The housing market’s crumple zone: part 1
Predicting gloom is great fun, and it sells newspapers, so throughout 2006 we have had breathless dire predictions of impending home-price crash — yet nothing of the sort has occurred. The reasons illustrate why the homeownership ecosystem is so resistant to price drops. Aside from the elasticity of housing demand, homeownership markets have an extensive set of interconnected crumple zones, each of which bears a bit of the brunt:
Make sure you hit the yellow and black part
Consider the following four baffles:
1. Owners who can hold, defer selling. As everyone knows, homes can and do sit on the market for long intervals. As the Washington Post sententiously observed last July:
In the past year, though, the number of homes on the market has tripled. Some sit for months instead of days.
Months. Good God.
I’m buying from Medusa?
The larger and more complex an asset, the smaller the percentage of all buyers who are likely to pay top dollar. So single-family residences, which have many dimensions — city, neighborhood, school district, configuration, condition, amenities, price — must go through large numbers of window-shoppers before Ms. Right comes along. Meanwhile, the putative seller absorbs a bit of carrying cost, either while still in residence or by paying mortgages on two homes:
“We encourage sellers to see what’s comfortable for them to walk away from the table with,” [said Margaret Ireland, chairman of the Northern Virginia Association of Realtors and a managing broker at Weichert Realtors in Manassas].
“The key is being flexible. Some people are so set that ‘I have to leave on this date,’ and that that’s the main thing they want. But if you get a good contract with a price you can live with and the settlement date is sooner than you’d expected, then you try to work it out.”
Now for the second crumple segment:
2. Home markets shift subtly, not just in sticker price. Purchase price is the talisman, but in fact a buyer is paying (a) a down payment, and (b) a monthly mortgage payment. The aggregate community of sellers wants to sustain the visible talisman (purchase price), so they exercise that flexibility by offering concessions on the less-visible elements:
We want to hold on to the sticker price
Sellers can also help buyers get temporary buy-downs from lenders.
Lenders offer three kinds of temporary buy-downs. In a 3-2-1 buy-down, a buyer can reduce the rate by 3 percentage points the first year, 2 percentage points the second year and 1 percentage point the third year, by paying 1% of the loan for each percentage point in the reduction. On a $100,000 loan, the total cost of a
This financial accommodation is particularly clever: it helps the buyer get into the house, relieving the bottleneck on sales price, and it gives the seller a stated price close to the original target.
[Continued in part 2]
