Saturday, March 29, 2008

Sticky Home Prices Finally Start to Get Less Sticky

Houses are almost perfectly engineered to trick owners into overvaluing them. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation. That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.

This week’s batch of economic reports suggest that the adjustment is finally starting to happen. The decline in house prices is accelerating, especially in some of the big metropolitan areas covered by the Case-Shiller index released Tuesday, while the number of home sales has recently risen a bit.

From "Be It Ever So Illogical: Homeowners Who Won’t Cut the Price" in the NY Times

6 Comments:

At 3/29/2008 9:12 AM, Anonymous Anonymous said...

http://www.liveleak.com/view?i=32d_1203437137

Top U.S. accountant warns of pending fiscal tsunami
Glenn Beck interviews David Walker, Comptroller General and head of the Government Accountability Office(GOA). They discuss the baby boomers who, since Jan 01, 2008, are eligible for early retirement and their long-term effect on social security benefits and taxes.

 
At 3/29/2008 12:48 PM, Anonymous Fred said...

The Boomers who are retiring now have paid into SS for forty years. Why can't they retire like everyone else who has reached retirement age?

 
At 3/29/2008 3:51 PM, Blogger Walt G. said...

At first I though the previous remarks were off-topic, but they are not.

Social Security and home prices both have an emotional attribute that defies fiscal sense. It does not matter whether you paid into Social Security for 40 years or what you paid for your house in the past. The values of those “investments” are determined when you are ready to collect or sell them, and grumblings of “it shouldn’t be like this” or “that’s not fair” will not change that fact.

 
At 3/29/2008 9:29 PM, Anonymous Anonymous said...

I think the number of early retirees is severely limited because many people can't take early retirement because of the inability to get medical coverage to cover until they are Medicare-eligible.

Many large companies have reduced or eliminated retirement medical coverage. The company I work for put the retiree in a separate pool with higher rates. I know of people who pay $1200 per month for coverage for themselves and their spouse on the corporate retiree plan.

Many between age 55 and 65 can't get private health insurance at all due to pre-existing conditions. Thus, they have to work to get group medical coverage through their employer.

As for me, I intend to work as long as I can at my current employer, even though I'll be 55 shortly. Yeah, I'll be eligible to retire, but I plan to stay as long as I enjoy my work, which adds to my retirement savings. And when I do "retire", I'll probably start my own business just for the fun of it.

And lest everyone think that retirees will abandon the stock market, I think that's been sensationalized - as time goes they'll shift some of their money to more conservative investments, but I don't believe they will pull everything out of stocks and put it elsewhere.

And Walt is correct, the value of something is determined not by the seller but by the buyer.

I'm sure real estate agents run into this problem all the time where a relatively objective market analysis runs counter to seller's opinions. Oh, that has to be an interesting discussion.

I think some these shows such as "Flip this House" also promotes some unrealistic thinking - example buy a house for $200K, put in $10K of improvements and sell it a year later for $240K.

For decades it's been said that houses and real estate are safe investments that could never lose value. It isn't true and never was.

Nothing is ever 100% safe or 100% guaranteed or 100% fair.

Risk is life. Life has risks.

 
At 3/30/2008 6:14 AM, Blogger juandos said...

fred asks the pertinent question: "Why can't they retire like everyone else who has reached retirement age?"...

Allow me to play the devil's advocate here fred but why didn't these same people who are getting ready to retire vote for Senators and Representatives that would've done away with the Constitutionally questionable socialist, nanny state programs like SS?

Consider the FDR machinations that had to happen for this ever so questionable program to be put in place...

 
At 3/30/2008 12:21 PM, Anonymous Anonymous said...

Anon. 9:29

The flipping example of selling for $240k does not account for legal costs, moving costs, real estate commission fees and interest. Is the flipper really that much further ahead? We also have to consider renovations as a significant opportunity cost.

Real estate functions more like an enforced savings plan. For many families, the family home is their primary retirement equity.

The interesting thing in the article was the resistance to realistic pricing which happens even in a good market even when most of us have observed unrealistic prices of neighbouring homes and observed the final price go down the longer the house is on the market.

In terms of behavior, we don't like what we need most...a real estate professional who tells us when we are being unrealistic. What we need is objective truth but instead, we pick the real estate agent who tells us what we want to hear and allows us to waste her/his time rather than rocking the boat by telling us the truth.

What drives this illogical decision making process? Is it fear of loss/risk, lack of trust, desire for control, avoidance of difficult decisions? Why do we invest more time comparing prices at the supermarket or buying a computer than comparing prices for our homes?

What is this "emotion"?

 

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