January 27, 2008

It's on sale, so it MUST be a good deal. Right? Right?

Let's say you have an investment, and the price is $1000. Then, two years later, the very same investment is at $2000. So you say to yourself - hey, it was $1000 just a bit ago - I'm not gonna pay $2000 today!

And then the investment falls in price to $1800, still 80% more than it did just 100 weeks ago.

So, is it a good deal? Should you run out and buy it, right?

?
?
?

Note, this is a trick question. You don't have enough information to make an informed answer. But if you're the "we don't get paid unless you buy" NAR or NAHB, your answer is YES! YES! YES! A price drop means it's a great time to buy, regardless of the fundamentals.

But we know how that can turn out.

Here's some hilariously BAD advice from the homebuilders from October 2006. I feel sorry for anyone who tried to catch the falling knife back then. Or tries to today. We've got a long way to go.

As a first-time buyer, should I wait until prices go lower to buy a home?

If you continue to wait, you may never be able to afford to get into the housing market. Even as home prices are currently moderating or in some areas falling, rents continue to climb.

Remember, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family.

34 comments:

Anonymous said...

http://activerain.com/blogsview/342904/Has-The-Market-Bottomed

I recently heard of a Real Estate Office that had a big sign outside on its front window that simply said “Smart People Are Buying Real Estate Now”. That pretty much says it all.

Here is a great question for any potential buyer out there. Would you rather buy now and have prices go down another 5% before beginning to recover or wait and buy when you have missed the bottom and prices are already on their way back up?

We must understand that the moment we feel we are at the bottom, we will be. When investors think the best deals are now, they will be. However, when we listen to those who keep stating that we are not there yet and believe them, we will make them right.

Action fixes everything. So, if you have buyers who still feel like the market has lower to go, have them tell you how much lower they think it will go and then “Write An Offer” using that number. Don’t wait another minute. Action creates demand and demand creates the upturn we are all waiting for. It will not be magic, but action that begins the recovery.
Let me state a simple fact. When America believes we are at the bottom, we will at that very moment be at the bottom. Because when America believes we are at the bottom and this is the best deal they will receive, they will act. Actions create demand and demand will create an upturn in the industry.

As long as we pay closer attention to the media than we do our own common sense, we will not be at the bottom. The media preaches that we are not at the bottom and when we listen, we confirm that. We keep waiting, and that keeps the perpetuation of the downturn in motion.

Take action before the end of this day!

Democraatus said...

translation of post no 1: catch the falling knive, now!

A better approach is using the statistics and your own wallet as a starting point.
*what can you pay
*what are you willing to pay

instead of:
*what does someone else want me to pay
*what's the house worth

DOPES said...

I'd buy but my 500 credit rating is'nt good enough anymore. I guess I'll just rebuild my credit with getting more credit cards.

Ed said...

HUH?

I heard a real estate agent say things are picking up. He also said if I don't buy something by summer I will have missed out on the greatest opportunity of my life.

Wait. You mean he was lying?

Anonymous said...

I don't even know why people are trying to guess where the bottom is in the real estate market.

If you can't buy a house and rent it out for enough to cover all of the holding costs, then the price will still go down until that math works out - and will probably keep going down even after that. Rents are limited by income. You don't have to worry about skyrocketing rents. And even if they go up significantly, if it's still cheaper to rent than buy, keep renting. You're still saving money, so why would you do anything else?

Given the HUGE oversupply of housing we have in some areas, prices will probably go down even further to the point where it is siginifcantly cheaper to own a home than rent one. I remember in the mid-late 90's, it was much cheaper to own a home than to rent it - even considering only inflation as appreciation.

You're MUCH, MUCH, better off waiting until prices have leveled off. You WILL catch a falling knife if you buy now. There really is no risk to waiting until a bottom is evident.

Understand: sales volume WILL pick up this year (as prices and interest rates go down, potential buyers will increase). It can't get much worse than it is now, so that isn't saying much.

HOWEVER, that does not mean that prices will stop going down. The thing that determines price is supply and demand. Demand will pick up, but there is such a HUGE oversupply in some areas of the country that it will still take years to absorb. Only then will prices level off. It's basic economics.

In South Florida, we have several years' worth of inventory. Even if sales volume doubles this year, it will still take a LONG time before prices stop going down. We've got WAY too much inventory. And Miami, in particular, may not see a bottom for many, many years. There are still tens of thousands of soon-to-be completed condos coming on the market.

Anyone thinking of buying now is a fool. Prices still have a long way to go. Remember the mortgage reset chart? 2008 will be way worse than 2007. And trust me - the vast majority of those people will walk away. They're not going to re-finance a house that is worth tens or even hundreds of thousands less than they paid - that's just stupid. That will only make the supply situation worse. We've only seen the tip of the iceberg.

And trust me - neither the Fed nor Washington have control over the situation. The problem is way beyond them. See 1990's Japan for a lesson on that.

3rd generation said...

How is your credit? Got any cash?

Anonymous said...

re: supply

Yes there is a lot of supply. But that supply seems to be in areas I don't want to live in. Every 2nd house in the ghetto is for sale. Doesn't do me much good. On the other hand almost nothing for sale in upscale, well established neighborhoods in the inner suburbs where I want to buy.

All the foreclosures I see are either in the ghetto or in new subdivisions. Again, does me no good.

Tyrone said...

OMG! I'm not owning a home! How will I build wealth? And WTF am I gonna do with this leftover $5500/month after my bills are paid?? Then there's the damn $2500/month going into my 401K, including company match. And $1400/month in interest and dividends coming in.

Where is my mo***er fu**ing wealth going to come from without a house??

BWAHAHAHA

Anonymous said...

Attention Bubble area residents!

Do not, I repeat DO NOT, offer anything over 50% of bubble price on any home!

Bank REOs are pilling up but banks are waiting for those last few suckers to sell their glut of overpriced stucco boxes to.

Sure make offers, But for no more than 50% of bubble price. Whats the bubble price? Pretty much the foreclosed $$ ammount. Don't let the greedy banks win!

Keep offering that 50% and eventually the banks will get the hint, which is.... Take it or leave it.

Anonymous said...


Yes there is a lot of supply. But that supply seems to be in areas I don't want to live in. Every 2nd house in the ghetto is for sale. Doesn't do me much good. On the other hand almost nothing for sale in upscale, well established neighborhoods in the inner suburbs where I want to buy.

All the foreclosures I see are either in the ghetto or in new subdivisions. Again, does me no good.


Or, as is the case in some areas like mine, all the desirable locations close in are still holding their prices, while McMansions in far-flung exurbs with long commute times are tanking. In the desirable areas prices haven't collapsed, but the market has all but frozen because you can't get a jumbo on reasonable terms anymore, even with good DTI, LTV, and FICO metrics.


We must understand that the moment we feel we are at the bottom, we will be.


Markets are difficult to time consistently. Illiquid markets are the worst of all.

An RE market paralyzed by lack of credit is just as artificial as one pumped by bad lending standards - buyers and sellers can't have any confidence in the price-setting action, so they draw back and wait (if they can).

Popping the conforming cap and historically low interest rates should get the market unstuck, and yet the return to traditional lending standards should restrict the pool of buyers. These are both good things, and once we get some transaction volume we will see just how far down prices have really sunk.


If you can't buy a house and rent it out for enough to cover all of the holding costs, then the price will still go down until that math works out - and will probably keep going down even after that. Rents are limited by income. You don't have to worry about skyrocketing rents. And even if they go up significantly, if it's still cheaper to rent than buy, keep renting. You're still saving money, so why would you do anything else?


I've never understood this argument. If you wait until buy-vs-rent is a wash, you'll never buy. The tax system is rigged in favor of owning, as is inflation. Perma-rentals are typically not as nice to live in. Both factors put a premimum on ownership. I'm in my 40s and I've lived in major metro areas on both coasts, and I have never seen a housing market where it wasn't more expensive to own than to rent if you look just at the first year's cash flows. Try looking out 10 years and you'll see why people would rather own.

area 51 said...

Can I add another anecdote to the pile?

Wife's friend's parents are lamenting their house purchase in 2007(!!!) since it has lost value.

Dudes at work are buying an old house to fix up and flip.

House prices have to revert to the mean, slightly higher than inflation appreciation. We are about 30% above that trend using the S&P/Case-Shiller Home Price Index. At the current pace of decline, it will be 2010 at the earliest.

To anonymous 11:53:
First thing I would do is "take action" & advice from Mr. Anon E. Muss.

NO, by your logic we should all wait it out forever until prices reach total rock bottom. Sounds great to all us bubble sitters and renters.....

The "bottom" is not a function of psychology in this case, but fundamentals.....

P/E that is.................

Anonymous said...

oh god I felt sick reading that!

Anonymous said...

The very first poster makes me laugh.

Write an offer now. Ha-ha, why waste my time (and your time).

You are obviously a realtor.

Here is an example. I think prices will go down another 20%. The homes in my area should be $600K right now, so you claim I should write an offer TODAY. So here is my $500K offer, but wait...the list price is $700K.

Do you HONESTLY think the sellers will take that? If so, I will write an offer TODAY.

What I really think, is that you want to try to convince me that the list price is what it is worth.

THAT is why you are not getting offers.

VirtualChris-OC

Anonymous said...

In Chicago prices are not crashing. On my brothers' block a house was listed for 699K and they ended up selling it for 650K and the buyers believed that they got a great bargain. What a bunch of fools. A lot of people here in Chicago are buying into the idea that "it's a great time to buy now before prices go back up again", "wow, this is a historic buying opportunity because God isn't making more land", etc... My uncle is selling condos that he converted and sold one for 499K and the other five are empty and now that he has lowered the price to 450K he will be closing on two of them this week. People are actually believing that this is s great time to buy. I feel sorry for them.

Anonymous said...

What makes everyone so sure that the home they are now buying at a better price, has a "good title" that won't be recalled to court in the future because it was part of a sliced up mortgage deal previously, even though you may have mortgage insurance at hopefully a sound insurance company?
Is anything in the mortgage industry a sure thing at this point?
Better be very careful out there with your hard earned (borrowed)money.

Anonymous said...

Somebody at work who always says I should buy a home told me excitedly that mortgage rates were down that week...

I told him that I like the percentage DECREASE ON MY RENT just this month on a year lease - 15%!!

That's right, I just got a MUCH NICER PLACE 2 blocks away and the rent is 15% lower than I was paying before!!

Why should I care about the mortgage rate? 5% 4%? Who cares! I like my 15% off much better. And the rent before was 1/2 the price to buy like places, even now!

Dream on desperate home sellers...perhaps we'll converse again in 2009. How far do you think the market will fall by then? Rent deflation is here!!

olemilt said...

PLEASE, PLEASE, PLEASE, just use your brain on this. Don't worry about not buying a house at the bottom. It will be OK. Use the momentum of the marketplace in your favor...for example:

If today is the bottom, at best we will see 3-5% appreciation over the next 12 months. If you wait that year, your payment is 3-5% more, so on a 100K house, next year you are paying 105K, so not you are putting 21K down instead of 20K down, and assuming that mortgage rates stay the same (read they will likely be less) your p&i will be $490 instead of 467. Twenty three bucks per 100K a month. But if the house goes down another 5%, you have lost 25% of your down payment, (and if you need to sell using a realtor, that 6% commission adds another 30% loss of your equity.) So you have lost 55% OF YOUR DOWN PAYMENT, OR 11k. If the market falls 10% over the next two years, then you sell, you will have lost all but 25% of your equity after closing costs. And this is assuming you put 20% down. If you didn't you cannot move unless you bring cash to the closing table.

So will you risk $23 per month per 100K of house to wait it out a year to avoid possible bankruptcy? If you are smart you will. Wait until the market flattens out, and perhaps looks like it is recovering for at least two quarters before you even think about buying.

Duh.

Frank@Scottsdale-Sucks.com said...

Remember, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family.

LOL ... how? I love how stupid people buy that without asking "how?" I would change it to read:

Remember, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your realtor, mortgage broker, title company, city tax assessor, and especially the bank to which you will pay 2-3x the purchase price of the house over the next 30 years.

Anonymous said...

So I posted a response to the first post on the activerain website and the entire blog was pulled. Over a 100 comments and their all yucking it up over this guy's wisdom and sage advice, one critical comment and the whole thing is pulled. Wimps.

Here is what we all must realize. We must realize that there is only one way to know that it was the bottom. That way is simply by “missing it” or when it is now behind us.
No, the bottom will be easy to identify, it will be when supply is at normal levels (less than 6 months) and credit is available to those who can afford the houses they can afford, and foreclosure activity at normal levels. Today in NOVA, 20 months inventory and sales at 1/2 2005 levels.
Let me state a simple fact. When America believes we are at the bottom, we will at that very moment be at the bottom. Because when America believes we are at the bottom and this is the best deal they will receive, they will act. Actions create demand and demand will create an upturn in the industry.
This is not a fact, it is a unsupported lie. There are sellers everywhere who "believe" their house is worth more than the market is willing to pay for it. They are in "FACT" not sellers, they are homeowners (aka bagholders).
As long as we pay closer attention to the media than we do our own common sense, we will not be at the bottom. The media preaches that we are not at the bottom and when we listen, we confirm that. We keep waiting, and that keeps the perpetuation of the downturn in motion.
Common sense- here defined as a set of fallacies and one-liners that a salesman would say are true regardless of the prevailing market. Media preaching- also known as pesky reality and statistics promulgated by the MRIS, MLS and NAR and county property appraisers/tax collectors that no amount of spin can fix.
I recently heard of a Real Estate Office that had a big sign outside on its front window that simply said “Smart People Are Buying Real Estate Now”. That pretty much says it all.
Anyone persuaded by an implied insult in a one liner such as this is dumb.
Here is a great question for any potential buyer out there. Would you rather buy now and have prices go down another 5% before beginning to recover or wait and buy when you have missed the bottom and prices are already on their way back up?
This is a loaded question. What if prices fall another 20%? They've already fallen 30-40% for the suburban counties around DC.
We must understand that the moment we feel we are at the bottom, we will be. When investors think the best deals are now, they will be. However, when we listen to those who keep stating that we are not there yet and believe them, we will make them right.
Nothing the salesman or the sellers do define the bottom. BUYERS are the marketplace. Anyone who sat on the sidelines up until know is not going to be persuaded by self serving feel good statements. If it's 1/3 off but still twice the 2000 price, it's still overvalued.
Action fixes everything. So, if you have buyers who still feel like the market has lower to go, have them tell you how much lower they think it will go and then “Write An Offer” using that number. Don’t wait another minute. Action creates demand and demand creates the upturn we are all waiting for. It will not be magic, but action that begins the recovery.
Ummm, action gives you a paycheck, what else does this statement say, am I missing something?
Take action before the end of this day!
I just did, you're welcome for the cold shower.

Frank@Scottsdale-Sucks.com said...

It's basic economics.

Hey, we know that, but good luck trying to explain that to a realtor or FB troll. That's like talking to a wall.


Dream on desperate home sellers...perhaps we'll converse again in 2009. How far do you think the market will fall by then? Rent deflation is here!!

When we moved to Newport Beach CA last year the place we really wanted was $4,500/month. Instead we found this house listed for $3,950 and negotiated down to $3,500 and have been happy here.

Our lease is coming up so we shopped again, and in the community where rents averaged $4,500 a year ago, we found four available for around $4,000 and just signed a lease for $3,600 after negotiating.

So for $100 more we're moving to a much larger, much nicer and newer house with awesome views, and it's big enough that I can get rid of my office and work from home saving another $1,700/month.

On the buying front, at the peak the homes here in Newport Coast were selling for hotcakes for between $1,000-1,100/square foot. Today most are listed at about $525/foot average, and just looking through MLS today, some are surfacing at around $480/foot. I predict they'll be well under $400 in a year.

Why anyone can't understand that it's a BAD time to buy right now is beyond me. And we'll be living in our luxury McMansion for $3,600 while others are paying $10,000/month to live in the same houses (they sold for $1.5M at the peak).

Anonymous said...

here's how I know housing is still too expensive. My income is in the top 5% for my zip code according to census numbers. Median home price in my zip code is almost 5 times my income.

Numbers make no sense.

Anonymous said...

Finding the bottom will not be that hard.

In past real estate busts, prices almost alwayus went sideways for a number of years before they started going up again.

It's not like there will be a 2-month period where prices hit bottom and then start skyrocketing again. That's preposterous. You won't see the boom-era appreciation again anytime soon.

When prices stop dropping and hold for at least a year or so, then you can start thinking about buying.

Anonymous said...

If prices go from $215,000 in 2007, hit bottom sometime in 2008 at $200,000 and go back to $215,000 in 2009 is it a tragedy if you missed that while renting? the money you saved is still earning interest the whole time you missed the bottom. this is the equivalent of buying a home in 1996 or 1997 and missing the 1995 bottom. does it really matter?

catch a falling knife?

NOPES!

Anonymous said...

Realtors know a lot about bottoms because they have nothing to do all day except sit on their bottoms.

Anonymous said...

It still costs us less than half to rent a great place in NoVA than it would to buy the same place, NOT including taxes and insurance!!

Haaa haaaa - Who needs to be tied down to THAT Bullshyttt right now, all while housing prices continue to fall?!!!

Only a fool would buy now...Don't buy into the FED CAT BOUNCE either--bide your time or you will be sorry!

horses ass said...

Ever go to the store and buy something on sale? They usuaully cross out an old articial price and have the sale price be way below that.If you believe their numbers you really are a horses ass.Trump is looking for realtors.

mrhappy said...

"buy when you have missed the bottom and prices are already on their way back up?"

I'll buy when it makes sense, not based on price signals. if the prices are too high, I'll stay put.

no biggee!

RE.Agent said...

http://activerain.com/blogsview/342904/Has-The-Market-Bottomed

I recently heard of a Real Estate Office that had a big sign outside on its front window that simply said “Smart People Are Buying Real Estate Now”. That pretty much says it all.

----------------------------

That is what I have been telling my shrewd investor clients: It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

area 51 said...

Anon 7:36

I did the exact same thing. I posted rebuttles to his hackneyed logic and soon afterward access was pulled.....

I guess all they want to hear is the sycophants cheering eachother on.........

Keith, you should pull his post as retaliation.

And YES, he is a realtor.

Paul E. Math said...

The historical average yearly home price appreciation, adjusted for inflation, is less than 1 percent. Several studies have reached this same conclusion (see Irrational Exuberance by Yale professor Rober Shiller).

Given the context of non-existent real home price appreciation, the concept of a 'bottom' seems inappropriate. People are thinking of a bottom as something that has a down and then an up and the middle part is the bottom. Home prices will have a down only with no up and therefore no bottom.

So you have absolutely NO worry about 'missing the bottom' and you need not worry about timing. You can wait 20 or 30 years and home prices, adjusted for inflation, will effectively be at wherever this downtrend stops. But please don't call it a 'bottom'. And for God's sake DON'T buy now when prices are still falling.

Anonymous said...

I loathe the NAR. What a bunch of slimy sleezy cheerleaders. Used car salespeople have 10 times the credibility in my eye.

Benji Franklin said...

Here is what we all must realize. We must realize that there is only one way to know that it was the bottom. That way is simply by “missing it” or when it is now behind us.

You're kidding, right? It's not like real estate prices are anywhere as volatile as the stock market, where prices can skyrocket within minutes (especially nowadays). This is NOT the Weimar Republic, where prices on commodities changed within hours. Even there, I doubt real estate was EVER so volatile as you'd suggest. Even if it WERE, I'd not be thinking of buying a home in such an unstable economy!

No, real estate prices are notoriously "sticky" on both the upside AND the downside, so it's not like you'll miss out on buying opportunities within a period of months, or even years.... Yes, all the "sell" signals were flashing in 2005-2006, but there was plenty of time to head for the exits (as long as the owner wasn't drinking the NAR's tranquilizing Kool-Aid).

Saying anything to the otherwise simply belies one's lack of experience with housing bubbles/busts (and in California, this is the 3rd such cycle we've seen in 20 years; although this clearly WAS the Mother of Bubbles).

Anonymous said...

Was listening to a cd from a band always ahead of its time (Snog). I hadn't heard it in awhile and it made me think of this blog. The song from 1999 was "Real Estate Man" - now again one of my favorites! - some of the lyrics include:

Feel the teeth, in your neck
Bloodsuckers at your back
Suit and tie, and a six month plan
The disguise of the real estate man

Worthless money, that's the scam
Slave to your debt, slave to the man
Counterfeit if you can
To destroy, the real estate man

Anonymous said...

My in-laws just bought a one-year-old 4,000 sq ft house (w/ a full basement) in NoVA. Some sucker bought it for 800K last year and they got it for 660K.

[Suzanne?] their realtor "friend" told them they needed to buy a five bedroom house for "the resale value!" I'm glad they did't pay more for it, but now they have a three floor house the size of a hotel for two people, one of which has bad knees!

They already have two houses currently on the market from the last time they listened to this woman. (this makes the 5th house they've paid this woman for in six years--paid for her Lexus I'm sure)

I've tried to reason with them, but I just get trumpeted down by "it's a great time to buy, it's different here," and of course the ever popular: "it's a tax shelter." I think people get confused because they can afford it and don't understand that it is possible that someone else might not want to buy it later at that price (especially when there are similar foreclosures down the street going for peanuts.)

I told my wife we'll clear out a space in the basement for them after [Suzanne] sucks them dry.