In the past several years in real estate every home seller basically got their price, no one lost, and everyone won. Listing agents postured and thought they were God’s gift to sellers...they weren’t. They were just order takers for a real estate fix that was driven by 100% credit. No money, no down payment, no problem! No questions asked! The result? The sold prices rose because the demand was so high; no one felt they were risking their own money. They used other people’s money, the bank’s money! The nation saw exorbitant rises in home appreciation, in fact last few years saw the most appreciation in property value than the previous few hundred years. It was a real estate market driven by greed instead of need. The ensuing run up in prices proved to be unsustainable, and so too will the contraction for the loss of that entire pool of buyers that will most likely never exist again. As a nation we are being weaned from an addiction of EZ Credit.
So during this period of euphoric rise in our credit bubble no one really negotiated anything. Why should they? It wasn’t as if it was their money they were spending. The buyers had not worked overtime for a few years just to save up the down payment. If they had saved the down payment, they would have negotiated the price. It is only natural. A buyer with a down payment would try to get the best deal possible to end up with as much possible equity as possible.
However since this was not the case… for several years, prices just kept rising. The sellers got their asking price, perhaps there was a little concession on a seller’s contribution to ward the buyer’s closing cost, or maybe all parties just agreed to bump up the price to cover the extras! Neighbor bragged to neighbor, and the neighborhood resale prices went even higher. In new home construction the prices rose even more exponentially. Why would a buyer look at a home without granite or stainless appliances? The builders were unwilling to throw in all the extras for free unless they had a loser of a product so how did they get around it? Roll in the extras into the loan. Unlike years ago you had to front the money for the upgrades, but that did not apply in the last few years. If we were amazed at how fast prices rose, we have to be OK with the return to reality. Get used to the return to a normal real estate market where buyers will buy with more of their own money in the deal, and sellers that are realistic will still make a profit as long as they do not get greedy.
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You're right, Jim--it does seem that the higher prices that we, as 'order-takers' were getting for our Sellers just came out of nowhere. I will say that a refreshing part of this down market is that we can now negotiate with the builders on new construction, which we were NEVER able to do in the past. It was as though they were the 'housing gods' and no one dared offer less than list price on one of their 'perfect' homes! My, how this correction changes the face of our business!
Debe Maxwell (Helen Adams Realty) I always use to negotiate with builders in the past, and in the past few years it did not happen. We are going back to a market where real estate can be more than order takers. The face of real estate is going back to a very different market that most currently licensed agents will find themselves in uncharted territory.
Ez Credit was the biggest boost to the run up in prices. Unfortunately for many so called investors they forgot prices can come down too.
Jim,
During the boom years many ordinary buyers and homeowners thought they had become successful real estate investors overnight and got sucked into the euphoria, fueling the boom even further. They have learned their lesson now and should buy future homes only to live in and enjoy, not as an ATM via a refinance or a flipping device.
What goes around comes around. This too shall pass... blah, blah, blah. Lots of lessons to be learned, for which we will all be better. I'd have to say that greed played a pretty big part in the mess.
Remember the 105% loans? When we can fill out paperwork and put money in the bank something is wrong... we will get through this!
Jim,
The boom was just a figment of our imagination...it was just a camouflage. It was a totally inflated false market that never should have been. I can honestly say it was enjoyable for a while watching anything with three legs sell. But the demise is now because of a bunch of falsehoods...if you can make 3-8% a year in a regular market then that's normal...not 25% every three months. Now the banks will suffer and so will the ones that bought with the premise of doubling their money.
Jim, I think that you are exactly right. We saw this play out in Central Florida and are now suffering the consequences.
Rick Belben - Orlando Real Estate - Orlando Homes For Sale (Amerivest Realty of Central Florida) You're right! Price is a two way street!
Esko Kiuru - Las Vegas NV Mortgage Consultant (Sinifox Financial) It is so true. Very well said. There is a saying on Wall Street.."Everyone is an Expert in A Rising Market!"
Susie Blackmon NC Realtor, Maggie Valley, Waynesville (COLDWELL BANKER) Susie, I totally agree that greed was a big part of the problem!
Charles McDonald / Your Trusted Agent for Charlottesville Real Estate (RE/MAX Assured Properties) I see some homes that are 125% over market!
Neal Bloom-Realtor ® Assoc.-CRS-Weston FL (RE/MAX Premier Associates) I agree Neal. I hope they like what they purchased. I did not buy into the rise, but paid my bills when it was happening. Times are very lean right now, but by the Grace of God I have no debt, and the kids are out of college.
Debbie Summers, Licensed Real Estate Professional (RE/MAX Central Realty Lake Mary, FL) We had it here in Atlanta also. No money down, roll the extras in, roll the closing costs in etc... We are now going to pay the price for this big time.
Jim I am an avid reader of Barrons magazine. Four or five years ago they warned of the coming wipeout in residential values because of unconventional loans.
John Walters (Specialized Real Estate) John most real estate agents are clueless and never do any research into statistics or trends. There are a lot of factors at play here. The retiring baby boomers and their changing buying habits, oversupply of product, naturally declining demand, a major credit crunch, and gas prices.
Jim , Thanks for a great post. There are a lot of factors as you mentioned above and it sums it up.
GITA BANTWAL, REALTOR BUCKS COUNTY, PA HOMES (ReMax Centre Realtors) Thanks.
Jim, I am lucky to live in a market where this simply didn't happen. There has been a small increase in housing prices here in Lexington TN but it's remained fairly constant. Our only problem is that a few sellers have listened to folks out of town and began to expect that kind of unrealistic increase. Their homes have simply lingered on the market but they still don't know why? lol
Kathy Fisher Lexington's ePRO RE/MAX Realtor (RE/MAX Unlimited) You are so blessed! In a lot of place...people just went stupid!
Jim - The hype is over and reality is setting in - sellers are finally realizing that they can't expect to make big bucks in real estate in a 2 year stint and buyers as you said are now having to save for the downpayment before buying. Builders in our area are starting to build entry level homes instead of castles for the rich and famous.
Judy Tuscano, NH Real Estate Professional (Prudential Verani Realty) Things are going to be OK for everyone - reality is setting back in just as you mentioned. Just as you mention...we are returning to where we need to be as a society. "Builders in our area are starting to build entry level homes instead of castles for the rich and famous."
Nothing is wrong with normal. I believe that people should buy what they can afford.
Dana Forster Realtor, A Home 4Sale Inc, Va (AHome4Sale) Amen! That is what it should be!
Another insightful article! I enjoy your blogs.
Please remember this bubble was NOT limited to US real estate, but a world wide phenomenon. That either means there was the same cheating /deciet going on around the world or it was really an event related to the spectacular growth of the world economy and the advent of all the new monies chasing for better returns!!! Have we not seen these financial cycles before!
Phil You are right. It is global and it is an epic event.
It was a crazy phenomeon Jim. I cant count how many people came to me and asked about buying a spec home and flipping it. I told so many people that the market was going to crash. I even had a brother in law come to me and say...remember how you told me not to buy...well im gettin foreclosed on. We are now reaping the poor decisions of buyers who wanted to make a quick easy dime with no effort.
Kahuna Rainmaking with Utah Dave and Utah Real Estate (Robison & Company Real Estate) There were loads of buyers we turned down because it was suicide...they purchased with other agents...and now are beiing forelcosed. Greed was the tune.
Very true article. We experienced the up starting way back in 2003/2004, and have been experiencing the down since late 2005. Some people got in and out and made great money, others lost their shirts, and it was due more to lucky timing than anything else. You know what they say: "What comes up, must come down"
This is actually a good thing in the long run. Our prices were so high that we priced out any first time homebuyers. They are actually coming back now.
Troy Erickson (Terra Solis Realty, LLC) It was the highest run up in prices and appreciation in US history, and yes without first time home buyers we cannot survive. With affordability coming back, we will be on a path to a healthy market again!
Jim:
Don't forget fear and greed. Buyers fear the prices are moving away from them. Greed tells them they are going to make a killing.
Richard Stabile (REMAX real estate associates LOL! So true. Greed rationalizes the decision to buy!