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How Do You Tell Someone Bad News?


               
2007 Jul 5, 3:57am   21,460 views  153 comments

by SQT15   follow (0)  

My parents, as I have mentioned before, are in the midst of trying to sell their house. They need to sell but they are completely unrealistic about the asking price. The house has been on the market now for months with virtually no interest in it all, but they still don't seem to get it. I've tried telling my mom (gently) they need to lower the price. The house is in dire need of remodeling which only makes it less attractive. No one is bidding on this house.

My husband recently sent me this from Merrill Lynch and suggested I email it to my parents.

Good things don't always come in ‘threes'
Good morning. Three key developments took place last week that has clouded the outlook for the second half of the year. First, we saw durable goods orders slide 2.8% month-over-month in May and outside of tech, which we should add is the new bright spot in the economy (and the markets) with two months in a row of impressive near-2% gains in new orders, the declines we saw were fairly broad-based across the old economy industrials. The overall data were weak enough to compel us to take down our second quarter capex forecast to around 5.5% sequential annualized growth from 6.0%; and for the third quarter, down to 4.0% growth from our earlier 5.5% forecast. So point number one is that the capex outlook is being trimmed, at least outside the tech space.

The housing situation is going from bad to worse
Second, the housing situation is going from bad to worse and you can forget about a recovery until next year. The starkest piece of information last week was the news that the national unsold existing inventory of single-family homes and condos surged at an astounding 82% annual rate so far this year. We still can't wrap that number around our head. The overhang is now up to an 8.9 months' supply, which is the highest inventory-to-sales ratio in 15 years. By way of
comparison, the months' supply of inventory was 6.4 a year ago and 4.3 two years ago. The massive excess supply we have on our hands today is simply going to reinforce the deflationary state in the housing market, at a time when home prices on average have already declined at an annual rate of 5% in the past six months, the biggest drop we've seen since the summer of 1991, and fully three quarters of the country is now deflating (outside of Manhattan, that is). Clearing out the excess inventory is going to mean at least another 10% downside in average home prices, in our view, which is just going to reinforce the weak performance we're seeing in the homebuilders, financials and consumer discretionary space.

Housing correction spilling over into the consumer space
This brings us to the third point from last week's data flow, which is that we are finally seeing unmistakable evidence that the downturn in housing is spilling over into the consumer space. We saw on Friday that consumer spending in real terms rose less than 0.1% month-over-month in May - well below the +0.3% that was widely expected. This took the three-month trend in real consumer spending growth down to less than a 1% annual rate (from 5% at the start of the year). We wonder how many people who are still bullish on the consumer are aware of that statistic. Now that's up until May - we already know anecdotally that June auto sales look flat and chain-store sales are running a half percentage point below plan. So as we did with capex, all this new information forced us to shave our forecast for second quarter consumer spending growth to 1.9% annualized from 2.5%, which outside of Katrina, would be the weakest pace since the fourth quarter of 2002. Consumer confidence fell to a 10-month low in June and the level, believe it or not, is lower now than it was at the onset of the past two recessions in March 2001 and July 1990. What all this means for the second half of the year In terms of what all this means for the second half of the year, the consensus is at 2.8% for real GDP at an average annual rate; we are barely at 2%. That 80 basis point difference is going to make or break whether you want to have a cyclical or defensive orientation as we move into the second half of the year. With the books closed in first quarter GDP with last week's final revision, growth came in at a paltry 0.7% annual rate, and the big drag of course was the fact that we had a rare inventory liquidation. So, what has happened in the second quarter is that inventories got replenished, which is why all the manufacturing diffusion indicators, like ISM, have looked so bullish. But here's the problem. The key guts of private sector demand-consumer spending, capex, nonresidential construction and housing-collectively slowed
to a puny 1.7% annual rate in the second quarter from what was an already uninspiring 2.2% pace in the first quarter. The history of the US business cycle shows that when you get an inventory rebuild that is not accompanied with a pickup in final sales, the rebound in GDP growth ends up getting snuffed out. The last time we had an aborted inventory-led backdrop like we're seeing now was in the second half of 2002, and the best places to hide back then were in consumer staples, health care and telecom services. Only tech managed to outperform on the economy-sensitive side, and perhaps their outperformance in June was a sign of things to come.

So do I send it to them or not? They haven't listened to a word I've said so far and I'm not sure they'll start now. But maybe the opinion from a financial institution will get through.

*sigh*

Probably not.
SQT

#housing

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1   e   @   2007 Jul 5, 4:50am  

AAPL is currently trading at $131.84

I just met another Appler that called in sick.

This is really going to help Fortress Cupertino continue to soar. :(

2   HARM   @   2007 Jul 5, 4:51am  

See definition of "Mental Accounting" from the Housing Bubble Glossary. And, no, your parents will probably not listen to you or pay any attention to articles you send them that conflict with whatever they "know" their house is "worth", until reality becomes impossible for them to deny. Just congratulate them on their fine business acumen and change the subject.

3   DennisN   @   2007 Jul 5, 5:10am  

My mentally-ill father, dying of dementia, had most of the family fortune tied up in telecom stocks (he had inherited a big block of ATT prior to divestiture and never sold any of the daughter stocks). He refused after years of badgering by my sister and me to permit any of it to be sold - the family fortune lost over $800K which simply evaporated after the dot-com bust.

4   GammaRaze   @   2007 Jul 5, 5:16am  

My 2 cents: Send in any links you find, but stop short of giving direct advice.

I do the same things with my friends. The Indian community in the bay area has always been in favor buying houses (house prices never go down!) and the recent downturn has not changed the opinion even a bit. Now, most people go around saying "prices have dropped so it is a good time to buy".

If I tell them not to buy and the prices go up next year, they are going to be bitter and angry that I prevented them from getting wealthy. If they buy and the prices go down, they would still be mad at me for predicting it as if my prediction had something to do with it.

So, to any of my friends interested in buying/selling houses, I send all links I find relevant *without any specific suggestions of my own*. I report, they decide :)

5   ColoradoBear   @   2007 Jul 5, 5:28am  

Send it to them. And back it up with a personal touch. At the very worst they will call you a naysayer. At the very best, when it is all said and done, they will continue to see prices drop and be glad you convinced them to get out when they did.

What they might think about their house and your intentions are completely irrelevant to the market.

Fact: Rental rates are significantly below monthly mortgages.
Fact: Wages are essentially flat to negative relative to inflation.
Fact: Personal savings are at an all time low and access to credit is becoming more difficult.
Result: There are few buyers entering the market.

Fact: New home inventory is at almost record levels.
Fact: The price of new homes continue to fall.
Fact: Sale prices of new homes tend to be artificially inflated due to incentives.
Result: Old houses which are not in a premium location or condition will not beat a new house and will suffer even greater depreciation.

Fact: The market fundamentals simply do not support anything but a continued decline in prices.

Do your best to suppress the emotional aspects. We are potentially talking about a lot of money here if they decide to hang on till the bitter end. Focus on what they will gain from having this money in the future versus what they'll lose in the present moment. Their gain will be tax free and is probably the last major infusion of cash they will have for retirement.

And the final reason you should send it: Even if they ignore everything and take a total bath, at least you can take comfort in the fact that you tried, which is much better than knowing and doing nothing.

6   e   @   2007 Jul 5, 5:48am  

But if they do insist on buying, there's a mortgage broker they should use:

http://www.burbed.com/2007/07/05/zak-khan-altaf-shaikh-car-salesman-mortgage-broker-and-more/

7   e   @   2007 Jul 5, 6:06am  

Any local gang experts?

There seems to be a tiff going on in this thread on my site:

http://www.burbed.com/2007/05/29/mountain-view-surenos-gang-uses-blue/#comment-8757

Should I delete it?

8   astrid   @   2007 Jul 5, 6:52am  

Unfortunately, there is very little you can do. Generally, other people are stubborn and unwilling to admit mistaken perceptions.

You can "try" by (1) highlighting how much they would pocket even at a lower price and (2) that even if they "lose a little" by pricing house down, they gain by being able to move on with their life and get out of limbo. The main thing is to try to shift their mental accounting towards things that they presumably value more than getting top dollar for their house.

Try a slightly different angle on each parent based on what appeals to them: financial security for your mom, ability to move on for your dad. No guarantee that it would work though.

9   SP   @   2007 Jul 5, 6:58am  

Here is a quick query I did on Zillow, for an area known as Garden Gate, in Cupertino. The neighborhood is extremely popular with a certain class of people who seem to favor ostentatious McMansions with brazilian cherry and doric columns, and whose school-district mania is elevated to the level of a fetish. Many of the old farm-worker dwellings were torn down to build these ridiculous caricatures of stately homes.

The list below shows the difference between actual "Recently Sold" prices and the "Zestimate". Every one of these has sold for significant amounts below the zestimate (except one which curiously is _exactly_ at zestimate).

10599 N Stelling Rd...... -150K
20987 Greenleaf Dr...... -113K
21031 Hazelbrook Dr.... -81K
10450 Flora Vista Ave... -27K
10242 N Stelling Rd...... -282K
20883 Elenda Dr........... -113K
21011 Greenleaf Dr....... -41K
10411 Glencoe Dr......... -82K
20860 Fargo Dr............. -97K
20861 Fargo Dr............. -34K
20860 Dunbar Dr........... -112K
20984 Alves Dr............. -34K
20916 Alves Dr............. -94K
21065 Freedom Dr........ -59K
21025 Lauretta Dr......... -63K
10584 Flora Vista Ave.... 0

Clearly, if Zillow's Zestimate algorithm works as designed, this should start to depress Zestimates fairly drastically going forward. If you are adventurous enough to buy in this market, please at least factor this into your pricing. And yet...

...houses that are _currently_ on the market in this area are priced significantly _above_ their own Zestimate. Go figure.

Disclaimer: The data is based on what I saw on Zillow, and I cannot guarantee its accuracy. Since the Zestimate changes based on new data, their algorithm may have adjusted zestimates down by the time you check, although I don't expect this will not happen overnight.

SP

10   SP   @   2007 Jul 5, 7:03am  

And oh, by the way, Garden Gate is within 2 miles of Apple's Cupertino campus, as well as at the interesection of freeways going to Mountain View (Google), San Jose (Ebay) and Palo Alto (you know what).

In other words, as prime as it gets from the dual-income Chindian lemmings' perspective.

SP

11   astrid   @   2007 Jul 5, 7:06am  

"Chindian lemming"

That will be my favorite new phrase.

12   SP   @   2007 Jul 5, 7:12am  

astrid Says:
“Chindian lemming”
That will be my favorite new phrase.

Glad to be of service. I originally had written "Chindian desperadinks", but figured that didn't quite fit the bill since these are usually DI2K's, not DINK's.

SP

13   SQT57   @   2007 Jul 5, 7:28am  

Thanks to whomever put the picture at the top of the post (Harm?)

I mentioned this article to my mom today and she said to send it over. Progress? I think my dad is actually the stubborn one. It's the car salesman in him, he's always convinced he can make the sale.

14   GammaRaze   @   2007 Jul 5, 7:35am  

As an Indian, the phrase "Chindian lemming" makes me chuckle (as well as a little bit sad.)

It pays to remember, though, that Chindians are no stupider than the rest. It is just that (a) there are more DINKs in there who are Chindians and (b) being foreigners, they have no historical perspective of how much houses used to cost.

The ridiculous obsession with school districts don't help either.

15   astrid   @   2007 Jul 5, 7:49am  

I don't know about Indians, but Mainland Chinese are now paying something like 40X annual wage for 800 sq. ft Shanghai apartments. By that measure, BA is absurdly cheap.

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