Wednesday, September 27, 2006

Home Prices Decline For First Time In 11 Years

I'm sure you've all read the articles that appeared on Monday that said, for the first time in 11 years, existing home prices fell. (If you didn't, you can read about it here and here.)

What struck me about these articles is the different views the so-called "experts" have. In the first article, we have this:

"This is the price correction we've been expecting," Lereah said. "With sales stabilizing, we should go back to positive price growth early next year."

In the second article, we have this:

At the end of August, there were so many unsold homes on the market that it would take seven and a half months to sell them all at the current sales pace. The association said that was the biggest backlog since April 1993.

What's even more confusing is that the two pieces of information come from basically the same source. David Lereah is the chief economist for the Realtors Association and the second quote comes from the Realtors Association itself. So if there is still seven and a half months of backlogged inventory, that means it will be at least mid-April before we're back to normal inventory levels. As any first year economics student can tell you, surplus inventory means less demand and less demand means lower prices. I think Lereah is being overly-optimitic.

And all this does not even begin to take into account the uptick of foreclosures and mortgage defaults that will be happening as variable rate mortgages start to adjust upwards, something we're already seeing the first signs of now.

I know one thing from experience: when people start prediciting a market has hit bottom, it hasn't.

So what does this mean for a real estate investor? As long as you know the basic rules of REI and stick to them, you should be ok. The most important one is that money is made when you buy a property, not when you sell. Don't buy something that is losing money and expect appreciation or tax savings to bail you out. Become more selective in your purchase criteria. It is becoming a buyer's market, so take advantage of that.


jim said...

In moments of prosperity, novices can enter the fray and make a little coin. Right now, the pickings are slim and anyone looking to test the waters is going to get killed by the sharks. I know a guy who has 5 houses on ARMs and they're all barely cashflow positive... he's going to find out he's the chum in the water in about six months.

FiveMZNYC said...

The whole, buy and hope for appreciation the day after closing is a new thing coming from the last run up of the market. If a property has a good cash flow and the buyer finds the right deal for themselves, this market correction should present some opportunities for income property purchases. At least that's what I'm hoping.

Steve said...

Real Estate decline seems to be the big media buzzword for today. It's not like this has never happened before in the history of our nation. I admit there will no doubt be more foreclosures this time due to differing factors, but I keep telling people if it gets as bad as some estimate it will, the economy itself will implode and paying a mortgage will be the least of your problems.

Anonymous said...

Last Year was a everyone wants to cash in late and can't. On the positive side homes are still selling and people are still moving here. Scott

Anonymous said...

Shaun will you send me a copy of your offer to purchase agreement you use so I can compare it to what I have? I just want to make sure I'm not missing anything. I would greatly appreciate it.


Shaun said...

The purchase agreement I use is the standard one used by Realtors in my area. Ask a Realtor in your area for a copy. There will be differences based on your local laws. Alternately, check out the preprinted legal forms that office supply stores sell.

Colin Meadows said...

There is typically a long-term inventory of properties on the market, according to some reports the increase in the past month of unsold homes in major metropolitan areas has increased by 3.5% in August. So while having a 7.5 month inventory may seem large, compared to normal levels it is not astronomical.

I think Lereah might have been referring to a resulting decrease in property listings due to longer days on market numbers and lower selling prices.

What he may not account for, as you mentioned, is the comming increase in foreclosures and "fire sales" as ARM rates begin increasing etc.

This timing, however does present a terriffic opportunity in the buy-to-rent market. As rates are increasing the margin between rents and mortgages increases which means landlords can raise their rents and still retain tenants.

Gotta love market give and take.

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