Tuesday, May 05, 2009

It's a Buyer's Market...So Why Are Prices Still So High

Manhattan Confidential, our local consumer blog, posted an article today about the decline in sales in Manhattan Beach and the Beach Cities. The post points out two things... the number of sales began to decline in 2002- 2003 ( higher prices mean fewer sales) and 2006 was when buyers started saying no and the market started cooling. Fast forward to 2009 and we have a real estate market that is trying to recover from a lousy economy and a tough lending market. Yet with all the chaos of the last few years prices, with a few exceptions, are still on the high side.

The issue for many Beach Cities' buyers is that while prices have fallen a lot in Manhattan, Hermosa and Redondo; they don't seem to be down as much as many believe they should be. Every news source is telling potential buyers that California has the largest number of foreclosures in the nation and prices are dropping like crazy. The media posts a new statistic every day on how much real estate prices have dropped in California. There are a glut of articles about buying foreclosures and short sales. So why are prices still so high in the Beach Cities?

Last Sunday the LA Times had a terrific front page article that addressed the issue... why some markets are not acting in the way buyers expect. The main thrust of the article is that while prices are down overall, they may not be down as much in the more desirable areas.... i.e. The Beach Cities as say in Riverside. This scenario is very frustrating for buyers and for sellers. Buyers believe that sellers should accept lower prices for homes that have been on the market for long periods of time. Sellers/Banks, on the other hand, want to sell for as much as they can, especially when facing a loss.

While not everyone thinks this is the time to buy... there are a lot of folks who are willing to take a chance and buy now. Most of these buyers don't think we have reached bottom but believe lower prices along with some very good long term interest rates mean it might make sense to buy. The problem is that there is still a big disconnect between where buyers believe prices should be and the prices that many home owners or in some cases banks are willing to accept. Many of my clients are especially frustrated with the prices that banks are setting for short sales.

While we don't have a huge inventory of REO's... there are a number of short sales in all the Beach Cities. Many of these are new construction that didn't find buyers. A number of builders have received NOD's. Logic would seem to say that as these homes have been on the market for a year or more that Banks would be wise to be fairly aggressive about accepting offers from well qualified buyers...but that isn't what seems to be happening.

We have seen an uptick in sales in the last month. This may be a seasonal reaction... spring is historically our buying season. It could be low interest rates. It could be that buyers are seeing a little light at the end of the tunnel in the economy and the housing market. Personally, I think prices still have a way to go before we see the bottom... but the bottom might not be as low as was predicted a few months ago. The kicker for our market will be foreclosures. If we see a spike in the number of foreclosures over the next 6 months then you can expect to see prices drop quite a bit. If we continue to have relatively few foreclosures prices will continue to be soft but will more likely be flat.


Anonymous said...

Hi Keye:

I wouldn't overanalyze too much. It is well established that prices are sticky on the way down. In affluent areas they are probably more so.

It is also true that prices started to soften much later in the beach cities than elsewhere. It is my belief that they will start to recover later.

All in all, I believe that we'll see a price to income comparable to that which was reached in the mid-90's. Probably 5 or 6 or so. I believe is is probably 9 right now, but incomes have probably eroded over the past year with the economy.

I don't expect that we'll be out of the fire until that corrects.

Kaye said...

Anon 8:54,
I suspect you are right about over analyzing.

I wouldn't be surprised to a factor of 7 as that has been about where things seem to have been over time for rentals and purchasing since the late 90's...

Not sure how much income has actually eroded as unemployment in the Beach Cities seems to be hanging around 6% or less.

I do think we will see more price corrections until at least the end of the year... too much of the inventory has been around for far too long.

Anonymous said...

I'd say that income includes investment income.

I made 200-K less on my tax return do to investment income.

I expect that I am not alone. Massive amount of paper wealth has been lost. That does play into discretionary purchases. A house may not be discretionary. But a multi-million dollar house surely is.

Kaye said...

Anon 9:08..
You are right... I stand corrected.

Anonymous said...

Good post Kay.
I live in 90277 and watch the local markets for SFR's (west 90503/90505/90277/90278) and a lot of stuff has gone into pending or sold - 500K ~ 650K - lot of buyers for this.
I am confused about why it is happening all of the sudden.

Kaye said...

Anon 7:43,
I can't speak for all buyers but for most of my clients they see an opportunity to get a long term low rate mortgage and perhaps a good deal on price.

Most folks believe that rates will go up and prices won't decline by a whole lot more. They don't want adjustable loans but rather are looking for a 30 yer fixed. For them this seems like a good time to buy.

Those who believe prices will see further large percentage declines will of course disagree.

RealEstateJoe said...

Your observation is correct, but I don't know that any long-term conclusions can be drawn. This market is defining itself as it progresses. I was recently on the Mendocino coast and noticed that properties there have not budged in price at all. It's like they are stuck in a 2006 time warp. However, that may change once inventory starts to sit for a longer period.

Kaye said...


It is an odd phenomena of this market and not typically what we have seen in previous markets.

I suspect that the main issue is that in the more affluent markets, contraty to what many believe, a number of sellers are simply willing to wait out the market.

If there are no compelling reasons to sell, job transfer, job loss, death, divorce, etc then they are not going to lower the price.

I know of a number of homes that have been on and off the market for 3+ years with only minor price reductions.

Anonymous said...

I think buyers are out there because prices have dropped and mortgages are cheap.

I don't think prices will be higher next year, however. I'd guess on 20% lower.

I also don't think mortgage rates will be much higher next year either....look, right now the federal government is trying to keep prices at unsustainable prices.

At the end of the day, prices will equalize to what is affordable. That will be through one of three mechanisms. Fed keeping mortgages rates low indefinately. Prices dropping. Or Fed triggering income inflation.

Right now, Fed is backstopping mortgages rates, which can last for a while. Prices are dropping, which can last for a while. Inflation can jump in, but right now, as for the past five years or so, salaries are DROPPING.

My guess is you will see sustained low mortgage rates. Price drops will continue. You may see salaries go up, but that will be 3-4 years from now. Too much unemployent and to have an pressure there.

Kaye said...

Anon 6:20,
I agree with most of what you are saying... I do believe prices will drop a bit more but think 20% is on the high side unless we get a lot more foreclosures that actually make it to REO status. If that happens then you will be right on the money.

Anonymous said...

"Most folks believe that rates will go up and prices won't decline by a whole lot more."

Wow. Thats a case of child-like wishful thinking. When interest rates spike, prices MUST fall. You can't have it both ways (interest rates up and prices down or level).

Kaye said...

Anon 9:00,
Prices have fallen 20-25% in the Beach Cities. While you may disagree most of those buying today know prices may fall more.. another 10% or so... which would put us around a 30%-35% drop which is about what we saw in the 90's with massive unemploymnet in the South Bay and a significantly higher number of foreclosures.

These buyers also know that the current interest rates are as low as we will see for many years. Most of my clients would rather have the low rate for the long term and take their chances on prices.

Somthing to think about...an increase of 1% in the interest rate is equal to about an 8% price increase.

As for higher interest rates meaning lower prices... that could certainly happen. However if history is any guide, when rates rose to 17% from '79-'81 prices didn't drop. They just went flat until rates dropped slightly in '85-'86 and then prices rose very quickly.