This interesting question over at patrick.net on the F word (Fear).
The human behavior aspect of the late great housing bubble will be a fascinating study down the road - and two words come to mind - Fear and Greed.
Fear drove renters to get into a house or forever be priced out of the market (or so they thought). Greed drove people to buy more than one house, trade in a perfectly good house for a much more expensive one on the hopes of making a killing, and greed drove the entire REIC I'd say.
Now Fear has gone the other direction - people are now panicking, canceling their builder contracts, putting their home on the market as fast as they can, and fear is stopping new home buyers from even thinking of making an offer. Here's the post:
We've talked about the fear/greed cycle that drove the RE market for the last few years. The big fear, as discussed before, was usually about being priced out forever. People jumped into the market because they were afraid not to.
But now the fear is going in a different direction. People are afraid of losing their homes, their equity and their jobs. We're already seeing panic selling here in certain parts of Ca. And the news is offering up daily stories that stoke the fear of the FB's.
What affect do you think all this fear is going to have on the RE market in the near future? Are you afraid?
August 25, 2006
Fear and the housing bubble
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9 comments:
...and fear will lead to savings - that will lead to reduced consumer spending - that will lead to even a harder crash -
...and the beat goes on.
retailer stocks are the next group to get killed as consumers hunker down in fear
watch listing traffic on ebay too as they try to raise cash
For all of you with experience, here is a question for you. I own a rental house, and a few months ago worked through the numbers with an accountant and determined that, at the present rate of appreciation combined with the increase in equity due to paying down the loan, it will be soon possible to sell the house and pay off my residence.
With the housing bubble now rapidly deflating, the dilemma is: Should I sell now while prices are at (or near) their peak?
Points to consider are:
Positive:
+1. This is the Seattle area, where the bubble hasn’t burst as badly as say, in Phoenix or SoCal. So prices aren’t declining yet. (Some people here say that because there is little land left between the Cascade Mountains and Puget Sound, and since people continue to move to this area, RE won’t take the hit that it is taking in other parts of the country. However, I am skeptical of the old, “It can’t happen here” mentality.)
+2. It is a starter house, at the lower end of the price range, so theoretically it should be easier to sell than a McMansion.
+3. The house next door, which is comparable to mine, just sold for a remarkable price. If my house sold for same amount, I would be able to pay off my residence today.
+4. While the tenants are very good renters, there is no guarantee how long they will continue to stay. If they moved out and a problem tenant moved in, maybe I would end up evicting, swear off being a landlord forever, throw up my hands, and sell the house. But given Murphy’s Law, the timing of all this would probably be when RE prices hit rock bottom.
+5. Making the monthly mortgage payment on my residence (purchased in 2001) is a difficult burden. It necessitates a 2-hour one-way commute (including crossing Puget Sound on a ferry) 5 days a week to a higher-paying job north of Seattle. Reducing an $1850 monthly payment to $350 (still need to pay taxes & insurance) would allow me to find a lower-paying job closer to home, which would greatly improve the quality of my life.
Negative:
-1. Again, the house is currently rented to very good tenants, who have lived in it for five years. The rent, plus $40 out of my own pocket, pays the mortgage, taxes, and insurance each month. So, every month that the house remains rented, the tenants pay down the mortgage principal by approximately $600.
-2. The house will be paid off in another ten years, after which the rental income will be a steady source of income for me. If I sell now, will this be like killing the goose that lays golden eggs?
-3. Even in the Seattle area, the housing inventory is increasing and they typically are sitting on the market longer than in the past. If I decided to sell the house, first the tenants would need to vacate the place; then, if it sat empty without selling for an inordinate length of time, I would be stuck with two house payments each month, as we slide into another gloomy, wet winter.
-4. There have been discussions on this board about the ethics of selling a house at such a high price, which effectively places an enormous weight on another person’s shoulders. The reality is that if I sold this house for what I paid for it, the likelihood is that a flipper would buy it and then do just that, while making a quick buck. Why should I do him this favor? That being said, while I am no holy roller, it would disturb my conscience to kick the tenants out of the home they have lived in for the past five years. However, given a choice of (+5) above and this, I would of course choose the former.
Now, many you people have already wrestled with the decision of whether to sell or not to sell your homes. Given the points listed above, what would you do if you were in my shoes? How to weigh the positives and the negatives? Please give this some thought before responding, and justify your recommendation.
Thanks,
Mammoth
Mammoth, ferget ethics. It's your money and your life.
mammoth -
You have sissed the peak by six months. Selling into a declining market is very tricky. If you set a price too high by even 10%, half of prospective buyers will never even look. The asking price has to be just right because the way things are falling apart even six months on the market could kill a big chunk of your profit.
Mammoth, you say:
"2. The house will be paid off in another ten years, after which the rental income will be a steady source of income for me. If I sell now, will this be like killing the goose that lays golden eggs?"
++++You've missed the peak to sell this house. Keep the goose; you'll appreciate its golden eggs when you retire....
one possibility is to give the current renters a new possibility - rent with option to buy
mammoth,
Can you give some context to your question by listing the purchase price/year of your rental house and the current estimated value?
I am currently seeing the downturn here in S Calif. I moved here from Kirkland a few years ago. I agree, Seattle area is lagging the trend (started about a year later - but the "final frontiers" could stop on a dime depending on the finances of Cali investors). I think you still have time to sell at close-to-peak prices if you decide to.
Your quality of life concerns would weigh in heavily if I were you. There will be opportunities to be had in the future. You might want to take your gains off the table and wait.
Anon Saturday, August 26, 2006 5:10:42 PM said:
“Can you give some context to your question by listing the purchase price/year of your rental house and the current estimated value?”
Purchased for $126,500 in August 1997. Turned it into a rental when I moved to this current residence in June 2001. The house next door sold for $317,000 in June.
Thanks for your comments
- Mammoth
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