garfangle_IHB
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<p>As regular readers of this blog, you know that California, OC, and Irvine homes have seen a dramatic fall off in the number of transactions since the bubble peaked in mid-2006. Yet, median home prices have been relative stable (excluding seller incentives). Why is that? Shouldn't supply-demand economics dictate that as demand falls prices fall to a new lower equilibrium point? In the long run, yes, but in the short run, disequilibrium reigns, stagnating the market with many fewer transactions. Buyers are unwilling or unable to pay for the price sellers, fearing a loss, hold out for.</p>
<p>In market-based trading like the stock market there is a concept known as the bid-ask (or bid-offer) spread. It is the difference between what the highest price the buyer is willing to pay (bid) and the lowest price the seller is willing to accept (ask). Since there are often several buyers and sellers with different bids and asks, the market is arranged so that the highest bids and lowest offers are given priority in a trade. It can be illustrated like this:</p>
<p>b1-50 a1-51</p>
<p>b2-49 a2-52</p>
<p>b3-47 a3-55</p>
<p>b4-41 a4-60</p>
<p>If you want to move up and displace a current market participant, you must either increase your bid or lower your asking price.</p>
<p>In liquid markets, the bid-ask spread is narrow, a tiny fraction of the transaction price. In the above example, it is one point, the difference between 51 and 50. However, in illiquid markets the spread can be very wide. If each of the three higher bid-asks were eliminated that only left b4 and a4 the spread would be 19 points. The reason for the widening is neither party wants to budge on its price. This is what is happening in the current home market freeze up.</p>
<p>We can illustrate this by transforming homes prices into their price per sq. ft. Home buyers want a low $/sqft, while sellers, naturally, want a high $/sqft. If we arrange the bids and asks we get an Irvine market that looks like this:</p>
<p>b1-350 a1-425</p>
<p>b2-325 a2-450</p>
<p>b3-275 a3-500</p>
<p>b4-250 a4-525</p>
<p>There is a 75 point per sqft spread between what the high buyer wants to pay and what the low seller holds out for. In a declining market buyers have the leverage and just wait for sellers to capitulate through foreclosure, short sale, or the traditional reason (job loss etc.). What the above representation doesn't show you is there are many more sellers than buyers, so motivated or forced sellers leapfrog the holdouts by offering a lower price than the current low ask, thereby increasing the likelihood of a transaction taking place. A pressed seller might offer $385/sqft, which is more than halfway between the stalled bid-ask. Although the high buyer might bite, he could also reduce his bid, knowing that he may be offered an even lower price.</p>
<p>When you hear realtors, brokers, and builders and others interested in keeping prices high say that prices have stabilized and the market has bottomed even though there continues to be plunging home sales, don't believe them because the market correction is far from over.</p>
<p>In market-based trading like the stock market there is a concept known as the bid-ask (or bid-offer) spread. It is the difference between what the highest price the buyer is willing to pay (bid) and the lowest price the seller is willing to accept (ask). Since there are often several buyers and sellers with different bids and asks, the market is arranged so that the highest bids and lowest offers are given priority in a trade. It can be illustrated like this:</p>
<p>b1-50 a1-51</p>
<p>b2-49 a2-52</p>
<p>b3-47 a3-55</p>
<p>b4-41 a4-60</p>
<p>If you want to move up and displace a current market participant, you must either increase your bid or lower your asking price.</p>
<p>In liquid markets, the bid-ask spread is narrow, a tiny fraction of the transaction price. In the above example, it is one point, the difference between 51 and 50. However, in illiquid markets the spread can be very wide. If each of the three higher bid-asks were eliminated that only left b4 and a4 the spread would be 19 points. The reason for the widening is neither party wants to budge on its price. This is what is happening in the current home market freeze up.</p>
<p>We can illustrate this by transforming homes prices into their price per sq. ft. Home buyers want a low $/sqft, while sellers, naturally, want a high $/sqft. If we arrange the bids and asks we get an Irvine market that looks like this:</p>
<p>b1-350 a1-425</p>
<p>b2-325 a2-450</p>
<p>b3-275 a3-500</p>
<p>b4-250 a4-525</p>
<p>There is a 75 point per sqft spread between what the high buyer wants to pay and what the low seller holds out for. In a declining market buyers have the leverage and just wait for sellers to capitulate through foreclosure, short sale, or the traditional reason (job loss etc.). What the above representation doesn't show you is there are many more sellers than buyers, so motivated or forced sellers leapfrog the holdouts by offering a lower price than the current low ask, thereby increasing the likelihood of a transaction taking place. A pressed seller might offer $385/sqft, which is more than halfway between the stalled bid-ask. Although the high buyer might bite, he could also reduce his bid, knowing that he may be offered an even lower price.</p>
<p>When you hear realtors, brokers, and builders and others interested in keeping prices high say that prices have stabilized and the market has bottomed even though there continues to be plunging home sales, don't believe them because the market correction is far from over.</p>
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