Slow decline or is a big chunk about to be ripped out?

[sdrealtor]

R,
Sounds like you are back on the Big Chunk side aftera brief period of uncertainty. After seeing all the events of the last few weeks I remain on the slow decline side based upon the stubborness of sellers to accept less.

Anote from the field: I submitted a cash offer on a property last week that IMO was 20K higher than I thought it should have been. After a few weeks of low offers my client grew impatient and said just give them what they want. The seller came back with some wacky conditions as if it was 2004 which pissed my buyer off and convinced them to renew their less for another 6 to 12 months which I have been begging them to do. It felt good to tell the seller and agent to take a flying leap.

sdr

[Bugs]

All the action occurs on the margins, and so far the margins aren’t big enough to dominate the rest of the market. The size of those margins will undoubtably increase, but how big they’ll get and how much damage to the buyer psychology they create is really tough to say.

We’re in uncharted territory at this point – nobody can know to what degree these various pieces will interact with respect to a declining market.

The conventional wisdom based on spikes in the past is that the downside of a spike is a little more moderate in pace than the upside of that spike. This last upside was very steep, so if the past repeats we can guess the downside will be steeper than average before it mellows out to that more moderate bleed.

Let’s say that must-sell transactions become 75% of the closed sales. We would still have to have buyers for each of those sales – buyers who think that now is a good time to buy. The cruel irony is that during the same time sellers are being punished the buyers are (finally) figuring out they don’t want to be the greater fool. This leads to more punishment for the sellers.

I’m still in the 10-12% camp as far as the next 12 months are concerned. For a few market segments in SD that would get us almost halfway to the original -50% forecasts. After that, the number of closed foreclosure sales and the number of REO listings may comprise a big enough margin to take over the driver’s seat.

No matter what, it’s still going to take years before this is over.

[Bugs]

All the action occurs on the margins, and so far the margins aren’t big enough to dominate the rest of the market. The size of those margins will undoubtably increase, but how big they’ll get and how much damage to the buyer psychology they create is really tough to say.

We’re in uncharted territory at this point – nobody can know to what degree these various pieces will interact with respect to a declining market.

The conventional wisdom based on spikes in the past is that the downside of a spike is a little more moderate in pace than the upside of that spike. This last upside was very steep, so if the past repeats we can guess the downside will be steeper than average before it mellows out to that more moderate bleed.

Let’s say that must-sell transactions become 75% of the closed sales. We would still have to have buyers for each of those sales – buyers who think that now is a good time to buy. The cruel irony is that during the same time sellers are being punished the buyers are (finally) figuring out they don’t want to be the greater fool. This leads to more punishment for the sellers.

I’m still in the 10-12% camp as far as the next 12 months are concerned. For a few market segments in SD that would get us almost halfway to the original -50% forecasts. After that, the number of closed foreclosure sales and the number of REO listings may comprise a big enough margin to take over the driver’s seat.

No matter what, it’s still going to take years before this is over.

[Bugs]

All the action occurs on the margins, and so far the margins aren’t big enough to dominate the rest of the market. The size of those margins will undoubtably increase, but how big they’ll get and how much damage to the buyer psychology they create is really tough to say.

We’re in uncharted territory at this point – nobody can know to what degree these various pieces will interact with respect to a declining market.

The conventional wisdom based on spikes in the past is that the downside of a spike is a little more moderate in pace than the upside of that spike. This last upside was very steep, so if the past repeats we can guess the downside will be steeper than average before it mellows out to that more moderate bleed.

Let’s say that must-sell transactions become 75% of the closed sales. We would still have to have buyers for each of those sales – buyers who think that now is a good time to buy. The cruel irony is that during the same time sellers are being punished the buyers are (finally) figuring out they don’t want to be the greater fool. This leads to more punishment for the sellers.

I’m still in the 10-12% camp as far as the next 12 months are concerned. For a few market segments in SD that would get us almost halfway to the original -50% forecasts. After that, the number of closed foreclosure sales and the number of REO listings may comprise a big enough margin to take over the driver’s seat.

No matter what, it’s still going to take years before this is over.

[Allan from Fallbrook]

sdrealtor: What effect will the new lending guidelines (lack of secondary markets for non-conforming loans) have on SD county real estate in your opinion?

Lots of differing opinions out there, but you are in the biz, so I am curious about yours.

Having a finance background and looking at this from an Econ101 vantage, I would think the inability to secure financing (or having to secure financing with a high cost of funds a la the Wells Fargo 8% Jumbo), would have a major impact on RE.

[Allan from Fallbrook]

sdrealtor: What effect will the new lending guidelines (lack of secondary markets for non-conforming loans) have on SD county real estate in your opinion?

Lots of differing opinions out there, but you are in the biz, so I am curious about yours.

Having a finance background and looking at this from an Econ101 vantage, I would think the inability to secure financing (or having to secure financing with a high cost of funds a la the Wells Fargo 8% Jumbo), would have a major impact on RE.

[Allan from Fallbrook]

sdrealtor: What effect will the new lending guidelines (lack of secondary markets for non-conforming loans) have on SD county real estate in your opinion?

Lots of differing opinions out there, but you are in the biz, so I am curious about yours.

Having a finance background and looking at this from an Econ101 vantage, I would think the inability to secure financing (or having to secure financing with a high cost of funds a la the Wells Fargo 8% Jumbo), would have a major impact on RE.

[NotCranky]

“R,
Sounds like you are back on the Big Chunk side aftera brief period of uncertainty”

Actually my comments reflecting “uncertainty” are more of a reflection of trying ot debate “politely”. If I understand “polite” debate, one component is that you insert the other guys insights and opinions into your commentary somehow. I think I got a little too polite once by saying you guys “have me on the fence”. Now I understand why people are reluctant to do that.If you follow my trail after the politenesses you will always see where I have stood.That said my buddy Cy is in the slow camp along with a few others like yourself so why should I get hostile about it? There is always religion, Bush or the wars to get hostile about(in some other forum)unless JG comes back.

[NotCranky]

“R,
Sounds like you are back on the Big Chunk side aftera brief period of uncertainty”

Actually my comments reflecting “uncertainty” are more of a reflection of trying ot debate “politely”. If I understand “polite” debate, one component is that you insert the other guys insights and opinions into your commentary somehow. I think I got a little too polite once by saying you guys “have me on the fence”. Now I understand why people are reluctant to do that.If you follow my trail after the politenesses you will always see where I have stood.That said my buddy Cy is in the slow camp along with a few others like yourself so why should I get hostile about it? There is always religion, Bush or the wars to get hostile about(in some other forum)unless JG comes back.

[NotCranky]

“R,
Sounds like you are back on the Big Chunk side aftera brief period of uncertainty”

Actually my comments reflecting “uncertainty” are more of a reflection of trying ot debate “politely”. If I understand “polite” debate, one component is that you insert the other guys insights and opinions into your commentary somehow. I think I got a little too polite once by saying you guys “have me on the fence”. Now I understand why people are reluctant to do that.If you follow my trail after the politenesses you will always see where I have stood.That said my buddy Cy is in the slow camp along with a few others like yourself so why should I get hostile about it? There is always religion, Bush or the wars to get hostile about(in some other forum)unless JG comes back.

[NotCranky]

“No matter what, it’s still going to take years before this is over”

This realization finally hit me last week. It was a big disappointment. Knowing and facing reality is always a big charge though. I am not contradicting my chunk remarks. I am just saying that even with 20% drops in a year,should it happen, we don’t have a healthy market nor are hopes of repeating the gains of the last cycle anything like part of the equation at that point.

[NotCranky]

“No matter what, it’s still going to take years before this is over”

This realization finally hit me last week. It was a big disappointment. Knowing and facing reality is always a big charge though. I am not contradicting my chunk remarks. I am just saying that even with 20% drops in a year,should it happen, we don’t have a healthy market nor are hopes of repeating the gains of the last cycle anything like part of the equation at that point.

[NotCranky]

“No matter what, it’s still going to take years before this is over”

This realization finally hit me last week. It was a big disappointment. Knowing and facing reality is always a big charge though. I am not contradicting my chunk remarks. I am just saying that even with 20% drops in a year,should it happen, we don’t have a healthy market nor are hopes of repeating the gains of the last cycle anything like part of the equation at that point.

[SD Realtor]

Hi Allan –

I know you were addressing sdr but I thought I would throw in my two cents. I do believe this will have an impact. I think there are alot of well incomed individuals or families looking to buy into the 700k-900k range who were going to rely on this sort of financing. This falls square into the 100k+ per year engineer type who has say 100-200 in cash for a downpayment. So they were going to buy that nice home from the builder in say CV or 4S and now they just saw the payment jump a few hundred bucks.

I do believe it will take awhile for this event to manifest itself into the statistics we always see. I doubt the median will get affected for many months. The volume and active/pending ratios will be the first visible signs of the change. Also as we are hitting the cyclical slow season it will further mask this out. I also feel that this REALLY adds vulnerability to the rate cycle. These risk premium additions imposed by the secondary market are hard to swallow but if the 10 year was at 5.5 then it would be a real gut punch.

So in summary I think this will manifest itself over the next few months to help suppress pricing. As always many of the sellers who just don’t get it will need to cycle through a few months of inactivity and then decide if they should cut bait or pull out of the market. Once that pipe is cleaned out, this should hit the “family looking for the nice home in the good school district” types the most such that they will sit for awhile longer. Thus I would expect the cookie cutter 4S, CV and those types of homes to suffer once it does kick in.

SD Realtor

[SD Realtor]

Hi Allan –

I know you were addressing sdr but I thought I would throw in my two cents. I do believe this will have an impact. I think there are alot of well incomed individuals or families looking to buy into the 700k-900k range who were going to rely on this sort of financing. This falls square into the 100k+ per year engineer type who has say 100-200 in cash for a downpayment. So they were going to buy that nice home from the builder in say CV or 4S and now they just saw the payment jump a few hundred bucks.

I do believe it will take awhile for this event to manifest itself into the statistics we always see. I doubt the median will get affected for many months. The volume and active/pending ratios will be the first visible signs of the change. Also as we are hitting the cyclical slow season it will further mask this out. I also feel that this REALLY adds vulnerability to the rate cycle. These risk premium additions imposed by the secondary market are hard to swallow but if the 10 year was at 5.5 then it would be a real gut punch.

So in summary I think this will manifest itself over the next few months to help suppress pricing. As always many of the sellers who just don’t get it will need to cycle through a few months of inactivity and then decide if they should cut bait or pull out of the market. Once that pipe is cleaned out, this should hit the “family looking for the nice home in the good school district” types the most such that they will sit for awhile longer. Thus I would expect the cookie cutter 4S, CV and those types of homes to suffer once it does kick in.

SD Realtor

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