Price swings puzzle Kate

Kate in the Valley is back, watching price reductions like a hawk and trying to make sense of a market that defies easy explanation:

Last week I was talking about how scary the drop in the market was because it seemed to be happening so fast.  This week I look around and think it's more like two steps forward, one step back.  For example, there's a street in the hills of Sherman Oaks called Contour Drive that has at least three homes for sale.  The first two have dropped significantly since they were originally listed:

13545 Contour Dr. (MLS # FR2055214 & F1732673) $478/ sq. ft.
Price Reduced: 07/23/07 -- $1.599M to $1.495M
Price Reduced: 09/03/07 -- $1.495M to $1.349M (down 15.63%)

13553 Contour Dr. (MLS # F1722523)  $389/sq. ft.
Price Reduced: 07/12/07 -- $1.025M to $950k
Price Reduced: 09/05/07 -- $950k to $895k (down 12.68%)

But the third -- a flip -- came on the market last week at $1.169M:
13566 Contour Dr. (MLS # F1732137) $779/sq. ft.

I've seen all three houses.  None of them are fixers and none of them are state of the art.  What could be the justification for such dramatic price differences?  I cannot guess.  And it's not just new listings. I've seen more than a few price increases recently.  For example, in Encino, a little house was on the market for 172 days.  It went through a lot of price reductions and then they inexplicably raised the price:

15560 Otsego Street (MLS # F1703604)
Price Reduced: 04/04/07 -- $875k to $859k
Price Reduced: 04/13/07 -- $859k to $829k
Price Reduced: 04/22/07 -- $829k to $779k
Price Reduced: 06/07/07 -- $779k to $739k
Price Increased: 08/30/07 -- $739k to $805k

The same thing happened in North Hollywood:

5101 Strohm Avenue (MLS # : B2100128)
Price Reduced: 04/16/07 -- $1,000,000 to $850,000
Price Reduced: 07/18/07 -- $850,000 to $835,000
Price Reduced: 08/07/07 -- $835,000 to $749,000
Price Increased: 08/09/07 -- $749,000 to $950,000

Of course, everybody is saying, "Prices are sticky. It's going to take years for this correction."  But I guess I imagined a slow, steady decline, not this spasmodic limping along.

Thanks, Kate.
Comments? Insights? Any explanations on why prices rise after being reduced?

Comments

[Tim K.]

It's two unrelated strategies:

1. Trying to get your home listed in a new "price range". Sometimes by raising the price, you are now in the new "low-end" of a different pool of buyers who didn't notice you before. It's a desperation move, and sometimes it works. Not likely in this market though.

2. Completely clueless real estate agent who hasn't been paying attention still is thinking of 2006 prices and is completely unaware of the competition. This happens a lot more often than you might think.

In any event, don't despair. These are *asking* prices, not sale prices, and what they end up selling for will bear little to no reflection on the asking price.

[Jonah1979]

What you're seeing is agents/sellers trying different things to get traffic generated towards their houses. There's a house located near where I currently live they are asking $720k and it "appears to be structurally sound" according to their ad. This house was built in the 40's and probably needs at least 100k worth of work. I was watching the house from my window when they had their last open house and nobody come by...it was kinda funny.

I wouldn't pay more than $350k for it...

[MyLessThanPrimeBeef]

If your house is going to sit there doing nothing, do you want it to sit there looking ugly or pretty?

I rather have a $1 million that is not going to sell than a $500K house that is not going to move.

Six months later, when the liquidity crisis is over, I pray to God it will be, I can then reduce it from $1 million to a bargain-of-the-millenium $799,999.99.

[Jax]

They're raising the prices so they can offer the buyers a huge, cash incentive on the backside if they purchase the home. Of course, any buyer that is stupid enough to accept such a deal will have to pay higher real estate taxes and will probably pocket the cash (or buy a new car with it) and try and finance as much as they can. This leaves them with a higher payment and then they'll default on the mortgage in a few months. Oops!!! That's already been happening, hasn't it?
This is a tired, old maneuver but you're they probably won't be able to get an appraisal that will satisfy the bank at those numbers and finding a qualified buyer who can pass muster with the lenders will be another huge obstacle to overcome.

[Kate]

Tim:

Your first theory had actually not occurred to me. Because I look at all the listings in a geographic area, I forget that some people run price-point searches and are blind to all the surrounding listings.

Jonah:

I love that "appears to be structurally sound" bit. I recently came across an MLS description that said "possibly copper plumbing." Because there's just no way to verify that. :-P

Prime wrote:

"...I can then reduce it from $1 million to a bargain-of-the-millenium $799,999.99."

And surely the listing description: will read: "Less than $800k in this area? UNBELIEVABLE! Don't miss this one."

And then, of course, I will be obligated to mock that one penny discount over at May 5th.

[Charles Wilson]

Okay, I think most people, at least in places like Southern California, are through the first stage of grief (denial) as it concerns the real estate situation. Now they are in the second stage (bargaining). As if to say, "If I agree to take a 15% haircut, is that fair?" Um, no dear, when you get to 50% let's talk.

[Alan]

The rise in jumbo mortgage rates means that you'll pay more for the house listed at $75,000 less now than if you bought a month ago at the "inflated" price. Jumbo rates are, on average, about 3/4 pt. to 1 pt. higher than just a month ago. That means that you could pay $4257/mo. on a 30-year fixed, 20% down purchase price of $800K, or a month ago paid $4220/mo. on the same loan on a $880K purchase price (albeit with an extra $16000 in down payment). Fixation on the waiting for "prices" to come down actually may have cost you more out of pocket.

[Kate]

Alan:

So what you are saying is: I've already been permanently priced out of the market? I don't think so.

Yes, if I bought TODAY, it might have cost me a bit. But eventually the price discounts will out pace the climbing mortgage rates. The laws of supply and demand dictate that a correction must come. Sorry, but eventually the party has to end.

[speedlet]

Alan --

You seem to be assuming that prices will not continue to fall beyond this month. This is an optimistic assumption, to say the least.

It's not as if it's a matter of choosing between last month's mortgage payment and this month's mortgage payment. As housing affordability in the form of monthly payments continues to decline, housing prices will inevitably decline as well.

Looking only at the monthly mortgage payment is what got so many people into trouble during the bubble -- i.e. "who cares if it's a $1M mortgage -- if I take a 2/28 ARM, I will still only pay $2500 for the first two years!" These people certainly care now that they're hundreds of thousands of dollars underwater on their mortgages.

It's entirely possible, however, that if housing prices get marked down 30%, housing affordability will remain the same as a result of higher interest rates. But Kate still would have dodged the bullet of being $250,000 underwater on her home.

Given the choice between a slightly mortgage payment and being underwater on a leveraged investment, I would certainly choose the former.

[Charles Wilson]

No, Alan, the rise in jumbo rates, if sustained, means that asking prices are going to get whacked even harder than they already were going to be whacked. That's how it happened in every other real estate crash, and this particular crash has a lot farther to fall than the rest of 'em. Katie, be patient. There is no rush. The drugs are going to wear off, and you'll get a house cheaper -- a lot cheaper -- than what's being advertised right now.

[Mark]

Alan, your argument is so 2005.

[Toby]

Fixation on the waiting for "prices" to come down actually may have cost you more out of pocket.

Posted by: Alan | September 07, 2007 at 04:14 PM

LOL I think you're missing the point. Next summer, she wont have to get a JUMBO loan for the same house.

That 300 to 500% run up was completely imaginary. You don't get to keep it.

[Ace]

'So what you are saying is: I've already been permanently priced out of the market? I don't think so.'

It depends on what market you are trying to get into. If you are trying to buy in Lancaster, you are sitting pretty! If you are trying to buy in Studio City, you may be out of luck for a while.

The sellers are holding firm on the prices and it is unlikely that the interest rates on a jumbo will go down a full point in the near future.

[MyLessThanPrimeBeef]

Purchase prices are like marraiges, or at least ideally: You get it done once and you are set. YOu can't change it.

Interest rates are like girl friends - you get an ARM and you can jump on a better one when the opportunity arises.

So, sure your monthly payment is higher now, but there is a good chance you can refi at a lower rate in the future. So who will be laughing then?

But you only pay the purchase once! You are stuck, like in a bad marriage.

In any case, as other posters have pointed out, it's certain that the prices will come down a lot to more than just offset the higher interest payments.

[Dr. JwB]

If Kate has the same amount to put down (lets say 150K) a few months ago and now, then she's still even, or perhaps slightly ahead:

THEN
880K house - 150K = 730K loan, at 6% ($4377/mo), 7% ($4857/mo)

NOW
800K house - 150K = 650K loan, at 7% ($4324/mo), 8% ($4769/mo)

Will interest rates continue to rise? Will prices continue to fall? I'm betting along with Kate that the rate increases won't match the price drops in the near future.

[shockg]

"Yes, if I bought TODAY, it might have cost me a bit. But eventually the price discounts will out pace the climbing mortgage rates. The laws of supply and demand dictate that a correction must come. Sorry, but eventually the party has to end."

Kate, why don't you come back when your ready to buy so you don't waste our time and take up space on this blog.

[Mark Gh]

Kate. Please go away already. How long does it take for you shop for pajamas?

[Dr. JwB]

shockg, Mark Gh, neither of you have contributed as much to this discussion as kate. frankly neither have I. If you don't like her comments, don't read them. Go back to yelling at your TV.

[AnnS]

There is no instant gratification in observing the vagaries of the market. It takes quite awhile for things to change -- particularly when reality becomes painful.

You can't analyze it on a daily obsessive-compulsive basis. It takes some patience.

Here is what we are seeing among the 2nd home market in our area:

The following are 5 homes that are or were for sale. The first 3 homes are in a 15 lot subdivision and are all located within a few hundred feet of each other. A .4 acre lot in the subdivision just got dumped at $40,000 which was only 45% of what the owner paid for it. The 4th house is in another new development within sight of the first 3 – about 1500 –2000 feet away and is a spec house. House #5 is the 3rd point of the triangle between the 3 devlopements and is about 1000 feet from #4 and 1500 feet from #2-3. The developments are aimed at 2nd homeowners. Only the #1 has sold.

House #1: 2275 sq ft. 3 bdrm 2 bath. LR, DR, FR, Ktchn, Bkfst, full walkout basement w/ 2 car garage & paved drive on .4 acres. About 2-3 years old

Original List $420,000 > $409,000 > $399,000 > S309,000 > SOLD: $295,000 3 weeks ago
Time on market : Over 18 months (and then owners said Get Rid Of It Now)

House #2: 2268 sq ft. 3 bdrm 2 bath, LR, DR, FR, Ktchn, Bkfst, full walkout basement w/2 car garage & paved drive on .32 acres New Construction (spec house)

Original List: $435,000 > $399,000 > (after sale of #1) > $347,000
Time on market: 16 months
Estimated value based upon comp should be: $295,000 or so, or 15% less

House #3: 2014 sq ft 3 bdrm 3 bath, LR, DR, FR, Ktchn, Bkfst, full basement w 2 car garage & paved drive on .43 acres About 2-3 years old

Original List $438,000 > (after sale of #1) > $399,000
Time on market: 16 months
Estimated value based upon comp should be: $268,900 or so, or 32.6% less

House #4: 1616 sq ft 3 bdrm 2 ½ bath LR, DR, den, Ktchn, bkfst, full basement w/2 car garage & paved drive on .22 acres. New construction (spec house)

Original List $299,000 > (after sale #1) $279,000
Time on market: 17 months
Estimated value based upon comp should be: $209,000 or so, or 25% less

House #5 1530 sq ft 3 bdrm 2 ½ bath LR, DR, Ktchn, full basement, no garage & dirt drive on .17 acres. New construction (spec house)

Original List: $284,000 > (after sale of #1) $274,900
Time on market: 13 months
Estimated value based upon comp should be: $179,000 or so, or 34.8% less

The sellers of Nos. #2 –5 are resisting lowering their prices to varying degrees. None are completely able to admit that the sale of #1 sent their prices into the dumper and some are in more of a state of denial than others. (And some are more seriously screwed than others as they are developers or contractors.)

And the local banker agrees that in view of the sale of #1 and the sale of the .4 acre lot, not one of them will appraise at the asking prices.

[Sam]

Kate-As I have stated before it can be difficult to time the market and the bottom. The trend is down and that will work in your favor only if you make offers and are ready to move. Make low offers, 50% of asking prices, until you find the bank and/or owner that will cave, and they will in this market at that price point. They all have artificially high aksing prices and if you want a deal you need to shove an offer in front of their face and be ready to close in a week. I do not want to be critical yet it appears you are doing too much research and looking, take action and try making 3 offers a week and you will have your dream house below market within 2 months. The deals are out there now if you make offers and this waiting for the bottom is a crock.

[investorguy]

Sam: you're a smart guy. I'm glad I'm not the only one here who gets this.

[RichW]

"The deals are out there now if you make offers and this waiting for the bottom is a crock."... Sam, its unlikely anybody will take 50% off asking. Most places for sale today fit into one of two categories; people who missed the boat cashing out and are still dreaming of getting a 2005 price for their home, and those who have their 2/28 ARM exploding in their face and are facing imminent foreclosure. The former group aren't serious sellers and the latter group lack the equity to swing their asking prices anywhere near reality. That being said, we are probably at least 2 years from bottom according to the huge number of homes facing ARM resets that will obviously turn into a flood of foreclosure inventory (on top of the existing flood). Buying today is foolish. If you think I'm wrong, check history, check the Case-Shiller index, check home prices vs. inflation, and check the subprime ARM reset inventory/schedule. Facts are a wonderful thing.

[Charles Wilson]

I think this calculator is a fantastic tool.

http://www.cepr.net/calculators/hb/hcc.html

It shows that, even after reductions, many house asking prices are double what they should be. Sellers need to throw away their drugs, and buyers need to sit on their wallets until it happens.

[KenO]

It might be interesting to look at the listings and see if the listing agent has changed. One scenario that might be playing out here is that after a house lingers on the market for many months, the seller becomes disillusioned with the first listing agent after a chain of successive reductions doesn't result in a sale. Then, after the listing agreement expires and the house still hasn't sold, the seller gets fed up and goes looking for a new agent. The seller ends up selecting the first agent that comes along and promises to get the house sold for an amount closer to the original asking price, hence the raise. Unfortunately, the seller doesn't realize that all they've accomplished is starting over at square one, and that another series of price reductions is inevitably on the way.

I also think that the scenario proposed by one of the other posters is plausible too -- that the price increase will be offered back to the buyer at closing as an incentive.

As for Kate, where do you drawn the line between conservative cautiousness and analysis paralysis?

[Michael T]

Kate: I have been a corporate banker for 23 years and have seen a few cycles. The rise in home prices in selected markets (California, Arizona, Nevada) was fueled by a outsized number of porrly underwriten mortgages. Defaults will not moderate for approximately 12 months. With the usual overhang of inventory, it should be perhaps another 6 months before your market hits bottom, maybe longer. You should wait, save your money for a bigger down payment and not try to catch a falling knife.