This post rated AA+.
From the subjective analysis that concludes the forthcoming August 2011 Stat Pack.
Advice for market participants:
SELLERS: You are right to believe that absolutely everything favors buyers right now including the price tag on your house. The question you must ask yourself is this: if you were a buyer in this market and this was the first-time you encountered your house, would you buy it? Would you buy your house during a time when the future of Fannie Mae and Freddie Mac is questionable? When the US lost it’s AAA credit-rating? When job security was so tenuous? Yes, this is made up for by the fact that values are depressed, interest rates are incredibly low, and there are 20% fewer homes to choose from then just one-year ago. While all the data is positive as far as “the deal” is concerned, buyers are taxed with everyday concerns that make ANY compelling decision to buy your home or someone else’s, extremely difficult. Whatever you can do to mitigate those concerns: do it.
BUYERS: This is the very definition of a kick-yourself market. Will you kick yourself for buying in this market? Or will you kick yourself for missing the boat and not buying? EITHER could be true. YOU are the only one that can answer that question, and it must be answered based on your personal situation. In the last 40 years, housing has not been this affordable. And at the same time, the perceived risk of making any major financial investment due to multiple circumstances beyond your control has never appeared greater. If you are in it for the long-haul, and that is defined as a period of time longer than five years of occupancy and ownership, then this is a brilliant market of markets to buy into. If you have any degree of uncertainty about five years of ownership, you best act quick on any decent rental, because there is only 1 – 3% occupancy out there in single-family rental properties.
Analysis:
A memory from my time studying history at Colorado College: freshmen regularly observed that “we learn from history” and “history repeats itself”. These comments would then be thrown out like fresh meat to a pack of starved lions, also known as the upperclassmen, who would pepper the room with their Aristotelian intellect, essentially rehearsing their law school application interview with startling logical brilliance. Of course we learn from history. Of course it repeats itself. But the implications of x and variables y and z will later cause the following courses of action, either action A or action B. It was simple. We were post-Cold War, Clinton-era wunderkids. We had it all figured out. Here was an orderly, systematized world that was easily understood and readily grasped.
Fast forward 15 years…
Standard and Poors just downgraded America’s credit rating to AA+. And the historical precedent for this is what exactly? Beyond that, the administration of this variable onto the system known as global finance will cause what future courses of action? A, B… Z? Why did Standard and Poors downgrade Fannie Mae and Freddie Mac this past Monday, and not in 2009? Why is France with a substantially larger percentage of debt to GDP still rated AAA? Why can’t I defend away $2 trillion mathematical errors? Does it matter?
The bizarro land of real estate invokes the immortal words of gonzo journalist Hunter S. Thompson (which strangely becomes more relevant with each passing year) “when the going gets weird, the weird turn pro”. There is no editorial accident in constructing a SWOT analysis to lead-off this month’s Stat Pack that shows all strengths and all opportunities as the present condition of the real estate market. Without getting too subjective, it is pretty safe to say that everything out there in the real estate market is really good right now: prices are mostly stable, inventory levels are down substantially, foreclosures are down by over 30% from a year ago (which was down off of 2009), interest rates are microscopic at 4.25% as of this writing, prepaid PMI programs give buyers with high credit, real income and the knowledge to buy in good areas incredible opportunities right now and quite a few sellers want/need to make a deal. Everyone of those statements is objectively, measurably accurate.
The problem has to do with everything else that is beyond the consumer’s ability to control. When you buy real estate you participate in world finance, like it or not. All those subprime mortgages were tied to Mexican banana farms which were tied to Thai import/export companies which were tied to Korean manufacturing which were tied to Irish discount airlines. The series of dominoes from one man’s excessive spending in 2005 and subsequent foreclosure in 2007 ended up carrying global implications because bits and pieces of his mortgage and hundreds of other defaulting mortgages were scattered around the globe to investors in all corners. Everybody, everywhere owned just a little bit of everyone else’s little debts. No problem, until a bunch of those (ahem, AAA-rated) debts start to go bad. In the thunderclap that followed this meltdown, the economy of trust was broken. Banks slammed the doors of trust shut in late August 2007 and have barely cracked them back open. Now ten years removed from 9/11 and the beginnings of a war that has seen the sacrifices of a volunteer armed forces, we live in a society that suffers from disaster-fatigue, where meltdowns are increasingly common and increasingly expected. What’s the next order of magnitude to steal away the headlines? Just when you think you have seen it all, something new happens. And the backdrop for this is an ever-more-toxic political climate, where civil discord is a relic of the past.
Why this matters: Sellers more often than not bought in a feel-good era. Buyers today are buying in a feel-worse era. When sellers bought, their motivations were very different than today’s buyers. More likely, the reasons to not buy were not nearly as pronounced as they are today. This makes a seller’s job of marketing their property to a cynical, distrustful audience extremely difficult. This makes buyers more resistant to making decisions that are based on feeling good. People make real estate decisions electively for one of two reasons: pleasure or pain. It is easier now to market with language like: “pain-free”, “move-in ready”, “all-set”; rather than “luxurious”, “masterpiece”, “incredible views”. The first set of phrases use language that dominates the mind of the buyer: pain; inconvenience; problems; doubt; it then overcomes these fears and pains. A seller must speak the day-to-day language of the buyer in order to demonstrate value in today’s market.
This is all talk about the emotional climate of real estate and the difficulty of gauging cause and effect in today’s economy. The day after the S&P downgrade that basically discounted America’s ability to repay it’s debt, what happened? Wall Street went into shock, losing more than 5% and treasuries – the repayment of which was the very thing S&P was calling into question – saw a surge of money, propelling 30 year mortgage rates down. In the midst of all this chaos, the real estate side of the ledger improved yet again.
Year to date, Colorado Springs Real Estate is having a decent year that no one seems to know about. It is all relative and all compared to the last several years which have not been the rosiest of real estate sales years. This year, there will be about as many sales as 2008, more than 2010, slightly fewer than 2009. But what is most intriguing is that the number of listed properties, while still high based on the last ten years of inventory, is lower than at anytime since 2005. For six consecutive months, inventory has been at 6.1 months or less, a stable balance between supply and demand. Because there are fewer homes for sale and slightly higher demand than this time last year, the earlier drops in average sale price will probably balance out as the year finishes because buyers that are buying are less likely to see new listings come on the market and are more likely to try and make a deal with what is out there now, thus stretching slightly upward in price.
The best advice we can give: if you’re participating in a real estate decision for long-term reasons, ignore the toxicity of the present.
Six months is considered a balanced market. That means prices are not likely to go up or down, but stay flat. Less then six months sustained gives pressure to rising prices; over six months gives credibility to falling prices. Again, this is the market as a whole. There are neighborhoods in the $300K’s with 4 months inventory today; there are neighborhoods in the low $200K’s with 10 months inventory today. But 2010 looked more like 2007 and 2008 then 2009 when the year ended with less than six months on the board. It is worth noting that months of inventory has actually declined through the fall into winter on a monthly basis, after peaking at over 10 months in August. But this graph indicates further threats to pricing in 2011.
