San Diego Housing Bubble News and Analysis

Sounds like you are begging for trouble to me.

If you can't afford another loss stay where you are at... since you can afford it. Anyway, that seems logical to me. Maybe it will come back and you don't have to take a loss anywhere? If it doesn't that probably means you would have been hosed by your plan "B" too.

Otherwise, make a clean break and don't buy the bigger house until you can afford at least another 10% decline, or more, depending on how things look at that hypothetical future time. I would think there has got to be somewhere in the ball park of a 50/50 chance that the new home you buy goes down by another 70K or more.

If you cannot "afford" another loss then repurchasing is not a great idea. You have a few options... stick it out... sell at a loss and rent.... sell at a loss and rebuy... or maybe just walk away from your mortgage and rent...

It is a tough dilema... Right now times are better then 2007 but to think there will not be rough times ahead is a fallacy. It may not be for awhile but they will come.

To me it sounds like the poker equivalent of "doubling down" or maybe just a strong case of buyer's remorse because your payment can afford you more house now. There are fundamental reasons why prices are lower now than in '07 and it is hard to see those fundamentals improving in the near term.

We were in a similar, but somewhat reverse situation earlier this year. Our plans were to accelerate our sell date and downsize for eventual retirement. Although we purchased well before the bubble and would have recovered our investment plus some, the decline relative to the 2006 peak was still hard to reconcile.

Here’s a brief summary of our experience.

We had planned on interviewing several realtors including a few on this site whom I would recommend consideration should you decide to sell. I’ve read their posts on and off for the past 2 years and find them very knowledgeable on local neighborhoods, measured, and usually balanced unless trolled into no win arguments. Unfortunately, my wife mentioned our intentions to a friend and before you know it, we were inundated with calls. We eventually selected with a local, top producer who was an acquaintance. Only real issue was asking price as we settled on a price higher than what this person recommended.

We received the most activity within the first two weeks. After that, the traffic dropped precipitously to probably 1 showing per week. Of interest was that 70% of the potential buyers surveyed thought the house was priced at market value and 20% thought it is was above market value. Unfortunately, the offers we received were all extreme lowballs, which we promptly rejected usually without any counteroffer. With respect to buyer profile, 40% were Asians who knew the local market inside out and probably go around making lowballs hoping one would bite. 30% were out of state professionals relocating to SD.

I think the biggest frustration for non-distressed sellers are the comps being biased low due to short and foreclosure closings. It’s unfortunate for sellers that comps are based on sales price rather than the appraised value. For example, if a foreclosure appraises at 500K but a shrewd buyer negotiates a deal at 400K, a follow on buyer for a similar house will baseline his purchase price at 400K, not the correct 500K. In effect you have a circular death spiral in home prices to the benefit of the buyer. For this reason and others, some homes have overcorrected as basic purchase metrics such as rent to PITI parity have been mutilated beyond recognition. Imo, the smart money began leaving the herd in late 2008 when fear was high, competition light and quality abundant.

Another interesting development was that many of our neighbors immediately assumed we were in financial difficulty and readily offered up all kinds of advice ranging from loan mods to rent with option to buy. In retrospect, the buyers probably made the same assumptions. Eventually we pulled the house off the market and will stay put until this storm passes. If you decide to sell your 720K house, be prepared for offers as low as 600K. Good luck.

For example, if a foreclosure appraises at 500K but a shrewd buyer negotiates a deal at 400K, a follow on buyer for a similar house will baseline his purchase price at 400K, not the correct 500K. In effect you have a circular death spiral in home prices to the benefit of the buyer.

Funny how no one complained about it when it was working the other way around. In a neighborhood of $400K houses, whenever any house on the block sold for $500K, everyone on the block was immediately $100K richer and would tell you all about it every chance they got. I guess it's just not as much fun on the way down :-(

Cabal,

Among buyers who make low-ball offers, they may be different. Some buyers look at the comps and mistakenly think your house is worth the same. Other buyers know the value of a house but try to bargain from the basement price.

For the first kind of buyers, there is really nothing you can do, except for a friendly note through their agent that his/her offer price is reasonable if the house is in a poor condition like those of foreclosed homes. They will realize their mistake after a while.

For the 2nd kind of buyers, what I would recommend is to give a counter offer with a price close to your asking price. This will give them a chance to understand that you know the value of a home and will not accept low ball offers so that they can make a 2nd offer if they are serious.

Funny! That's the first thing that came to my mind as well.

When fraudulent transactions and no-down, neg-am loans were used by speculators with no skin in the game, the rising prices of comps were "based on fundamentals." When prices drop as this fraud is wrung out of the market, somehow prices are "below market." Funny how that works...

"We eventually selected with a local, top producer who was an acquaintance. Only real issue was asking price as we settled on a price higher than what this person recommended."

Why?

To the OP -
Can you add more square footage to your existing home? That seems to be the appropriate compromise. It's a lousy time to sell and there's potential risk to buying at this point. Can you make the home you already have a home you can stay in long term?

OP-
I'm not sure I understand. Selling/Buying entails like 10% cost, doesn't it? I can hardly imagine that incurring a transaction cost of $70-80K is going to make sense(?)

Cabal, this is the most interesting post I have seen for a long time. Thanks for sharing. Very few sellers seem willing to share their experiences.

I'd just like to say that the experience you describe is the inverse of the inflating bubble. Low balling, and over correction is the jungle's response to bidding wars and over-pricing. However, the source of much frustration to many buyers is that bidding wars never really left us, so your story is a breath of fresh air.

I'm on the other end of the scale, a buyer-in-waiting, and my belief (hope) is that prices will continue to decline in my price range. I am aware that many sellers are waiting for an improvement, but I'm not sure that will happen any time soon. My gut tells me if, or when we have reached bottom, previous high levels of appreciation are unlikely, in the near to mid term. It seems to me that many sellers who bought more than ten years ago, could still sell and do well since historically California prices have always been high. So it seems there is a dilemma. Sellers wait for the 'hoped-for' improvement, which may never come, or lock in gains now at prices which are may reflect more realistic value, and therefore still provide a modest but not unreasonable gain.

I hope I'm not going to be (as you so aptly put it),"trolled into no win arguments", but wouldn't it be great if more buyers and sellers could share frank views directly, as opposed to shouting through an impenetrable wall of misinformation, middle-men, special interests, and greed?

Lousy time to sell? Low inventory, 5% interest rates and tax credits...

Sure the economy isn't great but when the economy picks up, rates will go up. The ability of future buyers to have any sort of additional purchasing power is highly suspect. Waiting to sell to "get your price" is thinking that all sort of incredible things will happen.

UCGal- adding more footage is not an option. Thanks!
My thinking is very simple. My house has depreciated about 10%, but the bigger houses in a nearby neighborhood have come down about 30%, so why not take the advantage and move up? The only thing not sure is if the price will come down more.

There are many unwilling participants of this wild roller coaster ride who view a primary residence as a place to raise a family, not an investment. It is a reasonable expectation to sell at a price consistent with historical norms when life circumstances dictate. Moreover, it is understandable if not expected, to reject offers 100K-200K below historical norms. No one is asking to sell at inflated prices. Schadenfreude and other undesirable traits may obscure this very basic and obvious point.

Many will agree that all is fair in love and war and real estate investing. I do not envy folks who made a killing riding the bubble, nor do I have sympathy for those who purchased at the peak and lost everything. These are risk reward consequences of free choice. I pass no judgment on those that knowingly and eagerly sold an overpriced asset at the peak to a naive buyer. Some may call this an immoral act. However, I do find it insincere that the same people now have the audacity to complain that the same overpriced asset is not depreciating fast enough for their liking because they’re tired of renting coupled with the desire to make a second killing. I don’t personally know any of these nefarious people, does anyone?

Regarding our realtor, we picked that person simply because enough information and choice presented itself to make a decision. No need to complicate the process and fall into an analysis paralysis trap.