Another Texas VC

I am in the middle of buying a house in Houston and have come face to face with a frozen market.

The concept is really simple. You think an asset you own is worth something; this is called ‘mark’. The market is only willing to pay something else; this is called ‘market’. Unless the owner of an asset is willing to revalue their assets from their current mark to market reality, they will never be able to sell it.

If you are from Houston you know that home sales are down by 20 to 30%. With fewer transactions at lower dollar volumes, you would expect home owners to lower their prices, in essence marking their home values to market. This isn’t happening. Sellers are acting like their property is still appreciating at 10% a year despite constant job losses in the area.

Houston homeowners are clinging to their irrational marks. Maybe this is because they owe more than what the market is willing to bear, maybe its ignorance, maybe its greed, I don’t know. The government has tried to help, with an $8,000 tax credit to try to bridge the gap between mark and market, but with very limited effect. Many Houston neighborhoods, like the overall credit markets, are frozen solid with neither side willing to blink.

This is a game of chicken that sellers cannot win. The cost for a buyer not to execute a transaction is to maintain the status quo. For a seller, it means another month paying a mortgage on a vacant property. Seller’s who refuse to face reality are foreclosing in record numbers, accounting for 45% of current home sales. To put that in more vivid terms, 1 out of 2 home sales are occurring because the seller went bankrupt instead of selling their home at a realistic price. The net result is that these homes are being bought at prices 28% lower than where they were in 2006!

Even if a buyer gets suckered into one of these dumb transactions, banks are refusing to lend above ‘market’ prices. A house I was looking at recently got a contract to sell at a price $40,000 above what I thought the market dictated. After 2 weeks in a holding pattern the contract got pulled because no bank was willing to lend the inflated amount to the buyer. The property relisted at $20,000 less the next day. The value is still inflated, but has a better chance of getting a realistic offer.

For you sellers, look at the last few transactions that have happened in your neighborhood and adjust your pricing accordingly. It’s better than the alternative.