Where is the market going?

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?

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.

• 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.
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”?
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 consumers 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.