From the Daily Reckoning:
According to the chief economist of the National Association of Realtors (NAR), the housing market is now transitioning from and “unsustainable boom” to a “permanently high plateau.” According to an October 25 NAR press release:
“David Lereah, NAR’s chief economist, said stabilizing sales should build confidence in the housing market. ‘Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction – this is likely the trough for sales,’ he said. ‘When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market, and sales will be at more normal levels in the wake of the unsustainable boom that we saw last year.’ He noted sales already are improving in some areas.
…
Housing inventory levels can certainly continue falling, but don’t make the mistake of concluding that this will automatically lead to the return of a “tight” market. Over the past year, inventories were given an extra kick as many existing homeowners merely tested the waters of the market; these homeowners hoped to extract big equity gains in 2006 via the analytically complex process of slapping an “ask” price closely resembling their neighbor’s sale price from last year. From there, they expected to sit back and wait for multiple “bids” above their ask price, ultimately selling to the highest bidder.Trouble is, buyers have finally wised up to the realization that housing runs in cycles – and the top of this cycle has been the most overextended in history. Irrationally exuberant psychology extended the topping process, as buyers clearly feared being left behind by the home equity gravy train. This was very reminiscent of the tech bubble psychology that caused an already-overvalued NASDAQ to double yet again from spring 1999 to spring 2000 before crashing.
…
“Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.“Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. ‘The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change.’
“Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law’s illness scotched the planned move. ‘My exit strategy was if they didn’t move into it, we could sell it or rent it,’ Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.”
The huge number of people who bought investment properties in recent years cannot all rent them out. For those who can, their after-tax, after-expense yield is practically negative. Without the fundamental support provided by yield, the “second house” market rests on the speculation that prices can continue to irrationally inflate. As the WSJ story shows, even “senior real estate strategists” are beginning to grasp this concept.
the worst is behind us as far as a market correction
Don’t you love this guy? Are we sure this isn’t Baghdad Bob?
David Lereah is a jerk. I hope buyers do not rely on anything he says. What a liar.
“‘This remains one of the most difficult periods for the U.S. housing market in over a decade and Levitt’s results reflect the challenges of the current operating environment,’ Levitt CEO Alan Levan said
Take that starving realtors
Yeah, rely on the NAR chief economist to give an unbiased, fact based view of the housing market. Right!
“Over the past year, inventories were given an extra kick as many existing homeowners merely tested the waters of the market;”
Tested the waters??? They dove head first into shark infested waters!!!
Sorry Dave, when you are making the biggest investment of you life, you don’t “test the waters”. How about when they are notified that their I/O has adjusted and they owe 50% more each month??? “Time out, I was just testing the waters?? Just a bunch of do-do.
The funny part that the guy in the paper is “Real Estate Strategist” Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., And he lost 30K by buying at the top – some professional he is – I’d fire him right there on the spot for professional incompetence…
and again Italics Just newer works for me Did it work?
I’m changing my title to Real Estate Strategist, I like the ring of that.
jb
italics off
Strategist:
-noun : an expert in strategy (especially in warfare)
how apropos
Maybe this will work.
Did it?
Yes. [I learned my lesson from a bad bold :)]
Mr. Lereah is suffering from self-delusion.
Mr. Lereah’s paycheck is contingent on his maintaining that delusional state.
jb
Sean Shallis is not the only professional who made the mistake of buying a condo at the peak in Jersey City. James Weichert Jr. bought a condo at 649,000 last year, and he is trying to sell it for the same price now (down from 749,000 if I remember correctly).
Not sure how many of you use Foxtons, but it seems far more helpful than realtor.com. (No, i dont work for Foxtons; fiancee found it and it seems far more useful than realtor.com).
Is it just me, or does this house seem pretty sweet? Without having driven to the area, or seeing how much the owner paid, I’d think an offer in the 325-350k ballpark wouldn’t be a lowball.
http://www.foxtons.com/search?md5=83517ad51435a14ffb3e7dd29d32fa69¬ebook=true&search_form=map&per_page=10&order_by=price%20desc&search_type=SS&inst_ref=130179&submit_type=search
“Mr. Shallis walked away from the contract and lost his $30,000 deposit.”
Brutal. To acquire $30K in cash, you have to earn about $40K, depending on your tax bracket.
Buying in 07,
Looks like a 1970s box, no? Fully 1/3 of the facade consists of garage door.
I’d love to hear more about Weichert’s condo.
jb
Weichert’s condo:
http://newjersey.craigslist.org/rfs/223412843.html
“Not sure how many of you use Foxtons”
I have used them, good success. However, you have to be on top of everything. I showed the house but only paid 2%. They have since changed this, not sure what they charge now.
Buying in Late 07 (maybe),
350k offer is WAY TOO MUCH.
Look at the comps in the neighborhood. That whole street seems to have the same lot sizes and about the same taxes.
A Dec ’05 comp went for 390. A late 90’s comp shows around 180. On a good day that house is worth 300. Offer 280 and if they don’t laugh you off and they counteroffer, go up to 300 as your best and final. Then watch them lose value month to month until it hits your price.
I clicked on the Map, FYI, to see the location looks to be on White Terrace and then used njacttb to find the comps. Comps are your friend.
Chapter 1.
Time to take up theory.
http://www.bankrate.com/brm/news/mortgages/200611092_avoiding_underwater_mortgage_a1.asp
Wow, MSD. I don’t remember seeing that article there before. Thanks for the link.
I’ve been looking for a three family for over a year around Jersey City and still can’t find anything that works out to a cap rate above 6%. It’s crazy. Seems like prices are never going to fall to what would seem rational levels. Getting tired of making low ball offers, it’s exhausting.