Here's today's question:
* What were people who paid $500,000 and up for a 2-bedroom condo in America thinking?
Feel free to comment, and also submit your own housing bubble questions for tomorrow's HousingPanic Stupid Question of the Day
July 07, 2006
New HousingPanic feature: The HousingPanic Stupid Question of the Day
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26 comments:
My thoughts exactly hejiranyc. In large metro areas with well paying jobs (in investment banking, for example) plus horrendous commutes, a 2BR condo for 500K could be a great deal. New York, Chicago, San Francisco, etc.
In New York, I imagine there are plenty of well heeled buyers who would shell out $500K to beat commuting 10-12 hours/week.
The question shuold be why would someone in Vegas or Florida pay $500k for a 2br. The question for New Yorkers is why would someone pay $1,000,000 for a 2br condo in NY, but they do...
But in NYC at least incomes are higher. I dont think that is the case with Vegas or Florida.
I would pay $1M for a NYC 2br before I would pay $0.5M for a 2br in the Nevada desert.
But what do I know, I refuse to buy a house until prices become reasonable, I may be waiting a long long time.
Well, if you really want to get to the bottom of it the question should be, "why do people pay more than intrinsic value?"
And not just in real estate. Look everywhere and you'll see people paying much more for items than any measureable benefit would suggest. Not only are they paying for it now, they're also willing to mortgage future income.
The widespread market penetration of televisions versus dishwashers is the classic example. American families were quick to buy televisions (a sensual item) and slow to buy dishwashers (a time saving, practical item). Even today, televisions are in nearly 100% of households and dishwashers are nowhere close (I can find where I read about this study, otherwise I'd cite it).
Herd mentality is a huge component of it. The desire for status/exclusivity is probably significant. The idea that buying real estate will make you rich quickly, is probably another.
Expensive marketing, hip cocktail parties, and pushy salespeople wouldn't make a dent if it weren't for the underlying psychology of buyers.
Why do people pay more than something is worth? Emotion takes over and their sight goes.
Just look at eBay ... I have watched people bid item up over what they'd pay for the item at their local retailer. Yeah - they don't pay tax or have to drive, but they pay sky high shipping charges that make up for that.
Its the thrill of the "hunt" with eBay and with houses and with lots of other things - emotion puts reason in the backseat.
Just a quick question:
Are salaries in NYC really that high to justify $1 million for a 2 bedroom? It is hard to believe.
IMHO housing is not going to go down. This is because historically housing has never gone down more than 20%, even during recessions.
Add to the fact that there are still plenty of people who want to buy, interest reates are starting to rise.
So now all the people that didn't buy before are coming out of the woodwork to buy before interest rates get too high. The 2nd wave of the housing bubble, so to speak.
After that, during the next recession, prices may fall 20% as they do during a lot of recessions a lot of places. But it doesn't seem like we need to worry about a big bubble popping.
wanna see a price crash first hand? go to any bubble city and put offers of 30% below asking all over town.
you'll get 30% off.
comprendo?
Enjoy your trailer in the sky.
Here in Seattle, King County is up over 16% this year. It's supposed to be over-valued by 30% but still going up.
Go anyplace in Phoenix or Las Vegas and offer 30% less and
YOU'LL GET LAUGHED AWAY. Yes, you'll get laughed away.
You might be able to get 10% less, but that's about it.
yeah, people would kill to get that, even today, in SF or NYC.
When the property bubble bursts AND the 10-year real change of the S&P 500 turns negative later this year or early '07 and stays there for years, there won't be people paying a million clams for a studio in NYC. The bonus cash flowing like the Hudson River in the Holland Tunnel after a terrorist attack will dry up. And who do you think is bidding up the price of FL properties? All that Jewish Wall Street cash flowing to the Hamptons and FL is OVER! Kaput! Oy vey! Who will buy? There will be a lot of farfalen schlemazels running around. Shalom.
Just remember, prices crash, the economy crashes, incomes crash, remember "buddy can you spare a dime?" Outside the USA there are lots of cities that $500,000 won't buy you much and they'd think a 2dr/2bath condo a steal. I agree that I'd rather rent than buy a condo at that price and save the difference. My 28 year old nephew lives in SJ and bought an OLD 2/2 for $470,000 and has two small girls and I can't imagine spending that kind of money at his age or income. He spends like 60% of his income on the place. My twin on the other hand left SJ to buy a house in Brentwood (about six years ago) and regrets it. The expense of driving two plus hours each way, not to mention four hours a day of driving eventually led him to rent an efficiency apartment in SJ to stay in four days a week. In the end it would have been cheaper to buy at the higher price.
Not Buying The Bubble said...
IMHO housing is not going to go down. This is because historically housing has never gone down more than 20%, even during recessions.
Add to the fact that there are still plenty of people who want to buy, interest reates are starting to rise.
So now all the people that didn't buy before are coming out of the woodwork to buy before interest rates get too high. The 2nd wave of the housing bubble, so to speak.
After that, during the next recession, prices may fall 20% as they do during a lot of recessions a lot of places. But it doesn't seem like we need to worry about a big bubble popping.
Friday, July 07, 2006 8:53:15 PM
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NotBuyin', I would submit the following:
1. This was the biggest housing boom in history. When the valuation (THE BUBBLE) returns to the mean, which it always does, it will be the biggest bust in history. Look to break any existing record of 20%. BTW, I've heard 40% for the last one in SoCal.
2. If you add in inflation (which is what you're really paying interest for/against), a 20% price decline over 4-5 yrs, becomes a 40% decline.
3. If "all the people that didn't buy before are coming out of the woodwork to buy before interest rates get too high", then why have sales plummeted and continue to slow? You're dead wrong here. You might be able to argue that when prices go down 10%, buyers will jump in. That's at least plausible. This statement makes you sound like a spokeshole for the NAR.
The real 2nd wave of the bubble will be people who cashed in, swooping back in at the bottom and getting GREAT deals.
People are already buying. I've been watching the inventory numbers drop this week.
In Seattle it's hard to find any deals at all. In other places you can make deals.
Foreclosures and pre-foreclosures were both down this week as well.
This is the end of the fall for the short-term at least as the buyers jump to buy before interest rates rise any more.
People are already buying. I've been watching the inventory numbers drop this week.
In Seattle it's hard to find any deals at all. In other places you can make deals.
Foreclosures and pre-foreclosures were both down this week as well.
This is the end of the fall for the short-term at least as the buyers jump to buy before interest rates rise any more.
Must be same people that paid 100$ to 200$ per share for all the dot.bombs of yester year that are worht 1$ to 2$ or less...
Prices do go below 20% - I was looking for a starter home in 1995. One was a 2 BDRM asking for $100K -I went back to check out the neighborhood at night and found some neighbors outside and told them I was thinking of buying. Lady almost had a heart attack because she had paid $178K for an identical unit just a few years earlier when interest rates were sky high. When we finally did buy a home for $120K - the neighbor across the street aid $220K and couldn't afford to get out. Prices did go back up and in this market they exceeded the last cycle - but they stayed down for a while - a lot of bargains to be had for people with money to spend.
To Not Buying the Bubble, prices absolutely have gone down by more than 20%. I was an REO Marketing Analyst with the RTC at HomeFed Bank in San Diego in 1992 and I personally sold apartments in the 92105 and 92115 zip codes for 25% to 35% of what they appraised for 2-3 years earlier. I also sold dozens of commercial properties for prices that made the mortgage payment with a 75% LTV loan less than the rent.
Before working for the RTC, I was a private real estate broker for a prominent doctor in San Diego and at the bottom of the market I sold 4 SFR's of his in not so great areas of Phoenix for $12,000 to $18,000 each and my client had to pay ALL the closing costs.
I have over 25 years in the business and guarantee you'll see prices decline for those that have to sell by over 50% this time. The others just won't sell at all.
As far as inventory declining, yes I noticed that in San Diego too but I read elsewhere that the same thing happens every year just before July 4th, so I went to check Zip Realty tonight and the listings are way up again. Look at the long-term trend of inventories at the Bubbletracking blog linked from this site, not just inventory
levels over just a few days.
Prices won't decline for awhile because it occurs slowly. I work at a large lending institution in San Diego and I'm already seeing ocassional properties selling for 10-15% below market. Once the foreclosure number kick up, it will spiral down. That's when it happened in 1993. That's also when rents decline because Landlords find they can't compete with the lower cost basis of competing landlords who bought their rentals as REO.
Prices will drop by more than 50%, the downturn just has to play itself out according to the natural economic order of things
Not Buying the Bubble-
Prices have gone down more than 20% in Seattle in the past.
There's a post on the Seattle Bubble Blog today made by a Realtor- an article from the last crash, circa 1990. (How quickly we forget!).
Anyway, pay no attention to the median- it'll rise for a couple more months just cuz here was some massive appreciation this year on the high end. But that was combined with numerous price reductions (King County now up to about 45% price reduced) and DOM's that we have not seen in YEARS.
Inventory's been rising steadily for months now although there was some stalling last week- because of the holiday. But you'll notice it began piling on again by July 7.
And our condos are just coming to market late summer and Fall. Noticed all the new construction? Impressive!
Oh yeah here's another the Realtor said about Seattle, but I'm sure it's relevant to other places.
He said everything was going great guns selling selling selling appreciating appreciating appreciating and then all of a sudden it JUST STOPPED. like it happened overnight or something!
Where are you seeing 45% reductions? Where?
I can guarantee you that there aren't ANY. I've looked all over Zip Realty and I don't see ANY 45% reductions?
Show me the MLS #s ... because I probably would BUY.
????
You guys are NUTSO.
One of the other things that I think this blog and HPers often over look is that they seem to make blanket statements. They Phoenix will drop 40%. No Phoenix will not drop 40%, CERTAIN areas of the Valley will drop, those being Queen Creek, Surprise, Maricopa, etc. Places like Scottsdale will probably not suffer the same because the salaries that many people who can move to Scottsdale allow them to buy expensive homes and the desire to live in that area will always be there. The same can be said in San Diego. LaJolla will probably always be hot, forever and ever and ever. The outlying suburbs and downtown will probably suffer big time. I think the housing bubble is going to be very regionalized within large metro areas. Even here in Chicago, certain areas are seeing huge reductions (i.e., River West, Gold Coast) while certain areas are simply hopping along, i.e., Wicker Park, Bucktown and certain suburbs will always be in demand such as Highland Park, Glencoe, Hinsdale, Northbrook. A $800K house in Glencoe is not going to worth $650K in two years. Just not going to happen in areas where they cannot build anymore inventory, same in Scottsdale, same in LaJolla, same in Boca, same in Manhattan.
Fear? In the San Fernando Valley (Los Angeles) SFRs (LAND) are now clearly falling below $500K in borderline areas. Lots of women aged 30-50 see safety as a major concern so would rather live in a tiny condo than a SFR in a borderline dangerous area.
In a somewhat related piece, from yesterday's LA TIMES: http://www.latimes.com/classified/realestate/news/la-re-auctions9jul09,0,3494596,full.story?coll=la-home-realestate
"...investment partners and auction veterans Robin Morgan and Miriam Wimberly came up with the winning bid of $436,000.
"I think we got a bargain," Wimberly said. Agents say that comps for the two-bedroom, 2 1/2 -bathroom condo in 1,023 square feet suggest the sale price was right on target for the neighborhood."
The dude above said:
"Where are you seeing 45% reductions? Where?"
Ummm... in So Cal the last two bubbles (1980 and 1989) took 4-5 years to drop 45%. This one might go faster because of the proliferation of suicide financing, but we're barely into the first year of the current crash. Check back in 2009.
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