When sales of existing homes fell in August–for the first time since March–home sellers jumped into action, slashing the asking price on their properties.
The average discount from asking price to sale price was 10% as of October 1, according to Trulia, a provider of real estate pricing date. The total hit? A $28.4 billion price cut in an effort to attract buyers.
So where was the worst damage? And what does this discounting mean for future home prices?
The biggest price cuts came on houses listed for more than $2 million. Owners in that segment received an average of 14% less than their original asking price.
Half of the 10 states with the highest percentage of discounted homes were in the Northeast: Massachusetts, Rhode Island, Connecticut, New Hampshire and New Jersey. New York, California and Florida accounted for 35 percent of the total value of price cuts across the U.S. market.
Among the 50 largest U.S. cities with the biggest percentage discounts: Memphis, Minneapolis, Portland,Indianapolis; and Baltimore. Trulia’s data excluded all foreclosed properties and undeveloped land.
Exactly the kind of discounting you’d expect as the rate of existing home sales drops and the inventory of homes for sale stays stuck at high levels.
Anyone looking for an end to the decline in home prices–which would help stop the erosion in family net worth that’s feeding the current recession–has to be disappointed in the news.
Continued discounting leads buyers to expect future discounts on asking price and that leads to further falls in home prices. And to another wave of discounting.
Declining prices for existing homes put pressure on the prices of new homes. To compete, home builders have to cut the prices of newly constructed houses.
If this sounds exactly like deflationary expectations have taken over the housing market, you’re exactly right. In deflation, people put off buying today because prices will be lower tomorrow. Their decision not to buy today then leads to falling demand that guarantees prices will keep on dropping.
To break this cycle you need something to encourage buyers to buy today. The $8,000 credit to first time buyers did exactly that–but that incentive expires at the end of November. Rising employment and rising incomes would do the trick too but those still seem like wishes on a distant horizon.
chameleoneyes:
For when and what mortgage resets are coming.
http://www.creditslips.org/creditslips/2007/12/is-this-just-a.html
Click on the graph that they got in the article. Still scares me every time I look at it.
I would like to agree with the comments of “Dan1to”. I was finally forced to cave and buy after looking for 4 or 5 months in the Tucson area. Most of the homes I saw were short sales. It was really almost surreal at times too. The banks would NOT let go of the properties even though I was a well qualified buyer putting in a reasonable offer on an abandon property that had been empty for years (and is still empty). Also, the banks seemed like they really knew they were manipulating the market because I was looking in one of the more expensive areas of Tucson (Foothills). There are just sooo many properties available in that area it is ridiculous. I also felt very badly for the individuals who were in the homes trying to conduct the short sale. It was sad because here was this person who was broke, they wanted to end their own misery and just sell the property. So let’s say on a 200K home, I offer 160k to 170k. What did the banks do? Nothing. They sat around and waited for a higher offer. So inevitably, the person hoping to get out from the mortgage would have to wait and wait. Well, you guessed it … they were foreclosed upon … eventually. I ended up buying a bank owned property. If I could have, I sure would have waited. I guess the current market conditions are a result of the law of “Unintended Consequences”. We now see how the TARP money has distorted the market and put manipulation in the hands of the banks.
Huge resets ahead in 2010 and 2011. It’s a major reason that many housing experts think the big jump in foreclosures is still ahead of us.
Here’s something that I’ve been wondering for awhile. Next spring (March 2010) how many people are looking at ARMs that will be resetting from 2007 when they purchased homes? And I ask that because I think many, many people were still flipping houses (esp, here in Phoenix), trying to get into a 1st home, etc during 2007. Will these mortgages that are resetting be as many as we saw this year? Even if it’s not as many as this past year, I would still think it would be enough to drive home prices down.
Jim,
Any chance you can comment on the Sorkin’s book “Too big to fail”?
In California (L.A. area) prices seem to be stagnant or possibly on the rise. However, we all know there are tons of homes that banks have not listed (shadow inventory). I have checked some condo complexes in my area -since i am looking for a first home- to see that out of 40 condos in a complex, 8 are in foreclosure, 1 or 2 are listed and 5 or more have been sold in the last year. Thats typical of the complexes I have looked at.
Inventory is drying up out here for now but I know its because the banks are not showing all the cards!
With new unemployments well above 400k, its going to take a while. I live in DC though, in this area it seems all the government contractors are flourishing and home prices are actually trending up.