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Where are we going, and why are we in this Handbasket?

I really wish there was some sort of easy solution to the deteriorating market that we're seeing, but I seriously doubt we've hit the bottom just yet. I have a couple of points to make in this post, and they are very closely related, so I'd like to apologize in advance if this gets too long:

The first thing I'd like to discuss is the declining market. Yes, there are pockets nationally that are seeing value growth. I'm talking about as a national trend though. Regardless of what any single region is doing, the general market is one of decline. What I see locally is high levels of foreclosures forcing homeowners to re-evaluate their own property value, and in some cases re-assess the need to move right now. Foreclosure is no longer that dirty word spoken only when someone didn't know how to balance their checkbook and lost their home. I would love to see stats on how many people know of at least one acquaintance dealing with foreclosure right now. I'm certain that almost everyone knows someone dealing with that risk right now.

HOW HEAVILY ARE FORECLOSURES/SHORT SALES/DESPERATE BUILDERS GOING TO DRAIN PRICES?

down arrow With banks starting to get desperate to unload unwanted inventory, It's caused big discounts for buyers, and the only time I see a buyer ready to jump on a property is when the bank has hit the end of their rope trying to sell a home at "market value". The buyers still exist, but they know better than to make the mistakes of the recent past. The problem is that now sellers are finding themselves directly competing against banks who are anxious to sell as well as builders who are struggling to avoid going overboard in a sea of red ink. It's a very hostile environment for sellers right now, and I don't envy their position in the least. sell now

IS WAITING SMARTER?

What's a seller to do? Wait it out? See what the market looks like in six months? How much worse could it really be? Whatever you do, don't ask John R. Talbott. In 2003 he wrote a book called "The Coming Crash in The Housing Market" (anyone care to guess what he was claiming?). In 2006 he wrote another book called "Sell Now! The End of the Housing Bubble". He takes an incredibly dim view of the current conditions, but I think his book is very significant in the sense that it really expresses in words what the worst case scenario of the housing market may be.

DOES JAPAN APPLY?

He seems confident he has the answer to the big question right now: "How far is the housing market going to slide?". His answer to the question points straight to Japan circa 1989, when they had an explosion in real estate values, very much like our own. The problem is that it's taken 15 YEARS to recover. When the market slid, so did the rest of their economy, dragging prices to record lows. Directly comparing our Housing Bubble to theirs is not entirely fair due to the structural differences in our economies, but who would have thought it was going to cause as big an impact in Japan as it did? We may or may not be stronger in an overall economic sense, I think it's impossible to tell right now.

Japan

When you look at a chart like this, it's shocking to imagine that values could slide like that, but they did, and who's to say they won't here? Japan enjoyed slow consistent growth in value until their boom hit, and the bust fell below pre-bubble prices. We know our market will continue to decline for now. The question is this: 1) If Active Market Foreclosures are forcing prices down across board, how long will it take before we see a reduction in the number of new foreclosures? and 2) How much is the average American ACTUALLY able to afford to spend on a home with a traditional 30 yr. fixed mortgage? Both of the factors weigh heavily on how far this market has to fall.

WHAT SHOULD WE EXPECT, AT BEST?

Real Estate has always grown at a fairly consistent rate, the last 5 years not withstanding. So if we were to agree that the worst case scenario would be a situation similar to Japan, what would the best case scenario be? How long will it be before market conditions are "Normal"?

growth

I've seen a lot of predictions about what the market is going to look like in a year; everybody seems to have a very distinct idea about it(except for those who have no idea and just agree with whatever the person standing closest to them has to say). I wouldn't go so far as to say I agree with this particular chart, but I think it illustrates very well just how consistent real estate values had been prior to 2000. In reality I think we're in for a slightly steeper fall that this chart shows, but the truth is a more rapid decline may be much better for us in the long run. The other question to ask is how, over the course of time, would the real estate market be able to out perform expectations and still remain affordable without interest-only loans and 5-1 ARMS being the norm? Is it even possible for that to occur? I for one hope that it doesn't simply because I would hate to see another bubble develop.

So NOW What do we tell our Clients?

As Realtors we can easily get caught in a situation where we find ourselves telling on client: SELL NOW! and then telling the next: DON'T SELL!. So Now What? Well, we all need to keep in mind that everybody moves for a different reason, and anybody considering putting their home on the market needs to have their Realtor sit down and seriously discuss the market and the homeowners options. I make a firm practice right now of telling EVERYONE that if they don't need to sell within the next 2-3 years; DON'T. However, If you know you're going to be moving within the next 18 months, look at the market and decide for yourself where it looks like it's heading in your region. It may make sense to sell sooner and rent until that job transfer or relocation happens. For Buyers, I tell them very plainly: Don't expect the 2 year return people saw in 2005, it's just not going to happen. In fact, don't be surprised when prices continue to fall for the next year, because they probably will. What happens with mortgage rates is more important in some respects, and a lot of buyers don't understand that principle. The Bottom Line: For Some Sellers, NOW IS the time to sell. For Some Buyers, NOW IS the time to buy. Pay attention to each situation case by case. Our bottom line is important to all of us, but I think we owe it to our clients, ourselves, and each other to protect the consumer as much as possible right now. There's going to be a lot of pitfalls for people over the next 18 months; Let's do our best to help people avoid them.

~Jonathan Benya

Team Benya

Century 21 New Millennium

9405-A Chesapeake St.

La Plata, MD 20646

301-609-9000

301-653-8116

Posted by Southern Maryland Real Estate~ Jonathan Benya on 10/19/2007 02:17 AM

Comments (7)

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7 Comments on Where are we going, and why are we in this Handbasket?

OCT

2007

Bravo! Well written post. Blog on...

Sorry to read this, you sound as pessimistic as the local newspapers. I think that is the problem, too many people over analyzing the issues. I get up and go to work every day, for me every day is a good day. I may not be doing the volume of business I had in the past but none the less business is out there if we take the time to look for it.

It is not my job to be an economist or a prognosticator of future events. I tell people my honest feelings and ask them their honest needs and expectations. If they want to buy a home to raise their kids I think they will do fine regardless of what the market does. If they are looking to make a killing I tell them that the streets are full of blood from those ahead of them who thought the could do the same.

Real estate is about families, lives, raising kids and looking forward to their grandkids. Its about a comfortable and safe place to do this, its not about the money unless that is all you can see. That being the case I would say put it in the bank.

We had 8 years of double-digit appreciation in some areas. If that trend continue and wages continue to spiral downward as they have for the past few years, we would have more than a market downturn.

One thing sociologist will discover when this period of history is analyzed is there is a strong "me to attitude". This attitude will continue to have some influence on marketplace demand. This me to attitude, in my opinion accounts for the many (especially Americans) living on the edge. Saving are at an all-time low, debt is at an all-time high. Large companies continue to reduce benefits paid to workers, while providing less job stability. Cars and houses are status symbols! That becomes a built in demand that must be satisfied.

Sounds like too many people are trying to keep up with The Joneses. Some when Joneses get that big house, we infer we have to get a bigger house. And this is the area of demand that will keep the bottom from falling out of the real estate market.

This psychology factor is not currently factored in computing demand.

I apologize if my post sounded overly pessimistic to you. I guess I just take a different approach to the market. I assisted while the market was hot and got licensed after the marked turned, but not a day goes by where I don't wake up and LOVE the job I do. I simply feel that if we as an industry had been able to better predict the actions taken and more carefully analyzed how lenders did their loans and how we advised our clients to accept those loans, we may have been able to soften the blow felt by so many homeowners. The fact is we are looked at as an authority on real estate and to claim otherwise is not fair to our clients.

There are too many people who wanted to just buy a home and raise their kids(not looking to make a big profit on their home, but rather have a roof over their heads) that are now in serious trouble with Interest only notes and ARM's coming due that are finding themselves without a place to live. Foreclosures aren't JUST happening to market speculators by any means. However real estate is NOT just about families and raising kids. It's about being able to secure one's own finances for the future as well. It's very much about money AND a place for one's family to live, if it were any other way people would simply rent on 99 year leases like people did at one time in England.

I agree that it's not our job to be economists or prognosticators, but at the same time I think we NEED to have an honest approach to what our own industry is doing, and that means trying to gauge how it rises and falls. For myself, and I'm sure other realtors as well, my investors expect to see a clear picture about the market from me, and that goes beyond doing a CMA on a property they're interested in buying.

The Keeping up with the Jones's Factor is a very good point, Thank you so much for bring that up! Bearing that in mind, I still have to wonder where the buyers for these larger properties will come from. My market has an average sales value of $362k, well below the $417k mark that indicates a jumbo loan. Given the points about savings and debt, and knowing that lenders restrictions have tightened, It makes builders selling homes starting at $500k push their incentives locally at least 15%. if they are now cutting 15% off the top through closing incentives, close-out deals, free upgrades, etc., they are forcing comparable resale homes to adjust below that in order to move. My feeling is that with foreclosures continuing to rise, the discounts being made by banks to get the debt off the books squeezes sellers even tighter. Until we can see a reduction in the rising number of foreclosures, I can't see home values rising; the appraisers have to take those foreclosure sales into account. For us the foreclosure rates didn't really start to climb until spring of this year, or roughly 6 months ago. the question becomes how much longer will foreclosures be this high a percentage of the market? I think that we're going to continue to see them through next year, well into the fall months.

Hello Jonathan!

I cover the Provincetown area of Cape Cod where the market here on Cape Cod & Provincetown is doing well. Sales volume in August 2007 vs August 2006 was up a whopping 20.9% in Barnstable county (Cape Cod). YTD volume is up 2.1%.

Thus, in my opinion, even if sales nationwide are down roughly 3%- we are not in housing slump. We are in a normal market. I think many people (Agents, Brokers, Buyers, Sellers, news media) only remember the frenzy days where values increase 15-20% each year, volume increased 10-15% each year. Many are spoiled with the high numbers. We are in a normal market. The fact is Buyers are buying!

If we are truly in a housing slump, what magic bullet is going to be shot in the future to suddenly make Buyers buy property in droves like a few years ago?? If there is a magic bullet to make a dramatic turn around, why hasn't anyone pulled the trigger?

Builders stop building all together to eliminate the supply? That's not going to happen without killing the economy! 30-year fixed interest rates going down to 5%? That's not going to happen! Wages increasing dramatically to make people wealthy without causing inflation? That's not going to happen!

Get used to it- we are in a normal market. Once everyone (especially the media) understands this reality in their hearts and brains, we can go about our normal business.

OCT

2007

I disagree! We are not in a normal market today and we were not in a normal market when we had doulble digit percentage increases in home sales/prices. What we are experiancing now is nothing more than a market correction. Buy now, Sell now really doesn 't matter unless you have a way of pulling yourself out of the market completely until after the correction.

John

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