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Are Madison house prices returning to earth?

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Postby Ducatista » Mon Apr 07, 2008 5:14 pm

christopher_robin wrote:To make any sense of that ratio, I would want to screen out all the FSBO listings. Those people have a seriously distorted sense of what the market will bear. Then they cry about the house sitting on the market for months on end.


I heard an interesting bit on this on All Things Considered last week. A professor of behavioral finance (?!) at Santa Clara university said that, in a normal market, homeowners typically ask for about 12% more than they think they can reasonably expect for their house. But in a down market, when homeowners worry they might take a loss on the selling price, they'll ask for about 33% more than they can reasonably expect.

He calls the psychological tendency behind such pricing "aversion to sure loss." Sellers would rather gamble by setting a much higher asking price, hoping they'll eventually find a magic buyer who'll pay their price, even if it means waiting longer. But they usually end up dropping their prices in the long run, to better match the market.
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Postby fennel » Mon Apr 07, 2008 8:31 pm

Ducatista wrote:
christopher_robin wrote:To make any sense of that ratio, I would want to screen out all the FSBO listings. Those people have a seriously distorted sense of what the market will bear. Then they cry about the house sitting on the market for months on end.

I heard an interesting bit on this on All Things Considered last week. A professor of behavioral finance (?!) at Santa Clara university said that, in a normal market, homeowners typically ask for about 12% more than they think they can reasonably expect for their house. But in a down market, when homeowners worry they might take a loss on the selling price, they'll ask for about 33% more than they can reasonably expect.

He calls the psychological tendency behind such pricing "aversion to sure loss." Sellers would rather gamble by setting a much higher asking price, hoping they'll eventually find a magic buyer who'll pay their price, even if it means waiting longer. But they usually end up dropping their prices in the long run, to better match the market.

That seems spot on, though I have seen that a few sellers in Madison are cutting to the chase and pricing practically — yapping realtors be damned. (Presumably because they don't want to play the waiting game.) But it's a bit harder to fathom value here, I think, since there doesn't seem to be any governmental infrastructure in place to monitor building improvements, additions, and so on. When a buyer is confronted with "improvements," it sets off warning signals, whether the improvements were done well or not.
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Postby Paco » Tue Apr 08, 2008 8:14 am

The woman across the street has been trying for about a year now to sell hers. This spring she put a new roof on. There are 4 in my block, none more than 200k I bet. Buyers market, unfortunately it's not a sellers market.
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Postby christopher_robin » Tue Apr 08, 2008 8:25 am

That's interesting, ducatista. The psychology is sort of mysterious to me--like it or not, your selling price is not rooted to an absolute value. You have to look at the market because that's your competition.

I pore over the Tenney-Lapham Newsletter, which has listings including days on market, and recently a tiny, unassuming, 1-story house on E. Miff sold for 210k, in like 4 days. Others ask 249 or 239 then drop further and further down and eventually the house sells after 10 months, but ick, how painful.
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Postby fennel » Tue Apr 08, 2008 9:23 am

christopher_robin wrote: Others ask 249 or 239 then drop further and further down and eventually the house sells after 10 months, but ick, how painful.
Painful if it was purchased in the last 4-5 years, but others will still see a good rate of return â€â€
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Postby Galoot » Sat Apr 12, 2008 1:53 pm

Haven't prices in Madison pretty much followed the national trend? Nationally, prices have gone up something like 70% to 100% above inflation, since about 1994 or 1995. Haven't Madison home prices done this too?

If so, then I see no reason why the prices wouldn't drop nearly 40%, to return back to the long-term average. Robert Shiller, the Yale economist, has gotten a lot of attention for this graph (click on the image to see the last part of the chart):

Image

It is really clear from that chart, that the recent runup in prices has no historical basis at all. The idea that you can get rich off of owning a home is relatively new. At most, house prices kept up with inflation, although during long periods, they dropped significantly, sometimes for decades.

Why would the Madison housing market have any special exemption from this long-term trend? Some bloggers think that consumers have changed their thinking about housing, to the point where a new plateau will appear in the long-term chart, but there doesn't seem to be any good reason for this. We aren't exactly running out of places to build houses here, except in the areas within a few miles of downtown.
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Postby fennel » Wed Apr 30, 2008 1:35 pm

And some of the fallout from that steep inflation:

This from the Cap Times:
Madison 10th for home debt
http://www.madison.com/tct/news/stories/284069
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Postby fennel » Fri May 23, 2008 1:05 pm

Well, I feel like I'm talking to myself in public again ... but I'm just fascinated by this.

This guy thinks the existing housing market won't recover until 2011. (Or will finish it's ongoing recovery by then, depending on your point of view.) :

http://www.safehaven.com/showarticle.cfm?id=9817
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Postby ConstantTraveler » Sat May 24, 2008 3:29 pm

Das Binky wrote:
fennel wrote:Is the idea of even thinking about buying a house here just loony?

So, I don't think thinking about buying a house around here is loony, at least on an aggregate level. On an individual level, maybe, but everyone's situation is different. Thinking about buying a house in Chicago, NY, LA, San Fran, DC, Houston or Florida (among many other inflated markets) may be loony, but from my perspective, we're not doing too bad.


I don't know too much about the housing markets in most of those places you mentioned, though I know it's been well documented for more than a decade that housing in the Bay Area is out of whack.

But I would respectfully disagree about Houston. Housing in that market is among the cheapest of any big city in the nation. One of the reasons that area is booming like crazy. A friend of mine who's a native Madisonian took a visit down there with me, and his jaw dropped at how inexpensive nice, 2-story homes in really nice and safe areas with big nice yards and trees cost in comparison to Madison. I'm talking in the $160,000 range.
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Postby roadkill bill » Sat May 24, 2008 4:09 pm

The problem with buying a house in Houston is that then you have to LIVE in Houston.

No thanks.
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Re: Are Madison house prices returning to earth?

Postby fennel » Fri Mar 13, 2009 9:13 pm

So I wonder how Madison stands at this point. I took the plunge and bought an older house that was, gladly, free of granite-counter-topped "improvements" and the like. But it was also relatively neglected. So it goes. The former owner clearly wasn't a fan of MSNBC.

I bought on the downward slope, it seems. My sense is that real values are about 15% -20% below the city-assessed value for central Madison. That may go a little bit lower over the next year. What do you think?

I think the City was a little over-eager to keep pace with the real estate bubble, with the hopes of keeping tax income high. Now the pressure is on to do a bit of realistic reckoning.
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Re: Are Madison house prices returning to earth?

Postby snoqueen » Fri Mar 13, 2009 10:54 pm

In my east side neighborhood most of the houses are nearly identical. I bought mine at probably the top of the bubble in 2006, and houses here continue to sell (they're all under $200K). I have noticed very little difference between what people are getting now for these houses, and what I paid in 2006.

It's nothing like the early 2000s, and prices have definitely not gone UP. But they aren't dropping like a rock over here. Hawk's Landing being the foreclosure capital of Madison is sadly entertaining -- those places had "overextended" written all over them from the start.

The old downtown neighborhood where I lived previously has taken more of a price hit than the postwar east side neighborhoods with very small houses. I think smaller, cheaper, reasonably sound houses have held up better than the atmospheric but rickety old Victorians on the Isthmus.

I am aware of a few foreclosures in my neighborhood. Some have sold, some haven't. The ones that haven't are in poor shape and would need updating, and quite possibly buyers are not in a position to do that immediately after purchasing so they're staying away.

If you go into the Yahoo real estate section and search on foreclosed properties you can get listings by neighborhood, with maps. Can be quite enlightening.
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Re: Are Madison house prices returning to earth?

Postby fennel » Sat Mar 14, 2009 9:48 pm

I think you're right about values in the postwar east side. I expect those weren't as inflated, being less appealing to short-term speculators. Just as they were resistant to inflation, they'll be resistant to depreciation. On the near west side, I think sellers are trying to wait it out. But there are always some who really do want to sell, for one reason or another. My hunch is that we'll have to wait until August to get a clear sense of which parties the recovery will favor – buyers or sellers. I think owners will be fine, as long as they can sit tight for 4-5 years. For the near east side, who knows? It has a lot of appeal, but values there are so hyper-inflated that the whole of it might eventually become a homogenous enclave of rich folk. Real estate speculation (unbridled) has a way of killing communities.
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Re: Are Madison house prices returning to earth?

Postby fennel » Tue Jul 28, 2009 11:36 pm

So it's not quite August yet, but the Case-Shiller index seems to indicate the rate of recovery is beginning to slow. The Case-Shiller's main weakness is that it deals only with major metropolitan centers.

Have any of you been tracking sales in your area?
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