Who is the market? We all come from different situations and there is no way to know every combination but does this describe you? Every real estate transaction requires a willing and able buyer and seller. You might be in more than one category and more than one sub-category. I doubt that this is a complete list and I am sure that some topics could fall under more than one heading. Nor are the all necessarily analytical decisions; real estate is emotional.
Current Owners
- Own only their primary residence
- Own their primary residence and at least one other property
Current Renters
Reasons for selling or buying:
- Change in family status (marriage, divorce, death, birth, empty nest)
- Change in employment (loss of job, transfer, retirement, etc)
- Financial considerations (ARM loan resets, change in income)
- Move closer to (or away from) family
- Belief that the market will remain flat or rise (buyer)
- Belief that the market will fall (seller)
- Tax considerations (talk to your accountant)
- Investment potential
- Selling and buying in the same market may be beneficial
- Selling, renting and then buying may be beneficial if you think the market will drop
- Don’t want to be a homeowner (seller)
- Loss of property to third party (to bank)
- Third party (bank, relocation company) selling property
Reasons for watching the market:
- Belief that the market will remain flat or drop
- Mortgage considerations (ability to finance, lack of down payment, etc.)
- Priced out of where you want to live
- Can rent for lower outlay than owning (might cost $1500 to own what you can rent for $1000)
- Can rent “more house” for the same outlay as owning (for $1500 you can rent more than you can own for $1500)
- Don’t want to be a homeowner
- View real estate as a long term investment so as current owner, view current downward market pressure as a bump in the road
- Don’t have the equity to sell and cover transaction cost to move into different situation (rental or less expensive home)
- Emotionally attached to current home and will do anything possible to stay in it
- “What market?”
One reason for selling+buying (which happened in our case and many others we know) is relocation for better schools
Who is in the Market?
Let’s not forget about auctioneers who are trying to help reduce builder inventory.
Oh, and it appears that Treasury Secretary Paulson has taken a much greater interest in the market:
http://www.treas.gov/press/releases/hp856.htm
(March 3, 2008 release)
Not quite sure where you’re going with this post Charles. My thoughts of the market would include something about actual transactions.
The point of this post was to show that there are lots of difference reasons one might be in our out of the market.
I would love it if people wrote about their transactions. It’s hard for me to write about what my clients are doing, “Freddie wrote two low-ball offers, against our advice, that were beat out by others but he did settle on something that he probably over-paid for because his lease was up and he needed somewhere to go and didn’t want to move twice.” Not that we have a Freddie but you can see where I am going.
Charles-
How do you define “low-ball offer?” And at the same time, how do we know that Freddie might have over-paid? The answer should include any extra gains Freddie would have realized had the offers been accepted, and Freddie’s aversion to moving twice. What I do know is that an offer that is not made will never be accepted.
Another Player: Bernanke
This mortgage situation is getting worse by the day. Who would lend money when the Federal Reserve Chairman is asking for principal reductions? Today you owe me $250,000, but now I’ll reduce your principal by ??? And then there is the whole interest rate situation. Investors are getting slammed from risk repricing, yet we hear about the need to lower interest rates on existing loans…
How much do you want to invest in the home mortgage industry?
“Battling a dangerous wave of home foreclosures, Federal Reserve Chairman Ben Bernanke called Tuesday for additional relief and urged lenders to help distressed owners by lowering the amount of their loans.”
bearlee has suggested that I live in another world, which may be true, but where does Bernanke live?
JP: yeah, I was surprised to hear Bernanke calling for reductions as well. Though, you’ve gotta admit, this kind of bailout (paid for by the lenders who made bad loans) would be preferable to a government bailout which we all end up paying for. It does seem fraught with other perils, though, as you point out. What if I’m not having any difficulty paying my mortgage, but I see my neighbor getting a reduction because he’s fallen behind? What will that incentivize me to do? I think if I were a lender and I heard that today I’d drastically cut back on lending just based on that idea being out there and espoused by the Fed chairman at that.
What’s the subtext here? Does this mean that Bernanke is facing reality? The reality that there’s no saving realty at this point. Is he essentially admitting that 20 to 30% decreases are a done deal and that there’s now way he can stop them? Given the way commodity prices, CPI and PPI numbers have been going he’s got to be pretty nervous about lowering rates again in this environment – maybe he sees this as another way out?
Certainly the banks won’t like what Bernanke said today, but if Ben is serious about this then the Fed can certainly play hardball with the banks to convince them to do it.
JP: yeah, I was surprised to hear Bernanke calling for reductions as well. Though, you’ve gotta admit, this kind of bailout (paid for by the lenders who made bad loans) would be preferable to a government bailout which we all end up paying for. It does seem fraught with other perils, though, as you point out. What if I’m not having any difficulty paying my mortgage, but I see my neighbor getting a reduction because he’s fallen behind? What will that incentivize me to do? I think if I were a lender and I heard that today I’d drastically cut back on lending just based on that idea being out there and espoused by the Fed chairman at that.
What’s the subtext here? Does this mean that Bernanke is facing reality? The reality that there’s no saving realty at this point. Is he essentially admitting that 20 to 30% decreases are a done deal and that there’s now way he can stop them? Given the way commodity prices, CPI and PPI numbers have been going he’s got to be pretty nervous about lowering rates again in this environment – maybe he sees this as another way out?
Certainly the banks won’t like what Bernanke said today, but if Ben is serious about this then the Fed can certainly play hardball with the banks to convince them to do it.
TiP-
Don’t get me wrong, I think the message Bernanke is giving is something along the lines of, “It’s time to fess up and face the reality that housing price appreciation isn’t going to save the day.” At the same time he is suggesting to maximize Net Present Value (NPV) for investors.
This is the ultimate Prisoner’s Dilemma game. Foreclosures are bad for property values, and with the number on the rise, it just keeps getting worse. Somehow we need to gain cooperation to reduce foreclosures. If everyone were to cooperate, then housing prices would remain high, as the forced selling based on financial problems would be eliminated. Yet each player has an incentive to defect and demand the full value of the contract.
It’s like the cooperation amount OPEC members, only the game is being played in our financial markets.
The major problem I have with all of this is how do you determine the right amount to reduce the loans by, and how do you select loans to reduce? If I just paid off my home loan, but my neighbor is behind in his payments, then I get nothing and he gets a hefty credit? That sends a great message about financial responsibility.
Don’t get me wrong, I don’t like what is going on in the real estate market, but it does remind me of a car that I tried to purchase for cash at a price above “fair market value.” The bottom line was that the owner was able to take advantage of the tax code (this was before the change regarding vehicles), and my cash was not good enough. Funny thing, I went to the auction and actually purchased the exact same vehicle after donation–I paid less at public auction than I tried to originally purchase the vehicle for.
How does this apply to the housing situation? Lenders were shoveling out wheelbarrows of money, and using both Charles and bearlee’s term, the lead to “Pricing some people out of the market.” Now that the warm feeling of shoveling money into the fire has subsided, let’s just forgive those who were left unable to sell at the top.
It’s somewhat like facing reality about counterfeit money: The last one to hold loses.
If I just paid off my home loan, but my neighbor is behind in his payments, then I get nothing and he gets a hefty credit? That sends a great message about financial responsibility.
Agreed. Definitely not the right message to send. Or as I mentioned, if someone were able to make payments just fine and they hear that their neighbor got a reduction because they were six months behind… well next thing you know everybody will be six months behind.
Any bailout at this point would be wrong… but this being an election year we’re hearing bailout proposals from all over.
The game theory angle is interesting. If there’s gonna be a panic, it’s best to be early to panic.
TiP-
“If there’s gonna be a panic, it’s best to be early to panic.”
When the mob is not around, the size of the door really isn’t that important… …Just like before a run on a bank. The first few through the tiny little door escape without injury.
It seems like a few too many homeowners have had their pants removed, and they didn’t even realize their buckle was undone, but they enjoyed every minute of it, until the money ran out–now they’d love to get a bit of a release from their lender.
By the way, it appears that supply in PDX has begun its ascent–let’s see how long prices, and textbook appreciation, can be maintained with over 12 months of inventory on the market.
Ultimately I don’t think there will be any real bailout. There are too many problems. To require the reduction of principal will either be considered a taking, or would not work because of the nature of contract law. Sure some lenders will realize that they can maximize value by trying to work with some borrowers, but even that will eventually fail.
Personally, I think the point of no return has probably passed, and it will take at least five years before we have stability and liquidity back in the housing market.
Personally, I think the point of no return has probably passed, and it will take at least five years before we have stability and liquidity back in the housing market.
Heck, it might take that long to restore it to the credit markets at this point.
If the banks drop the principal they are in effect dropping the sales price. Will realtors then give back part of their commissions?
I think we should do the same with all loans. If you pay $100,000 for a degree and it only nets you a job making 30K, the university should have to give some tuition back. If you buy a car for $30,000 and wreck it driving off the lot the dealer should refund part of your money to help fix it.
Let’s just dispense with the subterfuge and buy everybody in the country a house with tax money.
Let’s just dispense with the subterfuge and buy everybody in the country a house with tax money.
The FHLB is lending 100s of billions of cheap money to CFC, WaMu, WFC etc. I expect most of this will never be payed back.
If the banks drop the principal they are in effect dropping the sales price. Will realtors then give back part of their commissions?
I think we should do the same with all loans. If you pay $100,000 for a degree and it only nets you a job making 30K, the university should have to give some tuition back. If you buy a car for $30,000 and wreck it driving off the lot the dealer should refund part of your money to help fix it.
The difference is the banks created the money that comprises the principal when the loan was originated. Look up fractional reserve lending.