A new set of real estate fundamentals
News analysis: Long-term value, not short-term appreciation
By Inman News, Monday, October 6, 2008.
The real estate industry must rethink the market fundamentals, the long-held demographic and economic beliefs that experts argued would drive the housing demand into the future.
The world has turned upside down with old truisms now seeming trite.
In January 2003, Inman News convened a conference on the "Housing Bubble," during which some experts promised the boom would continue because of six "market fundamentals." These were the mantra for the industry for more than 10 years:
- The demographics-as-destiny argument. The expanding U.S. population -- immigration -- would fuel real estate demand well into the next decade.
- Low mortgage rates. Cheap credit would keep home loans affordable.
- Boomer wealth. Prosperity and the rolling over of assets from the Depression generation to the spending generation would continue to ignite home purchases.
- Consumer confidence. At the 2003 conference, Yale professor Robert Shiller of the Case-Shiller home-price index argued that historic bubbles did not burst until consumers gave up on the asset that prompted their confidence. At the time, real estate enthusiasm was as strong as the morning Starbucks coffee habit.
- Low unemployment. The argument was that people who are employed buy houses.
- Unlimited market liquidity. Access to capital seemed unrestrained as Fannie, Freddie and the mortgage-backed securities market was flush with funds.
Most industry experts proffered that the boom could continue unabated.
The housing market held up for two more years after the 2003 conference as an unaccounted factor -- subprime mortgages -- further whipped up an already questionable housing market and covered up cracks in the fundamentals, such as out-of-control home prices.
As the bubble began to burst in 2006 and 2007, real estate experts were bolstered by their "market fundamentals" arguments. But those promises now appear empty.
The demographic wind is gone, as immigrants are less drawn to the United States because of our economic demise and our overbearing border constraints.
Mortgage rates are low, but artificially cheap home loans are gone and super tight credit makes it difficult for even the most worthy borrowers to take advantage of low rates. And the secondary market has been downsized beyond anyone's imagination.
Boomer wealth is shrinking every day as home and stock equity evaporates. The tables have turned on the lucky generation. Plus, record levels of debt reduce the net worth of the average boomer's personal balance sheet.
Consumer real estate confidence is waning as homeowners witness record losses in their home equity.
Demand for housing now depends on more basic considerations -- a new, but actually an old, set of fundamentals.
Homeownership offers more control and freedom compared to renting. The government subsidizes homeowners, not tenants. And over the long term, owning a home is a disciplined way to build savings as owners pay off their loans and keep their housing costs predictable, assuming they get fixed-rate mortgages.
And finally, homeownership becomes reasonably affordable because wild swings in value even out as liquidity excess is not pushing too many buyers into the market.
In this environment advantages still favor owning over renting, but the new fundamentals translate into a housing market that is significantly smaller.
It is a future based on long-term value, not short-term appreciation, with significantly fewer home sales but a more stable market.
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Submitted by Bill Fooks on October 7, 2008 - 2:56am.
Bill Fooks
TFT realty Marketing Service
Warwick, RI
We at the Fooksteam.com, have always viewed the business as a long term investment. There is nothing wrong with being a tenant.Investing in stock is buying paper that can be easily reproduced as needed, allowing someone else to use your cash.
Why not use your cash in a hard asset, such as real estate, to protect your cash, and if possible, don't be a tenant.
Why believe all the hype about the market going up and down. It only moves by your control. (When you sell or buy). If you stay in the house a number of years and the price and value never move, you have a built in IRA, with a lot of tax advantages. We are one of the few countries that has such an abundance of housing. Lets keep it that way and not let the government control it.
Submitted by Lenn Harley on October 7, 2008 - 4:15am.
We watched it happen.
Once the average price of homes in a community surpassed the average family's ability to qualify, the boom was over.
If prices had come down as fast as they went up, the market wouldn't have crashed. Many of us have been clammering for reasonable pricing based on demand, not on "what's my net". When the DOM reached 75 days or more on average, it was over. That, to my recollection was about June of 2005.
The consumer put their foot down and renewed their lease or finished the basement in their existing home.
Consumers are still afraid to jump in. Prices are good but the consumer is still waiting for the elusive "bottom".
Too much turmoil in the housing market will keep home buyers out of the market. We need some quiet and stability.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Marc Grossman on October 7, 2008 - 4:54am.
It's interesting to look back and see who was saying what at that time. It would also be wonderful if a lesson was learned. Unfortunately, all too often that is not the case. Hopefully, this time that will be different.
Like Lenn Harley stated, we need "some quiet and stability." I think we will start seeing that a little more and therefore hopefully raising consumer confidence.
Besides market liquidity and available funds, I think that is one of the main things holding back.
There are some great prices and deals out there. And as with the last several paragraphs of your article, we need to get that word out there and help educate the consumer to the reality of the situation. Thereby, hopefully helping in the raising of consumer confidence.
Marc Grossman, GRI
Marc It Sold!
Submitted by Peter J. Pike on October 7, 2008 - 5:33am.
It is about time that someone said it like it is - a home is not an investment, it is a home. While it makes financial sense to purchase the home, and over time it will become a wealth generating asset, most people are not in a position to treat their home like they would treat a stock portfolio.
The industry mantra, "its a great time to buy a home" is always true. It is always a great time to buy a home - as noted above, "Homeownership offers more control and freedom compared to renting. The government subsidizes homeowners, not tenants. And over the long term, owning a home is a disciplined way to build savings as owners pay off their loans and keep their housing costs predictable, assuming they get fixed-rate mortgages."
I have constantly been telling my clients, if you like the house and you can afford the payments, what difference does it make what an appraiser says it is worth? If it makes financial sense for you to live there, then you do it! If, on the other hand, you are stretching yourself to the limit, and will continue to be stretched far into the future (with alt-a loans, for example), then, you should think twice.
Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on October 7, 2008 - 5:39am.
People want to buy and, as the article points out, people should buy. We need reasonable prices and access to credit. Prices are becoming more reasonable every day but the credit markets are still seized up.
Capital is out there ; there is tons and tons of money on the sidelines. Unfortunately, we have a liquidity problem. Banks and their customers are hording cash instead of lending it.
This bail-out thing should help and the Government is going to step in as a market maker in commercial paper, which will really help also.
MasterPlan Capital LLC - Simple, 1 Page Commercial Mortgage Application; Online at:www.masterplancapital.com
Submitted by Jack McCabe on October 7, 2008 - 7:09am.
There were a few analysts, a very limited group you can count on one hand, that predicted the market correctly through the boom/bust years.
Here's 15 Inman News examples since 9/4/04, including my quotes and comments.
http://www.inman.com/news/2004/07/5/real-estate-tells-tales-impending-bu...
http://www.inman.com/buyers-sellers/columnists/real-estate-booms-not-alw...
http://www.inman.com/news/2005/09/3/who-gets-hurt-in-real-estate-downtur...
http://www.inman.com/news/2006/04/3/its-naptime-in-florida-real-estate
http://www.inman.com/news/2006/05/3/world-discovers-florida-real-estate
http://www.inman.com/news/2006/10/1/real-estate-turns-economic-crutch-sp...
http://www.inman.com/opinion/letter-to-editor/2006/12/2/letters-editor
http://www.inman.com/news/2007/08/5/speculation-in-condo-conversions-sou...
http://www.inman.com/blog/2007/09/2/look-my-eyes-buy-this-condo-now
http://www.inman.com/news/2007/09/3/real-estate-purging-has-begun
http://www.inman.com/opinion/letter-to-editor/2007/10/1/letters-editor-2
http://www.inman.com/news/2008/03/31/foreign-buyers-fuel-second-home-sal...
http://www.inman.com/buyers-sellers/columnists/berniceross/media-create-...
http://www.inman.com/news/2008/06/10/nar-lowers-2008-price-forecast
http://www.inman.com/buyers-sellers/columnists/berniceross/premium-servi...
Jack McCabe
CEO
McCabe Research & Consulting
www.mccaberesearch.com
Submitted by Sean OToole on October 7, 2008 - 7:31am.
The biggest financial advantage you get from owning a home is the ability to lock in monthly payments using a 30 year fixed mortgage. Over the years that payment becomes smaller compared to rent as inflation is a force as fundamental as death and taxes.
While near term deflation of assets will likely continue, all the current bailout efforts will ultimately be highly inflationary. Anyone who locks in a 30 year fixed rate, and stays put, will ultimately look like a genius.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by chis eliopoulos on October 7, 2008 - 7:32am.
Real estate fundamentals 101
Long term, non liquid.
Every time this was violated end up in disaster.
People always have tried to alter the basics by bringing in "new innovations" "new thinking" and works for about 7 years at the time and then goes back to the rule.
Submitted by Marc Blasi on October 7, 2008 - 10:00am.
This was certainly a mess - how the sub-prime garbage was allowed to go for so long.....
Like Mark said a few comments back: IF a lesson was learned....
Even the densest person couldn't ignore what's happened - but we all know how that goes.
This could have been much worse, let's not forget.
Marc J Blasi
www.PalmBeachRealEstateAndLoans.com
Realtor - Leibowitz Realty Group
www.LeibowitzRealty.com
Mortgage Broker - Knightlines Mortgage Services
www.KnightlinesMTG.com
Submitted by Desiree Daniels on October 7, 2008 - 11:14am.
The market is what we make of it. Sure numbers are down but getting a positive message to consumers is key. The facts about the multitude of opportunities for both buyers and sellers is a way to start.
Agents are crying broke and I say good ridden's to all that hopped on the gravy train in "04-05".
Stability is essential, in both agents and housing prices. If the overall sense of panic in the industry would settle, the consumers might regain some faith in our industry and the market.
It isn't all about price reductions. Just improving the "quality" of inventory would improve the market.
Forgo the ego's and get those listings off the market that are not sellable.
I never understood taking a listing to put up a sign. I take listings that are marketable, motivated and sellable.
Otherwise the next "Joe" can have it... 6% of nothing still equals nothing.