The Tycoon Report

Real Estate in the Real World

Being involved in the Real Estate market, I read almost everything that is written about the state of the real estate market on a regular basis.

However, the average person, who is not as involved with the inside information of this business, is often confused by what they do read. So in this article, I would like to point out what is important and what is not, when it comes to real estate trends.

First, you should always take with a grain of salt any public relations statements put out by the National Association of Realtors (NAR) or local Real Estate trade groups. They all have an axe to grind in selling homes, and want to present the most favorable spin they can. For two years, the predictions made by the economists at NAR have been dead wrong in their minimization of the housing downturn. As a professional, it is quite embarrassing to read the same rosey predictions over and over again, when you know in your heart how skewed the facts are to the contrary.

Second, do not be influenced by Mortgage companies or real estate offices putting out public relations letters such as, "Why Now is a Great Time to Buy a House". People aren't dumb. If it was such a great time to buy a house, they would be doing so! These letters or flyers will give you three or four reasons such as "low interest rates", "prices have come down" "big selection", etc. It's about one step up from the car dealerships who have the "greatest sale ever" every other weekend, and then tell you that you must buy now before prices change.

Real Estate, unlike stocks, is both a national and a regional entity. Houses may sell like hot cakes in Seattle, while the market is dead in California. However, in general, markets across the country do rise or fall together, because buying and selling homes are usually influenced by National economic policies. One example of this would be interest rates, which will generally be similar in most areas across the USA.

When it comes to real estate values, most of us do not care what is happening across the country, as much as we care about what is happening in our own city. But even within a large city, you can have areas in which prices are rising more or less than other areas of the same town! Local areas can be influenced by job growth or decline, the number of foreclosures, number of homes for sale, etc.

So the key to learning the real trend in your area is to investigate information on local sales. You can do this by calling a local Realtor board and asking for their statistics on current inventory of unsold homes, recent monthly stats of closed and pending sales, and stats on the median sales prices for your area. If they aren't helpful, try doing an internet search on real estate statistics for your area.

When you have these stats, you will know whether your market is still dropping in price, holding steady, or rising. Remember that high inventory, coupled with low or declining closed sales = a bad market! If that sounds like your area, then prices will continue to fall. So hold off on buying, unless you can find a foreclosure, bank short sale, or a very motivated seller. It would be wise to buy below market, as a hedge against a further decline.

I would like to share with you the statistics from my own area, which is a fairly large area in size, known as Northeast Florida. The following are the number of closed sales over the last seven months of 2007, as reported by my local Multiple Listing Service:

June 1460

July 1303

Aug 1246

Sept. 1069

Oct. 943

Nov. 854

Dec. 784

And in the first 15 days of January, 2008, there were exactly 200 closings. Notice the declining trend? I should also mention that we have a current inventory of 13,800 unsold homes on the Multiple Listing Service. That means that only about 5%, or 1 out of every 17 homes listed for sale are in fact, selling. Pretty stinko, right?

But why aren't homes selling right now? There are three reasons:

1) Mortgage standards have tightened up considerably. As a result, many people no longer qualify for a loan. Mortgage companies are demanding higher credit scores, more money down for mediocre credit, and fewer loans are being made to people who can not provide lenders with income verification.

2) Fear of declining prices: As prices fall, those who haven't bought a home yet are afraid of further declines. As they wait to buy, a catch-22 develops in which prices fall even further in response to the limited number of buyers.

3) Rising number of foreclosures: As foreclosures rise, the inventory of unsold homes also rises. Because the foreclosures are priced below the market, this puts pricing pressure on the other listed homes to compete. Buyers make lower offers, but sellers remain unwilling to sell for less, so deals are not made. Many of the homes that do sell are foreclosures, so the limited number of buyers are just not buying the higher priced homes.

Despite my gloomy projections, remember that every dark cloud has a silver lining. The current bear market will eventually be a positive for first time home buyers, as prices and interest rates decline even further. Eventually people will start buying again, and inventory levels will decline. The foreclosure rates will abate, and mortgage standards may relax once again.

But will that happen overnight? Most certainly it will not. More likely it will take a minimum of a year or longer. In the meantime, if you are considering the purchase of a home for either investment purposes, or as owner occupant, relax, take your time, and look for the best deal you can find. Most importantly, do your own research, and don't believe the Pollyanna views of hyped up press releases! The real world of Real Estate is a tough place to be!