Consumer Confidence and Real Estate

Real estate sales have always tied closely to the index of consumer confidence.  Buyers' attitudes toward spending in general matter as much as interest rates to our level of sales.  The index has been going up most of the time over the past couple of years, rising even before we noticed an uptick.

Now, although the real estate market is much improved, the consumer confidence index is wobbling.  The past couple of months have seen declines, and, although we aren't seeing its effects directly, we know that the market recovery has always been shaky.  Every change in the stock market or mortgage policy makes us nervous.  We cannot count yet on the rising tide to carry us back to a strong sales climate.

We certainly can keep our fingers crossed that the recent dip is just that--a dip.  Also, it seems as though our improvement has come disproportionately from first-time buyers, who might be less inclined by age (they can't remember past downturns), life status (they are in the peak years of household formation), and risk profile (they tend to be less conservative), to worry quite as much about statistics.  Let's hope so.

Lowest Rates in 60 Years!

Remember this time, folks, because you won't see it again in your lifetime.  CHFA rates are at 3.625% for a 30-year fixed rate mortgage.  Compare that to when I bought my first home--my state-subsidized first-time homebuyers rate in 1982 was 17.75%!  Mortgage rates are the lowest they have been in 60 years.

If you add that to the fact that homes are down 5% in price, with vacation homes down 11% in price, this is a great time to buy.  Counterintuitively for many people, the period after a hurricane is an excellent time to buy property on the shoreline.  Just as with the spring after a bad winter, people often get spooked and decide that it's time to decamp for a condo or assisted living, and they are willing to be reasonable about their price.  If you add that to the discount that waterfront property often goes for in the fall, as well as the general rule that the best time to make an offer is between Halloween and Thanksgiving, everyone should be out scouting right now! 

Do you really trust the stock market more than the real estate market?

More Reasons to Buy Now

The Wall Street Journal this morning had one of the most positive articles about the current real estate market that I've seen in a long time. They said that, if you take out foreclosures, the real estate prices are really off less than 1 percent from a year ago, suggesting that we are at the bottom of the market. In addition, mortgage rates are near a 50-year low, and the ratio of housing prices to income is over 20 percent better than the fifteen-year average. Although household formation rates have fallen recently, the aging of the baby boomers portends an uptick in home purchases and second home acquisitions over the next number of years. They even went on to say that most people still want to own homes, even discounting or ignoring the investment value, because of control over their environment and access to schools and other amenities. They predict that prices will start to climb soon.

All of this seems to indicate that now is the time to buy. It never pays to try to find the low point at its exact nadir. All indications say that we are now close to that point, and therefore buyers should be rushing out to buy. The article does talk about the new difficulties in qualifying for and obtaining mortgages, but there are many other people who simply aren't buying because they are worried about the future value of their investment. Do those people not worry about the stock market? The bond market? The value of art and antiques? In fact, do they sleep at all?

It seems clear that we need to continue to convince buyers that the time to act is soon. If not today, then later this week or month!

Back From Boise

I just returned from Idaho, where the national group of independent real estate companies to which I belong was meeting, and I can report that it's scary out there. We have all cut costs, and are continuing to cut costs, finding new businesses and new ways of doing business, and changing our organizations to adapt to a changing world. No one thinks that it's going to get easier in the next couple of years.

We are probably not that different from owners in many industries. When you look at the stock market, it may seem as though times are better, since many are reporting higher earnings. However, when you examine things more closely, most of the improvement comes from cutting costs and laying off employees, not from raising revenues. Especially when you get to smaller companies, that strategy has its limitations. As one member of our group reminded us, you cannot save your way to prosperity.

While the whole country is affected, it's a good time to be in the Midwest. Those in that area say that it's because what doesn't go way up doesn't come way down, and that may be so. Everyone agreed, though, that some ways in which we traditionally made our profits--traditional brokerage, relocation, and commercial sales--are all suffering, and people are increasingly looking to new sources of income--mortgage, property management, and insurance (which, ironically, was fairly recently thought not to be much of a moneymaker for real estate). Short sales continue to affect all parts of the country, with the Midwest again being better than Nevada and other hard-hit markets.

We talked about the trends, the harsh realities, and the future of our industry. Afterward, we adjourned to do the only thing we could then think to do--drink!

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.

New Year, New Attitudes

Happy New Year! It is clear from watching the stock market that investors in that area have confidence about the future. In our business, we are looking forward to the same sort of sustained rise during 2010. I just returned from Arizona, where the number of sales has gone up quite a bit from the year before, although prices continue to lag and short sales are still very common. Since we are behind Arizona on the real estate curve, we can look there to see what's down the road for us.

What they are worried about is the glut of homes that could come up for sale if owners lose interest in trying to hold on to them while values are low. Moral suasion may not be enough to convince people to continue paying on mortgages that are underwater. There have recently been a number of articles about just that--homeowners moving into rentals and spending the difference in their monthly payments on trips and consumer goods. That's not good for real estate.

We will be somewhat protected from that phenomenon in Connecticut, I believe, since whatever happens on the West Coast and in Florida will most likely cause the government to take steps to prevent the spread of anything that might impede a general economic recovery, and before it gets to us. They took prompt action in the banking crisis, and the recent extension and expansion of the tax credit for homeowners is a good indication that real estate will be treated in much the same way. In addition, since we had nowhere near the amount of speculation and building as the South and Southwest, we are not in the position of having lots of empty houses and condos to fill. Sometimes it's not bad to suffer from slower growth!

In the meantime, we should take heart in the surge of interest in real estate in Arizona and other similar markets. Investors are buying, and there is activity. I talked to one agent who said that her experience there is bearing out what I've been preaching in this blog: Those properties that are priced correctly and are in good condition are hard to get, since they receive multiple bids early on. Although there is a great deal on the market, only homes and buildings considered to be good values are moving. So, if you want to sell, be sure that you are in that category. If you want to buy, get a jump on that trend and buy before the spring market and before the tax credit expires on April 30th.

Where are the Luxury Buyers?

I thought I should write a little bit more about the information on market inventories that I described last time. As I stated, there is a direct correlation between the price and the amount of months of inventory on the market. So, for properties under $200,000, there is a 1.7 month supply. For each increasing value bracket, that supply goes to between 2 and 3 months, between 3 and 4 months, between 4 and 5 months, and then goes to over a year above $700,000. Only 2.7% of the sales now are above $700,000, and there are more homes on the market in that price range than in either of the two price ranges below that.

This surprises me in some ways. While I know that consumers are cautious, and I realize that the governmental incentives are aimed at a lower price point, one would still think that the combination of low interest rates and a skittish stock market would drive people to spend their savings on real estate. In addition, there are still those who could be downsizing and yet be spending above that amount for a property. Since investing one's assets is so problematic these days, real estate stands out as a tangible asset that is currently selling at bargain prices.

We bought our home at what turned out to be the bottom of the last market cycle, and it has turned out to be our best investment. While you cannot pick the bottom of the cycle without luck, this clearly has to be a time that will turn out to be good, considering the interest rates and prices. Why not take advantage of that, and look back years later with great satisfaction on your best investment?

More Good News

The New York Times yesterday had the most positive article on real estate activity that I've seen there in many, many months. My interpretation was that the dreaded "W" or "L" recoveries may be replaced by a more robust resurgence. The "capital letter" recoveries suppose that the recent upticks in real estate and the stock market will be followed by either a second downturn (as happened in the Great Depression) or a period characterized by bumping along the bottom of the economic cycle.

Those who are now more optimistic seem to think that all the stimuli provided by the government will boost real estate sales to levels that are more than were expected. It may be that the stimuli are even too great, or incorrectly aimed, but they may do their job anyway. As most experts will admit, the effect of psychological factors in economics is far greater than its mathematical bases would predict. We have all known for a long time now that there is a crisis of confidence in our country, and that something would have to happen to get us off the fence, and spending again.

I still submit that it's the weather. It's a good an explanation as anything else.

Hazy is the Word

Well, the weather is hazy, hot, and humid every day now, and the outlook for prices in real estate is hazy as well. I just got a report from a real estate owner friend in Wisconsin, showing that activity there is way up, but that median prices are falling as sales rise. That seems to be true pretty much everywhere, and everyone seems to know it except sellers. They are still thinking that recovery means the stratospheric gains of a few years ago.

It's not really clear why they continue to think so. After all, the rapid rise of the stock market in the past few months has not brought stock prices up to where they were when they started to fall, so why would real estate be different? Lower-priced homes are moving because there are tax incentives and new buyers entering the market, but the incentives don't apply to those with higher incomes, so the government isn't going to prop up prices in those brackets artificially. The only things that will get those buyers off the fence are massive, sustained improvements in the economic climate, or perceived bargains. The latter is the only one within the control of sellers. Also, since prices have fallen for all kinds of items, sellers can buy more with the money they get for their homes at lower sales points, even if they are not reinvesting in real estate at the same lower levels.

Although this all makes sense, the psyches of sellers and buyers have never been terribly swayed by logic. Let's hope that this time is different, and that some of them will get real before the weather turns cold.