5 reasons home buyers aren't biting
Filed under: Real Estate, Recession, Mortgages
Apparently everything's on sale, when it comes to real estate, Affordability is near an all-time high.
Nevertheless, pending home sales are barely creeping up, reflecting what the National Association of Realtors calls a "gradual improvement" in home sales. So, what's stopping buyers from running out to grab up all these affordable homes at affordable rates?
1. Fear of foreclosures. The ongoing robo-signing/foreclosure fraud scandal and the resulting foreclosure freeze is beginning to play a role. If you haven't heard, two of America's largest mortgage servicers have frozen foreclosures and resales of foreclosed homes in 23 states, and Bank of America, the largest lender in the land, has frozen them in all 50 states, all because sweeping fraud and improprieties have been revealed in the way the banks are processing foreclosure documentation.
Buyers have a somewhat justified fear that if they buy a foreclosed home, that sale could be reversed down the road if it comes out that the banks wrongfully foreclosed on the former owner. And that could be stopping buyers from, well, buying foreclosed homes.
2. Waiting for the shadow inventory to come out. The phrase 'shadow inventory' refers to the homes that have been (or will soon be) foreclosed on by the banks, which are not yet on the market; some estimate this inventory to be as high as 7 million homes! Many buyers who are actively house hunting -- and who are disappointed with the homes that are available -- are fearful of pulling the trigger because they believe the banks are going to start releasing their 'shadow inventory' soon, and that those homes will be better than what's out there on the market right now.
3. Waiting for the bottom. Given the trajectory of home prices over the past couple of years, there's a large contingent of buyers who are afraid that after they buy, home price will continue to fall and they will lose their hard-earned investment in the home. These are folks who are still waiting for the bottom (although by some accounts, including that of the Case-Shiller Price Index, the bottom is here or has already passed, in many cities).
Human nature is always to wait too long for the bottom, miss it, and then end up wishing we had bought sooner. The behavioral economics theory of myopic loss aversion explains this phenomenon as being due to the fact that the pain of losing money generates a greater psychological fear and avoidance than the prospect of gaining the same amount of money. Buyers can set themselves up to gain over time, even if they lose equity in the very near term, by making smart decisions about the home they buy and how much they pay for it, and planning to stay in their home for a longer term than previous generations of buyers did.
4. Unemployment/underemployment. Take California, for instance. The national unemployment rate is 9.6%; California's is a whopping 12.8%. But right around the same number of Californians are underemployed, meaning they work part-time, but want full-time work. That's right, a quarter of Californians are unemployed or underemployed, and -- right again! - none of those people are buying homes. On top of that, many people who do have jobs lack job security, the confidence of believing they'll be able to keep their jobs in the future. Interest rates could be zero, and people will not buy homes as long as they have no jobs or job security.
5. Need to keep options open. Because home values are so volatile, currently, there's no guarantee that you can resell today's new home tomorrow without taking a loss. If we've learned anything from this crisis, we all know that it just doesn't pencil, financially, to buy a home on today's market unless you plan to own the home for at least 7 years (give or take a year or so, depending on how your market has fared in the housing recession).
Many Americans don't want to be tied to one location, given the changes in the job market, because they simply don't want to be stuck in one place, geographically speaking. They want to be free to meet someone via online dating and move if the match sticks. They want the freedom to move across the country or even to the next city or state for a job, if that's the direction their career takes them. The more mobile the person, the less likely they are to buy a home.
Paul Richards, AFP
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Reader Comments (Page 1 of 1)
10-12-2010 @ 10:17AM
Jim said...
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10-12-2010 @ 11:00AM
fattrucker said...
how about the fact that nobody has the 20% down, how about all the people who walked away from thieir houses have no credit now, how about the fact that the bank is holding on to these foreclosure houses and there's no inventory? houses are selling like hotcakes, what few actually go on the market. around here you can buy 3bdrm/2ba for under 100k and rent them out for about 800$ to 1000$. that's almost double your money. the way the banks are handling this situation is damn near as fishy as the easy credit that got us in this mess to begin with.
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10-12-2010 @ 11:31AM
Don Wilson said...
Can you run some numbers for me showing how you can pay 100K for a property and rent it for 1,000 a month and almost double your money. Thanks
10-12-2010 @ 11:46AM
Will said...
$100,000 house. 20% down. 30 year $80k mortgage at 4.4%..........$400 a month mortgage payment.
10-12-2010 @ 11:55AM
russ said...
fattrucker, then why aren't you doing it???? BUY BUY BUY Nobody is doing it
10-12-2010 @ 3:33PM
fattrucker said...
actually, i am in the process of buying a rental right now. i wasted a couple of years chasing short sales that never worked out, finally just bought one, bank owned. these bank owned houses are usually real dumps and need a quick 10 or 20k right off the bat, but we found a nice one. i'm planning on buying several of them but i've heard the lenders don't want to finance more than one per person. I'll have to see how it goes.
10-12-2010 @ 11:29AM
JOHN LIVERS said...
How about nobody has trust in Obama. Nobody can tell what he will tax next and how much it will be--just like health care...
Reply
10-12-2010 @ 1:45PM
pd39 said...
Item 4 -- unemployment/underemployment -- first reports out said last months numbers were 10.1% U-3, and 19.8% U-6. Revised numbers changed to 9.6% U-3, and 18.8% U-6. The first set, issued by IBD (Investors Business Daily) ads up to 29.9%, the second set, issued by the White House controlled CBO ad up to 28.4%.
Even going by the lower numbers, we are in deep doodoo. At the peak of the Great Depression, unemployment only hit 24.8%.
A "jobless recovery" means only one thing. Those who have jobs are earning more. That would be union bosses, politicians, corporate honchos, and those special interest groups favored by the current administration. They are the ones driving the market more than retirement programs, 401ks, pensions programs, working — or out of work — class, or anything else. I wouldn't be surprised to find George Soros and a bunch of liberals behind massive buying to drive the market up just so they could sell at the peak. Take their money and run.
The current crop of congress critters has got to go if we as a nation are to come back. If we allow them to continue taking us where only they want to go, we can just all bend over and kiss our azzes good-bye now.
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10-12-2010 @ 1:24PM
Alex said...
In Pamdale California, you can buy a home for 100k and rent for 1200 a month. I have investors buying them and renting them now...
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10-12-2010 @ 2:07PM
Doug said...
Shadow inventory? When a foreclosure takes place, that means the bank is losing money on property. Yet, when the bank threw the widow out from the house next door because her short sighted husband had the house in his name only, three people currently renting in the development wanted to look into buying the house. I tried and they tried repeatedly to contact the bank that held the mortgage. What do you think happened? I got hung up on twice and finally I was referred to two web sites that you pay to access for nation wide forclosures. WTF! I guess they have plenty of our money, courtesy of the Democrats, that they don't care if they have a ton of money out there doing nothing?! Meanwhile, the property is vacant with the power off, slowly filling up with water, potentially damaging the other homes in the development. In addition, people that want the house can't get it?
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10-12-2010 @ 2:27PM
DJ said...
THE C-U-R-R-E-N-T ADMINISTRATION IS THE "M-A-I-N REASON" PEOPLE ARE N-O-T BUYING ANYTHING..."WAKE UP"!!!
Reply
10-12-2010 @ 3:54PM
Tom said...
It's tough to beat the cash on cash return on buying $100,000 homes and renting them for $1000 per month. Follow the #'s.
20% down or $20,000, $80,000 30 year mortgage for 30 years at 4.4% has a monthly payment of $400. Assume real estate taxes and homeowners insurance cost $2000 per year. Here is your annual % return on the $20,000 down:
($1000 x 12 months) - ($400 x 12 months) - $2000
----------------------------------------------------------------- = 26%
$20,000 cash in the deal
That's a 26% annual return on the $20,000 an investor put into the deal, i.e. your cash on cash return. It's happening all day long people. Most people either let fear rule their lives or they don't understand the numbers and that is why they don't pull the trigger on these opportunities.
FYI, I am a former practicing CPA. These returns are for real in today's market. An opportunity of a lifetime. I and others who know this are capitalizing on this.
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10-12-2010 @ 4:15PM
fattrucker said...
This economic meltdown began under Bush. Obama had nothing to do with it, he started off in a deep, deep, hole, with an economic bailout plan engineered by Bush. It takes years to climb out a hole that deep, it doesn't happen overnight. I do agree that the Health Care deal was wrong idea at the wrong time, I blame that on Hilary more than anything. Health care was Hilary's Saddam Hussein. I'm not an Obama fan but people seem to be using him as a scapegoat for all of society's problems.
Reply
10-12-2010 @ 4:21PM
fatt said...
i would also like to mention that all this easy unemployment money is contributing to the high jobless rates. i personally know several people who are totally milking it when they could be working. it's like there wouldn't be nearly as many fires if it wasn't for fire insurance. this whole economic thing has been very rough on the greedy and the lazy.
Reply
10-12-2010 @ 5:49PM
DOC said...
As long as OBAMA's in office, you'd be wise not to purchase ANY big ticket items in your life, at this time!
Reply
10-12-2010 @ 7:16PM
chip rohlke said...
Personally I love buying in a declining market like this. The properties to buy are hard to find- great, like new homes in upscale communities you can buy for $40 a foot or less and rent for twice your cost to carry. I've been doing this in Melbourne & Vero Beach Florida and buying $300k homes built in '06 for $60-80k and renting for $1000 a month..pocketing $500 or more a month.
The trick is to be buying when the banks are desperate and if the markets going up that's not going to happen. Mst homes likie these are still selling for $100k so I'm still buying 20-35% under current market prices.
My goal is to have 10 properties by 2012 that yield $50-60k a year and can double or triple in 3-5 years. Buying at half replacement cost(without land cost)pretty much guaratees equilibrium pricing will eventually be cost plus a developer profit.
I'm setting up partnerships if anyone wants more info call me.
Chip Rohlke-Broker
Tropical Breeze Properties
agents get 80% commission-no fees
PO Box 34117 Indialantic Fl 32903
cell (321)298-9796
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