Break it down: Why is the Real Estate Market Bad?

Real Estate Agent with REeBroker CA Lic #01341858


Gordon Corsie wrote a really good piece this morning breaking down "what happened" to the Real Estate Market.  To the seasoned professional, this analysis is not new.  But I think it's really important to remind everyone as to the "how's" and "why's" of our Market today. 

It's like this, when you know where the "monster" is, it's a lot less scary.

QUESTION: Why aren't homes selling like they did before? 

(from Gordon's post) BECAUSE:

  1. Lenders loaned too much money to too many buyers who should never have been qualified to such a high level of purchase price.
  2. Those buyers who bought with zero down loans and whose "OPTION ARMS" (Negative amortizing loans) are adjusting upwards can not make the payments, and cannot refinance either and so are headed toward foreclosure.
  3. Because of #1 and #2 several major lenders are now out of business.
  4. The Media has loved to cover this, they love a good negative story.
  5. Buyers therefore are hesitant, why buy now when prices may keep falling!

This slowdown is different than the ones we have experienced over the last 10 years. For example, the 1997 Russian economy slowdown...remember that one? Lasted 23-4 months; 2001 9/11...

These were slowdowns related to the stock market which affected buyers confidence but really did not have anything to do with California Real Estate, but this one does!

In October of 1989 the Savings & Loan scandal hit and hit hard. We had close to 600 homes for sale alone in Pleasanton which was a much smaller town then. It took 5 years for prices to come back up to the peak levels they had reached in 1989.

THIS DIP IS NOT AS SEVERE AS 1989. We have more sales. We have fewer listings available.

There are still more peole moving to California than are moving out 

Statistically we can track the slowdown beginning in late spring of 2005 and if we project a 5 year term then we should creep out no later than 2009.

If I am a buyer, should I wait?  You can, but by doing so you miss out on owning a home with the potential to build equity. Even buyers who purchased at the peak in 1989 did very well in the long run. Get on the equity train, its time to buy, investors are!

If I am a seller should I wait?  What for? Assuming you sell at a lower price today, and you buy today, then all you are really doing is transferring your equity, you are not disadvantaged in any way. 

(end Gordon's post) 

Thanks, Gordon! 

I would add a couple of important points...

The housing market is always-and-forever linked to the job market.  If there are jobs, the housing market will be ok. 

The double whammy of the 1989 Earthquakes in SF and LA plus the economy (read: job market) being creamed by the first wave of military base closings caused a huge spike in unemployment. That was the big thing that REALLY tanked the market in CA (Sacramento alone lost three bases).  I would go a step further and say that the economic effect rippled through and actually 'artificially' depressed the price of homes for nearly a decade.

This latest upward correction was boosted by the final release of that downward pressure - which caused a bit of an over correction to the upside.

Ahhhh, free markets, you got to love 'em!

The overall conclusion is correct: barring some unknown catastrophe, we should get through this correction cycle in the next 12-18 mo. But I think's important to say that the days of 26%/yr appreciation rates are g-o-n-e for the forseeable future.



PS. The reason I included basically all of Gordon's post here was to add context and convenience. 

Comments (2)

Jeff Payne
The Payne Group at Keller Williams Success Realty - Panama City, FL
Panama City Real Estate

The housing market is really local and to the media trys to portray the market as a national market.


Oct 12, 2007 05:40 AM
Christina Botteri
REeBroker - Roseville, CA

The media -- don't get me started!!!

Here in Sac, our major paper has been bagging on the RE market for a loooong time.

I wrote this piece about it a while ago.

Whenever I start talking about the media and real estate, my 'crazy' starts to show... it's a hotbutton issue for me. sigh.

Oct 12, 2007 05:52 AM