NEWS: The Sky is Falling

Open just about any news paper in the United States and you will learn that the sky is falling in real estate. Perhaps you already knew that from your evening TV news source. There is truth to the argument that real estate in most markets is slower than it was during the last three years and that it is significantly slower in some very specific markets. I just wanted to take a little bit of time to analyze the arguments made by many of these reporters writing about the real estate market who I believe are not adding insight or context into what is happening and causing many to make improper decisions in their own lives based on the shallow analysis that they are getting from their regular news sources.

News Articles are written by Reporters

First let's address those writing the articles, the reporters. Important to note, most reporter studied journalism, political science, communications, broadcasting, or even English. It is the reporters that are writing the real estate stories and not real estate experts. Rarely are these reporters experienced in specific fields of industry prior to their days in journalism and it shows. When I was going through my real estate training years ago, my instructor would bring in an article from the newspaper about real estate. He would read it to us and then we would analyze what was incorrect about the article. We did find one columnist who actually was in real estate at some point and his articles were always much more on the mark. It is not that journalists aren't smart, but they are writing about a field that many of them really know little about and so they can't give context and understanding to general trends. Many times they will get some of their information and even conclusions write, but won't correctly show the why or how it is happening.

Where most news stories go wrong is that the reporter commonly has already decided what the story will be about upfront. They already have a catch-line and they already have most of their conclusions drawn. Now all they go looking for is some quotes or lines from someone they can call an industry expert and use those to draw their conclusions, and "WHAMO" you have the story.

Let me give my analysis on the falling sky in the real estate market and see if makes a little more sense and if it possibly gives some context that you may even remember to what is happening today.

Real Estate is Steady and Predictable

Real Estate follows the economics laws of supply and demand and is therefore general trends are somewhat predictable. For the past four years, we have seen abnormally high appreciation in a number of markets with the record low interest rates yet an increasingly good economy. In some of those markets, home prices have more than doubled during the four years. In essence, there was a run on homes by investors and by homeowners who felt they needed to buy before they were priced out of the market. It is now most of these same markets that are having some tremendous real estate cooling. Many of them are just coming back down to what they should have been if there hadn't been an over inflation. It was expected by many who followed the boom and if anything, the bust has been much less than many of us expected. Real estate does appreciate over time, but it is not usually a straight line of appreciation. Typically it is more like a staircase.

Real Estate is like a Staircase

Do you remember the California real estate market, specifically, L.A. back in the mid '90s? It was horrible. The real estate market had flattened out and even gone down in price after a few years of abnormally high appreciation. Homes had gone from under $100k in many areas up to $200k. When the market slowed, many went down in value to $160k - $180k. Every reporter was saying how overinflated the home prices were and how teachers and police officers could no longer afford homes and inferred that people should just stay out of the home market because the market was crashing. How many of you wish you could go back in time and even purchase those homes at the peak for $200k? Those same 3 bedroom, two bath homes with 1,100 sq/ft that were selling for $200k then are now close to $600k today.

All Real Estate is local

Many markets are now in a buyer's market for the first time in years but did you know there are still a number of markets that are very hot and are having some good appreciation. To name a few: Salt Lake City, Houston, Dallas, certain areas in Idaho, and more. During this last years when the reporters were talking about this big bust and many markets were coming back to reality, many homes in Salt Lake went up $50k - $100k. Unlike stocks where you can buy a Microsoft stock certificate in New York or a Microsoft stock certificate in Seattle and pay the exact same price, homes prices and market conditions are unique to local events. Salt Lake is booming because they largely missed the abnormally high growth during the last few years and because they have one of the highest job-growth rates in the nation.

Going Forward - Look for Deals in the Slower Markets

Since we can only look at the current situation were in and assess the best way to go forward, let's talk about what investments are likely to give good returns based on where we are now. First of all, I wouldn't necessarily recommend the markets I have listed above that are currently "Hot" markets. The time to buy is before they become hot, or early on after they do. You certainly want to be careful when they have been hot for a few years. Most hot markets only stay hot for a few years before they go through some cooling. The markets where you will likely do better in are markets that are cooling right now but that have good job growth and population increases. Because there is a buyer's market in those areas, you are more likely to be able to find a great deal.

Let me talk about two deals I just helped my clients with. The first one is in Phoenix. They were looking for a home to live in that they could hopefully get better than average appreciation so at some point they could refinance and pull out some money to invest. I helped them find a home built by a national builder in an area of the Phoenix valley that has good factors that will likely help him get better than average appreciation. In addition, the home he purchased had just fallen out of escrow from the previous buyer and was back on the market with only six weeks until it was finished being built. Because the builder had a number of homes that were almost done and needed to be sold, they knocked off all the upgrade costs, the lot premium, threw in a pool and garage cabinets. In all, it saved my buyer over $50k. After closing, he immediately had it reappraised and it appraised for more than $60k from what he paid for it.

The second deal is in Rio Rancho, New Mexico where I currently live. My buyer was also looking for a home to live in but wanted to find something with significant equity. I shopped around to the local builders and found out which ones had higher inventories of "spec" (already under construction) homes that were nearing their close dates that weren't sold yet. I came back to my client with some builders where he could get a great discount on spec homes and then we went looking. He found a home in one of the communities that he liked. The home was almost completely finished and had fallen out of escrow shortly before closing. In all, he was given a price nearly $60,000 less than an associate of mine paid in the same neighborhood for the same house just six months earlier.

What if I paid too much?

We have talked a little about how there are great deals out there, but some of you may wonder what to do if you bought for too much. I feel your pain on this. I did this on my home purchase many years back. Each situation is unique, but in general, the answer is don't sell it while the market is down. Unlike stocks, real estate rarely becomes worthless. In fact, it almost always increases in value over time. You do need to know what is happening in the city with job growth, government regulations, and other factors because in a few markets there is a chance that it would be better to sell now. In most cases, if you need to move, you can get rent your current property out until the market turns around and then sell it if you need to. In fact, when most real estate markets slow down, the rental market picks up making it easier and more profitable than ever to rent out the home. There is a lot to know about renting a property and I usually suggest hiring a good property manager to manage it for you unless you are willing to put in some good time into learning to do it yourself effectively.

In summary, I hope you now read the articles about real estate with a more cautious eye. Reporters are just that, reporters, and not experts. Also, that you understand the best time to buy real estate and the worst time to sell real estate, is when the sky is falling. The other key take away is, rental markets tend to improve when the real estate market "gets bad".

Jared Murphy
Associate Broker - Allstar Realty