Saturday, August 12, 2006

Sitting on the Bubble

Are bubble sitters driving down the market? From CNNMoney:

Convinced home prices will fall? So are a lot of other Americans. Some - known as bubble sitters - are acting on their conviction. They're cashing out by selling their homes and renting, figuring they'll return to the market after prices have fallen. Bubble sitters also include those people who have never owned a home and are waiting to take the plunge, along with folks who are relocating and holding on to their cash until the market in their new hometown softens...

Bubble sitting has contributed to softening in housing markets, especially in new homes. Builders have reported slowing sales and they're offering numerous incentives, rebates and discounts in order to move inventory. Just this week, builder Toll Brothers announced they expected sales to decline substantially for the year.
Some blame the home builders for encouraging fence sitting. From the Sacramento Bee's New Home Section:
Jo Sterling, owner of Sterling Creative in Sacramento, said she wishes builders would stop offering incentives because they can make potential buyers stay on the fence rather than buying a home. "Buyers start playing the 'what can you do for me' game and start looking for the best incentive plan and wait to buy," said Sterling, who has nearly 30 years' experience in the advertising and public relations field. "I think that one offer to pay heating and cooling costs is a really good idea. It doesn't devalue the home."

It also doesn't upset builders' loyal customers who may have purchased a home in a community a year earlier when no incentives were offered. If the Joneses got $100,000 off on the same floor plan I purchased just after the grand opening, I'd be pretty mad. But if my neighbors got a deal on their utility bill, then, hey, more power to them. Pun intended.

"Incentives have always been a cyclical thing," said John Orr, president and chief executive officer of the North State Building Industry Association. "The national companies want their local offices to move product, and they're doing what they need to do. But cutting prices is always a risky thing to do."
Speaking of price cuts, Sacramento Centex is launching a "new" pricing program:
Centex Homes today will launch a new pricing program aimed at providing homebuyers with the best value available. The program will be in effect at the builder's Sacramento-area communities through Aug. 27. "For the next couple of weeks we are giving homebuyers a special opportunity to save up to $150,000," said Patrick D'Arcangelo, vice president of sales and marketing. "By combining 15 brand-new neighborhoods throughout the Sacramento region with award-winning quality and unprecedented savings, we'll be providing a win-win situation for homebuyers."
I certainly didn't see that one coming.


Marin Family Guy said...

Pretty soon it will be "if you don't buy this house I'll eat a bug" a la Cal Worthington.

The people who are going to be upset are those who bought at the high point and never expected this to happen.

Too much inventory + too few buyers = lower prices.

When new home prices slide, existing home prices plummet like a rock.

Gwynster said...

I love that smart buyers are now taking the blame for tanking the market. I feel so evil >; )

I actually stoppped at an open house in Davis today. The place was tiny 925 sf 3/1 for 399K. The agent automatically tried to lure me to a 450k house. When I explained I was waiting for a 230k house she sighed and didn't look surprised. She really didn't like me mentioning the fact that the Bidwell condos have dropped to 230k to 250k (from 300k this time last year).

Anonymous said...

I went to Lincoln Saturday and JTS had homes which SOLD for $710,000 discounted to $525,000. Buyers had closed escrow on similar deals just weeks ago at the higher prices. Funny thing, they still did not make sense. $4,200 a month to own, vs. $2,000/mon to rent. Even after taxes it is better to rent, (assuming the homes do not go down in value more). There will be no appreciation in a new home for 10-years. This bubble has POPPPED.

Ali, in Cali said...

I had seen the CNN article, but the other one is also great! Thanks for connecting all the dots, Lander, especially with all the Centex sales. Your link to the previous post about their sales wass too funny!

My, my how things have suddenly changed.... No longer are we the insane forecasters of doom. We no longer have to argue with everyone (just the reluctant FB's who ever remain in denial, and even they are getting easier to convince) about the reality of the bubble popping. Thnak heaven! I was tired of defending myself and having people tell me I was crazy. Look around folks: it's happening. and it's about time.

Gyn: I LOVE your comment about feeling evil because of the hand the smart borrowers have in bringing this thing all the way to the ground. I just hope you are right. My fear is that people will see prices fall and start to jump into the market, therefore stopping the price slide before it wipes out everything in it's path. I also love that you are waiting for the $230k price tag. Even my own fiance looks at me like I'm nuts when I talk about us finding a house for that price next year or later. It's nice to know that someone else out there not only sees it, but also believes.

And MFG: I would pay my own closing costs to watch a realtor eat a bug. That's what I call high quality entertainment.

One last thing: did anyone see today's article in the Sac Bee about open houses in Sacramento?

Ali, in Cali said...

Seriously, though: I just can't get enough of this...

"When I explained I was waiting for a 230k house she sighed and didn't look surprised."

They aren't even wasting their breath any more trying to argue that a price like that would be impossible. Sound like they're beginning to feel a little defeated to anyone other than me?

Lander said...

Thanks to Ali for sending in the bubble sitter article!

drwende said...

Y'know, I was predicting $280k as where the typical 3-BR, 2-BA house in the Sacramento area was going... until I read that people are rushing to strip equity from their houses by doing a total refinancing at a higher interest rate. Now I believe in $230k.

I love it when my most pessimistic projections are overly optimistic.

(the online novel of the bursting bubble)--

Ali, in Cali said...

No sweat! I do what I can. But, I am quite certain you'd have found it with or without my help!


Ali, in Cali said...
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Anonymous said...

The inventory numbers are the key to pricing in this market. There are four good reasons prices are headed south and no good reason why prices will stabilize and rise.

1. ARM and Interest Only mortgage resets are beginning to add 40-50% to monthly mortgage rates. These resets will last at least another 2-3 years and are just gaining momentum now. Most who bought these notes did so in order to qualify and most will not be able to withstand the price increases without some serious help.

2. Foreclosures are rising as those with exotic mortgages can't make the payments. As homeowners get closer to foreclosure, they become desperate and try to sell. Prices begin falling as this desperation bleeds its way into the market. More distressed inventory is added to a depressed market.

3. Those that don't sell will give their homes back to the bank. Banks will take on unwanted inventory based on the rising foreclosure rate and will be dumping the properties to get them off the books. Saavy investors won't want the property because of the uncertainty of a market moving lower. This will force the banks to take losses and prices will be pressured lower as more distressed inventory hits the market.

4. New homebuilders are now competing with huge inventory increases in resale homes. Those that are mid to late stream in their buildout are faced with ever increasing carrying costs. Incentives are out there but buyers, wary of catching a falling knife, aren't buying. Builders will have to drop their prices in order to compete with a dropping price per sq ft in the resale market.

The sad thing is that this is not just a Sacto problem. This is going on across the country and will threaten the economy in the years ahead.

Happy in SF said...

Yeah, it's pretty funny that quadrupling home prices in 5 years can be seen as normal and sustainable but when people who cannot afford any house don't overextend themselves to purchase a house in gangland, they are seen as communists.

Anonymous said...

Now that the air is finally starting to release from the balloon, there are other problems that will further burst this bubble. Some reports I've read say that 25-40% of all jobs created over the last 5 years are related to housing. Not only the real estate broker/agent or the mortgage broker, but periphery type jobs such as title companies, appliance manufatureres, landscapers, interior decorators, and home improvement jobs. This undoubtedly will put pressure on the local, state, and national economies. In California, alone, there were nearly 500,000 real estate agents trying to make a living off the boom in the market. The consumer has stopped consuming and is more interested on how he will fill his gas tank, make his mortgage, feed his family, and keep his job. The "Hummer" in every garage days have ended, the cheap money is gone, and there are too few people skittishly looking to buy in a market that has not found its bottom. Inflation is whipping out of control placing a huge burden on the one thing that kept all the boats afloat....the consumer.

Anonymous said...

Gwynster: The new Wildhorse condos, which are fully upgraded, will wipe out all condo prices when they start getting discounted. Why live in a 15+yr old condo when you can have a brand new one, on a golf course? Not to mention condos are the first to take the plunge.

I'm liking what I'm seeing from the sidelines (housing prices dropping while my down payment amount rising!). I felt discouraged about a year and a half ago coming out of grad school and seeing the ridiculous prices. Now I'm going to keep waiting b/c yes, I'm a "what can you do for me" type of buyer. :)

"Why try to catch a falling knife?" I was offered $70K off the asking price on a new home before it was even advertised a week later. I think I'll wait until I get a call offering me $100K+.

Ali, in Cali said...
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Ali, in Cali said...

(the online novel of the bursting bubble)--

Is anyone else reading this?? It's a total guilty pleasure!! Wende hass me hooked on both her great story line and her random links embedded into the text. Seriously, if you haven't already, check it out!!