Residential real estate dynamics

I just read an article from Money Magazine on cnn.com about the current residential real estate downturn. In it, a brief description exists about the dynamics of a residential real estate downturn. We’ve heard this description so many times, you’d think the adjustment would be quicker each time around, yet it always seems to play out this way. I thought the description of the downturn dynamic was pretty succint and accurate and worth sharing ….

Miller thinks that many sellers are holding out for unrealistically
high asking prices, and the buyers actually purchasing homes are only
the ones willing to pay those higher prices. "That’s why there’s been
such a drop-off in volume," says Miller.

In a normal market those
sellers would more readily accept lower bids but, conditioned to
oversized price increases, they are reluctant to abandon their asking
prices.

To close deals with the on-the-fence or reluctant buyers,
sellers will have to drop their prices and only then will the index
reflect the actual market. The effect could snowball if sellers get a
bit panicky and try to unload their properties quickly, before prices
erode further.

— brian

tags technorati :
  • I have a firm and fundamental belief that this real estate crash is way overblown.

    Funny though, going down to Florida in 2005, the talk down there everywhere was real estate and more real estate. People at bars bragging how they bought a condo on spec and sold it a week later for 20K profit. All sorts of parcels with condo towers planned and people buying units pre-consrtruction.

    It all sort of reminded me of the tech stock and internet stock boom in 1999, when folks were trading four letter ticker symbols and the latest hot tip.

    But real estate is not drugstore.com or global crossing; there is inherent value to land and to bricks and mortar and demographics alone portend that there will also be a demand.

    The spate of fed hikes was suppose to be the latest death knell to real estate, but curiously long term rates have remained flat and stable. Since the last fed meeting, 15 year and 30 year rates have actually DROPPED about 25-40 basis points.

    Yes there will be a shakeout, yes some markets looked frothy, but long term real estate is a good bet.

    And for anyone reading this, Buffalo has lagged way behind the rest of the country… a 2500 sf new build in the burbs can be had for 250-400K; downtown waterfront condos from 200-320K. And in my mom and pop suburb of Cheektowaga… most homes still in the five figure range.

  • Andy,
    Thanks for the comment. I’m glad to hear from you.

    I agree that the downturn is overblown, yet it is indeed happening. I do not believe we will see a crash, and in fact in all liklihood we have seen the peak of interest rates. Bill Gross from PIMCO has some great posts and podcasts on the issue of rates and real estate, in particular this one (http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+august+2006.htm). Bill has got to be one of the most informed guys in the bond market around as well as on interest rates and the economy in general.

    We are currently looking at houses in Boston, and I have to say in the markets where real estate really got ahead of itself, such as Boston, the prices are dropping at a good clip. Over the past 3 months, I have seen price drops of 10% to 15% on listings. Austin is a different story, as the prices here are still rising a bit for now.

    The issue is less about rates than about those that took balloon mortgages or variable ARMs that are now about to float or just started floating. Can they handle the increased monthly payments for the amount of time it takes rates to adjust back down a bit, and can they handle the payments when the market settles to a rate that is above where they were paying but below the peak? If not, then we will see a lot of people selling and new buyers not being able to afford the same prices that they could when rates were in the 5% range.

    All of that said, I agree with you and think it is a gradual adjustment we will see and not a crash.

    Also, having grown up in Buffalo and making frequent trips there still to visit with family, the real estate market there has been rather flat for a very long time. If jobs can be created in new industries and the resurgence of the downtown area can continue, real estate there may be a good value.

    — brian

  • heard this description so many times, you’d think the
    adjustment would be quicker each time around,
    yet it always seems to play out this

  • honestly, i don't think the price of real estate will drop that much. cause there's no much for them to drop

  • Real Estate Internet Marketing

    Well what more can we expect Because of continuous economic downturn, many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.

  • Well what more can we expect Because of continuous economic downturn, many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.