For some months, REALTORS have been fretting that buyers are “sitting on the sidelines” waiting for the market to “hit the bottom.” We constantly hear news reports with interviews of “savvy” sellers who are trying to “time the market just right” to get the most for their home’s sale while getting a “bargain” for their next home. Timing the market – to sell high, and buy cheap – is a strategy for buying and selling stocks or bonds.
But when it comes to housing, it’s the entirely wrong market model. It’s time REALTORS started saying so.
One of the reasons the housing market crisis is dragging on for so long is clearly the glut of homes on the marketplace. With rising foreclosures and builders who went crazy in the last decade, some markets are saturated with excess housing units. Many are brand new units, which presents a clear problem for sellers of exisitng homes, since many first-time buyers are still from Gen X and they purchased 50% of all new constructions during the 2005-2007 boom period. Buyers should be coming off the sidelines en masse because excess supply is doing what it rightly should: depressing house prices. And like any commodity, the time to buy is when the price is low.
The problem lies in the understanding most buyers have of “buying low and selling high.” Their only experience to it, in most cases, is from financial news programs and their 401k investments. Both focus on stock and bond market purchases – not housing market purchases. Add in a few years of media stories about how some people sold their tiny 1000-square-foot condos for $1 million dollars, even though they only paid $400,000 for them (in 1979) and suddenly the public thinks they have to “make money” in every real estate transaction.
That’s a fundamental mistake and it can only be corrected by the real estate professionals who know better.
Most real estate “profit” is earned through equity investment (ie., paying your mortgage down) and appreciation over time. It is not made by “flipping” a home bought in a down market for a higher price in an up market. Very few people can do this successfully in the real estate industry – even when they do it “professionally.” To expect the average American family to figure this process out and be successful at it is why so many “no money down, sub-prime mortgages” are in failure today. Too many buyers tried to be successful speculators; and the odds were against them all the time, regardless of the media darling stories.
Changing this mentality – that you’re supposed to make a profit each time you buy or sell a home – can only be done by the real estate industry. The media will continue to run shows like “flip this home” or “how much is it worth now” because it’s fun to watch people rehabilitate shabby shacks. But rarely do those homes actually say what the house later SOLD for; they only say what the REALTOR “would list it for” which is virtually meaningless because most agents are unskilled at home improvement appraisal. Worse, just because the REALTOR would list it for that on a television show doesn’t mean the sellers got a “profit” on the sale. Makes you wonder what the real facts are for those programs: how many of the “flip” or improvements-made homes actually sold for a profit in their actual marketplaces? We are never told, but the public is left with the idea that everyone is always making a profit when they sell their homes.
Buyers sitting on the sidelines waiting for the “bottom” is a sign that buyers think real estate is like “day trading” stocks. They have to watch the internet, fingers-poised on their mouse to click-and-buy when the timing is just right. Why? Because nobody is telling them better. And today’s buyers are younger, and mistakenly think that their access to technology gives them access to investment wisdom.
Even the National Association of REALTORS “It’s a Great Time to Buy” campaign skirts this issue. The fact is, it’s always a great time to buy a home, if you’re doing it for the reasons that most people every buy a home: they want to build equity; they want more space, a better neighborhood, a certain school system, better work commute, lower crime, lower taxes, and so on. Those are the reasons MOST buyers have always bought a home. With a dash of common sense a la Franklin, the frugal American home buyer never sat on the fence waiting for the market to “bottom out to create the maximum future profit margin on their sale” because in the meantime, they continued to lose money waiting for their magical moment. Sitting on the sideline has consequences. Paying rent rather than building equity. Longer communtes means less family time, and higher gas costs. The cost of keeping your kids in a poorer school system – incalculable. Try to get those kinds of “returns” on your next home purchase and you’ll finally see that “gaming” the market is dangerous and destructive for nearly every buyer.
REALTORS need to become adept at communicating this message to buyers. They need to quote the top reasons people cited for buying a home last year: The desire to own a home, upsizing or downsizing space, better neighborhoods and better commutes. Not the desire to “create capital gains” when they sold it again in the future: because most people don’t know when they’ll sell again. They LIVE in their homes. Even if the market SOARED, would they sell? Are they willing to pull their kids from the schools, find cheaper housing further away and increase their commute, uproot their friends and family network, just to realize a “gain” on an “up market” a few years after they purchased their home for “a bargain.” Not likely.
People live in their homes. They trade stocks and bonds readily and quickly because there is no emotional attachment. Moving your home is stressful, emotionally complicated. You can’t just flip your property when the local conditions rise.
That’s why sitting on the sidelines is a psychological battle. Not even a pricing problem: If inventory is overpriced, buyers don’t have to wait for sellers to “lower it” before jumping off the fence. The buyers simply make a lower offer, and back it up with the list of comprably available homes at lower prices (or newer features, in the case of the new construction glut). Sellers always understand that the buyers set the real price – because sellers are really buyers, too. While they are trying to sell their home, they are looking for their next house, which makes them understand that the seller-fixed-price is a fantasy.
In fact, since sellers are really buyers, maybe that’s the first place for REALTORS to start bringing sanity to the buyer marketplace. Help sellers see that it’s the “wrong game plan” to try to make a “profit” on the sale of their home. Distressed sellers know they will lose, mostly because they know they took the wrong no-money-down-interest-only-finance gamble and lost. Yet the vast majority of sellers have equity and appreciation in their home.
Which means that most home purchases acted like long-term investments; and have likely paced or slightly beat inflation. Most seller/ buyers will make a little more than what they paid for it. But not a stellar, news-making, friends-and-family-bragging killing. Especially for Gen X sellers who represent the “move up” seller/buyer right now, that’s going to be a hard sell, because they are so status-conscious. Ironically, that might be easily resolved by a REALTOR community that’s about 20 years older than the average Gen X seller. Here’s a chance for the Baby Boomer REALTORS to teach – one more time – their Gen X children how to manage their money.
And at the same time, return some sanity and stability to the housing market.