The Housing Market
Remember Dusty Baker, the realtor featured in last week’s “My Corporate Life” post? He’s back again with some great insight into the housing market. If you have any questions about real estate, feel free to reach out to Dusty here!
The Current Market – Skipping Along the Bottom
Since people often ask me what is going on in the housing market and how it affects the economy, I can only assume that the majority of people reading this are wondering the same thing. The housing market affects the world economy drastically for a few reasons. One reason is simply that homes are very expensive compared to anything else we buy. The Tic-Tac market will never affect the economy because people would have to buy billions of those little mints to have any dollar significance. Homes, on the other hand, are arguably the most expensive asset in the world. Another reason is the number of people involved in the housing market. Not everyone buys and sells $500,000 worth of T-bills, but the majority of people will, at one point in their lifetime, spend $500,000 (or more) on a home. The third reason is government. Most publicly starting with Bill Clinton, the government likes to help people buy homes. Between the Federal Reserve pumping money to banks at laughably low interest rates and government policies which still, to this day, help with sub-prime loans, money is easy to come across to purchase a home.
Where did this take us?
Well, the fairy tale of “wouldn’t it be great if everyone owned a home” led to just that – everyone owning a home. Except the majority of people were only home-owners for about 6 years, and are now giving their homes back to the bank. The market is flooded with REO (foreclosed) and short-sale listings; and after a recent $26 billion agreement between Bank of America and the U.S. government, the number of bank owned properties on the market is forecasted to increase 4 fold in the next year.
When Will We Bounce Back?
Right now, at least in southern California, we seem to be bouncing along the bottom. I personally think we’ve hit rock bottom and are now skimming across, with little 2% jumps up and down. Other areas of the country, parts of Arizona for example, may certainly continue to drop. The difference is that in Santa Barbara there is no new construction – nowhere to expand. We are nestled between a mountain range and the Pacific Ocean. Our area can only get so cheap, because at a certain point you have to call a spade a spade; and perfect weather and ocean views are one heck of a spade in real estate. Parts of Arizona, though, were being built out and out, further away from the center of town because 1) real estate was selling like hot cakes so why not build and 2) they were in the middle of nowhere and the sky was the limit to expansion. How that affects the real estate is simple economics: demand. If there is no demand to live 45 minutes outside of a city in a half-built community, the property is essentially worthless. That is why there are many “ghost” towns in Nevada and Arizona (where the housing market took the greatest hit). In these places, banks are actually allowing people to live in their homes without paying their mortgage, because an occupied home is better than a vacant one (in terms of upkeep of the bank’s asset).
Should I Buy?
It’s hard even writing this knowing how biased I am on the matter (being an agent), but I absolutely think now is a great time to buy. If it gives me any credibility at all, I am currently representing good friends in purchasing a home – and I would never put a commission check over good friends. It is a buyer’s market: the market is flooded with listings, listings almost always sell for less than asking price, and banks are essentially giving money away at the current rates. If I had the money, I would buy everything my greedy little hands could get their palms on.
Can I Make Quick Money?
Clients always ask me, “If I buy now, what will this be worth in 3 years?” Answering that question is essentially asking for a lawsuit in the future. I have no idea what will happen in 3 years, and I have no intention of taking on that kind of liability. Having said that, I tell them that I NEVER see real estate as a short term investment. If you plan on “flipping” a house (quick note: despite the TV shows, more often than not people lose money flipping homes – you have to be very well connected and intelligent to succeed) or buying just for a few years and then selling, you better hope you are timing the market right. I would personally never purchase a property that I didn’t expect to hold onto for at least 10-15, minimum. With that kind of mindset you can almost never lose. I would dare you to find any 15 year segment in the housing market where you would lose money after that long of a time period.