Market Outlook, October 2007

Here is my uncensored commentary on the current housing market, surplus inventory, rates, and home valuations as of October 2007.

Housing Market- sucks. Ha! Just kidding. Well the market continues to suffer with this ongoing credit crunch and all, but the variables are complex. If you read items put forth by the sensationalized news media you’ll find doom and gloom… and if you read the propaganda put forth by the National Association of Realtors (NAR), you’ll find inflated numbers based on old data, that is arguably sketchy to begin with, all designed to make people feel confident that the worst is over. So I’m going to cut through the BS and skip to the chase. Or rather, what I believe is the chase.

First of all, the market has already declined worse than most people are aware. From what I can tell, all the data being reported about “current” home sales… are 3 months old. This isn’t really an opinion, but more of an observation. I mean, literally each report that comes out is dated, but released 3 months later. Now, I’m no genius, but it just feels like the media and NAR is smoking crack or something, because if an average guy like me can see this so clearly, why the heck can’t they? My thinking is this: the data we get is about 3 months old. The credit crunch started about 3 months ago. I am in the 90% bracket of all agent producers in terms of sales volume. I haven’t made a sale in 3 months. It doesn’t take a world renowned economist to predict the forthcoming news will reflect a “shocking” account of lower prices over the next three months.

I am not a psychic, but I do keep a finger on the pulse of the market via comp sales when doing refinances and purchase loans. And I have been pretty right so far. And while the pundits will continue to say the sky is falling… its sort of amusing to picture the sky falling down in chunks… that coincide each time an arbitrary report du jour gets released. The fact is the sky already fell. And if my production is any indication, market volume is starting to pick up. This month I have 2 purchases in escrow, a realistically priced listing, and 2 prospects looking to purchase soon.

But just like the irrational exuberance that drove the market up in the Dot Com and real estate bubble eras… it is now about to switch to the same fear that drove the stock market to over-correct all the way down until supply equaled demand.

In my opinion, the rapidly shifting pendulum from cockiness to fear, along with new lending qualification guidelines that are being revised lower to account for the increased risk, and along with increasing rates… will all combine to force prices still lower. I do not believe we have seen the bottom of this market yet. I hate it when people stay on the fence and hedge opinions that make them appear smart in light of whichever outcome unfolds. And while I have no way to back it up, I’m not afraid to venture an opinion. My guess is that history will show we have already seen a correction of 7-12% to date. And I stand by the prediction I made as early as 1 year ago, that we’ll see prices drop a total of 20-25% before we’re through. Maybe 30%. Please be advised that this is not a popular view. As far as I can tell, I’m about the only one who thinks it will be this bad.

That said, while we have no crystal ball to indicate the moment we “hit bottom” I strongly believe the time to buy is sometime before we do. This may seem counterintuitive, but keep reading to understand why.

Even though the Central Bank’s rate setting committee recently lowered the target for the federal funds rate by half a percentage point (a big deal), it really has not correlated to a rate decrease in the actual 30yr and 10yr mortgages that people are getting. It will alleviate the pain of those unfortunate folks who are experiencing rate lock re-sets, but only slightly. The rates we care about… those on new purchase loans… are largely driven by what the big guys on Wall Street are willing to pay in exchange for taking the risk of loaning homeowners money. And for now and the foreseeable future, the perception is much riskier than it was before the crunch ensued. Further, I believe the rates are being artificially kept low on two counts: upcoming election year… and huge foreign deficit. At some point, with more and more countries raising their own rates to counter global inflation… the damn will burst. In layman’s terms, while rates are expected to hold pretty steady or slightly increase from now until the election, I see rates getting back to ~8% over the next 2 to 3 years. Maybe higher. And as rates go up, more downward pressure will be put on home prices. But the thing to remember is this: even as prices decrease, if the rates increase… your monthly payment will likely increase. In other words, rates drive your monthly cost way more than prices. So from an investment standpoint, I’d say the ideal thing to do (though very impractical) is to sell now, stay in cash, rent for 1 to 2 years, then buy back in at a lower cost basis and a higher interest rate tax right off.

From a monthly cash-flow (or affordability) perspective, you’d be better off buying now and enjoying our still historically low interest rates, which although are higher than what we’re used to seeing, are very low in the whole 50-year-history-scheme-of-things. Realistically, if you sell now and buy now, or sell later and buy later, I would think it will pretty much result in the same outcome, since all ships rise with the tide. In other words, selling later will get you a lower price on your existing home, but then again, the next home you buy will cost proportionately less too.

Meantime, here is an example of what I mean when I say that a house with a lower cost will cost you more if rates rise:

Let’s say you put down 30% on a $900k house with a loan of 6%… your principal and interest payment is: $3,777

Now, let’s look at a scenario in which you wait for the same house to decrease by 10% to $810k… but this time rates increase to, say, 8%:
after putting down 30%… your principal and interest payment is: $4,160.

You saved $90k by waiting for prices to drop… but a 2% increase in interest would cost you $138k over 30 years.

But over 30 years… my challenge is to ask yourself do you really care? I say just sell when you feel like the chapter is coming to an end. And buy when you’re ready to turn the page. Or risk driving yourself crazy by analyzing things to death like I do.

The bottom line: it is never comfortable to pull the trigger. Its almost always a bad ideal to buy with a short term plan to flip it within 1-5 years. And its always a good idea to buy with a plan of staying for 10 years or longer, as long as you choose a place you will like to live in for that long, and you can afford to make the payments for that long.

Yes, there are a ton of houses on the market. Most, but not all of the sellers now selling, really need to sell, otherwise they wouldn’t be on the market, so “deals” are pretty easy to come by. But to set your expectations realistically, a deal is $10k-$25k off the price, not $100k. As a listing agent for one of my clients, we laughed so hard at a buyer who thought they might realistically get a ridiculous offer accepted. The bad news: you will spend ~$50k in costs and fees to sell your house.

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