Don't Count on Selling Above the Market Value

 What is it that people say about the stock market?  "Bulls get rich, bears get rich, but pigs get slaughtered".  Things are only worth what they're worth, and real estate is no different.  If a seller tries to take advantage of a tight market by overpricing, it might work, but, more times than not, it won't.  If it does work, it will usually be because multiple buyers are bidding on the same property.

Even then, reason mostly prevails, often the next morning, or when the appraisal comes in.  Although many people are either downsizing, or have saved extra money during the past 18 months, they still will be resistant to paying over the appraised value, despite what they might be putting down (which could even be the whole amount).  Even cash buyers regularly ask for appraisals, just to check that they are not "overpaying".  Although we know that that's a subjective term, and that appraisals can lag in a rising market, people still want to be validated for their business judgment.  If they think they may be getting taken advantage of, they will balk at some point.

Lately, we've been seeing a good number of homes coming back onto the market, after going under contract.  Sure, there are some bad inspections, and some mistakes about how much can be financed, but there are also cold feet, and they often relate to the aftermath of a bidding war or feeding frenzy.  Buyers get caught up in wanting to "win" the house, then wonder whether they have overpaid.

All of this is by way of saying that sellers, who have a short selling season for the next two months or so, should be wary of overpricing.  A good value will get snapped up, and will sometimes even have backup offers, but a property that looks to buyers as though it will sit for a while may do just that.  If there's no perceived risk of losing the purchase, there's no urgency.  And we all know that lack of urgency kills transactions.  Thinking too much about anything will bring out all the negative points.  So don't go there.  Price your home to sell.  Listen to your agent.  You'll thank him/her later!

Pay Attention to Where We Are in the Real Estate Cycle

People make money in real estate in all kinds of market conditions, but they don’t make it evenly across all parts of a cycle.  It does matter when you buy and sell.  Some of that is luck, but some is a matter of seizing the opportunity when it presents itself.  Today’s New York Times had a chart of the twenty top metro areas in the country for price appreciation in housing during 2020.  Bridgeport was first, and New Haven was eleventh.  We know that supply and demand were not in sync, and we know that people were leaving NYC to find more space in Connecticut.  We also know that mortgage rates are very, very low at present, and that other markets around the country have already experienced large price increases in recent years, during which period we lagged behind and saw no increases.  Finally,  we know that moving to smaller cities is a current trend.  In fact, the same edition of the NYT featured a large article about techies fleeing San Francisco for Austin.  We are not as big as Austin, but we are also located in between two other major cities, New York and Boston in our case.

What do you deduce when you read the above paragraph?  One possible choice is that you decide that now is a good time to buy, especially where prices have not risen to the highest levels supportable.  Bingo!  Those who ride a market up, and we are still headed up, we believe, see large gains in the early years of ownership.  Although you could also read the above to mean that you should buy anywhere, which is probably also true, there is more to gain in our region, since we began with such depressed prices.  Some of you may remember when those relocating for work got sticker shock when they got to Connecticut, even in our area.  Now many buyers have to spend extra, if they want to roll over all the equity they had in a previous home elsewhere.  It stands to reason that there should be plenty of gain left for those who jump into the market soon.

As the stock market reacts to Biden’s proposals for economic stimuli, think about real estate as well.  Americans in 2020 paid down a great deal of credit card debt, because they weren’t going out and spending money.  Why not use those better credit ratings, and savings, to buy your dream home now?  If you are a seller, there is no reason not to sell now, since you will be buying in the same type of market.  You will be getting the same gains on a new home.  Those who have been meaning to downsize should look to do so now.  Spend these last few weeks or months before the vaccine decluttering and making plans to move.  You will be glad you did!

Are We Headed for the Roaring Twenties Again?

 Residential real estate is booming right now, with only supply as a limiting factor on sales.  Now that the vaccines are in play, and 2020 is behind us, what's ahead of us?  I read one commentator's prognostication that we may repeat what happened after The Great Influenza 100 years ago.  And that turned out to be the Roaring Twenties.

We aren't likely to see Prohibition again, or probably flappers, but we may be in for the dizzy partying and mad optimism that characterized that decade.  I think all of us expect that we will be headed for distant places, or sports arenas, or at least crowds somewhere.  While old traditions never come back exactly in the same way, commercial real estate, and even office space, may enjoy a revival.  

All of that points to using the last few months of winter, and isolation, to plan, and execute, your real estate activity for 2021.  You may be able to attend open houses by this summer, but will you want to do so then?  Won't you want to be on vacation, or at the beach?  This is the time of year when people search for real estate on line, which makes sense.  Now that we've figured out the logistics of buying and selling with little or  no personal contact, it can also become the season for transacting.  

The desire for outside space, home offices, personal gyms, and kitchens made for cooking won't disappear.  All of us plan to hang on to some habits from the pandemic.  Here's our chance to set ourselves up for the best summer/fall ever!  You can buy now and renovate, renovate now and sell in the spring, finance a second home that can be a retreat or a refuge, or even build your dream house.  

This is a very special time in the economy, where the stock market is high, as is real estate, while people lucky enough to be employed have disposable income from activities they cannot pursue in isolation, and interest rates are historically low.  All of these factors add up to the perfect time to upsize, downsize, expand, acquire, and enjoy your living space.  As we head into the last few months of being so careful, let's use them productively.  A bright future can be seen at the end of the tunnel.  Act now, and enjoy for years to come!

Elections and Real Estate

 Elections, especially presidential elections, are good for real estate.  It's clear how having the economy strong helps the incumbent to stay in office.  It's not always clear how that can be done, although lowering interest rates is always helpful.

This year, interest rates are already very low.  It's still true, we think, that this time of year is when they are lowest, so it's rarely a mistake to buy or refinance now.  The uncertainty of an election also can make it easier to buy when others are not taking chances.  During this particular season, the stock market has been volatile, meaning that real estate looks safer in comparison.

In Connecticut, we have always associated fall with beautiful colors and changing leaves, but we also see it as a time of renewal.  Crisp air brings the return to school, and often gives people a spring in their steps, after a summer of humidity and heat.  That can be a spur to increased activity, and a return to normal days and weekends at home, perfect for looking at real estate.  

We find that very early morning is a busy time on our website, and cool, dark mornings are perfect for surfing the web.  Why not curl up with an iPad, a cup of coffee, and some new listings?  Then arrange to see them this weekend!

For sellers, we would again remind you that this fall is not like others--the market is still busy.  Just blow those leaves off the driveway, put some pumpkins on the doorstep and some cookies in the oven, and open your doors for buyers to visit.  You can still be in your new dream home by the end of the year!

Five Months and Twenty Nine Days

In my last blog post, I wrote about houses under two million on the Shoreline that were flying off the market.  I speculated that it had to do with the low prices versus perceived value, the stock market recovery, and the length of time since the last hurricane.  All of those things are true, I believe, but I also think that the baby boomer migration may also be a factor.

Baby boomers are turning 65 at an incredible clip, and many of them are retiring.  We know that the taxes, especially the estate tax, in Connecticut, means that many of them here are changing residency to other states.  Although that entails buying property in other states, it doesn't preclude them from buying here also.  When they sell the big McMansions, who's to say that they aren't buying waterfront property for the summers, where their extended families can gather and spend quality shoreline time?  It makes sense.  They want places where their children and grandchildren will want to visit on vacations and weekends, and the prices are attractive enough to be compelling.  They just have to spend six months and a day somewhere else.  And winter is a great time to do that, so it all works out well.

What will happen in the future?  Some of those families will keep those houses for generations, as long as taxes don't make that improbable.  Let's hope that we at least keep people spending their incomes in Connecticut for the warmer months, if they continue to go south in the winters.

Reaping the Rewards?

Now that the stock market has started to rally so strongly, maybe it’s time for people to take what they’ve made, and buy real estate instead.  In our region, prices are still very low, compared to even twenty years ago.  We used to have average home prices well above the national average, so that job recruits moving here were worried about finding affordable housing comparable to their previous homes.  Now, we are very close to the national average, and we haven’t gone up, in some areas, enough to cover the declines of the last decade.  Commercial prices have been bumping along, also not moving up over time.  Some industrial buildings are at prices equal to those of years ago.  While some towns have a shortage of smaller commercial spaces, others have empty big box stores, many of which could be repurposed.  We are very short on affordable housing in our region, and the gap keeps growing, as rents continue to rise.  Even as housing prices for homes have declined, rents have doubled, and many tenants are paying a percentage of their incomes for rental units that is considered to be onerous.

 

What does all this mean for buyers?  Real estate is, and always has been, cyclical to some extent.  Through the boom  years, we would say that what goes up, must come down.  Now it seems that the opposite should also be true:  What went down, will come back up.  There is still an opportunity in our area, which isn’t true in much of the country—especially the coasts—to get normal appreciation on purchases, given the current state of prices.  We know that investors have been increasingly drawn to our state, because of the high prices in Boston and NY.  Why would locals not invest as well?  While we’ve been reading about the woes of Connecticut, others have been coming from out of state and out of the country, and buying and buying.  With our deeper knowledge of the local market, we should be able to do better than they could.  So let’s make a resolution in 2019:  Buy local!

Have You Checked Your Real Estate Portfolio?

Given the current volatility of the stock market, many people I know having been talking to financial advisors, and checking regularly on the value of their stock portfolios. Although I subscribe to a different philosophy--don't check what you can't do anything about, so only look if you are planning to make changes---there are certainly many reasons for knowing the approximate value of your holdings.

Of course, your net worth also takes into consideration the value of the real estate you own.  So, when making financial decisions, it is sensible to know what is happening to the value of your real estate, even if you are not planning to sell in the immediate future. This makes me think that there are lots of people who are going to wonder what their properties are worth, and what percentage that would be now of their total holdings. 

This is a service we provide, and I encourage you to call your agent to see what property values are doing in your neighborhood, or check our website for information. Who knows?  Since real estate is tangible and limited in supply, you might even decide to buy more!

Do the Math

There is a famous aphorism that says that there is no certainty in life, except for death and taxes.  Taxes turn  out to be a big factor in the purchase of property, although we don't really see the certainty involved.  Yes, taxes go up over time, but do they go up at the same rate in every city and town?  Are they phased in the same way everywhere?  Are the same services included?  Are the school systems comparable?

People buying property care a lot about what the taxes are, since what they are really basing affordability on is the amount of the monthly payment of mortgage, interest, insurance, and taxes.  While they may know the first two calculations, if they get a fixed-rate mortgage, they tend to overvalue the current information available, and overrate the problem of uncertainty going forward, about all kinds of things.  For instance, if you take money out of your savings to purchase a home, and those savings were in the stock market, what are you giving up as an alternative return?  You don't know what the stock market will do over the long haul, although you do know that, like real estate, it's generally cyclical.  If you buy rather than rent, will the price of your home increase over the period that you own it? Again, you don't know, although that is usually true, especially if you hold it for a long enough time, and if you buy when prices are not at a peak.  Will your housing needs remain stable for the foreseeable future?  "Foreseeable" would seem to imply that you know what they will be, but life has a way of throwing curve balls, be it a new job, an illness or injury, another child or children, an aging relative, or any number of other variables.  You can't know up front what the market will be like when you sell.  If you wait to buy, will prices and mortgage rates hold steady?  Although we can't know, it's not likely, especially if you wait for a long time. How quickly will rents rise, especially in New Haven, the country's tightest rental market?

I could go on and on, but I've made my point.  So, what's a person to do?  One of the best things I learned in business school was how to make a decision tree.  Since this column does not include a tutorial in econometrics, I'll simplify.  Make a list of the uncertainties, then put them each in either the "Buy Now" column, or the "Buy Later" column, depending upon which way they are each likely to lead you.  Try to quantify the general risk of each one in monetary terms (e.g., interest rates go up 1% vs. taxes go up 8%), and you will get an idea of what the math tells you.  You should, of course, factor in your own particular risk aversion factor (that is, how much uncertainty will bother you), but the numbers will tell you something.  If you find yourself arguing with the numbers, you will be telling yourself something that way, because you will be revealing your gut instinct.  Whatever you decide, it's time to go with that, and act.

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.