Trying to Get Away

We're in Seattle for the weekend, enjoying a few days away from weekend chores. But I can't seem to escape the real estate hoopla.

On the front page of the Seattle Times today was this story:

http://seattletimes.nwsource.com/html/realestate/2004329266_homesales05.html

A few excerpts:

"Last month King County saw 37 percent fewer houses sell and prices fall 3.3 percent compared to March a year earlier. The real-estate market was no stronger in surrounding counties, the March sales-activity report released Friday by the Northwest Multiple Listing Service shows.

But here's the riddle: With buyers edgy and more homes for sale, why aren't prices dropping more? In fact, after being essentially flat since November, King County's house prices actually ticked up $10,000 from February to $439,900.

The reason for the relatively modest year-over-year price decrease, real-estate economists say, is sellers' unwillingness to cut prices. Economists call it "stickiness.""

The article focuses on "stickiness" and offers a few insights into why prices haven't dropped yet, including emotional ties to the house, and owing more than the house is worth.

"A study by economists Karl Case and Robert Shiller, who also author the S&P/Case-Shiller Home Price Indices, reveals just how strong the reluctance to discount is.

It asked sellers: "If you had been unable to sell your home for the price that you received, what would you have done?"

• 37 percent said they would have "left the price the same and waited for a buyer."

• 28 percent said they would have turned their home into a rental rather than sell for less.

• Fewer than 5 percent said they would have "lowered the price until they found a buyer."

Realistically, however, some sellers cannot lower their price, observes John Kilpatrick, president of Greenfield Advisors, a Seattle economic-analysis firm.

They're the ones who bought recently with little or no money down or the ones who refinanced the equity out of their homes just as prices slumped.

"The price is sticky because oftentimes they owe more than they could sell the house for," Kilpatrick says.

These sellers feel they must hold firm -- or take their home off the market and wait for conditions to improve.

"There's an old saying, 'Price drives everything.' But I'm not of the opinion that sellers are at that point yet. They're resistant," says Paula Fortier, the broker in Coldwell Banker Bain's Bellevue office.

Adds Mike Skahen, owner/broker of the Seattle real-estate firm Lake & Co., "Sellers are kind of stubborn, but the ones who are realistic are getting their homes sold."

He cites the recent sale of a North Seattle house originally listed for about $695,000. It sold three price drops later for $578,000.

Then there's the seller who thinks the condo he bought last year is worth 10 percent more. Not only will buyers not bite, but Skahen says agents may not either. "We've been known many times not to take listings where the sellers won't be realistic," he says.

While this many seem bleak to sellers, Kilpatrick, who holds a doctorate in real-estate economics, senses the situation is only temporary.

"The good news is homes are still valuable commodities," he says. "Prices are depressed, but I suspect as this shakes out -- and I suspect it will shake out in 2008 -- you'll see the market rebound.""

What seemed to be missing from the piece is what happens to those houses that are worth less than the mortgage. If the owner has an ARM that resets and they can no longer afford the payments, but they can't sell, it goes into foreclosure. A year later the bank owns it and will likely fire-sale it for 20% or more off, driving down prices.

Or if the builders can't sell but need cash to function, they'll have no choice but to drop prices to unload the properties.

So I really doubt the market will rebound in 2008, and I'm surprised to hear this from a PhD. in Real Estate Economics. More and more foreclosures are coming on the market and they will drive down prices at least in Portland and I'm sure in Seattle as well.

If I'm wrong, I'll buy him a coffee, but I don't predict a rebound until at least 2009 at the earliest.