Sell for the present, but buy for the future
Originally appeared in Hills Publications, April 1, 2005 and ANG Newspapers, April 2, 2005
With home prices reaching unprecedented heights, we may ask: Is this the top of the market? If not, how long can prices continue spinning skyward? Sampling Multiple Listing Service data for one popular Oakland zip code, I found the median price of a home has almost tripled since this seller’s market began in January 1997.
Sellers want to know, in the foreseeable future, when would be the best time to sell. Buyers ask if they should purchase before prices rise another notch, or wait until the anticipated “market correction.” Looking back at local real estate history plus a recently released “Risk Index” provides some clues to guide our expectations.
This cycle is different
2005 began in a similar fashion to years since 1997; a multitude of buyers is chasing a small supply of homes for sale. This, combined with fixed interest rates remaining below six percent, has caused bidding wars. In a number of instances, more than 40 buyers vied for one house.
Defying previous three-year cycles, we are now in year nine of our current seller’s market. In 1996, the median price for a property in zip code 94602, which includes Glenview, Oakmore, Dimond, Laurel, Lincoln Heights and part of Redwood Heights, was $203,500. For 2004, this number was $565,000. Continuing this trajectory, the median price for the same zip in the inventory-starved first quarter of this year reached $602,500.
Signs of change
Are we at the beginning of a change in the market, or will demand and prices continue their incessant rise? Over 50 percent of active Realtors began their careers in 1997 or later and have not experienced a major market downturn. Even long-time veterans know the difficulties of predicting a paradigm shift. Predicting and recognizing, nonetheless, are two different concepts. Seasoned professionals, having seen it before, will know the signs of change.
History and gravity teach us that nothing on earth can go up forever. Despite this, barring an unexpected catastrophe that would undermine consumer confidence, home prices are unlikely to suddenly stop increasing or, even, decrease. The time will come, nevertheless, when this seller’s market will have morphed into a buyer’s market.
Most likely, a combination of significantly higher mortgage rates, inflation and local unemployment will combine to finally derail the long real estate ride. In addition, the unrelenting problem of higher and higher prices also increases property taxes and insurance. When houses are affordable to only a handful, decrease in demand will follow.
In past downturns, it took at least a year for some salespeople and their sellers to accept the declining market. Competent agents figure it out more quickly than their clients as listings sit unsold, even after price reductions. Before the market transformation is generally acknowledged, prices stay higher than warranted because sellers and less savvy licensees are relying on comparable sales from three to six months previous that no longer apply.
In this scenario, sellers commonly insist their house is worth at least as much, if not more, than the house across the street that sold not long ago. Unfortunately, once the market has switched, even relatively recent comparable sales may no longer be relevant. In spite of this, to get listings, agents may work with overpriced properties.
As this trend continues, homes take more time to sell and may command lower prices than before. Inventory builds up, thereby putting increased downward pressure on prices. It takes six months to have sufficient data to quantify the new market direction. Six more months on the same course will validate it is not a temporary aberration. As a testament to avoidance of reality, in the 1990s downturn, prices on many properties remained high for three years after the market change began.
Sellers should appreciate today’s opportunity to sell for the maximum. Taking this good fortune for granted, or assuming it will last indefinitely, could be an expensive miscalculation.
Buyers, on the other hand, need to buy for the future and not try to outguess the market. They must recognize that buying soon could turn out to be the “top” of this market. Buying for the future means understanding that real estate, when purchased for the long term, is an incredibly safe investment.
Those who bought in 1989, at the previous top of the market, saw, in the 1990’s, their equity decrease. Many sold for a loss during this period. Those who held on longer saw their homes’ value increase substantially.
Risk assessment study
The PMI Mortgage Insurance Company just published an interesting analysis of economic and real estate trends (www.pmigroup.com). They are predicting a relatively minor increase in mortgage rates “to range between 6.2 and 6.3%” in the next twelve months (2005).
This report ranks 50 Metropolitan Statistical Areas (MSAs) in descending order of greatest likelihood, in the next two years, of a housing price decrease. “An index value of 100 implies a probability of falling house prices of 10%.” An index value of 200 suggests a 20% chance that home prices will decline.
“San Francisco-Oakland-Fremont, CA” is number three on the list, with a 479 risk index, equating to a 48% prospect of lower house prices in the coming two years. The only two higher MSAs are the San Jose area with a 530 risk index and Boston with a 533.
Guessing when the market will turn is daunting, even to sophisticated practitioners. Predicting the exact date is less important than accepting that it will happen because real estate inevitably follows a pattern.
As a seller, be thankful for the present opportunity. Your home is a limited commodity that could command a record price. At some future point, when the market has turned, today’s value will be irrelevant.
As a buyer, think long term and do not be concerned about when the market will shift. Over time, you can expect prices to increase. Even so, bear in mind the determinants of value. Location is always the key, but there are numerous variables to consider.
As always, having the right agent can make all the difference for you. Choose carefully!
Approaching the Peak
Prices Up, Market Shifting