Sticky Bay Area Housing Prices, Redux

A thoughtful question from reader "sun_kan" asked:

randy, i have read your price stickiness argument (in patrick.net) in detail & i have seen it play out precisely as you expected it to be, in the bay area, till the recent credit crisis. now i see a slightly different behavior from sellers, with a lot of them accepting the reality & cutting prices in bigger chunks. it is still expensive but i do see cuts in the range of 50K-100K, even in nicer areas (hills, school district etc). in not-so desirable areas where there is a lot of foreclosures/short sales, i am seeing sellers trying to price very competitively with (or sometimes lower than) the reo prices. is there a tipping point in the sellers psychology, just like the one in stock market? and if so, how would that affect the price stickiness?

Thanks for the question.  And it is very nice to hear when something I've written has been useful to someone.

The San Francisco Bay Area has definitely moved into a new phase of price stickiness.  It is roughly in line with the article I wrote all the way back in August 2006 (Housing Bubble Economics).  The thing I most missed in my analysis back then was the huge amount of time the stickiness would last.  Even I underestimated the psychological staying power of sticky sellers.  And to think, I was roundly attacked by a large number of Patrick denizens who thought I was nuts, a shill, or even a realtor in disguise (in once case).

So what about now?  In my opinion we're now in the phase where sellers have:

• Yanked their listing, gone into denial or deeply flawed reasoning, and decided to "sit out" the market.  This group includes most sellers who are able to do so monetarily and situation-wise.  We already know that most people are severely retarded when it comes to finances and money decisions.
• Accepted the market for what it is, whether willingly or not, and are prepared to price competitively.  Most will still walk-down the market, fearing underpricing more than overpricing.  That is, unless the seller is desperate (or compensated some other way like a relo package) then he/she will try to price right around where they think the highest-paying possible buyer might be.  From there, they'll walk-down the market as the listing grows stale.
• Entered the "end-game" phase.  These are sellers who are probably going to lose their home anyway.  Most will try to "work out" the loan.  Few [in the inner Bay Area due to prices] will succeed.  This phase keeps getting longer-and-longer with all the government intervention.  Even the mention of possible, maybe, perhaps, government intervention slows this process down, as lenders and troubled owners alike fear taking the loss right before the cavalry arrives.

Anecdotal, what I'm seeing here in southern Marin is indeed price reductions.  Some huge.  One I saw about three weeks ago was more than $600K off the "original listing price".  The problem is, those "original listing prices" were vintage 2005 peak-peak.  So now homes here are all the way back down to say $850/sqft.  There is a very long way to go before prices fall to within income supportability.

The bottom line:  I expect prices to bump along, walking-down the market in most areas.  They won't hit any sort of accelerated free-fall unless or until there is a dramatic decline in employment.  When people lose their jobs, then others fear losing theirs, then more homes get sold under duress, and more sellers start racing to simply unload.

That won't start before next summer (2009).  Probably late summer, at the earliest.  It will require (a) lots of bad news about jobs, very publicly features, and (b) passage through the "spring selling season", which now apparently lasts until August, with yet another dud.  That would be 3 years in a row of basically no selling season (2007-2009, homes in Marin at least were still selling in spring/summer 2006).

Comments

[sun_kan]

randy, thanks for posting your thoughts on this. this is what i see first hand.

in desirable areas (cupertino/mission san jose), not many new listings are hitting the market... because of slowdown & seasonality...but the ones that are listed, fall into 2 categories...

* some that are very old listings (more than 180 days) with less or no real interest among the listing agents/sellers....no open houses, no price adjustments, sometimes not even the "for sale" signs in front of the house...

* others that are chasing the market down. these sellers are desperate mostly because of personal reasons. i see huge price cuts every other month as they started off with the 06/07 peak.i made a (very) low ball offer to one in this category & the listing agent (whom i am also using as a buying agent for this transaction) told me that the seller is in a state of shock when he looked at my number. he still hasnt gotten back to me since he doesnt know what he can counter with. i think he understands that this price will be attractive in a year or so, if the downward spiral continues.

in not-so desirable areas (north fremont/union city, most of san jose), where i see a lot of short sales/foreclosures, the prices have come down considerably... to 02/03 prices...am not sure where the bottom is. but i see listing prices not very far from the what the similar houses are going in an auction.... may be 10%-15% more...

how do you look at this fragmented market? in terms of where the bottom is....the lower end ones are definitely decimated by the bank transactions while the higher end ones (at this point) have still some ways to go.

[sun_kan]

randy, thanks for posting your thoughts on this. this is what i see first hand.

in desirable areas (cupertino/mission san jose), not many new listings are hitting the market... because of slowdown & seasonality...but the ones that are listed, fall into 2 categories...

* some that are very old listings (more than 180 days) with less or no real interest among the listing agents/sellers....no open houses, no price adjustments, sometimes not even the "for sale" signs in front of the house...

* others that are chasing the market down. these sellers are desperate mostly because of personal reasons. i see huge price cuts every other month as they started off with the 06/07 peak.i made a (very) low ball offer to one in this category & the listing agent (whom i am also using as a buying agent for this transaction) told me that the seller is in a state of shock when he looked at my number. he still hasnt gotten back to me since he doesnt know what he can counter with. i think he understands that this price will be attractive in a year or so, if the downward spiral continues.

in not-so desirable areas (north fremont/union city, most of san jose), where i see a lot of short sales/foreclosures, the prices have come down considerably... to 02/03 prices...am not sure where the bottom is. but i see listing prices not very far from the what the similar houses are going in an auction.... may be 10%-15% more...

how do you look at this fragmented market? in terms of where the bottom is....the lower end ones are definitely decimated by the bank transactions while the higher end ones (at this point) have still some ways to go.

[randolfe]

I agree with your view of market fragmentation. The issue with less desirable areas is one of overcorrection. Those areas tend to fall faster, and come to "realistic pricing" much earlier, but then continue to fall. The reason being attrition, as even more people get foreclosed upon, move, or otherwise have to sell (divorce, death, etc). It is not uncommon to see, during big real estate corrections, less desirable areas fall to well below rent=buy.

It's a pretty easy calculus for that part of the market. There are 2 components driving home price: 1) Rent versus Buy, which actually entails a bunch of stuff like tax considerations, interest rates, and loan availability; 2) Income supportability.

In less desirable areas, people suffer the most during rising unemployment and recession. They also have the least savings, and the least alternative options (family money, etc). So, even if Joe Sixpack has his job, he's afraid he'll lose it, and therefore he's actually more comfortable paying higher rent than what it would cost to buy a home. He can always skip on a lease without much consequence -- seldom even a credit hit so long as he tries to work something out. But losing a home will destroy him, since he lives on his credit score.

For the nicer areas, the equation is more complicated because of the existence of savings, larger wealth options, and less reliance overall on simple wages to pay the mortgage. More folks in this group tend to try to wait it all out.

[randolfe]

By the way, we "lowballed' on an offer early last year for a home we really like. That lowball was actually about 15% higher than the seller's 2005 purchase price.

They were "deeply offended", and said "we know what our house is worth". They countered with an offer that was actually $300K higher than their last listing price (we offered after they "yanked" the listing for the 4th time in 3 years).

Well, their agent has called me twice since then. The first time she wanted to know if we'd like to offer again, as the sellers were "more realistic" about their price. At that point, I told her our offer was exactly their 2005 purchase price.

They were again "deeply offended", apparently.

A few weeks ago she called again, wondering if the last price was still "good". I told her that our price was now roughly what the 2002 purchasers had paid for that house, plus a tad for improvements.

I'll let you know if I hear back.

[Brand]

LOL. Randy, remind me to never play poker with you. If she comes back that the 2002 + improvements price is acceptable, are you going to push for 1999? ;)

[sun_kan]

i got my offer rejected as the seller is hoping that a new set are buyers would come in, once the jumbo rates follow the conforming rates (& go down). obviously he (& his realtor) is of the opinion that the prices in bay area went up (03-07) because of lower rates rather than the lax lending standards.

i dont subscribe to that theory but i am little concerned that the govt with all its power, is throwing everything but the kitchen sink, at the problem. with the low rates, they seem to have addressed the ARM reset (not the negative amortization loan) issue. i wouldnt be surprised if they decide to

* ease the lending standards on fannie mae/freddie mac loans.

* temporarily raise the conforming limits, say till the end of 2009.

* allow refinancing without a new appraisal, thereby addressing the upside-down issue.

* creating huge tax incentives (in form of tax credits, say like 50K) for homebuyers to take care of huge inventory.

if the new treasury secretary gives in to the pressure from NAR/NAHB & starts buying MBS, the govt can probably do all of the above, thereby rejuvenating the housing market, little bit. and if the job situation in the bay area, doesnt deteriorate further, i could see another bubble forming. i already see some of my colleagues, jumping in & buying distressed properties for investment purposes.

can the pendulum swing to the other side, in 09?
or rather can the govt make the pendulum swing the other side?

[randolfe]

The short answer is no.

No, the government, realtors and their shills, media, and all the wishful thinking in the world won't change the fundamental correction that is underway.

Income. Jobs. Affordability.

Those three words will drive home prices back down to realist, supportable levels. The coming year will be very tough on the Bay Area. Layoffs in the pipeline already are going to take a lot of people out at the knees. It's going to be bad.

And this is all a good thing. The reason the Bay Area lost its edge was home prices. It became simply unrealistic for anyone to move into the area without ludicrous compensation packages from their employer, which made those companies uncompetitive.

Drop home prices back to the (oooooh, scary, 1997-8ish) level of income/price and suddenly our companies become unstoppably competitive again.

It will happen. I can't promise it will happen in 2009. I am much more sure it will happen sometime 2009-2012. By 2015, if prices haven't corrected, then the US will have much bigger problems because that implies tremendous inflation. Inflation to the level where people can't afford to drive their cars, school their children, buy furniture, or take vacations.

[Ed S.]

Randy,

You're always a beacon of sanity. Thanks.

[alia]

randy... i step away from zillow for a week and it's gone. no more discussion forum.

if any of the old zillowers stumble over here, you have my permission to give them my email address.

very sadly,
alia

[sun_kan]

i agree that income, jobs & affordability are the basic ingredients to support strong housing prices...in the long term... but in the short term, can it be skewed by the strength of just one of those factors...

if we look at the run-up we had from 03-06, it was pretty much because of the lax lending standards that improved affordability. so can the govt (through Mae/Mac), ease the lending standards again (little bit) by doing away with down payments, increasing the conforming limits, freezing the rates and bringing in 40-99 year loans etc. this was kind of my earlier question too... especially if treasury is going to start buying Mortgage bonds without attaching any condition, dont they really have a lot of control over "affordability"?

[randolfe]

sun_kan

A lot of folks are going to be blindsided by what's in store for the Bay Area job picture next year. I already know for a fact that not only are there going to be massive layoffs at some of the larger companies as soon as January, but many of those same companies have already been preparing managers and executives that they're going to have to take 10-15-20% pay cuts.

So long as your pay is getting cut, the mortgage rate doesn't matter one iota to you. You're not feeling particularly secure in buying a house. At least not unless it's well below 28% of your gross income. Probably more like 20% of your gross income.

At 20% of AGI, we're talking about median prices on the peninsula of well below $500K.

Also, who cares if the Fed buys all the 30 year mortgage bonds they can print money for so long as the lenders refuse to issue that debt to anyone unable to pass conditions merely as strict as 12 years ago, let alone much stricter standards we're likely to see persist for the next couple of years.

No, prices are coming down hard. Rates and standards propelled the inflation. Jobs maintained it after the incoming air was shut off. But now it's deflating and nothing is going to stop it.

I have my money where my mouth is, by the way. Not only do I continue to rent & wait despite seeing prices come off their wishing-highs by hundreds of thousands (in south Marin), and very much wishing to buy another house after having been an owner for over a decade prior to this insanity (I've been out since 2005, for those unaware); but I'm also actively trading futures against the misreading of deflation/reflation currently underway by the market at large and the mass public.

[randolfe]

Alia,

Zillow Forums are gone? What happened? Honestly I haven't even peeked there in months. I'm not surprised, but was it lack of interest, an incident, or industry shills finally getting their way?

[alia]

no idea. because there wasn't a lot of new stuff to chew on, i was only going once a week or less myself. yesterday i went-- the page had been redesigned and the "discussion" tab was gone.

no explanation.

zilch.

on the official zillow blog they're talking about how great this new "ask the experts a question" service is... and all the comments are angry forum members shaking their fists in rage.

i'm guessing that the fear of a lawsuit/ the time babysitting by the zillow staff plus industry shilling equaled goodbye forums.

i'm rather sad about it, as i feel cut off from a lot of people mid-story.

[randolfe]

Well, you and any other Zillow refugees are welcome here. A while ago I was thinking about setting up a threaded forum sorta like Zillow's but simpler and of course more self-moderated. If I recall some very nice folks from Zillow actually volunteered to install and config it for me.

If enough of you guys are interested I'll get things set up. It wouldn't take but a couple days to do. I just don't want to go to the trouble if no one is really interested. I don't get huge traffic on my blog. Mostly just a small group of regulars and a few thousand drive-by browsers every month, most still in my old articles about virtual world economies.

--Randy

[busybee]

I too dislike the new Zillow format and don't plan on visiting there again. I would love to see you develop a threaded forum, if possible. I really enjoy reading your blog and I constantly tune in to learn something new. Keep up the good work!

[alia]

so i dug some more and the forums are sort of there. but really hard to use.

pasa(?) suggested it was zillow angling for a buyout or an ipo. i think it's like homeowners hoping to improve their resale value by putting beige carpet over the 100 year old oak floors...

i'll come play here if you add forums.

alia

[sunnyview]

Yes, it is true. The Zillow forums are mostly abandoned by the solid contributing posters. I think that the new format is for realtors only more like Trulia and meant to discourage real discussion. It makes me sad and I really miss the discussion forums. I would definitely love to reunite all the good old line zillow posters here if your added a forum. Only the good ones you could email me a "most wanted list" and I'll round them up if I can. I wish I had technical expertise to add foe the effort, but I would sure come. I would also promise to round up all well behaved contributing stragglers from Zillow that are still around. I miss the economic discussion. It is all but gone. Zillow added a separate forum title for it and the posts were really good. Lots of info from lots of sources, but now...crickets. Please add a forum here. I would come and promise to behave.

[mina36]

Randy!! Hey. PLEASE make us Z refugees a place to go to. I am still very upset by the destruction of the community that was there.

[Newface]

Hi randy!
Your website should allow PRO and CON ( that make the debate last longer).
However, your comments will neither PRO nor CON ( I read your comments, it had a little bias).
No insults are allowed.( the peoples will go away ).

On economic view, if the realtors or the mortgage agents, who want to leave their telephone number on their comment or their profile?
and if you want more traffic, you knew what to do...

[randolfe]

I haven't forgotten about you guys. I've just been busy with the holidays & all. But I'm definitely looking into setting up a simple, threaded, moderate-able forum on here very soon.

Happy New Year

[GK]

I am thinking that the following happens :

1) Recession lasts until June/July
2) Job losses continue, for an additional 3M more jobs lost from the most recent report (Nov 08) to the bottom. The bottom in job losses is late in 2009. The UE rate tops 9%.
3) Strong recovery in 2010 in the economy.
4) But housing, especially in CA, is in the dumps for a long time, possibly until 2013. Even after that, higher taxes kills off new wealth creation in Silicon Valley, preventing housing from rising much. Start-ups that could have formed here now form in Asia. In inflation-adjusted terms, the 2006 housing price peak is never reached again.

Comments? Agree/disagree?

[GK]

Remember that the Bay Area is being hit from both ends :

1) Low wages in Asia for engineers/IT people/finance people.
2) Vastly lower home prices in the interior US, including big cities like Dallas, Phoenix, Chicago, etc.

Factor 2 has existing for a long time, but now that factor 1 has started to combine with 2, the Bay Area has a problem.

Now consider more factors :

3) Sarbanes Oxley has killed IPOs totally. Silicon Valley has had only a couple dozen IPOs in the last 8 years.
4) CA state taxes will rise even further
5) Federal taxes will rise even further.

So, even for the few people who make a big pop when their startup has a good liquidity event, the marginal taxes they will pay will top 55% when you combine both the state and federal tax increases.

So factors 3,4,5 will totally kill the SV wealth creation engine. Only the big companies, where no new wealth is being created, will exist.

There is even a 6th factor.

6) Whites are moving to the US interior. Asians are moving back to Asia. Mexicans are flowing in.

Mexicans are nice people. But they are not likely to prop up the $1M+ houses the way whites and Asians could. They are not in the high-paying professions. Period.

There you have it. 6 knives in the heart of BA housing.

[Spec]

I don’t want to get too far off subject here so I will be brief. First I would like to thank you (Randy) for all the great contributions on this site. I have been coming here since you left "Z" the first time. Second when/if you are ready to set up a "discussion" style forum, I would be happy to help anyway I can.

Happy new year all !

[sunnyview]

You are missed Randy at Z. I think you should go undercover as Randy_I and consider helping us unwashed masses get our butts through this unstable economy in one piece. Inflation, deflation, inflationary recession...you understand it and explain it so well. All I get is a headache :) Hope all is going well for you and your family.

[randolfe]

Thanks. I miss the spirited Z conversations. But in reality I'm just much more busy these days and barely have time to keep my own blog rolling. For some reason I'm in more and more demand as things get worse and worse.

[Boston Transplant]

Hi Randy,

I know this thread is a bit old but I was intrigued by a comment you made a couple months ago. You said:

"I'm also actively trading futures against the misreading of deflation/reflation currently underway by the market at large and the mass public."

Of all of the macroeconomic debates going on today, the inflation/deflation issue seems to be one of the least resolved, whether discussed in the MSM or the blogosphere. On one hand I hear about the extra trillion the Fed added to its balance sheet, and how that will lead to future inflation, or will at least counteract deflationary forces. On the other hand I hear about trillions of dollars of credit contraction and how that will lead to deflation.

As a renter/saver with a significant cash position, deflation would serve me well, whereas inflation would imply I should buy a home before inflation takes off.

When you mention a "misreading of deflation/reflation currently underway by the market at large and the mass public" I'm a bit confused because I don't see one consistent story or prediction coming from the market, but rather many different predictions.

In any case, your post implies you have a position on this issue, and I'd be interested to hear what it is, if you're willing to share. Thank you.

[Boston Transplant]

Oops! I'm reading back on your blog and I see you had a whole thread devoted to the inflation/deflation debate. I'll read it now.

[randolfe]

Boston,

I'll probably open up another thread to discuss deflation and what kind of strategies we can employ to deal with it individually.

Good to see you again.

Randy

[Boston Transplant]

Thanks Randy, I enjoyed reading the inflation/deflation thread, though now that I understand your position I think I will consider it the deflation thread only. ;-)

In any case I do have one question on the subject but I will post it on the most recent topic.

[Megan]

Hi Randy -

I have read many of your blogs and agree with what you have been saying. Here is my question. I was born and raised in the Mission district of Fremont and would love to return to the Bay Area. My husband and I are looking to return to the Bay Area in the summer of 2012 as I will have completed law school. Should I have my parents invest in a property in Livermore which they can rent out until I return (then I would buy the house from them to preserve the low prices) or should I wait until 2012 to get a house? What do you think prices will do?

Thanks.

[randolfe]

Hi Megan,

I'm afraid I don't have any specific opinion on prices in Livermore as I don't follow that market in any detail. Insofar as whether it's wise for your parents to buy a house as a rental for the next couple of years, I would have them evaluate that on a cash flow basis. Basically, if the rent on the place covers their full-blown costs, then there is no harm in making the purchase. The caveat is whether or not your folks are prepared to be landlords. The negatives of being a casual landlord are many -- it's not the sort of business one gets into lightly.

Not only are there day-to-day maintenance and all the administrative overhead that goes along with having a rental income property, but there are also the differences in treatment of investment property under all the current rules, tax incentives, and government programs.

Even all that may be moot. Unless you're interested in having your parents buy a fixer-upper, and renting that out, you should be very wary of planning to move into a house that's been rented out. In short, renters never treat a home with the same tenderness as would owners. Even if they don't actively abuse the place, they're apt to passively neglect things that an owner would otherwise pay closer attention to.

I hope you and your husband find your way back to the Bay Area safely, and best wishes with law school.

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