As you might know, I recently relocated my family from Florida back up to the Brandywine Valley along the border of Pennsylvania and Delaware.
And while we decided to rent for the first year, my wife and I have been looking around at what’s on the market in our new area.
House hunting has become somewhat of a real hobby for us. After all, we’ve been on the sidelines throughout the housing bubble and bust, and have been interested observers the whole way.
After all, we DO want to settle down in a permanent residence … but only for a reasonable price!
In South Florida, the rise and decline unfolded right before our eyes. So we were eager to see what is now happening in a more “stable” part of the country.
What we found was more of the same thing: Houses that seem unreasonably priced given the economic fundamentals.
I just can’t understand it …
How can so many places cost $500K, $600K, even a million bucks when statistically, just 5% of the population earns more than $99,000 a year?
How can so many sellers still expect exorbitant prices for houses that are average at best? In need of kitchen renovations … new floors … bathroom remodels?
I know I’m conservative. But I just don’t see how we’re at the bottom yet. Not with so many McMansions littering the landscape, unoccupied and still overpriced. Not with unemployment creeping ever higher and consumer condidence eroding.
Will a $7,500 or $15,000 credit help? Sure, I guess. But not if houses are still going for $50K or $100K more than the fundamentals warrant.
Your thoughts? What’s it like where you live?
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{ 32 comments… read them below or add one }
According to a newspaper report, houses selling here in Lexington, Ky, declined by only 1% from 2007. There are a lot of houses for sale, however.
dividend cuts seem to be picking up steam and that is very
worrisom. Never the less, I appreciate your conservative
down to earth approach to things. Something tells me that your strategy is going to become even more popular
as the present situation continues.
Nilus Mattive Reply:
February 11th, 2009 at 12:15 PM
That seems to be the case all over — kind of a bottle neck with buyers not willing to buy at high prices and sellers not willing to come back to reality.
Regarding the dividend cuts … you’re right, this is one of the worst periods on record. At the same time, the alternative investments look far worse to me. Diversification and careful selection should help protect dividend investors.
Thanks for the kind words. I try my best to use common sense, history, and plain English whenever possible. Investing doesn’t have to be as complicated as some make it out to be.
Try Cheltenham, PA.
$400,000. homes are now selling for as low as $250,000.
Nilus Mattive Reply:
February 11th, 2009 at 10:25 AM
Thanks for the tip, Art.
Don’t get me wrong, we are seeing houses that represent values vs. their prices a year or two ago. I just question whether they are affordable to regular folks in this area.
I agree. Houses in western Oregon seem overpriced for the condition of the economy and our 9%+ unemployment rate. And yet, the RE folks in the area are telling us that now is the best time to buy a house! If Mr. Weiss is correct, we should see another big drop before the bottom is hit. So, I am waiting until prices get cheaper, just not sure what interest might be then?
Nilus Mattive Reply:
February 11th, 2009 at 10:23 AM
Ideally, you will get the best of everything — artificially supressed rates and bottoming prices. But my philosophy has always been this: You can always refinance, you can never re-buy the house.
In the TriCities (Kennewick, Richland, & Pasco) in SE Washington (state of) there has been a slowing of sales but rather little drop in house prices. Partly due to agriculture, diversified small industry (no large industry), and the clean up activity at the famous Hanford Nuclear Reservation.
Skyskies
I live in the UK near London.Although the property market is weak here,land and housing are scarce and people aren’t panic-selling.So there are no bargains here.
Nilus Mattive Reply:
February 11th, 2009 at 10:22 AM
Hi, Daniel. With the UK economy looking worse and worse, I’ve got to wonder how long things will hold up.
I live in Santa Barbara where most of the homes are bought with cash. I should be so fortunate. However, the market has dropped here too…..I’d say at least 25% for the lower end homes. I am going to wait for a higher end home to buy. I expect the alt-A and option arm loans that are due to reset in 2010/2011 will wreck havoc on the high end market. A lot of wealthy people lost huge amounts of their investments in hedge funds and have stopped buying homes. Nobody has escaped this mess, except a few smart ones who saw this coming.
Nilus Mattive Reply:
February 11th, 2009 at 10:20 AM
I love SB. Proposed to my wife at Rincon and then spent a night at the Simpson House Inn! Wonderful memories there.
I think your assessment is spot on. We go to California to visit friends about once a year and I saw the market just going crazy. A 1-bedroom shack in Laguna Beach going for $800K? C’mon!
First, I must congratulate you (and the Money & Markets and associated emails) for helping me to decide to sell my house in 2006. That was pretty much the peak! Here in Colorado, it’s apparently not as bad as most of the nation, but the outlook is certainly uncertain. I wonder about the “unintended side effects” of any government-inspired initiative. Will the $10-15K per tranasction simply encourage flipping? What are the limits? If I were you, I’d stay on the sidelines…I think you’ll get a better deal for waiting. Good luck and thanks!
Nilus Mattive Reply:
February 11th, 2009 at 10:12 AM
Hi, John. Glad to hear you made out well!
Regarding the stimulus initiatives … my take as a serious, qualified buyer is:
– The original $7500 “credit” was meaningless to just about anyone who understood the terms. It amounted to about $300 in real money once you did the math.
– Upping it to $15,000 and making it a real credit is nice, but still has limited impact on a house selling for $300K or more. Especially when the price could easily drop by that much in a few months.
– Making it available to all buyers would make a difference, and could get some higher income people off the fence. Then again, maybe it won’t. And as you note, it may bring out the speculators, which at this point in the cycle is not what we want.
To me, it’s a nice bonus if I actually do buy something. But it would not sway my decision either way. In fact, I think a lot of people are asking themselves … “How much more will I get if I wait? How much more will prices drop? Will they really push rates down to 4.5% or lower? Maybe I can catch the absolute bottom another year from now. Etc.”
This is why the psychology of markets is often the most important piece of the equation.
Prices in highly desireable areas that seem high on a local level can be attractively low to international buyers. When they buy a high priced house, their money circulates in the market and pulls up other house prices in the whole region.
Nilus Mattive Reply:
February 11th, 2009 at 10:04 AM
A year or two ago, I would have agreed with you. But now the entire global economy is weakening. And the dollar has been bouncing. I don’t think most Europeans and Asians are eager to snap up properties in the U.S. at this point. Maybe in select places like Florida, where we are starting to see bargains and the vacation home appeal is strong. Overall, however, I think the foreign buying isn’t going to be a big driver now.
Nilas, I have been a realtor in the Nashville area for the past 30 years. Unfortunately, Sellers have not made peace with the notion that their homes are not continuing to appreciate and that in order for them to sell their homes, they are going to have to price their home realistically. It is also disturbing for Realtors that Sellers are often not convinced despite the presentation of a comprehensive and current market analysis. They hold a set price in their mind. That value usually represents the highest price they could have received in a previous sound market. Rather than present their home in its best condition to better able them to compete in today’s market , a good many Sellers put their home on the market because work needs to be done. They often expect the same price as a neighbor whose home is in mint condition. Sellers continue to hope that “someone” will come along and love the home so much they will pay what he wants. Most important to the success of a Buyer and his offer is to determine why the Seller is moving. His motivation is key. In this economy, credit worthy Buyers are at a premium and number of showings at an all time low. It is the job of the Realtor to present all offers to the Seller relaying all its components and a net figure to enable the Seller to make a sound decision. Actual selling vs listing price along with an average of the percentage of list to sell price in your market is available for you through the Multiple Listing Service in your area and may be shown to you by your Realtor. Good luck house hunting! There are exceptional values available and the interest rates as low as they are enable Buyers to buy more house than ever before.
It’s the same story in Ireland, all over the country. Unoccupied, overpriced units available but no willing buyers.
We live in Asheville NC.15 yrs now. We have lived in six states-11 houses.Have seen some of these houses appreciate quit handsomly)Lincolnshire Ill.some did not-Arlington
TX.
Asheville has many communities that have been built over the past years.Prices range
from $300,000 to several Milions.There still building.Why? The area has attracted
retired people from Washington,New York, NJ who sold their $300,00 to several
millions a few years back and bought here with cash. New condos at the famous
grove park inn,under construction,start at $1.25 million.Half have been sold.Home sales
are local.
Nilus Mattive Reply:
February 11th, 2009 at 9:56 AM
Hi, Frank. I love Asheville … have been there twice in the last year. And I agree that it has been a bright spot in terms of real estate. No doubt retirees are driving the growth in that area. Local condittions and factors are certainly part of it. You’re right.
Enjoy all those great restaurants for me!
I live in a small relatively stable college town restricted in growth by higher taxed county boundaries. Most of our real estate buying comes from the college employees and the college is feeling the effects of state budget cuts. However, I see houses on the market in bad shape (I have attended open houses) with the same high prices as before. Several have been on the market more than a year; one for two years with no price cut. The only slightly reasonable cut has been a condo, and it is still too high. I think most potential buyers are waiting for prices to bottom out. This year when college employees move in and out will be the factor that decides when and if prices here fall. Another college town not far from here with $400,00 - million dollar prices, has not shown any appreciable drop,either. I think you would be very smart to wait for the resetting of ARMs in 2010-2011 that Robert mentioned. I have read this same time line in several books about the recession/depression. Meanwhile saving for a bigger down payment would mean borrowing less and therefore costing less even if interest rates are up.
Nilus Mattive Reply:
February 11th, 2009 at 12:19 PM
Same here, Pam. Some of the houses we toured this past weekend were badly in need of updates. Some weren’t even cleaned before the showings. One had a light switch covered with masking tape to indicate it didn’t work (priced at $450K). Nice, huh?
I agree that ARM resets will remain a major force going forward. The amazing thing to me is that even people who were in their houses for long periods of time are finding themselves upside down because of massive cash-out refis.
From reading the blogs here I gather that my area (Bainbridge Island, WA) is not the only area where the Real Estate market is still well overpriced. Sellers are not budging and houses are staying on the market for exuberant prices month after month. I heard a comment from a realtor last week that Sellers are waiting for the banks to loan money again and at that point they believe they will receive their overpriced prices. Microsoft and Boeng have both anounced lay-offs a little while ago, therefore I expect that the bubble may deflate somewhat in this area after all. Additionally, there is an incredible amount of “for Rent” signs, and the rental market has been very soft. Where are all the people who had to leave their houses due to foreclosure going? This is so counter-intuitive, it seems like the rental market should be very tight?
Nilus Mattive Reply:
February 11th, 2009 at 1:02 PM
I would expect those layoffs to have an effect, no doubt. And I don’t think renewed lending is going to lead to sales at high prices. The mentality has changed (at least on the buy side).
I do think rentals are benefiting from foreclosures. But there are always new about-to-be-foreclosed-on people becoming unintentional landlords. So the vacancies never get filled for good.
Hi Nilus,
Simple question: Are you a libertarian, or libertarian leaning?
Nilus Mattive Reply:
February 11th, 2009 at 1:15 PM
Simple answer: Yes. =^)
Of course, as always, there is another much more complicated answer I could give you if space and time weren’t factors.
I live in Bryan, TX. Bryan is next door to College Station, TX, the home of Texas A&M University. Housing hasn’t slowed here except in the over million dollar price range (built on golf courses here). My daughter is in construction in the $300,000 - $400,000 price range and while there are a small company they have just about their year’s building schedule filled. The Bryan-College Station area has about the lowest unemployment in the state.
I am sure that next year may be different and the slowdown will reach here.
Nilus,
Here in Manatee Co.,Fl we have lost at least 30% on home values. Foreclosures and bankruptcies are higher now then ever before and it is getting worse. In my gated community a home up the street from me just sold for $225K. Back in 2004-5 it would have sold for around $500K. The surrounding counties are in the same shape. In Feb 2006 I put a town home on the market in Pinellas Co (just North of Manatee Co.) for $299K. It finally sold in August 2008 at $218K. My advise to you is rent for at least the next 6 to 12 months. It will get worse and home prices will continue to fall and foreclosures will increase.
By the way I am a new subscriber to Dividend Superstars and have started to buy some of you recommended stocks. I moved to FL in 97 from NH and would never consider going back to snow, ice storms and days and days for gray winter skies.
Nilus Mattive Reply:
February 12th, 2009 at 10:42 AM
Glad to hear you’re a subscriber, Steve! I appreciate it, and hope you enjoy the newsletter.
Yes, it’s definitely hard to come back up north after a few years of terrific Florida weather! But my young daughter now gets to see her grandparents a lot more, and my wife and I have more support from friends and family. So it’s a tradeoff we were willing to accept. We’ll be back down there someday, I’m sure.
We have ten more months on our lease, which should give us a good window to shop around, learn the area, and see what happens with prices. The key is patience, and I’ve got lots of it.
Here in Ireland the very developers who with their banking buddies drove the price of houses through the roof and made millions in the process are now sitting on land banks and properties they cannot offload. However the ordinary people they ripped off
are now bailing them out through bank recapitalisation and these same developers are not being pressurised by their bankers to meet their commitments and a lot of them are just biding their time in the wings for an upturn and again to start the ripof all over.
They are basically laughing all the way to the bank as they have the banks where they want them. The cosy club at the top is where it all happens and it might change for a short while before going back to the fat cats rule all over again.
Nilus Mattive Reply:
February 17th, 2009 at 11:24 AM
I would love to disagree, but I can’t!
Here in the States I am seeing tons of unfinished new developments though. So I think it will be a long time before the builders are able to really get out of this downturn. Things are not going to simply bounce back to the previous levels of demand.
The real shame is that a lot of beautiful land was permanently ruined in the process. I can’t tell you how many farms were plowed over and covered with unattractive McMansions now sitting vacant. Ugh.
Also live in Santa Barbara. Some markets like SB, La Jolla and Laguna, are always exaggerated price-wise, due to fairly limited supply of quality inventory. Junk at the bottom of the market has adjusted as much as 30% (formerly $1 million 1300 sq ft cracker boxes now sell around $700K). However, a newer or restored prime view property with amenities will fetch $800=$1200 a sq ft, and new downtown condos are closing at $700-$1000 a sq ft. I develop commercial real estate for a living, and carefully track the numbers.
Retiring high net worth baby boomers, will pay stupid amounts of money to live in town like SB, when other places might be just as cool.
I don’t understand the hoopla. I moved from New York state to California in 1972. I’ve seen housing booms and busts every 10 years since I’ve lived here.
Los Angele’s real estate tripled from the mid ’70’s to the early ’80’s and then dropped by 20-30%. Lots of buyers were underwater, and I remember a law being passed to prevent negative amortization of home loans. What happened to that?
California real estate prices went up and down again from 1989 to 1992 and then again in the late ’90’s to 2007.
I bought a little house in San Ramon, CA in 1998, just as prices were starting to go up again. I thought the bubble would burst in 2004 and took out a reverse mortgage. I couldn’t believe the crazy prices people were paying for 1000 sq. ft. houses around here. Prices have dropped but houses are still selling for around $400K in my neighborhood. At least we don’t have a lot of dilapidated foreclosures.