A Spring Bounce (in Seller Delusion?)

Submitted by Rich Toscano on February 13, 2009 - 11:00am

A while back, just for giggles, I put a little Redfin price per square foot widget up near the lower right of the Econo-Almanac. Lately I've noticed an interesting pattern... that asking prices have turned up noticably even as selling prices continue to nosedive:

Now, there are a couple potential explanations here. The "sold" price lags behind the "asking" price, because asking prices are in realtime whereas sold (closed, presumably) prices were set a month or so back. So maybe the asking price is bit of a leading indicator of an actual bounce, or at least a slowdown of the decline.

More plausibly, it could be that all the cheap stuff us just getting snapped up, putting the lowest priced properties into the sold category while more expensive ones sit there in the asking category. However, the pattern of cheap stuff selling faster has been happening for the better part of a year now, whereas the asking price actually turning up is quite recent.

Or maybe sellers have suddenly gotten optimistic that the market is going to come roaring back this spring. And who can blame them, what with the lack of foreclosures and our vibrant economy?

There's certainly a combination of factors at work, but I think it's interesting that the typical asking price has suddenly bounced in the way it has.

Realtors and people looking around at homes, what are you seeing to explain this?

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Submitted by AK on February 13, 2009 - 11:12am.

I'd guess part of it is a surge of REOs coming on the market at optimistic asking prices, replacing older inventory that had already gone through several rounds of price drops.

Submitted by sdrealtor on February 13, 2009 - 12:32pm.

What you are seeing is the return of discretionary sellers to the market. The last several months have been dominated by distress sellers. You are now seeing higher quality properties coming on the market with more discretionary sellers. Better inventory and lower seller motivation translates to higher price per sq ft some of which, but not all, is justified.

Submitted by peterb on February 13, 2009 - 11:30am.

Many games get played in the RE business on the road to closing the transaction. All that counts is the closing price. Plus a little "Kentucky Windage" for any "give backs" that may have happened to sweeten the deal.

Submitted by FormerSanDiegan on February 13, 2009 - 12:34pm.

This to me seems like it's directly a result of the current mix of homes being sold.
By definition, asking prices are for unsold inventory. The price per sf can go up by
a) more inventory being put on for higher-end property
b) Depletion of inventory (via sales) at the low end
or
c) Both of the above

Since the low end is selling more briskly,this could simply reflect that there is more high-end inventory in aggregate.

This would explain a decline in sold prices and an uptick in asking prices simultaneously.

Submitted by cr on February 13, 2009 - 1:28pm.

I think it's a little of everything.

As Rich said lower prices homes are moving faster.

Akin to FSD's comments I've recently seen a huge influx of higher end homes hitting the market, at least in my area, my guess is those people think their homes are worth more than they paid (afterall their Realtor friend told them so).

Higher end homes tend to have higher price per sq ft ratios anyway, and we're just starting to see the tsunami of alt-a and option arm resets make waves.

I imagine higher end homeowners are a little more proactive in getting their home sold before the recast payments hit. I just wonder if they realize prices have fallen 50% since they bought.

Submitted by barnaby33 on February 13, 2009 - 3:04pm.

Ultimately we will only "know" in retrospect and maybe not even then. It is interesting to see an uptick in asking prices. As a matter of personal belief, its probably more discretionary sellers, as per sdrealtor, than banks raising the price on what they are asking as they hit the market.

I think this way because inventory is seasonally low and a few more sellers entering can skew the graph more easily than they could by June.

Josh

Submitted by SD Realtor on February 13, 2009 - 5:13pm.

I would agree with sdr as well. As far as foreclosures go I see them being priced pretty aggressively, even moreso then in the past. Spring is also the time of hope, renewal, denial, and unrealistic list prices.

Submitted by pepsi on February 14, 2009 - 1:32am.

I believe this has a lot to do with the foreclosure freeze from Nov, 08 to Feb, 09. From the chart, you can see that the asking price started to surge when the foreclosured homes stop
hitting the market.

The lines should start coming down after March.

Submitted by pepsi on February 14, 2009 - 1:38am.

I am surprised that none of you mentioned the foreclosure freeze.

Maybe we are watching this too close and get caught up by more recent events (bailout/tarp/stimulus packages...etc). I guess it is not difficult to forget some major events only 2 -3 months old.

Submitted by CA renter on February 14, 2009 - 2:05am.

Pepsi,

As I was reading down the thread, my mind kept saying "that's when the foreclosures were banned." Then, your post comes up.

Yes, you've hit the nail on the head, IMHO.

All last year, we got a tremendous number of foreclosures on the market, while some of the higher-end sellers held off in hopes that "the market would get better."

When they kept foreclosures from coming on the market, those that did come on, were priced aggressively and have been selling very quickly (see sold prices continuing to go down), but the overall inventory is more skewed toward discretionary sellers because they are now a greater portion of the inventory pie for as long as they try to hide the foreclosure inventory.

BTW, I'm in the camp that believes there is a ton of "shadow inventory" where the current residents have not been paying for a extremely long time, and also the banks are sitting on empty houses...waiting for their bailouts. They've even admitted to it.

There is NO reason to buy a house now or any time in the near future. Until we get full transparency in this RE market, there is a growing force just waiting to exert downward pressure on the housing market.

Words cannot describe how truly idiotic our politicians are behaving right now. They will drag us, kicking and screaming, into one of the deepest depressions we've ever experienced, and all because they couldn't define the problem in the first place: PRICES of all assets are TOO HIGH!!!.

Submitted by SD Realtor on February 14, 2009 - 9:58am.

Pepsi it is certainly hard to argue with your logic. Your post was well written. The growing force that you mentioned is in a battle with an equally strong opposing force that has decided long ago that they were going to go all in and drag every taxpayer into the battle.

So essentially we see a control mechanism holding back inventory which is subsidized by magic money that is saddled to the backs of the taxpayers. Inventory is reduced to "manageable" levels creating artificial demand which helps provide price stability (even though the new price stability is still not reflecting true value). The system is still greased by low interest rates.

Crack smoking politicians think they can bleed out the downturn in this manner for a few years at which point the economy will have turned around and everything will magically be okay...

All markets can be manipulated.

Submitted by gnashed on February 14, 2009 - 11:21am.

I live in the Seattle area on Bainbridge Island. I moved here from O.C. 2 1/2 yrs ago and have many relatives in San Diego so we watch "back home" closely.

The island here is known in the region as a very high priced area and has had very similar development/price trends that we saw in so cal but lag by about 1 1/2 years. In 2004 - 2006 there was a huge upsurge in home values and loans from $200K skyrocketing to $600-700K and higher. But the national credit crisis has closed the timing gap.

Some good friends put their house up for $600K at the beginning of Dec. because their Alt-A loan resets in May. They are anticipating a glut on the market this spring as others follow this cycle. No bites at all until the end of Jan when they dropped their price to $510 and found a buyer. 15% in one month.

This is the perfect example of the redfin curve Rich is showing for San Diego. It will be real interesting to see what happens this late spring when all those Alt-A and option arms reset no matter what govt help rolls down the hill.

Submitted by 34f3f3f on February 14, 2009 - 3:36pm.

Redfin has got some charts that show differences between listing and selling prices by zip code. I have tried to find the link but wasn't able. Basically, a small handful of zips have apparently sold for more than 2% of the asking price. However, at the other end of the spectrum one zip code was selling for 13% lower than asking. There wasn't much analysis of why this is, except that homes over $1m are more likely to discount the asking price. I would have thought that one way to stimulate sales, and get buyers frenzied and talking again would be for banks to offer a large number of homes for just below current market price.

Found the link for SD http://blog.redfin.com/sandiego

Submitted by SD Realtor on February 14, 2009 - 11:33pm.

I was up in La Costa today. The owner was listing his home at 1.395M and bought the home 14 months ago. While they are selling it at a loss compared to the original purchase price the same floorplan is in escrow for 1.2M. It is one of the models and is stocked with upgrades while the other one for 1.395 has a small set of upgrades. The subject home does have a bit better orientation then the model home but both have very nice ocean views.

Clearly the seller is hoping to get a premium for his home in comparison to the market conditions. I will mention that there was another party at the home viewing it as we were leaving. My clients did recognize the other party from a previous viewing so both parties were there for a second visit.

No way this home should sell for 1.395 or even close to it... Still nothing surprises me at the current time. We will see.

Submitted by Mr. Drysdale on February 15, 2009 - 11:22am.

There's something that everybody needs to keep in mind about these sales and especially the recent comps that are being used to establish the prices on them.

There is enormous pressure being brought to bear on banks and other holders of mortgages to modify those mortgages with well below market rates and terms, and/or to cram down their principal balances, and this is in fact occurring.

This causes prices on sales comps to reflect higher than they really should be. That's why appraisals have a line item adjustment for sales OR financing concessions. However, because these loan modifications and/or cram downs are occurring post sale, the transfer value that is recorded on those sales and used to comp future sales will reflect artificially higher than they should be. The compounding effect of this over time will effectively dupe many into paying more than they should. This is also starting to happen on commercial mortgages because of rent concessions demanded by tenants that are prompting loan workouts agreed to by banks. All of these things create additional opportunities to undermine the integrity of an appraisal. If taken to the extreme measure this socialist administration is apparently willing to do, in the aggregate, it will also undermine our entire economic system.

As many of you already know, there is also an enormous amount of phantom (non-performing) inventory being held by many financial institutions who are unwilling to foreclose for obvious reasons, not that the alternatives are any better, but at least if they wait, they can hope for something magical to occur ; )

When the phantom inventory is released and the extent of concessions made on loan modifications and cram downs becomes known, those who thought they bought REO and got "a steal" are going to be in for a very rude awakening. If you know anybody thinking of buying real estate, please tell them to hold off until the full impact of what I discussed above is reflected in the market.

Submitted by barnaby33 on February 15, 2009 - 1:44pm.

Mr. Drysdale, how do you come by this information? Do you work for a bank or servicing company?
Josh

Submitted by Mr. Drysdale on February 15, 2009 - 4:11pm.

Yes

Submitted by peterb on February 15, 2009 - 5:15pm.

Thanks for this scoop Mr D.! Very believable scenario! It's getting wierder by the day out there. Smart money should stay inside until the storm subsides.

Ms. Hathaway would be proud.

Submitted by thetoygiant on February 16, 2009 - 1:01pm.

I do not think that's 100% accurate that now
is not a good time to buy,There are many newer area's or developments that will get hit hard, but I also think the older more established area's
will not drop a lot more.If someone finds a home they love and can afford go for it.

Submitted by cr on February 16, 2009 - 1:59pm.

So the moral (hazard) of the story is again, buy a house you can't afford, default, wait for the bank to contact you, then work out a cramdown.

That probably takes more recklessness than most here are willing to lower themselves to, given that prices will continue to fall anyway.

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