Get off the Sidelines

If you've been waiting for the economy to straighten itself out, and for the real estate market to be clearly on the way up, you're waiting too long. History has shown over and over again that those who act before there is certainty are the ones who make the most money. Since most purchases and sales are, in reality, driven by family issues and not by national ones, that's not so hard to prove.

We bought a condo in 1981, when the economy was bad. We got a great price on it, and we moved in. We were getting ready to have kids, and there were no children allowed, so we put it on the market and bought a house. As soon as we moved into the house (the day we closed, in fact), we found out I was pregnant, and we'd bought a one-bedroom house. Although we planned to renovate, another, bigger one came on the market up the street, so we bought that too. What were we thinking? Anyway, the two houses were both bought in 1983, and the first was sold that year, as well as the condo. We made money on the condo, since we'd been the first to move in. We made no money on the little house. The value of the second house doubled in the the first couple of years, as the market went wild in the mid-80s.

What's the lesson here? You could reasonably say that it is to think ahead before you buy, but that's not my point today. My point is that we made almost all the appreciation on the house that we owned when the market started to rise. We also made money on the condo on that theory. The little house we only owned for a few months, and we would have made money there if we had been willing to own three homes for longer. It's a version of timing is everything, but it requires buying early in a cycle. People who waited until later in the 80s got caught in a declining market after 1988, and weren't able to get out for what they had paid.

The parallel to today's market is: If you wait until everything is rosy, the money will have already been made by those who bought sooner. Buy now.

Declining Markets

We recently received a list of "declining markets", as defined by AIG (some irony there, huh?) for appraisal purposes. Some states--Arizona, California, Florida, Michigan, and Nevada--are considered Severely Declining in their entireties. Our county has a list of declining markets, defined by zip codes, which appears to cover almost every town in our region. Hartford's noted zip codes are listed as Moderately Declining.

What this means is that, when you go to get a mortgage in an area marked as Declining, you are subject to certain restrictions or rate adjustments, in order to protect the lender. Therefore, since a town like Guilford is on this list, everything in Guilford will be subject to a higher rate for the same LTV (loan-to-value) ratio than a property listed in, say, Cambridge, Massachusetts.
I chose Cambridge for several reasons: it's like New Haven in some obvious ways; it's still in the Northeast, where real estate sales are broadly down; and, finally, I knew the zip code. In case you thought New Haven might be spared, 06511 through 06515 are all there as well.

This may make it easier to understand why so many sales are falling apart after the contracts are signed, since people may not be aware of these rules before they actually sign a sales agreement on a particular house. They may have been counting on getting a higher LTV, or a lower rate, both of which may have been advertised, but then are not applicable in the zip code in which they are buying.

It's hard to know how to fix this problem, but it needs to be addressed if we are going to break the cycle of lagging real estate transactions. This rule is not only arbitrary, since there are submarkets within these areas which are selling well and where prices are not declining, but lags in time as well, being based on prior sales. In addition, it punishes those who most need to sell, but throwing another roadblock in the way of their attempts to find buyers.