bostonbubble.com

[melonrightcoast]

Hi all. My husband and I were discussing real estate the other day, and I was surprised that he is thinking that the market is starting to turn around and that he thinks prices will continue to increase from this noticeable spring bounce. So I asked him: "Why would prices go higher?" He had a blanket answer of: "The economy is starting to pick up a bit... ". This was my rebuttal:

1)unemployment is still very high
2)lending requirements are still tightening
3)interest rates for mortgages have gone up
4)salaries (and especially bonuses) are decreasing, which means the money for large downpayments is running out

He acknowledged that all those were very good points for why the market would continue to go down, but he still thinks prices will continue to increase because the demand for homes (in our town) is greater than the supply of homes for sale. I have to admit that is true, but mostly only in the "low price range".

I just did a very informal look at 10 houses that sold for between $800 and $1M this year, and three had jumbo loans, two had conforming jumbos at the $465K limit, and the rest (five) had mortgages of $417K or less.

My hope is that the people with these $400K downpayments will start to disappear/dwindle due to the loss of huge bonuses at law-firms and financial services, therefore putting further downward pressure on prices by removing half the market in the upper end, which would eventually put downward pressure on "mid-range" homes at $500-$700K and "low-range" homes at $300-$500K. I guess I'll just have to wait and see .
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melonrightcoast ... are you?

[balor123]

$400k for a downpayment? That has to come mostly from sale of a previous house.

[melonrightcoast]

yes, probably, but not always. who makes a $400K profit on a house in 2008/2009? People that bought a home in Boston before 2000. Or, people that bought a home in CA or FL before 2002. Of those people, I would think that it would only be the Gen X demographic currently buying a big house (for their growing kids), as opposed to the young Baby Boomers whose kids are about to go to college. And Gen Y wasn't really old enough to buy real estate pre 2002.

so hopefully for me and many others not wanting/not able to spend too much on a house, these people that have $400K for a downpayment are an extremely endangered species.
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melonrightcoast ... are you?

[GenXer]

The media is working overtime (along with the Fed and the government) to convince people that everything is back to normal. It is not. Your husband has a 'hunch', but it is not because he has done a lot of research. You are the analytical one, so I think he should listen to you more.

Fundamentally, we are just waiting for the next disaster, given that the printing press is working overtime, guided by the teleprompter. The next disaster could be the prime loans driven by even higher unemployment figures. Think of all those graduates who get out of school and who can not find work. Think of all the mortgaged parents who will pay 50k a year for their kids college (boomers, mostly). Nothing is picking up (only the press' attempts to show that a seasonal rise in house sales and a random drop in unemployment rate has anything to do with a prolonged recovery).

Your statistical 'study' is biased. To do proper analysis you'll need to study 1000 or more houses spread out across the whole spectrum of prices. This is because the market is not made by the top 1% of all houses. If the general demand collapses, this will translate into various losses which will carry over into the top 1% as well. Although if you have 100 millionaires living in 100 houses, they may be able to survive a recession, so you may be out of luck if you want to buy in Weston or Wellsley.

From anecdotal evidence I've gathered, most of the foreclosure purchases and some of the high end ones are done by investors who have been buying all along hoping to make money on a recovery. We are yet to see any significant sales of houses in the area (the inventory is 1/3 of the usual one).

It is true that there may be artificial 'demand' because of the Eastern Block Mentality, but this is not an indicator of anything but the fact that there are very few houses for sale, and people are willing to overpay in the meanwhile. This may all change in a year or two.

[balor123]

[melonrightcoast]

GenXer wrote:

[WestCoastXPlant]

[GenXer]

Heh, I actually meant something else by "Eastern Block Mentality". More like making a choice while having only a limited inventory. So for example, if you only have 2 houses to choose from, you pick #1 of #2 (or pick nothing at all). But if you have 1000 houses to choose from, you have a much better spectrum to fit your budget. So, some people are so narrowly focused to buy a house that they are subject to a mental block I call the 'Eastern Block Mentality' (basically, down there you did not have a lot of choices in the supermarket - mostly canned fish of some sort, this is why I like this analogy). Instead of stepping back and saying, hey, this inventory sucks, I better not waste my money and overpay for a limited inventory, these people make bad choices with the very limited and overpriced inventory they have. Mind you, they are NOT living in an Eastern block country! They do not have to make this their choice, but they end up doing just that because they fool themselves to believe that this is the only choice they've got (forgetting that they also have a choice not to choose!)

Being optimistic in the face of reality is like a mild case of 'Eastern Block Mentality' of sorts. Wanting to see choices where there are none, or overestimating the payout while underestimating risk. At least, people need to be more sceptical and not be swayed by emotions. Easier said than done. When the risk of loss is high and the amount can break us, we can not afford NOT to consider the flip side.

The problem with 'biased' statistics is that the outcome is not always useful for reaching a conclusion. If you bias yourself and you do not correct for it, you may draw an inference from your sample that is wrong. For example, we don't know who bought those houses for $400k down. These could have been bought by investors. Not very representative. A 153 house sample is much better.

[GenXer]

Hey, I'm an optimist (sometimes). But you have to ask yourself. Is the downside bad enough that you may want to become a pessimist for a change? You can not take an optimistic view of everything. Sometimes it pays to be a pessimist!

[melonrightcoast]

[WestCoastXPlant]

Heh, I only have two things to add:

Group 1. is probably still not buying in the immune towns -- I'm not sure that if you were an avid saver and a bubble head you'd consider prices in these locations "affordable" today. Then again we live in the world of Quantative easing, so maybe they are Id be real nervous to sit on 1/2 mil in cash right now.

[GenXer]

To make you feel better, imagine this scenario. Some chap got lucky and won a million dollar lottery (or cashed some stocks, or got a property for free, or made some money another way). If you imagine the chance of that happening again - I'd say pretty close to 0 (or something small, that it is probably negligible - they may just as well lose money next time). If somebody is not likely to get the same 'windfall' again, you be sure that they will most likely average out to whatever their 'expected' savings rate is (which is negative), even if they get a big boost by luck alone. This is why we always hear about this person or that who lost all that money they had. Easy come - easy go.

So, what is the moral? Only the true savers will win in the end. Those who have high paying jobs are also on borrowed time - this recession will test the longevity of such jobs (and their subsequent replacement with lower paying workers). Some jobs simply disappear, so there will be a lot less of them. Yes, some banks are paying bonuses, but we are not done with banks going out of business, and many of these bankers will have to find other line of work, which does not pay the kinds of bonuses.

So, the scenarios you describe can happen, but the likelihood that these people run out of money while consuming (and trading up) is very high given this recession, so as I mentioned before, waiting patiently for your moment will in the end be justified. True savers are probably a small fraction of all house purchases, simply because they wait a long time to buy, and if they do, it probably will not be a 1M house, just because they saved 1M.

[mpr]

[GenXer]

http://www.businessinsider.com/henry-blodget-next-up-in-the-housing-crash-mcmansions-2009-6

[mpr]