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Bidding Wars in This Market?

Published by Gregory Rand on Saturday November 21, 2009 10:32 AM

This week new home starts and mortgage demand numbers were released, and appeared to paint a negative picture of the housing recovery. Being on the street in the real estate business gives us a much better perspective on the demand for homes than the statistics and indexes do, because we can see the activity of web traffic, incoming buyer calls, showings, offers and new contracts signed. We call them the Early Indicators of Demand, and they have been the key to our ability to forecast the market accurately. They are the reason we seem to have uncanny timing of when to pull back on expansion (as we did in 2005) and when to put the pedal to the metal (as we have in 2009).

I had the opportunity to put these numbers into context on the Fox Business Network. Please watch the segment and comment.

Reader Comments
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•	re: Bidding Wars in This Market?
	Posted by Jim M on Sunday November 22, 2009 9:57 AM
	What you said was nothing new in this market since 2006. If you price your property below market, you will get multiple offers. That happened in 2006, 2007, 2008, 2009. The tax credit helped push some buyers who were going to buy in 2010 to buy in 2009. We are now hook on this tax credit as when it ends, we will see another drop in sales activity. The wild card will be interest rates. When the Fed stops buying mortgage securities, rates will go up. What will that do to the real estate market? At some point, foreigners will stop supporting our Federal deficits causing rates to go significantly higher. The Fed is setting up another group of buyers who buy now with tax credits and artificially low rates to be underwater in their mortgage.

•	re: Bidding Wars in This Market?
	Posted by greg rand on Sunday November 29, 2009 11:26 AM
	The story I was asked to comment on was that demand for real estate was down, or non-existent. The presence of bidding wars on well-priced homes is evidence that demand is still strong, but intent of getting a great value. It's the same thing with the tax credit. $8,000 is not enough of an incentive to cause someone to become a home buyer in this economy. Their desire to be a homeowner must be present and very compelling. Same thing with low rates. Demand for homes is robust but demand for overpriced homes is non-existent. Increases in mortgage rates, as long as they stay below 7.5%, will not stop the market cycle from progressing. Neither will a new wave of foreclosures. Price declines, and the demand for well-rpiced homes will overpower both of those factors.

•	re: Bidding Wars in This Market?
	Posted by Jim M on Tuesday December 1, 2009 10:47 PM
	Greg, you seem to just focus on demand. What about supply? You seem to poo-poo the new wave of foreclosures coming over the next couple of years. What about all that shadow inventory the banks have not released into the market? What about all those sellers that are still waiting to put their homes on the market until the market gets better? As for demand, I personally know people who have accelerated their purchase into 2009 to take advantage of the tax credit. This tax credit has the same effect as all the funky financing in 2004 and 2005. That type of exotic financing pushed people into accelerating their purchases. That is what contributed to the sales decline in 2006-2008. Now people who would have purchased in the future have purchased due to the tax credit. We are just robbing from future demand which will lead to slower demand once the tax credit expire. By that time, the Fed will no longer be able to hold interest rates this low. This will be a double whammy on demand.

•	re: Bidding Wars in This Market?
	Posted by greg rand on Wednesday December 2, 2009 10:25 AM
	I am focused on demand because that is the secret to the performance of the housing market over the last century. Demand never goes away, and supply is limited. As for foreclosures, we are anticipating a SECOND round, which means we can look at the first round to predict how it will impact the market. In those markets where the first round of foreclosures hit (CA, FL, NV) the banks priced them to sell and they sold like hotcakes. It drove prices lower, but those markets are healing rapidly. All because of great pricing. Increased foreclosures are ripples on the surface. The market cycle is the tide. Regarding the tax credit, I can't disagree with you more. People paying less taxes becuase they are willing to invest in a home during a recession is a reward to taking a risk. There is no relation whatsoever to exitoc loans, which allowed people to falsly qualify for mortgages they couldnt afford. Tax credit is money that these homeowners would have wasted on taxes otherwise. This is not robbing demand from thefuture. That's a media sound byte that has been widely repeated, but is irrelevant. Before you discount my predictions, go to gregrand.com, look at my media clips and predictions for the past year. I have this nailed.

•	re: Bidding Wars in This Market?
	Posted by Rebecca Chandler on Wednesday December 2, 2009 5:19 PM
	Nice job Greg!

•	re: Bidding Wars in This Market?
	Posted by Jim M on Wednesday December 2, 2009 9:15 PM
	The flaw in your thesis is the future of interest rates. A large part of the price appreciation since the early 1980s was due to mortgage rates dropping from 16% down to current levels. Additionally, you also have the effect of a decrease in the down payment requirement from 20% to anywhere from 3.5% to 10 %. The last piece of the price puzzle of course was the increase in income over those years. As interest rates have bottomed out, we will see rates rise over the next few years. We may see mortgage rates to up to 8%, 10%, or even higher. Our fiscal irresponsibility over the past few years will cause us to pay much higher rates for a long time. Down payment requirements will increase back to 20% as even the FHA will need to increase their down payment requirements. Just watch, the FHA will need the Congress to authorize more taxpayer funding to keep it funding mortgages. Partially offsetting rising rates and higher downpayment requirements, will be higher income. But income growth will be slow. Bottom line is, home prices will stay flat or even decrease over the next few years. The trend has changed Greg.

•	re: Bidding Wars in This Market?
	Posted by mike smith on Saturday December 5, 2009 1:20 PM
	Jim, you made some good points that I never thought of. The two components that usually drives home prices are income and interest rate. I can see how a large portion of the rise in home prices since 1980s was due to interest rates dropping significantly. Now that rates will be going up, that will keep home prices down. Imagine if mortgage rates were ever to go back to 16%? I guess I would be able to buy that crappy cape for $100k again. The point about the down payment makes a lot of sense. I remember when my down bought home in the 70s and 80s, 20% was the standard. Over the past 10 years that has dropped significantly to zero down payment. I can see how this drop in down payment requirement allowed more people to qualify to buy a home and allowed people to pay more for a home. Both of this also pushed prices higher. Now that we are starting to reverse this, from 0% now to 3.5% and it looks like it will move higher, this will also keep prices down.

•	re: Bidding Wars in This Market?
	Posted by greg rand on Saturday December 19, 2009 4:45 PM
	You may be right, but when I look back on the past cycles, there were always other circumstances that could have held the housing market back and didn't. In 1980 there were 18% interest rates, high unemployment and a gas shortage. In the late 1980's there was a stock market crash and a massive bank insolvency crisis. In the late 1990's there was the tech stock crash. In the early 2000's there was a terrorist attack. None of them were enough to stop the cycle from cycling. I believe the cycle to be more powerful than economic flareups like increasing rates or changes in bank underwriting guidelines. I do agree that the mad spending in Washington is a wild card.