Monday, December 3, 2007

Doom & Gloom... or is it?

A recurring meme I see among SF housing bloggers and commenters is to label the concept that prices may be susceptible to declines or stagnation in the near future as "doom & gloom".
I think this label is funny, and perhaps gives away something about the people using it. Because what they are calling doom & gloom looks a lot like a beautiful sunshining day to me.
One comment I was reading today was from a homeowner who was quite secure in that whatever the future brought, their home had already appreciated 35% since they purchased it a couple years ago. They too were using the "doom & gloom" label to generalize those that thought prices were coming down. While I was stewing on that, I started thinking about what it would really feel like to a homeowner if housing prices started to move in a negative direction.
It occurred to me that while housing market pricing typically moves very slowly, that doesn't mean you can pull out on a moments notice if things take a turn for the worse, because the reality is that selling a house takes a while, even if done quickly. And therein lies the problem: history is full of people who hung to real estate a little too long, and couldn't get rid of it in time when the tide turned. The event that sets all of this off could be an external force, such as an economic downturn, or even a recession, which leads to a significant amount of job loss, which in turn leads to a number of people needing to cut the fat and reduce those $10k monthly housing costs.
Once critical mass is reached among sellers, an interesting effect occurs: buyers stop buying because they see the writing on the wall. They know all they have to do is wait and prices will come down further. Meanwhile desperate sellers find themselves increasingly cornered. Eventually they start to capitulate, only to find the first couple of rounds of price reductions aren't enough and only exacerbate the situation. This leads to more price reductions, and unless they wise up and price their home very competitively, they chase the market all the way to the ground. And in short order you start to see some very sudden price changes across the board.
As an example, Miami has a number of sellers who were confident in the gains they had already achieved and their ability to extract those gains in an emergency. Sadly, many did not realize these gains, holding out for the market to turn upwards again, only to be buried under even larger losses, until finally they lost their equity completely and their house was foreclosed.
Yes, that was doom and gloom for the seller, but when it has all shaken out, there will be some very happy buyers for whom this was a very sunny event.

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