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Finding Bottom: Where the Market Will Turn Around

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By George W. Mantor

home-web1RISMEDIA, April 28, 2009-The end is near. When exactly, is hard to predict. It is also hard to predict what that end will look like. However, it is hard to escape the sense that some things will change forever. But what? Will law and order, if you can call this that, descend into chaos? Will nations withdraw from the global economy and seek self-sufficiency and protectionism? Will complex monetary systems that allow insider manipulation be replaced by barter? Will Brad and Angelina ever tie the knot? These are the great questions of our time.

Now, I bring up Brad and Angie, not to name drop or be forever connected to them on the Internet, but because whenever I see a picture of them, and you can’t not, I always imagine an infant wailing in the background. In fact, everywhere I go I’m tripping over strollers, dodging toddlers, and trying to escape the ear piercing shrieks of a full-on baby boom. It turns out 2007 was a year on par with the fifties, which illustrates an important point…life goes on.

From Bristol Palin to Nadya Suleman, there are a lot of women of child bearing age. According to the US Census Bureau, “…the Nation’s population is projected to increase to 392 million by 2050 — more than a 50 percent increase from the 1990 population size.”

And, what do growing families need? Take Nadya Suleman for example, she’s unemployed, but when her brood swelled to fourteen, she went out and bought a bigger house.

The population growth of the United States will, as it frequently has in the past, snap up all surplus housing that currently exists in growing regions. When that happens, prices will rise and builders will have sufficient incentive to return to the market in some, but not all regions. But first, selling prices must rise to the level that returns the cost of construction and a profit worthy of taking the risk.

America has a lot of problems to solve and only time will tell if we made the right choices. And, while some of us are totally paralyzed waiting for the next dispatch of really bad news, others must get on with their plans. The summer buying season is fast approaching and buyers continue to wrestle with uncertainty.

It’s no secret that qualified potential buyers are sitting on the sidelines waiting for some indication that real estate prices are at, or near, their bottom. While increasing sales prices are an obvious sign, buyers who have a strong desire for a wide selection at the best possible prices will need to act before that occurs.

For many potential buyers, it isn’t so much about getting the lowest possible price as it is feeling secure that they made a wise investment. If they plan to stay for 10 years, it matters less what happens in the next two years to sales prices than it does where they spend those two years. There are real and tangible benefits to owning where one lives. One we keep overlooking is satisfaction. I love my home, and I love owning it and doing what I want with it.

Even so, most potential buyers will need some assurances that things won’t fall much further. And, their will be signs. In the fall of 2005, with inventory low and prices at an all time high, I advised listeners of my radio program that if they intended to cash out, now was the time. I told them that we were short of houses and they could get top dollar with a quick sale. While I did not say that we had reached the absolute summit of sales prices, I knew we were close.

In finding bottom, here are some things to consider:

1. Local employment

One of the factors affecting the selling price of real estate is local employment.

At first, all the talk of the housing crisis was about over-leveraged consumers. But, we have now moved to a more critical phase. If you do not have a job and you have little to no savings, you can’t make a mortgage payment, period.

Nor do I believe that housing brought down the economy. It’s the other way around. Housing is benign. People buy houses, start families, and trade up when they are employed. And, because jobs are disappearing so fast, even those untouched by job losses are fearful they could be next.

What brought down the economy was fraud. Massive waves of, as yet not fully disclosed, fraud did this to us. ENRON, WorldCom, AIG, Tyco, Halliburton, Arthur Anderson, Madoff, the legal fraud perpetrated by greedy CEOs; fraud by their accounting firms, loan fraud by sophisticated organized crime from both in and outside the country, fraud by elected and appointed officials, and a bunch of garden variety fraud by small timers brought down the economy. It was a whole sale looting. They got a lot of our money and they burned through our prosperity like drunken whores, and now we are forced to bail them out. But, this too shall pass.

When the job trend reverses, when we begin to create a few hundred thousand jobs over a few months, an enormous pent up demand will return to a limited selection of good housing stock. At the moment, one in seven of the nation’s houses is vacant. Many are in various stages of disrepair, functionally obsolete, or located in the wrong place.

Unemployment filings will likely continue to fluctuate for a while and are sometimes more indicative of changing industry dynamics than the actual employment health of a local community. If your region is anticipating stimulus funds or has modern growth industries that will be developing jobs of the future, your employment picture should start to improve.

Local communities’ recovery time will vary, reflecting employment conditions. Some will never recover at all. Apparently, there is no bottom in Detroit where reports have surfaced of homes selling for as little as a dollar. But, Detroit has been in decline for decades. In the 70′s, so many Detroiters moved to Windsor, Ontario that there was a common bumper sticker which read, “Will the last person leaving Detroit please turn out the lights.”

Detroit has been losing jobs for a very long time, and the recent woes of the American automobile industry do not bode well for the future. But, in other places, where contemporary industry is growing, like Seattle-Tacoma or the Silicon Valley, the bottom is closer.

2. Return to historical baseline of sales

To understand the market dynamic, it is important to understand “normal” for your community. Every month, a finite number of residential real estate transactions occur. In a down market, the number might be as few as half the number of sales during a boom market. But over time, it tends to average out.

Determine a monthly baseline of sales for your community. Obtain a history of sales activity for the past ten years. This will give you a measure that includes sufficient market ups and downs.

In a recovering market, there will be a return to the historical baseline of monthly sales activity.

3. Reduction of available inventory

Just as there are historical baselines for sales activities, there are also similar baselines of available property offered through builders, the MLS, and occasionally, private sellers. Simply tracking the number of listings through the MLS will give you a clear picture of the direction of inventory.

Knowing the baseline of sales activity, you can determine how many months of available inventory are currently in the local market. If inventory is shrinking, the bottom is near.

4. Relationship to cost of new construction

In many communities, sales prices are actually below replacement cost. And, that in itself suggests the bottom is near. If builders cannot recoup their costs and make a profit commensurate with the risk, they will cease building until sales prices begin to rise. Recognizing that prices are actually starting to rise and that resale inventory is shrinking, pent-up demand will pour back into the market and here we go again. Remember, all the people not buying these days will combine with normal baseline demand and overwhelm the market.

5. Hidden price stabilization

Recent reports of sales prices often seem to assert that these sales prices are representative of the value of housing in general. First, that’s just what sold that month. Since distressed properties make up much of the market, it stands to reason that those prices would reflect smaller square footage and a discount equivalent to the cost of rehabilitation.

Some homes are more desirable than others. What about those homes with extra features or those located in good school districts? Are their prices holding? If so, your community may be on its way to recovery.

For potential buyers, finding bottom is less important than knowing that it is near. While it is impossible, given our unprecedented circumstances, for anyone to say for certain when prices will begin to rise in each community, the buyer who knows the signs of recovery will already be settled into the opportunity of a lifetime. In growing communities, housing must and will return to the cost of replacement or new construction.

George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm. Mantor can be reached at GWMantor@aol.com.

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