Read it here first: Illogical Home Sellers
David Leonhardt has a terrific column in yesterday's NYT that hits upon many of our favorite themes:
Real Estate sellers (like other humans) are often irrational;
Price "Anchoring" occurs with many investors;
Here's what we wrote back in September 2007:
"Prices have slipped, but not nearly enough to eliminate the inventory. This has lead the usually cheerleading folks over at the N.A.R. to yet again lower their forecast for 2007 existing-home sales for the seventh-straight month. The real estate agent trade group is now predicting a drop of 8.6 percent in home sales versus last year. And, they expect new-home sales will fall a whopping 24% to 801,000 this year, and to 741,000 next year.
Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005. Thus, Supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve.
There is a psychological component to all this: It very much reminds me of the investors who when having missed selling Amazon at $400 and Yahoo at $200 and EMC at $80 and Cisco at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.
Speaking of the NAR, we continue to note their counterproductive cheerleading. Over a year ago, we noted a group of Palm Beach Real Estate agents blamed the NAR for putting unrealistic expectations in the minds of sellers:
"A growing number of Realtors in Florida are frustrated with the state and national Realtors groups' efforts to 'spin' the market as one that is strengthening and where home prices are stabilizing.
"Many (though probably not yet most) Realtors are frustrated by customers who continue to list their homes at price levels that are 'unrealistic,' and as a result, sales volumes - and thus commissions - continue to remain depressed.
"While Realtors have noted to customers that many home builders in Florida have slashed new-home prices in order to move bloated inventories, many home sellers are still holding off, hoping - along with FAR and NAR - that prices will start moving back up soon."
courtesy of NYT
>
Previously:
Real Estate Inventory Still Building http://bigpicture.typepad.com/comments/2007/09/real-estate-inv.html
Quote of the day: Realtors Get Real http://bigpicture.typepad.com/comments/2007/03/quote_of_the_da_1.html
>
Source:
Be It Ever So Illogical: Homeowners Who Won’t Cut the Price
DAVID LEONHARDT
NYT, March 26, 2008
http://www.nytimes.com/2008/03/26/business/26leonhardt.html
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See also:
How Easily Can Your Brain Be Fooled? http://bigpicture.typepad.com/comments/2007/01/how_can_your_br.html
The Psychology Behind Common Investor Mistakes http://bigpicture.typepad.com/comments/2005/07/the_psychology_.html
Thursday, March 27, 2008 | 01:30 PM | Permalink
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Comments
I thought that it was a basic economic concept that "prices are sticky downward."
I studied that in economics.
Posted by: Diogenes | Mar 27, 2008 1:35:41 PM
Maybe some just want to break even (the mortgage is bigger than the current market price).
Posted by: lurker | Mar 27, 2008 1:42:39 PM
see Mish's site today for letters Citibank is sending out to its adjustable-rate holders, trying to refinance them at HIGHER rates than their mortgage terms would warrant, completely aside from recent Fed efforts to supposedly bring lower rates (we all know Fed just trying to fatten up big finance co's margins by lowering their rates and looking away while they continue to gouge higher rates from customers). shocking. if anyone can be shocked by how these companies continue to act.
Posted by: scorpio | Mar 27, 2008 2:06:00 PM
Scorpio, could you give Mish's site address?
tx
Posted by: JeromeParis | Mar 27, 2008 2:15:21 PM
Being proud and stubborn inhibits logical behavior.
Posted by: AGG | Mar 27, 2008 2:25:56 PM
Saw the first "Public Awareness Campaign" ad in yesterday's weekly:
"In 2008, the campaign will go even further, countering some of the recent negative national media reports related to the housing market with facts about the value of housing as a long-term investment and helping local and state REALTOR® associations educate consumers about actual conditions in their local real estate markets."
Home Values Ad Campaign
"Over the past 30 years, the median price of existing homes has increased an average of more than 6 percent every year, and home values nearly double every 10 years, according to historical data from NAR’s existing home-sales series. Thanks to the power of leverage, a homeowner’s return on investment is even more impressive over time."
Posted by: candi | Mar 27, 2008 2:29:04 PM
I don't know if many people continue to play the short side in builders and REIT's, but that will be an awfully tricky trade here. It was a nice trade, but be careful here....stocks don't read economic reports.
Posted by: Matt M. | Mar 27, 2008 2:29:30 PM
i agree with the Citigroup post on his site but wholly disagree with his stance on the Fed NOT printing money.......
Is it not creating value when near worthless securities are exchanged for cash and then said cash is lobbed at the market (or bank balance sheet) inducing "up". In both cases (where the money is going)value is being created where it did not previously exist.
Without the operation(s) the value would not exist so the Fed may not be openly printing money to satisfy the "auction" process BUT the result of handing over the money creates value because it is placed either in the market (open purchases of whatever they decide) or directly on the balance sheet of the banks who were supposed to be lending it out-which they are not doing at present.
How is that not printing money??????
Mish's argument falls short because he fails to distinguish between real printed money and actual values that are measured in dollars in the same way he tries to argue that money is not being printed......but creating it out of thin air is just fine.....
Nice try Mish.......
Ciao
MS
Posted by: michael schumacher | Mar 27, 2008 2:34:01 PM
My real estate agent here in LA has been regularly delivering ultimatums to some of her more reluctant clients: Drop your price 10%, or I'll drop you.
She's been in the business for a long time and has seen her share of downturns. She knows she'd be wasting her time. Her feeling is that if her clients want the services of somebody who can get the place sold, they need to listen. Otherwise, they're welcome to go with somebody who has never seen a soft market, let alone a declining one, and get caught hanging in the wind.
She says the better and more established brokers are doing this all over the country.
-btc
Posted by: BelowTheCrowd | Mar 27, 2008 2:37:13 PM
Here are datapoints I'd like to see - Real Estate Broker Employment numbers, and licensing exam applications. When both are down 50% nationwide I will believe housing is at fair value.
Posted by: Steve | Mar 27, 2008 2:49:36 PM
As Diogenes pointed out, prices are sticky downwards and the spin coming out from NAR and FAR only makes prices even stickier! So while home prices remain sticky and above the market clearing equilibrium price, the inventory of unsold homes will remain and transaction volume will remain suppressed, hurting all the real estate agents out there. So in fact, the spin coming out from NAR and FAR is actually hurting the business of all the real estate agents!
Posted by: Prophet of Profit | Mar 27, 2008 2:50:09 PM
Candi.....
I love it! TV spot is playing here........
Posted by: portland Refugee | Mar 27, 2008 2:54:17 PM
Lotta prices here (Microsoft, WA) last week dropped 10% after Bear Stearns. These were high end new houses and original pricing woulda been 10% higher than anyone had ever got before in the neighborhood for a similar house, so it's not like historical prices really dropped. Although the builders may still take a bath because they're holding much longer than they expected, and the might have spent too much on land and construction.
Posted by: Bob A | Mar 27, 2008 3:19:26 PM
Scorpio, could you give Mish's site address?
tx
Posted by: JeromeParis | Mar 27, 2008 2:15:21 PM
http://globaleconomicanalysis.blogspot.com
Posted by: freshMint | Mar 27, 2008 3:26:59 PM
I think you have to be careful about comparing new home sales to existing home sales. The new homes were particularly inflated toward the top of the bubble because they were asking the same price for them as existing homes, and people were paying it. A lot of people's intentions were either to buy it as a second house and flip it for an instant profit, or to live in it because they felt they had to buy something, anything, right now or else, with prices skyrocketing, they would never be able to afford to own a home. But now that their investment is upside down, they can't afford to lower the price. And now that there is other inventory available, it turns out no one really wants to live 50 miles from city center when you can buy a similar house 15 miles from the center for the same price (adjust mileage to your locale). Further, the used home sales are of course skewed higher because they are, on average, in a much better loction than the new homes. And with gas prices inflating, and traffic only getting worse in most locals, the value of living in town only gets further exaggerated.
The homebuilders themselves were part of this same hysteria, and bought home lots for way more than they were worth. The difference is that the homebuilders, for the most part, can afford to lose a little on some bad investments, as long as they have some good ones in their portfolio to keep themselves afloat long enough to ride it out. But for the homeowner, this is their only (or one of only two) big investments, so they're stuck hoping they can break even before they go bankrupt because their arm resets and they can't refinance like they expected to be able to. I don't think it's that irrational on the part of the homeowner to put a house on the market for a price they only have a 1% chance of getting, if their only other option is to have their home foreclosed upon anyway. Having a 1% of selling it and finding a nice apartment in town is better than holding onto it with a 0 percent chance of selling it and being stuck in the roach infested complex because their credit is ruined! On the micro level, it's really not that irrational what's going on right now. I'm just glad I bought in town before the bubble and didn't buy new cars and HDTVs with my "supposed" equity. I'm doing OK, but I can see why, if I were in the shoes of some others, I'd be trying to sell for more than the house is worth!
Personally, I think the powers that be will try to inflate our way out of this mess. It's best for our corporate masters if they can keep only giving "cost of living" wage increases based on bogus low numbers, double the price of everything, and have collateral in absolute dollars that is worth much more than it would otherwise be (i.e. having collateral that is actually worth as much as the loan, unlike it is now). It's going to be a rough ride, though.
Posted by: Brendan | Mar 27, 2008 3:35:31 PM
Those most needing to lower the price are not in a position to do so because the loans outstanding equal or exceed prices. Most other sellers are housing neutral; they are both sellers and buyers. Whatever they give up on the sale they must make up for on the purchase so it becomes a game of chicken to see which sellers go first. Nothing really irrational about that. Meanwhile buyers will avoid buying unless it is discounted to the level they expect prices to eventually reach. Nothing irrational about that. Realtors taking listings on property they know they can't sell - now that is irrational, but desperation also instills hope.
Posted by: Lord | Mar 27, 2008 3:52:36 PM
Lord,
Agreed. Also, everybody knows the gubmint's going to fix it. Nobody wants to be the last casualty in the war.
Posted by: Estragon | Mar 27, 2008 3:59:37 PM
When the market's Pope
Pull out his rope
Just to make you choke
When the market's Pope
Reaches for his stoke
So he can poke
Abandon all hope
Cause he's gotcha ya on dope
Ready to slide the slope
To where there's no hope
Posted by: Francois | Mar 27, 2008 4:00:22 PM
What about illogical home builders? How many new homes come on the market each month? If these homes aren't tied contractually to a buyer why build them? In order to get rid of the glut you must first stop the "new" supply.
Posted by: Pat G. | Mar 27, 2008 4:35:43 PM
I was just in Miami and I was stunned by the amount of construction still going on. I guess once you've started a 35 story condo building you kind of have to finish it.
The Miami Hearld published this data for Dade county on Tuesday....
Home Sales - 244(down 41% yoy)
Median price - $306k (down 20% yoy)
Inventory - 16,361 (up 32% yoy)
Condo Sales - 235 (down 46% yoy)
Price - $293k (actually UP 5% yoy - huh?)
Inventory - 25,533 (up 16% yoy)
100+ mths of condo inventory at February's sales rate.......
Posted by: brian | Mar 27, 2008 4:37:39 PM
Owners of REO also can be very sticky about prices. Most put up the house near or above the current loan amount which has nothing to do with its market value.
Posted by: ron | Mar 27, 2008 4:38:18 PM
MS says,
"Mish's argument falls short because he fails to distinguish between real printed money and actual values that are measured in dollars in the same way he tries to argue that money is not being printed......but creating it out of thin air is just fine....."
"Nice try Mish"
I agree
I find that a lot of Mish's arguments fall short AND that he is also a little too loosey-goosey with his so called "facts" for my liking. For example, he has repeatedly stated that the Fed's TSLF has been a failure even though the FIRST auction under TSLF was held today. How can something be a failure when it hasn't happened yet!?!?
Posted by: glenn_in_MA | Mar 27, 2008 5:28:46 PM
Maybe Mish is psychic. Today's TSLF was a failure which begs the question why, if everyone is so liquidity challenged? Gives some creedence to the notion that "the FED is pushing on a string". I also heard that in the latest auction of treasuries, the South Korean's were cool to additional purchases preferring instead “ to diversify their holdings of debt in other countries”. What happens when the rest of the world begins thinking like that?
Posted by: Pat G. | Mar 27, 2008 6:15:38 PM
"What happens when the rest of the world starts thinking like that?"
We're doomed. As PrudentBear said today in the WSJ, standard of living must decline, the dollar must decline, and we must start actually saving and investing instead of trying to consume our way to riches.
Posted by: DonKei | Mar 27, 2008 6:40:29 PM
Surely a random coincidence, but "NAR" in the Danish language translates into "fool"...
Posted by: Mike H | Mar 27, 2008 6:44:00 PM
