Who Can You Trust in the Real Estate Market?

This is a difficult question.  It is in the Realtor’s® best interest for the market to settle down and for sales to increase.  It is in NAR and CAR’s best interest.  It is in the mortgage companies’ and banks’ best interest.  And to keep the banks solvent and more loans from defaulting, it may even be in the Federal Government’s best interest to have the real estate market return to a more normal pace.

How did we get here?

Interest rates hit a 30 year low.  So, people who hadn’t been able to afford to make house payments or who wanted to borrow more money to add on or move to a larger home did.

The increase in the value of real estate started accelerating.   Different areas accelerated at different rates, but certainly we were experiencing double digit inflation in the real estate price.

Because of the increased appreciation, people started looking at a home as a quick way to make money.  Buy now with nothing down.  Get a great interest only loan that doesn’t adjust for a couple of years.  Then, sell before the monthly payments go up, or refinance into another loan with a low start rate.

We started selling houses based on the monthly payments.  Remember when you used to buy a car based on its price?  Okay, maybe you don’t, but I do.  Financing for cars wasn’t as easy to come by.  So, when you bought your car, you either had to go to the bank and arrange financing or pay cash.  The auto dealers sold cars based on the price.  Then the auto dealers got into financing.  Then they got into incentive financing and selling cars based on what monthly payment you can afford.  The concept went from car ownership to making car payments for life.

Well people began to look at their houses in the same way.  People didn’t pay off their mortgage.  Their home was a cash machine.  Something that could be used as a cushion in times of trouble or for an extra vacation.  Want a new car, refinance your house.  Want to redo the lawn, the kitchen, the bathroom, take out an equity line.

The ability to get money to do things became easier.  And people refinanced to pay off their bills, remodel, whatever.  Then a year later, their lender calls them up and says, you’ve got another bunch of equity in your house.  Wouldn’t you like to take that out and do something fun?  Instant gratification

This additional money along with the high salaries and low interest rates in this area, created a stampede to buy homes.  Houses were on the market for a few days.  If you hadn’t sold the house you listed in 15 days, something had to be wrong with it.  Multiple offers were the norm.   Overbidding $100,000 over the asking price wasn’t unheard of or even unusual.

But this was not sustainable.  And things began to slow down.  Unfortunately, everyone didn’t get the memo.  Some real estate agents and lenders continued to assume that the boom was never going to end.  Why wouldn’t real estate and loan agents keep pushing the prices and sales?  This is how they make money.  If you client doesn’t close the deal, you don’t get paid.  In fact, the agent is spending money on marketing, cell phone bills, mailers, signs, note pads, postcards, and whatever else the agent can think of to help her get clients.  So no sales doesn’t simply mean no income, it means money is coming out of the agent’s pocket to pay the marketing bills.

As the market started to turn, the overbidding continued.  Sellers wanted more for their, buyers were afraid they weren’t going to get the house, and Realtors® were glad to be in the middle of the amazing housing boom.

The real estate market is slow to correct.  Agents, sellers and buyers were slow to notice the change in the market.  As the market slowed, the speed of appreciation decreased, slowed, and now in some areas values are actually lower.

Short sales started to happen.  These are sales where there isn’t enough equity in the home for the sales price to pay off the loan and all the other costs of sales.  If you can work with the bank, the bank may cut the amount due in order to make the sale.  (Keep in mind, whatever part of the loan is forgiven, the seller is taxed on.)  If the bank won’t help and the seller can’t come up with the money, then the home is foreclosed upon.

Some agents will argue with me about values.  But I’ve been watching one condo complex where the value was about $415,000 two years ago.  Now there is an identical unit listed at $399,000 that’s been on the market for 108 days and hasn’t sold.  The lender now owns it.

So what is the value of a home in this complex?  Nothing’s sold in this complex since January of this year.  There are eight homes in the complex that are for sale.  Value is based on what a willing and able seller and a willing and able buyer can agree on.  With the real estate agent’s input, of course.

Next:  The value of a real estate agent’s expertise

© 2007 by Judy Kane