What happens to a $3 million house when a $5 million drops to $3.5?
Nothing good, I suspect. I asked this same question a few years ago in my column when I noticed the large number of huge spec mansions going up and I questioned whether they'd all sell. I got no answer because at the time, they did keep selling and at ever-increasing prices. Now they aren't, and their prices are falling faster than Lehman Brothers' shares.
If what is really a $5 million house is slashed to that price after stupidly being priced at $8.5 no harm is done, I'd think, because now it's just competing with its peers. But in this market, what can be said objectively to be worth an absolute amount? What might have been considered a well priced house at $5 million a year ago may not sell today, regardless of what we agents think. If its builder, faced with foreclosure and total loss versus minimizing his losses and getting out while he still can - picture the dilemma of Merrill Lynch's chief yesterday afternoon - cuts that price to $3.5 the "real" $3.0 million house is going to look like a comparative dog. And, assuming someone can afford $3.5, won't he buy that instead of the lesser house? And won't the lesser house have to be marked down to reflect that?
All this is speculation, of course - most of the price reductions I'm seeing simply serve to bring the price closer to reality but I suspect it won't be long before genuine price cuts drop houses below what we would have considered their fair market value last year. If so, we'll have a merry time of price restructuring, from the top down. Good for the market and for buyers, eventually, but dispiriting for sellers who'd counted on gaining a fancy price for their home.
1 year ago
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4 comments:
It woudl be a long time coming. Wouldn't a house slashed that much be a "short sale"? And wouldn't that take ages to work its way through?
Second, while I believe the spec houses are priced too high, what percentage of the market are they? If 10% of the market is severely overpriced and those prices slashed, I would think that the 90% that aren't ridiculously overpriced would overcome that. And of those 10% that are spec houses how many are in trouble? I don't see Mark Mariani (who must have some powerful wishful thinking going on) eating at McDonald's.
You make the assumption that the $3 million house will also need to slash prices. I would think once the distressed seller is cleared out, that takes care of problems.
I wasn't old enough to know what happened to Greenwich real estate prices during the 1970s. But given where we are now, this isn't the end of the world. It IS the end, however, of throwing a ridiculous price on a house and having any chance of someone step up and pay it. The house that cost a developer $5 mil to build isn't going to go for a 100% price margin any longer. 20% maybe. Sometimes (in the case of Andrews Road) maybe 0%.
But spec is X% of the market, and spec houses in trouble are only some fraction of that.
Current Equity Analyst
I'm not referring to short sales so much as those houses that cost the builder, say, $4.5 million and were priced at $8.5 while visions of sugar plams danced in his head. If he sells for just enough to pay off his lender and other costs but loses his own equity, that's going to have a significant impact on price.
Good question on what percentage of the market is over-priced. A few months ago I'd have agreed with you that it was just 10% or so and that well-priced homes weren't affected but unless sales pick up I'm going to start believing that 90% of the market is over-priced. And that would be really bad.
I suspect it won't be long before genuine price cuts drop houses below what we would have considered their fair market value last year
I tend to agree with your thinking, Chris - your Wall Street analogies are quite apt. No one today is going to buy Lehman Brothers or Merrill Lynch stock at last year's prices. Why should houses fare any differently?
And of course there's the problem that Wall Street bonuses will be thin on the ground this year, not to mentions the thousands of employees that now - or soon will - have no jobs. Since Wall Street money fueled much of the increases in Greenwich real estate prices in recent years, it doesn't take a genius to posit that without that propping-up factor, local prices may go back not merely to last year, but to somewhere in the last century.
BTW, I've always loved Dick Fuld's house. Any chance you can help me buy it on the cheap? :)
Bill Clark said: "I've always loved Dick Fuld's house. Any chance you can help me buy it on the cheap?"
Problem is that Fuld will land on his feet, and so his house won't be for sale. Unlike the thousands of employees of LEH who are totally screwed because of Fuld's many bad decisions (both on the way up in this mess and his recent inability to face the reality of LEH's position on the way down).
Retired IB'er
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