Well, thank goodness for someone who understands the markets – other than the lopsided “woe-is-us” viewpoint of the National Association of REALTORS (NAR). In fact, when it comes down to it, maybe we should ask more Wall Street analysts and hedge fund managers to really monitor the markets for us. Here’s the good news, from the Wall Street Journal:
The Housing Crisis Is Over
By CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now….
Apparently, the real estate market is better understood by measuring housing inventory than simply hand-wringing over dropping prices. Since bubble-pricing had nowhere to go but down, then the true measure of the market cycle is better monitored by measuring absorption rates rather than price swings. This makes sense because commodity prices rise and fall with the volume of sold; not the other way around.
Of course, in REALTOR mentality, the reverse is true: if prices rise, the number of homes is expected to rise; when prices crash, REALTORS can’t sell homes – not because buyers don’t like a bargain, but because too many REALTORS don’t know how to put homes on the market at the right price. And the right price is always determined by the buyer, not the seller. As long as REALTORS take their pricing orders from the sellers, they won’t recover their sales volumes. Once they understand that their job is to create a transaction, not represent the pricing strategy of an unskilled seller, they will be back in the saddle. Commodity (stock) brokers have always understood this: If a stock holder calls and asks to sell their shares at 20% above the current selling price, the broker attempts to explain to them how a market works. If the seller insists on an inflated price, the broker hangs up the phone. Only REALTORS agree to take on the expense and waste their time trying to sell overpriced commodities – because they agree to run their business according to the seller’s insanity, not the buyer’s authority.
So what are buyers telling us? Here are the relevant selection from the article (although you should read it all because it is quite excellent:
The boom made housing unaffordable for many American families, especially first-time home buyers. …Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. …
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months. [emphasis added]
…New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months. …
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market. [emphasis added]
So, we’re already way on our pat to another “tight” market. Will that mean prices will soar again? Not likely – the next round of tight markets will more likely be “throttled” by tighter credit and lending practices (if we can keep FHA from creating the next bubble, instead of the Fed). Non-government backed loans will keep the lid on price inflation, even while the Fed continues to devalue the dollar and cause other commodities (food, oil, electricity) to soar. In fact, because the Fed is intent on creating and maintaining rising inflation rates, housing will be the least likely item to rise in price, since a substantial amount of buyers’ disposable income will be tied up in monthly expenses – limiting down payments. Yet another reason to keep a lower ceiling on loan limits, so that buyers can’t get themselves into “more home than they can afford” once again.
How should REALTORS take advantage of this clear evidence of the slow but steady upswing? Here are a few ideas:
- Stop lobbying the government to reflood the credit markets with cheap money. Remember, REALTORS can work for buyers just as easily as they can for sellers. And every deal needs both: so pricing out buyers by re-heating the price markets will only stall the recovery. Sellers can pine for the good-ol’ days all they want: Buyers understand they can always wait it out, or simply purchase from the large quantities of unoccupied foreclosure and new construction markets. REALTORS need to keep their wits about them and lobby for real market forces, not free lunches.
- Start creating technology and market efficiencies that make it possible to seller “lower priced” homes – which yield lower commission incomes – at profitable margins. Why do REALTORS need housing prices to rise? Because so much of their current business practices are bloated, cost-heavy and inefficient. Large office spaces mean large rents, even when agents own laptops and could work from the road. Newspaper advertising continues to suck up cash flow weekly, even though every scrap of evidence shows it is useless for marketing particular properties. Wasteful pay-per-click marketing online creates the illusion of generating leads, when all it really takes is a phone call or email to a past client to get a strong referral from old clients to potential new clients.
- Train agents to do their job. Or start hiring sellers, if you prefer their pricing strategy to your agents’ skills. Or start firing both (untrained agents + unrealistic sellers = financial disaster). Real estate brokers need to decide if they’re running an independent contractor babysitting agency or a business. They have to decide whose bottom line matters – their own (and their agents’) or their sellers (which, if they are unsupported by market facts, aren’t really bottom lines but fantasies). If brokers and agents can take away one less from the last three years, it’s this: The market does not care if you “want to help people” or run your business on wishful thinking. It hammered Bear Stearns, and it was bigger than anyone in the real estate business. Wiping aside silly-minded brokers and agents will be nothing to the marketplace, and perhaps welcome to many buyers who look at overpriced inventory and ask: How can they not understand it?
So, great news! The market is on it’s way back to a normal, healthy, consumer-driven environment. It’s up to REALTORS to figure out how to play in the game. Hyped values and free money isn’t coming back for a long time – so now is the time to figure out how to use sales, marketing, technology and consumer research to build the next generation of real estate brokerage.