Kool aid is poison to sellers, nectar for buyers
Hope springs eternal. People are prone to believe what they want to believe, and with a little bullshit from the the National Association of realtors buyer sentiment toward housing has barely declined at all since the housing bubble catastrophically burst six years ago. Take a careful look at the chart below, and marvel over the foolish optimism of potential homebuyers.
Most homebuyers over the last 10 years are currently either underwater or the value of their home is worth less than they paid for it. Homebuyer sentiment during the housing bubble was high, but that isn’t surprising given the strength of the kool aid. What shocks me is how well homebuying sentiment has held up during the crash.
Sellers on the other hand have been forced to deal with a heavy dose of reality. Falling prices have wiped out their equity and left them penniless. The precipitous decline in seller sentiment has tracked the deflation of the housing bubble very well. The attitudes of buyers is inexplicably high.
by JUSTIN T. HILLEY
Thursday, December 29th, 2011, 2:19 pm
Most Americans feel now is a good time to buy a home, but those who want to sell are having difficulty finding buyers at desired prices, causing seller sentiment to fall to record lows.
The low opinion is causing a wide gap between homebuying and home selling that won’t narrow for at least the next five quarters, according to a new report by the Mortgage Bankers Association‘s Research Institute for Housing America.
From 1992 to 2005, positive seller sentiment fluctuated between 40% and 60%, according to the report. Since 2005, sentiment has plummeted to 7.6%, even while homebuyer opinions remain high. Despite high unemployment, slow economic growth and problems plaguing the economy, nearly 80% of American households believe now is a good time to buy a home.
Ordinarily, investor sentiment is a good contrarian indicator. When everyone is bullish, it generally a good time to sell, and when everyone is bearish, it’s often a good time to buy. I expected to see buyer sentiment to decline with the continuing decline in prices. As a contrarian, I am bullish in beaten down markets like Las Vegas were everyone is bearish. The fact that buyer sentiment is so high is either a result of NAr kool aid or a sign that more pain is ahead.
Today’s pattern of homebuying sentiment looks similar to past recessions, but what is different is today’s historically low positive seller sentiment, according to Gary Engelhardt, Syracuse economics professor. The large overhang of mortgages past due or in foreclosure is a major factor for the difference. As market values have fallen, potential sellers have not adjusted their target selling prices downward fast enough to bring buyer and seller sentiment more in line with one another.
Seller sentiment is down because they are underwater, and they can’t get their wishing prices like generations past. The American Dream is a nightmare for today’s sellers.
Engelhardt said it is difficult to determine the main driver of the gap, but offers a few more possible explanations for the discrepancy.
He says seller prices may be anchored to past market values such as the purchase price of the property or what a comparable property sold for recently, especially around the market peak.
“If owners update these anchor prices infrequently, then a wide gap in buyer and seller sentiment would emerge in the face of sharp, prolonged declines in market values, such as those seen in the last few years,” Engelhardt says.
Psychological anchoring is partly responsible. Although sellers have delusions of what their houses are worth in all markets, so perhaps it shouldn’t be too surprising they haven’t adjusted to the crash.
He also cites the underwater homeowners who can’t or won’t adjust their selling prices to below that of their outstanding mortgage amount, as they would need to bring cash to the table to pay off the mortgage plus transactions costs.
Over the next three to five years, we will see many sellers who set their prices to pay off their mortgage rather than to sell the property. In a slow decline, prices are sticky due to seller reluctance. This phenomenon will be particularly acute among bear rally buyers who erroneously thought they were buying the bottom. Knife catchers are loath to admit their mistake.
Currently, about 20% of all homeowners with mortgages nationally are underwater. In some particularly hard-hit markets, as many as half of all homeowners with mortgages are underwater. Those are the same places with the highest incidence of delinquent mortgages and foreclosures.
The actual percentage of effectively underwater loan owners is much higher than 20%. Most underwater studies are based on original loan amounts which fail to take refinances into account, and these studies also ignore second mortgages. Further, these studies also ignore sales costs to get out.
Also, with large declines in market values, sellers now hold a highly leveraged option that pays off with any future increase in prices, meaning there may be increased value in waiting, either to initially list, or to keep, the property on the market. This could hold prices high enough to drive a substantial wedge between the existing buyer and seller. And a poor jobs market with limited mobility, a key driver of housing-market transactions, may exacerbate this.
Analyst expect home prices to stabilize in 2012.
Some analyst will call the bottom every year just as analysts have been calling the bottom every year since 2007. Eventually, like a broken clock that’s right twice a day, someone will correctly call the bottom. Hopefully for them, everyone will have forgotten their incorrect calls of years earlier.
The current lack of positive sentiment cuts across almost all demographic categories and regions. Positive seller sentiment is stronger among nonwhite households.
Engelhardt says that over the next five quarters, positive homebuying sentiment is forecast to align with current and long-run average levels. In contrast, positive seller sentiment is projected to remain at current and historically low levels. This indicates that home-selling sentiment and, hence, market activity, will also remain sluggish in the near term.
Write toJustin T. Hilley.
Follow him on Twitter @JustinHilley.
The market will remain sluggish in the near term, not due to seller sentiment, but due to their inability to sell without bank approval. Further, the lack of a move-up market will hurt demand. Low interest rates are the only salvation of the market, and low rates will not be enough in the near term.