Are Prices Starting to Rise?

As with many things, prices are local--very local. In addition, price indices are rarely apples-to-apples comparisons.  They usually take prices on one date and compare them to prices as a whole on another date.  For example, the Case-Shiller Index actually takes the total sales of all the property in a city and compares it to the total value of the property sold in that city in an earlier period, to calculate the rise or fall of real estate values over a period of time.  That means that it's hard to know what would happen to one specific property when it got sold or resold.

In the current market, sales are being driven by first-time homebuyers and are strongest at the low end of the price spectrum.  Overall, prices are flat or still falling slightly, although this does lag in time, due to reporting delays.  However, we are beginning to see appraisal problems again, which had not been occurring in recent months.  That indicates that prices are rising, thereby pushing up sales prices above levels of past reported sales, which are used by appraisers to calculate value.

What's the bottom line?  Prices at the lower end are being squeezed by supply and demand factors, and are probably heading up.  Higher-end sales are still waiting for that phenomenon to take place.

Learning from Ebay

I'm not an Ebay person, but I have lots of friends who are, and I've certainly read enough about the philosophy to get the idea.  You go on looking for something, and then you watch the bidding over a period of time.  In the end, if you want to get something, you pay the price that it takes to get it.  If you can't stand watching others bid, you take the "Buy It Now" option.

There's a real estate theory along the same lines.  When a house is listed, potential buyers look, and note the price.  They often sit back and watch the action, sometimes bidding, but often waiting.  If they really, really want just that house, they will go in early and strong, and close the deal.  If not, they wait and see.  At the end of their search, if that's the house they want, they need to outbid others to get it.

The idea is that things will sell, in most cases, for what they're worth.  There may be times when sellers get lucky, or buyers do, because of circumstances not created by them, but by the other party.  Most of the time, property goes for its fair value, because bidders will eventually come in and pay what they know it's worth. The moral?  It's not the listing price, it's the inherent value.  Put your property on low, and let buyers bid it up.  Just as in Ebay, if you can create a feeding frenzy, you will get more, and much more quickly, than if you list it too high.

Thinking of Waiting for Spring?

At this time of year, we often hear people say that they are putting their searches for property on hold until the spring. While we understand the appeal of taking an item off the To Do list at this busy season, I want to point out the possible consequences.

Savvy buyers don't talk about the price of the property, they talk about the monthly payment. Current mortgage rates are so low that the cost of risking an increase in rates almost surely outstrips the risk that you might buy now and have prices decline slightly before they rise again. The low rates also trump any idea that you have to bargain for the last nickel. Take the deal, lock in the rate, and gloat later.

Many consumers are acutely aware of the aspects of this housing market that favor buyers. They therefore think that, regardless of what a property is listed for, they should offer 20% less. They seem to believe that sellers are desparate, and that they need to bottom fish in order to purchase now. Since only the well-priced properties in good condition are selling, it's not even really true, as I have pointed out before, that there are so many things to choose from that such a strategy can succeed.

Let me remind any such people that this market is not a zero-sum game. Both the sellers and the buyers can win. The sellers can sell and repurchase at the current lower prices, with the lower interest rates. The buyers can buy and also take advantage of these rates. Everyone can walk away better off. This is an unusual time in that respect. If you figure out what the monthly payment will be, you may discover that it makes far more sense to buy and move than to wait.

Where the Money Is

I've been reminding agents this week that most, if not all, of the money people make investing in real estate comes during the run-up in prices after a downturn ends. While it can be somewhat equivalent to trying to be a market timer in the stock market, it's a little easier to judge in real estate.

We know that prices and units have both been flat or declining since the beginning of 2006. We also know that there is a lot of pent-up demand, as people have been sitting on the fence for some time now. As soon as demand picks up, there's a good likelihood that prices will follow. Those who act now, and get in on the ground floor (no pun intended) will reap the biggest rewards.

Of course, that applies as well to investment property. There is a fairly good selection now of rental and other property. This might be the time to take money out of that 1% (or less) money market account, and buy some real estate.

Market Statistics

I just gave an interview to a reporter about last year's numbers for the state of Connecticut. The Commercial Record showed that sales were about even with 2008, while prices were down about 10% from 2008 to 2009. She wanted to know whether that surprised me. It did not.

The above results are typical for markets that are in moderate recovery. When they decline, they decline first in units and then in prices. On the way back up, we see units increasing before we see prices returning. This is also because, when the economy is not strong, it's people at the lower end of the price spectrum who are most likely to buy or sell property, either because they are first-time homebuyers, or because they are forced to sell. These reasons account for the decline caused by a change in the mix of units changing hands.

The other piece of the decline is caused by the value of the same house going down in this market. Most houses, especially when they are competing with foreclosure sales, are selling for less than they would have a year ago. That's the part of the decline I would call same-sale price loss.

If you add those two explanations together, you can see that the 1% a month loss in value that I've been blogging about is not going to go away any time soon. On the other hand, we should see unit sales beginning to rise faster than they did in 2009, particularly as long as the government continues to give incentives to homebuyers. And that's good news.