I wrote earlier that Alan Greenspan announced that the housing "correction" was over.
However, a unique discussion has been going on over at Sellius about the recent announcement by the National Association of Realtors that home sales are down nationally.
And the discussion is one that every buyer has been having internally, whether they know it or not.
"When should I buy?"
Maybe that is too easy. But if you are in the market to purchase a home, why haven't you? Or if you are selling your home, why hasn't those second - and even third - showings resulted in offerings?
Looking at it from a different perspective.
As a buyer, what risk do you have if you don't purchase that home today? And as a seller, what pressure can you put on the buyers to make them buy today? The answer to both is .. relatively little.
There are more houses on the market today, than buyers have seen in close to 15 years. They are sitting longer and prices -- at least in central Ohio -- have not dropped a significant amount.
The basic economics equation is that when supply equals demand then the market will reach equilibrium (remember Adam Smith's "Invisible Hand" theory from high school civics?). It is the basic concept that drives our market.
So, translating that to the current real estate market: supply is high.
Theoretically, that would mean that we need to stimulate demand (add buyers) to return supply to "normal" levels. Normally, when dealing with something like housing that would come in the form of price reductions and incentives.
The incentives have come, but for the most part, we haven't seen the buyer's respond to these incentives. And the home prices are not dropping at rates to drive people into the market.
Why?
Because the basic Econ 101 concept doesn't really work in this type of market.
Sellsius provided a great thought on what led to the recent growth market, and an insight into the current market's troubles:
"The fear of higher prices spurring sales: Panic demand
In fact, I believe the run-up in prices during the last boom actually spurred sales because people feared if they didn't buy now the price would be higher tomorrow."
Hence, we leave the world of "true" economics and enter into the world of "risk managment" -- a nicer way of saying "panic buying".
The concept is pretty simple, and makes a lot of sense when held against our current market.
In a seller's market -- especially one as hot as recent years -- a home that is priced correctly is going to move, and move quickly. So, as a buyer, if I WANT this property then I need to write that purchase contract today -- and maybe, even offer above list -- or it could be in contract and my opportunity is lost.
Even worse, the changing housing market would make "your perfect" house a luxury. By chance, if you find a three bedroom 1-1/2 bathroom ranch in that perfect subdivision -- there may be only one on the market. So if you miss this property, you are settling for a home that may not have all your desired features.
Of course in a buyer's market, all those risks remain. But the mind-set of the buyers have changed. Now they are asking:
- Where is the bottom of the market?
- Can I get this cheaper?
- How long has this been on the market?
- How much do they owe?
They don't have the incentive to purchase, as the risk of losing this property has decreased and the pressure is now on the seller. When sellers offer incentives and "small" price decreases it only shows a level of desperation and makes the buyers feel more empowered. Not the result the seller was looking for.
But, as a buyer, what risks do they have in the current market?
- Too many homes on the market: The glut of homes has a lot of effects on the market, but in the buyers mind it gives them too many options. So now the "luxury" of that three bedroom and 1-1/2 bathroom ranch in the "good" school distirct has been replaced with a "commodity" of all these similar homes. Are they the same? Of course not, but they are close enough that a buyer would purchase home "x" or home "y" and be happy. What makes this a buyer's risk? I've seen this lead to house overload. Too many houses in a sub-division make it look bad -- but when EVERY sub -division has that, how do you differentiate the good from the bad?
- Too much information: Pick up a daily newspaper in Ohio and you are going to find a story on foreclosures, builders in financial trouble, and just general real estate woes at least a couple of times a week - if not daily. Add on to that the hundreds of Web sites that "promise" to give them all the information they need when buying a home -- and you have information overload.
- Missing the best deal: This is one that I'm finding with a couple of first-time home buyers that I'm working with. We've looked at new-builds, condos, repossessed properties, and traditional homes, close to 30 in all. Why so many? Because they are overloaded with information and have become petrified they will miss the "best deal" in a home if they buy today. They feel empowered and are using that to their best advantage. The risk is that they will pass up "x" to look at hundreds of other houses and six months later they realize that "x" -- now sold -- was the house they wanted.
- Instant Equity: Reap the seeds that you sow. Living in one of the nation's top foreclosure markets in nation's top foreclosure state, I'm seeing buyers that are very interested in the equity that the home will have. They have seen too many of their friends go house-poor and suddenly find themselves in the foreclosure process. The risk to the buyers is that they are not willing to "reach" for houses in the way their friends did a few years ago. The risk is that they are going to be purchasing a smaller house than their friends did a couple of years ago. Why? So many zero-down (or worse 100+) loans have left the sellers in a spot where they can only drop the price a small amount. So buyers are being priced out of traditional markets, by past financing.
- Foreclosures/Short-Sales: The risk here is a little different. We are seeing homes that are priced below market value moving very quickly. Why? They are bringing back the buyer risks from the past several years. I can pay $100,000 for this house? Bid, bid, bid.
What does this mean? Well it means we have a brand-new set of rules to the game. Sellers need to play all their cards right -- and make the home stand out as different than anything else on the market. Buyers need to remember that while the risks have decreased - they are still present.
But one thing is for certain, eventually the economic principles will have to overtake the risk management.
;)
Links;)
Archives
Posted by 
"When should I buy?"
I think it is very simple. You buy when you need a house and you have the money. Period.
It is impossible to time the market.