Real estate, like any realm of human endeavor, is subject to its own myths and beliefs, some of which are wondrously true and others of which are dangerously false. Here are five of the latter that should be debunked:
Myth #1: The housing market has “collapsed.”
Fewer homes have been sold overall throughout the United States so far this year compared with the last few years and the slowdown has struck harder in some markets than others. Yet plenty of people have bought a home this year. In September, existing homes were sold at a pace of 6.18 million units, according to the National Association of Realtors, while new-built houses were sold at a rate of 1.08 million units, according to government agencies. Those seasonally adjusted and annualized figures aren’t a “collapse” of the housing markets by any stretch of the imagination.
Likewise, the rapid pace of home-price appreciation has come to a halt and even reversed itself in some markets. The national median home price for September was $220,000, a retreat of 2.2 percent compared to the prior-year period, though the pain has been more severe for new-home builders. These trends might be characterized as a price “correction,” but “collapse” is no more accurate than “bubble” ever was. And it’s important to realize that the median price is influenced not only by the overall level of prices, but also the mix of homes sold. More sales of lower-priced houses lowers the median price even if individual houses were sold for more money.
Myth #2: House prices are “too high.”
The lament that house prices are “too high” has no basis in fact. Prices are never “too high” or “too low,” rather, they are what the market dictates. When demand at a given price outpaces supply, prices rise, and when supply at a given price expands faster than demand, prices retreat. The price of any particular house is determined by negotiation and agreement between the seller and buyer.
What’s more, home prices depend largely on location. A mansion on the California coast might be worth millions, but while a median-priced home in the Midwest costs just $169,000.
The reality that many people can’t afford to buy certain homes or indeed any home doesn’t mean prices of homes are “too high.” Homes are an emotional purchase; market psychology is a factor; and some sellers set fanciful asking prices, but sales prices are still based essentially on the economics of supply and demand.
Myth #3: Everyone should own a home.
Real estate professionals often believe owning a home is inherently better than renting, regardless of whether the homeowner can make the mortgage payments and shoulder the other expenses of home ownership without hardship. Creative loan products aren’t evil, but foisting esoteric loans on people who don’t understand the risks is ethically questionable at best.
The notion that falling interest rates and rising home values will protect people from those risks is dicey as well because rates can — and do — rise and values can — and do — fall. Real estate pros should encourage people who want to own a house and understand and accept the risks, but should caution and counsel those who are riding a wave into disaster. Home ownership simply isn’t right for everyone.
Myth #4: Real estate means easy money.
House flipping can be a lucrative business due to favorable capital gains tax laws for owner-occupants. But flipping for profits isn’t “easy money.” Rather, it takes an uncanny ability to time the housing market, a lot of hard work, the necessary know-how and experience to hire competent contractors, and a willingness to weather considerable disruption to one’s home life. An unanticipated sudden shift in the market can turn a healthy profit into a huge loss. Hefty transaction costs also diminish the potential returns of rehab-and-resell schemes.
Myth #5: Realtors earn big bucks.
Rising house prices, the proverbial 6 percent brokerage commission and the high-rolling lifestyle of some top Realtors have enticed more than a million people into the business. Some achieve success, but many close a few deals and then come to realize the business involves cutthroat competition, high operating costs and commissions that are divvied up into surprisingly small pieces. Realtors can earn a decent living in a difficult business and may be able to afford nice homes and luxury cars, but only a small percentage truly earn the mythical “big bucks.”
Marcie Geffner is a real estate reporter in Los Angeles.
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