Real Estate is the World's Largest Man Made Wave Pool - Summit, New Jersey
I know the title may seem a bit odd. Maybe even a little crazy, yet you'd be surprised how true it is. Consider the ebb and flow of any market; real estate, stocks, bonds, etc. Markets are alive and rise and fall with the times. Real estate is the largest of these markets because everyone needs a place to live. Not everyone invests in the stock or bond market. Now that we've established the analogy and labeled real estate the king of all man made wave pools, let us take a closer look at how this ridiculous statement makes complete sense.
The Rise and Fall of the Real Estate Wave
Similar to the economy real estate is cyclical. This means that it will pass through phases only to return to the same phase years later. To better illustrate this theory here is a chart taken from Wikipedia's Business Cycle page.
As you can see, the wave reaches its peak and slowly falls. Once this wave hits rock bottom it rises higher then ever before. This cycle is then continued time and time again. The good news for real estate is that prices, like the wave, will always rise over the long term. Economically speaking, this theory makes complete sense because land is scarce. This means that we cannot create more land then there already is. Since the world population is always growing and the amount of land remains the same, we can conclude that the demand for this land will be greater over time. This increase in demand is what ensures that prices will rise and your real estate investment is a good one.
Now that we understand the long term real estate cycle, we need to think of the implications it will have on the short term. The next logical question would be to ask how long the cycle takes. Unfortunately, I cannot answer this question. In fact, if I could I would probably be laying somewhere on an island that I own. What we can do, however, is use history to teach us of the future. I am sure you have heard the phrase, "history repeats itself". Well, in real estate we've already established that this is true. Although we can account for this cycle, the time the cycle takes to shift from one phase to the next will vary over time. This deviation is related to so many variables that it becomes difficult to forecast far in advance. Real estate analysts, who study the market to forecast the future, are typically accurate about the coming six month market, yet vague about longer forecasts.
Pricing the Short Term Wave
Having read, listened to, and attended every possible real estate analyst's forecast you can imagine, I feel comfortable about my knowledge of this coming spring market. Therefore, I will use our current real estate market to emphasize pricing a home correctly.
First, let us consider pricing a home in an appreciating market. I have created this chart to help graphically portray what I will be explaining.
Reading this chart you will notice that in January, the price of the home was wrong. The sellers/ Realtor priced the home above the market value at the time. This means that no buyers would be willing to buy the home. Fortunately for the sellers, the market in this example was appreciating. This means that by waiting the seller's home will actually be worth more. In theory, the sellers could ride the wave of appreciation up until they were able to sell for a much higher value in June. This, of course, is a theory because the home would likely receive an offer in February.
The next chart we need to consider is the chart of a home priced wrong in a depreciating market. Once again, I have created this chart to help you visualize my explanation.
Similar to the first chart, we can see that the home was priced wrong from the start. The problem is that, rather then the market, or what I labeled "Buyer's Perceived Value", rising up to meet this list price, the market is depreciating. This means that over time the home will be worth less and less money. In fact, the difference between January and June is at least a $20,000 loss for the seller. In this example, the sellers choose to leave the home at the same list price for six months, yet what about a seller that chooses to lower their price.
The final chart worth analyzing depicts the same scenario as in chart 2, yet the seller decides to finally reposition after six months time.
In this final example we can see that by waiting to reposition the list price, these sellers inevitably lost $20,000. This money could have easily been seen by these sellers had they lowered their price from the start or listened to the market early on. Instead they remained greedy and learned a hard lesson.
Now that we understand how the market can dictate a price, I have some shocking news to impart on you. Both the second and third graphs represent the actual forecast for NJ communities along the New York City train line in the next year. These communities, including Summit, Short Hills, New Providence, Berkeley Heights, and the Chathams, are expected to lose 6 percent equity as the wave slowly declines.
Although this percent of depreciation may seem difficult for homeowners in these areas to deal with; consider yourselves lucky. We are the last to depreciate and the first to recover. Don't believe me, take a look at the forecast for the rest of this region. The forecast for the entire Northeastern United States and of most of New Jersey is graphically portrayed like this.
No, your eyes are not playing tricks on you. The forecast for the coming year is expecting depreciation levels of 15 percent. This is due to a number of different reasons which include, but are not restricted to; sub-prime lending, media scare tactics, affordability issues, industry migration, and the economy as a whole.
Timing is Everything
One problem many Realtors and sellers either have been or are beginning to face, is selling for a loss. Keep in mind, many of the homeowners who purchased homes between 2003 and 2005 paid for these homes at the peak of the market. Remember the wave analogy? These buyers began riding the wave at the highest point. Another perspective on how to view the crest is the point before the wave starts to fall. If the wave is price and the price is falling, it matters not what these individuals paid in the past. Yesterday's price is a thing of the past, just as you cannot relive yesterday. If these homeowners need, want, or hope to sell in today's market, they must first make a decision; either wait until the wave recovers and starts to rise or price their home to meet the current market.
I recognize that this is an extremely tough decision for many sellers because a home is the largest investment you can make in life. Some of these sellers even invested money in improving the home above and beyond the initial sale's price. Regardless of the time, effort, and money invested in a home, the market is not always a fair place. Think of a product like Starbucks coffee. If Starbucks decided to sell every cup of coffee for $20 they would not sell any coffee. The buyer is what dictates the price because the price must at a minimum equal the demand.
One thing I touched upon above, with my description of chart two, is that chasing a depreciating market can be extremely detrimental to the seller's interests. As the wave continues to fall, many sellers price their home behind the curve and follow the market straight down the slope. As the cliché would suggest, it is a slippery slope and some people find out the hard way. Unfortunately, many sellers, currently listed, will blame their Realtors that their home is not selling. Some of these sellers are correct to blame their agents because homes underexposed to the public, will not sell in any market. A Realtor must maximize the amount of exposure for a home and accentuate the positive aspects through staging. Beyond these two aspects, buyers perceive value through price and, as we now know, price will always be relative to the wave movements of the market.
Do Not Drown in a Pool of Sorrow Just Yet
Patience is a virtue for a reason. The current market is a difficult one because unless a seller prices his/her home well below the curve, buyers have not been responding immediately. One thing a seller must consider is the average days on market for a given price range. If the average days on market is 60 days and a home has only been listed for 30 days, it could be that the market is taking longer to respond. This is especially true for markets which have not had any recent activity. There is point within all markets that buyers are hesitant to buy. It usually occurs during periods of transition when the wave is slowly falling. Buyers begin asking themselves, "If I wait to buy, will I be better off?" The good news for sellers is that the answer is not always. Homes priced correctly in today's market are just as good an investment as homes priced well, at a later date.
The important question buyer's need to be asking is, how long they plan on living in the home they purchase. As I mentioned above, the issue of selling for a loss is only true in the short term. Over the long term, buyers will always be able to make a profit on these investments. Timing truly is everything and real estate exemplifies this fact better then most aspects of life. Being educated to the market is crucial because you can never underestimate the market's influence on price.
Watching the Tide From Solid Ground
Before I conclude, I want to make you aware of one last thought. The average homeowner, in today's market, moves every 7 years. The real estate cycle is not on the same schedule. In fact, sellers in New Jersey who waited to sell during 1986 did not see an appreciating market until 1997. This does not mean that we should expect an 11 year downward trend. In reality, many real estate analysts are tentatively forecasting a strong 2009. The important point to remember is that waiting for the market is a risk because the future will always be an unknown. Forecasts can be made and are generally very accurate due to the high levels of expertise and experience these analysts incorporate into their work. The underlying fact, however, is that forecasts will always be precise educated guesses. People move for a number of reasons including downsizing, job relocation, first time buying, and new additions to the family. It stands to reason that homes sell in all markets and always will. I hope this analysis has been beneficial to you as a seller, buyer, investor, homeowner, or just someone curious about understanding the nature of real estate. Being educated to the market and the form it takes, is an important step towards making any smart real estate decision. I wish you luck in the future.
Sincerely,
Michael Pennisi
If you have any questions about this article or about buying or selling a home feel free to contact me at (908) 656-3858 or email me at Michael-Pennisi@Burgdorff.com
Interested in learning more about the home buying process visit my site at:
http://www.michaelpennisi.com/ - The Key to Your Dream Home
Copyright © 2007 Michael Pennisi. All Rights Reserved
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