Lost in the euphoria associated with double digit increase in home values, are the critical reasons why the US Housing Recovery in more than 48 States can NOT be a good indicator of the overall heath of the US economy. Let’s explore an example:
We recently received a Cash offer for $320,000 on a Fixer Upper Bank-Owned (REO) property we just listed 3 hours ago for $275,500! I know Goldman Sachs made tons of money, but is the recession over!? Why would someone write a cash offer for a property in Alum Rock area of San Jose and offer more than what the bank is asking! The only conclusion I can draw is that it’s price.
There has been plenty of theoretical justification for buyer’s use of “psychological Reference Point“ in Merchandising Research. And it points to this Reference Price as a internal standard against an “Observed Price” in marketing to consumers. Bottom line is that Retailers use the sales gimmicks to move out inventory where the consumers spend a lot more money without regard to “Quality” when the merchandise is priced well below our internal standard.
Have you ever taken home a shirt from the Clearance Rack, knowing full well that you will never wear it because it has a sale sign on it?
Have you ever paid too much for something only because it was on Sale? And believe me, pricing properties lower than everyone expectations really works! It generates tons of interest. And precisely because people are seeing prices well below their “reference point”, we believe they over spend.
Could it be that my bankers are taking a page from Retailers and are marketing properties the same way Retailers conduct Sales? We are seeing quite an interesting trend where our valuations are cut when we price REO properties for sale! One industry observer was stating that the FED has asked the banks to keep the property prices low, to avoid the creation of another Real Estate bubble.
Aside from these merchandising techniques used by banks to increase their Net Proceeds on REO Properties, are the positive impact of the Low Interest rates which are fueling some of the home purchases. Another contributing factor to the rise of Home Prices is the tight inventory that has been created by the banks’s refusal to release millions of homes in what’s now been dubbed as “Shadow Inventory”.
We therefore believe relying on housing data to judge the strength of this recovery is misleading. What do you thing? Let us know.