Seller Psychology In A Falling Market – “While the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.” [We Disagree]

From discussion at reddit.com (25 Jun 2012):

ionpulse: “Housing in Vancouver is overvalued (bubble!) so the value of homes will ‘diminish’, affordable housing or not.”

mike_sol: “That’s been said before, and it will be said again; but while the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.”

incognito_crocoduck: “We’re seeing it in a micro fashion right now. The factors that should be causing a sag in the market are all in play, but that sag is being delayed and perhaps even lessened because people are simply refusing to lower their prices below what they think they should get.
People are perfectly willing to sit on the market for up to a year rather than go below their preferred price range. Eventually most of them find a buyer and prices stay relatively high – the market just moves slow as molasses.
The economy isn’t in the state where many people are truly desperate to sell, and unless that changes dramatically prices can only go down so much.”

We disagree with the last two commenters.
For one thing, 600K houses may very well become 200K houses again when the bubble completely unwinds.
And for another, we don’t by any means need a weakening economy for the speculative mania in housing to collapse (even though we are indeed at risk of an economic ‘squeeze’ by virtue of local and international factors).
Mostly, however, we disagree with these posters regarding the psychology of sellers in a falling market.
Many people seem to believe that, in a stagnant or falling market, sellers will simply take their homes off the market, or simply ‘sit’; even prospective sellers themselves seem to believe that’s what they’ll do. But they are speaking from their current perspective, where they have been conditioned over years of Vancouver RE price increases that homes are ‘worth’ ‘x’, and are soon to be worth ‘x + y’, and thus they can’t possibly imagine ‘giving them away’ for less, or ‘selling for a loss’, or even the idea of houses selling for the same prices they fetched a few short years ago.
Further, the very brief 2008-2009 drop conditioned market participants to believe that dips would be short-lived; that the market is ‘bullet-proof’.
None of these beliefs takes into account the market psychology that will exist when price drops clearly declare themselves. All it takes is for a handful of necessary sales at lower prices to establish new, lower price levels that are modestly but definitely below the levels at peak. Once prices show that they are dropping, a percentage of potential sellers will stir. Those who own multiple properties with leverage, those who are holding ‘flips’, those who had planned to sell to fund imminent retirement, those who had been waiting to ‘pull the trigger at the top’, and other subgroups, will come to market.
Greed for higher prices will be replaced by fear of lower ones.
There will then exist a situation where sellers are competing with other sellers for a smaller pool of buyers.
Anybody who has been a participant in a market which is unwinding from speculative heights knows the psychology that prevails as prices fall. The prevailing sentiment is very, very different from that on the way up and at the top. Seller confidence and patience becomes doubt and impatience, and then urgency.
We never expect the Vancouver RE market to move as rapidly as markets for stocks or commodities, RE always moves slower, but the factors at play in the unwinding of different types of speculative mania are the same, and the price charts for manias in all markets look remarkably similar after the fact.
– vreaa

73 responses to “Seller Psychology In A Falling Market – “While the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.” [We Disagree]

  1. Ralph Cramdown

    Interesting how optimists’ sentiment gradually changes from “ain’t gonna drop” to “ain’t gonna drop THAT much.”

    Who will sell at that much of a loss? Banks, if that’s where the market is.

    • These pretzels are making me thirsty

      It’s called denial

    • Yes, it is funny, isn’t it? In an ironic twist, it is likely those who can’t really afford the homes they’re in (but remain inexplicably attached to them) that are likely to wait it out and sit on the sidelines in hopes of making a profit or getting their money back while those that have substantial equity built up or own their homes outright are more likely to whack the bid without much thought (in much the same fashion as they would when liquidating some of their deadbeat stock holdings).

      • I disagree, if you own your home outright, you may think you you can afford to wait out any dips, why? Because you owe nothing on your home and of course because renting is “throwing” away money.

        Thats part of why this down turn is going to be a long and prolonged one. In the long term the selloffs of those who can afford to saty in thier homes are going to happen in the future when they are older and can no longer stay in thier homes (financial or physical reasons) and in the short term the overextended are going to lose thier homes to foreclosure. It going to be a loooooonng and bumby ride.

      • @ Arshes
        I know my reasoning sounds perverse. If you no longer have skin in the game, you have nothing to lose if prices drop more. To save face, I think many people would opt to keep paying their mortgages (as they are getting a great deal and would have to pay rent anyway), stay in their homes, pretend everything is OK and pray things work out in the end (ie. they’ll get their dp back and then some). Those with substantial amounts of cash tied up in multiple properties (and various other investments) will hit the sell button, get liquid and batten down the hatches if things look like they are headed over a cliff.

      • @bullwhip29, you mean only those who can sell will?

  2. “While the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again.”

    Well that is a bit extreme. There are no $600K houses.

      • oh no you didn’t

      • Loon probably meant to say “$600K houses in good neighbourhoods…” 😛

      • Van east guy

        Surrey won’t even see 50% off. Unless Internet rates move to 6% in a hurry.

        A van special cost about $900k. Priced at $300k would bring prices back to 98 levels. Unless, there is another global disaster, it won’t happen. Inflation only adjusted price would be about 400k for a east van special. So, about 45-50% off at the worst.

      • Surry. Land of the McMansion. Seen this one yet? The death of the big box suburban house in the US is finally taking shape. Seems as many as fourty million of them are going unloved. My God…people actually do want to live in smaller more efficient homes closer to city services after all!

        http://www.thedailybell.com/4023/Forty-Million-Houses-in-the-US-That-No-One-Needs

      • @ Van east guy: “unless interest rates move to 6%”, “unless there is another global disaster” ….

        Be careful what you wish for.

      • The problem is that the whole economy has adapted to become more dependent on real estate. Construction is much larger share of employment, for example. It’s hard to account for these second order effects, but that’s what produces a crisis.

        I would say the damage really occurred when we allowed the economy to become this dependent on rising house prices in the first place.

      • Actually Surrey is nearer fair value than say Richmond or East Van. It didn’t go up that much, the rent/price ratio is not as extreme and so % drop may not be as huge as some places. We have already seen some West Van homes drop their 20% and yet no bites. They have come from psychotically over-priced to just stupidly valued.

  3. If sellers can’t sell and refuse to lower prices they’re not really sellers. Just saying.

    • Too true. That’s how markets work- stuff priced appropriately for the market will move, and stuff overpriced for the market will sit.

      The same is true for all markets, be it for houses, big screen TV’s, or kittens.

    • I think it is just tough-guy talk to be honest. Sellers have had the game tilted in their favour for so long that they really feel they hold all the cards. Call it confidence or cockiness or whatever but they are going to discover that the market will not be dictated by their attitude….

      Nor by how much they have invested, or how much work they put into the place or how hard they believe Chinese buyers are coming in yellow helicopters. None of that matters when declines begin.

      All that matters is that the selling price meets the market.

  4. Ralph Cramdown

    Some nice charts and graphs to give to the next person who says houses might be overvalued by, or prices might drop by 10-15%, here:
    http://ftalphaville.ft.com/blog/2012/06/26/1059711/of-housing-booms-and-busts/

    • Great charts; proverbial ‘thousand words’; thanks; will headline.

      • Excellent charts…

        Thought I’d post the conclusion for all to see:

        Speculative bubbles have occurred in numerous countries and asset markets (see Lansing 2007). A common feature of all bubbles is the emergence of seemingly plausible fundamental arguments that attempt to justify the dramatic run-up in asset prices. One such argument cited to justify the recent U.S. house price boom posits a decline in the risk premium of rational investors. However, a variety of evidence showing that investors typically expect high future returns near market peaks seems to clearly refute this explanation.

        History tells us that episodes of sustained rapid credit expansion combined with booming asset prices are almost always followed by periods of financial stress (Borio and Lowe 2002, Riiser 2005). This was certainly true for the U.S. housing market of the mid-2000s. Time will tell whether things turn out differently for the Norwegian housing market.

        I like this line:
        “A common feature of all bubbles is the emergence of seemingly plausible fundamental arguments that attempt to justify the dramatic run-up in asset prices.”

      • This was the conclusion from the actual Fed paper, not the website, just to clarify.

    • Wow. I never hear anything but good things about Norway’s finances. Well it seems their government’s surplus is negated by a massive private debt. 210% of annual income??? That’s an average? Holy crap, they make Canadians look like misers.

  5. because nobody will sell for that kind of loss.

    … except banks.

    • As I mentioned earlier, I believe those with a vested interest in their RE holdings will be more likely to whack the bid first. Many with multiple properties won’t bat an eyelash when it comes time to shrinking the portfolio. I doubt we see a massive wave of foreclosures in Cda like we did in the US.

  6. homelessindunbar

    I have a friend going through an ugly divorce. He is desperately trying to sell his house in the Dunbar/PG area (Neither he nor his wife want/are able to move out). Despite weekly open houses, there is no interest. They have dropped the price by more than $100k but still no action. They definitely don’t want this situation to continue much longer. Not everyone can wait a year+ for prices to come back. Some really do need to sell now.

    • “Some really do need to sell now.”

      And those are the ones that will set the comparables for the rest of the neighborhood. Lather, rinse, repeat.

      • What people are not factoring in is the overextendedness of a large percentage of 1st time buyers and moving one level up buyers. If they are even 10% of the total number of home-owners, they will take the 90% down, quite a way down. Sub-prime, 0 down, liar loans and all the US shenanigans are very much in play in Canada, maybe even more so than in the States. Once the great unwind starts, it will be a long long long way down for everyone. And since some 20% of Canadian GDP is now related to Real Estate, mostly residential, it will send shock waves throughout the Economy, far worse than the States, which has a much more diversified Economy and also the World’s Reserve Currency. Canada will first be a repeat of Ireland, then Spain, and eventually of Japan, where RE values will be permanently depressed and never return to 2010-2012 levels.

  7. If we were calculating the “normal” RE price for the Greater Vancouver area with the normal ratio to the med. local income – what that number would be? That would be the expected RE price drop bottom? (it could be lower for awhile but should go back to the fundamentals?).

    • I think it comes in at 5:1 but would depend upon the property type and the area. Vancouver’s a big region, big enough that I expect 5:1 isn’t unrealistic in aggregate

    • Based on long term averages, Vancouver needs a 40%-50% drop to get back to normal.

      • Unfortunately for recent buyers, it does need to correct that much. There has been little more than the belief in ever rising prices holding this market up against the forces of gravity. Take that away and down she comes.
        ———————-
        By the way, I met a guy from Ireland in the bar a few days back. He is like a refugee from his home country. Only been here for three short weeks but thinks we are booming and wants his kids and wife to join him as soon as possible. “It’s not like back home” he said. Was telling me how his family got wiped out by the property crash. So anyway, he landed a great job here as a mining engineer of some sort. Told me he was thinking of buying a house.

        I actually said nothing this time. Just bit my tongue.

      • @ Farmer
        Is this Irihsman now working in Alberta???? Where i work we hired a Irishman with the same story. Houses that were$600,000 are like $200,000 now. Huge crash in Ireland.

      • All Irishmen tell the same story. Because that’s exactly what happened.

    • Renters Revenge

      Historical norms are around 3:1 but I think Vancouver has always had a slight premium so I wouldn’t expect a ratio quite that low. Don’t forget that as RE implodes incomes will be falling too. So maybe 3.5-4 : 1 ratio but on average household income of $50-60k. That would put us at about $175-240k as a “normal” for the average Vancouver home.

  8. Anyone who doesn’t sell now is merely going to see the value of their house drop by 15 to 50 percent, it may take 5 years to bottom out. Then they have to wait another 5-10 years for the price to rise to the same level it’s at today. So those people who dig their heels in on price are going to lose the most. They may have to wait 10-20 years to get their coveted price.

    • Or… dude sees prices falling and, realising he only has $100K of equity left, panics and decides to sell before he goes red.

      I do enjoy second-guessing prognostications of game theory, which pirate gets all the gold and all that, and we only need to look at decreased sales volumes and bloated inventory to validate the “won’t lower prices quickly” hypothesis. That doesn’t mean prices won’t drop, and in glacial terms this will happen quickly, just not (as mentioned by the editor) very quickly.

      • Ralph Cramdown

        The neat game theoretical part about real estate is that, generally, the two principals in a sale aren’t experts, so they each retain ‘expert’ agents whose motivations are different from the principals’ (or their principles, as it were).

      • @Ralph, I know a few agents who outright refuse to offer any advice on price, other than displaying comparables and indicating how long properties take to sell. They understand there is a conflict of interest so take a giant step back. Others have figured out their clients are pliable, but birds of a feather I guess.

      • Ralph Cramdown

        But given their access to MLS, advice on price is the ONE THING which they should indisputably be able to do better than the seller. How can we tell whether they’re “better negotiators” or any of the other pluses they regularly claim?

        Want to get an agent’s advice on price? Just put it up for sale yourself. Every agent for ten miles around will opine that they can get you more than you’re asking… NOT THAT I’M BITTER, but I’ll never have qualms again about wasting real estate agents’ time — they were certainly willing to waste mine. My deal, a sale for relatives, closed yesterday.

    • But you just said I might be able to buy @ 50% off within 5 years?

      FWIW, I think it is going to take much longer for things to bottom out and perhaps another generation for things to get back to current levels. Of course, by that time, my grocery bill will also be 5-10x higher than it is presently and no one will be able to afford to maintain the types of dwellings we take for granted today.

    • I would disagree, the last crash took almost 15 years for prices to recover. This one being so much much much worse with absolutely unrealistic interest rates, prices will not recover for 25 years and may never recover as in Japan now some 25 years later, Ireland, Spain, and then Japan is where we are headed.

      • Somewhat agree, Signs-of-the-End. What is underway now is generational. It is simply not going to be a garden variety recession and back to business like the old days sort of scenario. We will delever off these highs and deal with what consequences arise. But as I keep warning, this kind of event has the hallmarks of a major structural change in the wind and so it is really our living standards themselves and our entitlement based system that is going to be affected most.

  9. “….because nobody will sell for that kind of a loss..”

    Now that’s quite a piece of illogic. Of course they can sell. And they will sell if things get tough. Homes will be lost to foreclosure, bankruptcy and taxes and if buyers do not step forward the houses will go for whatever the market might bear.

    But even if none of the worst events happen, owners will still have to contend with neighborhood price drops and comparables. They will have to fend off multi-decade neighbors selling at a huge profit despite the fact they will end up with a major loss after the block price drops.

    And they should not hold out for Asian buyers to step into the fray and save them. I hear now that China is on course for a hard landing and that means Vancouver is going to land hard too. It is all about employment levels in the future. That is the only thing that will distinguish a falling market with one that actually crashes.

    • Farmer, just wanted to thank you for the excellent reply to my question on Friday’s post. I’m sure I’m not the only one that benefitted from the time and thought you put into it. Thanks also to VREEA for this forum! You are truly providing a public service through your efforts.

      • Thanks Curious. Glad to be of help. I am a big fan of Vreaa and many of the contributors here too by the way. Always thoughtful analysis (but without all the hairballs and indigestion other sites offer!)

  10. There will also be a large segment of new buyers that are “frozen” in their homes. They told themselves when they bought, that they would be in it for the long haul, and they may well be. However, with a 10%-15% deposit and a coresponding drop, a sale would simply mean a loss of equity.
    These folk will not be buyers or sellers, unless their employment situation changes…

    • Ralph Cramdown

      Or they told themselves they’d only have to live in their too-small-condo or their crappy-home-in-a-sketchy-neighbourhood for a few years while they built equity so they could buy what they really wanted.

      This whole property ladder meme caused people to buy what they didn’t want to get what they wanted, rather than renting what they wanted in the first place. I hope they won’t be bitter.

    • Sadly a lot of these very same buyers are involved in the Real Estate industry in some form or another. And their incomes are sure to take a big hit. There will be a significant enough percentage that will be forced to sell, in some cases literally by the banks, and they will bring the whole house of cards down. These are Canada’s sub-primers and the US model will repeat here. A small number of sub-primers got the ball rolling in the US and 5 years later it is still rolling down and down and down…

  11. I hear people bought houses for much, much less than today’s prices only a short 15 years ago. Those folks, if they didn’t HELOC the place, may even see a profit selling when the market sits at half of current prices! Crazy, I know! The only folks getting slammed in the crash are the speculators (people who put skin into the game either by purchasing or taking out equity in the last 15 years).

    • In the late 1970’s good houses in Kits were selling for under 100,000. People were outraged by anything normal and family oriented in the 70k or 80k range. There are indeed a lot of people out there who have owned paid off homes for a couple decades. I know some. They were my neighbors……speaking of which, I really should have married that gal up on Belmont that I dated way back when.

  12. Very nice summation vreaa.

    When a seller sees they’ve lost 15% and the clear momentum and sentiment is still heading lower towards 25% or 30%. They’ll think about cutting their losses instead of “not selling for that kind of loss.”

  13. Anyone know if there Is there a VREAA equivalent in other markets that have dropped? Nothing better than learning from past mistakes …

  14. “don’t hold your breath for the $600K plus houses to return to $200K ever again”

    That would take a 66% drop. Considering Vancouver is as overvalued today as San Diego was in 2005 – if a 66% drop happened there, it can happen here.

    Exhibit A:
    Sales History
    Date Price Held Return Annual
    05/15/2012 $165,000 6y 5m -66% -16%
    12/14/2005 $490,000 7y 6m 298% 20%
    06/02/1998 $123,000 12y 1m 54% 4%
    04/10/1986 $79,900 n/a

    http://www.sdlookup.com/Property-8D158E85-2617_Bonita_St_Lemon_Grove_CA_91945

    • How could they possibly have sold for that kind of loss?
      (/sarcasm)

      Thanks for the example, Michael.

    • In Lemon Grove… OK that’s not exactly Dunbar

      • Correct. Beginning to end, Dunbar has been priced upwards by a greater percentage than Lemon Grove.
        😉

      • The drops in San Diego have been far from homogeneous.

      • Do you mean compared with Vancouver, so far?
        If so, I’d point out that all we’ve seen in Vancouver (so far) have been ‘choppy tops’ across the sectors… we have not yet begun to fall.
        Near tops (with ‘market narrowing’) one often sees some sectors show late strength, others top first… market sub-sectors may appear to be very poorly correlated.
        Once we’ve had a year or three of definite price drops in the LML we’ll be able to comment on degrees of homogeneity across sub-sectors. As you know, I’m predicting we’ll get to pretty much the same price targets across sub-sectors, but trajectories may vary.

  15. 4SlicesofCheese

    I just got an email from my realtor friend about Solo District and they have a new ad that says:

    http://tinyurl.com/89pyh2w

    Is that true? I thougth the 25 Amort applies to all not just high ratio mortgages.

    • 4Slices -> repost with valid link and I’ll edit.

    • Ralph Cramdown

      ALL of the government amortization reductions have been done through high ratio insurance regulations. As far as I know, banks are free to offer 40 year ams if you’ve got 20%. But they all scaled back their conventional mortgages’ ams when Finance disallowed the high ratio ones. I think HSBC held out longer than the others, but eventually it too threw in the towel.

      The problem with being the last A lender to offer long am is you get flooded with marginal applications. And if you were set up to efficiently weed out a few good applications from a pile of crappy ones, you’d be a B lender in the first place

      • +1 for extra thinkin’

      • Ralph Cramdown

        A followup. Over at Canadian Mortgage Trends, Rob is reporting that lenders are starting to announce they’ll stop taking applications for old-school mortgages several days before the official deadline. Likely a relief to their underwriting and back office staff.

      • Relaxed & Happy Islander

        A conversation I had with HSBC Vcr mgmt way back last year (when I thought I was alone in thinking bubble/ before discovering this site), I was told they weren’t agreeing if the numbers didn’t work for 25 yr rule. Also was led to believe they were relatively quiet – their A list clients had
        (generally) become uninterested in VCR RE.

        I juxtapose that with a recent conversation with one of the big sicx

      • Relaxed & Happy Islander

        Sorry (note to self: learn how to use ‘reply’ windows)

        Pt II: a recent conversation I had with one of our ‘Big Six’ gave me the impression they were still working diligently to make the numbers work on the mortgage applications

      • I believe McLister claimed some lenders need time to ensure application forms are correct in advance of the deadline (which is a week Saturday). This leads to inevitable late applications.

        One wonders what will remain after the next two weeks!

  16. ‘As soon as he heard the berm had been breached, the 77-yearold man drove his precious Mercedes sports car up to the dike, followed by his motorhome.’

    “First my car, then my house,” he said, looking out over the water.

    http://www.chilliwacktimes.com/Berm+wasn+enough/6840312/story.html#ixzz1yvkoa9ze
    By Paul J. Henderson, June 26, 2012 12:13 PM

  17. Anyone remember Nortel or Bre-X? RE is a mania much like the Tulip mania, the end result will be the same. Canadian home prices will retreat to 3 X income, whatever that dollar amount happens to be, and may well overshoot to the downside for a while.

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