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How Low Will They Go?
Q: I’m in a position to buy a home but worry that prices may go down further. How can I tell if this a false bottom, a market where prices may slump even lower?
A: As with the stock market or gold futures, no one can tell when the “market” has reached a bottom – or a top.
Most of the numbers we see are related to studies that reflect real-estate trends at the national, state or metro level. Your “market” is very much smaller, perhaps your neighborhood, condo project, ZIP code or that farm down the country road. For instance, the National Association of Realtors reports that when compared with last year existing home prices in the first quarter of 2009 fell in 134 metro areas and rose in 18.
It’s tough to tell what the future will bring. For instance, David Lereah, a former chief economist for the National Association of Realtors, said in 2005 that “I believe that in years to come historians will see the beginning of the twenty-first century as the ‘golden age’ of real estate.” Lereah made this statement in connection with his then-new book, “Are You Missing the Real Estate Boom?” (Broadway Business, 2005).
Now, as much as always, it’s difficult to predict the future. In particular, the current market is hard to judge for five reasons.
1. We have a huge inventory of unsold foreclosed properties held by lenders. While we often associate foreclosed homes with lower prices, that’s not always the case. In many markets and at given times there has been no “foreclosure discount” because the properties were readily salable. At other times the foreclosure discount has been substantial. Today we not only have foreclosed properties being sold at discount, we also have lender-held properties not available for sale, the idea being to wait until prices firm before placing such homes on the market. Until we clear out a large portion of the foreclosure inventory we will not see price increases in most local markets.
2. Unemployment is rising. The Bureau of Labor Statistics reported in June that “since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has grown by 4.5 percentage points.” You can look at unemployment numbers as a leading indicator, a hint of things to come in real estate because people need dollars to make mortgage payments. Your local economic development agency can tell you if your state or area job base is growing, falling or holding steady.
3. The problem of unemployment would be more tolerable if we spent less and saved more. Unfortunately, the 2009 MetLife Study of the American Dream found that “For many Americans, a job loss could have dire consequences since they have little financial cushioning to survive a job loss. A startling 50% of Americans surveyed say they could only meet their financial obligations for one month if they were to lose their job, and the majority believe they are already working as hard or harder than ever just to get by.”
4. The sale and price figures we have this year are skewed because we have a massive federal effort to encourage home buying. The first-time homebuyer credit of up to $8,000 is likely to bring more buyers into the marketplace and thus reduce inventories and pricing pressures, but what happens to sales and prices after Dec. 1 when the program is scheduled to end? Given continuing weak home sales, don’t be surprised if the program is extended into 2010 if not later.
5. Recorded prices in down markets are unlikely to reflect full transaction details, information needed to accurately evaluate local marketplace trends.
Imagine two homes are sold for $500,000 according to public records. In practice the real “sale” prices may be different. One buyer may have paid the full $500,000 while the other may have gotten a 6-percent “seller contribution” ($30,000 in this case), new appliances ($5,000) and a new roof ($6,000). That’s a difference of $41,000 that cannot be seen when looking at recorded sale prices, but you can bet that the second buyer fought hard for such results.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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