Sales prices based upon payment-- not actual cost.

[pkbarnhart]

Several years ago I had a conversation with the local Ford dealer about buying a truck. He commented that "It doesn't matter to most buyers what the sticker price is... they only want to know what the monthly payment is." I never paid much attention to this until recently in my local market.

Local conditions can best be summed up as "very soft". About 20% of my work are foreclosures, 20% sales (some of the same foreclosures) and 60% refinances. What is amazing to me is that sales prices have held up pretty well even with the large supply of homes listed for sale. I have talked to several local realtors who indicated essentially the same as the car dealer. "It doesn't matter what the sticker price is as long as the buyer can make the payment".

Some of my initial thoughts are:

The "market" whatever that entity is, is incredibly efficient and changes rapidly. Along with this is the socio-economic status that each of us has in the country. For example in my area we have a large "service worker" population that tends to purchase homes in one area and we have several "factory workers" that tend to purchase homes in another area. Prices in both of these areas should have dropped in the past few years due to the high inventory of homes available. They have not dropped however and I think that this is due to the monthly cost of purchaseing a home.

A while back when interest rates were at say 8% a $100,000 mortgage would cost approx. $733/month (without taxes and insurance). Today with rates at 6% or so that same $733/month will buy a $122,000 home. It appears as if the "market" has rebalanced itself with higher sales prices based upon that same "$733/month". The scary part about this scenario, if I am right, is what will happen if and when interest rates go up again. I would imagine that a good portion of the real estate "bubble" in the country is fueled by these low rates. I predict the bubble with begin to burst with any increase in interest rates.

There appears to be little difference in the typical buyer's mind between a $100,000 home at 8% and a $122,000 home at 6%. In fact they may be two identical properties. I have a brother in law that carries several seconds on homes and he often tells stories about borrowers who won't pay 12% interest, but have no problem paying 8% interest with points charged with the same monthly payment. They just don't want to have to tell anyone that they are paying 12%.

Any thoughts?

 

[Pamela Crowley (Florida)]

I think you're right. Some of what I'm seeing that didn't make sense before would be understandable under your explanation. It's becoming more difficult to determine some adjustments because the prices are all over the board.

Of course, I also believe that this would not be happening at all if there weren't so many so called appraisers that make whatever number they are told to. Too often anymore, I find myself shaking my head wondering how on earth any appraiser in their right mind made a value on a sale that sticks out like a sore thumb when comps are pulled that are actually comparable. Then again, maybe it was a BPO or AVM that did it.

 

[Dee Dee]

pk,
Interest rates were dropped in an attempt to stimulate the economy. The theory was that if people were able to have more cash in their hands it would be poured back into the public sector. Unfortunately, it would appear that a large number of homeowners are using that extra money to simply hang on to what they already have.
I'm not sure how much lower the interest rates can go down from what they are now, and if they did go down it could only mean that our economy is so bad that history-making, desperate measures are being taken to keep it from collapsing.
You're right. If rates go up, many people will be unable to find ways to make up the financial difference that cash-out refi's or reduced monthly payments have provided in the past.

 

[Chad J. Houser]

Pk you make an interesting point, although don't you think this happened when interest rates fell from their highs in the early 80's. Since very few people purchase with cash, they are forced to convert how much can we afford (in $/mo) to how much can we afford (in $ sale price). And that varies with the interest rates overall and the interest rate a particular borrower qualifies for. What I find much more interesting is that you say 20% of your appraisals are sales (right now). When rates go back up won't that % will zoom higher.

As Dee Dee said, the point of lowering interest rates was to get people to refinance, take that difference in payment, and start spending.

Your post reminded me of something my macro-economics professor said in class one day. In calculating GDP and Investment here in the U.S, mortgages are considered "investment", but he believed it should be counted as consumer spending on durable goods. I disagreed with him at the time (what did I know) but the more new construction and mfg homes I see, along with the current consumer habits, I'm beginning to see the light.

 

[Dee Dee]

Chad,
You're missing an important point.
In the early 80's very few people had such easy access to credit like they do now and cash-out refi's were rare. Back then most people actually had savings accounts and the majority had very little money, if any, in the stock market.

 

[Chad J. Houser]

Dee Dee

That is true and I don't disagree. Perhaps I am missing the point (it's Friday).

 

[Dee Dee]

Chad,

Don't take it too hard (and it is Friday...Thank God!). :wink:

I think MOST people who are trying to make sense of what is happening right now make two big mistakes. Either they try to compare it with historical trends, the equivalent of trying to fit a round peg into a square hole, or they're too young to realize how much our society has changed in just a couple of decades, particularly when it comes to personal financial management.

 

[Carol]

I've also felt for a long time that what you describe is what is going on in the market place. After all only in this cuture and it's mentality would there be repeated situations where the buyer is angry with you the appraiser and put out simply because your value opinion came in lower than what they wanted to pay. Of course, this is because, the bottom line if irrevelant, only "do I qualify and can I make the monthly payment" is important. The appraisers low value is not helpful to them, only a deal killing situation as far as they are concerned. Only a tip of all the crazy things going on. Imagine, people all over this country are making most probably the biggest debt obligation of their life under these circumstances. Scary.....

 

[jtrotta]

because of how our society works, we froget the past rather quickly, but when it rears it's ugly head, everyone will remember.

DeeDee
I think your on course, "personal financial management" - what a great new job description :wink: Lets see; 1989 to 1996 deepest period in forclosure actions since the 20' - 30's; second time in History we lost the largest amount of independent Banks; 1997 to 1999 consistent growth; 2000 to 2002 the greater growth period in Real Esate and the largest Loss in the stock market - all relative to approximately 60 years ago, oh and by the way I believe during the 30's was the first time a bomb exploded on wall street, killing approximately 30 people. 8O

well, well, well - history's kickin our butt again

8)