A contratrian view on home prices

Industry Observer with WideOpen Networks 250784

Ocean WaveThere has been some discussion on a forum that I frequest about house prices needing to come down on the Crystal Coast.

It is an easy argument, prices need to come down so sales will come up.  Unfortunately the logic is probably wrong.

To start with if lower prices were the answer, then why does the data show the most houses being sold in 2005 when the average price was the highest.

Unfortunately pricing is only part of our problem and then only in relation to value.  I have seen builders struggle trying to awaken buyers with lower prices.  We now have a range of small to medium size new homes on the market at prices between $159,000 and $199,000.  That's not a bad price for a home just a few miles from the beach.

Now those homes are often in newly developed neighborhoods which take time to mature, but I find it hard to argue that we need lower priced homes.  I sold a home in December of last year, it sold for only $5,000 more than it did new in 2004.  A home recently sold for $280,000 not far from us.  I expect it cost around $265,000 to build in 2005.

Those homes were good buys and have disappeared from the market.  We do have a lot of $500K and up homes on the market.  Few people seem to be interested in these homes.  I don't think it is because some of these homes aren't good deals, because they are. 

What I do think is that real estate does not look like a good investment so fewer people are buying and many who buy are more likely to buy conservatively.  For years you could assume that if you bought a home and sold it, you would probably make money.  Now we all know there were plenty of exceptions to that rule, but many people came to take it as gospel.

Unfortunately we are now seeing some people who bought homes in 2005 and 2006 lose money.  When people lose money on an investment, the investment becomes less attractive.  It takes some time for that bad reputation to disappear.  Real estate now has something of a bad reputation.

When we add to this the uncertainty of the credit markets, and the other negative parts of the economy, I am pleased to be selling any homes.

While I don't believe there will be a particularly quick turnaround, I do believe that the people who are buying homes in 2008 are getting them at a price that likely will set them up for a profit in a few years. That will certainly help erase the bad taste.

On top of that, there are people who are still making good money when they sell their homes.  Of course their homes have to be priced right and be a great value, but those that are sell.

People are looking for great value in a home.  While it might be nice to think we could give them that value by seeing $600K homes drop to $400K, I don't think it is going to happen.

I used to work for Apple Computer.  Apple does things a little differently. While most manufacturers continue to drive price down, Apple holds to its premium prices.  Their market share is growing at record rates.  Why are they selling more computers at a higher price?  The perceived value that a customer receives with his Apple computer is greater than what a Windows customer gets at a lower price.

I don't know how we can translate that into the housing market, but we have to deliever great value to our clients to get out of this mess.

Everytime we are able to find a buyer and seller who can both get that value from the transaction, we are one step closer to turning the market around for all of us.

In summary, what we face now more than anything is a shortage of buyers at any price and a value proposition for clients that just doesn't work.

The thought that the house they buy today might be worth less tomorrow is a greater disincentive to buying than almost any price.

As the purchasers of homes today turn them over and make money, the problem will fix itself with help from fewer people listing their homes since the profits are not there.

The lack of buyers is driven by a number of factors, but price is certainly not the biggest factor.  It is also not the easy solution.

On another note I am starting to experiment with high definition video which I think will help those of us with lots of great scenery like here on the Crystal Coast.  I haven't done a house yet, but this is an outside video clip that shows the promise of the technology.



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