Wednesday, November 26, 2008

Buyer's Angst

I have just returned from a continental shopping trip. Not your ordinary walk on the high-street, but a cross between a serendipitous search and actual more imminent need for some family-oriented bricks and mortar. Some skeptics (hi Charles!) will undoubtedly be rubbing their eyes at the thought and timing of this potential pecadillo. And this has not been lost on this writer, though in my defense I will suggest it is more opportune than the denoument of 24 months passed. But what was most fascinating about my recent sojourn was the first-hand peak into the market of discretionary and forced sellers by a real discretionary buyer (who importantly has a macro view).

I was looking in two specific regions of this nation – one characterized by a gentle climate with second homes purchased by numerous non-local primary lifestyle transplants that are peripheral to essentially agricultural countryside, though still proximity to transport and several conurbations. The other - a decidedly wealthy area, with an enviable proximity to diversified commerce, natural beauty, as well as a financial centre.

Many agents (along with their customers), however, are behind the proverbial curve, or at the very least are putting on the bravest of faces. They simply do not get it. Or rather IT. They are in denial, clinging to the belief it’s a financial sector phenomena or, at worst, a recession like the others without making the connection between what such a recession might do do to prices given the 150% increase in the values of certain properties in these grographical markets during the preceeding 5 years, on top of an approximate doubling during the 6 years before that, which assumes optimistically that the blood-letting in 88-93 was sufficient to purge the massive Reagan-induced credit growth. The compounded effect (up ‘til recently) has been eye-watering to the man-in-the-street who doesn’t own, or who has stretched to own and a meaningful deterrent to this observer’s prior entry to the ranks of landed gentry – not out of ability, but purely out of an offense to my sensibility of value. The Chelsky basement studio of miniscule sq.mt.was NEVER “worth” GBP500,000 (let alone USD$1,000,000+ with the currency effect). Nor 400,000. Probably not even 300,000. Certainly not at exchange rates prevailing then, and probably not even now. That neither stopped people from bidding them up and trading them at those prices. The waterfront, the slope-side, the cliff-perched with the rare view, yes these of course do have rarity value. And when The People are flush, and lenders munificent, there is no telling what The Determined will pay, or, for that matter what is the correct price. This is precisely why momentum trading and trend-following strategies have great efficacy in long-toothed cycles. But without the fortuitous ability to go short, they would likely be pink elephants.

Historically, high-end real estate was property’s NASDAQ to median residential’s Blue Chip Dow, sporting higher betas. But fascinatingly, this time, until recently at least, there was a bizarre consensus that IT was a sub-prime problem, and not an economic one. IT affected the little guy. High-end jobs, and the winner-take-all economy would persist as jollily as before. Greenwich, Chelsea property, and prime secondary home values were safe. And while sub-prime markets indeed collapsed, NY and London prime vedically-levitated as if unaffected albeit with a dramatic fall in turnover giving pause for – if nothing else – hope that two decades of growing income inequality and flush emerging-market buyers would underpin both demand and prices. No one of course seemingly remembered the prime directive of forecasting, which is the aged-old-saw “Shit Happens”.

Fast-forward to late 2008 where asset prices have collapsed – be they equities (developed or emerging); commodities (except gold which is a mere 20% below highs) which are 50% off peaks; credit-risk (can spreads widen any further?); commercial real-estate (please look at S15REAL Equity or British Land chart) while shit-boxes in Florida, Vegas, CA and Arizona reportedly 40 or 50% of peak too. Yet the top-end remains in denial. Or alternatively, they have not yet been forced to sell their homes as others (even the best hedge fund managers with double-digit positive returns) have demonstrably been forced to liquidate their stocks, real estate, or commodity portfolios. There is clearly a lag, but sure as tides greatly rise and fall in Newfiendland, so too will the top end follow the path cut by other core asset prices, in similar if not greater magnitudes.

Instead what I heard from agents in the upper-end of a particular ”Prime” market was distinctly apologetic drivel such as:

It’s a micro-market...
It’s different this time…
Prices will not fall – they will just plateau and stabilize...
But it’s a very desired place…
Supply is so limited...
Enquiries have actually increased…
Our website traffic has been increasing…
People must have a place to live…
The Russians are coming…
When the new road [building, airport, blah blah] opens, a flood of buyers will enter…

They are counseling their clients NOT to panic. And to the sellers’ umm errr credit, they are heeding the advice…so far. “He is firm in his price”. No, she will not negotiate. “His cost is 2.5, and he’ll countenance a small loss, but no more”. Oh if I could only dictate to the trading gods the size of the loss I will countenance!! The emerging story is: “It was offered at 2.4mm and he turned down a bid at 2mm, and now its 1.8 offered, and there are no bids”. The more honest amongst the agents speak frankly at a time in which their allegiance to the seller is tenuous at best for they want to simply do a transaction, offering up bona-fide anecdotes like: “the family was squabbling about price. It was offered at 1.2mm a year ago (which was too high), and is now offered at 750k with no bidders. It will probably trade at 500k, when it does, and the buyer will have a “stolen” it. I liked that agent as she was the most honest of the lot, apart from being the most competent.

Other regions have out of necessity become more realistic. Dordogne has been flooded with distressed English sales, liquidating to stop the haemorrhaging in their primary residences, household budgets, to pay school fees, etc. The writing is on the wall. “Make an offer”, “looking for a quick-sale”, oh the sheet says EUR 1mm, but the actual offer price is 800k. Yes that’s 20% off admittedly elevated values before negotiation and a bid is countenanced. Country Life had not many more than a dozen props advertised in their mag this week, down from the three or four dozen not two months ago. Perhaps it is the time of year, but it’s more likely discretionary advertising budgets have been cut, and the buyers have simply disappeared. Where is the price today? Ask the bond-traders….for they will tell you: "where-ever the bid happens to appear!"

No, now, or soon, ALL manner of people are or shortly will-be out of work. Now, real businesses will go bankrupt. Now, everyone becomes cautious. Now, one’s worth has been halved and security diminished, and uncertainty increased. Now is NOT the time the seller has his or her way with prices. Now, the seller is lucky to find a bid, let alone a buyer. Now, the seller will lucky to have someone even view their property that they wish to sell. Now is the time the smart seller hits the bid when he finds it. Now, the smart seller is the one who can imagine and conjure images of how low prices can go, and how elevated the even-scarce bids are in comparison to but a few years ago.

In the same vein, too perhaps we will witness a return from outer space of art, antique and other emblematic late-cycle tell-tales. Transfer fees? Sports-ticket prices? Even the vaunted Honus Wagner T-104! Deflation? Yes, of sorts, but probably not the pernicious kind of the thirties but rather a demolishing of the last decades’ relative asset price bubbles - from the Gucci bag, to a year at Harvard, en primeur first growths to eccentric collectibles and five-star hotel room rates in comparison to their rack prices.

I do have a requirement for a family home, though I am not without a place to live. And I saw several places that would suit quite perfectly. But as an economist, trader, investor and pseudo-seer, I am choking at the thought of buying before the coming compression at the top-end. And this causes both anxiety and marital discord. I know what my instinct says, but this is obviously not "everything". Thoughts, strategy or advice anyone?!?!

24 comments:

Bill Mill said...

My advice is this: buy as conservatively as you can, live happier with non-housing goods, and don't buy for investment. If your value goes down a bit, and you bought conservatively, who cares? You're getting value out of the house.

The Ruminator said...

have been doing exactly the same thing but in london. will rent for 1 year to decide where to buy and wait for prices to stabilize (drop some more.)

Rental prices are collapsing - from gbp1,600p.w. to gbp900p.w. in less than a month.

met (only) one honest agent; 2.5mm she believed might go for 1.75mm but definitely not more. anything around 2mm would go for below 1.5mm. that's quite a lot of unwound compound growth.

Anders said...

Better marital discord now than total marital dissonance later.

There's very little (none?) data about the lack of house purchases causing marital issues whereas my (admittedly anecdotal) data seems to indicate that purchasing a house at a too high price can indeed cause marital stress, up to and beyond the breaking point.

Of course, the amount of marital stress is often further increased with the seemingly mandatory residential time investment that people insist on expending when moving into a new habitat.

Robertm73 said...

You leave in your house, you dont invest in house. Pay what you can afford. Enjoy what you get. Hope in 20 years people will be talking about the bad days. If you can wait, give it another 6 months till there is clarity in losses. Till we have that that market has not bottomed.

dismale said...

Splash out on a rental for a year, you need time to think about where is best, proximity to your intended area of residence will ensure you choose a better home. The fact it may be at a much lower price is of course a bonus. The spouse benefits from the fabulous rental, a huge present and the admission that you are stupid and can't cope with all the stress of buying a house at the moment.
Of course having first hand experience of all the above, it is not all a bed of roses. My other half now spends evenings surfing the net, half in desperation and half in wonderment.

PS many thanks for that post on gold miners

Charles Butler said...

Cass,

My guess, given demographics and economics, is that rural/small town at more than a commute from a large city is better protected against further long term depreciation - especially if you can buy it at distress. The Dordogne: couple of acres spitting distance from a small town and twenty minutes from a regional centre. Sounds like heaven to me.

The other option would be somewhere near Lyon?

Half Empty said...

My mature, nicely-presented, amazingly well insulated place in the Cotswolds just valued at 30% off assumed peak "value". New build over road, priced earlier this year on-plan at GBP575, went on at GBP495 and sold same day for GBP400.

The current level of denial is proportional to the deepness of the sh*t that over leveraged mortgagees in over-priced assets are in. Humongous will be the awfulness. 2009 is There Will Be Bargains year, starring Daniel Day Lewis as Desperate Man. I'm with the other commenters advising you to rent and keep looking. Sooner or later there will come along a place that is both just right for you and a mind-boggling bargain, even in mid-deflation.

Maybe best avoid anywhere requiring flying or other long distance travel.I've a suspicion that air travel as we know it is going permanently tits-up after 2010. Is that one of the reasons why the organisers of London 2012 were on a PR mission today to downscale expectations? London 1948 more like!

bondinvestor said...

I've been going through the same exercise on the SF peninsula. the stretch from burlingame to los gatos is reminiscent of london. most of the tech folks are in complete and utter denial about what is coming their way. they can't quite seem to grasp that lot prices in the los altos hills cannot be sustained at $3m in a world where tech multiples regress to more realistic levels. the HF guys from the city are more realistic, and freely admit that prices are going to get cut in half. most would have you believe that they got this cycle right and hence won't be forced to sell. we'll see.

here is how we're approaching this:

1. housing is consumption, not investment. figure out what you're willing to pay and work backwards from there to determine whether to rent or buy. i've run the numbers and concluded that the break even on renting vs buying is when the home price is within 10-20% of the value calculated by capitalizing the annual rents at 8% (which i think is the true, all in cost of owning a home when you include opportunity cost on the equity and a realistic maintenance reserve).

2. on the few occasion where we've bid on a house, we've adopted the philosophy that if we aren't embarrassed by our bid, it isn't low enough.

3. we looked into creating a hedge for the house (eg. futures, shorting homebuilders, etc). that worked in 06/07. not so much these days, given how quickly the prices of financial assets have moved relative to hard assets. but if you're creative enough, you might be able to find something that is inversely correlated to your local submarket.

one thing i'll say is that having a spouse who is cheaper than you are really helps. my wife spent her first 15 years in brazil where she received an education in macro-economic and financial instability. she refuses to pay up for ANYTHING, because she has little faith in the ability of macro-economic systems to remain stable equilibrium for the 30 yrs required to amortize a traditional mortgage.

anyway, good luck!

Anonymous said...

Hold out another six months to a year and there will be gorgeous bargains.

Unfortunately we bought a year ago in Taipei. One morning my wife couldn't stand the smell in the kitchen in the morning, 20 year old plastic pvc pipes. This was once a topper end condo. Prices here are off in theory at 5% only, many cash rich speculators holding on. Still lots of new construction in the area. However the export platform in China where our wealth is derived is crashing hard.

Nick von Mises said...

Rent somewhere nice. Tell the wife to be quiet.

Gayla said...

My heart goes out to ya! We were transferred in 2003, and I didn't get it. The realtor, at the first house we looked at, was telling me about the improvements in the home buying process... down payments, credit,PMI, even jobs unnecessary? WTF? Unfortunately my husband didn't share my reluctance to jump right in and it was a rough two years renting while we searched for something that I was comfortable with. He called me 'doom and gloom.' We did buy in 05 finally, but transferred again a year later! After another rough two years, marital discord and anxiety oh my, we are in the process of buying a house now if all goes well... I believe it's like going to an orgy, don't do it unless you're both ready! To thine own self be true. And waiting might get you the waterfront, it got us the great view! Good luck and Happy Thanksgiving!

tooearly said...

i think you are actually more interested in getting a read on your readers sentiments. well in that case, i favor the views of Templeton who said prices would fall 90% i beleive some 10 years ago.
now if governments around the globe decide hyperinflation is their preferred route, and if they can have their way, (and they most certainly can to but only to the extent that they are willing to risk undermining themselves), homes as tangible things might actually fair well.

kristiina said...

In Finland reality started to return to realty a year after the downturn happened (last time). During that time unemployment increased from 4% to 14% So widespread unemployment is the only thing that seems to make sellers start eating that nasty reality-pie. Shame on you for not choosing a wise wife ;-)

burnside said...

Find a middle ground - say, something lovely out at Marly - to wait out the storm? Rental, that is.

Ah, but Paris rentiers are in denial as well, no doubt.

I think it was Bill at CR who identified polls of builders associations as a leading indicator for bottoming or recovery. I've found that useful so far.

RichL said...

In your market of interest I'd wait, but in my hometown prices are stable! -(not)-

Rent for a year and look at leisure over the course of the rental. You'll make a better informed purchase decision when you know the area better. If you find you really don't like it, you won't have to sell in a questionable market.

Greg said...

Lease with an option to buy.

Good luck in your search.

Anonymous said...

mistress cassandra,

When a supermodel spouts that "that there is no way that she would purchase a house in this market...", and that is covered worldwide (like Giselle and her admonition regarding not "accepting dollars, only Euros from now on...." for payment for modeling 'servies', then...

that will be your signal

Anonymous said...

helpful link for UK property searching:

http://www.zoopla.co.uk/

K said...

I live in Minnesota, USA and spent Thanksgiving Week in Arizona looking at "shitboxes" while our realtor told us they were good value, all I saw was "sale off." What isn't on sale? I am inundated with email ads announcing 20% off of everything as a starting point. The real bargain is when prices are off 50% or more. How can real estate be a value when bubble price of 2005-2006 is taken off the top of a property but your stock portfolio has lost at least 10 years of gain? This doesn't even take account of the zero advance in the financial markets when inflation is taken into account. The quality inventory of houses is not marked off, not on sale. Time after time, the bargain properties were junk and examples of late cycle "flips" gone bad. Keep 6 months of living expenses on hand? How about 5 years to be safe and take your lifestyle down to manageable levels. Vacation home market is dead dead dead. Take the kids on a family vacation and create memories and develop values instead of a sense of entitlement. My parents had close friends who lost money in S. California real estate market twice. Barron's (decades ago) reported on a house in Greenwich CT which sold for $1.5M after an earlier sale of approximately $15M. This is the aftermath of the shockwaves in the wealth effect.

Anonymous said...

Wait for the bottom to be set. Feels much better to have an appreciating asset. Or at least one that's not losing value.

Anonymous said...

If the past history of house bubbles is considered, the US housing market has at least 5 years until the bottom will be reached. The UK is probably at least year behind. Find a house to rent.

macndub said...

Oh if I could only dictate to the trading gods the size of the loss I will countenance!!

Absolute gold. Thank you for that. It will be my epitaph. Perhaps when I can look back on all this with wonder and amusement.

Mr. Naybob said...

Cassandra, one for the road and this ones for you...

http://naybob.blogspot.com/2008/12/good-buy-or-good-bye.html

goto100 said...

If you're buying France (which appears to be the widespread assumption) it is the one European property market in complete and utter denial. Prices have barely budged downwards. The bubble is nationwide. Near me, in Alsace, they remain through the roof and completely unrelated to average incomes. Fantasy land. Don't touch with a barge pole. The advice above that any offer that doesn't leave you embarrassed isn't low enough, is good.