I think it's safe to say that the real estate market of 2002-2005 was an anomaly. Rather like Halley's Comet, that only shows up once every 76 years, it will be a long time before we see something similar. While this was not the first market to see multiple offers and prices in excess of the asking price I think it was the first that fundamentally changed people's views about real estate.
The basic expectations of buyers and sellers appear to have changed rather drastically from a few years ago. Ten years ago you bought a home as a place to live. People bought homes because they didn't want to pay money to a landlord. Your first home was a starter home; something small until you could afford to buy a larger one. You hoped to make some money along the way as an added bonus. It made sense to pay money toward something for yourself instead of your landlord. You expected to own a home for 7-10 years before selling and buying another one.
Buyers and Sellers have taken housing from a place to live to a retirement fund. Buyers are angry that prices are high and blame greedy sellers. Sellers think buyers are trying to take advantage of them. Everyone is concerned that if they do not buy or sell at exactly the right time their entire financial future will be ruined. In it's own way the current real estate market is as crazy as the one that precededed it.
Today the concept of homeownership has changed from one of shelter to a short term financial commodity. Buying a home is not about a place to live that is yours; it's about how much money you can make immediately. Owning real estate as a long term investment has lost it's appeal. Flipping has taken the place of shelter as a reason to purchase real estate. It amazes me how many people think it's better to pay rent then to buy a home unless prices drop 50%. I certainly understand that no one wants to overpay for a home. What I find different in this market is that rents are skyrocketing(up 10% over last year in the South Bay) and yet most of the Bubble Blogs are advising people to rent instead of buy and comments from their readers agree. My Dad always said it made no sense to pay rent because you were just helping someone else buy a property instead of yourself. Many of today's buyers don't see it that way.
It defies basic economic principals that a potential buyer will pay $1800 in rent for a one bedroom condo rather then purchase it. The monthly P+I payment would be $2100 or less depending on the loan you choose. If you are in the 30% tax bracket you would be able to write off $630 each month making your payment about $1470. Add in taxes and association fees and you are paying about what you would in rent, and you own it. When prices go up you get the benefit... and prices will go back up. If you rent the landlord will probably raise the rent each year to cover his debt service and receive the benefit of increases in value. If prices drop a bit more you would still be ahead if you look at your purchase as along term investment.
Everyone seems to have forgotten that real estate is a cyclical market. In California,and most states, the market changes every 7-10 years. Since 1979 I've seen this happen over and over. Prices go down for a time but they always go back up. I doubt that even the most pessimistic of potential buyers really expects to see prices drop to 1980 levels. In our local Beach Cities market inventory is definitely up over last year but the number of listings available has been fairly constant since May. The number of sales has remained constant also, about 25% of total inventory each month. Prices have declined in some areas , remained steady in others, and even increased for certain premium properties.
Buyers are sitting on the sidelines afraid to make a purchase in case prices go down 10% next year while not taking into account that rising interest rates may overshadow a decrease in price. Sellers, on the other hand, are worried that if they take a lower offer and the market goes up slightly they will lose some extra profit. They are not realizing that if the price is slightly lower on the home they sell it will also be slightly lower on the new one they hope to buy.
There is no crystal ball to predict the future of the current real estate market. But to quote my Dad again.. you can't make any money in real estate if you don't buy real estate. Makes sense to me.....
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