bostonbubble.com

[CC]

I searched ziprealty.com recently and found there are mainly 3 types of sellers now.

1) Foreclosured properties sold by banks. The percentage is pretty high in certain towns, especially household income level lower than probably around 65k. I think more foreclosures are coming this years, since banks can't hold them forever.

2) Folks bought houses between 2002-2009. The way these people set their asking price is very simple. The price they bought plus 5-10% to cover their agent fee and price negotiation range. It doesn't make sense that they are hoping someone to pay much higher than 2003's price. I guess their agents are not doing their jobs too.

It's also very strange I saw many people who bought in 2008 or 2009 are selling their houses too. If the asking price is around 2001-2003 level, it sells.

3) Baby boomers try to test the water. Because they about their houses so cheap (may refinanced few times), and it's their last chance to cash out, they usually set the asking price so high. Because of the unrealistic prices, no one will even bother to look their houses. But they may have plenty of time and had a great ride, they are just testing the water.... forever.

Any thought?

[john p]

This is good. You have these basic segments in almost all market conditions. Basically you always have a number of those in trouble, those that bought starter homes and want to move into a bigger place or they're relocating or something and the typical empty nesters that are downsizing or relocating. The question is how much of a surcharge are we getting in each segment and why.

Beyond that, you have to study the properties of each segment, the forces that are acting on them, the remedies that are available to them, and figure out the lowest price elevation of that they would sell. Lastly, it is about future projections of earnings.

What I mean by the "properties" is how much fireprotection they have on them. Take a typical seller who bought in 2002-2003, they've had about 7-8 years of nominal salary cost of living increases so they're making at least 20% more than what they were when they bought. I call that affordability reach height; because they've had those years of increases they can more easily clear their hurdles. Younger families tend to get their fastest increases when they are younger and plateau when they get older, so in many cases, those that bought in 2002 are making much more than they were back then. To others, the expenses have outpaced their salary increases. The degree of stagflation or how much an individual has fallen behind, meaning their nominal wage increases not keeping up with their expenses I think relates to the price points in the housing markets. For example, a 60% increase in public transportation prices eats into a lower salaried person more than it eats into an executive who rides into the Financial District. A family with bad insurance coverage could get wiped out with a health issue so they don't have much fire protection and can melt under financial heat. It's kind of like what houses are made of stick and what houses are made of brick. Now another aspect of this is the age and condition of the home. Many say that a home can require 1% of the value of the home for maintenance. Now lets say that a family makes $100k and they own a place worth $300k (3 times their salary). That 1% of maintenance is 3 times their salary so that eats all of their Cost of Living Adjustments if it tracks inflation. Now, many who bought in the bubble years were overpaying for properties that needed a lot of work, so that 1% of the property value for maintenance may have built up over years of neglect so it could really be 5-10% of the house value, if the roof is bad, there is rot, etc. If it is an older drafty building the cost to heat the building can be a killer.

What I mean by "forces acting upon them" would be be how hard the wolf is blowing on them. Or, what force is deflating the bubble and what force is inflating it (the $8k first time homebuyer deal). Unemployment is the biggest lateral force that can blow a building down(deflating the bubble). Wealthier people can be like skyscrapers of expenses i.e. a family belongs to a country club, has a big mortgage, sends the kids to private schools and a job loss can topple it provided that they don't have a very good emergency fund. Depending on when they bought, many can still refinance because of their loan to equity ratio. The last big real estate market correction was in the early 90's and that aligned with job losses. I am actually surprised that 2009 didn't drop more because of the tremendous amount of unemployment. Perhaps many families are under fire but still have fire proofing that can hold them for a year or so. In a building, we design building elements in construction types i.e. one type might require a 2 hour fire protection rating on floors and columns i.e. steel reinforced concrete construction, where unprotected construction has no rating i.e. wood frame construction. On 9/11 the towers held until their fireprotection burnt through and then the heat caused melting and deformation. With 10% plus in job losses, many families are feeling the heat and we might get a surcharge of motivated sellers. Another big force on families is college tuition. Colleges were able to let tuitions skyrocket because they allowed families to tap into their home equity during the housing bubble. The government created a safety net under this by subsidizing colleges so now that people can't tap into their equity, colleges haven't adjusted their tuitions enough so families are struggling. Obama is going to try to subsidize colleges further and redistribute wealth by controlling the process in determining what a family can pay for college tuition. Basically, they will determine what the price tag is for each type of family. A guy making $200k might end up being in the same financial boat as a guy making $75K depending on what the financial aid package looks like (keep in mind that colleges can cost up to $45k per year). The government isn't saying that the poorer family needs to focus on the cheaper colleges, so this is a huge expense that is totally subsidized and administered in a totally socialistic manner (which totally screws up free market capitalism and creates a huge price bubble that still exists). Again, although house prices have dropped about 30% since the peak in 2005, college tuitions HAVEN'T dropped 30%, they've got MORE expensive.

What I mean about the "remedies available to them", that would refer to if they have the ability to refinance or not and live off their equity or if they're under water. The statistic that shows the percentage of homeowners that are upside down will help with this analysis. The amount of pent up demand could be a remedy. If there are enough people out there wanting to buy a person in trouble could sell. I know in Washington D.C. people are buying homes OVER asking price. This is because federal government workers are making more and more money (which is a rant for another day, but important to consider in your analysis). Other remedies for babyboomers is retirement to Florida. A family might take a 30% drop from 2005 peak prices in order to buy a place in Florida for a 100% drop from 2005 peak prices.

What I mean about understanding the price elevation of selling, this is set kind of like how you described in that they need to clear the realtor fees. I wouldn't be surprised to see more homes being for sale by owner due to this. I think people that are just out on a fishing expedition may choose the for sale by owner route. You really have to evaluate the situation you're negotiating in and think about their escape routes or remedies available to them. In a foreclosure situation you have to think about the banks costs and at what point they walk away from a property. Now banks care that house prices don't cascade downward beause it just makes the overall situation worse, but they are selfish and greedy so they might bite at a very low offer (might as well try).

What I mean about future projections of earnings is that people will stretch to pay for something if they think they can "grow into their mortgage". People in the llate 1990's saw huge salary increases. People for the first time were able to find jobs on the Internet and we had an explosion of a new industry in the Internet and with global expansion. Women were entering the work force (fewer stay at home Moms) more and more so families made more and more. The salary increases of this time period provided for the slack that allowed the bubble to lift upward. It ran out of slack in 2006 in Massachusetts and the cost of living and unemployment is pulling it downward. People see that politicans have been doing the poltically expedient thing and pushing the problems down the road as well as weakening the long term financial strcture by making short term solutions that push problems and risk down the road. Policies like creating the Adjustable Rate Mortgages helped poor families for a period but created a tremendous risk in 2008 when a huge wave of subprime were resetting to an unfavorable LIBOR Rate. Although the adjustable rate mortgages were allowed for by legislation pushed by Democrats, and the leverage limits expanded by legislation pushed by Democrats (Commodities Futures Modernization Act) which also allowed for the expansion of Derivatives and Credit Default Swaps, and the encouragement of Subprime lending by the Federal Government and the purchases by Fannie and Freddie of the Subprime and the implicit safety net and guarantee by the US Taxpayer all supported and pushed for by Democrats; despite the majority of this house of cards being built by Democrats, the top ones being bought off by lobbyists ended up being now in charge of fixing the problem. This blame game is important because it helps you understand how almost impossible it is politically for the people in power to do anything because if by doing the right thing moving forward requires them to admit their own mistakes, they won't do it and therefore we have to sit in this pile of shit longer. I mean Paul Volker did not want the Commodities Futures Modernization Act yet it was pushed by Harvard's Lawrence Summers (who is responsible for losing $Billions from their Endowment). Is Lawrence Summers going to tell Obama that he screwed up? That is as likely as Obama admitting to taking the second most amount of political graft from Fannie and Freddie and having Franklin Raines, the worst poverty pimp in US History as a chief aide. Part of fixing a problem is admitting you have a problem and identifying the cause. Politically, the Public blamed the wrong people for the problem and now we are stuck with the foxes guarding the henhouse. As people peel back the onion they realize this and we hope that the people in power do the right thing regardless.

Further, as far as moving forward and future projections of earnings which will help people determine whether or not they should pay 3 times their salary or whatever will be based on how many more economic casualties there will be, and how much taxes they will have to pay out and if we're just buried with this day of reckoning adjustment. This adjustment can be in currency adjustment/ debasement like how we got out of our trade deficit with Japan in the Plaza Accord and later adjustment in the Lourve Accord. China is more powerful than Japan and is less likely to eat from our shit sandwich as Japan did and lost a decade. China, thankfully has a self interest in keeping us afloat, at least until their infrastructure is up and running and their markets become sustainable. The real check we have with China is the internal stresses within China when they will eventually feel their own socialistic and union type forces. The problem is that if someone has a problem with anything, there are a billion in line to take their place in a shitty situation.

Lastly, and this is big to consider, Kenysian Theory is like "Shooting the Moon" in the game "Hearts". It is risky and if you don't make the big stimulus you end up with a huge debt. This is Obama's biggest political challenge. How do you explain to regular Americans that you can spend your way out of financial problems? That is so far out from our vocabulary of rationality that it takes a genius to even consider it. To most Americans, when you are in financial trouble, you don't spend more, you spend less. Having an MBA, I get the concept that when personal incomes decrease the government revenue (based on income taxes) decreases. The Kenysians argue that government ought to turn on the printing press to bring it up to prior levels to prevent deflation. I argue that if the private sector is forced to be more productive, so too should the public sector. If we just take what was trimmed out of the private sector and try to glue it to the public sector, that public sector will get too bloated and make us entirely uncompetitive. This is exactly what the Unions want, to feed off the private sector host, except they are too lazy to actually work in a profit / competitive environment, they'd rather let the income taxes come in and just feed off that until their pension kicks in. What they don't get is that the private sector just can't carry all that dead wood. Cities that have overspent are going bankrupt and the responsible ones are having to bail them out. In the end, it is about values and if we bail out the irresponsible and people take advantage of the social safety net that the good hearted nature in us provide for one another. If the Unions and left wing extremists prevail and we get an entitlement society we will have our own lost decade and I'd be careful about buying anything more than 2.5 times my salary.

What I think we ought to do is strenghten the dollar by increasing competition to China, meaning if an American can get a flat screen t.v. for $200 versus $1,200, that is as good as giving them a $1,000 stimulus check. We have to learn how to make capitalism work for us instead of changing into a socialistic nation. By the way, the reason why South Boston is drifting towards the Tea Party and Republicans is that Ireland is in trouble with an entitlement society and many of the new crop of Irish who come here are tired of seeing lazy people expecting handouts. The problem is that the people wanting handouts are Obama's base so we'll see how things go. I hate to talk about politics, but they absolutely are critical to making the biggest financial decision of your life, buying a home...

[balor123]

If our primary obstacle to competition with China is price (so maybe we don't have to be equal but proportional to our incremental value), then we need to bring the price of our goods down. There are two ways to do this: reduce the cost of living and increasing subsidies, where dropping the value falls into the second category. We're doing neither. We're reducing the drop speed or even increasing the cost of living on an absolute basis and increasing it on a relative to income basis. We could be subsidizing our goods like China does but we're using that precious capital instead propping up our cost of living.

[GenXer]

[JCK]

[CC]

Yes, the listing prices are more realistic this year. I guess sellers and their agents are getting the message.

[Guest]