notably, resulting in a profit for those shorting.)

    Without the ability to short, you’ll often see a “boom/bust” pattern in a market (see: tulips). Prices will rise, and as long as there are a few people williing to buy a few units at the new price, keep rising. Generally, holders will not sell at anything under the perceived new “value” based on those sales. The correction only comes when for some reason the buyer base is completely exhausted, but when it does, there’s a huge drop, as much of the previous level was based on the belief in rising prices instead of any kind of intrinsic value (see: housing, 2006).

  48. jkw commented on Aug 25

    Builders short the housing market all the time. They sell houses before they start building them. It is at least technically a short sale, since they are selling something that they do not currently own. This is why building permits don’t drop until after prices start going down. As long as the builder can short the market at current prices, they don’t care what the houses will be worth when they finish them.

    I haven’t payed any attention to what has happened with it, but CME and some other places started listing housing futures recently. If these go well, it will possibly have some affect on future boom/bust cycles. I’m not sure how or what, but it might do something. I would certainly prefer to speculate on house price increases in the futures market then with a real house. Anyone that knows how to make money in real estate probably would too. So it might reduce speculator demand. Or it might do nothing. Or it might do something completely different.

  49. NABNALB commented on Aug 25

    Regarding “nefarious” reasons for the pricing disconnect, here’s one that I personally observed. I sold my Bay Area “starter home” back in March. Ask was 829k, and the buyer offered full price with “concessions” that amounted to 15k for new roof and other repairs. The price looks like it went through for 829.

  50. T commented on Aug 25

    “Builders short the housing market all the time. They sell houses before they start building them. It is at least technically a short sale, since they are selling something that they do not currently own. ”

    I disagree… that’s really a forward contract. They’re agreeing to a fixed price for something that will be fulfilled at a later date. Generally, the cost to fulfill the contract is labor+land+materials, which are not tightly linked to the larger house. When a builder sells in advance, they’re not taking the risk that the cost of “closing out” that trade is going to shoot way up if housing prices skyrocket. They’re just giving up the opportunity for extra profit if prices rise later.

  51. philip commented on Aug 25

    Will reducing the interest rate help the residential RE market? I think not. I agree with the bulk of what the other commentators are saying, and one key macro fact no one is mentioning is that the nation’s savings rate is NEGATIVE. And I don’t see what can cure that short of people reducing their discretionary spending and focusing on paying down their debt. Does this equal a recession? I think so. Does it mean that even with slightly decreasing interest rates that the demand for RE will remain low? I think yes, also. And does it mean that spendthrifts who find themselves upside down are going to find themselves more than a little upside down? I can’t see how it couldn’t. But there are macro games that congress and the Fed can play to make it happen in unpredictable ways. My greatest fear is that the pressure to devalue the dollar will be too great for the powers that be to resist…. after they park their money over seas, of course.

  52. jkw commented on Aug 25

    So they go short a forward contract. It is the same thing. Technically you can’t short any commodities, you can just short the futures contract.

    When house prices go too high, the builders sell more of them in advance and build them faster. In a perfectly rational market, this would have the exact same effect as shorting. It is all the other factors that make the housing market irrational that prevent it from behaving properly. Bubbles happen in markets whether they can be shorted or not. It’s the result of psychology and non-rational behavior.

    If anything, the fact that builders don’t lose money if prices keep going up means that they should be more willing to dump houses on the market whenever prices go too high. They were shorting forward contracts all the way through the housing boom. Anyone that tried to short the NASDAQ all the way through the tech bubble was bankrupt by 1999. The ability to go short does not prevent bubbles, it just deflates them faster once they pop.

  53. Robert commented on Aug 25

    anecodotal evidence:

    Me neighborhood in AZ 2-3yr old +4500sqft homes.
    Last year houses (4 sales) were going for just over $1Mil. Now 4 home on the market, one for 8mo’s, prices:
    I some will go for above $900K the smallest under.

    Atleast a 10% drop from the peak of last year.

    BTW 3yrs ago from the bulder these were $600K loaded with options pool, and full landscaping

  54. Zack commented on Aug 27

    My friend has been looking for a house in Jersey for almost a year. He is looking for a house in the $500,000-$800,000 range. He told me that asking prices on the same exact houses are $100,000 lower than a year ago. Prices are way down from last year. If you people believe the NAR report that housing prices are up I have some great CPI reports from the BLS for you.

  55. Kiki commented on Aug 27

    I am in Scottsdale and I hear you guys but I’m just not seeing it…as stupid as it may seem to you bears we are in the market right now because we just feel like we can’t wait (two kids, two dogs-apartment life is driving me crazy)…we have been waiting for years and years to be able to afford a home in CA…finally gave up, moved to AZ tried to establish ourselves and found that we are being priced out again. We are looking for something “reasonable” in the neighborhood that we have been living in in Scottsdale…by reasonable I mean that I am going to have money left over for food AFTER I pay my mortgage (epecially now…because I don’t know if you have noticed it but everything is jumping in price general household products, food, gas, utilities). We make over 100,000, @ 2 incomes and I go to see these ‘reasonable’ homes $320,000 (this seems like a ‘reasonable mortgage’ to me) and they are awful dumps…I just can’t bring myself to consider them…I can’t imagine a $500,000-800,000 mortgage on our income with our expenses (we have Student loans)…we would have NO room to save, NO room for emergencies, and no room for maintaining our new home, no room for a college fund, the list goes on and on…I feel like I am missing something so vital and I can’t figure out what it is…where does the money come from for everyone else? The people who live near us go on vacations, buy new exspensive cars, buy designer clothes. But I KNOW that they don’t make as much in annual income as we do…

    So enough ranting…here is the point…I guess I am in the camp that says “so WHAT if they drop the prices 10% in my neighborhood…if they dropped them 40%-50%…then we would be talking”. Mr. X buys a home in late 2004 for 110,000. Mr. X decides in summer 2006 to sell for 370,000…I am supposed to get all excited that the home value dropped 10% (he was asking 399,500 two months ago so that creamy little 30,000 dollar drop is supposed to get me “the buyer all hot and bothered” like I have GOT TO HAVE THAT ONE RIGHT NOW! I’m not feeling it.

    I come to this site and I get all excited “the housing bubble is over” and then I go back out into the real world and get all depressed because I am the quintesential home buyer and that ‘housing bubble is over’ is just not taking me very far (as a matter of fact, housing in my neighborhood still hasn’t dropped, it is still going up.) The ‘investors’ turned around and rented what they couldn’t sell.

    I am sure that there will be a few people who get the short end of the stick…but from where I stand some of what you are preaching is not making total sense…how long could an ‘investor’ hold onto a rented home at the price 2005 price he is asking (because the vast majority are holding the asking price and not BUDGING) taking a small loss every month in the rental income vs. mortgage payment vs selling at a higher percentage loss? Lets say he loses 600 dollars a month on the rental income vs mortgage…he could hold the home at the 2005 price for 66 months (40,000 discount divided by 600 loss) then sell for the current market value without any threat of serious financial risk becasue the market may have fallen and turned back around by then. He is never forced to sell as you predict because he can take a loss for 5.5 years before he could recoupe a 40,000 loss on investment (and that is worst case senario…meaning if he bought in 2005…if he bought in 2004 or earlier he would probably MAKE money on the rent)….

    So where is the down turn and the seller incentive to lower prices on property come in? I am not seeing it…but I am hoping like hell you are correct.

  56. bobby commented on Aug 28

    Kiki is the only person on here that still has a brain. Everyone else is just a Barry wannabee. None of you predicted a real estate bull market in 1999,2000,2001,2002,2003,2004, or 2005. 100% of you are predicting a real estate crash of some sorts. I think 4 people publicly predicted the stock market crash in 1987. Crashes happen when nobody expects it.

  57. jkw commented on Aug 29

    I don’t know anything about Scottsdale. But if prices have tripled over the past 5 years, they will come down. If you think the prices are too high now, why would you change your mind 5 years from now? Are you expecting your income to go up that much? If you really make more than your neighbors, they can’t afford to buy the houses either. If everyone is renting out the homes instead of selling them, then the rental market will be flooded with homes, so rents will drop. Which means they will lose more money every month.

    There is also a difference between getting a lower asking price and actually losing money. If they lower their price by $40k, they still have all their current money plus whatever profit they have from selling the house. If they lose $600/month, that comes directly out of their savings or income.

    Also, houses bought on ARMs with low introductory rates (or an interest-only introductory period) are going to have their mortgage payments increase soon. Some people bought investment houses when they could barely afford the introductory payments. If the payments go up by just 10%, they will not be able to afford them anymore. What I’ve read indicates that many mortgages are going to have their payments double or triple when the intro period ends.

    You know your local market better than any of us do. You can compare the current cost of renting vs. buying. You can decide how much it is worth to you to own a home instead of renting one. But if you actually have an above-average income and you could barely afford a house, then most of the current owners are going to be defaulting at some point in the next few years. Learn how to buy foreclosure properties, since that will be where the good deals show up first.

  58. Kiki commented on Aug 29


    Thank you for your response…

    My neighbors are buying…and they do make significantly less than me…against every good piece of advice and every caution I could give they are taking out ARM’s and other exotics to purchase beautiful homes (you have NO IDEA how jealous I am) I wouldn’t consider as a first time buyer…I know people who are STILL borrowing against their equity too…again, against my own strong sermonizing…but whatever…I guess my point is that here…despite what I hear on the web, the party is still going. When we were in LA everyone swore up and down when the average price for our neighborhood was ‘affordable’ at around 335,000 (mid 90’s) that the bubble could NEVER go on…and look at it now…it makes me sick…but those same places are going for over 1 mil.

    I just started working for the first time in 6 years…so I do expect my income to just keep going up significantly (unless the dollar crashes, we hyper-inflate and basically the world goes to complete …. [On that note I know a bunch of different people who are really into leaving the US before the parties over]).

    I will search it right now on the AZ Republic (ok there are two pages more than there was last time…but any place you would want to live is not cheap 2500/month). So that IS more options than there was last time…but why would I pay those rents when I could purchase for that much? Right now I pay around 1200 (it fluctuates) for my crappy apartment.

    I understand your point about ‘actually losing money’ but I think your point is more emotional because if you are loosing money one way ‘mortgage’ or another ‘lesser sale price’ it is inevitably the same thing, it is just that one ‘feels’ different than the other, but basically you are transferring funds from your savings to your mortgage investment). A few of those poor bastards are actually losing money on the deal (I check the county records to see when they bought and how much they paid, compare that to the sale price and time on market to see how much trouble the poor bastards are in, check the price reduction and see how motivated they are before I consider the home…). I get what you’re saying though…I guess I had to wrap my mind around the idea that they were investing when they couldn’t really afford to invest…they were not being wise or couldn’t really afford to be doing what they were doing. But isn’t that the minority (LOL not if you consider my neighbors…)?

    I know that people are worried about the ARM’s, but what about inflation pressures…I hate to say it but I am on the fence about that one…I have a love hate relationship with inflation…I don’t mind it so much because I am not going to do something mindless like over leverage myself so that inflation will kill me…but I am really looking forward to having some of my student loan and …hopefully new house loan wiped out by inflation pressure…if the fed (Godless bastards) can leverage us into a position where we are subtly inflating the dollar without loosing face with our money globally, we are going to be in the sweet spot again, after our recession. However, if I had an ARM and it came due and I couldn’t afford it I guess I would get that lovely and attractive night job (in which case I would be too tired to spend money anyway I would be able to save a ton LOL).

    Plus, we are a credit society right now…lets say you DUMPED that ARM house on the market (someone would buy it if you could swallow the fact that you were cheesed and price it correctly, it would probably be less of a debt than my student loans…lets call it a lesson from the school of hard knocks, expensive but ultimately not that problematic…its a lot easier to pay off a 150,000 loss than a 450,000 house payment (on the other hand think inflation (handled correctly) they might be in less trouble than you think).

    OK here it is in response to the renting comment. I found an example home in Scottsdale which is in my price range, that advertises on the MLS…sale price 320,000…rental price 1400…I used an online calculator to figure the mortgage (aprox. 1900/month + taxes 170 + Ins 150 + PMI 170 + 20,000 down = 2400/month)…I am not sure what this means for me (except maybe HOUSING IS WAY OVERPRICED [think LA, comparatively it is still affordable]…but it is not indicative of a crash yet…is it?)

    I do think you are right about the foreclosures (and I have been looking for almost a year but the only thing I am finding are these FSBO where the owner is SO ‘high’ in price and expectation that they make real estate agents look ethical in comparison)…but there are NONE in my area…and I looked because I am a cheap ……. I did find a mobile home in the boondocks (I don’t even know what city it was in), with actual tumbleweeds…but just think of the gas and commute time, and the lovely tumbleweeds. YUCK!!

    I am going to keep looking…in the off chance you guys are correct…but I have been bitten once already…and I can’t seem to find the definitive economic indicator that will tell the real direction of the economy (like watching a weather vane in a tornado). It is obvious that our current economic fantasy can not go on forever…but forever is a long time…the real question is how long CAN it go on for…with so much at stake are we going to be surprised (I can’t bring myself to lie and say that there has been anything that resembles economic ‘truth’ in the last 20 years)…why should that stop now…

  59. jjh commented on Aug 30

    Arizona Republic. “Although there is a record number of homes on the market in the Southeast Valley, including about 4,000 in Chandler, realtors say the city is well positioned to hold its housing values. But while the city’s housing market has a lot going for it, it’s still a tough market for sellers in Chandler. The city faces the same problem as the rest of the Southeast Valley with too many sellers chasing too few buyers.”

    “The number of homes for sale hit a record 17,550 in the Southeast Valley in July, according to the Arizona Regional MLS. Only two years ago, the last time the market was ‘normal,’ as opposed to overheated, there were about half that many.”

    “Realtor Pamela Watson Brown, also of Chandler, said, ‘It definitely is a buyer’s market. But I have been through a lot of buyer’s markets where everything was a lot more affordable. Now everything is a lot more expensive.’”

    “She called it a frustrating situation for sellers and listing agents. ‘I have had open houses where maybe I would get one person coming through,’ she said.”

    “Even in the Ocotillo area, it’s not easy to sell a house. Realtor Carol Royse, who specializes in luxury homes, said this past week there were 133 homes priced at $450,000 to $600,000 in the Ocotillo area. ‘That’s just too many houses. As a Realtor, how do you pick out what you are going to show the buyer?’ she said.””

    “Homes built in the 1980s or earlier have been losing their values. And those built in the 1990s are not as popular as those built after then, real estate agents say.”

    “Struggling Phoenix builder Turner-Dunn, which has stranded home buyers for a year or more after walking away from about 200 unfinished homes in Pinal County, has filed for Chapter 11 bankruptcy protection.”

    “The bankruptcy is the latest in a string of problems for the small builder, which pocketed thousands of dollars in earnest money from each home buyer and left homes unfinished for months in Casa Grande and Maricopa. Unpaid subcontractors have claimed they’re owed millions of dollars and slapped liens on Turner-Dunn’s housing lots and in some cases on new homes that buyers moved into a few months ago.”

    “The commitment means little to home buyers like Tony Tellez and his family, who’ve waited 18 months for their Maricopa home. ‘We’re jaded,’ Tellez said. ‘That entire neighborhood has a stigmata.’”

    “Arizona State University’s plan to move the School of Journalism to downtown Phoenix has hit a major snag. Phoenix officials were forced to start looking for alternatives late last month after the developer, Al Iudicello, failed to give them a guaranteed maximum price for the construction of the ASU space.”

    “‘He (Iudicello) also couldn’t commit to a definitive time frame on the condos and the office components,’ Deputy City Manager David Cavazos said.”

    “City officials say that the combination of rising construction prices and the Valley’s cooling housing market has made it impossible for Iudicello to build the ASU space for a manageable price. In other words, it not only will cost more to construct the entire complex but the developer also is likely to lose needed revenue if he can’t sell the condominiums because of a glut of similar properties.”

  60. The Big Picture commented on Sep 25

    Home Prices Drop; 1st time in a Decade

    The National Association of Realtors announced Existing-Home Sales today. The data is consistent with our expectations of softening sales and prices and increased inventory: • Total existing-home sales slipped 0.5 percent in August; This was 12.6% lowe…

  61. Ken Yamat commented on Sep 25


    We are selling 1560 sq ft new homes for 250k and 2000 sq ft homes with 4 bd/2.5 ba/3 car garage for 300k in a city called California City, CA. Send me an email and I will get you back into California.

  62. Ken Yamat commented on Sep 25

    We are selling 1560 sq ft new homes for 250k and 2000 sq ft homes with 4 bd/2.5 ba/3 car garage for 300k in a city called California City, CA. Send me an email and I will get you back into California. Call me at 408-472-2987. These may be worth in the 400s to 500s in a few years! No hype! In this market just go by the 10 year time frame and you should be OK.

  63. Homeowner commented on Nov 28

    I disagree with the author’s thoughts on the disconnect between sales volume and price level. The real reason is this: Look at how much home sales volumes rose over the last 3 years. In any given year, there are only so many people who have a life event that causes them to buy or sell a house: getting married, having kids, retiring and downsizing, etc. Lets say this natural amount is 1% of the population every year (I have no idea what real number is, just making up a number). Now look at the rise in home sales volumes in the last 4 years – say this 1% number went to 2% meaning a doubling of sales volumes. Was that because the steady longterm housing demand of families growing older & bigger etc had suddenly made a permanent demographic change? Of course not.
    What happened was Mr. Greenspan deflated rates & lenders came up with ingenious ideas like I/Os and option ARMs etc. Suddenly the family that would have had to wait 3 years to save up a 20% down payment just went with 5% down and an I/O and bingo, they bought their house. Natural demand had been pulled forward. Prices rose as this demand came first. Then to equalize must come the supply. How did that come? Well, people that didnt really need to sell started putting homes on the market for “lemme see” prices (“lemme see” if I can get this outrageous price).
    So whats happening now? The “lemme see” sellers are disappearing because they know the party is over. There are less buyers left than usual b/c their purchases were pulled forward, and still others are afraid to buy in a declining market. So volumes drop off the cliff.
    And prices? Well, you might see prices of homes for sale drop by around 10% in your area. But sales at those levels NEVER ACTUALLY HAPPENED, because people were trying to get higher prices than their neighbors. So the first 10% price drop never shows up in the stats. Thats what happened in Q1-Q3 of 06. In reality the market peaked in October of 2005 when the yield curve flattened & the short-term rates came up to match the 30 yr mortgage rates thus ending the adjustable ARM phenomenon.
    Now we see if real price drops keep happening from todays levels….right now prices are basically the same levels where many people actually bought houses about a year ago. My guess is that with long-term rates flat, inventories dropping, “lemme-see” sellers going away, and hesitating buyers who can only wait so long before their kid is born & they really need a house, things will be at worst flat to down 5% from here.

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