Vashon Homes & Events from Go! Real Estate

Vashon Island Real Estate: State of the Market

November 12, 2008 at 8:00 pm Leave a comment

The Seattle Times Real Estate Section for November 9, 2008, contained two sobering articles about the continuing perturbations in the national housing market.  The first article, A Realty Reality Check, written by Ylan Q. Mui of the Washington Post, discussed the impact of Consumer Fear in the face of the current economic turmoil.  The second article, Bargains Help Cut Housing Glut, written by James R. Hagerty of the Wall Street Journal, discussed the impact of purchases of foreclosed homes by investors hunting for distressed properties.  Taken together, these articles offer sound wisdom to both sellers and buyers on Vashon Island.

The thesis of Mui’s article is that the palpable fear of homesellers that they are losing enormous amounts of home equity if they put their home on the market today, and the corollary fear of buyers that the market has not bottomed out and that they can expect deeper price cuts if they wait it out, has caused the market to freeze.  Even though reports suggest that banks are now making mortgage loans available to qualified buyers, demand for mortgages has declined.

Mui writes that psychologists are ranking the emotional angst on a par with the stress of divorce and even death.  Behavioral economist Rom Brafman calls the condition “loss aversion,” that is, when FEAR of action creates a stagnant economy.  The condition is insidious.  It works like this: if the median price of houses were to fall slightly, a few more homes would sell; but, if the median price would rise by the same amount, home buyers would drastically cut back on their willingness to purchase a home.

For example, a 2001 study of the Boston housing market found that sellers who expected to take a loss on selling their condominiums set prices HIGHER than did their competitors, effectively pricing themselves out of the market. By the same token, buyers can also take themselves out of the market with inflated views of their purchasing power in a distressed market, passing by reasonably priced homes on a gamble that a sweeter deal is around the corner.

Consider this emotional analysis with Hagerty’s article concerning the emerging investment market in distressed properties, investors snapping up properties to turn into rental units.  The effect is an apparent decline in the amount if inventory on the market which consumers might mistake for a turn in the traditional market. 

The mistake is that these sales are not traditional transactions between homeowners and buyers, and they are not spread across the board of available inventory.  These transactions are between investors and banks which have foreclosed on properties and are in all liklihood selling the properties at some loss.

Consider.   A quarterly Wall Street Journal report on data from 28 cities shows that the glut in homes listed for sale is shrinking.  The Census Bureau reported that seasonally adjusted  new home sales were down 33% from September 2007. The National Association of Realtors reports that sales of previously occupied homes edged up 1.4% in September relative to 2007.  Further, housing analysts caution that many homes that aren’t currently listed for sale may hit the market within the next few years.

Factor in evidence that many sellers have taken their homes off the market to try to wait out the storm, and intend to re-list their properties when they perceive the market has strengthened . . . which will swell the market dramatically down the road.  This future glut will continue to depress prices!

As we all know, the general economic news is getting worse. Selective bailouts by the current administration do not seem to stem the tide of market shift.

What is a home seller or buyer to make of this data and the perception that the purchase or sale of property is a fearful event?

First, be cognizant of the role fear is playing in the market and remove it from your decision making calculus. Second, view the purchase of a home as a long term investment, similar to the approach a prudent investor takes in the stock market.  This advice applies to a home seller who is moving on to a new property. Third, be aware of the impending increased glut in the market as more foreclosures arise AND as sellers decide to relist their homes out of necessity or a perception that the market is correcting.

Finally, homesellers and real estate professionals must take a cold hard look at today’s market, not the artificial market of yesterday that was fueled by sub-prime lending. A realistic home price today should be set through consultation with an experienced professional who is deeply aware of local market trends.

Celia Chen, director housing economics at Moody’s Economy.com, expects a further drop of 14% before prices bottom out in the second half of 2009. Be aware that the market will not bottom out or recover at the same time for all regions of the country and for all sectors of the housing market.

Entry filed under: • Real Estate, Housing Market News, Real Estate Statistics. Tags: Seattle home finance, Seattle mortgages, Vashon home finance, Vashon Mortgages.