The Rise of the Desperate Seller

Submitted by Rich Toscano on January 23, 2006 - 11:11am

Today's Voice of San Diego hits on a key driver of home price movements: what they refer to as "desperate sellers"—people who, for one reason or another, need to sell their homes.

To understand their importance, let us first imagine a world without desperate sellers. In such a world, a home price decline of any significance would be highly unlikely. If housing demand declined such that homes weren't fetching the desired prices, most homeowners would just take their homes off the market and stay put. They would, in the words of my friend Gary London, "lock their doors instead of locking in losses." The resulting decrease in the supply of homes for sale would balance out the decline in demand and stabilize prices.

Enter the desperate seller. This person has gotten divorced, lost a job, gotten a new job out of state, had a financial setback, etc. The end result is that he does not have the option to lock his doors and wait it out. He must sell at whatever price the market will bear.

There are always a few such people, of course, but problems begin to arise when their numbers grow significantly. If this happens, supply of for-sale housing does not decline along with demand. There are too many homesellers chasing too few buyers, and the most desperate of sellers are forced to lower their prices to ensure that they are able to sell their homes. This dynamic will continue, and home prices will continue to fall, until most of the desperate sellers have been able to unload their homes. Thus do housing crashes occur.

The optimistic consensus for Southern California housing, whether knowingly or not, assumes that the number of desperate sellers will remain low for the forseeable future. I find this assumption to be questionable. Any or all of the following groups are at risk to enter the "desperate seller" category over the next few years:

  • People employed in the now-enormous real estate, mortgage, remodeling, and construction industries, some of whom will inevitably lose their jobs if the trend towards flattening home prices and declining home sales volume continues.
  • Holders of adjustable-rate mortgages whose payments will increase if interest rates continue to rise.
  • Holders of negative-amortization, interest-only, payment-option, etc. mortgages whose payments will eventually increase whether interest rates rise or not.

The above list is certainly not complete (now that the flood of new home equity wealth is drying up, for example, BMW salespeople might want to start working on their résumés). But it makes the point: the number of "desperate sellers," while still quite small, could grow substantially over the next couple of years. Should this occur, it is highly doubtful that California home prices will remain at their rarefied heights.

(category: )

Submitted by teatsonabull on January 23, 2006 - 1:37pm.

From within the Voice of San Diego post comes this gem:

"Indeed, Sharon Hanley, a Realtor in Oceanside who compiles a weekly report on sales activity in San Diego County, said sales traffic on new homes has actually picked up in the last week. Sales were "par for the course" for January, Hanley said, indicating that the market was actually picking up.

Hanley's advice to desperate home sellers was simple: Get a reliable broker.

She said many sellers have been hurt in the past by self-interested brokers who represent to buyers that a seller is in a difficult situation and will take what they can get for a property. This creates a breakdown in the fair supply-and-demand factors at play when selling a property, she said."

How about changing that last paragraph to read more like this?: She said many BUYERS have been hurt in the past by self-interested brokers who represent to buyers that the BUYER is in a DANGEROUS situation and SHOULD PAY what they can for a property. THIS creates a breakdown in the fair supply-and-demand factors at play when BUYING a property."

BOO, F*ING,HOO for the sellers!!

I for one will be dancing a jig on the financial "graves" of the greedy Sheeple when this whole thing plays out. BTW--I keep bumping into people who are just now closing on investment properties in AZ or somewhere...ask your friends and neighbors...everyone is doing it. Yet another sign of the impending collapse of our financial system as we know it today. (In many ways this may be good, although I am sure it will cause ALL of us pain.)

Submitted by theplayers on January 23, 2006 - 2:58pm.

I also find the assumption questionable that the number of "desperate" sellers will remain low. In fact, I believe these desperate sellers, along with speculators, will be the biggest factor in home prices falling in San Diego and other bubble markets.

I have a few assumptions of my own. There were about 116,000 homes and condos sold in San Diego in 2004 and 2005. If 82% of those purchases used "creative" loans such as adjustable-rate, negative-amortization, interest-only, payment-option, etc., then we have about 95,000 buyers living on the edge. We don't how many of those buyers had to stretch themselves to buy the house, but we'd have to assume most, otherwise they probably wouldn't have used creative lending.

So how many of these buyers will be able to afford it when their loans adjust, and they have to immediately start paying significantly more each month? They won't be able to refinance if they don't have equity (a very real possibility, especially since many put no or very little money down). Even if they sell, many will lose because of a lack of appreciation, transaction costs, etc.

And I didn't even include another class of homeowner, the ones who have been borrowing to the max against their home as they've seen their home values increase over the last 5 years. Many of them will be upside down when home prices fall, and if they become a desperate seller (i.e. because of losing their real-estate related job when things slow), they're screwed too.

And then there are the speculators (estimates range from 25 of 40%, especially in downtown SD). I'd guess that they will be some of the first ones out once they realize that the good ole days of appreciation are over. They can't even get close to covering their costs by renting out their investment, so their options are to continue losing each month or sell before their losses mount even higher; they will become desperate too.

If even just half of the 95,000 become a desperate seller, then we'll have 47,500 homes for sale in San Diego. That's an incredible amount of inventory! Granted, not all of those homes will go onto the market at the same time. It will likely drag on for years.

Meanwhile, all of these sellers will be competing against each other, needing to get out fast, dropping prices, while buyers sit on the sidelines, too afraid to buy in a falling market during a recession.

Submitted by powayseller on January 23, 2006 - 3:35pm.

All it takes is one desperate seller per subdivision to drop the price for the entire subdivision. A realtor at the office of Diane Kane (who was quoted in the article) told me of two listings in Poway, where the seller took about 10% below list price, and now the comps are down for the entire very large neighborhood. These are tract home subdivisions, where each home is the same.

There is also a group of sellers, who might be uncomfortable with their large mortgage payment. I fall into this group. We bought in 2000, after the runup had started, and were forced from a 15yr mortgage in Phx to a 30yr mortgage in SD. We bought one of the cheapest houses available in an area of good schools for our kids. Still, the payment was only slightly more than we liked, but with no car payments, it was okay. I didn't like having a 30 yr, bec. ultimately we wanted to have a home that was paid off, and with the 30yr mortgage, the home would not be paid off when my husband retired. I think anyone who bought after 2000, unless they had equity from a San Francisco sale, may be uncomfortable with their loan or their payment. Take a job loss, a pay cut, or an emergency, and those people could be desperate sellers too. Only because we all had to stretch ourselves to buy any house at all.

Submitted by Steve Smith on January 23, 2006 - 3:35pm.

Instant Discounts

Was at a PB open house yesterday...

- 33 days on the market
- 1380 permitted sq ft on 3000 sq ft lot.
- needed serious remodeling
- listed asking price $960k to $1M

With in 10 minutes of arrival and saying nothing about the high price, realtor approached and said the owner would take $850k and suggested we just 'make any offer'. Family cirumstances was forcing the sell... Nothing like the instant $150k+ discount!

PS. Every home we looked at yesterday was vacant...

Submitted by barnaby33 on January 23, 2006 - 3:59pm.

Even in really bad times, real estate was not cheap in SD. The prof always talks about income to price ratio and its always been pretty low here. I know of very few people who came to SD, even in the 90's that didn't have to stretch beyond their comfort zone to buy. Of course if you bought from 94-2k, you probably feel pretty secure now.

My mom living here in the 60's when her first husband was a grad student at UCSD, back then she trucked all the way out to Clairemont to look at houses, and dammit if they weren't 50-60k. On an income of 8k for her and his stipend they just couldn't swing it.


Submitted by teatsonabull on January 23, 2006 - 4:51pm.

I'm not sure what your point is Barnaby, however my take is that you are in the "plateau never go down" camp. Dude...the ride is so OVER. If I read you correctly, that is. Now is the time when we begin to watch our friends and family BURN UP in the aftermath (lots of good people will get burned). Even after a 40% drop (which is coming) San Diego will remain "not cheap" as you put it. I don't disagree with that point...however make no mistake--this will end BADLY for a large number as house prices( a.k.a. the retirement account) collapse. The old adage "it's different this time" NEVER, NEVER rings true.

Submitted by MANmom on January 23, 2006 - 4:59pm.

Here's one for the "prices never go down" crowd...I know of a friend who was transferred from SD and sold his house in April 2005 for over 1 mil. The bank bought him out but the buyer eventually backed out. My friend, however, had his check and left town. The house is now owned by the bank and is currently still for sale, 9 months later. The same friend did not like where he was transferred to and will probably return to SD, where low and behold his old house is now listed for $899,000. I wonder if he will buy it back for a profit???

Submitted by LookoutBelow on January 23, 2006 - 5:09pm.

The thing that I personally think is so funny, is all the current sellers think that ALL the future buyers are dipsh$ts and dont, or are not reading the same things they read ! Haa Haa Haaa !

I know at least 5 people who havent bought yet and WONT because they see the top of the market and refuse to be the last sucker on the hook. I see inflation for the first half of 06 and DE-flation for the remainder. Its gonna be bad folks,,, depression bad... I think.

Submitted by LookoutBelow on January 23, 2006 - 5:20pm.

I also want to comment on one more thing, there are lots of "desperate sellers" out there and there's going to be more and more, ARMS going up 2-3 points will make a LOT of new "desperate sellers" too. But these are the same schmoe's who were "desperate BUYERS" too. It was their overstimulated greed (or irrational exuberance as Greenspan puts it) and lack of due dilligence and common sense that compelled them to buy at such high, and going higher prices. I know a few Qualcomm EX-millionaires too ! They were convinced it was heading for 800 bucks per share ! Haahahahaaa

Anytime something doesnt pass the "Smell test" forget it ! Next time maybe they will turn off the TV and think for themselves, I have ZERO pity for these poor souls that will get wiped out on this. Real estate and mortgage debt are like playing with fire!..Not like stocks or Vegas losses, YOU pay for this for 3,5,15--30 YEARS ! Even my 22 yr. old college student daughter knows that ! When these greedy Bast@rds are on the rampage and looking for someone to blame their misfortunes on, they only have to look in the mirror and kick THAT persons a$$ !

Submitted by unclepappy on January 23, 2006 - 6:36pm.

Doesn't anyone take into account such things as continued pay raises, pooling of money and assets, and good ole' American know how?
Come on all you doom and gloomers the sky is not falling as of yet....
We live in a beautiful area of the country, yes there might be some small resetting of prices, for the most part these prices are justified or people wouldn't pay them? It's not like the market all of sudden just shuts down, there still buyers and sellers out there.
This will be natural correction in the market.


Chicken Little

Submitted by Blissful Ignoramus on January 23, 2006 - 8:25pm.

Well, Barnaby does have a point of housing in SD being historically expensive. This NY Times article summarizes it nicely:

Affordability in SD is actually right around where it was in the early 1980s.

Of course...

1) Affordability was a serious problem in the early 1980s!
2) The problem in the early 1980s wasn't just high prices, it was mortgage interest rates in the mid-teens. Now, interest rates can only go up, so that means the only way your property will become more affordable is if prices go down.

At the same time, the lowest the percentage income required to purchase a home has been in San Diego since 1979 was 25.8%, in 1996. That's still above the CURRENT national average.

It all comes down to "you get what you pay for". If you want perfect weather and beautiful surroundings, you're going to pay a few bucks for that. I don't think it's worth it to pay 55% of my income in mortgage to live anyplace, but 35%? Yeah, I could deal with that.

Submitted by Steve Smith on January 23, 2006 - 9:17pm.

'for the most part these prices are justified or people wouldn't pay them?'

Not when the buyer hasn't a clue what they are doing financially. I have an employee who bought a home recently using stated income when their mortgage broker sold them on the idea that ownership was desireable at any cost.

He is currently paying minimum payments on a neg amor loan with less than 3% down. When you sit down and do the math, in 5 years his monthly payment will be over 80% of his familiy's net take home. This includes an annual 5% raise on his $45k base salary, his wife is on disability. They have two children, one starting college next year...

So you see the idea of 'price justification' is badly skewed becasue there is no grasp of the financial fundamentals.

Another example of how loose lending practices lead to bloated pricing... At the open house yesterday they offered 'payment options' flyers to the prospective buyers. They suggested doing 10% cash and a 10% 2nd to meet the down leaving a $680,000 loan. Minimum payments on the Option ARM are at $2175 the 1st year, increasing to $3000 in year 5. Conversely, a conventional 30 year fixed comes in at $4750. Assuming you have the $85k available for the down, the income level to qualify (using the 28% rule) is just about $105k/year.

For the conventional loan, about $210k/year.

So these mortgages, focused solely on payments, are encouraging home buyers to purchase beyond their means and driving prices. Have you ever gone to buy a car and the salesman tried to sell you on the monthly payment rather than the purchase price? It's one of the oldest tricks to get you to buy those high profit margin options at what is perceived to be little cost.

I'm not falling for it.

As for pay increases keeping up with pricing... Let's say that couple that buys the home I mentioned above. They make a combined $110k. 5% raises over the next five years takes them to $127500. They are now taking home an extra $1000/month. Guess what, the increase in their 'minimum payment' is $900/month! So those raises, worked so hard for, are just helping you tread water financially... and that's just the minimum payment. Want to shoot for the daunted Interest Only plan? Tack on another $1000/ month.

God forbid a layoff, family illness or divorce. What a nightmare.

Submitted by teatsonabull on January 23, 2006 - 10:02pm. would appear to me that we are getting a LOT of trolls on here....which is yet ANOTHER INDICATOR that the "sky" truly is falling else they would be watching "Flip that house" or filling out more phony and fraudulent "liar" loan applications for their 10th "investment property" along the train tracks in San Pedro or some sh*t.

Ha, F*ing HA...all you "can't go down from here" fools are all F*ed and you know it!! If you are reading this...ask yourself WHY and then go list your house for sale b4 it is too late. OOPS! Sorry. That time is OVER..I forgot!!

Submitted by powayseller on January 24, 2006 - 7:58am.

Steve, you said your employee's mortgage broker convinced him about the loan. I have been telling almost everyone I meet now why we sold our house - the housing bubble. Most of the time, the first question people ask is, "Are you a realtor?" or "Talk to my realtor friend for advice on what to buy now". For some reason, the realtor is held in high esteem as a knowledgeable professional. Probably the same for the loan officer. People believe their optimistic forecast.

The CAR website even claims we have a housing shortage and their economic forecast predicts a 5% rise in home prices this year. With talk like this for supposed experts, it's no wonder that people w/ little interest in finance are just following the guidelines of the "experts".

That's the only reason anyone would still buy a house.

Submitted by barnaby33 on January 24, 2006 - 10:37am.

I didn't mean to imply by any means that I think prices will stay flat. I just wanted to inject a little historical perspective. The point I was trying to make, albeit badly was that even when prices decline we will still have a huge structural imbalance in housing. For instance, how many times in San Diego's past has it been cheaper to buy than rent? I don't have the figures to back it up, but certainly in my lifetime I only know of one period, the early 90's.

Much like the prof, I don't claim prescience, but intuitively I feel that the coming storm will be fairly awful for owners, and renters alike. No one is going to escape this completely. I for example will probably take a big hit in my stock values, which in turn will lessen the amount of money I can put down when I buy.

A bit of gloom and doom is fine, but just a bit.


Submitted by Doofrat on January 24, 2006 - 1:15pm.

Good point Powayseller. Listening to a realtor or mortgage broker's "market analysis" is like walking onto a car lot and asking a salesman "what do you think I should buy and how much will it cost me?"

The difference is that a bad deal at the car lot will not bankrupt you, and the finance guy is only going to tie you down to payments for 5 years.

The realtor is a salesperson, and that's it. People are treating these salespeople like they are financial planners, or market oracles. Regardless of their motivation to sell overriding their own personal opinions about the market, I wonder how many of these licensed salespeople were minted during this housing price boom and really believe that housing will keep going up, or will just "flatten out"? How many of these salespeople remember the times in the early 90s when nothing was selling and houses were on the market for years.

Submitted by unclepappy on January 24, 2006 - 2:42pm.

Very interesting comments today, but it does sound like most of you read the daily reckoning and alike. Great entertainment but a little far off from reality.
Help me out here brothers and sisters, the last time we saw a nationwide decline in housing prices was in 1933 the great depression. Do you really think we are heading that way, and if so what kind of evidence do you have to back it up?

Chicken Little

Submitted by powayseller on January 24, 2006 - 3:36pm.

UnclePappy - great question. I wondered myself what could happen to housing prices, so I checked the data on the history of housing prices in San Diego. My quest led me to this website. If you look in the upper right corner, "A Bubble Primer", you'll find Dr. Piggington's extensive analysis, going back to 1970's, of the local housing market. Read that, and I'd love to hear your thoughts. On the basis of that data, we sold our house after having lived in it for only 3 months.

Submitted by unclepappy on January 24, 2006 - 4:33pm.

So that begs the question, what do I do (being a average joe) after I sell my home? Do I rent for the next 3-5 years? Do I move to another City where prices are so crazy?
Just out of curiosity, why did you buy in the first place?
I'm not from SoCal, but I'm still a Westcoaster (Seattle) and the way I see it so goes housing goes the economy and California is a leading indicator of both.
Put that in your pipe and smoke it!

Chicken Little

Submitted by Blissful Ignoramus on January 24, 2006 - 5:16pm.

While the bubble might be bursting now, I wouldn't count on affordability returning in a 3-5 year timeframe. For one thing, even if prices drop, affordability might not improve, because rising interest rates could easily make up the difference.

If I had purchased a primary residence in California that had appreciated greatly, I would resist the temptation to cash out unless I really knew I had a good alternative. Basically, if I bought a house for $300K in 2000 that I could sell today for $700K, I'd be operating as though I could sell it for $400K and be damn happy with that.

Now, if I 1) were professionally geographically mobile and 2) knew very well that I could live some place else and be just as happy, I would consider cashing out and moving elsewhere, and thinking about returning when things get back to normal. But I wouldn't bluff.

Submitted by sdduuuude on January 24, 2006 - 5:22pm.

I can't really say I like this "Voice" article. I am a believer in Rich's old motto - "IN GOD WE TRUST. EVERYONE ELSE BRING DATA." This article had no data, only unsupsported guesswork, which is what Prof. Piggington has always tried to avoid.

Yes, I understand the desparate seller. Yes, I agree that many conditions exist to create lots of desparate sellers in the future, but I don't see anything in this article to suggest they are actually out there selling now.


Submitted by Doofrat on January 24, 2006 - 7:11pm.


First, it's great to have some differing opinions in here finally, nothing like an open mind and a difference of opinion to create an opportunity to learn.

Second, I think that the bubble primer shows almost indisputably that the San Diego (or SoCal) market is way above it's fundamental value. The Professor does a great job using cold hard facts to point this out. I don't know how anybody could read the primer and not come away seeing this.

Third, I think that trying to guess when, what, and how much the bubble will pop is impossible to figure out, there are too many factors involved (psychology, world events, etc.), but it sure is interesting to try and speculate about all the various possibilities. I think that the desperate seller article is great (regardless of it lacking data) because it points out some of the factors that can't be distilled into numbers:

Think about this, say you're a owner who bought in 2004 for $450,000, and now it's mid 2006 and your house is supposedly worth $575,000. Now let's say any of the following factors happens: Death, divorce, job loss (either spouse), relocation for that dream job (either spouse). Let's say the market has slowed in mid 2006 and that's when you're trying to sell it. People look at it, but you don't get any offers. The timeline of your move or divorce is coming up and you haven't gotten any offers. You can lower the price all the way down to $450,000 if you have to to sell it, and you will, you'll lower it as much as you have to, the market demands it. Once you sell (at say $500,000 - $50,000 profit to boot), you have just lowered the market in your neighborhood by $75,000 to $500,000.

The point is not that everybody is a "desperate seller", but some people are, and in a slow market, they could be a factor in bringing the prices down even though you can't place a number on it.

Submitted by unclepappy on January 24, 2006 - 7:36pm.

You have an excellent point when it comes to deflating housing prices, however if the seller originally had the listed price at 600k and had to fire sale it at 450k and he found a buyer at that price it doesn't necessarily mean that's the current market value.
It was an anomalous transaction well below market
value, or in other words the buyer stole the property.

The next transaction could be well above that. The market is set when a buyer and seller agree on a price and no one else objects to it. Obviously the neighborhood doesn't like to see a transaction take place like that but hey it happens every now and then.

The problem you run into is when you've got multiple properties up for sale with no buyers in sight and you have to keep reducing your listing price to attract would-be-buyers. This would be a true market correction in the sense that you are reducing trying to meet the market. Yes yes!

Thoughts, comments????

Chicken Little

Submitted by Steve Smith on January 24, 2006 - 9:16pm.

'doesn't necessarily mean that's the current market value'...

True, but in the reverse case, where that house sells for a greater amount than the going rate it is viewed as the 'new standard' that all comps should be held to.

Doesn't this happen on the way down as well?

Submitted by barnaby33 on January 24, 2006 - 9:20pm.

Nope, on the way down its every man for himself!

Submitted by powayseller on January 24, 2006 - 9:24pm.

unclepappy - we bought in 2000, after a move from AZ. We had hardly any equity, and barely eked in to a 30yr mortgage. At that time, we had no idea of the housing bubble, and thought CA houses just cost more because of the desirability of living in CA. I had not researched past pricing cycles. We lost our house in a fire, and rebuilt, moving in last fall. Then we sold. Now we are renting until the market corrects. It's amazing how many rentals you can find. Since 30% of purchases are by investors (some flip, the others rent out in hopes of continuing appreciation), there are rentals in very nice neighborhoods. We lived in one of the premiere Poway neighborhoods for 2 years while we built our house, renting for a fraction of what the lady paid on her mortgage (she had purchased the house a month before we became tenants). I think renting a house is a great option for a family, and if you care about the school district, there were at least 30 houses for rent in the Poway school district in December. This summer there should be a lot more, so we may move again this summer to get into a better location.
Yes, when the real estate market corrects, so will our economy. SD is completely dependent on everything we make and do here: real estate, and consumer spending from home equity withdrawal.

Submitted by powayseller on January 24, 2006 - 9:57pm.

All it takes is one seller to sell at a lower price, to bring down the comps for the entire neighborhood. Realtors check the most recent sale prior to writing up an offer for their buyer. Their eyes light up when they find that diamond of information: the house down the street from the one the buyer wants, just closed last week for $890K, whereas the list price on the buyer's desired house is $999K. Guess what: now the buyer will offer $850K. And every other buyer will do the same. Chicken Little, if you talk to a realtor, they will tell you this is how it works. Furthermore, they keep an eye on sales near their listings; my realtor told me she had a listing in Sabre Springs at $1mil, but a house down the street, identical, just closed escrow at $875K or something like that. She's real worried for her seller, but did not know yet if the seller would lower her price. I experienced this same strategy when I sold my house: the buyers' realtor said the prices are going down, so she deducted 5% from the last sale (August 2005) to come up with a firm and final offer which was below my list price by $50K.
Rich's opinion piece was Opinion, anyway. It was clearly labeled as such, to distinguish it from the data-driven analysis he usually does. I find it usefull to offer opinions, because to forecast the future we have to make inferences based on the data. As long as it's labeled editorial or Opinion, everyone is clear.
Chicken Little - do you think housing prices will continue to go up?

Submitted by Steve Smith on January 24, 2006 - 9:59pm.

I agree, but most sellers are probably unaware of the personal situations of fellow sellers... their perception of the market makes its own reality.

In this market where you may have $250k+ in equity due to comp increases, are you willing to take the 'sure money' and run? aka Millionaire, or stay the course against competitive sellers. I personally would stay the course (with a good product), but it always amazes me how people playing with 'the house's money' (to use a Vegas term) cut and run with the sure profit rather than go for a home run...

Submitted by unclepappy on January 25, 2006 - 11:31am.

To answer your question, no I don't think they'll keep going up at the same pace. In fact you all will probably see a small correction then a flattening out.

Unless something big happens with fundamental change (akin to what happened back in the early 90's with the massive layoffs in SoCal) I think the deflation in housing values will be fairly small percentage (5-10%).
Or in other words a natural correction.
-Chicken Little

Submitted by LookoutBelow on January 25, 2006 - 7:07pm.

Home run Steve ?

I have numerous friends who paid mortgages on their newly bought homes in 1991-93 and watched their neighborhoods tuen into rental neighborhoods and all that entails !

It took 11 years for the house to appraise to what they paid for it originally. How long do you have to be alive to hit a home run ? Theres a LOT of variables in that kind of time span..... I say "Sell out and take the cash" Ooops...Of course its too late now but my brother did last year and pocketed 300G's in 10 months on a home in Scottsdale, thats life changing money there.....The new buyer never moved in and STILL has it up for sale, almost 1 year later...does the theme song to Titanic come to mind here ?

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