Current Market: June 2007 Archives

Market Resilience

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Most Resilient U.S. Real Estate Markets

Market corrections follow three basic recovery patterns. A V-shaped recovery where a market experiences a sharp, fast decline but comes out strong once it hits bottom; a U-shaped recovery, where prices decline gradually and recover slowly; and an L-shaped curve, a hard, fast fall with paltry price bounceback following the market trough.

The differences between a V-shaped market and a U-shaped one has to do with barriers to growth. High vacancy rates and high investor share can hurt a market, but if the local economy remains strong and housing stock affordable it's only a matter of how long it takes to absorb the excess inventory.

San Diego is portrayed as a V shaped market, albeit one whose recovery is dependent upon external factors. However, the fact that there just isn't anywhere new to build is going to be a major factor, as is the desirability of living in San Diego.

Those who wait for confirmation of market bottom are likely to completely miss out on the best bargains. It wasn't until prices had been decreasing for almost a year that official statistics admitted it. October 2005 is generally seen as having been the top, but the statistics confirming this didn't emerge until July or August of 2006.

This isn't any double-talk. I ran an article just a few days ago telling people that it's a rotten time to sell. Inventory is high, and there aren't a lot of buyers who have come off the sidelines yet. But this precise combination of factors is what makes right now one of the best times possible to buy. But it's not going to last forever. The seller to buyer ratio is nearly twenty percent lower than it was last year at this time (32 versus 39). It's getting harder to find the very best bargains. Stuff that's beautiful is selling, but properties that aren't reach out and grab you beautiful are sitting on the market. Great if you can afford to fix it. Not so hot if you can't. On the other hand, if you're willing to be the one to deal with a few minor cosmetic issues, this is a great time to end up with a great bargain. Particularly if you've got a few thousand in your pocket to redecorate once you've bought, now is a great time to be finding those properties where $10,000 in easy stuff like carpets and paint can add $100,000 in value. Whether you then want to live in it for ever and ever or simply take your profits and run, that's not at all a bad situation to be in.

San Diego is a resilient market, and I'm seeing a huge number of people who want to buy but are "waiting for the market to hit bottom." When you've got a situation like that, as soon as those people see some indication that things have turned, they're likely to come swarming, thereby boosting demand and depleting inventory (i.e. supply) over a very short period of time. I haven't been among those thinking San Diego is likely to see any kind of a double digit gain any time soon, but the longer it takes to start getting people off the sidelines, the more demand will build, and the stronger the turn will be. I still don't think we're likely to see double digit gains in the next couple of years, but I'm starting to see evidence that I could be wrong about that. I predicted losing thirty percent of peak value, and we're at about 25% off peak right now. The number of bad loans could make the housing bear run a little bit further, but there's also a large amount of pent up demand, in the form of people who are eager, willing, and able to buy a home, but are only "waiting for the right time". Based upon purely anecdotal evidence, I think we're at the point where the latter significantly outnumber the former. If you're one of those on the sidelines waiting for the right time, I'd be very careful not to be late onto the field.

Caveat Emptor

Precis: Still an excellent good time to buy and a poor time to sell. Matter of fact, don't put the property on the market if you've got a reasonable alternative. If you're looking to buy, though, you're not likely to find a better time soon.

The hard fact is that there's a lot of inventory, and most owners have priced their property over the market. There's an awful lot of agents out there that "buy" listings by telling owners they can get more than the property is worth. There are comparatively few buyers out there, and there are 32.6 sellers for every one of them. I hope those readers who aren't hetero bear with us, but imagine you're at a dance where one sex outnumbers the other thirty to one. Those few members of the outnumbered sex can be incredibly picky, while the multitudes of the outnumbering sex are going to have to do a lot to compete with their thirty plus rivals.

Real estate isn't a dance of course. For one thing, in the real world boys can dance with boys and girls can dance with girls, at least if they're so inclined. But in real estate, two sellers can't really dance - it doesn't do them any good. In the real world, you have the ability to leave this dance and go find another one. In real estate, you can't do that. The property is where it is. You can leave the dance and go home, but there's only one dance to go to.

For sellers, you can either do what is necessary to out-compete the other sellers for the buyer's attention, or you can decide it's not that important to sell. If you take the latter option, get your property off the market. If you want to sell, look at what properties like yours are actually selling for. For most, it's thousands to tens of thousands less than asking price. Properties that are correctly priced are selling, while properties that are overpriced aren't. If you need to sell, it doesn't do any good to price it too high. If you don't need to sell, and I mean need to sell, then why is your property on the market? If you do need to sell, you might as well list it for what it's going to sell for and get it done, because until you're ready to accept an appropriate offer, it's going to sit unsold, which costs you money. You can have $X now, or you can have $X three months from now, after you've spent another $10,000 on taxes and mortgage. Your choice. $X plus thirty thousand is not on the list of options.

For buyers, the pickings are still very rich, if not quite as good as they were earlier in the year. Where earlier in the year you could take all the time you wanted to think it over, no matter how good the bargain was, I've had three properties go "Pending" on interested buyers in the last month. People are out there, looking for bargains. Properties that are priced appropriately are selling.

One thing that distresses me is what a large proportion of Vampire properties are out there, and what some of them are selling for. There was a Vampire some clients of mind got interested in because it had a large lot, four bedrooms and a pool. However, it also had foundation, structure, and settling issues. I talked my clients out of it, but somebody else paid essentially full price despite the fact that the foundation is cracked through and the structure is settling unevenly. Spotting Vampires is one of the areas where a good buyer's agent earns every penny they make - in this instance, my clients aren't going to have to find thirty or forty thousand to fix the foundation and another twenty plus for the structure. It seems like the proportion of Vampire is increasing, also. People are trying to unload their problem properties rather than fixing them correctly - and other people are buying them. It's one thing if it's disclosed and everybody is negotiating on the same page. It's something else again if the sellers are trying to pretend those problems don't exist, or even worse, trying to hide them. If you try and hide it, I guarantee it will come back to haunt you - it's not like those buyers are going to say, "Oh, well, we're just out fifty thousand dollars!" Not that winning the lawsuit is going to be any comfort to those buyers in the meantime, but the sellers can pretty much count on having to make it good.

I've saved the most important recent development for last. Rates on loans, particularly thirty year fixed rate loans, are up. A month ago, I could get 5.875% on a thirty year fixed for one point retail. The equivalent rate today is 6.50 percent. So if someone qualified for a payment of $2500 then, they could afford a loan for $422,500, while at today's rates the equivalent loan is only $395,500 - more than a six percent drop. Now I'm neglecting other factors in the equation, but the point is this: Unless rates go back down, they're exerting downwards pressure on prices. With the trade deficit, budget deficit, and microscopic US Savings rate, I don't expect rates to fall, nor does the federal reserve. In the longer term, prices will continue to rise, but in the short term, together with the huge glut of inventory on the market and the high ratio of sellers to buyers, we may see further price drops until this inventory clears. If you don't need to sell right now, no biggie. But if you do, it's even more reason to price the property correctly and get it sold now, because the odds are that the prices will be at least a little lower in the next few months.

Some people are going to read that and think, "We'll wait to buy until prices have bottomed out!" This is an excellent way to miss the buying opportunity we have now. How will you know that prices have bottomed out? The answer is, "When prices start rising again," but if you wait until then, there's a reason why prices will be rising again. The excess inventory will have cleared, there will be a lower ratio of sellers to buyers, and in general, things will be much better for sellers than they are now, while not being as good for buyers. There is also a tremendous pent up demand out there, people who want to buy houses but figure they'll be better waiting. When those folks finally decide to come off the sidelines, as they will when government starts reporting housing prices increasing again, watch out for another year like 2003 where prices go crazy because everybody wants to buy and nobody wants to sell. But in order to cash in on it, you have to have bought previously.

Caveat Emptor


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