Surprising story on comps and appreciation up at Seattle Bubble this morning. Hat tip to Tim and S-Crow for providing the information. Seems a common practice might be overstating appreciation via comps. I’ll admit, this one never even crossed my mind.
Housing Appreciation: the dirty little secret
We’ll it’s not really a dirty little secret, but like my mother-in-law says about certain things taboo, “we just don’t talk about that.” One of the least talked about facets of home price appreciation and what we see on the majority of the purchase transactions we close that were 100% financed, is this little secret: It’s simply sellers jacking up the sales price to cover the buyers request for paying closing costs. The cause and effect: artificial appreciation and compounding that spirals house prices upward absent of fundamental economic drivers.
Ok, fine you say. What’s the big deal. What’s the big deal??? Let’s discuss the ramifications of this because it is quite remarkable. A recent home in a transaction we closed (numbers are for example only) was listed for $450,000. It was sold for $458,000. The seller was quite happy with just accepting a full price offer, but here comes a very enthusiastic buyer that is qualified to purchase the home, but like many buyers, is cash poor. So the buyer and seller agree to artificially increase the appreciation of the home via a sales price increase that covers the closing costs for the buyer. While this appears to be somewhat routine, the compounding price appreciation inertia from this sale creates a domino affect that is hard to stop. Think about this. If our firm has closed just 75 of these transactions (and we have) in 2006 alone, just think what the title companies who dominate the market must be closing, in each county. Now think all across the state. Now think all across the country.
Caveat Emptor!
Grim
While this may be a “dirty little secret” for existing homes, the practice seems to be quite overt for new homes. Builders today commonly offer loads of free upgrades, cars, plasma TVs, free property taxes or HOA fees for a year, and even below market mortgages. Their express intent is to keep the comps high as not to upset those who bought a year ago. I have to wonder how much new home prices have really fallen in the absence of these gimmicks.
Mortgage bonds languish as investors stay sidelined
The U.S. mortgage-backed securities market languished on Tuesday, with yield spreads versus comparable Treasuries ending mostly unchanged from the previous session as scant demand offset moderate supply from originators.
With the summer doldrums in full force, the mortgage bond market is in a particularly vulnerable position right now since many of the market’s main participants are sidelined awaiting a clearer picture on where the U.S. Federal Reserve is headed.
Investors out of Asia have been quiet for several months and Wall Street dealers hold hefty inventories. On top of that, demand from banks, large holders of mortgage bonds, appears to be fading.
But, some of these participants are expected to emerge again once the Fed concludes its two-year-old campaign of interest rate hikes.
…
Some Wall Street firms have turned more cautious on the sector.
Barclays Capital recently downgraded its recommendation for mortgage bonds to neutral from a tactical overweight.
The overweight stance was driven by expectations of real-money buying after June’s Federal Open Market Committee meeting and expectations that greater clarity about the Fed would help the sector.
“Neither factor seems valid anymore,” the company said in recent research.
Padding the sales price to cover closing costs…that’s the first thing I thought of when I saw that an average colonial on an average (small) lot in Bloomfield sold last week for 15 percent above the asking price, which was already quite high at $563,000.
crude is up to $77/barrel.
I am still sticking to my guns.
$100 by Labor Day.
That means $10/gallon at the pumps.
You don’t think that will slow things down?
SAS
Just curious–in the typical “padded” price closing, is the realtor’s commission calculated on the basis of the artificially inflated asking price, or the “real” price of the home (asking minus incentives/money paid at closing)?
I really don’t think this is happening here in NNJ. I know a number of them, and I’ll be sure to ask, but I just don’t see it here–sorry.
Who are you?
From Reuters:
Fannie Mae suspends construction lending program
Home funding company Fannie Mae said on Thursday it has agreed to suspend its acquisition, development and construction loan transactions due to concerns raised by its regulator, the Office of Federal Housing Enterprise Oversight.
“We will be working closely with OFHEO to work through our current pipeline and issues related to risk management reporting, policies and procedures, and oversight of the program,” Fannie Mae said in a statement.
It said the suspended program represents “less than one-tenth of one percent of the company’s overall book of business (approximately $1.7 billion), and we do not anticipate that this action will have a significant financial impact on the company.”
You beat me to it Jay.. Big news for sure.
grim
Same source..who was on a thread here yesterday looking for the catalyst to a 50% drop? Here it is. last line.
WASHINGTON, July 12 (Reuters) – U.S. Treasury Department officials have scheduled meetings with government-sponsored mortgage enterprises to discuss details of GSE debt issuance, a Treasury official said on Wednesday.
The meetings come as the Bush administration pressures Congress to shrink the mortgage portfolios of the largest mortgage enterprises, Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) . The administration says those companies’ portfolios of mortgages and mortgage-backed securities have grown so big that a failure at either institution could put the U.S. financial system at risk.
Oh, I remember, now. SAS was trying to explain his catastrophic price predictions.
I’m sticking with my 50% bid. Bailout still possible.
Pat
“The meetings come as the Bush administration pressures Congress to shrink the mortgage portfolios of the largest mortgage enterprises, Fannie Mae and Freddie Mac.”
Okay, let’s shrink the mortgage portfolios. We’ll off-load the risk to other banks and foreign investors. Oh, but wait,
“Investors out of Asia have been quiet for several months and Wall Street dealers hold hefty inventories. On top of that, demand from banks, large holders of mortgage bonds, appears to be fading.”
JAY
Hah..yep. Maybe the 30 yr will hit 8.5 in twelve months.
And Ben Ben will do the nasty 50 next month.
Check out frontpage video on realtytimes.com, where they answer the question:
“We purchased an ocean-front condo in south Florida last May. We’ve decided we want to sell…if we do sell at this point we’ll loose anywhere from $75,000 to $100,000 or more…how will we be suffering such a large loss?”
JAY
He skirted the issue very diplomatically, without specifically calling them greater fools, but we all get it, don’t we?
it is very interesting to watch the way the RE industry deals with the dropping market.
Amidst all the B.S. though, occasionally there are is suprising candor such as the following also in today’s Realty Times:
Americans Appear Comfortable Wallowing in Debt
JAY
i am really getting excited, i can feel the wheels in motion on price declines, and reading grim’s blog as well as ben jones’ blog is just great
keep up the good work
and this is just the tip of the iceberg
Pat,
he he…yee….
I am glad to see I am leaving you with a lasting memory.
Glad to see your news article.
Now do you believe me and thinking this old dude might know what he is talking about?
SAS
SAS..you never had to convince ME of all people…
I’m the Cash Queen. The Corsican Contrarian.
Pat
I get married next summer, and the summer after that, 2008, I will be looking to buy a house for about 30% less than they are now.
What does everyone here think of Rockaway township? Decent place to live? They seem to have some nice houses for very good prices
I have not visted the blog lately, been busy. Where is Bob?
Booooya bob.
Bob is probably managing Cramer induced damage control.
Intreresting article from Money about what $100,000/yr gets you in NY
http://tinyurl.com/m8wwr
Where the (best) 6-figure jobs are
If keeping more of your paycheck is important to you, some places are much better than others.
By Jeanne Sahadi, CNNMoney.com senior writer
July 13 2006: 1:18 PM EDT
NEW YORK (CNNMoney.com) — Making $100,000 or more is nothing to sneeze at.
Only 5 percent of earners in 2004 reported making that much, according to Census data.
While entering six-figure territory can be a marker of a certain level of success, it’s not always a marker of a lot of buying power.
In some cities, a $100,000 salary sounds a lot better than it is because the cost of living is high, taxes are high and, as Murphy’s Law would have it, even the rate of inflation runs higher than in other parts of the country.
New York is the clearest example. Its cost of living is double the national average, according to data from ACCRA. Put another way, in New York, $200,000 is the new $100,000 paycheck.
But that $200,000 doesn’t really mean you can afford the same lifestyle that $100,000 could buy in lower-cost cities like Cleveland or Denver.
Consider inflation. Over the past 12 months through May, overall inflation in New York metropolitan area was 4.8 percent. In Cleveland, the rate was 3 percent. The rate of inflation on rent was 5.6 percent in New York, while in Cleveland it was just 0.8 percent.
Next, consider taxes. State and local taxes make a big difference in how much you net, but so, too, does the federal income tax. Earning a nominally higher salary ($200,000 versus $100,000) puts you in a higher tax bracket. J. Scott Moody, chief economist at the Maine Heritage Policy Center working on behalf of the Tax Foundation, notes that a single person making $205,000 in New York would have an effective tax rate of 25.4 percent, paying just over $52,000 in federal income tax, leaving him with $153,000.
If you adjust for cost of living differences, that $205,000 salary would be worth $102,000 in Cleveland or Denver. The effective federal tax rate on that amount would be just 20.4 percent, so you would pay $20,868, with $81,480 left over.
“Even though the two incomes are equivalent in terms of purchasing power, the New Yorker has an effective rate that is 5 percentage points (or 25 percent) higher than the person living in Denver. As a result, the New Yorker suffers a lower level of after-tax purchasing power,” Moody said.
Of course, the greatest number of six-figure jobs tend to be in the most pricey and populous cities, but there are also plenty of opportunities in more affordable ones.
We asked job listing sites 6FigureJobs.com and The Ladders.com to provide us with a snapshot of where they have had the greatest number of listings for six-figure jobs in the past two months.
Predictably, New York, San Francisco, Los Angeles and Washington, D.C. were in the top 10. But there were also a relatively high number of such jobs in Chicago, Atlanta, Seattle, Cleveland, Denver, Philadelphia, Milwaukee, Houston, Dallas, Minneapolis and Charlotte, NC.
Besides being less costly, there is another big advantage these cities offer if you’re in the running to make six figures. To attract talent, companies often will offer the same big salaries that you could earn in New York or San Francisco.
“Whenever top talent is scarce (which is always), salaries offered to those super-producers ignore any geographic pattern that would suggest a lower number,” said Jim Brennan, a senior associate at the Economic Research Institute, which specializes in competitive salary surveys. “So if you want to get a key executive, you have to pay world-class dollars.”
_______________________________
Grim
NJMLS Requires the true sale price to be shown in the sold listing.Seller’s concession are not to be inlcuded.
KL
KL,
Thanks for the info! I see you got the login issue fixed.
jb
Today has been one hell of a day:
Oil up to 78
http://money.cnn.com/data/commodities/index.html
Mortgage rates drop for 1st time in 5 wks
http://news.yahoo.com/s/ap/20060713/ap_on_bi_ge/mortgage_rates
Israel finally is not taking shit anymore
cnn.com
Dow takes major hit (but the god dam Dow is a deck of cards anyway)
http://finance.yahoo.com/
What is good for Merck is good for NJ.
Jury Absolves Merck in N.J. Vioxx Case http://biz.yahoo.com/ap/060713/vioxx_trial.html?.v=14
When a company like Intel cuts jobs, you know the Fed is doing its job.
Intel to slash 1,000 management jobs
http://www.usatoday.com/money/industries/technology/2006-07-13-intel-jobcut_x.htm
ahh yes….I love making money on headlines like these…..
Life is good.
SAS
I think I’ve come across another dirty little trick. A Realtor sent me a link about a month ago to 13 listings that I check periodically to see if they’ve come down in price.
For the first time today, the DOM column, days on market, is blank on all of the listings! Some of these listings have been on the market for 200+ days.
Has anyone else come acros this?
Here is a sweet little $3.1 million dollar price reduction..
MLS# 2208171 – Franklin Lakes, NJ
OLP: $9,995,000
LP: $6,900,000
DOM: 261
“Whenever top talent is scarce (which is always), salaries offered to those super-producers ignore any geographic pattern that would suggest a lower number,” said Jim Brennan, a senior associate at the Economic Research Institute, which specializes in competitive salary surveys. “So if you want to get a key executive, you have to pay world-class dollars.”
Yes, it does take a special individual to fleece a company’s true owners, the shareowners.
“you have to pay world-class dollars”
I love the way empty suit hucksters use the English language.
dr horton lowers guidance for
y06
DHI tanks in after hour trading
down10%
Here’s a big seller wakeup call:
MLS 2255716
93 Pine Street, Millburn
1) Aug 2006 – $850,000
2) Mar 2006 – $799,000 (Relisted w/ new MLS#)
3) May 2006 – $729,000
4) Jul 13 2006 – $697,000 SOLD
Took them about a year to face reality.
Sorry, that #1 should be 2005, not 2006:
1) Aug 2005 – $850,000