A thoughtful question from reader "sun_kan" asked:
randy, i have read your price stickiness argument (in patrick.net) in detail & i have seen it play out precisely as you expected it to be, in the bay area, till the recent credit crisis. now i see a slightly different behavior from sellers, with a lot of them accepting the reality & cutting prices in bigger chunks. it is still expensive but i do see cuts in the range of 50K-100K, even in nicer areas (hills, school district etc). in not-so desirable areas where there is a lot of foreclosures/short sales, i am seeing sellers trying to price very competitively with (or sometimes lower than) the reo prices. is there a tipping point in the sellers psychology, just like the one in stock market? and if so, how would that affect the price stickiness?
Thanks for the question. And it is very nice to hear when something I've written has been useful to someone.
The San Francisco Bay Area has definitely moved into a new phase of price stickiness. It is roughly in line with the article I wrote all the way back in August 2006 (Housing Bubble Economics). The thing I most missed in my analysis back then was the huge amount of time the stickiness would last. Even I underestimated the psychological staying power of sticky sellers. And to think, I was roundly attacked by a large number of Patrick denizens who thought I was nuts, a shill, or even a realtor in disguise (in once case).
So what about now? In my opinion we're now in the phase where sellers have:
- Yanked their listing, gone into denial or deeply flawed reasoning, and decided to "sit out" the market. This group includes most sellers who are able to do so monetarily and situation-wise. We already know that most people are severely retarded when it comes to finances and money decisions.
- Accepted the market for what it is, whether willingly or not, and are prepared to price competitively. Most will still walk-down the market, fearing underpricing more than overpricing. That is, unless the seller is desperate (or compensated some other way like a relo package) then he/she will try to price right around where they think the highest-paying possible buyer might be. From there, they'll walk-down the market as the listing grows stale.
- Entered the "end-game" phase. These are sellers who are probably going to lose their home anyway. Most will try to "work out" the loan. Few [in the inner Bay Area due to prices] will succeed. This phase keeps getting longer-and-longer with all the government intervention. Even the mention of possible, maybe, perhaps, government intervention slows this process down, as lenders and troubled owners alike fear taking the loss right before the cavalry arrives.
Anecdotal, what I'm seeing here in southern Marin is indeed price reductions. Some huge. One I saw about three weeks ago was more than $600K off the "original listing price". The problem is, those "original listing prices" were vintage 2005 peak-peak. So now homes here are all the way back down to say $850/sqft. There is a very long way to go before prices fall to within income supportability.
The bottom line: I expect prices to bump along, walking-down the market in most areas. They won't hit any sort of accelerated free-fall unless or until there is a dramatic decline in employment. When people lose their jobs, then others fear losing theirs, then more homes get sold under duress, and more sellers start racing to simply unload.
That won't start before next summer (2009). Probably late summer, at the earliest. It will require (a) lots of bad news about jobs, very publicly features, and (b) passage through the "spring selling season", which now apparently lasts until August, with yet another dud. That would be 3 years in a row of basically no selling season (2007-2009, homes in Marin at least were still selling in spring/summer 2006).