Push home buyers off the fence now
Part 1: Capitalizing on new market conditions
By Bernice Ross, Friday, April 11, 2008.(This is Part 1 of a two-part series. Read Part 2, "If Trump and Buffett can do it, so can you.")
Many agents are lamenting about how bad the market is. Most people who were in business in 1998 will remember that it was a pretty good year. The National Association of Realtors is projecting that in 2008 there will be more than 5 million home sales or 10 million transaction "sides," the same number as in 1998. Assuming that there are approximately 1 million active Realtors today, that's 10 sides per agent.
The question is how can you capitalize on today's market conditions to increase your income in 2008?
1. Target active market areas. Regardless of where you work, there are some locations and price ranges that are more active than others. Watch the sales board in your office as well as the MLS statistics. Focus your marketing efforts on those areas that have the most business. If you do face-to-face prospecting such as door knocking, calling on for-sale-by-owners, prospecting owners of expired listings, or holding open houses, make active areas your first priority.
If you normally work the $400,000+ area and the sales are currently active in the $250,000 to $300,000 price range, shift your efforts there. Also, be sure to carefully monitor activity each month. If you observe a shift, follow it.
2. Put pressure on buyers who are negotiating by doing a simultaneous price reduction. Whenever you issue a counteroffer with a lower price, ask the seller to reduce the list price. When the buyers realize that the seller is lowering the price, it places additional pressure on the buyers to take action.
3. The best buyer's market in 35 years: If you use print or Web marketing, use your marketing pieces to proclaim, "2008—the Best Year to Buy a Home in 35 Years!"
Here's how to back up this claim: In April of 1973, mortgage rates were about the same as they are today. Since that time, we have only had mortgage rates this low during 2001 and 2002, the height of the seller's markets where there was little inventory. In the last two major buyer's markets, one in the early 1980s and the other in the early 1990s, the rates were much higher. When I started in the business in 1978, interest rates were at 9.75 percent, en route to 18 to 21 percent in 1980. In the early 1990s, the rates were hovering in the 11 to 12 percent range. Thus, today's buyer's market, with exceptionally low mortgage rates plus a substantial supply of inventory, is the best time in decades to purchase.
4. Show first-time buyers the cost of waiting. There are several different ways that first time buyers lose money by waiting to purchase. The first is loss of tax deductions. In most cases, people who lack a mortgage pay more federal and state income taxes than those who qualify for a mortgage deduction. You can use a mortgage calculator to illustrate this point. For example, assume that a buyer is currently paying $1,500 per month on a rental. If the buyer purchases a $300,000 property with $30,000 down and a fixed-rate 30-year mortgage of $270,000 at 6.25 percent, the buyer actually nets $24,262 more, assuming that appreciation keeps pace with inflation, the buyer owns the property for eight years, and is in the 28 percent bracket.
Another way renters lose money is through wealth accumulation, generally in the form of creating equity by paying down the loan and through appreciation. According to the Federal Reserve, the average homeowner between 1995 and 2004 had a net worth of $184,400, of which approximately $60,000 was due to home ownership appreciation. To account for the difference of $60,000 of wealth accumulation, a $200,000 house would have to decline by 30 percent. Thus, each year a buyer waits to purchase a median-priced home, they lose $6,000 in potential wealth accumulation.
An additional way that renters lose money is through increased interest rates. For example, on a $200,000 mortgage, assume that interest rates increase from six to seven percent. By waiting, the buyer's payments increase by $1,578 each year causing a total loss (in payments and wealth accumulation) of $7,578. If interest rates increase from six to eight percent on that same loan, they will pay an extra $3,221 per year resulting in a total loss of $9,221.
Using the numbers that clearly illustrate the costs of waiting to purchase will help to get many reluctant buyers to take action. If you need more help getting buyers to buy now, then don't miss next week's article.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
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Submitted by Michael Hamby on April 11, 2008 - 6:15am.
I totally agree with you on at least one major point:
3. The best buyer's market in 35 years: If you use print or Web marketing, use your marketing pieces to proclaim, "2008—the Best Year to Buy a Home in 35 Years!"
Here's how to back up this claim: In April of 1973, mortgage rates were about the same as they are today. Since that time, we have only had mortgage rates this low during 2001 and 2002, the height of the seller's markets where there was little inventory. In the last two major buyer's markets, one in the early 1980s and the other in the early 1990s, the rates were much higher. When I started in the business in 1978, interest rates were at 9.75 percent, en route to 18 to 21 percent in 1980. In the early 1990s, the rates were hovering in the 11 to 12 percent range. Thus, today's buyer's market, with exceptionally low mortgage rates plus a substantial supply of inventory, is the best time in decades to purchase.
So far this year we are well ahead of last years and even the previous years sales. While the market is contracting those people that are out there are serious. I am having fewer and fewer "tire kickers". When someone contacts me about selling their home, they are serious, and when I explain the activity in the market they price their homes correctly. We all know that the most important marketing tool is proper price.
Michael Hamby
http://www.callmike.org/
Submitted by Hank Perry on April 11, 2008 - 7:58am.
As usual, Bernice's comments are right on the money. Our market areas are micro-markets which vary street by street. The top agents are focusing their activity on the product which can be sold, not that which is oversold and in danger of being short. Also, to Bernice's point, there's nothing better to motivate a 2nd time showing to write an offer than a simultaneous price reduction.
Hank Perry
President
Empire Realty Associates
Submitted by Kathleen Kuhn on April 11, 2008 - 10:51am.
I have been involved in real estate since interest rates were 17%. Back then home inspections were new and smart real estate professionals began to use the home inspection as kind of a trial close to get buyers to make a commitment. Same concept can work today. Buyers today can use a home inspection to further negotiate the house price if defects are found. Tell buyers not to wait for sellers to come down even further on price and encourage them to go to contract with a home inspection contingency. Let them know that if the home checks out well, then they are getting a home in good condition and can feel good about the purchase. If the house has some concerns they can negotiate with the home seller based on noted deficiencies - which is easier to do than asking the seller for a lower price simply because the buyer "thinks" the house should sell for less.
Kathleen A. Kuhn
www.housemaster.com
Submitted by bob jones on April 11, 2008 - 12:27pm.
You should rename this article "Push buyers off the fence and into financial ruin". Deceitful marketing techniques are nothing new in the world of real estate, but they don't change the problem of the housing bubble. Too few buyers exist because prices are way too high and the fundamentals cannot keep this dead horse propped up. (I guess you forgot to include point 5: lower commission. Oops.)
This article is a great companion piece with the one published June 29, 2007, about why people should stop renting. Within that collection of amazingly inaccurate and deceitful information, the main assumption put forward was that prices will continue to appreciate. How in June, 2007, as somebody that works in the market that you didn't know that was certainly not going to be the case, I cannot imagine.
I'm sure those that followed that advice are just thrilled to have fallen in the red with their sinking property value. Is it your goal to ruin people's future, or is it just unintentionally poor advice?
Submitted by Bernice Ross on April 11, 2008 - 1:31pm.
Hmmm--so it's bad advice to tell people to buy real estate in this market. Warren Buffet, Donald Trump, and most professional investors are very active in this market. There's a reason that 90 percent of the fortunes in this country have been made using real estate.
Real estate has always been cyclical, just as any other market. If you bought at the top of the market, the good news is that in virtually every place in the country, time and inflation increases the value of your home. Paying down your mortgage builds equity. Paying rent does nothing but pay down your landlord's mortgage. Furthermore, a fixed rate mortgage means my payments are locked in for 30 years. I pay off my mortgage with inflated dollars. On the other hand, rent increases with inflation and you build no equity.
Yes we have had a major blip--driven by Wall Street's hunger for money and bad loans. A major part of the problem was not the demand--it was inability to obtain financing. The values are only down nationally by less than 1 percent according to OFHEO. With the new mortgage products and new loan limits at FHA, Fannie, and Freddie, look for a robust spring and summer. The demand is there and now the loans are available to meet it.
Real estate has helped millions of people pay for their retirement, paid medical bills for loved ones, and put their kids through college. To me, there is no better investment than owning your own home. Of course, each person has to make their own decision where to invest. My money is in real estate and it's going to stay there.
Bernice Ross
Submitted by bob jones on April 11, 2008 - 1:59pm.
"Warren Buffet, Donald Trump, and most professional investors are very active in this market."
These fat cats can afford to take a huge loss in real estate. They'll never have to worry about feeding their kids or paying the heating bill. Nice standards to assume the rest of the country can be as risky with.
"Real estate has always been cyclical, just as any other market. If you bought at the top of the market, the good news is that in virtually every place in the country, time and inflation increases the value of your home."
How does that good news for somebody that bought at the market peak? That makes no sense.
"Paying down your mortgage builds equity. Paying rent does nothing but pay down your landlord's mortgage."
Complete garbage. The amortization schedules are such that for the first several years, you're hardly paying anything, let alone what it costs to be able to sell the house. If you put nothing down, and the prices remained stagnant (which, let's face it, is the best case scenario), it could take seven years just to be able to sell the place and not have to bring money to the table. Way to "pay down the equity".
My rent is 1/2 what my landlord's mortgage is. Rent or buy, either way you're just paying for a roof overhead. Isn't it smarter to pay half and not suffer the pitfalls of depreciation?
"Furthermore, a fixed rate mortgage means my payments are locked in for 30 years. I pay off my mortgage with inflated dollars. On the other hand, rent increases with inflation and you build no equity."
Property taxes are skyrocketing, maintenance is expensive, and a lot of these newer homes and condos have absurd HOA's that go up significantly. That makes any rent increases compared to the increased cost of owning negligible, if not in fact less significant.
"Yes we have had a major blip--driven by Wall Street's hunger for money and bad loans."
Funny, realtors get to keep their absurdly high commission. That's what you get when you have an embargo on the industry. At least the lenders, as shady as they are, operate in a free market system.
"The values are only down nationally by less than 1 percent according to OFHEO."
That is for ONE MONTH. A one percent of value lost in a month, and we're still overinflated by at least 30% in most markets.
"Real estate has helped millions of people pay for their retirement, paid medical bills for loved ones, and put their kids through college."
Real estate has helped millions of people lose their retirement, rob their savings, and forced their kids to get student loans.
"To me, there is no better investment than owning your own home. Of course, each person has to make their own decision where to invest. My money is in real estate and it's going to stay there."
Of course you think it's a great investment. That's what your job requires other people to believe. Fact is that until this current bubble, housing prices stayed the same, adjusted for inflation. At the peak, that number had doubled. We aren't even close to bottoming out, so how is it a wise investment when it's almost guaranteed to drop significantly in value?
Submitted by Bob Smith on April 11, 2008 - 3:28pm.
Bernice - nice tutorial on how to mislead potential buyers regarding the risk of buying real estate in today's environment.
"4. Show first-time buyers the cost of waiting. There are several different ways that first time buyers lose money by waiting to purchase."
At least in my neighborhood, first time buyers avoided a loss of 20% of the purchase price by not buying a house a year ago (when you were also providing similar arguments that it was a great time to buy). Based on historical median income/home price ratios, in most areas of the country, prices have a long way to fall before they return to normal levels.
The only way that any of your points make sense is if you assume that we've reached the bottom of this cycle and prices will go up from here. If you really believe that, say so and back it up supporting data. By the way, if you think now is a great time to buy, let's have some examples of the real estate investments you're making right now (we don't want to hear about how much you've made on something you bought seven year ago).
Unfortunately, it seems that the real estate industry can freely give out misleading financial advice without any consequences but you'd hope that at least some of you would feel an obligation to provide a more balanced picture of the potential risk and benefits of purchasing in today environment.
Submitted by Bob Smith on April 11, 2008 - 4:21pm.
"Thus, today's buyer's market, with exceptionally low mortgage rates plus a substantial supply of inventory, is the best time in decades to purchase."
Interesting concept, I was under the impression that the price of the house was also an important factor in determining whether or not it made sense to buy real estate but I guess it's only interest rates and inventory that matters. It also seems that in 1997, when prices were about 50% less than today in some markets and the ratio between median price and median income was in line with historical norms would have been a much better time to buy but what do I know.
Submitted by Orlando MagicPants on April 11, 2008 - 5:00pm.
"Paying rent does nothing but pay down your landlord's mortgage."
Hilarious Realtor propaganda.
Correction:
"Paying rent does not pay your down your landlord's mortgage because he was a greedy fool who bought more house then he should have with an INTEREST ONLY or OPTION ARM loan.
You watch his lifelines all bleed slowly away as you pay 1/3 to 1/2 of his INTEREST ONLY or OPTION ARM MINIMUM PAYMENT.
After about FIVE YEARS of smartly renting and saving instead of buying in the early stages of THE BIGGEST HOUSING PRICE CRASH WE WILL SEE IN OUR LIFETIMES you pick up you landlords house for a song.?
Submitted by Jon Strum on April 11, 2008 - 6:11pm.
The reason you shouldn't proclaim 2008 as "the best year to buy a home in 35 years" is that people won't believe you. Regardless of your data. Because fear is emotion-driven, and until we acknowledge how buyers out there are feeling today, we have very little chance of putting ourselves in a position to help them.
Some might suggest that providing "objective information" is the way to defuse fear. But, as some of these comments attest, your "objective information" is someone else's "deceptive marketing."
It will remain an extraordinary goal for realtors to reclaim their credibility (because if we ever had it, we've lost it over the past 6-9 months) without simply acknowledging that things are a mess in the housing market. And then listening to our buyers as they vent their fears and frustrations. And then simply asking them what they'd like to do.
It's not a sexy-sounding strategy, but I'm confident that it will put you light years ahead of those agents who are lip-syncing to the NAR's "It's a great time to buy a home!" or the strategy posted above. Instead of "pushing home buyers off the fence now", why not simply offer a hand and see if you can help them down?
Submitted by Rob Aubrey on April 14, 2008 - 6:12am.
Warren Buffet does not buy real estate to lose money. Duh!
Neighborhoods that "may" have dropped 20% are usually not starter homes. A million dollar home may be selling for $800,000 but no way a $200,000 is selling for $160,000
Too all the naysayers, if you own any property I am in the market of buying property at a 40-50% discount that you keep touting.
We need a blog called real estate hooters 'cause there sure are enough boobs commenting.
Submitted by bob jones on April 14, 2008 - 6:19am.
Rob Aubrey, you don't seem to understand the nature of the market that we are living in. Look at the right hand column of this house-tracking blog:
http://novabubblefallout.blogspot.com/
You won't see many houses that sold for $200k now going for $180k. There you'll see houses that previously sold for $400k now selling for $180k.
So please, continue shopping for "discounts". It's a sad state of people's lack of self-information that they can consider houses discounted right now. Prices are merely falling to 2003 levels in some areas. If I ran a department store, doubled the prices overnight, then cut them by half the next day, would I not rightly laugh at the shoppers that called that a discount?
Submitted by Bob Smith on April 14, 2008 - 8:39am.
Jon Strum - I think you need to realize that it's not necessarily fear that's stopping buyers from purchasing at today's prices but possibly common sense and the ability to sort through the biased information presented by agents who only care about getting a commission. Bernice's example of how potential buyers are losing $6K per year by not buying now based on the assumption that the appreciation that occurred between 1995 and 2004 will continue forever is like watching someone win $100 on a hand of blackjack and stating that you'll lose $100 for each hand you don't play.
I already own a home and I think I was smart enough to realize that the value of my house at the peak of the bubble was based on transient factors that could not continue to exist forever. There are hundreds of reasons why I believe that prices will continue to decrease in bubble areas (some are mentioned below) but I don't see any data to back-up Denice's implied claim that we've hit the bottom of this cycle. If you're going to tell people that they're losing $6K per year by not buying now, at least mention the assumptions the projection is based on.
The Press Telegram. “Many real estate agents insist this is a great time to buy a house because so many foreclosed properties are on the market. But two years from now there might be even better deals, at least in Southern California, where the foreclosure situation is going to worsen.”
“‘We’re going to see more notices of default and more notices of trustee sales (foreclosures),’ said Michael Carney, executive director of the Real Estate Research Council at California State Polytechnic University, Pomona.”
“Carney disagrees with the popular argument that the real estate meltdown was caused by the huge number of buyers who obtained funky mortgages just to get into a house.”
“He maintains it’s a factor of price, not payment. ‘The main reason for the huge surge in foreclosures is that home prices didn’t keep going up,’ he said. ‘They started falling, and this simply caused people to walk away from these properties.’”
“‘Excess supply is responsible for much of the risk we’re seeing in the market,’ David W. Berson, PMI’s chief economist and strategist, wrote in his report.”
“‘Are we nearing the end of the current housing downturn?’ Bernson wrote. ‘We don’t think so, given the magnitude of the run-up in housing, with no significant housing downturn since the recession of 1991-92.’”
Submitted by S S on April 14, 2008 - 9:33am.
After reading this article, I have to make the assertion you believe the preponderence of the people are just plain dumb.
The market has not bottomed out. If I were to purchase today, I would take that into consideration in my offer. I am not going to make an offer on a house that I know in the next six months to a year will decrease in value.
The big boys invest when the market is bad. If I had their millions, I would too. However, the percentage of people in the United States that can do that is actually very small. Ask all those flippers and investors that are now facing foreclosure on all the houses they couldn't flip fast enough.
I don't understand either why realtors don't decrease the percentage of their commission. My house decreased in value, yet when I sell it, that percentage point certainly hasn't moved any. Oh yes, again those dumb people.
The realtors, appraisers, builders, mortgage lenders et al are the cause of this mess. Greed just doesn't become you all. Now that the ride is over, you all pewl and whine. You bit the hand that was feeding you, and now are trying to get them to swallow your BS.
IF you want to buy a house and don't plan on selling it within the next 10 to 15 years, it is a great time to buy, especially with all of the foreclosures on the market. However, if you don't plan on staying, and a great percentage of the buyers tend to move around regardless their reasons, and it isn't a good time.
How about being honest about the market. How about being honest in that you all were instrumental in the collapse. How about not believing that house buyers are a bunch of patsys.
It isn't over yet.
Submitted by Bob Smith on April 14, 2008 - 10:22am.
Here's a link to a house down the street from me that sold in September 2005 for $865,000 and is currently listed for $699,900: http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?lis...
Using Denise's methodology for estimating the amount of appreciation that potential buyers miss out on by waiting to buy based on appreciation over a specific period, I can make an equally valid statement that a potential buyer would save $66K per year by waiting to purchase this house. However, I would never attempt to convince someone that just because the value of this property declined at a specific rate since 2005, you should assume that this rate of decrease will continue into the future.
I wonder what advice Denise was giving to on-the-fence buyers back in September 2005.