November 15, 2006

Running away as fast as they can - Home Buyers Back Out Of Deals in Record Numbers

I'll say it again. Anyone buying a home in America today is a fool. But it looks like most people have come to terms with that, and are walking away from deposits so as not to make the worst financial decision of their lives. Bravo.

It's always fascinating to watch the end of a financial mania, where the object of desire (tulip bulbs, stock) that was soooooo desirable just a few hours ago is suddenly seen as simply disgusting.

We're there with housing. From "Manias, Panics and Crashes: "The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king."

Now here's an update from

A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.

With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves.

At a semiannual housing forecast conference in Washington, D.C. recently, economists reported that contract-cancellation rates for big builders were running around 40 percent — about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.

"There are a whole lot of people running from contracts," says Alexandria, Va., real-estate attorney Beau Brincefield.


Anonymous said...

You're right. Every time I check out house prices I get a faint nausea. The "Marie Antoinette, let them eat rent if they can't afford my asking price" house owners have a big surprise coming.

I'm going to be cheering as their financial heads tumble into the basket.

Anonymous said...

Even if prices flatline, the flippers and ones dreaming of quick returns on a 2nd home investment will just not buy anymore.

Given that during this bubble, I would say at least one out of every 4 homes was bought simply as a speculative play, not as a longterm investment or to live in.

Now its going to be a mexican standoff between sellers refusing to lower their asking prices and buyers who will refuse to pay bloated asking prices that in no way reflect reality.

The sellers will blink first.

Anonymous said...

NOT everyone buying a house today
is wrong. SOME are, yes, but
not everyone. 'Keith' is simply
wrong....and obsessed.

Anonymous said...

"NOT everyone buying a house today
is wrong"

True enough, you could buy the whole of Buffalo and Youngstown for the price of a trailer in Malibu!!

Case in point a brick built 4plex in buffalo $50k.
A lick of paint, new carpets and curtains, rent out each flat for $100+ a week. Even if the area's Beirut, or you fill them with students, those price to earnings have to add up.

hcooper said...

Question - if home prices were soaring in the past couple of years and people were buying and selling as fast as they could at extremely overpriced amounts, why would it not make sense to buy at a time when prices have leveled off? Historically, prices of homes have never decreased (except for a brief period during the Great Depression) and are not going to now - they may slow, true enough. Doesn't it make sense to invest now while interest rates are at an all time low, inventories are high and sellers are willing to make concessions? Or do you think it is wise to wait it out only to see the market skyrocket again and be left wondering why you didn't make the move sooner? Just curious?

Anonymous said...

are you saying don't buy in austin, or places likes salt lake city?

blogger said...

In the entire US if we're down to SLC or Austin, that's trouble

Yes, I'm saying even those two areas are going to get killed. SLC is already plummeting.

Anonymous said...

Oh Jeez. No wonder the housing stocks haven't tanked. Apparently the Gates Foundation (Bill Gate's charity) has been buying millions of shares of 7 main home builders.

With a 40 billion dollar loose cannon on deck, it's no wonder the stock market is unfathomable.

Anonymous said...


salt lake city has 2.5 unemployment rate very affordable to live. low taxes, eletric.gas etc. There are other area's i only mentioned these that i'm most familiar. Houses are still selling in utah and going up. I know i just sold a rental.

Anonymous said...

I have a friend who is a real estate "expert". Owns three properties and has made money largely because he "understands the LA market." What a joke! To his credit, he's been trying to get me to buy since 2002. Unfortunately, I've been stubborn - damn MBA & CFA!!! Anyway, this weekend he tells me about an article in the LA Times that stated it's never been a better time to buy a home... I try not to talk real estate with this guy since I think the real estate market in CA (amongst many areas) is wildly overvalued, which of course includes his properties. But, I couldn't resist in this case. I said "so now is a better time to buy than five years ago?!" And, he said "yes, and I’ll show you the article to prove it."

From what he was saying, and I guess this is the misguided thinking of the typical fool speculator out there (like the poster above), the gains we've seen in property values are cemented in. They don't understand anything about valuation, and think that property values only go up.

Tell that to the condo owners in Downtown San Diego. Tell that to the people getting foreclosed on. Tell that to my Dad who in 1989 bought a property in San Pedro and sold at a huge loss two years later since the rent didn't cover the payment. Real Estate values, like all asset values are based on CASH FLOW and DISCOUNT RATE – end of story.

Speculative bubbles always start out with fundamental reasons. In this case the interest rates being slashed, but then they take on life of their own. Greed takes over, fear is completely forgotten and "investors" start bidding prices up and up. The market starts to feed on itself as people keep trading up using the equity in their previous home to over pay for their second home or a huge McMansion. Add to this equation fraud, and you get property values that are not based on anything but fantasy-land comps.

So yes, it is a bad - very bad idea to buy a home right now. But, go ahead, I hope you do. I bet you can get a "great" price right now. Probably 10 - 20% off asking. And then when it goes down another 50% you'll be stuck in a 1200 sq. ft. starter-home until you're about ready to retire. Yea, that's what I want. To be living like a 28 year old when I'm 50 because I over-paid, and in order to move I have to pay the bank hundreds of thousands of dollars to get out of my mortgage.

Anonymous said...

Your friend in LA may prove correct. I'm concerned that housing prices could skyrocket from here if the dollar breaks 80. In Argentina, when their currency crashed, housing prices became out of reach for Argentinians - but it was the best of times to buy for foreigners with foreign currency. No one internally was buying and prices still continued upward - not because of any great demand internally or externally, but because of the failure of their currency to maintain its value.

foxwoodlief said...

Price corrections are not the end of the world. If corn prices fall not all farmers will go out of business, only those who are over extended or over-leveraged. Same with home builders.

Most projects can take up to ten years in some parts of the country to get off the ground so a lot of builders have leverage to lower prices and still make a small profit. Do you think in Phoenix that builders costs were rising $10,000 a month or a week when prices were going up in 2005? Not. I know the neighborhood I bought in in Litchfield Park in 2002 the builders could sell you a 3200 sq ft on 1/2 acre with a lot of upgrades for $265,000 and make money (they sold out in six months instead of their projected 3 years).

The home buyers in 2005 are the ones who will bleed before a lot of home builders will.

Corrections are coming. Not all markets are equal and price alone doesn't indicate value.

Texas may have one of the most "affordable" indexes but also has one of the highest foreclosure rates. California may have the highest prices but one of the lowest foreclosure rates. (That may change in 2007)

I do sense a change in attitudes. People are tired of working for the "man." A lot of people are tired of consuming, of having a large house to take care of (even if they can afford it), of not having a life. Americans work longer and harder than Europeans.
A lot of Americans are tired of debt.

Still, it will be another generation before we give up our consumption society.

Often our views of the housing market are as skewed as our views on what is happening in Israel or Iraq. News, TV images create dramatic and false images. Many think that Israel is dangerous and unsafe. You visit and find it looks no different than visiting Madrid. Basque terrorists in Madrid are as distant in your mind as Palestinian terrorists. A small section of Bagdad is bombed and we think the whole city is in flames. Yes, there is uncertainty and fear everywhere in Bagdad because of the chaos but the city isn't in flames like Servegio was in the Bosnian conflict.

Cost is more than PI, it is PITI. I constantly tell friends, realtors, here in Austin that the cost of a house isn't defined by the price. You have to add $300 a month for taxes for each $100,000 in value, that is equal to increasing the cost $50,000 for each increment of price so if you pay $100,000 you're really paying $150,000 and that doesn't include insurance.

I'd rather buy a $400,000 in Phoenix and pay 1% tax instead of a $200,000 house in Austin and pay 3% as I'd save $2,000 a year in Phoenix in taxes.

Each market is local. Even California may appear pricey until you look at ALL costs. Here in Austin if you bought a $10,000,000 house (a pretty nice place in California) you'd pay $300,000 a year in property tax. In California you'd pay $100,000. In ten years you'd save two million dollars just in taxes.

Same in New England, ME, MA, high property taxes, Florida-high property taxes and insurance. Places like Nevada, Arizona, California have much lower taxes.

Phoenix may have had bubblicious prices in 2005 but it is still much more affordable than other places with higher property taxes and once prices revert to 2004 or 2003 prices those two combinations will make owning affordable and since builders can sell at 2004 prices with those incentives, for some people buying in Phoenix may still make sense.

Anonymous said...

"...he tells me about an article in the LA Times that stated it's never been a better time to buy a home."

An article or an advertisement?

The NAR recently placed a bunch of large advertisements attempting to sell this very tagline to the public, and there's been a lot of ensuing reaction of all sorts.

Anonymous said...

Okay, foxwood, you're not making much sense.

Texas doesn't have a state income tax, so it might be wiser to buy in Austin and pay the higher property tax if you are in your peak earning years.

Prices in PHX went uup 200% in 4 years. That didn't happen in Texas, which accounts for the high foreclosure rates. Texas never had the equity cushion that CA, LV and PHX got when they became bubbly. Now that the bubble has popped, expect to see these markets surpass TX in foreclosures.

Oh, and have you been to Bagdad? The city is in flames. It's a war zone, much worse than anything on the West Bank.

foxwoodlief said...

Thanks annonymous. Texans do brag about not having an income tax but you know for those who loose their jobs, retire, take a sabbatical, you are paying as if you do have earnings and to lock your revenue into one form, property, income tax, sales tax and such is wrong. Ultimately I believe income tax is the fairest tax.

And yes, foreclosure are higher because there is no high appreciation rates on most Texas homes to fall back on but then isn't the point of this blog to make homes, homes, and not piggy banks? The reason I see a lot of people dumping homes in Texas is taxes. I'm not retired but I see retired folk selling because they bought a house in 1975 and now in 2006 they can't afford to pay $6,000 a year in taxes retired.

No, not Bagdad. Yes, the middle east. The reality is so different in person than what you hear on the news. Also Arabs don't really hate Americans, they hate our government. And I visited New Orleans and the news really distorts what it is like there. Mississippi was and is much worse. New Orleans always was TWO cities and the city that rules and runs the city hasn't changed and is as beautiful (minus a few branches from the oaks) as before and the French quarter is very intack. The devastated areas were hell holes before Katrina and dangerous to drive through. All Katrina did was scatter an underclass with a welfare, you owe me, crime oriented society around the USA. Houston took a big hit and people there are getting tired of the crying, the increase violent crime, the drugs and all they brought with them. Here in Austin the tax payer is paying through the nose to fix rental properties destroyed by these "victims" of Katrina. The point I was making isn't that violence isn't happening in Bagdad or Iraq or Palestine or Israel or Lebanon but as everywhere you have sur-real environments where the world is as normal as NY City (which is another, people might look at the video of 9/11 and think NY was severely damaged, not to minimize the damage but NY city is very large and those few buildings are not NY city) the day after 9/11.

What I was saying is we have to filter the news, the context, what is happening from the hype, the fluff, the "let us make it as simple as 1+1.

Anonymous said...

every dollar overpaid and financed on a 30 year note becomes about $2.50 total out of pocket cost over the life time of the loan. bad enough to overpay while paying cash, even worse to compound the problem with interest top of it.

Smug Bastard

Anonymous said...

Your friend in LA may prove correct. I'm concerned that housing prices could skyrocket from here if the dollar breaks 80. In Argentina, when their currency crashed, housing prices became out of reach for Argentinians - but it was the best of times to buy for foreigners with foreign currency. No one internally was buying and prices still continued upward - not because of any great demand internally or externally, but because of the failure of their currency to maintain its value.
I'm afraid this is exactly what will happen to us here in America if the dollar seriously tanks....

Anonymous said...

And if this does happen, what are you going to do? How are you going to be able to afford food, clothing, etc if your dollars suddenly become worthless?

The time to prepare for this sort of thing is now. You may thank yourself in the future for stocking up on the basic necessities now.


Anonymous said...

The eighties have destroyed all of you.

Anonymous said...

I keep seeing the phrase, "cash is king!"

Can someone please explain why cash is king?

The reason I am so diametrically opposed to "cash is king" in a hyperinflationary environment, is that in all the historic hyperinflation events, the fools were the ones left standing with bags of cash that were essentially worthless.

Every indication points to hyperinflation on the verge of occuring in the U.S.A.

Skyrocketing taxes, American workers screaming for higher pay, governmental funds being dumped into monetary black holes, way overvalued stock, real estate, what else?

A government and a populace that refuses to face reality, that it is all over now but the crying.

The only choice left is to run the monetary printing presses full speed ahead, which I have strong reason to believe is already occuring.

foxwoodlief said...

And tax and spend democrats back in power and declaring they will finally raise the minimum wage. Inflationary? No, a corrrection or is it a wage bubble? Non-the-less the minimum wage needs raising since it has lost so much of its value, what the lowest since the early 50s? Hard to believe a minimum wage of $1.35 in the early 70s was more money than the minimum today. If wages rise the cost vs income ratio will decline making homes more affordable and instead of home values declining to catch up with wages, wages will rise to catch up with inflated home values, all as the dollar depreciates. Soon we'll feel soooo European (mid-80s style) when instead of Euros you had lira and who could figure out how much 1,000 lira was when buying something? To an Italian, 45,000 lira didn't sound like much, to us it was how much is that in dollars? Here comes the $25 burger and someone with Euros will say, how much in Euro? Only 1 euro? Wow as we say, $25, how expensive.

Inflation will definitely pick up no matter what our government says. Go to any thrift store and see what they charge poor people for items donated and say there isn't inflation.

Anonymous said...

Will the government when it sees massive future foreclosures not be tempted beyond measure to dump more cash on the market to try to ease the pain?

For the majority of American workers have been stepped on or pinched for the longest time. Always paid just enough to sustain but never paid enough to get ahead of the game.

A man who worked steadily for 30 years and was somewhat frugal with the money he made told me no matter how far he ever got ahead he always felt "behind the curve" of making a difference in his life.

Now that him and his wife finally have their dream home property taxes are eating them alive to the tune of $10,000 dollars a year.

I personally only see heartache ahead. A globalization plan that will fail in abject misery and poverty. But it will have to fail very big and ugly for the unknowing mass populace to accept it as truth and fact for being the unsustainable hogwash it was and is.

It does not look good. Everyone will be affected.

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Anonymous said...

I pleasure myself to the Koran.

Are you listening Shakster? Honica?

Anonymous said...

I don't know much about life but what I do know is that credibility deteriorates when an anonymous name is used.

Its always the ones with big tempers that have the anonymous names.

Maybe its the big temper to begin with.

People calling others fools for this and that. I wonder the one who calls the current home buyer or seller a fool is a fool in any other catergory himself? I.E Bad father, dispassionate husband, unfair teacher, bad dancer,bad joke teller...etc.

Yes I am a real estate agent and yes I do believe the market is turning into a buyers market or a wait and see mentality. Buyers are backing out left and right and I accept that and have no problem with it as well.

It's part of business and thats that. If they buy from me then I thank them, if they don't buy from me then I thank them.

You can take this anyway you want and say what you want. But I have a job to do and no matter what market goes on any predictions that the housing market will implode, exlpode and or burst is irrelavent to any real estate agent.

There are many who just tout that "Today is the time to buy!" mentality.

That's not necessarily true. Everyday is always a day to buy but WHAT you buy and to a lesser extent WHERE you buy it are other issues.

My father is a small time private builder and yes he does have a hard time selling his homes but he WILL sell them and at reduced prices of course but he still has profit.

All this reminds me how someone can really hype things up just to make news. For example almost all unit investment properties are negative cash flow and very few investors ever think of having break even cash flow or positive cash flow simply because its so rare. It's possible to find positive cash flow investment units (Duplex,Triplex etc) but your gonna find one for every 500 to 1000 properties you scour over.

There's no "Don't buy investment properties units because nearly ALL of them TAKE money from your pocket!"

Units are bought and sold everyday with the very real fact that negative cash flow is a reality AND STILL there are buyers.

Don't tell me those of you who are waiting to buy homes because this is such a an uneasy market to buy into are going to buy instead units or investment units when the market picks up again. More then likely you're still going to have negative cash flow even if your utopian market scenerio comes true.

Also why would some of you be so glad that many sellers are stubborn about prices or about their home values? Waiting to see the "agony" or "laugh at their misery" really does say something about you and the fact that you feed off of peoples misery makes you know different then those you criticize.

AH! So thats why you're anonymous.