Friday, August 25, 2006

Incentives Mask Market Health

From the New York Times:

Home for Sale, by Anxious Owner
Home sales are falling rapidly, and the number of houses on the market is surging. Yet each new economic report offering evidence of a housing slowdown also shows that the national median home price has continued to rise over the last year.

To understand how this could be happening, consider a three-bedroom house surrounded by oak and redwood trees, not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000, or an equal amount toward lease of a car.
...
In California, the Northeast, South Florida and parts of the Southwest, deal sweeteners like these are playing an increasingly important role in supporting home prices. From large national home builders to individual homeowners, many sellers are offering thousands of dollars in perks, including straight cash, so they do not have to slice deeply into asking prices.

But these discounts are almost entirely missing from the statistics on new-home prices reported by the government and on existing-home prices reported by the National Association of Realtors. As a result, home prices may now be falling, despite what the official numbers show, many economists say.

The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.
...
On Wednesday, the Realtor group reported that the median price of existing homes was also $230,000 in July, up 0.9 percent from a year earlier.

Mark Zandi, the chief economist of Moody’s Economy.com, estimated that incentives might now be equal to as much as 3 percent of the effective prices of houses across the country, on average. But he and other economists said there was simply no way to know for certain.

“We don’t have any house price indexes that get it right,” said Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania.
...
Mr. Zandi, the economist, said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993. The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts.

“The reason the Realtors’ data has never showed an outright decline” before, he said, “might be that they’re not measuring the effective price.”
...
Eventually, buyers will realize “there is no free lunch,” he said. “There is a reason it’s being given away.”

22 Comments:

Anonymous Anonymous said...

Getting real about the real estate bubble

Myth #1: As long as job growth is strong, prices can't go down

Myth #2: The builders learned their lesson in the last downturn. They won't swamp the market with new houses when the market turns


Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices


Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices

8/25/2006 05:57:00 AM  
Anonymous Anonymous said...

I haven't seen any of these incentives in the NYC area that sellers & developers are supposedly offering.

More of the same in the NYC area in terms of pricing. Sellers, builders & the media (NY Times, Newsday & NY Magazine) have this attitude that since this is NYC -- it can't & won't happen here. We have enough trust fund babies in this region as well as Wall Streeters & six figure earners who will keep the economy strong like they did in 2001 before 09/11 and while the US economy went into recession

Apartments may be 'taking longer to sell' (according the NY Times) but they do sell and do sell for the price that is being asked..

Only in NYC area can a one bedroom condo in Jersey City in a fourth floor walkup get $400,000 and a one bedroom co-op in the 'other 4 boros' outside Manhattan can easily sell for $500,000 or more. And in many cases, the buyer not only is required to pay 100% of their own closing costs + the sellers portion as well especially in the case of a sponsored co-op,

8/25/2006 06:16:00 AM  
Anonymous Anonymous said...

Anon's 06:57:49 myths are actually facts for this part of the country where not only is job growth strong, but wage growth is very strong as well.

Interest only loans are a very small portion of the total with most buyers putting down 20% or more and going with the 30 year or 15 year fixed loan.

8/25/2006 06:18:00 AM  
Blogger grim said...

Please post the data to back up your statement.

Thanks,
The Management

8/25/2006 06:28:00 AM  
Anonymous Anonymous said...

Anon 7:16

There are very few areas outside of Manhattan in NYC that a 1 bed coop would fetch 500k or more. There are some areas that have become very expensive because the yuppies have spilled over, such as they have in Hoboken. However, in most other areas of NYC NO ONE will pay 500k for a 1 BR coop. And don't use Park Slope, Brooklyn Heights or Williamsburg as examples because it's already understood those areas are outrageously priced.

8/25/2006 06:30:00 AM  
Anonymous Anonymous said...

Its worth noting that NYC is a true 'international market'. So you cannot just look at jobgrowth and interest rates there... but the $dollar's exchange rate, and the world GDP growth. macro factors effect this place, and to a lesser extent the FAR north regions of jersey (ie Jersey City,etc). Although there is correlation in % inclines and drops... i do agree that the NYC valuations cannot be held to the same arguement as NNJ... not anytime soon anyway.

Curious

8/25/2006 06:51:00 AM  
Anonymous Anonymous said...

Sounds awfully like clicks, eyeballs, and mindshare. "It's different this time."

8/25/2006 06:59:00 AM  
Anonymous Anonymous said...

Is Queens or the Bronx anymore of a 'world class' destination than Manhattan is??

Since NYC is composed of 5 boros and really includes the entire metro area including Long Island, CT, & North / Central Jersey.

8/25/2006 07:10:00 AM  
Anonymous Anonymous said...

Forget the damn perks.

Demand real price cuts from these money grubbing sellers.

8/25/2006 07:15:00 AM  
Anonymous Anonymous said...

"Anon's 06:57:49 myths are actually facts for this part of the country where not only is job growth strong, but wage growth is very strong as well."

Do you have the facts to back this up?

No you don't. Grim presented the fact several months ago about wage growth in NJ. I believe wage growth was flat for last 5 years.
If someone can provide the link we can stomp dowjn another realotr myth.

8/25/2006 07:18:00 AM  
Blogger jayb said...

What a clever way for builders to make the numbers not seem so bad. Of course they should be required to report incentives and perks, so these can be taken into account when doing the stats.

I can't wait to see where my market, Jersey City, is headed with about every builder possible building now. Tens of thousands of units under construction. Pray the demand curve doesn't shift left.

8/25/2006 07:29:00 AM  
Anonymous Anonymous said...

"Interest only loans are a very small portion of the total with most buyers putting down 20% or more and going with the 30 year or 15 year fixed loan."

8/25/2006 07:18:10 AM

Really???? Can you please provide a link that will quantify this. Everything I read states that close to 50% of the mortgages taken out in this area were some form of an adjustable in 2005,a higher % of this on the west coast. A mere $2 trillion of this is due to adjust in 2007. If I am wrong about please advise. This may alter my buying plans.

BC Bob

8/25/2006 07:39:00 AM  
Blogger NJGal said...

Sounds like another day of "NYC is different" cliche arguments. Grim, care to post yet another link to your carefully researched post filled with NY Times articles from the 1990s where NYC real estate DID fall?

8/25/2006 07:45:00 AM  
Anonymous Gary said...

The realtors and lenders managed to brainwash a whole bunch of idiots by writing down a number on a piece of paper thereby sucking in a bunch of fools who evidently drank too much kool aid.

Don't think for one minute that that's going to sway anyone on this forum who understands that economic fundamentals are based on principals and not by panic-laden propaganda. Realtors have toppled used car salesmen for the "don't feed me your line of BS" award. And once again, I am a homeowner.

8/25/2006 07:46:00 AM  
Anonymous Anonymous said...

eyeballs and mindshare?

-newark's murders have gone up 9.4% between 2004 and 2005. NYC's
0.5.

-Since 2000 NYC has seen a drop in violent crimes every year, newark has increased every year and is now 50% higher than 2000's number of murders.
there are 116 police officers per mile in NYC, there are 50 in newark.

-less than 50% of the murders carried out bewteen 1998 and 2003 led to a conviction in Essex county.

-The Economist, august 19 issue

... yes, NNJ and NYC are different and will attract a different threshould in any economy.

Curious

8/25/2006 07:48:00 AM  
Anonymous Anonymous said...

...by the way, not refuting Grims points... I agree (and have seen the 90's analysis he's done...excellent). My only point is that the markets are only correlated to an extent (which supports this blog theory... NNJ is in MUCH worse trouble... I agree!).
Curious

8/25/2006 07:50:00 AM  
Anonymous Anonymous said...

Sounds awfully like clicks, eyeballs, and mindshare. "It's different this time."

Wow, as a one-time dot-com advertising casualty, I can say that you are dead on. The first tactic we used to combat declining CPM rates was incentives--gratis placements on other pages and affiliate sites. But there was no combatting the change in market philosophy--the problem wasn't the cost of CPM ad buys; it was the results they garnered.

Eventually, the house-selling sector will become "Dilbertized": realtors will have to have a "business model" for sellers; brokers will have to go on retreats to "deal with the new paradigm"; sellers won't be selling homes, they'll be offering "full-scale dwelling solutions." Will the return of the Handspring Visor be far behind?

-Jamey

8/25/2006 07:51:00 AM  
Anonymous Anonymous said...

Latest CME futures prices for NYC metro:

Month bid/ask
08/06 - 214.40/215.60
11/06 - 210.40/212.00
02/07 - 207.00/208.80
05/07 - 202.60/204.60

Those putting cash on the line see a trend.

8/25/2006 10:33:00 AM  
Anonymous Anonymous said...

I can understand how builders benefit not reporting the incentives in the true sales price, they obviously get to keep the market price afloat artificially. But why would individual sellers not prefer to drop their price rather than offering incentives? Wouldnt a lower sales price mean lower commission to the broker,as well as a lower tax bill to foot with the smaller profits that are declared? eg, in the case of this 1.53M house that is mentioned in the article, assuming that the couple even bought it in 2000, they probably are sitting on 700-800k of profit. So why would they not declare a sale price of 1.3M for eg, and reduce their declared profit to 500k and avoid paying taxes on it completely?

8/25/2006 10:36:00 AM  
Anonymous Anonymous said...

Anon 11:39
What is the symbol for those Housing CME prices?
Appreciate it if you can share
Thanks!

8/25/2006 10:38:00 AM  
Anonymous Anonymous said...

each contract probably has it's own symbol. But go to http://housingrdc.cme.com/ to check for real-time data. If that link doesn't get you there, start at CME.COM and work your way through the links.

8/25/2006 10:49:00 AM  
Blogger Mr. Oliver said...

"Anonymous said...
Latest CME futures prices for NYC metro:

Month bid/ask
08/06 - 214.40/215.60
11/06 - 210.40/212.00
02/07 - 207.00/208.80
05/07 - 202.60/204.60"

Could you quickly explain CMEs and what this is telling me?

Danke.

8/25/2006 04:11:00 PM  

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